2020-25394
Federal Register, Volume 85 Issue 230 (Monday, November 30, 2020)
[Federal Register Volume 85, Number 230 (Monday, November 30, 2020)]
[Rules and Regulations]
[Pages 76428-76450]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25394]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 50
RIN 3038-AE33
Swap Clearing Requirement Exemptions
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is adopting amendments to the regulations governing which swaps are
exempt from the clearing requirement set forth in applicable provisions
of the Commodity Exchange Act (CEA). These amendments exempt from the
clearing requirement swaps entered into by certain central banks,
sovereign entities, international financial institutions, bank holding
companies, savings and loan holding companies, and community
development financial institutions. The Commission also is publishing a
compliance schedule setting forth all the past compliance dates for the
2012 and 2016 swap clearing requirement regulations. Finally, the
Commission is making certain other, non-substantive technical
amendments.
DATES: The effective date for this final rule is December 30, 2020.
FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Deputy Director,
at 202-418-5684 or [email protected]; Megan A. Wallace, Senior
Special Counsel, at 202-418-5150 or [email protected]; Melissa D'Arcy,
Special Counsel, at 202-418-5086 or [email protected]; Division of
Clearing and Risk; or Ayla Kayhan, Office of the Chief Economist, at
202-418-5947 or [email protected], in each case at the Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Ongoing Review of 17 CFR Part 50 Regulations and May 2020
Proposal
B. Swap Clearing Requirement
C. Swaps With Central Banks, Sovereign Entities, and IFIs
D. DCR No-Action Letters for Four Additional IFIs
E. DCR No-Action Letters for Certain Bank Holding Companies, and
Savings and Loan Holding Companies, and CDFIs
F. DCR No-Action Letters for Relief for Community Development
Financial Institutions
II. Final Rule for Swaps Not Subject to the Clearing Requirement
A. May 2020 Proposal
B. Comments Received
C. Swaps Entered Into by Central Banks, Sovereign Entities, and
IFIs
D. Exemption for Certain Central Banks, Sovereign Entities, and
IFIs
E. Data Related to Swaps Entered Into by IFIs
F. Swaps Entered Into by Bank Holding Companies, Savings and
Loan Holdings Companies, and CDFIs
G. Exemption for CDFIs
H. Exemption for Certain Bank Holding Companies and Savings and
Loan Holding Companies
I. Data Related to Swaps Entered Into by CDFIs, Bank Holding
Companies, and Savings and Loan Holding Companies
J. Adoption of Subpart D of Part 50
III. Clearing Requirement Compliance Schedule and Compliance Dates
IV. Technical Amendment to Subpart C for Banks, Savings
Associations, Farm Credit System Institutions, and Credit Unions
[[Page 76429]]
V. Commission's Section 4(c) Authority
A. Central Banks, Sovereign Entities and IFIs
B. CDFIs, Certain Bank Holding Companies and Savings and Loan
Holding Companies
VI. Final Rules Do Not Effect Margin Requirements for Uncleared
Swaps
VII. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background
A. Ongoing Review of 17 CFR Part 50 Regulations and May 2020 Proposal
On May 9, 2017, the Commission published in the Federal Register a
request for information seeking suggestions from the public for
simplifying the Commission's regulations and practices, removing
unnecessary burdens, and reducing costs.\1\ In response, a number of
commenters asked the Commission to codify certain staff no-action
letters and Commission guidance, including those that are the subject
of this rulemaking.\2\ The Commission also engaged in an agency-wide
review of its regulations and practices to make them simpler, less
burdensome, and less costly.
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\1\ See Project KISS, 82 FR 21494 (May 9, 2017) and Project
KISS, 82 FR 23765 (May 24, 2017).
\2\ See, e.g., Comment letter from the Institute of
International Banking, International Swaps and Derivatives
Association, Inc., and Securities Industry and Financial Markets
Association, dated July 24, 2017, at 2.
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On May 12, 2020, the Commission published a notice of proposed
rulemaking \3\ that would exempt from the swap clearing requirement (1)
swaps entered into by certain central banks, sovereign entities, and
international financial institutions (IFIs), as set forth in the
preamble to the 2012 End-User Exception final rule; \4\ (2) swaps
entered into by four additional IFIs that previously received staff no-
action letters from the Commission's Division of Clearing and Risk
(DCR) in 2013 and 2017; \5\ and (3) swaps entered into by certain bank
holding companies and savings and loan holding companies, as well as
community development financial institutions (CDFIs).\6\
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\3\ Swap Clearing Requirement Exemptions, 85 FR 27955 (May 12,
2020) (hereinafter referred to as the May 2020 Proposal).
\4\ May 2020 Proposal at 27957-27961 (citing the End-User
Exception to the Clearing Requirement for Swaps, 77 FR 42560 (Jul.
19, 2012)).
\5\ See CFTC Letter No. 13-25 (June 10, 2013) (providing no-
action relief to the Corporaci[oacute]n Andina de Fomento); CFTC
Letter No. 17-57 (Nov. 7, 2017) (providing no-action relief to Banco
Centroamericano de Integraci[oacute]n Econ[oacute]mica); CFTC Letter
No. 17-58 (Nov. 7, 2017) (providing no-action relief to the European
Stability Mechanism and for which an expiration date was added in
CFTC Letter Nos. 19-23 (Oct. 16, 2019), 20-13 (Apr. 14, 2020), and
20-22 (Aug. 27, 2020) (providing that no-action relief to the
European Stability Mechanism expires on December 31, 2020)); and
CFTC Letter No. 17-59 (Nov. 7, 2017) (providing no-action relief to
the North American Development Bank).
\6\ The May 2020 Proposal included a supplemental notice of
proposed rulemaking related to an August 2018 proposal issued by the
Commission. See Amendments to Clearing Exemption for Swaps Entered
Into by Certain Bank Holding Companies, Savings and Loan Holding
Companies, and Community Development Financial Institutions, 83 FR
44001 (Aug. 29, 2018) (hereinafter referred to as the August 2018
Proposal). Both the August 2018 Proposal and the May 2020 Proposal
(together, the Proposals) proposed to codify CFTC Letter No. 16-01
(Jan. 8, 2016) (providing no-action relief to certain small bank
holding companies and savings and loan holding companies pursuant to
a request from the American Bankers Association); and CFTC Letter
No. 16-02 (Jan. 8, 2016) (providing no-action relief to community
development financial institutions pursuant to a request from a
coalition of such entities).
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The Commission also proposed revisions to part 50 intended to
simplify the requirements and minimize compliance burdens for market
participants. The Commission proposed to add a compliance date chart
for all swaps that the Commission has determined are required to be
cleared under Commission regulation Sec. 50.4.\7\ In addition, the
Commission proposed improvements to the structure and organization of
17 CFR part 50 through heading changes and restructuring amendments.\8\
Finally, the Commission proposed the creation of a new subpart D to
distinguish 17 CFR part 50 exemptions that apply to specific swaps from
the exceptions and exemptions for market participants eligible to elect
an exception or exemption under subpart C.\9\
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\7\ May 2020 Proposal, 85 FR at 27962.
\8\ For example, the Commission proposed that the provisions
exempting eligible banks, savings associations, farm credit
institutions, and credit unions from the definition of ``financial
entity'' for purposes of the swap clearing requirement be moved to a
separate regulation at 17 CFR 50.53 so that the exemption is easier
to locate and the conditions to claim the exemption are set forth
more clearly. See May 2020 Proposal, 85 FR at 27962-27963.
\9\ See id. at 27959-27960.
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B. Swap Clearing Requirement
Title 17 CFR part 50 of the Commission's regulations implements the
swap clearing requirement under section 2(h) of the CEA. The swap
clearing requirement under section 2(h)(1)(A) of the CEA states that if
the Commission requires a swap to be cleared, then it is unlawful for
any person to engage in that swap unless the swap is submitted for
clearing to a derivatives clearing organization (DCO) that is
registered under the CEA or a DCO that the Commission has exempted from
registration. The Commission has adopted swap clearing requirement
determinations for certain classes of interest rate swaps and credit
default swaps.\10\ Swaps that are subject to the Commission's swap
clearing requirement are described in Commission regulation Sec. 50.4
(Clearing Requirement).
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\10\ Clearing Requirement Determination Under Section 2(h) of
the CEA, 77 FR 74284 (Dec. 13, 2012) (hereinafter referred to as the
2012 Clearing Requirement Determination) and Clearing Requirement
Determination Under Section 2(h) of the CEA for Interest Rate Swaps,
81 FR 71202 (Oct. 14, 2016) (hereinafter referred to as the 2016
Clearing Requirement Determination).
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Title 17 CFR part 50 of the Commission's regulations also includes
a number of exceptions to and exemptions from the Clearing Requirement.
Certain of these exceptions or exemptions are based on statutory
principles (e.g., the end-user exception),\11\ and others were adopted
pursuant to the Commission's public interest exemption authority (e.g.,
the exemption for swaps entered into by certain cooperatives and the
exemption for swaps between affiliated entities).\12\
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\11\ 2012 End-User Exception, 77 FR 42560.
\12\ Clearing Exemption for Certain Swaps Entered Into by
Cooperatives, 78 FR 52286 (Aug. 22, 2013); Clearing Exemption for
Swaps Between Certain Affiliated Entities, 78 FR 21750 (Apr. 11,
2013); and Exemption from the Swap Clearing Requirement for Certain
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures, 85 FR 44170 (Jul. 22, 2020).
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C. Swaps With Central Banks, Sovereign Entities, and IFIs
In the preamble to the 2012 End-User Exception, the Commission
determined that foreign central banks, foreign governments, and IFIs
should not be subject to the swap clearing requirement set forth in
section 2(h)(1) of the CEA.\13\ This determination was based on
considerations of comity and was in keeping with the traditions of the
international system.\14\ The Commission also stated that the Bank for
International Settlements (BIS), of which the Federal Reserve and
foreign central banks are members, should be considered to be a foreign
central bank, and, therefore, swaps entered into by the BIS should not
be subject to the Clearing Requirement.\15\
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\13\ See 2012 End-User Exception, at 42561-42562.
\14\ See id.
\15\ Id. at 42561, n.13.
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The Commission provided several reasons in support of its
determination. First, the Federal Reserve Banks and the Federal
Government are not subject to the Clearing Requirement under the
CEA.\16\ Therefore, the Commission
[[Page 76430]]
stated it would expect that if any part of the Federal Government, the
Federal Reserve Banks, or IFIs of which the United States is a member
were to engage in swaps in a foreign jurisdiction, the actions of those
entities with respect to those swaps should not be subject to foreign
regulation.\17\ Second, the Commission stated that canons of statutory
construction ``assume that legislators take account of the legitimate
sovereign interests of other nations when they write American laws.''
\18\ Third, the Commission noted that IFIs operate with the benefit of
certain privileges and immunities under U.S. law, which indicates that
such entities may be treated similarly under certain circumstances.\19\
Finally, the Commission stated that there is nothing in the text or
legislative history of the swap-related provisions of the Dodd-Frank
Act to establish that Congress intended to deviate from the traditions
of the international system by subjecting foreign central banks,
foreign governments, or IFIs to the Clearing Requirement set forth in
section 2(h)(1) of the CEA.\20\
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\16\ Id. at 42562. Under the Dodd-Frank Act, Congress
specifically excluded any agreement, contract, or transaction a
counterparty of which is a Federal Reserve bank, the Federal
Government, or a Federal agency that is expressly backed by the full
faith and credit of the United States from the definition of a swap
under section 1a(47)(B)(ix) of the CEA. Public Law 111-203, 124
Stat. 1376 (2010). Only transactions that are swaps are subject to
the Clearing Requirement. See section 2(h) of the CEA.
\17\ Id. at 42561-42562.
\18\ Id. at 42562 (citing F. Hoffman-LaRoche Ltd. v. Empagran
S.A., 542 U.S. 155, 164 (2004)).
\19\ Id. at 42562 (citing various provisions of the U.S. Code
and a CFTC staff interpretative letter, which stated that ``[b]ased
on the unique attributes and status of the World Bank Group as a
multinational member agency, . . . the CFTC believes that the World
Bank Group need not be treated as a U.S. person for purposes of
application of the CFTC's Part 30 rules.''). The Commission also
cited to a determination of the Board of Governors of the Federal
Reserve that the Bank Holding Company Act does not apply to foreign
governments because they are not ``companies'' as such term is
defined in the Bank Holding Company Act. Id.
\20\ Id. at 42562. The Commission also noted that if a foreign
central bank, foreign government, or IFI enters into an uncleared
swap with a counterparty that is subject to the CEA and Commission
regulations with regard to that transaction, then the counterparty
should still comply with applicable Commission requirements under
parts 23 and 45 of the Commission's regulations. Id.
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In the preamble to the 2012 End-User Exception, the Commission also
determined that the IFIs that would be exempt from the Clearing
Requirement to be those institutions defined as such in section
262r(c)(2) of Title 22 of the U.S. Code,\21\ and the multilateral
development banks (MDBs) included in the Proposal for the Regulation of
the European Parliament and of the Council of the European Union Final
Compromise Text, Article 1(4a(a)) (March 19, 2012).\22\ Under EMIR,
European authorities exempted 12 MDBs from all requirements apart from
reporting obligations.\23\ Based on these two sources, the Commission
identified 17 IFIs that would not be subject to the Clearing
Requirement under its policy determination.\24\
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\21\ 22 U.S.C. 262r(c)(2). The IFIs included in the U.S. Code in
2011 were the International Monetary Fund, International Bank for
Reconstruction and Development, European Bank for Reconstruction and
Development, International Development Association, International
Finance Corporation, Multilateral Investment Guarantee Agency,
African Development Bank, African Development Fund, Asian
Development Bank, Inter-American Development Bank, Bank for Economic
Cooperation and Development in the Middle East and North Africa, and
Inter-American Investment Corporation.
\22\ 77 FR at 42561 n.14. This provision was enacted as Article
1(5)(a) of the European Market Infrastructure Reform (EMIR), and
exempts those entities from all but the reporting requirement of
EMIR. See Regulation (EU) No 648/2012 of the European Parliament and
of the Council of 4 July 2012 on OTC derivatives, central
counterparties and trade repositories, 2012 OJ (L201)1. Section 4.2
of part 1 of Annex VI to Directive 2006/48/EC, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32012R0648 and
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32006L0048. See also discussion below regarding
subsequent updates to EMIR.
\23\ The 12 entities exempt from the EMIR were the following:
(1) International Bank for Reconstruction and Development; (2)
International Finance Corporation; (3) Inter-American Development
Bank; (4) Asian Development Bank; (5) African Development Bank; (6)
Council of Europe Development Bank; (7) Nordic Investment Bank; (8)
Caribbean Development Bank; (9) European Bank for Reconstruction and
Development; (10) European Investment Bank; (11) European Investment
Fund; and (12) Multilateral Investment Guarantee Agency. The
Commission noted that the exemption for IFIs would be consistent
with EMIR and other foreign laws. 77 FR at 42561 n.14.
\24\ The 17 international financial institutions identified in
the preamble to the 2012 End-User Exception final rule are: (1)
African Development Bank; (2) African Development Fund; (3) Asian
Development Bank; (4) Bank for Economic Cooperation and Development
in the Middle East and North Africa; (5) Caribbean Development Bank;
(6) Council of Europe Development Bank; (7) European Bank for
Reconstruction and Development; (8) European Investment Bank; (9)
European Investment Fund; (10) Inter-American Development Bank; (11)
Inter-American Investment Corporation; (12) International Bank for
Reconstruction and Development (part of the World Bank Group); (13)
International Development Association (part of the World Bank
Group); (14) International Finance Corporation (part of the World
Bank Group); (15) International Monetary Fund; (16) Multilateral
Investment Guarantee Agency (part of the World Bank Group); and (17)
Nordic Investment Bank. 77 FR at 42561-42562 n.14.
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D. DCR No-Action Letters for Four Additional IFIs
Based on the Commission's action in the preamble to the 2012 End-
User Exception, DCR issued staff no-action letters to four additional
IFIs stating that the division would not recommend the Commission take
enforcement action against such entities for not clearing swaps that
otherwise would be subject to the Clearing Requirement, provided the
IFIs satisfied certain conditions.\25\ These institutions include: (1)
The Corporaci[oacute]n Andina de Fomento (CAF), an economic development
financing institution established pursuant to a treaty among 10 Latin
American countries; \26\ (2) Banco Centroamericano de
Integraci[oacute]n Econ[oacute]mica (CABEI), an economic development
financing institution established pursuant to a treaty among 11 Latin
American countries, Spain, and Taiwan; \27\ (3) the European Stability
Mechanism (ESM), a lending institution established by European Union
member states to provide emergency financial assistance to member
states located in the Eurozone; \28\ and (4) the North American
Development Bank (NADB), a financing institution established by the
United States and Mexico under the auspices of the North American Free
Trade Agreement to finance environmentally sustainable infrastructure
projects in the region along the U.S.-Mexican border.\29\ In their
request letters, CAF, CABEI, ESM, and NADB each stated that their
functions, missions, and ownership structures are analogous to the
functions, missions, and ownership structures of the IFIs included in
the 2012 End-User Exception.\30\
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\25\ DCR required each IFI to comply with other provisions of
the CEA and the Commission's regulations, such as the recordkeeping
and reporting requirements under parts 23 and 45 of the Commission's
regulations, which would apply to an uncleared swap entered into by
an IFI opposite a counterparty that is otherwise subject to the CEA
and Commission regulations.
\26\ CFTC Letter No. 13-25.
\27\ CFTC Letter No. 17-57.
\28\ CFTC Letter No. 17-58. In CFTC Letter No. 20-22, on August
27, 2020, DCR staff extended the expiration date of this no-action
letter until December 31, 2020. The relief provided in CFTC Letter
No. 20-22 will continue until the effective date of these final
rules.
\29\ CFTC Letter No. 17-59.
\30\ For example, NADB was included as a MDB in the report
required by 22 U.S.C. 262r(c)(2) since as early as 2012. The 2012
Report to Congress from the Chairman of the National Advisory
Council on International Monetary and Financial Policies (December
2013) (referred to herein as the 2012 NAC Report), and subsequent
reports, are available at https://www.treasury.gov/resource-center/international/development-banks/Pages/congress-index.aspx.
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E. DCR No-Action Letters for Certain Bank Holding Companies and Savings
and Loan Holding Companies and CDFIs
In 2016, DCR staff issued a no-action letter providing that the
division would not recommend enforcement action against certain bank
holding companies and savings and loan holding companies for not
clearing swaps
[[Page 76431]]
subject to the Clearing Requirement if such entities satisfy certain
conditions.\31\ At the same time, staff issued a no-action letter
providing that DCR would not recommend enforcement action against CDFIs
for not clearing certain swaps subject to the Clearing Requirement,
under specific conditions.\32\ These bank holding companies, savings
and loan holding companies, and CDFIs were not eligible to elect an
exception to the Clearing Requirement under Commission regulation Sec.
50.50(d) because they are not depository institutions.
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\31\ CFTC Letter No. 16-01 (Jan. 8, 2016) (providing no-action
relief to certain small bank holding companies and savings and loan
holding companies pursuant to a request from the American Bankers
Association).
\32\ CFTC Letter No. 16-02 (Jan. 8, 2016) (providing no-action
relief to CDFIs pursuant to a request from a Coalition of CDFIs).
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The 2016 DCR no-action letter for bank holding companies and
savings and loan holding companies applies only to holding companies
with no more than $10 billion in consolidated assets.\33\ This
limitation is consistent with the statutory provisions under section
2(h)(7)(C)(ii) of the CEA and Commission regulation Sec. 50.50(d)
applicable to depository institutions and savings associations. The DCR
letter also requires that such a holding company be using swaps to
hedge or mitigate commercial risk and notify the Commission how it
generally meets the obligations associated with entering into uncleared
swaps.\34\ Many bank holding companies and savings and loan holding
companies enter into interest rate swaps to hedge interest rate risk
that they incur as a result of issuing debt securities or making loans
to finance their subsidiary banks or savings associations.\35\ In
addition, these swaps generally have a notional amount of $10 million
or less, and the bank holding companies and savings and loan holding
companies enter into swaps less frequently than other swap
counterparties. Further, the bank holding company or savings and loan
holding company, rather than the subsidiary bank or savings
association, must enter into the swap in order to gain hedge accounting
treatment.\36\
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\33\ Under CFTC Letter No. 16-01, the limitation of no more than
$10 billion in consolidated assets means that the aggregate value of
all the assets of all the bank holding company's or savings and loan
holding company's subsidiaries on the last day of each subsidiary's
most recent fiscal year, do not exceed $10 billion. CFTC Letter No.
16-01, at 4.
\34\ See CFTC Letter No. 16-01, at 4.
\35\ CFTC Letter No. 16-01, at 3.
\36\ Id.
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Also, in 2016, in response to a request from a coalition of CDFIs,
DCR staff issued a no-action letter providing that the division would
not recommend that the Commission take enforcement action against a
CDFI for failure to comply with the Clearing Requirement, provided
certain conditions are met.\37\ DCR limited the letter to CDFIs
certified as such by the U.S. Department of the Treasury that engage in
no more than 10 interest rate swaps per year, with an aggregate
notional value cap of $200 million per year.\38\ However, DCR
recognized that there are public interest benefits that may be served
by permitting CDFIs to engage in limited swaps activity that serves
smaller, local communities.\39\ DCR also was persuaded that status as a
CDFI, pursuant to certification by the Treasury Department's Community
Development Financial Institutions Fund (CDFI Fund), would ensure that
CDFIs operate under a specific community development organizational
mission and provide financial and community development services to a
targeted market.\40\
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\37\ See CFTC Letter No. 16-02, at 4. DCR required CDFIs to file
a notice of election and additional information as described in
Commission regulation Sec. 50.50(b), and limited the election of
the exception to swaps entered into for the sole purpose of hedging
or mitigating commercial risk as described in Commission regulation
Sec. 50.50(c). Id. Letter No. 16-02 also noted that the letter did
not excuse the affected persons from compliance with any other
applicable requirements contained in the CEA or in the Commission's
regulations. Id.
\38\ See Certification as a Community Development Financial
Institution, 12 CFR 1805.201.
\39\ CFTC Letter No. 16-02, at 3.
\40\ Community development financial institutions are small in
scale and tend to serve smaller, local markets. They operate under
an organizational mission of providing financial and community
development services to underserved target markets. Community
development financial institutions are entities that must apply for,
and receive, certification from the CDFI Fund. The CDFI Fund was
created by section 104 of the Community Development Banking and
Financial Institutions Act of 1994, which is contained in Title I of
the Riegle Community Development and Regulatory Improvement Act of
1994. See Public Law 103-325, 108 Stat. 2160 (1994). See CFTC Letter
No. 16-02, at 3.
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II. Final Rule for Swaps Not Subject to the Clearing Requirement
A. May 2020 Proposal
On May 12, 2020, the Commission proposed amendments to Part 50 of
the Commission's regulations to create new exemptions from required
clearing consistent with the policy statements made by the Commission
in the 2012 End-User Exception and six no-action letters issued by DCR
beginning in 2013, to add a compliance date chart, and to make other
non-substantive technical amendments. The Commission requested comments
from market participants on all aspects of the May 2020 Proposal.
B. Comments Received
The Commission received ten comment letters in response to the May
2020 Proposal.\41\ Nearly all the comments letters supported the
Commission's proposal. Specific aspects of these comments, including
suggested changes to the rule text and other clarifications, are
discussed in detail below.
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\41\ The Commission received comments from the following: (1)
American Bankers Association; (2) Asian Infrastructure Investment
Bank (AIIB); (3) BIS; (4) Better Markets, Inc. (Better Markets), (5)
Chris Barnard; (6) the Capital Impact Partners, Community Housing
Capital, Enterprise Community Loan Fund, IFF, Low Income Investment
Fund, Reinvestment Fund, and Self-Help Ventures Fund (CDFI
Coalition); (7) ESM; (8) Inter-American Development Bank, the Inter-
American Investment Corporation, the International Bank for
Reconstruction and Development, and the International Finance
Corporation (collectively referred to as Commenting IFIs); (9) New
South Wales Treasury Corporation and (10) the Opportunity Finance
Network. All comments are available on the Commission's website at:
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3112.
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One commenter, Better Markets, expressed opposition to the proposed
exemptions for a number of reasons. Better Markets stated that the
Commission's proposal to permit financial entities to elect not to
clear swaps subject to the Clearing Requirement is unnecessarily
complex, undermines the Dodd-Frank Act's financial reform effort, and
could serve as a drain on liquidity in the cleared swap market. The
Commission believes that the final rules make the overall regulatory
framework for cleared swaps less complex, codify longstanding practice,
and are narrowly tailored to limit any impact on cleared swaps market
liquidity.
C. Swaps Entered Into by Central Banks, Sovereign Entities, and IFIs
In the May 2020 Proposal, the Commission proposed to codify its
determination that swaps entered into by central banks, sovereign
entities, and IFIs, set forth in the preamble to the 2012 End-User
Exception final rule,\42\ are not subject to the Clearing Requirement
under section 2(h)(1) of the CEA.\43\ The Commission received six
comment letters addressing this aspect of the proposal.\44\ After
considering the
[[Page 76432]]
comments, the Commission is adopting the rules largely as proposed. The
final regulations are consistent with the policy the Commission set out
in the preamble to the 2012 End-User Exception, and in finalizing the
exemption for swaps entered into by central banks and sovereign
entities in regulation Sec. 50.75 and the exemption for swaps entered
into by IFIs in regulation Sec. 50.76, the Commission is providing
legal certainty that such swaps entered into by a narrow group of
entities are not subject to the Clearing Requirement.
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\42\ See 2012 End-User Exception, 77 FR at 42561-42562.
\43\ Id. at 42562. As discussed in the preamble to the May 2020
Proposal, the Commission will refer to ``foreign governments'' as
``sovereign entities'' because it considers ``foreign governments''
and ``sovereign entities'' to mean the same thing. 85 FR at 27956
n.7, 27959.
\44\ The following comments addressed this proposal: Chris
Barnard, AIIB, ESM, BIS, New South Wales Treasury Corporation, and
Commenting IFIs.
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In response to comments received, the Commission is making one
important modification to the final regulations to clarify that the
exemption is not dependent on the exempted swaps being reported to a
swap data repository under Commission regulation Sec. Sec. 45.3 and
45.4, and this reporting obligation does not fall to central banks,
sovereign entities, or IFIs.\45\ As discussed further below, the
Commission did not intend this result and is modifying the rule text
accordingly.
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\45\ Under one reading of the proposed rule text, the exemption
is dependent on reporting the swap to a swap data repository. See
May 2020 Proposal, 85 FR at 27959.
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1. Definition of Central Bank--Sec. 50.75(a)
The Commission proposed to define ``central bank'' to mean a
reserve bank or monetary authority of a central government (including
the Board or Governors of the Federal Reserve System or any of the
Federal Reserve Banks) or the Bank for International Settlements. The
Commission did not receive any comment on its proposed definition of
central bank and is adopting the definition for ``central bank'' as
proposed.
2. Definition of Sovereign Entity--Sec. 50.75(b)
The Commission proposed to define ``sovereign entity'' to mean a
central government (including the U.S. Government), or an agency,
department, or ministry of a central government. In the 2012 End-User
Exception final rule, the Commission referred to certain exempt swap
counterparties as ``foreign governments.'' The term ``foreign
government'' is intended to refer to sovereigns, similar to the U.S.
Federal Government, that are located outside of the United States.
Because the Commission distinguished the Federal Government from state
and local government entities, the term ``foreign government'' is
intended to apply only to the Federal level of governmental
organizations.\46\
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\46\ 77 FR at 42562. The Commission stated that Congress did not
expressly exclude state and local government entities form the
``financial entity'' definition. On the contrary, in section
2(h)(7)(C)(i)(VII) of the CEA, Congress expressly included employee
benefit plans of state and local governments in the ``financial
entity'' definition, thereby prohibiting them from using the end-
user exception. Id.
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The Commission requested comment on the scope of the proposed
definition and whether an alternative definition should be adopted. The
Commission received one comment from New South Wales Treasury
Corporation addressing this issue and proposing alternative definitions
for consideration.
The commenter stated that comity and the traditions of the
international system support including foreign states and
instrumentalities (such as agencies, departments, or ministries) under
the definition of ``sovereign entity.'' The commenter further stated
that the Commission should not limit its concept of ``sovereign
entities'' based on the American distinction between states and the
Federal Government because this would adversely impact foreign
governments that operate under systems where the Federal and state
governments exist as independent bodies but operate within a
financially integrated system. The commenter proposed that the
Commission consider alternative definitions of ``sovereign entity''
including: (1) A definition that includes all foreign state
governments, agencies, departments, and ministries; (2) a definition
that includes named jurisdictions that have a constitutional basis for
sovereign authority based on a comparable recognition of the foreign
state or public authority as a ``sovereign'' under national laws; (3) a
definition based on recognition of foreign public sector entities based
on government (state or Federal) ownership; or (4) a definition based
on the alignment of an entity with capital adequacy standards under
foreign laws.
The Commission considered this comment and its proposed alternative
definitions of ``sovereign entity.'' The Commission believes the
definition of ``sovereign entity'' adopted in this final rule
appropriately limits the exemption in a manner that is consistent with
the 2012 End-User Exception and provides clarity regarding the scope of
swaps that are not subject to the Clearing Requirement. The second and
fourth alternatives proposed by the commenter would require the
Commission periodically to reassess which entities are included in the
definition based on geopolitical events or whether a specific entity
meets capital adequacy standards under foreign law. The Commission does
not believe that these alternatives provide standards that are feasible
to implement; nor are they helpful in identifying foreign government
entities that are similar to the U.S. Federal Government. Rather, the
Commission has purposefully defined the term ``sovereign entity'' so
that it excludes the concept of ``state governments.''
The first and third alternatives proposed by the commenter would
add references to foreign state governments or entities based on state
government ownership. Under the best reading of section 2(h)(7) of the
CEA, it is appropriate to limit the exemption from the Clearing
Requirement to national governments thereby excluding state, regional,
provincial, or municipal governments. This limitation applies equally
to U.S. and non-U.S. governmental entities. The Commission continues to
believe, as it did in 2012, that most governmental entities are
predominantly engaged in non-banking and non-financial activities
related to their core public functions and, therefore, are not likely
to be ``financial entities'' ineligible to elect an exception from the
Clearing Requirement under section 2(h)(7)(C) of the CEA.\47\ The
activities of state and local government entities in the United States
and internationally that might be in the business of banking or
financial in nature under section 2(h)(7)(C)(i)(VIII) of the CEA ``are
likely to be incidental, not primary, activities of those entities.''
\48\ Nevertheless, because some state or local government entity's swap
activity may be commercial in nature, the Commission does not believe
that a per se exclusion for state and local government entities from
the Clearing Requirement is appropriate. Accordingly, the Commission
has determined not to include these entities or any of the four
suggested alternatives in the definition of ``sovereign entity'' and is
adopting the definition of ``sovereign entity'' as proposed.
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\47\ 85 FR at 27960 (citing 2012 End-User Exception, 77 FR at
42562-42563).
\48\ Id. at 27960 (quoting 2012 End-User Exception, 77 FR at
42562-42563).
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In addition, adopting any of the alternative definitions of
``sovereign entity'' proposed by the commenter would diverge from the
approach taken by the Commission in the margin for uncleared swaps
rules under Part 23. Maintaining consistency between the application of
the Clearing Requirement and the application of the margin for
uncleared swaps regulations avoids introducing unnecessary complication
and possible confusion for swap market participants due to the
interrelationship between the two sets of regulations.
[[Page 76433]]
3. Definition of IFI--Sec. 50.76(b)
As proposed, regulation 50.76 would define ``international
financial institution'' to mean the 17 entities the Commission
identified in the 2012 End-User Exception final rule,\49\ the four
entities to whom DCR issued no-action letters in 2013 and 2017,\50\ the
Islamic Development Bank,\51\ and any other entity that provides
financing for national or regional development in which the U.S.
Government is a shareholder or contributing member.
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\49\ The 17 IFIs identified in the 2012 End-User Exception final
rule are the following: (1) African Development Bank; (2) African
Development Fund; (3) Asian Development Bank; (4) Bank for Economic
Cooperation and Development in the Middle East and North Africa; (5)
Caribbean Development Bank; (6) Council of Europe Development Bank;
(7) European Bank for Reconstruction and Development; (8) European
Investment Bank; (9) European Investment Fund; (10) Inter-American
Development Bank; (11) Inter-American Investment Corporation; (12)
International Bank for Reconstruction and Development (part of the
World Bank Group); (13) International Development Association (part
of the World Bank Group); (14) International Finance Corporation
(part of the World Bank Group); (15) International Monetary Fund;
(16) Multilateral Investment Guarantee Agency (part of the World
Bank Group); and (17) Nordic Investment Bank.
\50\ CAF; CABEI; ESM; and NADB.
\51\ The Islamic Development Bank is included in the definition
of ``multilateral development bank'' under Commission regulation
Sec. 23.151, the definitions applicable to the Commission's margin
for uncleared swaps rules and was included as an IFI in the May 2020
Proposal for this reason.
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The Commission received one comment on the definition of IFI. The
Asian Infrastructure Investment Bank (AIIB) requested that it be
included as an IFI because it is similar to other IFIs under proposed
regulation Sec. 50.76(b).\52\ According to AIIB, inclusion on the list
would encourage international comity and promote cross-border
cooperation, particularly with regard to European Union authorities
because AIIB is exempt from the clearing obligation under European
law.\53\ AIIB also states that the CEA does not require that the U.S.
Government be a shareholder or contributing member of a foreign
institution in order to qualify for an exemption from the Clearing
Requirement, and ten of the 22 institutions included in regulation
50.76 do not have the U.S. Government as a shareholder or contributing
member.\54\ AIIB argues that it is comparable to the other IFIs under
the proposed rule and should be afforded similar treatment.\55\
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\52\ AIIB notes that in 2018 it submitted a request to DCR for
no-action relief from the Clearing Requirement based on the same
factors discussed in the DCR letters issued in 2013 and 2017. AIIB
Letter at 3, n. 8. AIIB is a MDB that began operating on January 16,
2016. AIIB is an international organization with its principal
office located in Beijing, People's Republic of China.
\53\ AIIB Comment at 4. AIIB explains that it could not have
been included as a MDB under European law in 2012 because it was not
yet established. AIIB, along with CAF and CABEI, is included on a
new list of MDBs that are not subject to the European clearing
obligation under Regulation (EU) No 375/2013, Article 117(1) and
(2)(p), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02019R0876-20200627. AIIB argues that the European
Union's subsequent recognition of AIIB as a MDB should mean that it
is de facto an IFI for purposes of an exemption from the CFTC's
Clearing Requirement.
\54\ AIIB Comment at 4. These institutions include the Bank for
Economic Cooperation in the Middle East and North Africa, Caribbean
Development Bank, Council of Europe Development Bank, European
Investment Bank, European Investment Fund, Islamic Development Bank,
Nordic Investment Bank, CABEI, CAF, and ESM.
\55\ AIIB further states that it has not entered into any swaps
with any U.S. counterparty because it is not exempt from the
Clearing Requirement and margin requirements. AIIB Comment at 8.
---------------------------------------------------------------------------
The Commission does not believe it would be appropriate to include
AIIB as an IFI for purposes of an exemption from the Clearing
Requirement for a number of reasons. First, the CEA does not prescribe
that the swaps of all foreign central banks, foreign sovereign
entities, or IFIs should be exempt from the Clearing Requirement.
Rather, pursuant to section 4(c) of the CEA, the Commission must find
that exempting swaps entered into with AIIB from required clearing is
consistent with public interest, taking into account principles of
international comity.
In the 2012 End-User Exception, the Commission did not exempt all
IFIs from the Clearing Requirement. Rather, the Commission based its
identification of IFIs on the expectation that if any of the Federal
Government, Federal Reserve Banks, or international financial
institutions of which the United States is a member were to engage in
swap transactions in foreign jurisdictions, the actions of those
entities with respect to those transactions would not be subject to
foreign regulation.\56\ As explained above, the Commission determined
that the exemption from the Clearing Requirement would apply to IFIs
defined under 22 U.S.C. 262r(c)(2) and the IFIs defined as MDBs under
the proposal for the regulation that became Regulation (EU) No 648/
2012, of the European Parliament and of the Council on OTC derivatives,
central counterparties and trade repositories (EMIR).\57\
---------------------------------------------------------------------------
\56\ 77 FR at 42561-42562 (emphasis added).
\57\ 77 FR at 42561 n.14.
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The IFIs defined in 22 U.S.C. 262r(c)(2) are entities in which the
United States is a direct shareholder (or member) and therefore is able
to influence the IFI and promote U.S. foreign policy, economic
interests, and national security interests abroad.\58\ Thus, while
there is no requirement in the CEA that the U.S. Government be a
shareholder or contributing member of an IFI in order to qualify for an
exemption from the Clearing Requirement, the 2012 End-User Exception
established a policy that recognized the importance of furthering U.S.
policy goals when the Commission listed IFIs of which the United States
is a member as the type of entity it would expect to be entitled to
relief from mandatory clearing in foreign jurisdictions.
---------------------------------------------------------------------------
\58\ The United States also can exert this influence through its
membership in an IFI that is a member of another IFI. See generally
2012 NAC Report.
---------------------------------------------------------------------------
Further, it is appropriate to exempt the swaps entered into by CAF,
CABEI, ESM, and NADB from the Clearing Requirement.\59\ Each of these
entities is sufficiently similar to the IFIs identified in the 2012
End-User Exception in that each entity's function, mission, and
ownership structure (i.e., comprised of national authorities) is
analogous to those IFIs. In addition, it is appropriate to include the
Islamic Development Bank as an IFI because it is included as a MDB
under Commission regulation Sec. 23.151, the definitions section for
the margin for uncleared swaps rules. As noted above, consistency
between the regulations for required clearing and margin for uncleared
swaps helps avoid unnecessary complication and reduce possible
confusion among market participants due to the interrelationship
between the two sets of regulations.
---------------------------------------------------------------------------
\59\ The Commission notes that NADB was considered a MDB in 2012
and is included in the 2012 NAC Report.
---------------------------------------------------------------------------
AIIB differs from the other IFIs in two important respects. First,
as AIIB notes, the United States is not a shareholder under AIIB's
Articles of Agreement,\60\ and the Commission has indicated that the
exemption from the Clearing Requirement should apply to IFIs of which
the United States is a member. The United States made a determination
not to become a shareholder or contributing member of AIIB.\61\ This
[[Page 76434]]
decision was based on, among other things, concerns that the goals of
AIIB may not necessarily align with the interest of U.S. foreign
policy, economic interests, and national security interests. It would
not now be appropriate for the Commission to treat AIIB as if the
United Stated had elected to become a member of AIIB. Further, with
respect to the IFIs included in regulation 50.76, the member
governments generally have a collective majority control and governance
over the entities. In AIIB, China is the largest shareholder
(controlling 297,804 of 1,000,000 shares), with no other member
government holding a block of shares that could realistically influence
policy.\62\
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\60\ The Articles of Agreement may be found here: https://www.aiib.org/en/about-aiib/who-we-are/financing-operations/index.html. Under the Articles of Agreement, the number of shares is
set at 1,000,000. Membership is divided between regional members and
non-regional members, with regional members controlling 750,000
shares, and non-regional members controlling 250,000 shares. China
owns 297,804 of the 750,000 regional member shares, with 16,150
shares unallocated.
\61\ According to a report from the Congressional Research
Service, AIIB was conceived in 2013 as part of China's ``one belt,
one road'' policy. The United States did not join this development
bank for two reasons. First, China's voting share (28.7%) is
substantially larger than that of the second-largest AIIB member
nation (India at 8.3%). This is the largest gap between first and
second largest shareholders at any existing MDB. Second, there are
two key differences in governance structures: AIIB does not have a
resident board of executive directors that represents member
countries' interests on a day-to-day basis; and AIIB gives more
decision-making authority to regional countries and its largest
shareholder (China). Congressional Research Service, Asian
Infrastructure Investment Bank, R44754, at 8-10 (Feb. 3, 2017).
\62\ Id.
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Second, AIIB's stated purpose appears to be broader than the
entities added pursuant to DCR no-action letters. The stated purpose of
CAF is ``to promote sustainable development and regional integration,
by providing multiple financial services to clients in the public and
private sectors of its Shareholder Countries.'' \63\ CABEI's objective
is ``to promote the economic integration and the balanced economic and
social development of the Central American region.'' \64\ ESM's purpose
is ``to mobilize funding and provide stability support under strict
conditionality, appropriate to the financial assistance instrument
chosen, to the benefit of ESM Members which are experiencing, or are
threatened by, severe financing problems, if indispensable to safeguard
the financial stability of the euro area as a whole and of its Member
States.'' \65\
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\63\ Article 3, Agreement Establishing Corporaci[oacute]n Andina
de Fomento (March 2015).
\64\ Article 2, CABEI Constitutive Agreement (Aug. 22, 2018).
\65\ Article 3, Treaty Establishing ESM (Feb. 2, 2012),
available at https://www.esm.europa.eu/legal-documents/esm-treaty.
---------------------------------------------------------------------------
By contrast, AIIB's purpose is to ``foster sustainable economic
development, create wealth and improve infrastructure connectivity in
Asia by investing in infrastructure and other productive sectors'' and
``promote regional cooperation and partnership in addressing
development challenges by working in close cooperation with other
multilateral and bilateral development banks.'' \66\ The Commission
notes AIIB's broader purpose--particularly to create wealth--along with
AIIB's comments that ``AIIB is posed to be a major issuer in the
international capital markets'' and ``will be required to negotiate a
significant volume of swaps in connection with issuances under this
program'' goes beyond other IFIs that serve the public interest needs
of developing countries through lending capital.\67\
---------------------------------------------------------------------------
\66\ Article 1, AIIB's Articles of Agreement (Dec. 25, 2015),
available at https://www.aiib.org/en/about-aiib/basic-documents/articles-of-agreement/index.html.
\67\ AIIB Letter at 7.
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Finally, the Commission is not persuaded by AIIB's argument that
international comity with European authorities will be enhanced by
exempting AIIB's swaps from the CFTC's Clearing Requirement. Global
authorities, including the CFTC and European authorities, have long
acknowledged that there will be differences in the scope of products
and participants covered by their respective mandatory clearing
regimes.\68\ In addition, the relevant country for purposes of
considering international comity with regard to AIIB is more likely to
be China given that AIIB's headquarters are in Beijing. The Commission
notes that China has issued a clearing mandate for Renminbi interest
rate swaps, however, the Commission has not determined that such swaps
are required to be cleared.
---------------------------------------------------------------------------
\68\ 2016 Clearing Requirement Determination, 81 FR at 71203-
71205 (providing an overview of relevant clearing mandates adopted
in non-U.S. jurisdictions with which the CFTC sought to align its
clearing requirement, despite differences in terms of product and
participant scope). See also the International Organization of
Securities Commissions' Information Repository for Central Clearing
Requirements for OTC Derivatives (last updated Dec. 12, 2019),
available at https://www.iosco.org/publications/?subsection=information_repositories.
---------------------------------------------------------------------------
For these reasons, the exclusion of AIIB from the definition of
``international financial institution'' for purposes of the Clearing
Requirement is an appropriate exercise of the Commission's discretion
under section 4(c) of the CEA and is consistent with the 2012 End-User
Exception.\69\
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\69\ The Commission also notes that its decision regarding the
scope of the definition of IFI is consistent with the Commission's
recently issued Cross-Border Application of the Registration
Thresholds and Certain Requirements Applicable to Swap Dealers and
Major Swap Participants, 85 FR 56924 (Sep. 14, 2020). In the context
of determining the registration threshold for swap dealers, the
Commission stated that the term ``U.S. person'' does not include the
International Monetary Fund, the International Bank for
Reconstruction and Development, the Inter-American Development Bank,
the Asian Development Bank, the African Development Bank, the United
Nations, and their agencies and pension plans, and any other similar
international organizations, and their agencies and pension plans.
85 FR at 56937. The Commission based its definition on 22 U.S.C.
262r(c)(2) and the European Union's 2012 regulation on ``OTC
derivatives, central counterparties and trade repositories.'' Id.
(citations omitted). Additionally, the Commission stated there is
nothing in the text or history of the swap-related provisions of
Title VII to suggest that Congress intended to deviate from the
traditions of the international system by including such IFIs within
the definitions of the term ``U.S. person.'' Id. (quoting Further
Definition of Swap Dealer, Security-Based Swap Dealer, Major Swap
Participant, Major Security-Based Swap Participant and Eligible
Contract Participant, 77 FR 30596, 30692 n.1189 (May 23, 2012)
(citing to 22 U.S.C. 262r(c)(2) and the 2012 European Union
definition for support in identifying IFIs as excluded from the
definition of ``U.S. person'' as a discretionary and appropriate
exercise of international comity-based doctrines). Finally, as noted
above, the list of IFIs recognized in the European Union has since
been superseded and updated in Regulation (EU) No 575/2013, Article
117(2).
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D. Exemption for Swaps With Central Banks, Sovereign Entities, and
IFIs--Sec. 50.75(a) and 50.76(a)
Proposed regulation 50.75(a) would exempt from the Clearing
Requirement swaps entered into by central banks and sovereign entities.
Proposed regulation 50.76(a) would exempt from the Clearing Requirement
swaps entered into with IFIs. Under both proposed rules, the Commission
included the phrase ``and this part if reported to a swap data
repository pursuant to Sec. Sec. 45.3 and 45.4 of this chapter.''
The Commission received two comments on the inclusion of this
reporting requirement. Both commenters, the BIS and the Commenting
IFIs, supported the codification of the proposed exemptions from the
Clearing Requirement, but noted that the Commission did not impose a
reporting requirement on central banks, sovereign entities and IFIs in
the 2012 End-User Exception. Rather, the commenters explained that
under current market practice their swap counterparties report the swap
to a swap data repository. The commenters stated that the Commission
should clarify that the eligibility to claim an exemption is not
conditioned on: (i) The central bank, sovereign entity, or IFI itself
reporting the swap to a swap data repository; or (ii) its counterparty
reporting the swap to a swap data repository.\70\
---------------------------------------------------------------------------
\70\ See Commenting IFIs comment at 4-5 and BIS comment at 2-4.
---------------------------------------------------------------------------
The Commission agrees with the comments received and did not intend
to impose a reporting requirement on central banks, sovereign entities,
or IFIs under regulations 50.75(a) and 50.76(a). The Commission is
revising the text of the regulation to delete the reference to
[[Page 76435]]
swap data repository reporting.\71\ This edit also is intended to
respond to commenters concerns that a counterparty's failure to report
a swap to a swap data repository could make those swaps ineligible for
the exemption, even if the central bank, sovereign entity, or IFI had
no knowledge of the counterparty's failure to report appropriately. The
removal of the citation to part 45 reporting from the regulation is
intended to permit current practice to continue regarding which
counterparty reports the swap to a swap data repository. The removal of
the citation is not intended to relieve any swap counterparty's
independent obligation to report the swap to a swap data repository
under Commission regulation Sec. Sec. 45.3 and 45.4.
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\71\ Regulation Sec. 50.75(a) is being amended to state that
swaps entered into by a central bank or sovereign entity shall be
exempt from the clearing requirement of section 2(h)(1)(A) of the
Act. Regulation Sec. 50.76(a) is being amended to state that swaps
entered into by an international financial institution shall be
exempt from the clearing requirement of section 2(h)(1)(A) of the
Act.
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E. Data Related to Swaps Entered Into by IFIs
The Commission requested comment on the data it presented regarding
the use of swaps by IFIs from the Depository Trust & Clearing
Corporation's (DTCC's) swap data repository, DTCC Data Repository
(DDR). As the Commission noted in the May 2020 Proposal, from January
1, 2018 to December 31, 2018, 16 IFIs named in proposed regulation
50.76 were counterparties to a swap that was entered into and reported
to DDR during that time period. Overall, the 16 IFIs entered into
approximately 2,500 uncleared interest rate swaps with an estimated
total notional value of $220 billion. Of those 16, four IFIs entered
into more than one hundred swaps during calendar year 2018. Compared to
data that the Commission gathered from DDR during calendar year 2017,
the number of IFIs entering into interest rate swaps increased from
nine to 16, and the total number and total notional value of all
uncleared interest rate swaps entered into by IFIs increased from 381
swaps totaling $59.8 billion to approximately 2,500 swaps totaling $220
billion.
The Commission did not receive any comments on the data and has no
reason to believe this data is not an accurate representation of swaps
entered into by IFIs. Based on this data, the scope of swaps entered
into by IFIs and eligible for this exemption is quantifiable and does
not represent a significant shift in swaps away from the Clearing
Requirement. The data also reflects continued interest from IFIs in
entering into uncleared swaps with their counterparties.
F. Swaps Entered Into With Certain Bank Holding Companies, Savings and
Loan Holding Companies, and CDFIs
The Commission proposed to exempt from the Clearing Requirement
swaps entered into to hedge or mitigate commercial risk if one of the
counterparties to the swap is either (a) a bank holding company or
savings and loan holding company, each having no more than $10 billion
in consolidated assets, or (b) CDFI transacting in certain types and
quantities of swaps.\72\ Such an exemption would be consistent with
Commission regulation Sec. 50.50(d), which permits banks, savings
associations, farm credit system institutions, and credit unions with
total assets of $10 billion or less (small financial institutions) to
elect not to clear their swaps that are used to hedge or mitigate
commercial risk.\73\
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\72\ See August 2018 Proposal, 83 FR 44001 and May 2020
Proposal, 85 FR 27955.
\73\ Commission regulation Sec. 50.50(d); see also 2012 End-
User Exception, 77 FR 42560. Commission regulation Sec. 50.50(d)
exempts for the purposes of the Clearing Requirement, a person that
is a ``financial entity'' solely because of section
2(h)(7)(C)(i)(VIII) of the CEA if the person: (1) Is organized as a
bank, as defined in section 3(a) of the Federal Deposit Insurance
Act, the deposits of which are insured by the Federal Deposit
Insurance Corporation; a savings association, as defined in section
3(b) of the Federal Deposit Insurance Act, the deposits of which are
insured by the Federal Deposit Insurance Corporation; a farm credit
system institution chartered under the Farm Credit Act of 1971; or
an insured Federal credit union or State-chartered credit union
under the Federal Credit Union Act; and (2) has total assets of
$10,000,000,000 or less on the last day of such person's most recent
fiscal year. Commission regulation Sec. 50.50(d) does not excuse
the affected persons from compliance with any other applicable
requirements of the CEA or in the Commission's regulations. As
discussed below, the Commission is recodifying Commission regulation
Sec. 50.50(d) as a separate rule, Sec. 50.53, so that it is easier
to locate and the conditions to claim the exemption are set forth
more clearly. The Commission does not consider this relocation to
alter the substance of the exemption.
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In adopting Commission regulation Sec. 50.50(d), the Commission
noted that small financial institutions tend to serve smaller, local
markets, and are well situated to provide swaps to the customers in
their markets for the purpose of hedging commercial risk.\74\ The
Commission also noted that small financial institutions typically hedge
customer swaps by entering into matching swaps, and if those swaps had
to be cleared, small financial institutions would have to post margin
to satisfy the requirements of the DCO, which could raise the costs
associated with hedging the risks of their swaps with customers.\75\ In
addition, the Commission acknowledged that some of these small
financial institutions may incur initial and annual fixed clearing fees
and other expenses that may be incrementally higher relative to the
number of swaps executed over a given period of time.\76\ Finally, the
Commission stated that given the relatively low notional volume of swap
books held by these small institutions, and the commercial customer
purposes these swaps satisfy, the swaps executed by these entities were
what Congress was considering when it directed the Commission to
consider the exemption for small financial entities.\77\
---------------------------------------------------------------------------
\74\ 77 FR at 42578. The Commission acknowledged that, as
indicated by commenters, that a large portion of the swaps executed
by these financial institutions with customers likely hedge interest
rate risk associated with commercial loans. Id.
\75\ Id. These costs would largely be driven by the costs of
clearing in terms of funding the cost of posting initial margin and
paying variation margin to the DCO.
\76\ Id.
\77\ Id.
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The proposed amendments would codify two no-action letters issued
by DCR in 2016.\78\ The Commission believes that codifying both of
these staff no-action letters is consistent with the policy rationale
behind the exemption from the Clearing Requirement that the Commission
granted for swaps entered into by banks, savings associations, farm
credit institutions, and credit unions in the 2012 End-User
Exception.\79\
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\78\ CFTC Letter No. 16-01 (request from the American Bankers
Association) and CFTC Letter No. 16-02 (request from a coalition of
CDFIs).
\79\ See August 2018 Proposal at 44004. See also 2012 End-User
Exception, 77 FR at 42590-42591.
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The Commission received four comments letters on this aspect of the
proposal.\80\ While most of the comments were supportive, Better
Markets opposed the Commission's use of its public interest exemptive
authority to exempt from the Clearing Requirement swaps entered into by
these entities. As discussed below, the Commission is adopting the
regulations as proposed with one minor clarification.
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\80\ See Comments submitted by the American Bankers Association,
Opportunity Finance Network, Better Markets, and the CDFI Coalition.
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1. Definition of Community Development Financial Institution--Sec.
50.77(a)
The Commission proposed to define ``community development financial
institution'' to mean a CDFI, as defined in section 103(5) of the
Community Development Banking and Financial Institutions Act of 1994,
that is certified by the Treasury Department's Community Development
Financial
[[Page 76436]]
Institution Fund under the requirements set forth in 12 CFR
180.201(b).\81\ CDFIs certified by the Treasury Department must meet
certain community development finance criteria intended to show they
promote economic revitalization and community development in low-income
communities that lack adequate access to affordable financial products
and services.\82\ The Commission did not receive any comment on its
proposed definition and is adopting the definition as proposed.
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\81\ Under section 103, a ``community development financial
institution'' means a person (other than an individual) that: (i)
Has a primary mission of promoting community development; (ii)
serves an investment area or targeted population; (iii) provides
development services in conjunction with equity investments or
loans, directly or through a subsidiary or affiliate; (iv)
maintains, through representation on its governing board or
otherwise, accountability to residents of its investment area or
targeted population; and (v) is not an agency or instrumentality of
the United States, or of any State or political subdivision of a
State. 12 U.S.C. 4702(5).
\82\ See Certification as a Community Development Financial
Institution, 12 CFR 1805.201(b)(1) through (6) (setting forth the
following criteria for a community development financial institution
to obtain Treasury Department certification: (1) It has a primary
mission of community development; (2) its predominant business
activity is the provision of financial products or financial
services; (3) it serves one or more target markets such as an
investment area or target population; (4) it has a track record of
providing development services to borrowers in conjunction with
financing activities; (5) it maintains accountability to the
residents of its target market; and (6) it is a non-government
entity). See also Community Development Financial Institutions Fund,
Notice of Funds Availability, 83 FR 4750 (Feb. 1, 2018) (stating the
priorities of the CDFI Fund).
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2. Definition of Bank Holding Company--Sec. 50.78(a)
The Commission proposed to define ``bank holding company'' to mean
an entity that is organized as a bank holding company, as defined in
section 2 of the Bank Holding Company Act of 1956.\83\ This definition
represents the accepted meaning for ``bank holding company.'' The
Commission did not receive any comments on the proposed definition and
is adopting the definition as proposed.
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\83\ Section 2 of the Bank Holding Company Act generally defines
a ``bank holding company,'' subject to limited exceptions, as any
company which has control over any bank or over any company that is
or becomes a bank holding company. 12 U.S.C. 1841(a)(1) (subject to
exceptions described in paragraph (5) therein).
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3. Definition of Savings and Loan Holding Company--Sec. 50.79(a)
The Commission proposed to define ``savings and loan holding
company'' to mean an entity that is organized as a savings and loan
holding company, as defined in section 10 of the Home Owners' Loan Act
of 1933.\84\ This definition represents the accepted meaning for
``savings and loan holding company.'' The Commission did not receive
any comments on the proposed definition and is adopting the definition
as proposed.
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\84\ Section 10 of the Home Owners' Loan Act generally defines a
``savings and loan holding company,'' subject to limited exceptions,
as any company that directly or indirectly controls a savings
association or that controls any other company that is a savings and
loan company. 12 U.S.C. 1467(a)(1)(D)(i) (subject to exclusions
described in clause (ii)).
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G. Exemption From the Clearing Requirement for CDFIs--Sec. 50.77(b)
The Commission proposed to exempt swaps entered into by a CDFI from
the Clearing Requirement if: (1) The swap is a U.S. dollar denominated
interest rate swap in the fixed-to-floating class or the forward rate
agreement class that would otherwise be subject to the Clearing
Requirement under Commission regulation Sec. 50.4(a); (2) the total
aggregate notional value of the all swaps entered into by the CDFI
during the 365 calendar days prior to the day of execution of the swap
is less than or equal to $200,000,000; (3) the swap is one of ten or
fewer swap transactions that the CDFI enters into within a period of
365 calendar days; (4) one of the counterparties to the swap reports
the swap to a swap data repository pursuant to Commission regulation
Sec. Sec. 45.3 and 45.4, and reports all information described under
Commission regulation Sec. 50.50(b) to a swap data repository; and (5)
the swap is used to hedge or mitigate commercial risk as defined under
Commission regulation Sec. 50.50(c). The proposal is consistent with
the 2016 DCR no-action relief previously afforded CDFIs.\85\
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\85\ August 2018 Proposal, 83 FR at 44005 (citing CFTC Letter
No. 16-02).
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The Commission received strong support for the proposal. The CDFI
Coalition supported the proposal because interest rate swaps help CDFIs
manage risk, and CDFIs borrow funds at floating rates and lend to
customers at fixed rates. The floating rate leaves the CDFI exposed to
future adverse interest rate moves, and interest rate swaps allow the
CDFI to hedge its interest rate exposure by converting that exposure to
a fixed rate thereby enhancing its ability to lend to customers and
fund projects.\86\ The CDFI Coalition stated that an exemption from the
Clearing Requirement will eliminate the costs of clearing (posting of
margin, cost of initial and annual fixed clearing fees and other
expenses) and free up the time, effort, and resources that would be
necessary to establish intermediary and clearinghouse access. The CDFI
Coalition stated that ``while the potential volume of interest rate
swap activity may increase in the future, it will not reach the level
of systemic importance.'' \87\
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\86\ CDFI Coalition Letter at 3.
\87\ CDFI Coalition Letter at 6.
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The CDFI Coalition also confirmed that CDFIs enter into swaps to
hedge risk from financing transactions infrequently and have relatively
low notional volume swap books.\88\ As was the case when the Commission
provided an exception for the small banks, farm credit system
institutions, and credit unions under regulation 50.50(d), the CDFI
Coalition stressed the public interest benefits that will be served by
permitting CDFIs to engage in tailored and limited swaps to pursue
their public interest goals without incurring the costs of central
clearing.
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\88\ Id. The CDFI Coalition confirmed the swap data used in the
proposed rule is correct: Eight different CDFIs entered into 13
uncleared interest rate swaps in 2018 with an aggregate notional
value of almost $84 million.
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Better Markets opposed the exemption for CDFIs, as well as for bank
holding companies, and savings and loan holding companies, as
unnecessary and detrimental to the derivatives reforms of the Dodd-
Frank Act. Better Markets stated that under section 2(h)(7)(C)(ii) the
CFTC may consider excluding only certain categories of financial
entities and that Congress intended to insure financial institutions
broadly mitigate risks through the derivatives clearing system.\89\
Better Markets is concerned that these exemptions will permit swaps
activities to occur outside of regulated, transparent, impartially
access markets, and will draw liquidity away from markets.\90\
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\89\ Better Markets comment at 4-5.
\90\ Id. at 6-7.
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The Commission disagrees with Better Markets' view that the
proposed exemption for CDFI is not permitted because Congress did not
include CDFIs under section 2(h)(7)(C)(ii) of the CEA. As discussed
further in Section V, below, Congress did not exclude section 2(h) from
the Commission's statutory authority under section 4(c) of the CEA if
the Commission finds an exemption from the Clearing Requirement to be
in the public interest.
CDFIs are sufficiently similar to the type of entities Congress
included when it directed the Commission to consider an exemption from
the Clearing Requirement for small banks and savings associations.\91\
CDFIs certified
[[Page 76437]]
by the CDFI Fund serve rural and urban low-income communities across
the nation that lack adequate access to affordable financial products
and services.\92\ Through financial assistance and grants from the CDFI
Fund, CDFIs are able to make loans and investments, and to provide
related services for the benefit of designated investment areas, target
populations, or both.\93\ CDFIs enter into a limited number of interest
rate swaps and forward rate agreement swaps in order to hedge interest
rate risk incurred as a result of issuing debt securities or making
loans in pursuit of their organizational missions.\94\
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\91\ See 77 FR at 42578. The Commission notes that uncleared
swaps with a counterparty that is subject to the CEA and Commission
regulations with regard to that transaction must still comply with
the CEA and Commission regulations as they pertain to uncleared
swaps, e.g., the recordkeeping and reporting requirements under
parts 23 and 45 of the Commission's regulations.
\92\ See also Community Development Financial Institutions Fund,
Notice of Funds Availability, 83 FR 4750 (Feb. 1, 2018) (stating the
priorities of the CDFI Fund). In the event certification is not
maintained, a CDFI would no longer meet the definition and would no
longer be able to rely on this exemption from the Clearing
Requirement.
\93\ See Community Development Financial Institutions Program,
68 FR 5704, 5704 (Feb. 4, 2003). Additional information is available
at the CDFI Fund's website, https://www.cdfifund.gov/about/Pages/default.aspx.
\94\ CDFI Coalition comment at 5-6; Better Markets comment at 6.
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The CDFI Coalition requested that the Commission clarify that
regulation 50.77(b)(1) applies equally to both fixed-to-floating and
floating-to-fixed interest rate swaps. The Commission confirms that the
regulation is intended to apply to both fixed-to-floating and floating-
to-fixed interest rate swaps, and that both formulations are included
within the fixed-to-floating swap class that is subject to the Clearing
Requirement according to the specifications outlined in Table 1a to
Commission regulation Sec. 50.4(a).\95\ Given that the same language
is used elsewhere in part 50 to describe the fixed-to-floating interest
rate swap class, the Commission declines to amend regulation Sec.
50.77(b)(1). However, the Commission confirms that both fixed-to-
floating and floating-to-fixed interest rate swaps are covered by
regulation Sec. 50.77 for swaps entered into by CDFIs.
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\95\ Although the language in new regulation Sec. 50.77(b)(1)
and Commission regulation Sec. 50.4 is written as applying to an
interest rate swap in the ``fixed-to-floating class'' this does not
mean that the provision applies only to swaps if the first leg is a
fixed rate and the second leg is a floating rate. As the Commission
explained when it determined that the class of ``fixed-to-floating
swaps'' should be subject to the Clearing Requirement, a fixed-to-
floating swap is a swap in which the payment or payments owed for
one leg of the swap is calculated using a fixed rate and the payment
or payments owed for the other leg are calculated using a floating
rate. 2012 Clearing Requirement Determination at 74302. This
description from the 2012 Clearing Requirement Determination helps
to explain why it is unnecessary to list fixed-to-floating swaps and
floating-to-fixed swaps separately; these two phrases are referring
to the same swaps (i.e., one leg is a fixed rate and one leg is a
floating rate, regardless of which leg is characterized as the first
leg).
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The Commission also believes that the conditions set forth in
proposed regulation Sec. 50.77(b)(1) through (5) are consistent with
the conditions under regulation Sec. 50.50(d). By limiting the product
scope to U.S. dollar interest rate swaps in the fixed-to-floating swap
class and forward rate agreement class, the Commission is recognizing
the need for CDFIs to hedge or mitigate interest rate risk created by
the loans, investments, and financial services provided to their target
populations. In addition, limiting the total aggregate notional value
of all swaps and forward rate agreements entered into during the 365
calendar days prior to the day of execution to less than or equal to
$200,000,000 ensures that the swaps are being used to hedge or mitigate
commercial risk. In that same regard, the requirement that a given CDFI
enter into ten or fewer swaps over the course of 365 calendar days will
prevent these entities from arbitrarily increasing the number of swaps
into which they enter. Lastly, the reporting requirement will permit
the Commission to verify that the exemption is being used in the manner
intended.
The Commission did not receive any comments on the proposed
conditions set forth in proposed rule 50.77(b)(2) through (5), and is
adopting those conditions as proposed.
H. Exemption From the Clearing Requirement for Bank Holding Companies--
Sec. 50.78(b) and Savings and Loan Holding Companies--Sec. 50.79(b)
As described above, the Commission proposed to codify the 2016
staff no-action letter extending relief from the Clearing Requirement
to certain bank holding companies and savings and loan holding
companies that otherwise would have qualified for the exception for
small banks and savings associations under regulation 50.50(d).\96\ In
response to this proposal, the Commission received one comment from the
American Bankers Association stating its support,\97\ and as discussed
above, one comment letter from Better Markets generally opposing the
proposed exemptions.
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\96\ In CFTC Letter No. 16-01, subject to certain conditions,
bank holding companies and savings and loan holding companies are
permitted to elect the exception from the Clearing Requirement under
Commission regulation Sec. 50.50(d) as if the bank holding company
or savings and loan holding company were a bank or savings
association having no more than $10 billion in assets.
\97\ American Bankers Association comment, at 2. The American
Bankers Association's comment also expressed the position that all
financial entities, apart from swap dealers and major swap
participants, should be exempted from the Clearing Requirement. This
comment is beyond the scope of this rulemaking.
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Better Markets states that section 2(h)(7)(C)(ii) of the CEA does
not cover bank holding companies or savings and loan holding companies
and that if Congress intended to authorize such an exemption, it would
have done so explicitly.\98\ The Commission disagrees with Better
Markets that the exemptions for bank holding companies and savings and
loan holding companies are not permitted because the entities are not
specifically listed under section 2(h)(7)(C)(ii) of the CEA. Bank
holding companies and savings and loan holding companies with
consolidated assets of no more than $10 billion are sufficiently
similar to the type of entities Congress was considering when it
directed the Commission to consider an exemption from the Clearing
Requirement for small banks.\99\ Because Congress allowed the
Commission to exempt small banks and small savings and loan
associations with assets of no more than $10 billion from the Clearing
Requirement, it follows that the parent companies of such small
entities, when subject to the same size limit, should be eligible for a
similar exemption from the Clearing Requirement under an appropriate
exercise of the Commission's exemptive authority under section 4(c).
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\98\ Better Markets comment at 5-6.
\99\ In the preamble to the 2012 End-User Exception final rule,
the Commission determined that small banks and small savings
associations were not ``financial entities'' for purposes of the
Clearing Requirement. 77 FR at 42578.
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Bank holding companies and savings and loan holding companies
generally enter into interest rate swaps to hedge interest rate risk
that they incur as a result of making loans or issuing debt securities,
the proceeds of which are generally used to finance their subsidiaries,
which are themselves small financial institutions exempt from the
Clearing Requirement under regulation 50.50(d), renumbered as
Commission regulation Sec. 50.53. These entities enter into swaps to
hedge risk from financing transactions infrequently and have relatively
low notional volume swap books. These entities also pose less
counterparty credit risk insofar as they generally enter into swaps
with a notional amount of $10 million or less.\100\ As discussed
further below, commenters relied on data in the supplemental proposal
regarding the
[[Page 76438]]
number of swaps entered into by eligible bank holding companies and
savings and loan holding companies to complete their own analyses
related to swap market effects of the proposal.\101\
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\100\ See August 2018 Proposal, 83 FR at 44005; see also CFTC
Letter No. 16-01 at 3.
\101\ See Better Markets comment at 6 (stating that the data
shows the proposal ``would not dramatically shift swaps current
trading away from the Dodd-Frank Act's clearing and multilateral
trading framework, it nevertheless would permit more than $200
million of swaps activities to occur outside of regulated,
transparent, impartially accessed markets.'') See also 85 FR at
27965 (noting that between January 1, 2018, and December 31, 2018,
eleven bank holding companies executed 18 interest rate swaps with
an aggregate notional value of $152.5 million. Seven of those bank
holding companies entered into more than one swap during the
calendar year 2018.).
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Regulation Sec. Sec. 50.78(b)(2) and 50.79(b)(2) require that the
information described in paragraph (b) of Commission regulation Sec.
50.50 be reported to a swap data repository. Commission regulation
Sec. 50.50(b) requires that the electing counterparty notify the
Commission of how it generally meets its financial obligations
associated with its non-cleared swaps. This reporting requirement is
needed in order to verify that the exemption from the Clearing
Requirement is being used in the manner intended by the Commission and
the exception is not being misused.\102\
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\102\ 2012 End-User Exception, 77 FR at 42565. See Section
2(h)(7)(F) of the CEA; Regulation Sec. 50.10.
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Regulation Sec. Sec. 50.78(b)(3) and 50.79(b)(3) also require that
only swaps used to hedge or mitigate commercial risk, as defined under
paragraph (c) of Commission regulation Sec. 50.50, may be exempt from
the Clearing Requirement. This limitation appropriately reflects how
these entities use swaps and also responds to Better Market's comment
that the Commission does not have the authority to exempt swaps entered
into by bank holding companies and savings and loan holding companies
from the Clearing Requirement.\103\
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\103\ See August 2018 Proposal, 83 FR at 44006.
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Congress saw the benefit in exempting small banks, savings
associations, farm credit system institutions, and credit unions from
the Clearing Requirement when it allowed the Commission to consider
such an exemption. The Commission issued such an exemption in the 2012
End-User Exception provided that such swaps are used for hedging and
not speculation and are reported to a swap data repository.\104\ Since
2016, by virtue of a staff no-action letter, small bank holding
companies and savings and loan holding companies have been permitted to
elect the exemption under regulation Sec. 50.50(d) on behalf of their
underlying small bank or savings and loan. In the intervening four
years, the Commission has not discovered or been made aware of any
abuse of this no-action letter. Accordingly, the Commission believes
that the extension of the 2012 End-User Exception's exemption for small
banks to bank holding companies and savings and loan holding companies
subject to this new regulation is appropriate and consistent with
Congressional intent. The Commission is adopting regulation Sec. Sec.
50.78 and 50.79 as proposed.
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\104\ See Section 2(h)(7)(A) of the CEA. The Commission notes
that uncleared swaps with a counterparty that is subject to the CEA
and Commission regulations with regard to that transaction must
still comply with the CEA and Commission regulations as they pertain
to uncleared swaps, e.g., the recordkeeping and reporting
requirements under parts 23 and 45 of the Commission's regulations.
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I. Data Related to Swaps of CDFIs, Bank Holding Companies, and Savings
and Loan Holding Companies
As the Commission did in the May 2020 Proposal, it is including a
discussion of data related to past swaps activity to provide context
for this final rule. All interest rate swaps data included in this
section was reported to DDR as events-based data and was analyzed by
Commission staff.\105\
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\105\ This section does not include credit default swaps data
because the relief provided to CDFIs does not extend to credit
default swaps and there has been no credit default swaps activity by
eligible bank holding companies or savings and loan holding
companies in the time periods analyzed.
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During the time period between January 1, 2018, and December 31,
2018, eight different CDFIs entered into interest rate swaps and four
of those entities entered into more than one swap. Over this one year,
CDFIs entered into thirteen uncleared interest rate swaps with an
aggregate notional value of almost $84 million. According to this data,
more CDFIs entered into uncleared interest rate swaps during the
calendar year 2018 than during the previous 18-month time period
between January 2017 and June 2018.\106\ At the same time, the
aggregate notional value of all uncleared interest rate swaps entered
into during calendar year 2018 ($83.9 million) was less than the
aggregate notional value of swaps entered into by CDFIs during the 18-
month time period between January 2017 and June 2018 ($251.6 million).
The CDFI Coalition agreed with the data presented by the Commission in
the May 2020 Proposal related to CDFI swaps activities.\107\
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\106\ During an earlier 18-month time period, between January 1,
2017 and June 29, 2018, three CDFIs executed interest rate swaps:
One executed two swaps with an aggregate notional value of $5.6
million; another executed three swaps with an aggregate notional
value of $116 million; and another executed three swaps with an
aggregate notional value of $130 million.
\107\ CDFI Coalition comment at 5-6.
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Similarly, the Commission provided data in the May 2020 Proposal
regarding the number of swaps entered into by eligible bank holding
companies and savings and loan holding companies. Between January 1,
2018 and December 31, 2018, eleven bank holding companies executed 18
interest rate swaps with an aggregate notional value of $152.5
million.\108\ Seven of these bank holding companies entered into more
than one swap during the calendar year 2018. In calendar year 2018 the
aggregate notional value of all swaps entered into by eligible bank
holding companies increased substantially ($152.5 million in 2018
compared to $68.6 million in 2017), but this increase was also the
result of more eligible bank holding companies entering into uncleared
interest rate swaps.
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\108\ During the previous year, between January 1, 2017 and
December 31, 2017, one bank holding company executed ten interest
rate swaps with an aggregate notional value of $43.6 million, and a
second bank holding company executed one interest rate swap with a
notional value of $25 million.
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Based on this data, Better Markets concluded that the scope of the
exemptions was limited and not likely to dramatically shift the level
of swap clearing pursuant to the Clearing Requirement.\109\ The data,
together with the market observations and statements by commenters,
demonstrates that these entities have an ongoing interest in entering
into uncleared swaps and likely will benefit from the Commission's
codification of the relief currently afforded under CFTC staff letters.
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\109\ Better Markets comment at 6.
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J. Adoption of Subpart D of Part 50
The creation of subpart D is part of an effort to distinguish
exemptions that apply to specific swaps from the exceptions and
exemptions for market participants eligible to elect an exception or
exemption under subpart C of Part 50. This distinction is important
because the exemptions for swaps under subpart D are not eligible for
an exemption from margin for uncleared swaps, as discussed further
below. Additionally, some of the exemptions for swaps are more limited
and, in some cases, have additional conditions.
The exemptions in subpart D are intended to be consistent with the
Commission's determinations set forth in the 2012 End-User Exception
and do not limit the applicability of any CEA provision or Commission
regulation to any person or transaction, except as provided in this
final rulemaking. The exemptions in subpart D will include transactions
with central banks,
[[Page 76439]]
sovereign entities, IFIs, bank holding companies, savings and loan
holding companies, and CDFIs, as defined in the regulations. The same
policy reasons that the Commission considered when exempting these
institutions in the 2012 End-User Exception final rule support the
adoption of subpart D.
III. Clearing Requirement Compliance Schedule and Compliance Dates
The Commission implemented the Clearing Requirement through two
separate rulemakings: (i) The 2012 Clearing Requirement Determination;
and (ii) the 2016 Clearing Requirement Determination. Under each of
these final rules, the Commission made the decision to phase-in the
compliance requirement. Neither clearing requirement determination
required compliance by all market participants for all swaps included
in Commission regulation Sec. 50.4 on a single date. The Commission
proposed to improve transparency and to provide the information about
compliance dates for both the 2012 Clearing Requirement and the 2016
Clearing Requirement in one location that would be convenient for
market participants to reference.
The Commission did not receive any comments on proposed regulation
Sec. 50.26. The compliance schedule is adopted as proposed.
IV. Technical Amendment to Subpart C for Banks, Savings Associations,
Farm Credit System Institutions, and Credit Unions--Sec. 50.53
The Commission proposed technical amendments to subpart C of part
50 to reorganize the subpart by re-codifying the existing regulatory
provision for certain banks, savings associations, farm credit system
institutions, and credit unions to create a new numbered section and
heading, proposed regulation Sec. 50.53. The Commission believed that
a stand-alone regulation for this exemption would facilitate swap
counterparties' use and understanding of Part 50 of the Commission's
regulations by separating this exemption from the non-financial
entities' exception.
The Commission views this as a non-substantive change, and the
minor changes to the text of the regulations serve to clarify and
update the requirements in light of current swap reporting conventions,
specifically related to swap data reporting by entities eligible for an
exception or exemption from the Clearing Requirement. The Commission
did not receive any comments on the proposed changes. The change is
adopted as proposed, and the Commission is changing cross-references to
Commission regulation Sec. 50.50(d) to new regulation Sec. 50.53
throughout part 50.
V. Commission's Section 4(c) Authority
Section 4(c) of the CEA provides the Commission with the authority
to exempt certain transactions from the requirements of the CEA if the
Commission determines that the exemption is consistent with the public
interest. Section 4(c)(1) of the CEA authorizes the Commission to
``promote responsible economic or financial innovation and fair
competition'' by exempting any transaction or class of transactions,
including swaps, from any of the provisions of the CEA (subject to
exceptions not relevant here).\110\ In enacting CEA section 4(c)(1),
Congress noted that the goal of the provision ``is to give the
Commission a means of providing certainty and stability to existing and
emerging markets so that financial innovation and market development
can proceed in an effective and competitive manner.'' \111\
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\110\ Pursuant to section 4(c)(1) of the CEA, in order to
promote responsible economic or financial innovation and fair
competition, the Commission by rule, regulation, or order, after
notice and opportunity for hearing, may (on its own initiative or on
application of any person) exempt any agreement, contract, or
transaction (or class thereof) that is otherwise subject to
subsection (a) of section 4(c)(1), either unconditionally or on
stated terms or conditions, or for stated periods and either
retroactively or prospectively, or both, from any of the
requirements of subsection (a) of CEA section 4(c), or from any
other provision of the CEA. The Commission is finalizing these
exemptive rules pursuant to sections 4(c)(1) and 8a(5) of the CEA.
\111\ H.R. Rep. No. 102-978, 102d Cong. 2d Sess. at 81 (Oct. 2,
1992), reprinted in 1992 U.S.C.C.A.N. 3179, 3213.
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Section 4(c)(2) of the CEA further provides that the Commission may
not grant exemptive relief unless it determines that: (A) The exemption
is consistent with the public interest and the purposes of the CEA; and
(B) the transaction will be entered into solely between ``appropriate
persons'' and the exemption will not have a materially adverse effect
on the ability of the Commission or any contract market to discharge
its regulatory or self-regulatory responsibilities under the CEA.\112\
Section 4(c)(3) of the CEA includes within the term ``appropriate
person'' a number of specified categories of persons, including any
governmental entity (including the United States, any state, or any
foreign government) or political subdivision thereof, or any
multinational or supranational entity or any instrumentality, agency,
or department of any of the foregoing,\113\ banks,\114\ savings
associations,\115\ and such other persons that the Commission
determines to be appropriate in light of their financial or other
qualifications, or the applicability of appropriate regulatory
protections.\116\
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\112\ Section 4(c)(2) of the CEA.
\113\ Section 4(c)(3)(H) of the CEA.
\114\ Section 4(c)(3)(A) of the CEA.
\115\ Section 4(c)(3)(B) of the CEA.
\116\ Section 4(c)(3)(K) of the CEA.
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The Commission requested comment regarding whether the proposed
amendments would be an appropriate exercise of the Commission's
authority under section 4(c) of the CEA, including whether the proposal
promotes the public interest.\117\ The Commission also requested
comment on whether there are any entities that would not be
``appropriate persons'' under section 4(c)(3) of the CEA, and on
whether the Proposals provide certainty and stability to existing and
emerging markets so that financial innovation and market development
can proceed in an effective and competitive manner.\118\
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\117\ May 2020 Proposal, 85 FR at 27966; August 2018 Proposal,
83 FR at 44008.
\118\ Id.
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The Commission received one comment generally opposing the
Commission's exercise of its authority under section 4(c) to exempt
from the Clearing Requirement swaps entered into with CDFIs, bank
holding companies, and savings and loan holding companies, but the
commenter stated that the Commission was correct to condition the
exemptions to limit their scope and provide oversight of financial
institutions relying on the exemptions.\119\ The Commission did not
receive any comment on its proposed exercise of its authority under
section 4(c) to exempt from the Clearing Requirement swaps entered into
with central banks, sovereign entities, and IFIs. As discussed in
detail above, the Commission believes that the exemptions from the
Clearing Requirement for swaps entered into by central banks, sovereign
entities, IFIs, banks holding companies, savings and loan holding
companies, and CDFIs are a proper exercise of its exemptive authority
under section 4(c) of the CEA.
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\119\ Better Markets comment at 5.
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A. Central Banks, Sovereign Entities, and IFIs
The Commission believes that it is consistent with the public
interest and the purposes of the CEA to exempt from the Clearing
Requirement swaps entered into with central banks, sovereign entities,
and certain IFIs under its broad exemption authority under section 4(c)
of the CEA. In 2012, the Commission
[[Page 76440]]
established a policy that transactions with central banks, sovereign
entities (then referred to as foreign governments), and certain IFIs
should be exempt from the Clearing Requirement on the basis of comity
and in keeping with the traditions of the international system. The
Commission continues to believe, as it did in 2012, that based on the
canons of statutory construction and considerations of comity, and in
keeping with the traditions of the international system, sovereign
entities and central banks should not be subject to section 2(h)(1) of
the CEA.\120\ With respect to IFIs, these entities serve an important
public policy purpose. The member governments of IFIs generally have
majority control and governance over these entities. The Commission
therefore continues to believe that an exemption is appropriate
because, in a real sense, an IFI is not separable from its government
owners. Codifying the Commission's 2012 policy determination through a
section 4(c) exemption provides clarity and certainty for market
participants.\121\
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\120\ The Commission continues to believe that transactions with
sovereign wealth funds or similar entities should not be exempt from
the Clearing Requirement because these entities generally act as
investment funds. See 2012 End-User Exception, 77 FR at 42562, n.18
(noting that the foregoing rationale and considerations do not,
however, extend to sovereign wealth funds or similar entities due to
the predominantly commercial nature of their activities).
\121\ As with the other exemptions from the Clearing
Requirement, the Commission reminds the counterparties that these
swaps exempted from the Clearing Requirement by this final rule and
the existing 2012 determination must be reported to a swap data
repository.
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The amendments to exempt swaps entered into by central banks,
sovereign entities, and certain IFIs from the Clearing Requirement are
available only to ``appropriate persons'' under section 4(c)(3)(H) of
the CEA. No commenter disputed that these entities are ``appropriate
persons'' under section 4(c)(3)(H) of the CEA, which states that any
governmental entity (including the United States, any state, or any
foreign government), or political subdivision thereof, or any
multinational or supranational entity or any instrumentality, agency,
or department of any of the foregoing.
The Commission also notes that these entities are considered ECPs
as set forth in section 1a(18)(A)(vii) of the CEA. Given that only ECPs
are permitted to enter into uncleared swaps, and that the ECP
definition is generally more restrictive than the comparable elements
of the ``appropriate persons'' definition of section 4(c)(3)(H) of the
CEA, the Commission believes that there is no risk that the exemption
could be used by any entity other than an ECP or ``appropriate
person.'' Accordingly, the class of persons eligible to rely on
regulation Sec. Sec. 50.75 and 50.76 is limited to appropriate persons
within the scope of section 4(c) of the CEA.
Additionally, the Commission notes that the applicable central
banks, sovereign entities and IFIs have been relying on the language in
the preamble to the 2012 End-User Exception and the DCR no-action
letters for many years. The Commission is not aware of any increase in
counterparty risk attributable to the affected entities' reliance on
the 2012 preamble language and the staff no-action letters.
Finally, the exemptions for swaps entered into with central banks,
sovereign entities, and certain IFIs will not have a materially adverse
effect on the ability of the Commission to discharge its regulatory
responsibilities under the CEA. The exemptions from the Clearing
Requirement are limited to swaps entered into with specific central
banks, sovereign entities, and IFIs and do not limit the applicability
of any other CEA provision or Commission regulation except as discussed
above. The Commission will continue to have access to information
regarding the exempted swaps because the non-electing counterparty to
the swap must report the swap to a swap data repository. Uncleared
swaps with a counterparty that is otherwise subject to the CEA and
Commission regulations with regard to such swaps must comply with the
CEA and Commission regulations as they pertain to uncleared swaps.
Additionally, the Commission retains its special call, anti-fraud, and
anti-evasion authorities, which enables the Commission to adequately
discharge its regulatory responsibilities under the CEA.
B. CDFIs, Certain Bank Holding Companies, and Savings and Loan Holding
Companies
The Commission believes it is consistent with the public interest
and the purposes of the CEA to exempt from the Clearing Requirement
swaps entered into by CDFIs, bank holding companies, and savings and
loan holding companies under section 4(c) of the CEA. The Commission
believes that the same policy reasons that Congress considered in
directing the Commission to consider exempting swaps entered into with
small financial institutions (small banks, savings associations, farm
credit system institutions, and credit unions) from the financial
entity definition, making them eligible for the End-User Exception of
section 2(h)(7)(c)(ii) of the CEA, support an exemption for swaps
entered into by CDFIs, bank holding companies, and savings and loan
holding companies.\122\
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\122\ See 2012 End-User Exception, 77 FR at 42578. These
entities are not eligible to elect the End-User Exception under
Commission regulation Sec. 50.50, and they remain financial
entities under the definition of financial entity of section
2(h)(7)(C) of the CEA.
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In the 2012 End-User Exception, the Commission determined that the
small financial institutions should be excepted from the financial
entity definition because these entities tend to serve smaller, local
markets, and the swaps executed by the small financial institutions
likely hedge interest rate risk associated with making commercial
loans.\123\ Small financial institutions typically hedge their swaps
with customers by entering into matching swaps in the swap market, and
if those matched swaps had to be centrally cleared, the small financial
institutions would have to post margin to satisfy the requirements of
the DCOs. The Commission determined that mandatory clearing could raise
the costs for small financial institutions and such costs may be
prohibitively high given the small number of swaps such entities
execute over a given period of time.\124\
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\123\ 2012 End-User Exception, 77 FR at 42578.
\124\ Id.
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Swaps are an important risk management tool, and CDFIs, bank
holding companies, and savings and loan holding companies should be
afforded the means to hedge their capital costs economically in order
to promote the public interest objectives of smaller financial
institutions serving smaller, local markets. Commenters agreed with the
Commission that the swaps entered into by CDFIs, bank holding
companies, and savings and loan holding companies have smaller notional
amounts and that these financial entities use swaps infrequently.\125\
While the Commission recognizes that these entities may enter into more
swaps to hedge against rising interest rates, the conditions on the
exemption make it unlikely that the volume of swaps entered into by
these entities will reach a systemic level.
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\125\ See CDFI Coalition comment at 6; Better Markets comment at
6 (acknowledging that the scope of the exemption is limited and will
not dramatically shift transactions away from clearing).
---------------------------------------------------------------------------
These exemptions from the Clearing Requirement may serve to promote
responsible financial innovation and fair competition due to the
substantial fixed costs associated with clearing swaps. The cost of
clearing on a per-swap basis cannot be supported by the small number of
trades into which the entities eligible to elect these
[[Page 76441]]
exemptions enter. While the Commission did not receive any comments on
the cost of clearing, the Commission notes that in 2012, the cost
estimate for small financial institutions included between $2,500 and
$25,000 in legal fees related to reviewing and negotiating clearing-
related documents, and a minimum of between $75,000 and $125,000 per
year on fees paid to each futures commission merchant with which it
maintains a relationship.\126\ The Commission believes an exemption
from the Clearing Requirement for CDFIs, bank holding companies, and
savings and loan holding companies will lower costs, which enables
these entities to better manage their financing risks and provide cost-
effective loans to their subsidiaries, as well as to small and middle
market businesses. In addition, this exemption from the Clearing
Requirement may support commercial lending and depository activities of
the holding company's subsidiaries.
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\126\ 2012 End-User Exception, 77 FR at 42577 n.74.
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The Commission believes that the specific amendments to exempt
swaps entered into by CDFIs, bank holding companies, and savings and
loan holding companies from the Clearing Requirement are available to
only ``appropriate persons.'' Under section 4(c)(3)(A) and (B) of the
CEA, ``appropriate person'' includes a bank or a trust, and a savings
association. The extension of the term ``appropriate person'' to
include CDFIs, bank holding companies, and savings and loan holding
companies aligns with the statute's determination that banks and
savings associations are ``appropriate persons.'' The Commission did
not receive any comments on whether these entities are ``appropriate
persons.''
The bank holding companies, savings and loan holding companies, and
CDFIs eligible to elect these exemptions are ECPs pursuant to section
1a(18)(A)(i) of the CEA.\127\ Given that only ECPs are permitted to
enter into uncleared swaps, and that the ECP definition is generally
more restrictive than the comparable elements of the enumerated
``appropriate person'' definition, there is no risk that a non-ECP or a
person who does not satisfy the requirements for an ``appropriate
person'' could enter into an uncleared swap using these exemptions from
the Clearing Requirement. Accordingly, the Commission believes that the
class of persons eligible to rely on the exemptions codified in new
regulation Sec. Sec. 50.75 through 50.79 will be limited to
``appropriate persons'' within the scope of section 4(c) of the CEA.
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\127\ August 2018 Proposal, 83 FR at 44008.
---------------------------------------------------------------------------
The Commission notes that the CDFIs, bank holding companies, and
savings and loan holding companies have been relying on the DCR no-
action letters since 2016. The Commission is not aware of any increase
in counterparty risk attributable to affected entities' reliance on the
staff no-action letters, and commenters did not point to any instances
of increased counterparty risk. These exemptions from the Clearing
Requirement are limited in scope, and the Commission will continue to
have access to information regarding the swaps subject to these
exemptions because such swaps will be reported to a swap data
repository by one of the counterparties to the swap.\128\
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\128\ Uncleared swaps with a counterparty that is subject to the
CEA and Commission regulations with regard to such swaps are
required to comply with the CEA and Commission regulations,
including data reporting and uncleared margin rules.
---------------------------------------------------------------------------
The Commission further notes that the exemptions are intended to be
consistent with the Commission's policy determinations set forth in the
2012 End-User Exception with respect to the exception from the Clearing
Requirement for small financial institutions, and do not limit the
applicability of any CEA provision or Commission regulation to any
person or transaction except as provided in this final rulemaking. In
addition, the Commission retains its special call, anti-fraud, and
anti-evasion authorities, which will enable it to adequately discharge
its regulatory responsibilities under the CEA. The Commission therefore
believes the exemptions will not have a materially adverse effect on
the ability of the Commission to discharge its regulatory
responsibilities under the CEA.
For the reasons discussed above, it is appropriate and consistent
with the public interest to adopt new regulation Sec. Sec. 50.75
through 50.79 as set forth in subpart D.
VI. Final Rules Do Not Effect Margin Requirements for Uncleared Swaps
In the Proposals, the Commission explained that these exemptions,
if finalized, would not affect the Commission's margin requirements for
uncleared swaps.\129\ The Commission did not receive any comments on
the effect of the exemptions on the Commission's margin requirements
for uncleared swaps.
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\129\ May 2020 Proposal, 85 FR at 27966, August 2018 Proposal,
83 FR at 44008 (citing to relevant margin for uncleared swaps
provisions in Commission regulation Sec. 23.150(b)(1)).
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The Commission affirms its position as set forth in the Proposals.
Under Commission regulation Sec. 23.150(b)(1), the margin requirements
for uncleared swaps under part 23 of the Commission's regulations do
not apply to a swap if the counterparty qualifies for an exception from
clearing under section 2(h)(7)(A) and implementing regulations.\130\
Commission regulation Sec. 23.150(b) was added to the final margin
rules after the Terrorism Risk Insurance Program Reauthorization Act of
2015 (TRIPRA) \131\ amended section 731 of the Dodd-Frank Act by adding
section 4s(e)(4) to the CEA to provide that the initial and variation
margin requirements will not apply to an uncleared swap in which a non-
financial entity (including a small financial institution and a captive
finance company) qualifies for an exception under section 2(h)(7)(A) of
the CEA, as well as two exemptions from the Clearing Requirement that
are not relevant in this context.\132\
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\130\ Commission regulation Sec. 23.150(b)(1).
\131\ Public Law 114-1, 129 Stat. 3.
\132\ Commission regulation Sec. 23.150(b)(2) provides that
certain cooperative entities that are exempt from the Commission's
clearing requirement pursuant to section 4(c)(1) authority also are
exempt from the initial and variation margin requirements. None of
the entities included in this proposal is a cooperative that would
meet the conditions in Commission regulation Sec. 23.150(b)(2). In
addition, the regulation Sec. 23.150(b)(3), which pertains to
affiliated entities, does not apply in this context.
---------------------------------------------------------------------------
The final rules are not implementing section 2(h)(7)(A) of the CEA.
Instead, the Commission, pursuant to its 4(c) authority (as discussed
above), is exempting swaps entered into by central banks, sovereign
entities, IFIs, bank holding companies, savings and loan holding
companies, and CDFIs from the Clearing Requirement. The Commission is
not excluding these entities from the ``financial entity'' definition
of section 2(h)(7)(C) of the CEA. Therefore, these entities are not
eligible to elect the End-User Exception under Commission regulation
Sec. 50.50, and they remain financial entities under the definition of
financial entity of section 2(h)(7)(C) of the CEA. For these reasons,
the new regulation Sec. Sec. 50.75 through 50.79 do not implicate any
of the provisions of section 4s(e)(4) of the CEA or Commission
regulation Sec. 23.150.\133\
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\133\ The Commission believes that the final rules do not affect
the margin rules for entities that are supervised by the prudential
regulators. The prudential regulators' rules contain provisions that
are identical to Commission regulation Sec. 23.150. See Margin and
Capital Requirements for Covered Swap Entities, 80 FR 74916, 74923
(Nov. 20, 2015).
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[[Page 76442]]
VII. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires Federal agencies to
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis on the impact.\134\ The
Commission previously has established certain definitions of small
entities to be used in evaluating the impact of its regulations on
small entities in accordance with the RFA.\135\ As discussed in the
Proposals, the final regulations do not affect any small entities as
that term is used in the RFA. The regulations will affect specific
counterparties to an uncleared swap, namely, central banks, sovereign
entities, IFIs, bank holding companies, savings and loan holding
companies, and CDFIs. Pursuant to sections 2(e) and 5(d)(11)(A) of the
CEA, only ECPs may enter into uncleared swaps.\136\ As discussed above,
the entities whose transactions are covered by these exemptions from
the Clearing Requirement are ECPs.\137\ The Commission has stated
previously that ECPs, by the nature of the definition, should not be
considered small entities for RFA purposes.\138\ Because ECPs are not
small entities, and persons not meeting the definition of ECP may not
conduct transactions in uncleared swaps, the Commission need not
conduct a regulatory flexibility analysis respecting the effect of
these rules on ECPs.
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\134\ 5 U.S.C. 601 et seq.
\135\ 47 FR 18618 (Apr. 30, 1982).
\136\ Section 2(e) of the CEA limits non-ECPs to executing swap
transactions on a board of trade designated as a contract market
(DCM) and section 5(d)(11)(A) of the CEA requires all DCM
transactions to be cleared. Accordingly, the two provisions read
together permit only ECPs to execute uncleared swap transactions.
\137\ See Section 1a(18)(A)(i) and 1a(18)(A)(vii) of the CEA.
\138\ See Opting Out of Segregation, 66 FR 20740, 20743 (Apr.
25, 2001).
---------------------------------------------------------------------------
The Commission received no comments on the RFA discussions in the
May 2020 Proposal or the August 2018 Proposal. Accordingly, the
Chairman, on behalf of the Commission, hereby certifies pursuant to 5
U.S.C. 605(b) that the final regulations will not have a significant
economic impact on a substantial number of small entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) \139\ 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. In the Proposals, the Commission
determined that these regulations would not impose a new collection of
any information or any new recordkeeping requirements on any persons
and would not require approval of the Office of Management and Budget
(OMB) under the PRA.\140\ The Commission received no comments on these
determinations. As such, the final rules do not impose any new burden
or any new information collection requirements in addition to those
that already exist pursuant to Commission regulations.
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\139\ 44 U.S.C. 3501 et seq.
\140\ The applicable collection of information is ``Swap Data
Recordkeeping and Reporting Requirements,'' OMB control number 3038-
0096. Parties wishing to review the CFTC's information collections
may do so at www.reginfo.gov, at which OMB maintains an inventory
aggregating each of the CFTC's currently approved information
collections, as well as the information collections that presently
are under review.
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C. Cost-Benefit Considerations
As discussed in detail above, the Commission is amending its
regulations to add new regulation Sec. Sec. 50.75 through 50.79, as
set forth in subpart D, to exempt swaps entered into with central
banks, sovereign entities, IFIs, certain bank holding companies,
savings and loan holding companies, and CDFIs from the Clearing
Requirement consistent with the policies set forth in the 2012 End-User
Exception and subsequent staff no-action letters.\141\ Section 15(a) of
the CEA requires the Commission to consider the costs and benefits of
its actions before promulgating regulations under the CEA or issuing
certain orders.\142\ 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;
(3) price discovery; (4) sound risk management practices; and (5) other
public interest considerations (collectively referred to as the Section
15(a) Factors).
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\141\ The other non-substantive amendments made to part 50 do
not affect the cost-benefit considerations of this rulemaking.
\142\ Section 15(a) of the CEA.
---------------------------------------------------------------------------
1. Consideration of the Costs and Benefits of the Commission's Action
The baseline for the Commission's consideration of the costs and
benefits of this final rulemaking is the existing statutory and
regulatory framework of section 2(h)(1) of the CEA and part 50 under
which any swap subject to the Clearing Requirement would be required to
be cleared by central banks, sovereign entities, IFIs, bank holding
companies, savings and loan holding companies, and CDFIs. The
regulatory baseline, however, has been affected by Commission
statements in the 2012 End-User Exception and CFTC no-action letters,
which have been relied on by central banks, sovereign entities, IFIs,
bank holding companies, savings and loan holding companies, CDFIs, and
their counterparties when entering into swaps that otherwise would be
subject to the Clearing Requirement. The final regulations in this
adopting release largely codify the current practice that has been in
place since 2012. The Commission recognizes that the actual costs and
benefits of the final rules as realized in the market may not be as
significant as compared to that regulatory baseline. The Commission
endeavors to assess the expected costs and benefits of the final rules
in quantitative terms where possible. Where estimation or
quantification is not feasible, the Commission discusses the costs and
benefits in qualitative terms.
This consideration of costs and benefits is based on an
understanding that the swap markets function internationally with many
transactions involving U.S. firms taking place across international
boundaries. Some Commission registrants are organized outside of the
United States, some leading industry members typically conduct their
operations both within and outside of the United States, and some
industry members follow substantially similar business practices
wherever they may be located. Where the Commission does not
specifically refer to matters of location, this discussion of costs and
benefits refers to the effects of the final rule on all activity
subject to the amended part 50 regulations, 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 U.S. commerce under section
2(i) of the CEA.\143\ In particular, the Commission notes that some
entities affected by this rulemaking are located outside of the United
States.
---------------------------------------------------------------------------
\143\ Section 2(i) of the CEA.
---------------------------------------------------------------------------
In the sections that follow, the Commission discusses: (1) The
costs and benefits of the new part 50 exemptions to the Clearing
Requirement for swaps entered into by entities that meet the
definitions of central bank, sovereign entity, IFI, bank holding
company, savings and loan holding company, and CDFI as set forth in
these rules; and (2) the impact of such exemptions on the Section 15(a)
Factors.
[[Page 76443]]
a. Costs
New Commission regulation Sec. Sec. 50.75 through 50.79 exempt
swaps entered into by central banks, sovereign entities, IFIs, certain
bank holding companies, savings and loan holding companies, and CDFIs
from the Clearing Requirement under section 2(h)(1)(A) of the CEA. In
the Proposals, the Commission recognized that the protections of
central clearing will not accrue to swaps entered into by these
entities, which is a cost.\144\ The Clearing Requirement is designed to
mitigate the counterparty credit risk associated with swaps and, in
turn, to mitigate the potential systemic impact that an accumulation of
counterparty credit risk through swaps activity could cause instability
in the financial system.
---------------------------------------------------------------------------
\144\ May 2020 Proposal, 85 FR at 27968; August 2018 Proposal,
83 FR at 44009.
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In general, central clearing mitigates counterparty credit risk
through the substitution of the DCO as counterparty to the swap. After
this novation occurs, a DCO manages risk by collecting initial margin
from its clearing members for all their swap positions and collecting
and paying out variation margin among its clearing members based on
marking the swap positions to market prices on a daily basis. The
collection of margin allows a DCO to mitigate the possibility of a
clearing member or customer default, as well as to cover potential
losses due to such a default. Central clearing also provides protection
through a default fund that is made up of mutualized contributions from
the DCO's clearing members and can be used in the case of a default by
one or more of those members.
New Commission regulation Sec. Sec. 50.75 through 50.77 exempting
swaps entered into by central banks, sovereign entities, and IFIs
codify the policy determination made in the Commission's 2012 End-User
Exception that is based on considerations of international comity, and
in keeping with the traditions of the international system. Under the
final rules, swaps entered into by central banks (including BIS),
sovereign entities, and IFIs are treated like swaps entered into by the
Federal Reserve Banks, the Federal Government, or a Federal agency and
are not subject to the Clearing Requirement. As discussed above,
Congress exempted swaps entered into by the Federal entities expressly
backed by the full faith and credit of the United States when it
excluded any agreement, contract, or transaction entered into by these
entities from the definition of a swap and consequently from the
application of the Clearing Requirement.\145\
---------------------------------------------------------------------------
\145\ Section 1a(47)(B)(ix) of the CEA.
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The costs of not subjecting swaps exempted from the Clearing
Requirement under these final rules, as identified in the May 2020
Proposal, include the possibility of increased counterparty credit risk
that is left unmitigated by the protections of central clearing. The
costs associated with exempting swaps entered into by central banks,
sovereign entities, and IFIs from the Clearing Requirement also are
reflected in data showing the low notional amounts and number of such
swaps.\146\
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\146\ May 2020 Proposal, 85 FR at 27967-27969. See also
discussion of data above. From January 1, 2018 to December 31, 2018,
16 IFIs named in proposed regulation Sec. 50.76 were counterparties
to a swap that was entered into and reported to DDR during that time
period. Overall, the 16 IFIs entered into approximately 2,500
uncleared interest rate swaps with an estimated total notional value
of $220 billion. Of those 16, four IFIs entered into more than one
hundred swaps during calendar year 2018.
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The Commission received no comments directly related to the costs
of regulation Sec. Sec. 50.75 through 50.77. The Commission continues
to believe that swaps entered into by central banks, sovereign
entities, and certain IFIs should not be subject to the Clearing
Requirement, and the minimal costs associated with this determination
have been taken into account. Central banks, and the sovereign entities
backing those central banks, are the very entities that protect the
global financial system against systemic risk. IFIs provide financing
for national and regional development and are fully backed by their
governmental members. As such, the swaps into which they enter do not
pose the type of risk that the Clearing Requirement was intended to
address.
Turning to new regulation Sec. Sec. 50.78 and 50.79, which exempt
from the Clearing Requirement swaps entered into by certain bank
holding companies, savings and loan holding companies, and CDFIs, the
direct cost associated with these final rules is that the exempted
swaps will not be subject to the Clearing Requirement and the entities
entering into the swaps will not benefit from the risk-mitigating
aspects of clearing described above. Under this view, costs are
measured in terms of increased risk to the counterparties to the swap
and to the financial system. However, the Commission notes that, as was
the case when the Commission exempted small financial institutions from
the definition of ``financial entity'' for purposes of the codifying
the end-user exception in 2012, these final regulations implementing
the exemption for swaps entered into by bank holding companies, savings
and loan holding companies, and CDFIs are appropriately conditioned to
minimize risk.\147\ For example, the notice and reporting requirements
under regulation Sec. Sec. 50.77(b)(4) through (5), 50.78(b)(2)
through (3), and 50.79(b)(2) through (3) will afford some degree of
risk mitigation because the electing entity is required to indicate how
the electing counterparty generally meets its financial obligations
with regard to its uncleared swaps. These requirements also help ensure
that counterparties are aware of the potential exposure each swap may
have on the entity's overall risk profile.
---------------------------------------------------------------------------
\147\ 2012 End-User Exception, 77 FR at 42578 (explaining the
policy rationale for adopting the Clearing Requirement exception for
small financial institutions and setting conditions on the
exception).
---------------------------------------------------------------------------
The Commission also considered the regulatory reporting costs for
bank holding companies, savings and loan holding companies, and CDFIs
under new Commission regulation Sec. Sec. 50.77(b)(4), 50.78(b)(2),
and 50.79(b)(2) and concluded that the regulations do not impose any
additional costs. In general, the Commission understands that in most
cases reporting swaps to the swap data repository is done by swap
counterparties that are swap dealers. The bank holding company, savings
and loan holding company, and CDFI entities that are electing an
exemption from the Clearing Requirement under these regulations would
report the swaps to the swap data repository only in extremely rare
cases.\148\ Because these entities have been operating pursuant to no-
action letters that have the same reporting requirements, the
Commission believes that the final rules will not impose any new
compliance costs on bank holding companies, savings and loan holding
companies, or CDFIs.
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\148\ As the Commission explains above, the election of an
exemption from the Clearing Requirement by any central bank,
sovereign entity, or identified IFI is not dependent on reporting
the swap to a swap data repository. That obligation rests with the
non-electing counterparty to the trade based upon independent
obligations under part 23 or 45 of the Commission regulations.
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The Commission also considered the additional cost to the financial
system that could result from the imposition of the $10 billion size
threshold for bank holding companies and savings and loan holding
companies eligible for the exemption and has determined that there is
no additional cost associated with the imposition of a size
[[Page 76444]]
threshold.\149\ As noted in the 2018 Proposal, the $10 billion cap is a
bright line and, due to the nature of using a bright line as a
threshold, it is possible that some entities with attributes similar to
those entities whose transactions are exempted from the Clearing
Requirement, may not be eligible to use the exemption from the Clearing
Requirement. It is also possible that some bank holding companies or
savings and loan holding companies could make operational and business
decisions that would allow them to qualify to use the exemption from
the Clearing Requirement. However, the Commission does not expect that
an entity would limit its potential revenue in order to maintain a
smaller size in order to be able to rely on this exemption. As such,
the Commission believes that the $10 billion size threshold is
appropriate and will not impose additional costs on entities covered by
these regulations.
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\149\ The Commission did not propose a size threshold for CDFIs
because the Commission believes these entities generally fall under
the $10 billion size threshold.
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The comment letter received from Better Markets raises a number of
indirect and hard to quantify costs.\150\ For example, the letter
states that piecemeal exemptions and carve-outs diminish the
effectiveness of the swap market regulatory reforms, result in less
transparency, and fragment markets.\151\ Furthermore, the letter notes
that the trades that will remain uncleared as a result of exemptions
codified in this adopting release will be intermediated bilaterally
with one of a handful of already dominant derivatives dealers, which
limits participation and diversity in the cleared swaps markets and
results in reduced liquidity in the marketplace.\152\ Despite these
concerns, the Commission continues to believe that the conditions
imposed on the swap exemptions under this adopting release limit these
costs.
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\150\ Better Markets comment at 1-3.
\151\ Id. at 4.
\152\ Id. at 5.
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Finally, another mitigating factor related to the costs of not
centrally clearing these exempted swaps, is that the Commission's
uncleared margin requirements may apply to some of the swaps exempted
under these final rules. In these instances, the costs that may result
from not requiring central clearing by a DCO may be mitigated.
b. Benefits
The Commission has identified a number of benefits associated with
the final regulations. The Commission notes that to the extent that
market participants have been relying on Commission statements in the
2012 End-User Exception and DCR no-action letters, the actual benefits
of the final rules as realized in the market may not be as significant
as compared to the regulatory baseline. First, central banks, sovereign
entities, IFIs, certain bank holding companies, savings and loan
holding companies, and CDFIs will benefit from lower transaction costs
as a result of these final exemptions from the Clearing Requirement. In
terms of project financing and risk management, these entities will not
face the added expense of central clearing and can put those cost
savings to good use. For example, the costs savings achieved through
these exemptions could allow CDFIs and IFIs to enter into more public
service projects in furtherance of their missions.
There are other important benefits associated with these amendments
to part 50. If the Commission were to subject foreign governments
(sovereign entities), central banks, or IFIs to regulation under the
CEA in connection with their swaps, foreign regulators could
reciprocate with regard to the United States Federal Government,
Federal Reserve Banks, or IFIs of which the United States is a member
in a similar manner. The Commission expects that these swap exemptions
from the Clearing Requirement will help ensure that if any of the
Federal Government, Federal Reserve Banks, or IFIs of which the United
States is a member were to engage in swaps in foreign jurisdictions,
the actions of those entities with respect to those transactions would
not be subject to foreign regulation.\153\
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\153\ See discussion in the May 2020 Proposal, 85 FR at 27957
(citing 2012 End-User Exception, 77 FR at 42561-42562).
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In addition, there are benefits to the financial system from having
certain bank holding companies, savings and loan holding companies, and
CDFIs enter into interest rate swaps to hedge interest rate risk they
incur as a result of issuing debt securities or making loans to finance
their subsidiary banks or savings associations at a lower cost. For
some bank holding companies and savings and loan holding companies,
interest rate swaps need to be entered into by the holding company in
order to gain hedge accounting treatment and promote efficiencies to
benefit their subsidiaries.\154\ Finally, the costs savings from the
final regulations may result in more projects being funded in small
communities where certain bank holding companies, savings and loan
holding companies, and CDFIs operate. As several commenters noted,
there can be significant benefits from exempting swaps entered into by
small banks and CDFIs for the communities these entities serve.\155\
---------------------------------------------------------------------------
\154\ See August 2018 Proposal, 83 FR at 44010.
\155\ See CDFI Coalition comment at 1-2 (``providing regulatory
certainty through codification of the no-action relief will help to
ensure that community development financing remains available and
commercially feasible for our country's most distressed
communities''); id. at 4-6 (``CDFIs, like small financial
institutions, face the same costs [cost of posting margin to a DCO,
cost of initial and annual fixed clearing fees, other expenses, in
addition to time, effort and resources necessary to establish
relationships with an intermediary and clearinghouse access] and
provide similar public benefits by serving smaller, local markets
and providing financial and community development services to a
target market''); and Opportunity Finance Network comment at 1
(``the exemption will save CDFIs the expense of clearing swaps
through a third-party clearinghouse, allowing more of their
resources to be devoted to their community development mission'').
---------------------------------------------------------------------------
The Commission believes that most of the central banks, sovereign
entities, IFIs, bank holding companies, savings and loan holding
companies, and CDFIs that will benefit from these regulations also
benefit from relief from the uncleared margin requirements under part
23 of the Commission's regulations. For entities that would be required
to comply with the Commission's uncleared margin requirements, their
benefit from an exemption would be mitigated. In addition, actual
benefits may be less than expected if central banks, sovereign
entities, and IFIs and their counterparties choose to clear their swaps
voluntarily instead of relying on this exemption from the Clearing
Requirement. As a practical matter, however, the Commission reviewed
swap data and found that the entities that will benefit from the final
rules are not clearing their swaps subject to the Clearing
Requirement.\156\ In that regard, the practical effect and primary
benefit of the final regulations is to provide regulatory certainty,
which will reduce the legal costs faced by these entities.
---------------------------------------------------------------------------
\156\ Again, as the Commission noted in the May 2020 Proposal,
the Commission reviewed data from January 1, 2018 to December 31,
2018 that was reported to DDR and found that 16 international
financial institutions entered into approximately 2,500 uncleared
interest rate swaps with an estimated total notional value of $220
billion. Three IFIs elected to clear a portion of their interest
rate swaps.
---------------------------------------------------------------------------
2. Section 15(a) Factors
The discussion that follows supplements the related cost and
benefit considerations addressed in the preceding section and addresses
the overall effect of the final rule in terms of the factors set forth
in section 15(a) of the CEA.
[[Page 76445]]
a. Protection of Market Participants and the Public
Section 15(a)(2)(A) of the CEA requires the Commission to evaluate
the costs and benefits of a final regulation in light of considerations
of protection of market participants and the public. The Commission
considers the costs and benefits of the final regulations exempting
swaps entered into with central banks, sovereign entities, IFIs, bank
holding companies, savings and loan holding companies, and CDFIs from
the Clearing Requirement in light of its responsibility for determining
which swaps should be required to be cleared.
In recognition of the significant risk-mitigating benefits of
central clearing, Congress amended the CEA to direct the Commission to
review all swaps that are offered for clearing by DCOs to determine
whether such swaps should be required to be cleared. The Commission is
cognizant that in enacting the Dodd-Frank Act, Congress excluded from
the definition of a swap any agreement, contract, or transaction
wherein the counterparty is a Federal Reserve Bank, the Federal
Government, or a Federal agency that is expressly backed by the full
faith and credit of the United States. In so doing, Congress determined
that swaps with the Federal Reserve Banks, the Federal Government, and
Federal agencies are not subject to the Clearing Requirement. Under
this final rule, the Commission is extending similar treatment for swap
transactions with central banks and sovereign entities, as discussed
above. With respect to certain bank holding companies, savings and loan
holding companies, and CDFIs, the Commission believes that an exemption
from the Clearing Requirement is similar to the regulatory treatment
extended to swaps entered into with small banks, savings associations,
farm credit institutions, and credit unions.
Under the final rules, counterparties entering into swaps with
central banks, sovereign entities, IFIs, certain bank holding
companies, savings and loan holding companies, and CDFIs will not have
the protection afforded by central clearing through posting initial
margin, daily variation margin payments, and other types of
collateralization and risk mitigation associated with central clearing.
The Commission, however, believes Congress would not have excluded the
swaps entered into by the Federal Reserve Bank, the Federal Government,
and Federal agencies from the definition of a swap if such transactions
would pose a significant risk to market participants and the public.
As discussed above, the Commission believes that international
comity supports an exemption for swaps entered into by central banks,
sovereign entities, and IFIs and is an appropriate exercise of the
Commission's authority under section 4(c) of the CEA. These
institutions generally enter into a limited number of swaps in
furtherance of their public interest missions. As such, while an
exemption from the Clearing Requirement does result in reduced
protection for counterparties, the Commission believes that the
exemption for swaps with these entities does not pose a significant
risk to market participants and the public.
Finally, like the small financial institutions listed in section
2(h)(7)(C)(ii) of the CEA, the Commission believes that certain bank
holding companies, savings and loan holding companies, and CDFIs are
likely to have limited swaps exposure, both in terms of value and
number. As such, the Commission believes that the exemptions will have
a minimal impact on market participants. In addition, counterparties to
a swap entered into with a bank holding company, savings and loan
holding company, or CDFI under these exemptions will have some degree
of protection against default because the electing entity is required
to indicate how it generally meets the financial obligations associated
with its uncleared swaps.
The Commission also believes that the asset cap for bank holding
companies and savings and loan holding companies whose transactions
will be exempt from the Clearing Requirement, combined with the
requirement that one of the counterparties to the swap adhere to the
requirements of Commission regulation Sec. 50.50(b) and (c), means the
exemptions are not likely to have a negative impact on market
participants or the public.
b. Efficiency, Competitiveness, and Financial Integrity of Swap Markets
Section 15(a)(2)(B) of the CEA requires the Commission to evaluate
the costs and benefits of a regulation in light of efficiency,
competitiveness, and financial integrity considerations. As discussed
above, these final amendments to part 50 are likely to lower the cost
of using swaps, and in that sense, make trading more efficient. Another
potential effect of the exemptions may be to increase liquidity in swap
markets insofar as entering into swaps would be less costly. Any
increase in trading would improve the competitiveness of swaps markets
for all participants. However, because of the small number of swaps
anticipated to fall under these exemptions, and the low notional value
of such swaps executed by bank holding companies, savings and loan
holding companies, and CDFIs, in particular, the Commission expects a
minimal impact on the efficiency of the swap markets, and negligible
impact on the financial integrity of the overall swaps market. The
Commission notes that to the extent that these counterparties' swaps
are currently not cleared because of reliance on the Commission's
determination in the 2012 End-User Exception and DCR no-action letters,
the practical impact of the exemptions on the efficiency,
competitiveness, and financial integrity of the swap markets may be
negligible.
c. Price Discovery
Section 15(a)(2)(C) of the CEA requires the Commission to evaluate
the costs and benefits of its regulations in light of price discovery
considerations. The Commission believes that these exemptions from the
Clearing Requirement will not have a significant impact on price
discovery. Typically, more liquidity supports greater price discovery
as more participants enter the market and/or more trading occurs. To
the extent that markets become more liquid, price discovery could
improve. In regard to transparency of prices, swaps, whether cleared or
uncleared, and regardless of the counterparty, are required by section
2(a)(13)(G) of the CEA to be reported to a swap data repository. These
final rules do not alter any independent reporting obligations under
parts 23 or 45. Accordingly, the price discovery function of the
reporting requirement is unchanged.
In terms of price discovery through trade execution, the Commission
notes that the swaps subject to these final rules would not typically
be executed on an exchange. They also would not be subject to a trade
execution requirement under section 2(h)(8) of the CEA.
d. Sound Risk Management Practices
Section 15(a)(2)(D) of the CEA requires the Commission to evaluate
the costs and benefits of a regulation in light of sound risk
management practices. The Commission believes that by eliminating the
costs associated with clearing for central banks, sovereign entities,
IFIs, bank holding companies, savings and loan holding companies, and
IFIs, the Commission is facilitating the use of swaps by these
entities. To the extent that these entities use swaps to hedge existing
interest rate risk, the Commission believes the exemptions from the
Clearing Requirement will
[[Page 76446]]
enable better risk management at a potentially lower cost. The
Commission also notes that swaps entered into by certain bank holding
companies, savings and loan holding companies, and CDFIs tend to have
small notional amounts, and the entities enter into swaps infrequently.
Therefore, the Commission does not believe that swaps with these
entities pose risk to U.S. financial markets.
e. Other Public Interest Considerations
Section 15(a)(2)(E) of the CEA requires the Commission to evaluate
the costs and benefits of a regulation in light of other public
interest considerations. As discussed above, the Commission believes
that public interest and international comity support the exemption
from the Clearing Requirement for swaps with central banks, sovereign
entities, and IFIs. The Commission believes that the public interest
mission of these entities will be served by lowering the cost of
financing in support of their public interest missions. For the other
entities, the Commission has not identified any public interest
considerations relevant to this rulemaking beyond those already noted.
C. Antitrust Considerations
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 anti-competitive means of achieving the
objectives of the CEA, as well as the policies and 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)).\157\ The
Commission believes that the public interest to be protected by the
antitrust laws is generally to protect competition. The Commission did
not identify anti-competitive effects of the Proposals. The Commission
requested comment regarding its analysis about the possible anti-
competitive effects of the proposed exemptions and whether there are
specific public interests to be protected by the antitrust laws in this
context.\158\
---------------------------------------------------------------------------
\157\ Section 15(b) of the CEA.
\158\ May 2020 Proposal, 85 FR at 27970; August 2018 Proposal,
83 FR at 44011.
---------------------------------------------------------------------------
The Commission did not receive any comments. The Commission
confirms its determination that these final rules establishing new
exemptions from the Clearing Requirement under subpart D are not anti-
competitive and have no anti-competitive effects. Given this
determination, the Commission has not identified any less anti-
competitive means of achieving the purposes of the CEA.
List of Subjects in 17 CFR Part 50
Business and industry, Clearing, Cooperatives, Reporting
requirements, Swaps.
For the reasons discussed in the preamble, the Commodity Futures
Trading Commission amends 17 CFR chapter I as follows:
PART 50--CLEARING REQUIREMENT AND RELATED RULES
0
1. The authority citation for part 50 is revised to read as follows:
Authority: 7 U.S.C. 2(h), 6(c), and 7a-1, as amended by Pub. L.
111-203, 124 Stat. 1376.
0
2. Revise subpart B heading to read as follows:
Subpart B--Clearing Requirement Compliance Schedule and Compliance
Dates
0
3. Add Sec. 50.26 to read as follows:
Sec. 50.26 Swap clearing requirement compliance dates.
(a) Compliance dates for interest rate swap classes. The compliance
dates for swaps that are required to be cleared under Sec. 50.4(a) are
specified in the following table.
Table 1 to Paragraph (a)
----------------------------------------------------------------------------------------------------------------
Currency and Stated
Swap asset class Swap class floating rate termination date Clearing requirement
subtype index range compliance date
----------------------------------------------------------------------------------------------------------------
Interest Rate Swap............. Fixed-to-Floating Euro (EUR) 28 days to 50 Category 1 entities
EURIBOR. years. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap............. Fixed-to-Floating Sterling (GBP) 28 days to 50 Category 1 entities
LIBOR. years. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap............. Fixed-to-Floating U.S. Dollar (USD) 28 days to 50 Category 1 entities
LIBOR. years. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap............. Fixed-to-Floating Yen (JPY) LIBOR.. 28 days to 50 Category 1 entities
years. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap............. Fixed-to-Floating Australian Dollar 28 days to 30 All entities December
(AUD) BBSW. years. 13, 2016.
Interest Rate Swap............. Fixed-to-Floating Canadian Dollar 28 days to 30 All entities July 10,
(CAD) CDOR. years. 2017.
Interest Rate Swap............. Fixed-to-Floating Hong Kong Dollar 28 days to 10 All entities August
(HKD) HIBOR. years. 30, 2017.
Interest Rate Swap............. Fixed-to-Floating Mexican Peso 28 days to 21 All entities December
(MXN) TIIE- years. 13, 2016.
BANXICO.
Interest Rate Swap............. Fixed-to-Floating Norwegian Krone 28 days to 10 All entities April 10,
(NOK) NIBOR. years. 2017.
Interest Rate Swap............. Fixed-to-Floating Polish Zloty 28 days to 10 All entities April 10,
(PLN) WIBOR. years. 2017.
Interest Rate Swap............. Fixed-to-Floating Singapore Dollar 28 days to 10 All entities October
(SGD) SOR-VWAP. years. 15, 2018.
Interest Rate Swap............. Fixed-to-Floating Swedish Krona 28 days to 15 All entities April 10,
(SEK) STIBOR. years. 2017.
[[Page 76447]]
Interest Rate Swap............. Fixed-to-Floating Swiss Franc (CHF) 28 days to 30 All entities October
LIBOR. years. 15, 2018.
Interest Rate Swap............. Basis............ Euro (EUR) 28 days to 50 Category 1 entities
EURIBOR. years. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap............. Basis............ Sterling (GBP) 28 days to 50 Category 1 entities
LIBOR. years. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap............. Basis............ U.S. Dollar (USD) 28 days to 50 Category 1 entities
LIBOR. years. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap............. Basis............ Yen (JPY) LIBOR.. 28 days to 30 Category 1 entities
years. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap............. Basis............ Australian Dollar 28 days to 30 All entities December
(AUD) BBSW. years. 13, 2016.
Interest Rate Swap............. Forward Rate Euro (EUR) 3 days to 3 years Category 1 entities
Agreement. EURIBOR. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap............. Forward Rate Sterling (GBP) 3 days to 3 years Category 1 entities
Agreement. LIBOR. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap............. Forward Rate U.S. Dollar (USD) 3 days to 3 years Category 1 entities
Agreement. LIBOR. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap............. Forward Rate Yen (JPY) LIBOR.. 3 days to 3 years Category 1 entities
Agreement. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap............. Forward Rate Polish Zloty 3 days to 2 years All entities April 10,
Agreement. (PLN) WIBOR. 2017.
Interest Rate Swap............. Forward Rate Norwegian Krone 3 days to 2 years All entities April 10,
Agreement. (NOK) NIBOR. 2017.
Interest Rate Swap............. Forward Rate Swedish Krona 3 days to 3 years All entities April 10,
Agreement. (SEK) STIBOR. 2017.
Interest Rate Swap............. Overnight Index Euro (EUR) EONIA. 7 days to 2 years Category 1 entities
Swap. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
2 years + 1 day All entities December
to 3 years. 13, 2016.
Interest Rate Swap............. Overnight Index Sterling (GBP) 7 days to 2 years Category 1 entities
Swap. SONIA. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
2 years + 1 day All entities December
to 3 years. 13, 2016.
Interest Rate Swap............. Overnight Index U.S. Dollar (USD) 7 days to 2 years Category 1 entities
Swap. FedFunds. March 11, 2013.
All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
2 years + 1 day All entities December
to 3 years. 13, 2016.
Interest Rate Swap............. Overnight Index Australian Dollar 7 days to 2 years All entities December
Swap. (AUD) AONIA-OIS. 13, 2016.
Interest Rate Swap............. Overnight Index Canadian Dollar 7 days to 2 years All entities July 10,
Swap. (CAD) CORRA-OIS. 2017.
----------------------------------------------------------------------------------------------------------------
(b) Compliance dates for credit default swap classes. The
compliance dates for swaps that are required to be cleared under Sec.
50.4(b) are specified in the following table.
Table 2 to Paragraph (b)
----------------------------------------------------------------------------------------------------------------
Swap class Clearing requirement
Swap asset class subtype Indices Tenor compliance date
----------------------------------------------------------------------------------------------------------------
Credit Default Swap............ North American CDX.NA.IG........ 3Y, 5Y, 7Y, 10Y.. Category 1 entities
untranched CDS March 11, 2013.
indices. All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
Credit Default Swap............ North American CDX.NA.HY........ 5Y............... Category 1 entities
untranched CDS March 11, 2013.
indices. All non-Category 2
entities June 10,
2013.
Category 2 entities
September 9, 2013.
[[Page 76448]]
Credit Default Swap............ European iTraxx Europe.... 5Y, 10Y.......... Category 1 entities
untranched CSD April 26, 2013.
indices. Category 2 entities
July 25, 2013.
All non-Category 2
entities October 23,
2013.
Credit Default Swap............ European iTraxx Europe 5Y............... Category 1 entities
untranched CSD Crossover. April 26, 2013.
indices. Category 2 entities
July 25, 2013.
All non-Category 2
entities October 23,
2013.
Credit Default Swap............ European iTraxx Europe 5Y............... Category 1 entities
untranched CSD HiVol. April 26, 2013.
indices. Category 2 entities
July 25, 2013.
All non-Category 2
entities October 23,
2013.
----------------------------------------------------------------------------------------------------------------
0
4. Revise subpart C heading to read as follows:
Subpart C--Exceptions and Exemptions from the Clearing Requirement
0
5. In Sec. 50.50, revise section heading and paragraph
(b)(1)(iii)(A)(2) and remove paragraph (d) to read as follows:
Sec. 50.50 Non-financial end-user exception to the clearing
requirement.
* * * * *
(b) * * *
(1) * * *
(iii) * * *
(A) * * *
(2) Exempt from the definition of ``financial entity'' as described
in Sec. 50.53;
* * * * *
0
6. In Sec. 50.51, revise section heading and paragraphs (a)(3)(i) and
(ii) to read as follows:
Sec. 50.51 Cooperatives exempt from the clearing requirement.
* * * * *
(a) * * *
(3) * * *
(i) Exempt from the definition of ``financial entity'' pursuant to
Sec. 50.53; or
(ii) A cooperative formed under Federal or state law as a
cooperative and each member thereof is either not a ``financial
entity,'' as defined in section 2(h)(7)(C)(i) of the Act, or is exempt
from the definition of ``financial entity'' pursuant to Sec. 50.53.
* * * * *
0
7. Revise Sec. 50.52 heading to read as follows:
Sec. 50.52 Affiliated entities exempt from the clearing requirement.
0
8. Add Sec. 50.53 to read as follows:
Sec. 50.53 Banks, savings associations, farm credit system
institutions, and credit unions exempt from the clearing requirement.
For purposes of section 2(h)(7)(A) of the Act, a person that is a
``financial entity'' solely because of section 2(h)(7)(C)(i)(VIII)
shall be exempt from the definition of ``financial entity'' and is
eligible to elect the exception to the clearing requirement under Sec.
50.50, if such person:
(a) Is organized as a bank, as defined in section 3(a) of the
Federal Deposit Insurance Act, the deposits of which are insured by the
Federal Deposit Insurance Corporation; a savings association, as
defined in section 3(b) of the Federal Deposit Insurance Act, the
deposits of which are insured by the Federal Deposit Insurance
Corporation; a farm credit system institution chartered under the Farm
Credit Act of 1971; or an insured Federal credit union or State-
chartered credit union under the Federal Credit Union Act; and
(b) Has total assets of $10,000,000,000 or less on the last day of
such person's most recent fiscal year;
(c) Reports, or causes to be reported, the swap to a swap data
repository pursuant to Sec. Sec. 45.3 and 45.4 of this chapter, and
reports, or causes to be reported, all information as provided in
paragraph (b) of Sec. 50.50 to a swap data repository; and
(d) Is using the swap to hedge or mitigate commercial risk as
provided in paragraph (c) of Sec. 50.50.
0
9. Add subpart D to read as follows:
Subpart D--Swaps Not Subject to the Clearing Requirement
Sec.
50.75 Swaps entered into by central banks or sovereign entities.
50.76 Swaps entered into by international financial institutions.
50.77 Interest rate swaps entered into by community development
financial institutions.
50.78 Swaps entered into by bank holding companies.
50.79 Swaps entered into by savings and loan holding companies.
Sec. 50.75 Swaps entered into by central banks or sovereign entities.
Swaps entered into by a central bank or sovereign entity shall be
exempt from the clearing requirement of section 2(h)(1)(A) of the Act.
(a) For the purposes of this section, the term central bank means a
reserve bank or monetary authority of a central government (including
the Board of Governors of the Federal Reserve System or any of the
Federal Reserve Banks) or the Bank for International Settlements.
(b) For the purposes of this section, the term sovereign entity
means a central government (including the U.S. Government), or an
agency, department, or ministry of a central government.
Sec. 50.76 Swaps entered into by international financial
institutions.
(a) Swaps entered into by an international financial institution
shall be exempt from the clearing requirement of section 2(h)(1)(A) of
the Act.
(b) For purposes of this section, the term international financial
institution means:
(1) African Development Bank;
(2) African Development Fund;
(3) Asian Development Bank;
(4) Banco Centroamericano de Integraci[oacute]n Econ[oacute]mica;
(5) Bank for Economic Cooperation and Development in the Middle
East and North Africa;
(6) Caribbean Development Bank;
(7) Corporaci[oacute]n Andina de Fomento;
(8) Council of Europe Development Bank;
(9) European Bank for Reconstruction and Development;
(10) European Investment Bank;
(11) European Investment Fund;
(12) European Stability Mechanism;
(13) Inter-American Development Bank;
(14) Inter-American Investment Corporation;
(15) International Bank for Reconstruction and Development;
[[Page 76449]]
(16) International Development Association;
(17) International Finance Corporation;
(18) International Monetary Fund;
(19) Islamic Development Bank;
(20) Multilateral Investment Guarantee Agency;
(21) Nordic Investment Bank;
(22) North American Development Bank; and
(23) Any other entity that provides financing for national or
regional development in which the U.S. Government is a shareholder or
contributing member.
Sec. 50.77 Interest rate swaps entered into by community development
financial institutions.
(a) For the purposes of this section, the term community
development financial institution means an entity that satisfies the
definition in section 103(5) of the Community Development Banking and
Financial Institutions Act of 1994, and is certified by the U.S.
Department of the Treasury's Community Development Financial
Institution Fund as meeting the requirements set forth in 12 CFR
1805.201(b).
(b) A swap entered into by a community development financial
institution shall not be subject to the clearing requirement of section
2(h)(1)(A) of the Act and this part if:
(1) The swap is a U.S. dollar denominated interest rate swap in the
fixed-to-floating class or the forward rate agreement class of swaps
that would otherwise be subject to the clearing requirement under Sec.
50.4(a);
(2) The total aggregate notional value of all swaps entered into by
the community development financial institution during the 365 calendar
days prior to the day of execution of the swap is less than or equal to
$200,000,000;
(3) The swap is one of ten or fewer swap transactions that the
community development financial institution enters into within a period
of 365 calendar days;
(4) One of the counterparties to the swap reports the swap to a
swap data repository pursuant to Sec. Sec. 45.3 and 45.4 of this
chapter, and reports all information as provided in paragraph (b) of
Sec. 50.50 to a swap data repository; and
(5) The swap is used to hedge or mitigate commercial risk as
provided in paragraph (c) of Sec. 50.50.
Sec. 50.78 Swaps entered into by bank holding companies.
(a) For purposes of this section, the term bank holding company
means an entity that is organized as a bank holding company, as defined
in section 2 of the Bank Holding Company Act of 1956.
(b) A swap entered into by a bank holding company shall not be
subject to the clearing requirement of section 2(h)(1)(A) of the Act
and this part if:
(1) The bank holding company has aggregated assets, including the
assets of all of its subsidiaries, that do not exceed $10,000,000,000
according to the value of assets of each subsidiary on the last day of
each subsidiary's most recent fiscal year;
(2) One of the counterparties to the swap reports the swap to a
swap data repository pursuant to Sec. Sec. 45.3 and 45.4 of this
chapter, and reports all information as provided in paragraph (b) of
Sec. 50.50 to a swap data repository; and
(3) The swap is used to hedge or mitigate commercial risk as
provided in paragraph (c) of Sec. 50.50.
Sec. 50.79 Swaps entered into by savings and loan holding companies.
(a) For purposes of this section, the term savings and loan holding
company means an entity that is organized as a savings and loan holding
company, as defined in section 10 of the Home Owners' Loan Act of 1933.
(b) A swap entered into by a savings and loan holding company shall
not be subject to the clearing requirement of section 2(h)(1)(A) of the
Act and this part if:
(1) The savings and loan holding company has aggregated assets,
including the assets of all of its subsidiaries, that do not exceed
$10,000,000,000 according to the value of assets of each subsidiary on
the last day of each subsidiary's most recent fiscal year;
(2) One of the counterparties to the swap reports the swap to a
swap data repository pursuant to Sec. Sec. 45.3 and 45.4 of this
chapter, and reports all information as provided in paragraph (b) of
Sec. 50.50 to a swap data repository; and
(3) The swap is used to hedge or mitigate commercial risk as
provided in paragraph (c) of Sec. 50.50.
Issued in Washington, DC, on November 12, 2020, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Swap Clearing Requirement Exemptions--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--Statement of Support of Chairman Heath P. Tarbert
I am pleased to support today's final rule amending the CFTC's
Part 50 rules, which implement the swap clearing requirement of
section 2(h)(1) of the Commodity Exchange Act (the Clearing
Requirement). The final rule concurrently achieves two ends--it
demonstrates the CFTC's evolving philosophy on comity and deference
towards our international counterparts while alleviating unnecessary
regulatory burdens on small domestic institutions that look nothing
like Wall Street banks.
First, today's final rule creates new regulations 50.75 and
50.76, which codify existing exemptions from the Clearing
Requirement for swaps entered into with certain central banks,
sovereign entities, and international financial institutions. Just
as we would not expect a foreign regulator to impose clearing
requirements on the United States Treasury or the Federal Reserve
for entering into swaps on behalf of our government, the CFTC will
not impose similar requirements on other nations' finance ministries
and central banks. The same is true for multilateral governmental
institutions such as the World Bank Group and the International
Monetary Fund. Mutual respect and a two-way-street must be the
cornerstone of our international regulatory relations.
Second, the final rule establishes new regulations 50.77, 50.78,
and 50.79, which exempt from the Clearing Requirement certain swaps
entered into by small bank holding companies, savings and loan
holding companies, and community development financial institutions.
In addition, the final rule clarifies existing exemptions for banks,
savings associations, farm credit systems, and credit unions with
total assets of less than $10 billion. These entities are the
engines of the real economy, providing financial support to American
communities, businesses, and families. While exempting these
entities from the Clearing Requirement makes sense in normal times,
doing so is especially critical now. As we continue to manage the
fallout of the COVID-19 (coronavirus) pandemic, it is particularly
important that the CFTC advance our strategic goal of regulating the
derivatives markets to promote the interests of all Americans.\1\
Today's final rule is a step in that direction.
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\1\ CFTC Strategic Plan 2020-2024, at 6 (discussing Strategic
Goal 2), https://www.cftc.gov/media/3871/CFTC2020_2024StrategicPlan/download.
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Appendix 3--Supporting Statement of Commissioner Brian D. Quintenz
I am pleased to support this final rule, which codifies existing
relief from the
[[Page 76450]]
Commission's requirement that certain commonly traded interest rate
swaps and credit default swaps be cleared following their
execution.\2\ The new exemptions may be elected by several classes
of counterparties that may enter into these swaps, namely: Sovereign
nations; central banks; ``international financial institutions'' of
which sovereign nations are members; bank holding companies, and
savings and loan holding companies, whose assets total no more than
$10 billion; and community development financial institutions
recognized by the U.S. Treasury Department. Today's final rule notes
that many of these entities have actually relied on existing relief,
electing not to clear swaps that are generally subject to the
clearing requirement. I strongly support the policy of international
``comity'' described in the final rule, recognizing that sovereign
nations and their instrumentalities should generally not be subject
to the Commission's regulations. I trust that by issuing this rule,
the United States, the Federal Reserve, and other U.S. government
instrumentalities will receive the same treatment in foreign
jurisdictions.
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\2\ The swap clearing requirement is codified in part 50 of the
Commission's regulations (17 CFR part 50).
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Appendix 4--Statement of Commissioner Dan M. Berkovitz
I am voting for the final rule codifying certain limited
exemptions from the swap clearing requirement that currently exist
through Commission guidance or staff no action relief. The
exemptions are consistent with longstanding Commission policies.
Analysis of available historical data shows that the number and
notional amount of swaps that would be exempted are relatively
limited and not likely to materially impact systemic risk.
Furthermore, the swaps exempted from clearing will be subject to
uncleared swap margin requirements, if applicable, thereby
mitigating the risks of not clearing these swaps.
The final rule codifies in rule text exemptions for swaps
entered into by foreign central banks, sovereign entities at the
national level, and certain international institutions that
previously have been exempted from the clearing requirement through
no action relief or guidance. In this regard, the final rule
represents a proper exercise of international comity in recognition
of the governmental nature and non-speculative purposes of these
sovereign entities and international institutions.
The final rule also provides clearing exemptions for certain
interest rate swaps of community development financial institutions,
subject to a number of significant limits, and for swaps entered
into by bank or savings and loan holding companies that have no more
than $10 billion in consolidated assets. In each case, the exemption
only applies if the swap is used to hedge or mitigate commercial
risks. Congress provided in Commodity Exchange Act section
2(h)(7)(C) for an exclusion from the clearing requirement for banks
and savings associations with less than $10 billion in assets to the
extent determined by the Commission. It is appropriate to apply this
exemption to the holding companies of these financial entities.
One commenter, Better Markets, expressed concern that the number
of entities that will now have an exemption from the clearing
requirement has grown over time, leading to the potential for
greater risk, reduction in liquidity in cleared markets, and
complexity in managing the exemptions. As described in the preamble
to the final rule, swap data repository data indicates that over the
past several years the number and scope of swaps entered into by
these institutions that will be included within the exemptions has
been relatively limited. Given this data, these concerns, today, do
not outweigh the benefits of the final rule. However, the Commission
should periodically review the SDR data to reassess whether the
clearing requirement exemptions are cumulatively having a material
impact on the extent of swap clearing given the intent of the Dodd-
Frank Act. The Commission can then evaluate whether, on a going
forward basis, any changes to the exemptions may be warranted.
I commend the staff of the Division of Clearing and Risk for
this well developed and drafted final rule. The clarity and
completeness of the final release helps establish a sound basis for
the Commission to approve the final rule.
[FR Doc. 2020-25394 Filed 11-27-20; 8:45 am]
BILLING CODE 6351-01-P