85 FR 41346
[Federal Register Volume 85, Number 133 (Friday, July 10, 2020)]
[Rules and Regulations]
[Pages 41346-41355]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12033]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AF02
Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Interim final rule with request for comment.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is adopting and invites comment on an interim final rule
amending its margin requirements for uncleared swaps for swap dealers
(``SDs'') and major swap participants (``MSPs'') for which there is no
prudential regulator (``CFTC Margin Rule''). The Commission is revising
the compliance schedule for the posting and collection of initial
margin under the CFTC Margin Rule to defer the compliance date of
September 1, 2020, to September 1, 2021 (``Interim Final Rule''). The
Commission is issuing the Interim Final Rule to address the operational
challenges faced by certain entities subject to the CFTC Margin Rule as
a result of the coronavirus disease 2019 (``COVID-19'') pandemic,
consistent with the recent revision of the Basel Committee on Banking
Supervision and Board of the International Organization of Securities
Commissions (together, ``BCBS/IOSCO'') implementation schedule for
margin requirements for non-centrally-cleared derivatives.
DATES:
Effective Date: This rule is effective July 10, 2020.
Comment Date: Comments must be received on or before September 8,
[[Page 41347]]
2020. Comments submitted by mail will be accepted as timely if they are
postmarked on or before that date.
ADDRESSES: You may submit comments, identified by RIN 3038-AF02, 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.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (``FOIA''), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec. 145.9 of the Commission's
regulations.\1\
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\1\ 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR chapter I.
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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 public comment
file and will be considered as required under the Administrative
Procedure Act (``APA'') \2\ and other applicable laws, and may be
accessible under the FOIA.\3\
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\2\ 5 U.S.C. Subchapter II.
\3\ 5 U.S.C. 552.
FOR FURTHER INFORMATION CONTACT: Joshua B. Sterling, Director, 202-418-
6056, [email protected]; Thomas J. Smith, Deputy Director, 202-418-
5495, [email protected]; Warren Gorlick, Associate Director, 202-418-
5195, [email protected]; or Carmen Moncada-Terry, Special Counsel, 202-
418-5795, [email protected], Division of Swap Dealer and
Intermediary Oversight, Commodity Futures Trading Commission, Three
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Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
Section 4s(e) of the Commodity Exchange Act (``CEA'') \4\ directs
the Commission to adopt rules establishing minimum initial and
variation margin requirements on all swaps \5\ that are (i) entered
into by an SD \6\ or MSP \7\ for which there is no prudential regulator
\8\ (collectively, ``covered swap entities'' or ``CSEs'') \9\ and (ii)
not cleared by a registered derivatives clearing organization
(``uncleared swaps'').\10\ To offset the greater risk to the SD or MSP
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.\11\
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\4\ 7 U.S.C. 6s(e) (capital and margin requirements).
\5\ CEA section 1a(47), 7 U.S.C. 1a(47) (swap definition);
Commission regulation 1.3, 17 CFR 1.3 (further definition of a
swap). A swap includes, among other things, an interest rate swap,
commodity swap, credit default swap, and currency swap.
\6\ CEA section 1a(49), 7 U.S.C. 1a(49) (swap dealer
definition); Commission regulation 1.3 (further definition of swap
dealer).
\7\ CEA section 1a(32), 7 U.S.C. 1a(32) (major swap participant
definition); Commission regulation 1.3 (further definition of major
swap participant).
\8\ CEA section 1a(39), 7 U.S.C. 1a(39) (defining the term
``prudential regulator'' to include the Board of Governors of the
Federal Reserve System; the Office of the Comptroller of the
Currency; the Federal Deposit Insurance Corporation; the Farm Credit
Administration; and the Federal Housing Finance Agency). The
definition of prudential regulator further specifies the entities
for which these agencies act as prudential regulators. The
prudential regulators published final margin requirements in
November 2015. See generally Margin and Capital Requirements for
Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015) (``Prudential
Margin Rule''). The Prudential Margin Rule is similar to the CFTC
Margin Rule, including with respect to the CFTC's phasing-in of
margin requirements, as discussed below.
\9\ CEA section 4s(e)(1)(B), 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. CEA section 4s(e)(1)(A), 7 U.S.C. 6s(e)(1)(A).
\10\ CEA section 4s(e)(2)(B)(ii), 7 U.S.C. 6s(e)(2)(B)(ii). In
Commission regulation 23.151, the Commission further defined the
term uncleared swap to mean a swap that is not cleared by a
registered derivatives clearing organization or by a derivatives
clearing organization that the Commission has exempted from
registration as provided under the CEA. 17 CFR 23.151.
\11\ CEA section 4s(e)(3)(A), 7 U.S.C. 6s(e)(3)(A).
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BCBS/IOSCO established an international framework for margin
requirements for uncleared derivatives in September 2013 (the ``BCBS/
IOSCO framework'').\12\ After the establishment of the BCBS/IOSCO
framework, the CFTC, on January 6, 2016, consistent with Section 4s(e),
promulgated rules requiring CSEs to collect and post initial margin
(``IM'') \13\ and variation margin (``VM'') \14\ for uncleared
swaps,\15\ adopting the implementation schedule set forth in the BCBS/
IOSCO framework, including the revised implementation schedule adopted
on March 18, 2015.\16\
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\12\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (Sept. 2013), https://www.bis.org/publ/bcbs261.pdf.
\13\ Initial margin 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 pursuant to
Sec. 23.152. 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). See CFTC Margin Rule, 81 FR at
683.
\14\ Variation margin, as defined in Commission regulation
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. 17 CFR 23.151.
\15\ See generally 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-
23.159, 23.161. In May 2016, the Commission amended the CFTC Margin
Rule to add Commission regulation Sec. 23.160, 17 CFR 23.160,
providing rules on its cross-border application. See generally
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).
\16\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (March 2015), https://www.bis.org/bcbs/publ/d317.pdf.
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In July 2019, BCBS/IOSCO further revised the framework to extend
the implementation schedule to September 1, 2021.\17\ Consistent with
this revision to the international framework, in April 2020, the
Commission promulgated a final rule amending the compliance schedule
for the IM requirements under the CFTC Margin Rule (``April 2020 Final
Rule'').\18\
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\17\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (July 2019), https://www.bis.org/bcbs/publ/d475.pdf.
\18\ See generally Margin Requirements for Uncleared Swaps for
Swap Dealers and Major Swap Participants, 85 FR 19878 (April 9,
2020).
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The World Health Organization declared the COVID-19 outbreak a
global pandemic on March 11, 2020.\19\ On March 13, 2020, President
Donald J. Trump declared a national emergency
[[Page 41348]]
due to the COVID-19 pandemic.\20\ The disease has impacted individuals
across the world.
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\19\ WHO Director-General's opening remarks at the media
briefing on COVID-19 (March 11, 2020), https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020.
\20\ Proclamation on Declaring a National Emergency Concerning
the Novel Coronavirus Disease (COVID-19) Outbreak (March 13, 2020),
https://www.whitehouse.gov/presidential-actions/proclamation-declaring-national-emergency-concerning-novel-coronavirus-disease-covid-19-outbreak/.
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The COVID-19 outbreak has severely disrupted domestic and
international business, and adversely impacted the global economy. In
March 2020, a group of global financial market trade associations wrote
a letter to BCBS/IOSCO requesting a suspension of the nearing
compliance dates, set to begin on September 1, 2020, and September 1,
2021, in light of the pandemic.\21\ The Trade Association Letter stated
that staff at financial firms have been displaced and repurposed given
the increased market volatility.\22\ The letter further stated that
working from home limits access to legal and operational documentation
and also limits abilities to communicate with counterparties.\23\ With
operational teams working at full capacity to ensure proper business
continuity, the trade associations declared that the strained working
conditions at firms had ``impaired'' such firms' ability to undertake
preparations to exchange IM, such as custodian onboarding and custodian
documentation, by the upcoming September 1, 2020 deadline.\24\
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\21\ Margin Requirements for Non-Centrally Cleared Swaps
Margin--Impact of COVID-19 on Initial Margin Phase-In (March 25,
2020), https://www.isda.org/2020/03/25/joint-trade-association-letter-on-impact-of-covid-19-on-initial-margin-phase-in/ (``Trade
Association Letter'').
\22\ Trade Association Letter at 2.
\23\ Id.
\24\ Trade Association Letter at 3.
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Under these circumstances, the Trade Association Letter emphasizes
the industry concern about diverting resources from ongoing business
continuity efforts to the substantial preparations needed for the
exchange of regulatory IM ahead of the September 1, 2020 deadline.\25\
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\25\ See id.
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In response to these concerns, BCBS/IOSCO decided to further extend
the implementation schedule for the margin requirements for non-
centrally cleared derivatives by one year.\26\ BCBS/IOSCO, in a joint
statement, stated that the extension would provide additional
operational capacity for firms to respond to the immediate impact of
COVID-19 and at the same time facilitate firms' diligent efforts to
comply with the requirements by the revised deadlines.\27\
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\26\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (April 2020), https://www.bis.org/bcbs/publ/d499.htm (``2020 BCBS/IOSCO Margin Framework'') and Press
Release, April 3, 2020, https://www.bis.org/press/p200403a.htm
(``April 2020 BCBS/IOSCO Press Release'').
\27\ Basel Committee and IOSCO announce deferral of final
implementation phases of the margin requirements for non-centrally
cleared derivatives (April 3, 2020), https://www.bis.org/press/p200403a.htm.
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Recently, a Global Markets Advisory Committee (``GMAC'')
subcommittee encouraged the adoption of the BCBS/IOSCO recommendation
to extend the implementation schedule given the circumstances brought
about by the COVID-19 pandemic. The subcommittee noted that the April
2020 BCBS/IOSCO action ``serves as confirmation by the collective
international standard[hyphen]setting bodies that it is critical for
the industry to be able to divert and dedicate scarce resources to
respond to the COVID-19 crisis and related market volatility and
liquidity issues without jeopardizing compliance with upcoming
regulatory obligations under uncleared swap margin rules.'' \28\
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\28\ See Recommendations to Improve Scoping and Implementation
of Initial Margin Requirements for Non-Cleared Swaps, Report to the
CFTC's Global Markets Advisory Committee by the Subcommittee on
Margin Requirements for Non-Cleared Swaps, at 3 (April 2020),
https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download. The GMAC adopted the subcommittee's report and recommended
to the Commission that it consider adopting the report's
recommendations. The GMAC subcommittee was not tasked to respond to
the COVID-19 pandemic. Rather, its establishment pre-dates the
pandemic's impact and its directive was to address the ongoing
challenges involving the implementation of the CFTC margin
requirements during the last stages of the compliance schedule,
which may be taken up at a later date by the Commission. See CFTC
Commissioner Stump Announces New GMAC Subcommittee on Margin
Requirements for Non-Cleared Swaps (Oct. 28, 2019), https://www.cftc.gov/PressRoom/PressReleases/8064-19.
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II. Interim Final Rule
The Commission is issuing the Interim Final Rule to amend the CFTC
Margin Rule by deferring for one year to September 1, 2021, compliance
with the IM requirements for entities subject to the September 1, 2020
deadline. The Commission is issuing this deferral in recognition of the
extraordinary operational challenges and risk-management demands faced
by the entities as a result of the COVID-19 pandemic, consistent with
the recent revision of BCBS/IOSCO's implementation schedule.\29\
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\29\ See generally 2020 BCBS/IOSCO Margin Framework. The
Framework extends the BCBS/IOSCO implementation schedule to
September 1, 2022, by deferring the compliance dates of September 1,
2020, and September 1, 2021, to September 1, 2021, and September 1,
2022, respectively. Given the immediate need to address the impact
of the COVID-19 pandemic on entities nearing the September 1, 2020
deadline, the Commission is issuing the Interim Final Rule discussed
herein. As discussed below, the Commission intends to issue a notice
of proposed rulemaking with respect to the September 1, 2021
compliance date in the near term.
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The CFTC Margin Rule requires covered swap entities to post and
collect IM with counterparties that are SDs, MSPs, or financial end
users with material swaps exposure (``MSE'') \30\ (``covered
counterparties'') in accordance with a phased compliance schedule set
forth in Commission regulation Sec. 23.161.\31\ The compliance
schedule applies progressively to CSEs and their covered counterparties
in staggered phases, starting with entities with the largest average
daily aggregate notional amounts (``AANA'') of uncleared swaps and
certain other financial products, and then successively with lesser
AANA.
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\30\ Commission regulation Sec. 23.151 provides that MSE for an
entity means that the entity and its margin affiliates have an
average daily aggregate notional amount of uncleared swaps,
uncleared security-based swaps, foreign exchange forwards, and
foreign exchange swaps with all counterparties for June, July, and
August of the previous calendar year that exceeds $8 billion, where
such amount is calculated only for business days. A company is a
``margin affiliate'' of another company if: (i) 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; (ii) both companies are consolidated with a third company
on a financial statement prepared in accordance with such principles
or standards; or (iii) for a company that is not subject to such
principles or standards, if consolidation as described in (i) or
(ii) would have occurred if such principles or standards had
applied. 17 CFR 23.151.
\31\ 17 CFR 23.161.
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The compliance schedule originally spanned from September 1, 2016
to September 1, 2020. The April 2020 Final Rule extended the schedule
by one year by dividing the last compliance ``phase''--which would have
brought into scope CSEs and covered counterparties with an AANA between
$8 billion and $750 billion--into two compliance phases. Under the
April 2020 Final Rule, CSEs and covered counterparties with an AANA
between $50 billion and $750 billion must comply with the IM
requirements beginning on September 1, 2020.\32\ In addition, again
pursuant to the April 2020 Final Rule, other remaining CSEs and covered
counterparties, including financial end users with MSE, must comply
beginning on September 1, 2021.\33\
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\32\ See 17 CFR 23.161(a)(6).
\33\ 17 CFR 23.161(a)(7).
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This Interim Final Rule amends Commission regulation Sec. 23.161,
as revised by the April 2020 Final Rule,\34\ by deferring for one year
the April 2020
[[Page 41349]]
Final Rule's compliance date of September 1, 2020. The Interim Final
Rule reflects the recent revisions to the BCBS/IOSCO framework
extending the margin implementation schedule.\35\ More specifically,
the Interim Final Rule defers compliance for entities that would come
into scope beginning on September 1, 2020, requiring CSEs and covered
counterparties with an AANA between $50 billion up to $750 billion
during the three-month period of March-May of 2021 to come into
compliance beginning on September 1, 2021.
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\34\ 17 CFR 23.161.
\35\ 2020 BCBS/IOSCO Margin Framework.
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By extending the September 1, 2020 deadline for compliance with the
IM requirements under the CFTC Margin Rule, the Commission, consistent
with BCBS/IOSCO's revision of the margin implementation schedule, seeks
to alleviate the challenges, operational and otherwise, that COVID-19
poses to entities nearing the September 1, 2020 deadline. In the
Commission's view, compliance with the existing requirements could
exacerbate COVID-19's adverse impact on operations by causing entities
to divert scarce resources from more pressing operational needs, which
could hinder business continuity efforts and adequate management of
volatility, liquidity, and other risks brought about by the
pandemic.\36\
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\36\ To be sure, the exchange of IM mitigates various risks,
such as counterparty credit risk. However, given the relatively
small share of the swaps market affected by this IFR, the Commission
believes it is appropriate to defer covered entities' IM obligations
to allow such entities to focus on immediate operational,
volatility, and liquidity risks arising from the COVID-19 pandemic.
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The COVID-19 pandemic has severely and adversely impacted
preparations for the exchange of regulatory IM in advance of the
current compliance deadlines, including procuring rule-compliant
documentation, setting up custodial arrangements, and establishing
internal processes for the calculation, collection, and posting of IM,
among other things. In the midst of high market volatility, firms have
experienced a reduction in operational capacity, carrying out remote
operations, with employees performing critical functions from home or
other temporary locations, which has limited access to legal and
operational documentation and limited the ability to work with
counterparties.
Service providers, such as custodians, are facing similar
operational challenges. As the next phase of compliance, beginning on
September 1, 2020, approaches, custodian onboarding is being impeded,
resulting in further delays in the establishment of custodian accounts.
Other vendors providing IM-related services are being similarly
affected.
The Commission notes that the compliance delay provided by the
Interim Final Rule applies to entities whose uncleared swap portfolios
tend to be smaller than the portfolios of entities that came into scope
in earlier phases of the compliance schedule. The CFTC's Office of the
Chief Economist (``OCE'') has estimated that entities with such smaller
uncleared swap portfolios represent only 8% of total AANA across all
phases.\37\ This modest share of notional amount, spread across many
small entities, likely means that the uncollateralized swaps entered
into by these entities--taking into account that no exchange of IM is
required by the CFTC Margin Rule until the IM threshold amount has been
exceeded \38\--pose less risk to the financial markets than the risk
posed by uncleared swaps entered into by entities that have already
come into the scope of IM compliance.
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\37\ Richard Haynes, Madison Lau, & Bruce Tuckman, Initial
Margin Phase 5, at 4 (Oct. 24, 2018), https://www.cftc.gov/sites/default/files/About/Economic%20Analysis/Initial%20Margin%20Phase%205%20v5_ada.pdf (``OCE Initial Margin
Phase 5 Study'').
\38\ Under Commission regulation Sec. 23.154(a)(3), there is no
requirement to post or collect IM until the initial margin threshold
amount has been exceeded. See 17 CFR 23.154(a)(3). The term
``initial margin threshold amount'' is defined in Commission
regulation 23.151 as an aggregate credit exposure of $50 million
from all uncleared swaps between a CSE and its margin affiliates on
one hand, and a covered counterparty and its margin affiliates on
the other. 17 CFR 23.151. For the definition of ``margin
affiliate,'' see supra note 30.
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This Interim Final Rule does not address the last phase of
compliance beginning on September 1, 2021. As discussed below, the
Commission is making a finding that notice and public procedure on this
rule is impracticable because the need for relief is immediate. Because
there is more time to address the last phase of compliance currently
set to commence on September 1, 2021, the Commission will address that
compliance date through a notice of proposed rulemaking and public
comment process. The Commission intends to take action with respect to
the final compliance phase in the near term. The Commission notes that
without an extension of the final compliance phase, approximately 700
entities would come into the scope of the IM requirements
simultaneously on September 1, 2021.\39\
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\39\ See OCE Initial Margin Phase 5 Study at 4.
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III. Request for Comment
The Commission is issuing this Interim Final Rule to revise
Commission regulation Sec. 23.161 to address concerns relating to the
COVID-19 pandemic, as discussed above. Issuing an Interim Final Rule
means that the amendment to delay the April 2020 Final Rule's
compliance deadline of September 1, 2020, will take effect sooner than
if the Commission followed the usual prior notice and comment
rulemaking process. A discussion of the Commission's finding that there
is good cause to omit the usual prior notice and comment procedures
appears below in the section entitled ``Administrative Procedure Act.''
The Commission welcomes public comments from interested persons
regarding any aspect of the changes made by this Interim Final Rule.
The Commission also seeks comment on the following specific questions.
The Commission will take into consideration comments received and may
modify the Interim Final Rule if warranted.
(1) This Interim Final Rule delays by one year compliance with the
IM requirements under the CFTC Margin Rule for entities subject to the
September 1, 2020 deadline to alleviate the challenges, operational and
otherwise, that COVID-19 poses to entities engaging in uncleared swaps
nearing the existing compliance deadline as discussed above. Uncleared
swaps that are entered into during the one year extension period will
be legacy swaps not subject to the IM requirements (although they would
be subject to VM requirements) and, as such, lesser amounts of margin
would be collected for these swaps, potentially increasing counterparty
risk and the risk of contagion.\40\ In light of these risks, should the
Commission consider any alternative to extending the compliance
schedule? Please describe the alternatives if any can be identified.
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\40\ Pursuant to Commission regulation Sec. 23.161, the
compliance dates for the IM and VM requirements under the CFTC
Margin Rule are staggered across a phased schedule that extends from
September 1, 2016, to September 1, 2021. The compliance period for
the VM requirements ended on March 1, 2017 (though the CFTC and
other regulators provided guidance permitting a six month grace
period to implement the requirements following the implementation
date), while the IM requirements continue to phase in through
September 1, 2021. An uncleared swap entered into prior to an
entity's IM compliance date is a ``legacy swap'' that is not subject
to IM requirements. See CFTC Margin Rule, 81 FR at 651 and
Commission regulation Sec. 23.161. 17 CFR 23.161.
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(2) As an alternative to the Interim Final Rule deferring
compliance for the entities coming into scope in September 2020, should
the Commission consider
[[Page 41350]]
a longer deferral period for such firms? Please describe the potential
benefits and any costs were the CFTC to provide a longer deferral
period.
Please refer to the ADDRESSES section above with respect to the
submission of comments.
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.\41\ However, an agency may issue a new rule
without publication in the Federal Register of a notice of proposed
rulemaking with an opportunity for comment if the agency for good cause
finds (and incorporates the finding and a brief statement of the
reasons therefor in the rules issued) that notice and public procedure
thereon are impracticable, unnecessary, or contrary to the public
interest.\42\ The Commission for good cause finds that such notice and
public procedure on the instant amendments to Commission regulation
Sec. 23.161 are impracticable and contrary to the public interest due
to the COVID-19 pandemic. The World Health Organization declared the
COVID-19 outbreak a global pandemic on March 11, 2020.\43\ On March 13,
2020, President Donald J. Trump declared a national emergency due to
the COVID-19 pandemic.\44\
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\41\ See 5 U.S.C. 553(b).
\42\ 5 U.S.C. 553(b)(B).
\43\ See supra note 19.
\44\ See supra note 20.
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The Commission for good cause finds that notice and public
procedure on this rule are impracticable because the need for relief is
immediate. With respect to the change to the compliance schedule for
the CFTC Margin Rule, time is of the essence. Participants in the
uncleared swaps markets have experienced diminished operational
capacity due to stay-at-home orders, closures, and other community
nonpharmaceutical interventions.\45\ Efforts to comply with the IM
requirements may divert manpower and funding resources from already
strained operations, hindering business continuity efforts and focus on
management of risks posed by the pandemic.
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\45\ See Nonpharmaceutical Interventions (NPIs) (describing
strategies to slow the spread of COVID-19), https://www.cdc.gov/nonpharmaceutical-interventions/index.html (last visited April 28,
2020).
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The practical effect of these contagion mitigation strategies is to
require many businesses to carry out remote operations with employees
performing critical functions from their homes or other temporary
locations. Preparations in anticipation of IM compliance by, among
other things, procuring rule compliant documentation, setting up
custodial arrangements, and establishing internal processes for the
calculation, collection, and posting, are more difficult to accomplish
when personnel are working remotely.
Undertaking the regular rulemaking proceedings would therefore be
impracticable to provide the immediate relief market participants need
to focus on immediate COVID-19 response. Delays in the response could
exacerbate the adverse impact of the pandemic on these entities'
operations and detract from more urgent operational matters.
The next compliance phase commences on September 1, 2020. Entities
coming into scope need to prepare for months in advance to comply with
the IM requirements. These preparations may be affected by the
entities' reduced operational capacity. A compliance delay until
September 1, 2021, will alleviate the operational burden. This
militates against the delay needed to conduct the regular notice and
comment rulemaking.
The Commission for good cause also finds that notice and public
procedure thereon are contrary to the public interest in the context of
the COVID-19 national emergency. As explained above, participants in
the uncleared swaps markets have an immediate need for operational
flexibility due to the COVID-19 pandemic. The Commission has determined
that issuing this Interim Final Rule, to be effective immediately upon
publication in the Federal Register, is crucial to alleviate the burden
associated with the exchange of regulatory IM for entities whose
operations may be already strained given the effect of COVID-19 on
their operations. Providing a notice and comment period pursuant to
normal rulemaking process would delay relief and thus be contrary to
the public interest.
For the above 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.\46\
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\46\ 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 \47\ requires Federal agencies to
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities 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.\48\
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\47\ 5 U.S.C. 601 et seq.
\48\ See 5 U.S.C. 603(a).
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C. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \49\ 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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\49\ 44 U.S.C. 3501 et seq.
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The Commission believes that this Interim Final Rule does not
impose any new recordkeeping or information collection requirements, or
other collections of information that require approval of OMB under the
PRA.
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 revises the compliance schedule for the
CFTC Margin Rule by deferring compliance with the IM requirements from
September 1, 2020, to September 1,
[[Page 41351]]
2021, for CSEs and covered counterparties with an AANA ranging from $50
billion up to $750 billion.
The baseline against which the benefits and costs associated with
the Interim Final Rule are compared is the uncleared swaps markets as
they exist today and the current compliance schedule. As discussed in
both the CFTC Margin Rule and the April 2020 Final Rule, the existing
compliance schedule represented an attempt to balance the costs and
benefits of requiring margin for uncleared swaps for different
entities. For example, the CFTC Margin Rule noted that ``[t]he
compliance dates have been structured to ensure that the largest and
most sophisticated CSEs and counterparties that present the greatest
potential risk to the financial system comply with the requirements
first. These swap market participants should be able to make the
required operational and legal changes more rapidly and easily than
smaller entities [that] engag[e] in swaps less frequently and pose less
risk to the financial system.'' \50\ As discussed below, the COVID-19
pandemic has raised the cost of compliance for the next cohort of
entities, and hence altered the calculus in setting the CFTC Margin
Rule's compliance schedule, which is based on balancing costs and
benefits.
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\50\ Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 81 FR at 676.
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1. Benefits
As described above, the Interim Final Rule defers compliance with
the IM requirements for CSEs and their covered counterparties subject
to IM compliance beginning on September 1, 2020. The Interim Final Rule
creates a benefit as it is intended to mitigate the disruptive effect
of COVID-19 and the attendant market volatility by permitting firms to
allocate their resources to ensure proper business continuity and
management of risks brought about by the pandemic.
Starting in March, 2020, entities that trade uncleared swaps have
experienced diminished operational capacity, due to stay-at-home
orders, closures, and other community nonpharmaceutical
interventions.\51\ These entities are currently conducting business
operations remotely and employees are performing critical business
functions from their homes or other temporary locations.
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\51\ See supra note 45.
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With reduced operational capacity, preparations to come into
compliance with the IM requirements in the next phase of the compliance
schedule represent a challenge to these entities. Compliance will
require procuring documentation addressing the exchange of regulatory
IM, setting up custodial arrangements, and establishing processes for
the calculation, posting, and collection of IM, among other things.
Absent the Interim Final Rule, which delays compliance with the IM
requirements, some market participants may be unable to secure
necessary documentation and establish processes for the exchange of IM
by the September 1, 2020 deadline. As a result, these entities may be
required to cease uncleared swap trading in September, with a resulting
reduction in their ability to hedge their risk. The inability of some
entities to trade uncleared swaps may reduce liquidity in this market,
and thereby potentially harm other traders as well.
Another potential benefit of the Interim Final Rule is that it
would mitigate the effect on entities that would have otherwise been
required to collect and post IM beginning on September 1, 2020, under
the April 2020 Final Rule. Many of these entities would likely have
reduced cash reserves due to the effects of COVID-19 on their business
operations. For these firms, the compliance delay in the Interim Final
Rule may mitigate the temporary cash constraint by eliminating or
suspending the cost of IM collateralization, allowing for continued
hedging and the management of risks posed by the pandemic. By extending
the September 1, 2020 compliance deadline, the Interim Final Rule
defers the timeline for compliance, thereby promoting diligent risk
management and allowing entities who might be precluded from trading
uncleared swaps to continue to hedge using uncleared swaps.
2. Costs
The Interim Final Rule delays compliance with the IM requirements
by one year for CSEs and covered counterparties that are subject to the
September 1, 2020 compliance deadline. Uncleared swaps entered into
between September 1, 2020, and the new deadline of September 1, 2021,
may be treated as legacy swaps exempt from the IM requirements and, as
such, lesser amounts of collateral would be collected to offset the
risk of uncleared swaps, potentially increasing the risk of contagion
and systemic risk to the United States.\52\
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\52\ See supra note 40 for the definition of ``legacy swaps.''
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In addition, many entities in advance of the nearing September 1,
2020 deadline may have already engaged in preparations for the exchange
of regulatory IM, procuring compliant documentation and setting up
processes for the exchange of IM. Given the extension of the compliance
deadline, these entities would likely need to re-negotiate the existing
documentation and refresh processes put into place as the new
compliance deadlines approach and would thus incur additional costs to
come into compliance with the IM requirements.
The Interim Final Rule provides relief to entities whose uncleared
swap portfolios tend to be smaller than the portfolios of entities that
came into scope in earlier phases. The decision to defer the compliance
date of September 1, 2020, to September 1, 2021, affects slightly fewer
than 200 entities, representing approximately 8% of AANA across all
phases, as estimated by the OCE. This modest share of notional amount
spread across many small entities likely means that the
uncollateralized swaps entered into by these entities--taking into
account that no exchange of IM is required by the CFTC Margin Rule
until the initial margin threshold amount has been exceeded \53\--pose
less risk to the financial markets than the risk posed by uncleared
swaps entered into by entities that have already come into the scope of
IM compliance.
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 discussed above, as a result of the COVID-19 pandemic, entities
trading uncleared swaps are facing a reduction in their operational
capacities due to stay-at-home orders, closures, and other community
nonpharmaceutical interventions \54\ to contain the spread of the virus
and slow its progress. To alleviate the effect on entities nearing the
September 1, 2020 deadline for compliance with the IM requirements, the
Interim Final Rule delays compliance by one year for those entities,
allowing them to continue to trade uncleared swaps and hedge their risk
without incurring the full costs and operational demands of preparing
for compliance while simultaneously responding to the COVID-19
pandemic.
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\54\ See supra note 45.
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The Interim Final Rule also allows entities that would otherwise be
focused on implementing regulatory margin
[[Page 41352]]
requirements, in order to continue to trade uncleared swaps, to instead
focus on and respond to the challenges posed by COVID-19.
Because the Interim Final Rule delays the implementation of
mandatory IM for uncleared swaps, there may not be as much IM posted to
protect the financial system as would be the case if the Interim Final
Rule were not promulgated. This could potentially make market
participants' positions more risky.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
Entities nearing the September 1, 2020 deadline for compliance with
the IM requirements may face difficulties in preparing to exchange
regulatory IM given the reduced operational capacity as a result of
COVID-19. By extending the compliance deadline for these entities by
one year, the Interim Final Rule may enhance efficiencies in several
ways, as this extension allows these entities to shift their focus to
emerging risks and to act diligently to comply with the IM requirements
by the revised deadlines. As such, the Interim Final Rule promotes the
financial integrity of the markets.
The Commission acknowledges that delaying compliance with the IM
requirements will result in the collection of less IM overall,
potentially making the uncleared swaps markets more susceptible to
financial contagion where the default of one counterparty could lead to
subsequent defaults of other counterparties. This could potentially
harm market integrity. However, because this extension covers a
relatively smaller share of the swaps market, the Commission believes
that such a contagion is less likely to occur during the limited
extension period.
(c) Price Discovery
Delaying the margin requirement for one year for some entities may
have an effect on trading behavior, and consequently, may potentially
have an effect on price discovery. Postponing the requirement may allow
more firms to trade uncleared swaps (i.e., those who would have an AANA
above $50 billion based on March-May 2020, yet could not comply with
the IM requirements by September 2020). This, in turn, could make the
uncleared swaps market more liquid, so that trading would be more
likely to result in prices that reflect fundamentals.
(d) Sound Risk Management
By deferring the September 1, 2020 deadline by one year, the
Interim Final Rule will have the effect of relieving some of the burden
on managerial resources, at a time when such resources are strained
from the COVID-19 outbreak. As such, the Interim Final Rule allows
covered entities to more readily undertake proper business continuity
measures and address the market, liquidity, operational, and other
risks brought about by the pandemic. In this sense, the Interim Final
Rule promotes sound risk management.
Uncleared swaps entered into during the one year compliance delay
may be treated as legacy swaps exempt from the IM requirement. As such,
less collateral would be collected to offset the risk of uncleared
swaps, increasing the risk of contagion and systemic risk to the United
States.
As noted above, the Interim Final Rule addresses entities whose
uncleared swap portfolios tend to be smaller than entities that came
into scope in earlier phases, comprising approximately 200 entities
that represent 8% of total AANA, as estimated by the OCE.\55\ This
modest share of notional amount spread across those entities likely
means that the uncollateralized swaps entered into by these entities
during the one year delay pose relatively less risk to the financial
markets than the swaps entered into by the entities with larger swap
portfolios that are already subject to the IM requirements.
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\55\ See OCE Initial Margin Phase 5 Study at 4.
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(e) Other Public Interest Considerations
The Interim Final Rule amends the CFTC Margin Rule consistent with
the revised BCBS/IOSCO margin framework, promoting harmonization with
international and domestic margin regulatory requirements and reducing
the potential for regulatory arbitrage.
Request for Comments on Cost-Benefit Considerations. The Commission
invites public comment on its cost-benefit considerations, including
the section 15(a) factors described above. 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 amendment 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 this Act, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market or registered futures association established
pursuant to section 17 of this Act.'' \56\
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\56\ 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 the Interim Final Rule implicates any other
specific public interest to be protected by the antitrust laws.
The Commission has considered the Interim Final Rule to determine
whether it is anticompetitive and has preliminarily identified no
anticompetitive effects. The Commission requests comment on whether the
Interim Final Rule is anticompetitive and, if it is, what the
anticompetitive effects are.
Because the Commission has preliminarily determined that the
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 Act. The Commission requests
comment on whether there are less anticompetitive means of achieving
the relevant purposes of the Act that would otherwise be served by
adopting the 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 part 23 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. Amend Sec. 23.161 by revising paragraph (a)(6) to read as follows:
Sec. 23.161 Compliance dates.
(a) * * *
(6) September 1, 2021 for the requirements in Sec. 23.152 for
initial margin for any uncleared swaps where both--
(i) The covered swap entity combined with all its margin
affiliates; and
(ii) Its counterparty combined with all its margin affiliates have
an average
[[Page 41353]]
daily aggregate notional amount of uncleared swaps, uncleared security-
based swaps, foreign exchange forwards, and foreign exchange swaps in
March, April, and May 2021 that exceeds $50 billion, where such amounts
are calculated only for business days; and where
(iii) In calculating the amounts in paragraphs (a)(6)(i) and (ii)
of this section, an entity shall count the average daily notional
amount of an uncleared swap, an uncleared security-based swap, a
foreign exchange forward, or a foreign exchange swap between the entity
and a margin affiliate only one time and shall not count a swap that is
exempt pursuant to Sec. 23.150(b) or a security-based swap that is
exempt pursuant to section 15F(e) of the Securities Exchange Act of
1934 (15 U.S.C. 78o.10(e)).
* * * * *
Issued in Washington, DC, on June 1, 2020, by the Commission.
Robert Sidman,
Deputy 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 Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Supporting Statement of Chairman Heath P. Tarbert
If there were no uncertainty, there would be no derivatives
markets. Indeed, the CFTC is in the business of regulating markets
that enable market participants to hedge their risks. But there are
some exogenous events that come but once a century--a so-called
Black Swan--which even prudent risk management can neither foresee
nor adequately prepare for. The United States and much of the world
is now facing such an event in the form of the COVID-19
(coronavirus) pandemic.
Two months ago, the Commission voted to extend the compliance
schedule for initial margin requirements for uncleared swaps for
those entities with the smallest swaps portfolios.\1\ This extension
split Phase 5 of the schedule in two, creating a new Phase 6
composed of entities with swaps portfolios between $8 billion and
$50 billion in average aggregate notional amount (``AANA'').
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\1\ Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants, 85 FR 19,878 (published in the Federal
Register Apr. 9, 2020) (``March 2020 IM Rule'').
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The Commission deferred the compliance deadline for entities in
this new Phase 6 for one year. This was due to the complex
operational burdens these entities will face and the fact these
entities account for less than 3 percent of total uncleared swaps
AANA.\2\ Phase 5--which comprises entities with larger swaps
portfolios \3\--remained subject to the prior compliance deadline.
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\2\ Statement of CFTC Chairman Heath P. Tarbert in Support of
Extending Relief for Initial Margin Requirements for Uncleared Swaps
(Mar. 18, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement031820 (citing Richard Haynes, Madison Lau, & Bruce
Tuckman, Office of the Chief Economist, CFTC, Initial Margin Phase 5
(Oct. 2018)).
\3\ As a result of the March 2020 IM Rule, Phase 5 is now made
up of entities with $50 billion to $750 billion in AANA.
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These timelines did not factor in the most severe economic
downturn the world has witnessed since the Great Depression. Today
we are doing so. Accordingly, I support our interim final rule
(``IFR'') deferring the compliance date for the Commission's initial
margin requirements for uncleared swaps in response to the
coronavirus pandemic. This rule would provide a one-year extension
for Phase 5 entities, which would otherwise become subject to
initial margin requirements in just three months, on September 1,
2020. I believe issuing this IFR is appropriate from both a
substance and a process perspective.
Need for the Extension
First, allow me to explain the substance of why an extension is
necessary. As everyone listening is painfully aware, we are in the
midst of a global pandemic. Economies across the world have largely
shut down in response to social distancing needs. Market volatility
has reached historic levels. Financial firms, like so many other
organizations, have been forced into a near-total remote-working
posture. These extraordinary market conditions and operational
shifts demand that financial firms--including those regulated by the
CFTC--devote an inordinate amount of time and resources to day-to-
day operational, business continuity, and risk-management efforts.
Preparation for compliance with initial margin requirements
requires procuring compliant documentation; setting up custodial
arrangements; and establishing internal processes for the
calculation, collection, and posting of initial margin, among other
things. These steps are both time intensive and resource intensive.
For many firms, the intense effort necessary to meet the imminent
compliance deadline would divert focus and resources from their
respective coronavirus responses. Moreover, working from home has
made it difficult to access required legal and operational
documentation and communicate with counterparties.
Recognizing these concerns, the Basel Committee on Banking
Supervision and International Organization of Securities Commissions
have jointly extended their initial margin compliance schedule.
Several BCBS/IOSCO members have already taken steps to implement
this relief.
As I have said before, the CFTC's margin rules are a key
systemic risk mitigant. However, the market participants receiving
an extension under this IFR have some of the smallest uncleared
swaps portfolios. Indeed, Phase 5 entities collectively represent
only 8 percent of total AANA across all margin phases.
We must balance the critical need to marshal scarce operational
resources for pandemic response against the relatively small risks
posed by a one-year compliance delay. The circumstances here weigh
clearly in favor of being consistent with our international
counterparts in granting the extension.
Need for an Interim Final Rule
Now, I will address the process for granting this extension. I
have made very clear in the past that I believe the Commission
should regulate via notice-and-comment rulemakings where possible.
This gives the public a voice in the regulatory process and provides
the agency the benefit of commenters' expertise and experience.
Indeed, since I joined the CFTC last July, we have issued 11 final
rules and 15 proposed rules, not counting the two we are voting on
today.
However, as I have said before, there are certain circumstances
in which prior notice and comment is not an ideal regulatory
vehicle. Congress recognized this in the Administrative Procedure
Act. For example, the statute makes clear that agencies need not
engage in the prior notice-and-comment process where doing so would
be ``impracticable, unnecessary, or contrary to the public
interest.'' In those circumstances, agencies may issue an interim
final rule--that is, a rule that is effective after issuance without
further public comment and agency response. The public may comment
on the IFR after it becomes effective, and the agency may issue a
revised final rule if those comments warrant changes to the IFR.
Here, providing a public comment period before issuing the
extension would be both impracticable and contrary to the public
interest. Challenges related to the coronavirus pandemic have
already become dire. And because the current deadline for Phase 5
firms is only three months away, initial margin preparation demands
are extremely pressing right now. If we opened even the shortest
permissible comment period and incorporated those comments into a
final rule, any relief issued likely would already be moot. Although
we are soliciting comments on the IFR, we believe that Phase 5
entities need relief that is effective now in order to maintain
focus on the real business continuity and risk-management issues
they are facing today.
By contrast, because the Phase 6 compliance date is not until
September 2021, the CFTC will address an extension for Phase 6
through the traditional notice-and-comment rulemaking process.
However, I recognize the importance of clarity and certainty for
Phase 6 market participants. So I expect we will issue a proposed
rule in that
[[Page 41354]]
regard in the very near term and proceed with that rulemaking as
expeditiously as possible.
As previously demonstrated by our staff's coronavirus-related
no-action relief,\4\ the CFTC stands ready to do whatever is
necessary to help regulated entities weather the current crisis. I
hope today's compliance schedule extension will help give firms the
capacity they need to do so.
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\4\ These no-action letters are available at https://www.cftc.gov/coronavirus.
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Appendix 3--Supporting Statement of Commissioner Brian Quintenz
I am pleased to support the interim final rule to defer the
phase 5 compliance date of September 1, 2020 to September 1, 2021 in
light of the unprecedented economic and social impacts of COVID-19.
Under these difficult circumstances, I think it is appropriate to
provide phase 5 firms with additional time to comply, ensuring that
their already strained resources are not diverted from ongoing
business continuity efforts. I would also support a one year
deferral for the phase 6 compliance date, in line with the BCBS-
IOSCO recent amendments to the recommended margin framework to push
out, respectively, the phase 5 and phase 6 compliance dates by one
year.\1\ As I have noted previously, given the large number of firms
brought into scope during phases 5 and 6, the estimated 7,000
initial margin relationships that need to be negotiated, and the
small overall percentage of swap activity these firms represent, a
one year deferral for these final phases is appropriate in order to
facilitate an efficient, orderly transition for the market into the
uncleared margin regime.
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\1\ See Basel Committee on Banking Supervision and Board of the
International Organization of Securities Commissions, Margin
Requirements for Non[hyphen]Centrally Cleared Derivatives (Apr.
2020), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD651.pdf.
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As we approach these final compliance deadlines, I also think it
is appropriate to reflect on how the uncleared margin regime can be
improved to address some of the compliance challenges experienced in
earlier stages. During last week's meeting of the Global Markets
Advisory Committee (GMAC), I found the presentation of the
Subcommittee on Margin Requirements for Non-Cleared Swaps regarding
its recommendations to improve our margin framework to be incredibly
informative.\2\ I look forward to working with staff to review all
of the Subcommittee's recommendations and I appreciate the hard
work, thoughtfulness, and dedication that went into producing the
Subcommittee's report.
---------------------------------------------------------------------------
\2\ See Recommendations to Improve Scoping and Implementation of
Initial Margin Requirements for Non-Cleared Swaps, Report to the
CFTC's Global Markets Advisory Committee by the Subcommittee on
Margin Requirements for Non-Cleared Swaps (May 2020), https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download.
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Appendix 4--Statement of Commissioner Rostin Behnam
A little over two months ago, the Commission cancelled a
scheduled open public meeting due to the COVID-19 pandemic.\1\ One
of the three matters on the agenda for deliberation that day was the
most recent amendment to the CFTC Margin Rule, which sought to align
the compliance schedule for initial margin or ``IM'' requirements
with recent changes to the BCBS/IOSCO framework extending
implementation dates through September 1, 2021. The Commission
ultimately voted to approve a final rule, the April 2020 Final Rule,
extending the schedule one year by dividing the last compliance
``phase''--which had been phase 5--into two phases, now phases 5 and
6.\2\ The primary stated purpose for the extension was to mitigate
the potential for market disruption that could result from the large
number of entities--approximately 700--coming into compliance with
IM requirements at the same time.\3\ The Commission's action
reflected further efforts to coordinate and harmonize with
international counterparts and U.S. Prudential Regulators, who
establish the margin requirement for the uncleared swaps of swap
dealers and major swaps participants for whom they are the primary
regulator.\4\
---------------------------------------------------------------------------
\1\ Press Release Number 8131-20, CFTC, CFTC Cancels March Open
Meeting (Mar. 16, 2020), https://www.cftc.gov/PressRoom/PressReleases/8131-20.
\2\ See Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 85 FR 19878 (Apr. 9, 2020).
\3\ Id. at 19879.
\4\ Id.
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Today's interim final rule will amend the CFTC Margin Rule a
second time. The interim final rule will align part of the remaining
compliance schedule--phase 5--with recent revisions to the BCBS/
IOSCO framework further extending the implementation schedule for
the margin requirements for non-centrally cleared derivatives by one
year in response to concerns expressed by market participants in the
early stages of the COVID-19 pandemic. The interim final rule does
not address the last compliance phase, phase 6, beginning on
September 1, 2021. While a similar extension would preserve both the
intent of the recent amendments to the CFTC Margin Rule and
consistency with the BCBS/IOSCO framework, the standards for
foregoing notice and comment rulemaking procedures under the
Administrative Procedure Act \5\ are rightfully high and
demonstrating separate exigency for the 2021 compliance deadline
without notice and comment would be inappropriate given that there
is adequate time for the process. Accordingly, the Commission is
focusing its resources on entities that will need relief within the
next several months.
---------------------------------------------------------------------------
\5\ See 5 U.S.C. 553(b).
---------------------------------------------------------------------------
I approved the April 2020 Final Rule cautiously; noting that
this seminal part of the policy response following the 2008
financial crisis was perhaps becoming even more critical as we
collectively faced the uncertainty of COVID-19.\6\ As I highlighted
in my statement, in times of market stress and volatility, margin
not only provides confidence, but it embodies vigilance when
responding to risks and real-world concerns. While I believed--and
continue to believe--that it is important to address transition
risks associated with IM implementation, it is nevertheless my
expectation that covered entities will work diligently in the time
they are given to come into compliance.
---------------------------------------------------------------------------
\6\ 85 FR at 19883.
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I have and continue to be fully prepared to respond to the
fallout of current market conditions as a result of the pandemic,
and will not hesitate to act within my capacity to preserve market
interests and protect customers and market participants, I have no
appetite for an indefinite deferral of the final phases for IM
implementation. We are collectively working through the COVID-19
pandemic towards goals of continuity, resiliency, and normalcy. I do
not believe that there is any circumstance where that equates to
abandonment of core reforms at a time when the very relief being
sought is a result of addressing market volatility and stress.
I support today's interim final rule deferring for one year
compliance for the phase 5 swap entities that would come into scope
beginning on September 1st of this year. I base my decision on
representations that the COVID-19 pandemic has severely and
adversely impacted preparations for the exchange of regulatory IM.
Such disruption will undeniably make compliance with the September
1, 2020 deadline untenable if doing so diverts already strained
resources from critical continuity functions. I have some concerns
that by postponing the compliance deadline, we are inviting
increased counterparty risk and the risk of contagion through the
additional uncleared swaps that will be entered into during the one
year extension period and will not be subject to IM requirements.
Addressing claims for relief due to increased market volatility by
delaying margin requirements for a subset of swaps seems
counterintuitive, and I am pleased that the Commission is soliciting
comments on the matter. I am hopeful that the Commission will take
appropriate action if subsequent facts or comments so require.
In closing, I'd like to recognize Commissioner Stump and her
leadership as Sponsor of the Global Markets Advisory Committee,
which recently adopted recommendations in connection with
implementation of the IM requirements for uncleared swaps for the
Commission to consider.\7\ Also, I wish to thank the staff in the
Division of Swap Dealer and Intermediary Oversight for their
diligent and thoughtful work on this interim final rule.
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\7\ See Recommendations to Improve Scoping and Implementation of
Initial Margin Requirements for Non-Cleared Swaps, Report to the
CFTC's Global Markets Advisory Committee by the Subcommittee on
Margin Requirements for Non-Cleared Swaps, April 2020, https://www.cftc.gov/media/3886/GMAC_05192020MarginSubcommitteeReport/download.
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Appendix 5--Concurring Statement of Commissioner Dan M. Berkovitz
I concur with issuing the interim final rule to extend by one
year the initial swap margin compliance deadline for ``Phase V''
financial entities that is currently set for September 1, 2020
(``IFR'').
[[Page 41355]]
As I have stated previously, the Commission should be reluctant
to extend compliance deadlines when a long lead-in period has been
provided. The 2020 compliance date for the swap margin rule was
originally set in January 2016. However, the COVID-19 pandemic is
significantly impacting business operations just as the negotiation
and implementation of the initial margin agreements and processes
for Phase V are in full swing leading up to the September 1, 2020
deadline. These activities can be time consuming and require
substantial human interaction given the need to negotiate terms and
third party custodial agreements, and agree on margin calculation
methods. Accordingly, while many firms were undertaking this
process, it appears that a substantial amount of work remained for
Phase V firms just as the COVID-19 pandemic erupted.
With respect to the length of the extension, the progress of the
pandemic and speed at which work operations will normalize is
uncertain. As discussed in the IFR, on April 3, 2020, the Basel
Committee on Banking Supervision and Board of the International
Organization of Securities Commissions (``BCBS/IOSCO'') amended its
existing margin policy framework to extend the relevant comparable
compliance date to September 1, 2021.\1\ While the Commission is not
obligated to follow this framework, doing so when reasonable and on
the same timeline as other regulators will reduce the likelihood of
regulatory arbitrage. Given that the existing September 1, 2020
compliance date is fast approaching, and recognizing the benefits of
international cooperation on this issue, I will support the one-year
extension as provided in the IFR.
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\1\ The BCBS/IOSCO was directed to establish a policy framework
for implementation of margin requirements globally. See G20
Information Centre, Cannes Summit Final Declaration, http://www.g20.utoronto.ca/2011/2011-cannes-declaration-111104-en.html.
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At the same time, it is critical that we continue to emphasize
the importance of requiring margin for uncleared swaps. During the
2008 financial crisis, when margin for uncleared swaps was not
required, American International Group (``AIG'') would have failed
as a result of its pending default on swaps that, according to AIG
personnel, only months earlier presented little or no risk exposure
for AIG. The Federal Reserve System and the U.S. Department of the
Treasury provided over $180 billion of support to prevent that
outcome.\2\ A default by AIG would have substantially damaged its
swap counterparties and left other market participants uncertain as
to the knock-on effects of that default.
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\2\ See Interpretive Guidance and Policy Statement Regarding
Compliance with Certain Swap Regulations, 78 FR 45292, 45293-94
(July 26, 2013).
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Requiring margin for uncleared swaps is a critical part of our
regulatory framework that was put in place to help prevent another
financial crisis. Uncleared swaps activity remains vigorous. The
requirement to post initial margin helps mitigate systemic risk and
reduce counterparty contagion and related effects by ensuring that
collateral is available to offset losses from the default of
counterparties. In response to the 2008 financial crisis, the Dodd-
Frank Act required that the Commission establish minimum initial and
variation margin regulations for certain swaps entered into by swap
dealers.\3\ The need for margin was also recognized by the G20
nations when the G20 directed the BCBS/IOSCO to establish the swap
margin policy framework for global implementation of margin
requirements.\4\
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\3\ Commodity Exchange Act section 4s(e).
\4\ G20 Information Centre, Cannes Summit Final Declaration,
http://www.g20.utoronto.ca/2011/2011-cannes-declaration-111104-en.html.
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The IFR notes that Phase V is estimated to cover about eight
percent of the swap trading activity for firms that may be subject
to the margin requirements, and therefore that the uncollateralized
swaps entered into by the entities in this phase ``pose less risk to
the financial markets than the risk posed by uncleared swaps entered
into by entities that have already come into the scope of IM
compliance.'' \5\ While literally correct, this statement only
relates to relative risk with respect to other swap activities and
says nothing about the absolute known or unknown risk posed by the
swap activity covered by the Phase V extension. The Commission's
statement regarding this relative risk should not be misinterpreted
to provide justification for any further extensions or exceptions
from the margin requirements for these entities.
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\5\ IFR, Section II.
[FR Doc. 2020-12033 Filed 7-9-20; 8:45 am]
BILLING CODE 6351-01-P