Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations 229 

1See Confirmation, Portfolio Reconciliation, 

Portfolio Compression, and Swap Trading 

Relationship Documentation Requirements for 

Swap Dealers and Major Swap Participants, 77 FR 

55904, 55927 (Sept. 11, 2012). 

1 7 U.S.C. 6s(e) (capital and margin requirements). 

2CEA section 1a(47), 7 U.S.C. 1a(47) (swap 

definition); Regulation 1.3, 17 CFR 1.3 (further 

definition of a swap). A swap includes, among other 

things, an interest rate swap, commodity swap, 

credit default swap, and currency swap. 

3CEA section 1a(39), 7 U.S.C. 1a(39) (defining the 

term ‘‘prudential regulator’’ to include the Board of 

Governors of the Federal Reserve System; the Office 

of the Comptroller of the Currency; the Federal 

Deposit Insurance Corporation; the Farm Credit 

Administration; and the Federal Housing Finance 

Agency). The definition of prudential regulator 

further specifies the entities for which these 

agencies act as prudential regulators. The 

prudential regulators published final margin 

requirements in November 2015. See generally 

Margin and Capital Requirements for Covered Swap 

Entities, 80 FR 74840 (Nov. 30, 2015) (‘‘Prudential 

Margin Rule’’). The Prudential Margin Rule is 

substantially similar to the CFTC Margin Rule, 

including with respect to the CFTC’s phasing-in of 

margin requirements. 

4CEA section 4s(e)(1)(B), 7 U.S.C. 6s(e)(1)(B). SDs 

and MSPs for which there is a prudential regulator 

must meet the margin requirements for uncleared 

swaps established by the applicable prudential 

regulator. CEA section 4s(e)(1)(A), 7 U.S.C. 

6s(e)(1)(A). 

5CEA section 4s(e)(2)(B)(ii), 7 U.S.C. 

6s(e)(2)(B)(ii). In Regulation 23.151, the 

Commission further defined this statutory language 

to mean all swaps that are not cleared by a 

registered derivatives clearing organization or a 

derivatives clearing organization that the 

Commission has exempted from registration as 

provided under the CEA. 17 CFR 23.151. 

6CEA section 1a(49), 7 U.S.C. 1a(49) (swap dealer 

definition); Regulation 1.3 (further definition of 

swap dealer). 

7CEA section 1a(32), 7 U.S.C. 1a(32) (major swap 

participant definition); Regulation 1.3 (further 

definition of major swap participant). 

8CEA section 4s(e)(3)(A), 7 U.S.C. 6s(e)(3)(A). 

* * * * * 

Issued in Washington, DC, on November 

25, 2020, by the Commission. 

Robert Sidman, 

Deputy Secretary of the Commission. 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendices to Portfolio Reconciliation 

Requirements for Swap Dealers and 

Major Swap Participants—Revision of 

‘‘Material Terms’’ Definition—Voting 

Summary and Chairman’s and 

Commissioners’ Statements 

Appendix 1—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 

Commissioner Dan M. Berkovitz 

I support today’s interim final rule that 

will maintain the continuity of swap 

portfolio reconciliation requirements for 

swap dealers. In September 2012, the 

Commission established in regulation 23.502 

the requirement for swap dealers to regularly 

reconcile key material terms of swaps in 

portfolios with certain counterparties. These 

portfolios can include hundreds, thousands, 

and even tens of thousands of individual 

swap transactions. Regularly reconciling 

economic terms that determine the periodic 

payments made on swap portfolios reduces 

the likelihood of significant disputes and 

potential payment shortfalls or interruptions. 

Reducing these events reduces risk in the 

financial system, particularly during times of 

market stress.1

On September 17, 2020, the Commission 

adopted a final rule revising parts 45, 46, and 

49 of its regulations on swap data 

recordkeeping and reporting requirements. In 

the amendments, significant changes were 

made to material terms that are crossreferenced in regulation 23.502. The 

unintended consequence would be to render 

the portfolio reconciliation requirement 

ineffective when the swap data regulations go 

into effect in approximately 60 days. The IFR 

corrects this unintended consequence by 

reestablishing the same material economic 

terms identified for regulation 23.502, 

thereby maintaining the status quo for the 

portfolio reconciliation requirement. This is 

a necessary action to maintain the risk 

reducing effects of that requirement. 

[FR Doc. 2020–26536 Filed 1–4–21; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 23 

RIN 3038–AF05 

Margin Requirements for Uncleared 

Swaps for Swap Dealers and Major 

Swap Participants 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is adopting amendments 

(‘‘Final Rule’’) to its margin 

requirements for uncleared swaps for 

swap dealers (‘‘SDs’’) and major swap 

participants (‘‘MSPs’’) for which there is 

not a prudential regulator (‘‘CFTC 

Margin Rule’’). The Commission is 

amending the CFTC Margin Rule to 

revise the calculation method for 

determining whether certain entities 

come within the scope of its initial 

margin (‘‘IM’’) requirements for 

uncleared swaps beginning in the last 

phase of the phased compliance 

schedule, which starts on September 1, 

2022, and the timing for compliance 

with the IM requirements after the end 

of the phased compliance schedule. 

These amendments align certain aspects 

of the CFTC Margin Rule with the Basel 

Committee on Banking Supervision and 

the International Organization of 

Securities Commissions’ (‘‘BSBS/ 

IOSCO’’) Framework for margin 

requirements for non-centrally cleared 

derivatives (‘‘BCBS/IOSCO 

Framework’’). The Commission is also 

amending the CFTC Margin Rule to 

allow SDs and MSPs subject to the 

CFTC Margin Rule to use the risk-based 

model calculation of IM of a 

counterparty that is a CFTC-registered 

SD or MSP to determine the amount of 

IM to be collected from the counterparty 

and to determine whether the IM 

threshold amount for the exchange of 

IM has been exceeded such that 

documentation concerning the 

collection, posting, and custody of IM 

would be required. 

DATES: This rule is effective February 4, 

2021. 

FOR FURTHER INFORMATION CONTACT: 

Joshua B. Sterling, Director, 202–418– 

6056, jsterling@cftc.gov; Thomas J. 

Smith, Deputy Director, 202–418–5495, 

tsmith@cftc.gov; Warren Gorlick, 

Associate Director, 202–418–5195, 

wgorlick@cftc.gov; or Carmen MoncadaTerry, Special Counsel, 202–418–5795, 

cmoncada-terry@cftc.gov, Market 

Participants Division, Commodity 

Futures Trading Commission, Three 

Lafayette Centre, 1155 21st Street NW, 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Section 4s(e) of the Commodity 

Exchange Act (‘‘CEA’’ or ‘‘Act’’) 1

requires the Commission to adopt rules 

establishing minimum initial and 

variation margin requirements for all 

swaps 2 that are (i) entered into by an SD 

or MSP for which there is no prudential 

regulator 3 (collectively, ‘‘covered swap 

entities’’ or ‘‘CSEs’’) 4 and (ii) not 

cleared by a registered derivatives 

clearing organization (‘‘uncleared 

swaps’’).5 To offset the greater risk to the 

SD 6 or MSP 7 and the financial system 

arising from the use of uncleared swaps, 

these requirements must (i) help ensure 

the safety and soundness of the SD or 

MSP and (ii) be appropriate for the risk 

associated with the uncleared swaps 

held by the SD or MSP.8

Pursuant to its rulemaking authority 

under section 4s(e), the Commission in 

2016 promulgated Regulations 23.150 

through 23.161, namely the CFTC 

Margin Rule, which requires CSEs to 


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230 Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations 

9 IM or initial margin is the collateral (calculated 

as provided by Regulation 23.154) that is collected 

or posted in connection with one or more uncleared 

swaps pursuant to Regulation 23.152. IM is 

intended to secure potential future exposure 

following default of a counterparty (i.e., adverse 

changes in the value of an uncleared swap that may 

arise during the period of time when it is being 

closed out). See CFTC Margin Rule, 81 FR at 683. 

10 VM or variation margin, as defined in 

Regulation 23.151, is the collateral provided by a 

party to its counterparty to meet the performance 

of its obligations under one or more uncleared 

swaps between the parties as a result of a change 

in the value of such obligations since the trade was 

executed or the last time such collateral was 

provided. 17 CFR 23.151. 

11See generally Margin Requirements for 

Uncleared Swaps for Swap Dealers and Major Swap 

Participants, 81 FR 636 (Jan. 6, 2016). The CFTC 

Margin Rule, which became effective April 1, 2016, 

is codified in part 23 of the Commission’s 

regulations. 17 CFR 23.150 through 23.159, 23.161. 

In May 2016, the Commission amended the CFTC 

Margin Rule to add Regulation 23.160, 17 CFR 

23.160, providing rules on its cross-border 

application. See generally Margin Requirements for 

Uncleared Swaps for Swap Dealers and Major Swap 

Participants—Cross-Border Application of the 

Margin Requirements, 81 FR 34818 (May 31, 2016). 

12See Margin Requirements for Uncleared Swaps 

for Swap Dealers and Major Swap Participants, 85 

FR 71246 (Nov. 9, 2020) (extending the phased 

compliance schedule for the CFTC’s IM 

requirements for uncleared swaps to September 1, 

2022). 

13The schedule also addresses the VM 

requirements under the CFTC Margin Rule, 

providing a compliance period of September 1, 

2016, through March 1, 2017. See 17 CFR 23.161(a). 

The compliance period (including a six-month 

extension to September 1, 2017, through no-action 

relief) has long expired and all eligible entities are 

required to comply with the VM requirements. 

14The term ‘‘covered counterparty’’ is defined in 

Regulation 23.151 as a financial end user with 

material swaps exposure or a swap entity, including 

an SD or MSP, that enters into swaps with a CSE. 

See 17 CFR 23.151. 

15Regulation 23.151 provides that MSE for an 

entity means that the entity and its margin affiliates 

have an average daily aggregate notional amount of 

uncleared swaps, uncleared security-based swaps, 

foreign exchange forwards, and foreign exchange 

swaps with all counterparties for June, July, or 

August of the previous calendar year that exceeds 

$8 billion, where such amount is calculated only for 

business days. A company is a ‘‘margin affiliate’’ of 

another company if: (i) Either company 

consolidates the other on a financial statement 

prepared in accordance with U.S. Generally 

Accepted Accounting Principles, the International 

Financial Reporting Standards, or other similar 

standards; (ii) both companies are consolidated 

with a third company on a financial statement 

prepared in accordance with such principles or 

standards; or (iii) for a company that is not subject 

to such principles or standards, if consolidation as 

described in paragraph (i) or (ii) of this definition 

would have occurred if such principles or standards 

had applied. 17 CFR 23.151. 

16The determination of MSE requires computing 

AANA, calculated on a daily basis, of covered 

products over June, July and August of the previous 

calendar year. For simplicity purposes, this 

formulation will be referred to as ‘‘daily average 

AANA’’ to contrast with month-end AANA, which 

is used for the calculation of AANA under the 

BCBS/IOSCO Framework. 

17See generally BCBS/IOSCO, Margin 

requirements for non-centrally cleared derivatives 

(July 2019), https://www.bis.org/bcbs/publ/d475.pdf 

(‘‘2019 BCBS/IOSCO Framework’’). 

18The U.S. adopted the BCBS/IOSCO threshold, 

but replaced the 8 billion euro figure with a dollar 

amount of $8 billion. As a result, there is a small 

disparity in the threshold amounts given the 

continuing fluctuation of the dollar-euro exchange 

rate. The Final Rule does not address this issue. 

19See generally BCBS/IOSCO, Margin 

requirements for non-centrally cleared derivatives 

(Sept. 2013), https://www.bis.org/publ/ 

bcbs261.htm. 

20See generally BCBS/IOSCO, Margin 

requirements for non-centrally cleared derivatives 

(March 2015), https://www.bis.org/bcbs/publ/ 

d317.htm. 

21 81 FR at 645. The potential for mutual funds 

to alter their portfolios prior to disclosure 

(‘‘window dressing’’) has been documented in the 

financial economics literature. See, e.g., Musto, D. 

(1999). ‘‘Investment decisions depend on portfolio 

disclosures.’’ Journal of Finance 54, 935–952, or 

Agarwal, V., Gay G. and Ling, L. (2011). ‘‘Window 

dressing in mutual funds.’’ Review of Financial 

Studies, 27, 3133–3170. 

collect and post IM 9 and variation 

margin (‘‘VM’’) 10 for uncleared swaps.11

In administering the CFTC Margin Rule, 

the Commission has identified matters, 

further described below, that may pose 

challenges in the implementation of the 

IM requirements. 

A. Calculation Method for Determining 

Whether Certain Entities Are Subject to 

the IM Requirements and the Timing for 

Compliance With the IM Requirements 

After the End of the Phased Compliance 

Schedule 

Regulation 23.161 sets forth a 

schedule for compliance with the CFTC 

Margin Rule, spanning from September 

1, 2016, to September 1, 2022.12 Under 

the schedule, entities are required to 

comply with the IM requirements in 

staggered phases,13 starting with entities 

with the largest average aggregate 

notional amount (‘‘AANA’’), calculated 

on a daily basis, of uncleared swaps, 

uncleared security-based swaps, foreign 

exchange forwards, and foreign 

exchange swaps (‘‘covered products’’) 

and then successively with lesser 

AANA. The last phase of compliance, 

which begins on September 1, 2022, 

encompasses CSEs and covered 

counterparties 14 that did not come into 

the scope of the IM requirements in 

prior phases, including financial end 

users (‘‘FEUs’’) with material swaps 

exposure (‘‘MSE’’) 15 of more than $8 

billion in AANA of covered products.16

The method for determining which 

entities come within the scope of the 

CFTC’s IM requirements beginning in 

the last phase of compliance, as set forth 

in the Commission’s regulations, differs 

from the method set out in the BCBS/ 

IOSCO Framework.17 More specifically, 

the BCBS/IOSCO Framework requires 

that in the last phase of implementation 

of the IM requirements, which begins on 

September 1, 2022, entities with Ö8 

billion 18 in average month-end 

aggregate of notional amount (‘‘monthend AANA’’) of non-cleared derivatives, 

including forex forwards and swaps, 

during the period of March, April, and 

May of the current year, to exchange IM 

beginning on September 1 of each year. 

In contrast, under the CFTC Margin 

Rule, a CSE must exchange IM with an 

FEU that has MSE with respect to 

uncleared swaps entered into between 

the parties beginning in the last phase 

of compliance, which starts on 

September 1, 2022. The MSE for the 

FEU is to be determined on September 

1, 2022, based on the FEU’s daily 

average AANA during the period of 

June, July, and August of the prior year. 

After the last phase of compliance, the 

MSE for the FEU is to be determined on 

January 1 of each calendar year based on 

its daily average AANA during the June, 

July, and August period of the prior 

year, with application of the IM 

requirements, if the FEU has MSE, 

required to begin on January 1 of each 

year. 

The BCBS/IOSCO Framework was 

originally promulgated in September 

2013,19 and then revised in 2015.20 The 

2015 version of the BCBS/IOSCO 

Framework changed the calculation 

period of June, July, and August, with 

an annual implementation date of 

December 1, to March, April, and May 

of each calendar year, with an annual 

implementation date of September 1. 

The CFTC Margin Rule incorporated the 

earlier 2013 version of the BCBS/IOSCO 

Framework by adopting the June, July, 

and August calculation period for the 

annual calculation of MSE. As a result, 

the Commission’s existing regulations 

do not reflect the calculation period of 

March, April, and May set forth in the 

revised BCBS/IOSCO Framework 

published in March 2015. 

The Commission also departed from 

BCBS/IOSCO’s month-end AANA 

calculation for determining whether an 

entity is subject to the IM requirements. 

The Commission decided to adopt 

instead daily AANA averaging to 

determine whether an FEU has MSE, the 

finding of which requires a CSE to 

exchange IM with the FEU, to gather a 

more comprehensive assessment of the 

FEU’s participation in the swaps 

market, and to address the possibility 

that a market participant might 

‘‘window dress’’ its exposure on an asof date such as year-end, in order to 

avoid the Commission’s margin 

requirements.21

As a result, the Commission’s current 

method for the annual calculation of 

MSE, which was adopted in 

coordination with the U.S. prudential 


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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations 231 

22See, e.g., Commission Delegated Regulation 

(EU) 2016/2251 Supplementing Regulation (EU) No. 

648/2012 of the European Parliament and of the 

Council of July 4, 2012 on OTC Derivatives, Central 

Counterparties and Trade Repositories with Regard 

to Regulatory Technical Standards for RiskMitigation Techniques for OTC Derivative Contracts 

Not Cleared by a Central Counterparty (Oct. 4, 

2016), Article 28(1), https://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/ 

?uri=CELEX:32016R2251&from=EN. Financial 

Services Agency of Japan (JFSA) Cabinet Office 

Ordinance on Financial Instruments Business 

(Cabinet Office Ordinance No. 52 of August 6, 

2007), as amended (March 31, 2016), Article 

123(11)(iv); Office of the Superintendent of 

Financial Institutions Canada (OSFI) Guideline No. 

E–22, Margin Requirements for Non-Centrally 

Cleared Derivatives (April 2020), Section 5, 71, 

https://www.osfi-bsif.gc.ca/Eng/Docs/e22.pdf. 

23See Recommendations to Improve Scoping and 

Implementation of Initial Margin Requirements for 

Non-Cleared Swaps, Report to the CFTC’s Global 

Markets Advisory Committee by the Subcommittee 

on Margin Requirements for Non-Cleared Swaps, 

May 2020 at, 48–54, https://www.cftc.gov/media/ 

3886/GMAC_051920MarginSubcommitteeReport/ 

download (‘‘Margin Subcommittee Report’’ or 

‘‘Report’’). 

24 Id. 

25Pursuant to a Commission plan of 

reorganization, the Division of Swap Dealer and 

Intermediary Oversight was renamed Market 

Participants Division (‘‘MPD’’) effective November 

8, 2020. The Division is referred to as MPD 

hereinafter. 

26CFTC Letter No. 19–29, Request for No-Action 

Relief Concerning Calculation of Initial Margin 

(Dec.19, 2019) (‘‘Letter 19–29’’), http://

www.cftc.gov/idc/groups/public/@lrlettergeneral/ 

documents/letter/19-29.pdf. 

27Under Regulation 23.154(a)(3), SDs and MSPs 

subject to the Commission’s regulations are not 

required to post or collect IM until the initial 

margin threshold amount has been exceeded. See 

17 CFR 23.154(a)(3). The term ‘‘initial margin 

threshold amount’’ is defined in Regulation 23.151 

to mean an aggregate credit exposure of $50 million 

resulting from all uncleared swaps between an SD 

and its margin affiliates (or an MSP and its margin 

affiliates) on the one hand, and the SD’s (or MSP’s) 

counterparty and its margin affiliates on the other. 

See 17 CFR 23.151. 

28See supra note 23. 

29See Margin Subcommittee Report at 48–54. 

30See Margin Subcommittee Report at 34–36. 

31The possibility of calculation errors may be 

mitigated by substituted compliance, as described 

in Regulation 23.160, if the parties are non-U.S. 

entities and substituted compliance is available, as 

the parties may be able to avail themselves of the 

rules in the foreign jurisdiction and may therefore 

not face the concern about different calculation 

methods. However, while the changes to the 

method of calculation of AANA under the Final 

Rule will align the CFTC’s method of calculation 

with BCBS/IOSCO’s approach, the Commission 

acknowledges that the changes will result in a 

divergence from the U.S. prudential regulators’ 

approach, which may increase the potential for 

calculation errors for entities located in the United 

States. 

regulators and is similar to the U.S. 

prudential regulators’ method of 

calculation, is not consistent with the 

most recent version of the BCBS/IOSCO 

Framework. Nor is it consistent with 

requirements in other major market 

jurisdictions, most of which adopted the 

2015 BCBS/IOSCO Framework’s monthend AANA calculation using the period 

of March, April, and May for the 

purposes of determining whether an 

entity is subject to the IM requirements 

beginning in the last phase of 

implementation.22

In a report prepared by a 

subcommittee established by the CFTC’s 

Global Markets Advisory Committee 

(‘‘GMAC’’), discussed in more detail 

below, the subcommittee reported that 

the differences in the methods for 

determining when an entity comes 

within the scope of the IM requirements 

and the timing of compliance after the 

last phase of compliance may impose an 

undue burden on market participants’ 

efforts to comply with the CFTC’s 

margin requirements.23 The report 

stated that entities have to account for 

different compliance schedules and set 

up and maintain separate processes for 

determining when they meet the 

thresholds for IM compliance.24

B. No-Action Letter No. 19–29 

Concerning the Calculation of IM 

The Commission’s Division of Swap 

Dealer and Intermediary Oversight 25

issued CFTC No-Action Letter 19–29 in 

July 2019 in response to a request for 

relief submitted by Cargill Incorporated 

(‘‘Cargill’’), a CFTC-registered SD and 

CSE.26 Cargill sought no-action relief to 

be able to use the risk-based model 

calculation of IM of a counterparty that 

is an SD to determine the amount of IM 

to be collected from the counterparty. 

Cargill stated that while its swap 

activity primarily involved physical 

agricultural commodities with non-SD 

counterparties seeking to mitigate 

commercial risk, it maintained positions 

that required the collection of IM from 

SDs. Given the highly specialized and 

discrete nature of its swaps business, 

mainly focusing on commodities, Cargill 

opted to rely on the standardized IM 

table to calculate IM rather than develop 

a risk-based model. Because the use of 

the standardized table could generate 

higher amounts of IM than a risk-based 

model, requiring its SD counterparties 

to post higher amounts of IM, Cargill 

stated that SD counterparties might 

choose not to trade with it. 

Based on Cargill’s representations, 

MPD stated that it would not 

recommend enforcement action, subject 

to specified conditions, if Cargill used 

the risk-based model calculation of IM 

of a counterparty that is a CFTCregistered SD as the amount of IM that 

Cargill was required to collect from the 

SD and to determine whether the IM 

threshold amount of $50 million (‘‘IM 

threshold amount’’) 27 had been 

exceeded, which would trigger the 

requirement for documentation 

concerning the posting, collection, and 

custody of IM collateral. 

C. Market Participant Feedback 

As previously mentioned, the CFTC’s 

GMAC established a subcommittee of 

market participants in January 2020 to 

consider issues raised by the 

implementation of margin requirements 

for non-cleared swaps, identify 

challenges associated with forthcoming 

implementation phases, and prepare a 

report with recommendations. The 

subcommittee issued the Margin 

Subcommittee Report and submitted the 

Report to the GMAC.28 The GMAC 

adopted the Report and recommended 

to the Commission that it consider 

adopting the Report’s recommendations. 

Among other things, the Margin 

Subcommittee Report recommended the 

alignment of the CFTC Margin Rule 

with the BCBS/IOSCO Framework with 

respect to the method for calculating 

AANA for determining whether an 

entity comes within the scope of the IM 

requirements and the timing of 

compliance after the end of the phased 

compliance schedule.29 The Report also 

recommended the codification of Letter 

19–29.30

In response to feedback from market 

participants, in particular the GMAC 

subcommittee’s recommendations, the 

Commission issued a notice of proposed 

rulemaking (‘‘Proposal’’), published in 

the Federal Register on September 23, 

2020, proposing amendments to the 

CFTC Margin Rule. The Commission 

proposed to align the CFTC Margin Rule 

with the BCBS/IOSCO Framework with 

respect to the method for calculating 

AANA for determining whether certain 

entities come within the scope of the IM 

requirements and the timing of 

compliance after the end of the phased 

compliance schedule, noting that BCBS/ 

IOSCO is the global standard setter for 

margin requirements for non-centrally 

cleared derivatives and that the 

proposed amendments would promote 

international harmonization in the 

application of the IM requirements. The 

Commission stated that the disjunction 

between the CFTC and BCBS/IOSCO 

concerning the calculation of AANA 

and the timing of compliance with the 

IM requirements does not further any 

regulatory purpose, noting, in 

particular, the foreseeability of 

calculation errors resulting from 

differences in the calculation 

methods.31

The Commission also proposed to 

amend the CFTC Margin Rule to permit 

CSEs to use the risk-based IM 

calculation of a counterparty that is a 


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232 Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations 

32Margin Requirements for Uncleared Swaps for 

Swap Dealers and Major Swap Participants, 85 FR 

59702 (Sept. 23, 2020). The comment letters for the 

Proposal are available at: https://comments.cftc.gov/ 

PublicComments/CommentList.aspx?id=4157. 

33Letter from Jennifer Minnis, BP Energy 

Company (Oct. 23, 2020) (BPEC 10/23/2020 Letter). 

34Letter from Scott Earnest, Shell Trading Risk 

Management, LLC (Oct. 23, 2020) (STRM 10/23/ 

2020 Letter). 

35Letter from Michael Lovendusky, American 

Council of Life Insurers (Oct. 23, 2020) (ACLI 10/ 

23/2020 Letter). 

36Letter from Tara Kruse, James Kemp, and Kyle 

Brandon for International Swaps and Derivatives 

Association (ISDA), Global Foreign Exchange 

Division (GFXD) of the Global Financial Markets 

Association, and Securities Industry and Financial 

Markets Association, respectively, (collectively, 

‘‘Associations’’) (Oct. 22, 2020) (Associations 10/22/ 

2020 Letter). 

37Letter from Allison Lurton, Financial Industry 

Association (Oct. 22, 2020) (FIA 10/22/2020 Letter). 

38Letter from Jennifer W. Han, Managed Funds 

Association (Oct. 22, 2020) (MFA 10/22/2020 

Letter). 

39Letter from Sarah A. Bessin, Investment 

Company Institute (Oct. 22, 2020) (ICI 10/22/2020 

Letter). 

40Letter from Jason Silverstein, Asset 

Management Group of the Securities Industry and 

Financial Markets Association (Oct. 22, 2020) 

(SIFMA AMG 10/22/2020 Letter). 

41Letter from Alexander S. Holtan, Commercial 

Energy Working Group (Oct. 22, 2020) (Working 

Group 10/22/2020 Letter). 

42Regulation 23.151 defines the term ‘‘swap 

entity’’ as a person that is registered with the 

Commission as an SD or MSP under the CEA. 

43See ACLI 10/23/2020 Letter at 1; Associations 

10/22/2020 Letter at 1; BPEC 10/23/2020 Letter at 

2; FIA 10/22/2020 Letter at 2–3; ICI 10/22/2020 

Letter at 1; MFA 10/22/2020 Letter at 1; SIFMA 

AMG 10/22/2020 Letter at 1; STRM 10/23/2020 

Letter at 1; Working Group 10/22/2020 Letter at 3. 

A commenter stated that the Proposal reflects the 

realities of the marketplace and further aligns the 

U.S. regulations with the global regulators. See 

ACLI 10/23/2020 Letter at 2. Other commenters 

stated that the Proposal would enable the 

implementation of the IM requirements in a 

practical and efficient manner, as market 

participants prepare for forthcoming compliance 

dates, reducing complexity and burden associated 

with implementation and would foster greater 

liquidity and contribute to the lowering of hedging 

costs, particularly in the last phases of the 

compliance schedule. See BPEC 10/23/2020 Letter 

at 2; MFA 10/22/2020 Letter at 2. 

44While expressing support for the Proposal, 

commenters asked the Commission to consider 

other issues raised by the CFTC Margin Rule, 

including whether to exclude commodity swaps 

from the CFTC’s uncleared margin requirements, 

the need to harmonize the definition of financial 

entity under section 2(h)(7) of the CEA and the 

definition of financial end user under the CFTC 

Margin Rule, whether treasury affiliates of an SD 

should be exempt from the CFTC’s uncleared 

margin requirements, and other topics raised in 

prior communications to the Commission. See FIA 

10/22/2020 Letter at 2; MFA 10/22/2020 Letter at 

2. The commenters also asked the Commission to 

consider other recommendations from the Margin 

Subcommittee Report not addressed in the 

Proposal. See ACLI 10/23/2020 Letter at 2; 

Associations 10/22/2020 Letter at 1; SIFMA AMG 

10/22/2020 Letter at 4. The Commission will not 

currently act on these additional matters as they fall 

outside the scope of the Proposal. The Commission 

is aware of these issues and will continue to 

consider them and monitor pertinent developments 

to determine whether further Commission action 

concerning these matters is appropriate in the 

future. 

45ACLI 10/23/2020 Letter at 1; Associations 10/ 

22/2020 Letter at 4; MFA 10/22/2020 Letter at 2. 

46See 17 CFR 23.161(a)(7) (requiring CSEs to 

comply with the CFTC’s IM requirements with 

respect to uncleared swaps with counterparties that 

are FEUs with MSE beginning on September 1, 

2022). 

47For definition of MSE, see supra note 15. 

48 January 1 is not explicitly set out in the 

Commission’s regulations as the determination date 

for MSE after the last phase of compliance. 

However, absent the Final Rule, Regulation 

CFTC-registered SD or MSP, in line with 

the terms of Letter 19–29. The 

Commission stated that this amendment 

would promote legal certainty and 

clarity, facilitating efforts by market 

participants to take the application of 

the Commission’s regulations into 

account in planning their uncleared 

swaps business, without undermining 

the effectiveness of the CFTC Margin 

Rule. 

The Commission stated that the more 

widespread availability of the relief 

provided by Letter 19–29 would 

promote efficient risk hedging by 

smaller CSEs that offer swaps services to 

smaller entities that are neither SDs nor 

MSPs. The Commission further noted 

that having the ability to use the riskbased IM calculation of a counterparty 

that is an SD or MSP would allow 

smaller CSEs to engage SDs and MSPs 

that otherwise might be disincentivized 

from trading with the CSEs. That is 

because for such CSEs, the single 

method of IM calculation available may 

be the standardized IM table, as the 

CSEs, given the discrete and limited 

nature of their swaps business, may find 

it uneconomical to develop and 

maintain a proprietary model. As a 

result, swap entity counterparties may 

be required to post higher amounts of 

IM to the CSEs, as the table-based 

method of calculation does not account 

for portfolio composition, 

diversification and hedges. 

In the preamble to the Proposal, the 

Commission sought comment from the 

public on the proposed amendments.32

The comment period for the Proposal 

closed on October 23, 2020, and nine 

comment letters were received: one 

from an SD in the gas and electric power 

industry; 33 one from an SD in the oil 

and gas industry; 34 one from a life 

insurance trade association; 35 one from 

a group of swaps and financial industry 

advocates; 36 one from a futures industry 

group representing members active in 

the physical commodities markets; 37

one from a managed fund industry 

group; 38 one from a regulated funds 

association; 39 one from a representative 

of the asset management industry; 40 and 

one from a group of commercial firms in 

the energy industry.41

II. Final Rule, Summary of Comments 

and Commission Response 

The Commission is adopting revisions 

to the method for calculating AANA for 

determining whether an FEU has MSE 

and the timing for compliance with the 

IM requirements after the end of the last 

phase of compliance to align these 

aspects of the CFTC Margin Rule with 

the BCBS/IOSCO Framework, as 

proposed. The Commission is also 

amending Regulation 23.154(a), 

consistent with the terms of Letter 19– 

29, and thus allowing CSEs to use the 

risk-based model calculation of IM of 

counterparties that are CFTC-registered 

SDs or MSPs (‘‘swap entities’’) 42 to 

determine the amount of IM to be 

collected from such counterparties. 

All the comment letters received on 

the Proposal generally expressed 

support for the proposed amendments 43

and the Commission’s efforts to identify 

and address challenges in the 

implementation of the CFTC’s margin 

requirements as the phased compliance 

schedule nears conclusion.44

Commenters expressed support for the 

Proposal even in the absence of parallel 

action by the U.S. prudential regulators, 

while urging the CFTC to continue 

coordination with the prudential 

regulators and encourage corresponding 

amendments to the prudential 

regulators’ margin rules so that 

prudentially regulated SDs and MSPs 

and their counterparties are not 

disadvantaged by requirements that are 

neither globally nor domestically 

harmonized.45

A. Regulation 23. 151—Amendments to 

MSE Definition 

As noted above, a CSE must exchange 

IM with respect to uncleared swaps 

with a counterparty that is an FEU that 

has MSE beginning in the last phase of 

the phased compliance schedule, which 

will start on September 1, 2022.46

Regulation 23.151 provides that an 

entity has MSE if it has more than $8 

billion in AANA, calculated on a daily 

basis, during June, July, and August of 

the prior year.47 An FEU that has MSE 

based on the calculation of AANA over 

June, July, and August of 2021 would 

come within the scope of the IM 

requirements beginning on September 1, 

2022. In subsequent calendar years after 

September 1, 2022, however, because 

the base year for calculating AANA is 

the prior year, the annual determination 

of MSE, which triggers the applicability 

of the IM requirements, would be 

January 1 of each year,48 using the 


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23.161(a)(7) (addressing the last phase of 

compliance and the timing of compliance going 

forward) and the definition of MSE in Regulation 

23.151 can be reasonably read together to set 

January 1 as the MSE determination date. See 17 

CFR 23.151; 17 CFR 23.161(a)(7). 

49Pursuant to Regulation 23.161, the compliance 

dates for the IM and VM requirements under the 

CFTC Margin Rule are staggered across a phased 

schedule that extends from September 1, 2016, to 

September 1, 2022. The compliance period for the 

VM requirements ended on March 1, 2017 (though 

the CFTC and other regulators provided guidance 

permitting a six-month grace period to implement 

the requirements following the implementation 

date), while the IM requirements continue to phase 

in through September 1, 2022. An uncleared swap 

entered into prior to an entity’s IM compliance date 

is a ‘‘legacy swap’’ that is not subject to the IM 

requirements. See CFTC Margin Rule, 81 FR at 651 

and Regulation 23.161. 17 CFR 23.161. 

50See Margin Subcommittee Report at 49. 

51 Id. (The GMAC subcommittee stated that the 

divergence between the U.S. and international 

requirements ‘‘creates complexity and confusion, 

and leads to additional effort, cost and compliance 

changes for smaller market participants that are 

generally subject to margin requirements in 

multiple global jurisdictions.’’). 

AANA for June, July, and August of the 

prior year. If the FEU has MSE on 

January 1 of a given year, the FEU 

would come within the scope of the IM 

requirements on January 1 of such year. 

As such, a CSE would be required to 

exchange regulatory IM beginning on 

such January 1 for its uncleared swaps 

with such FEU. 

As proposed, the Commission is 

amending the definition of MSE in 

Regulation 23.151 by replacing ‘‘June, 

July and August of the previous 

calendar year’’ with ‘‘March, April and 

May of that year.’’ The period for 

calculating AANA for determining 

whether an FEU has MSE will thus be 

March, April, and May of ‘‘that year.’’ 

‘‘That year’’ will be understood to mean 

the year the MSE status for an FEU is 

assessed for the purpose of determining 

whether a CSE that enters into 

uncleared swaps with the FEU is 

required to exchange IM with the FEU. 

The Commission is also amending the 

definition of MSE to set ‘‘September 1 

of any year’’ as the determination date 

for MSE. Under the current 

requirements, absent a rule change, the 

MSE for an FEU would have to be 

determined first on September 1, 2022, 

which would begin the last phase of 

compliance under the phased 

compliance schedule, and subsequently, 

after the end of the phased compliance 

schedule, on January 1 of each year. 

Under the Final Rule, the date for the 

determination of MSE after the end of 

the phased compliance schedule will 

shift from January 1 to September 1. The 

change in the MSE determination date 

to September 1 of each year effectively 

sets the timing for compliance with the 

IM requirements on September 1 after 

the end of the phased compliance 

schedule with respect to uncleared 

swaps entered into by a CSE and an FEU 

with MSE. 

The shift of the MSE determination 

date from January 1 to September 1 may 

defer for nine months to September 1, 

2023, the obligation to exchange IM for 

a firm that absent the rule change would 

have been subject to the IM 

requirements on January 1, 2023. 

Uncleared swaps entered into by the 

firm during the nine-month deferral 

period will be deemed legacy swaps, or 

uncleared swaps exempt from the IM 

requirements.49 As a result, in 2023, less 

collateral may be collected for uncleared 

swaps, which could render uncleared 

swap positions riskier and increase the 

risk of contagion and systemic risk. The 

Commission, however, notes that 

because the deferral period will affect 

entities with lower AANAs than entities 

brought into scope in earlier phases of 

the IM compliance schedule, the 

potential uncollateralized risk would be 

mitigated, becoming a lesser concern, 

particularly because the proposed 

change in the MSE determination date 

will draw the Commission’s rules closer 

to BCBS/IOSCO’s approach, promoting 

international harmonization. 

Conversely, the change in the MSE 

determination date could also result in 

requiring certain entities to post and 

collect IM that otherwise would not 

have been required to do so. This could 

occur when an FEU meets the MSE 

threshold in the last phase of 

compliance beginning on September 1, 

2022, but falls below the threshold by 

January 1, 2023, because the AANA for 

June, July, and August of the prior year 

(i.e. 2022) is below $8 billion. In such 

case, under the current rule, a CSE 

would no longer be required to 

exchange IM with such FEU beginning 

on January 1, 2023. However, the 

change in the MSE determination date 

to September 1, as adopted, will require 

the CSE to continue to exchange IM 

with the FEU through September 1, 

2023, as no determination of MSE status 

will be required between September 1, 

2022, and September 1, 2023, and, as a 

result, the CSE will be required to 

exchange IM with the FEU for nine 

months longer than the January 1, 2023 

MSE determination date would have 

required. 

These amendments to the definition 

of MSE will have the effect of reducing 

the time frame that FEUs and their CSE 

counterparties will have to prepare for 

compliance with the IM requirements. 

Under the current rule being amended, 

CSEs would have been required to 

exchange regulatory IM with 

counterparties that are FEUs with MSE 

beginning on September 1, 2022, which 

starts the last phase of the phased 

compliance schedule. The MSE for the 

FEU would have been determined using 

the AANA for June, July, and August of 

the prior year (i.e., 2021). As a result, for 

the last phase of compliance in 2022, a 

CSE and FEU would have had at least 

twelve months to prepare for 

compliance with the IM requirements. 

By contrast, under the Final Rule, a CSE 

and FEU, for the last phase of 

compliance in 2022, will have only 3 

months to prepare for IM compliance 

because MSE will be required to be 

determined using the AANA for March, 

April, and May of the current year (i.e., 

2022). 

Also, under the Final Rule, after the 

last phase of compliance under the 

phased compliance schedule, the date 

for determining MSE for an FEU will be 

September 1 of each year, and the 

AANA calculation period for 

determining whether an FEU has MSE 

will be March, April, and May of such 

year. As a result, an FEU with MSE and 

its CSE counterparty will have three 

months to prepare in advance of 

compliance with the IM requirements, 

whereas under the current rule being 

amended, such parties would have had 

four months because MSE would have 

been required to be determined on 

January 1 based on the AANA for June, 

July, and August of the prior year. 

In its Margin Subcommittee Report, 

the GMAC subcommittee acknowledged 

that the change in the period for the 

calculation of AANA and the change in 

the MSE determination date from 

January 1 to September 1 would reduce 

the time frame for preparing for 

compliance with the IM requirements.50

Nevertheless, the subcommittee 

expressed support for the changes, 

noting that the changes would align the 

CFTC’s margin requirements with the 

BCBS/IOSCO Framework.51

The Commission is also amending the 

definition of MSE to replace ‘‘average 

daily aggregate notional amount,’’ or 

daily average AANA, with ‘‘average 

month-end aggregate notional amount,’’ 

for calculating AANA to determine 

whether an entity has MSE. In adopting 

the CFTC Margin Rule, the Commission 

acknowledged that month-end AANA 

averaging for the calculation of AANA 

would be consistent with BCBS/ 

IOSCO’s approach. Nonetheless, the 

CFTC, along with the U.S prudential 

regulators, decided to adopt daily 

AANA averaging for the calculation of 

AANA to determine MSE. In the 

preamble to the CFTC Margin Rule, the 


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52See supra note 21. 

53As used in the Margin Subcommittee Report, 

Phase 5 meant the phase of compliance with the 

CFTC’s IM requirements that started on September 

1, 2020, comprising covered swap entities and 

covered counterparties with AANA between $750 

billion and $50 billion. Since the issuance of the 

Report, the IM compliance schedule has been 

revised to defer the beginning of Phase 5 to 

September 1, 2021. See 17 CFR 23.161(a)(6). 

54Margin Subcommittee Report at 52. 

55 Id. 

56Under the Final Rule, the MSE calculation will 

be made annually on September 1 of each year and 

will be in effect for the next twelve months after 

that date. 

57 17 CFR 23.402(a)(ii). 

58 7 U.S.C. 6b. 

59For example, the Commission observes that 

certain physical commodity swaps, such as 

electricity and natural gas swaps, are products for 

which a month-end AANA calculation might not 

provide a comprehensive assessment of the full 

scope of an FEU’s exposure to those products. 

60Note that the OCE calculation excludes 

commodity swaps, and the examples of products 

that end-of-month calculations may undercount 

tend to be commodity swaps, such as natural gas 

and electricity swaps. Overall, commodity swaps 

tend to represent less than 1% of all swap trades. 

See BIS Statistic Explorer, Global OTC derivatives 

market (July 30, 2020), https://stats.bis.org/statx/ 

srs/table/d5.1?f=pdf. 

61The prudential regulators have not indicated 

whether they intend to amend their margin 

requirements consistent with the BCBS/IOSCO 

Commission explained that daily 

average AANA would provide a more 

comprehensive assessment of an FEU’s 

participation in the swaps market in 

determining whether the FEU has MSE 

and would address the possibility of 

window dressing of exposures by 

market participants that might seek to 

avoid the CFTC’s margin 

requirements.52

In its Report, the GMAC 

subcommittee stated that the use of 

daily average AANA for the calculation 

AANA entailed more work for smaller 

counterparties and that such method of 

calculation was only used in the United 

States, noting that in the United States, 

daily AANA averaging over the threemonth calculation period for Phase 5 53

required 64 observations while global 

determinations based on month-end 

AANA required only three 

observations.54 The Report further 

stated that month-end AANA averaging 

over the three-month calculation period, 

by accounting for three periodic dates 

on which AANA would be calculated, 

would mitigate the risk that market 

participants would adjust exposures to 

avoid the CFTC’s margin requirements, 

and that it would be neither practicable 

nor financially desirable for parties to 

tear-up their positions on a recurring 

basis prior to each month-end AANA 

calculation, as it would interfere with 

their hedging strategies and cause them 

to incur realized profit and loss.55

The Commission notes that the 

adoption of a month-end AANA 

methodology for the calculation of 

AANA to determine MSE will align the 

CFTC’s approach with the BCBS/IOSCO 

Framework and the approach adopted 

by other major market jurisdictions. The 

Commission does acknowledge that 

such methodology for calculating 

AANA could raise the risk that market 

participants that are counterparties to 

CSEs may ‘‘window dress’’ their 

exposures by adjusting their exposures 

as they approach the month-end date. 

By doing so, an FEU would no longer 

have to post and collect IM with all 

CSEs for all its uncleared swaps for at 

least twelve months from the date on 

which compliance with the IM 

requirements would have been initially 

required.56

To address this concern, the 

Commission has determined to revise 

the proposed rule text to include antievasion language prohibiting activities 

not carried out in the ordinary course of 

business and willfully designed to 

circumvent the month-end AANA 

calculation by, for example, altering 

swap book composition to evade 

meeting the definition of MSE and thus 

coming within the scope of the CFTC’s 

IM requirements. In addition, the 

Commission points to the availability of 

other tools to address the risk of 

‘‘window dressing.’’ Regulation 

23.402(a)(ii) requires CSEs to have 

written policies and procedures to 

prevent their evasion, or participation in 

or facilitation of an evasion, of any 

provision of the CEA or the 

Commission’s regulations.57 Also, 

section 4b of the CEA prohibits any 

person entering into a swap with 

another person from cheating or 

defrauding or willfully deceiving or 

attempting to deceive the other 

person.58

The Commission further notes that 

replacing daily average AANA with 

month-end AANA for determining MSE 

could result in an AANA calculation 

that is not fully representative of an 

entity’s participation in the swaps 

markets. Under the current definition of 

MSE, AANA must be calculated 

counting uncleared swaps, uncleared 

security-based swaps, foreign exchange 

forwards, or foreign exchange swaps. 

Under the Final Rule, which provides 

for the calculation of AANA by 

averaging month-end AANA during the 

three-month calculation period, some of 

the financial products that are required 

to be included in the calculation, 

because of their terms, such as tenure 

and time of execution, may be 

undercounted or excluded.59

The Commission believes that the 

notional amount associated with 

products that may be excluded from the 

AANA calculation, as a result of the 

change to month-end AANA averaging 

for the calculation of AANA, may be 

relatively low and that the products’ 

contribution to the AANA calculation 

for the purpose of determining MSE 

may be insignificant. In this regard, in 

an analysis undertaken by the 

Commission’s Office of the Chief 

Economist (‘‘OCE’’) on a sample of days, 

the OCE estimated (setting aside the 

window dressing issue) that 

calculations based on end-of-month 

AANA would yield fairly similar results 

as calculations based on the current 

daily average AANA approach. Based 

on 2020 swap data, the OCE estimated 

that 492 entities of the 514 entities that 

would have come into scope in the last 

phase of the IM compliance schedule 

(with AANA between $8 and $50 

billion) based on the current daily 

AANA calculation methodology would 

also come into scope under the monthend AANA calculation methodology 

being adopted herein. Put differently, all 

but 22 of the entities that would be 

above MSE under the existing 

methodology would also be above MSE 

under the month-end AANA 

methodology. In addition, there are 20 

entities that would be in scope under 

the month-end AANA methodology, but 

would not be in scope under the 

existing methodology, so that the 

aggregate number of entities under the 

two methodologies differs only by two. 

In the aggregate, the two 

methodologies capture quite similar sets 

of entities. In addition, the entities that 

fall out of scope applying the monthend AANA methodology tend to be 

among the smallest coming into IM 

compliance in the last phase of 

compliance. That is, entities that would 

have been in-scope under the current 

daily average AANA methodology but 

not the month-end AANA methodology 

average $6.95 billion in AANA, 

compared to $20 billion for all entities 

coming into scope in the last phase of 

compliance.60

Based on the OCE analysis discussed 

above, in the Commission’s view, 

switching from daily average AANA to 

month-end AANA for the purpose of 

determining MSE would likely have a 

limited impact on the protections 

provided by the CFTC Margin Rule. In 

addition, the Commission believes that 

the anti-evasion language being 

incorporated into the rule text by this 

Final Rule mitigates the window 

dressing concerns.61


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Framework and the amendments to the definition 

of MSE discussed herein. Also of note, the U.S. 

Securities and Exchange Commission (‘‘SEC’’) has 

adopted a different approach that does not use MSE 

for identifying entities that come within the scope 

of the SEC margin requirements. See Capital, 

Margin, and Segregation Requirements for SecurityBased Swap Dealers and Major Security-Based 

Swap Participants and Capital and Segregation 

Requirements for Broker-Dealers, 84 FR 43872 (Aug. 

22, 2019). 

62See ACLI 10/23/2020 Letter at 1; Associations 

10/22/2020 Letter at 2; FIA 10/22/2020 Letter at 4; 

MFA 10/22/2020 Letter at 1; SIFMA AMG 10/22/ 

2020 Letter at 2; Working Group 10/22/2020 Letter 

at 3. 

63SIFMA AMG 10/22/2020 Letter at 1; ACLI 10/ 

23/2020 Letter at 2. 

64 Id. 

65 Id. 

66Associations 10/22/2020 Letter at 2. 

67 Id. 

68 Id. 

69 Id. 

70 Id. 

71 Id. 

72SIFMA AMG 10/22/2020 Letter at 3. 

73 ICI 10/22/2020 Letter at 5. 

74 Id. 

75ACLI 10/23/2020 Letter at 2. 

76SIFMA AMG 10/22/2020 Letter at 3; Working 

Group 10/22/2020 Letter at 2. 

77Working Group 10/22/2020 Letter at 3. 

Commenters expressed strong support 

for the amendments to the MSE 

definition in Regulation 23.151 to align 

the method for calculating AANA and 

the timing of compliance with the IM 

requirements after the end of the last 

phase of compliance with the BCBS/ 

IOSCO Framework.62 Commenters 

stated that the amendments would help 

smaller market participants overcome 

unnecessary operational challenges. 63

The commenters also stated that the 

amendments would help entities that 

conduct swaps business across 

jurisdictions.64 A commenter stated that 

the differences in the AANA calculation 

methods and the timing of compliance 

burden market participants, such as 

asset managers, in determining whether 

clients are in scope in the later phases 

of the compliance schedule and create 

a complex and confusing ongoing 

monitoring process.65

Another commenter noted that the 

U.S. is the only jurisdiction that 

requires using the three-month period of 

June, July and August of the preceding 

year for the calculation of AANA, and 

the only jurisdiction besides Brazil that 

requires AANA to be calculated using 

daily averaging rather than month-end 

averaging over the three-month 

period.66 The commenter stated that a 

jurisdiction-specific approach creates 

additional effort for smaller 

counterparties coming into scope in the 

later phases of the compliance schedule, 

which need to run separate AANA 

calculations using different time periods 

and methods and need to provide 

separate notifications to their 

counterparties concerning the 

application of the IM requirements.67

The commenter stated that according to 

its estimates, 775 counterparties with a 

total of 5,443 relationships could come 

into the scope of global IM requirements 

in the last phase of compliance 

beginning September 1, 2022, and that 

over 74% of those counterparties will 

qualify for the IM requirements with 

less than EUR 25 billion AANA and 

therefore may be in a position to 

recalculate their AANA each year to 

affirm the continued application of the 

IM requirements.68 In addition, 

hundreds of other counterparties that do 

not initially breach the $8 billion 

threshold will need to conduct annual 

AANA calculations to confirm whether 

they have come into scope of the IM 

requirements in one or more 

jurisdictions.69 The commenter 

concluded by stating that jurisdictional 

differences are difficult to track and 

manage, leading to inadvertent errors or 

omissions in the calculations and the 

application of IM requirements, and that 

the differences could interfere with the 

ability to apply substituted compliance, 

since a party may become subject to the 

IM requirements under the CFTC 

Margin Rule on a different date in the 

U.S. as they will in other global 

jurisdictions.70

Addressing concerns that the monthend AANA methodology for 

determining MSE may result in window 

dressing, a commenter stated that it was 

not a realistic risk, as it would take 

considerable effort for parties to unwind 

their positions and then reestablish the 

position on a recurring basis over the 

three-month period, which would 

interrupt their hedging strategies and 

require the counterparties to absorb the 

cost of realized profit and loss 

changes.71 Another commenter echoed 

these arguments, noting that tearing up 

positions may interfere with hedging 

and cause portfolios to incur realized 

profit and loss changes.72 A commenter, 

speaking on behalf of the managed fund 

industry, stated that adjustments to 

swaps positions to benefit from the 

month-end AANA methodology would 

be contraindicated in the case of an 

investment adviser to a regulated fund 

because the investment adviser is a 

fiduciary to the fund that is legally 

obligated to manage the fund’s assets in 

accordance with that fund’s investment 

strategy, policies, and limitations.73

Adjusting swap exposures over the 

course of three periodic dates solely to 

avoid IM could impose transaction costs 

and inhibit a fund’s ability to manage its 

portfolio risk, which may be 

inconsistent with the adviser’s duty to 

act in the best interest of its clients.74

Another commenter representing the 

life insurance industry stated that the 

proposed changes to the calculation of 

AANA would be unlikely to change the 

life insurers’ market behavior given that 

life insurers are subject to significant 

state regulation of their derivatives 

activities.75

While recognizing that practical 

considerations, as discussed by the 

commenters, may reduce the risk of 

window dressing, the Commission 

believes that it should seek to remove 

any potential incentives that may lead 

to the manipulation of swaps exposures 

to avoid meeting the definition of MSE 

and thus coming within the scope of the 

margin requirements. Accordingly, as 

discussed further above, the 

Commission is revising the proposed 

rule text to incorporate an anti-evasion 

provision prohibiting activities willfully 

designed to avoid the month-end AANA 

calculation. 

With respect to the divergence 

between the CFTC and the U.S. 

prudential regulators regarding the 

method for calculating AANA for 

determining whether an entity has MSE 

and the timing of compliance after the 

last phase of the compliance schedule, 

commenters stated that the CFTC 

should proceed with the amendments 

even if the prudential regulators do not 

make corresponding changes to their 

margin rules while also encouraging the 

prudential regulators to align with the 

global standards.76 A commenter further 

noted that given that most affected FEUs 

belong to a corporate group that has to 

calculate AANA for multiple 

jurisdictions, a deviation between the 

CFTC and prudential regulators would 

not increase the regulatory burden for 

most FEUs as they would already be 

calculating AANA under the CFTC/ 

prudential regulator approach and the 

BCBS/IOSCO approach.77

After reviewing the comments, the 

Commission has confirmed the rationale 

articulated for proposing the 

amendments to the definition of MSE in 

Regulation 23.151 and is therefore 

adopting the amendments as proposed, 

subject to the change to the proposed 

rule text to add the anti-evasion 

provision discussed in more detail 

above. The Commission believes, as 

discussed in the preamble to the 

Proposal, that the amendments will 

eliminate the need to maintain separate 

schedules and processes for the 

computation of AANA and reduce the 

burden and cost of compliance with the 


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78The Commission acknowledges that the 

burdens on market participants will not be fully 

eliminated, and in fact, may increase, for those 

entities that enter into uncleared swaps with SDs 

and MSPs that are subject to the U.S. prudential 

regulators’ margin requirements for uncleared 

swaps and come within the scope of the prudential 

regulators’ margin regime, as the prudential 

regulators have not revised their rules consistent 

with the rule changes being adopted herein. Any 

further discussion in this Final Rule of the benefits 

of not needing to maintain separate schedules and 

processes is limited to entities not also undertaking 

swaps with U.S. prudentially regulated SDs. 

79See section 752(a) of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act, Public 

Law 111–203, 124 Stat. 1376 (2010). 

80See 17 CFR 23.152. 

81See 17 CFR 23.154(a). 

82See id. 

83See 17 CFR 23.154(b)(1)(i). In this context, the 

term ‘‘registered futures association’’ refers to the 

National Futures Association (‘‘NFA’’), which is the 

only futures association registered with the 

Commission. 

84See 17 CFR 23.154(b)(1)(i). 

85The Commission, however, notes that the 

potential for conflict may be mitigated as the swap 

entity, as a CFTC-registered SD or MSP, would be 

subject to Regulation 23.600, which requires SDs 

and MSPs to establish a risk management program 

for the management and monitoring of risk, 

including credit and legal risk, associated with their 

swap activities. See 17 CFR 23.600. 

86As previously discussed, Letter 19–29 permits 

Cargill to use the risk-based IM calculation of a 

counterparty that is a CFTC-registered SD to 

determine the amount of IM to be collected from 

such counterparty, subject to specified conditions 

discussed in more detail below. 

87The prudential regulators have not amended 

their margin requirements for uncleared swaps 

consistent with the amendment to Regulation 

23.154(b) discussed herein. As such, the CFTC’s 

margin requirements will diverge from the 

prudential regulators’ approach. 

88See Further Definition of ‘‘Swap Dealer,’’ 

‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap 

Participant,’’ ‘‘Major Security-Based Swap 

Participant’’ and ‘‘Eligible Contract Participant,’’ 77 

FR 30596, 30608 (May 23, 2012) (noting that a 

distinguishing characteristic of swap dealers is 

being known in the industry for their availability 

to accommodate demand for swaps). 

IM requirements.78 In addition, section 

752(a) of the Dodd-Frank Act calls on 

the CFTC to ‘‘consult and coordinate’’ 

with respect to the establishment of 

consistent international standards.79 As 

such, the Commission believes that 

amending the definition of MSE, as 

proposed, is appropriate to harmonize 

its compliance schedule with that of 

BCBS/IOSCO and, for entities engaging 

in swaps with CSEs, eliminates a 

disjunction that could risk calculation 

errors and may hinder compliance with 

the IM requirements. 

B. Regulation 23.154—Alternative 

Method of Calculation of IM 

As originally adopted, the CFTC 

Margin Rule requires CSEs to collect 

and post IM with covered 

counterparties, including CFTCregistered SDs or MSPs.80 Regulation 

23.154(a) directs CSEs to calculate, on a 

daily basis, the IM amount to be 

collected from covered counterparties.81

CSEs have the option to calculate the IM 

amount by using either a risk-based 

model or the standardized IM table set 

forth in Regulation 23.154(c)(1).82 For a 

CSE that elects to use a risk-based 

model to calculate IM, Regulation 

23.154(b)(1) requires the CSE to obtain 

the written approval of the Commission 

or a registered futures association 83 to 

use the model to calculate IM required 

by the Commission’s margin 

requirements for uncleared swaps.84

After reviewing the comments on the 

Proposal, the Commission is adopting 

the amendment to Regulation 23.154(a) 

as proposed, subject to some 

clarifications further discussed below. 

More specifically, the Commission is 

amending Regulation 23.154(a) by 

adding new paragraph (a)(5). Paragraph 

(a)(5) permits a CSE that enters into 

uncleared swaps with a CFTC-registered 

SD or MSP, or a swap entity, to use the 

swap entity’s risk-based model 

calculation of IM to determine the 

amount of IM that must be collected 

from such counterparty and to 

determine whether the IM threshold 

amount has been exceeded, which 

would require documentation 

concerning the posting, collection, and 

custody of IM. 

This amendment to Regulation 

23.154(a) modifies, consistent with 

Letter 19–29, the requirement that CSEs 

calculate the amount of IM to be 

collected from a swap entity 

counterparty by giving CSEs the option 

to rely on such counterparty’s risk-based 

IM calculation. The Commission 

acknowledges that as a result, some 

CSEs may forgo the adoption of a riskbased model to avoid the cost and 

burden associated with developing and 

maintaining such a model. The 

Commission notes that without a model 

to compute its own IM, a CSE may lack 

reasonable means to verify the IM 

amount provided by its counterparty or 

may fail to recognize shortfalls in the IM 

calculation or flaws in the 

counterparty’s risk-based model. As 

such, the CSE may collect insufficient 

amounts of IM to offset counterparty 

risk. In addition, the Commission 

acknowledges the swap entity’s 

potential conflict of interest in 

calculating IM for the CSE, 85 as it may 

be biased in favor of calculating and 

posting lower amounts of IM to the CSE. 

Based on the foregoing concerns, the 

Commission is adopting, as part of the 

new paragraph (5) in Regulation 

23.154(a), two of the conditions set forth 

in Letter 19–29.86

First, consistent with Letter 19–29, 

paragraph (a)(5) requires that the riskbased model used by the CSE’s swap 

entity counterparty for the calculation of 

IM satisfy the requirements of 

Regulation 23.154(b) (requiring the 

approval of the use of the model by 

either the Commission or the NFA), or 

that the model be approved by a 

prudential regulator.87

Second, paragraph (a)(5) permits CSEs 

to use the risk-based model calculation 

of IM of a swap entity counterparty only 

if the uncleared swaps for which IM is 

calculated are entered into for the 

purpose of hedging the CSE’s own risk. 

The risk to be hedged is understood to 

be the risk that a CSE would incur when 

entering into swaps with non-swap 

entity counterparties. By limiting the 

application of this alternative method of 

calculation of IM to only uncleared 

swaps entered into for the purpose of 

hedging risk arising from swaps entered 

into with non-swap entities, the 

Commission ensures the narrow 

application of this method of 

calculation. 

The Commission contrasts the risk of 

customer-facing swaps with the risk that 

CSEs incur when entering into a swap 

in a dealing capacity ‘‘to accommodate 

the demand’’ of a swap entity 

counterparty.88 The Commission 

believes that it would be inappropriate 

to allow a CSE to use the IM calculation 

of the swap entity counterparty in this 

latter case. The Commission notes that 

the latter case (i.e., where the CSE is 

acting in a dealing capacity for a 

counterparty that is itself calculating 

IM) would occur in the inter-dealer 

market for swaps. The Commission 

believes that a CSE participating in the 

inter-dealer market in a dealing capacity 

should have the capacity to develop, 

implement, and use an approved riskbased model. 

The Commission expects that new 

paragraph (a)(5) would be relied upon 

by CSEs that opt not to develop and 

obtain approval to use a risk-based 

model for the calculation of IM but 

instead elect to use the table-based 

calculation described in Regulation 

23.154(c) for swaps with non-swap 

entity counterparties. Such CSEs, in the 

course of their uncleared swaps 

business, would enter into uncleared 

swaps mostly with end-user, non-swap 

entity counterparties, and hedge the risk 

of those swaps with other uncleared 

swaps entered into with swap entity 

counterparties. The CSEs would 

exchange IM with the swap entity 

counterparties for the uncleared swaps 

entered into for their own hedging, as 

the swaps would be subject to the CFTC 


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89See generally 17 CFR 23.152 (requiring CSEs to 

exchange IM with swap entity counterparties for 

their uncleared swaps). 

90 17 CFR 23.158(a). 

91 7 U.S.C. 6s(e);17 CFR 23.504(b)(4)(i). 

92Regulation 23.504(b)(1) further provides that 

the documentation should include all terms 

governing the trading relationship between an SD 

or MSP and its counterparty, including without 

limitation, terms addressing payment obligations, 

netting of payments, events of default or other 

termination events, calculation and netting of 

obligations upon termination, valuation, and 

dispute resolution. 17 CFR 23.504(b)(1). 93 7 U.S.C. 6s(j)(2). 94See 17 CFR 23.600. 95Exceedances are price movements above the 

amount of IM computed using a risk-based model 

that complies with the Commission’s regulations. 96Letter 19–29 at 4. 

97Associations 10/22/2020 Letter at 4; BPEC 10/ 

23/2020 Letter at 2; FIA 10/22/2020 Letter at 4; 

STRM 10/23/2020 Letter at 1; Working Group 10/ 

22/2020 Letter at 3. In addition to the comments 

addressing the alternative method of calculation of 

IM, as proposed, two commenters requested 

broadening the Proposal to permit CSEs to use the 

risk-based model of calculation of IM of financial 

end user counterparties. BPEC 10/23/2020 Letter at 

9; Associations 10/22/2020 Letter at 4. In the 

Commission’s view, this matter falls outside the 

scope of the Proposal. Accordingly, the Commission 

will not express a view or act on this matter. 

98BPEC 10/23/2020 Letter at 2. 

99FIA 10/22/2020 Letter at 5. 

IM requirements.89 Because maintaining 

a risk-based model imposes a 

disproportionate burden on the CSEs 

relative to the discrete and limited 

nature of their uncleared swap 

activities, the CSEs would generally not 

have a model for the calculation of IM, 

and thus new paragraph (a)(5) will 

permit them to use the risk-based model 

calculation of their swap entity 

counterparties to determine the amount 

of IM to be collected from such 

counterparties. 

Letter 19–29, in addition to the 

foregoing conditions, requires that 

Cargill, prior to using the risk-based 

model calculation of IM of a swap entity 

counterparty, agree with its 

counterparty in writing that the IM 

calculation be provided to Cargill in a 

manner and time frame that would 

allow Cargill to comply with the CFTC 

Margin Rule and other applicable 

Commission regulations, and that the 

calculation be used to determine the 

amount of IM to be collected from the 

counterparty and to determine whether 

the IM threshold amount has been 

exceeded, which would require 

documentation addressing the posting, 

collection, and custody of IM. While the 

Commission acknowledges that the 

application of the alternative method of 

calculation of IM adopted herein could 

potentially result in the miscalculation 

or underestimation of IM, it believes 

that the safeguards in Part 23 of the 

Commission’s regulations, such as the 

documentation requirements in 

Regulations 23.158 and 23.504, address 

this concern. 

Regulation 23.158(a) requires CSEs to 

comply with the documentation 

requirements set forth in Regulation 

23.504.90 Regulation 23.504(b)(4)(i) 

requires CSEs to have written 

documentation reflecting the agreement 

with a counterparty concerning 

methods, procedures, rules, and inputs 

for determining the value of each swap 

at any time from execution to the 

termination, maturity, or expiration of 

such swap for the purposes of 

complying with the margin 

requirements under section 4s(e) of the 

Act and regulations under this part.91

Regulation 23.504(b)(3)(i) also provides 

that the documentation shall include 

credit support arrangements, including 

initial and variation margin 

requirements, if any.92

Letter 19–29 also sets forth two 

conditions that are designed to ensure 

that Cargill will undertake adequate risk 

management with respect to its 

uncleared swaps. The Commission 

notes that the availability of the 

alternative method of calculation of IM 

may lead some CSEs to forgo the 

adoption of a proprietary risk-based 

model for the calculation of IM. Without 

a proprietary risk-based model, CSEs 

may not be able to precisely calculate 

IM, or the potential future exposure of 

uncleared swaps, which could undercut 

a CSE’s ability to adequately manage the 

risk of its swaps. However, the 

Commission believes that CSEs’ risk 

management obligations under the CEA 

and the Commission’s regulations 

provide adequate safeguards to address 

this concern. In this regard, the 

Commission notes that section 4s(j)(2) of 

the CEA requires SDs and MSPs, 

including CSEs, to establish robust and 

professional risk management systems 

adequate for the management of their 

day-to-day swaps business 93 and that 

Regulation 23.600, consistent with the 

mandate under the CEA, requires SDs 

and MSPs to establish and maintain a 

risk management program to monitor 

and manage risk associated with their 

swap activities.94

To obtain relief under Letter 19–29, 

Cargill also must ‘‘keep track of 

exceedances’’ 95 and ‘‘[if] the 

exceedances indicate that the Approved 

IM Calculation Method fails to meet the 

relevant regulators’ standards, [Cargill] 

must take appropriate steps to ensure 

compliance with its risk management 

obligations and address exceedances 

with its SD counterparty.’’ 96 The 

purpose of this requirement is to ensure 

that Cargill monitors, identifies, and 

addresses potential shortfalls in the 

amount of IM generated by the 

counterparty. Cargill must also report to 

the CFTC ‘‘any adjustments and 

enhancements . . . applied to the 

amount of IM calculated pursuant to the 

Approved IM Calculation Method to 

ensure [Cargill’s] collection of adequate 

amounts of IM.’’ 

The Commission notes that if a CSE 

declines to adopt a proprietary model to 

calculate IM, a CSE may be unable to 

verify whether the amounts of IM 

calculated by its counterparty are 

sufficient. The Commission, however, 

believes that Regulation 23.600 

addresses this concern by requiring SDs 

and MSPs to account for credit risk in 

conducting their risk oversight and to 

ensure compliance with the CFTC 

margin requirements. In the case of a 

CSE relying on new paragraph (a)(5), as 

adopted, adequate risk oversight will 

include steps by the CSE to monitor, 

identify, and address potential shortfalls 

in the amounts of IM generated by the 

counterparty on whose IM model the 

CSE is relying. While the Commission 

does not prescribe the CSE’s oversight 

process, it believes that a risk 

management program that is unable to 

identify or to address shortfalls in IM 

will be insufficient to comply with 

Regulation 23.600. 

Moreover, Regulation 23.600 requires 

SDs and MSPs to furnish to the 

Commission risk exposure reports 

setting forth credit risk exposures and 

any other applicable risk exposures 

relating to their swap activities. Here 

again, the Commission believes that an 

adequate risk exposure report pursuant 

to Regulation 23.600 will require a CSE 

to identify any adjustments and 

enhancements to the amount of IM 

calculated pursuant to the risk-based 

model of its swap entity counterparty to 

ensure the CSE’s collection of adequate 

amounts of IM. 

Commenters generally supported the 

proposed amendment to Regulation 

23.154(a) to permit CSEs to rely on their 

swap entity counterparties’ risk-based 

model calculation of IM.97 A commenter 

stated that the proposed alternative 

method of IM calculation would greatly 

reduce the complexity and burden 

associated with the implementation of 

the margin requirements, in particular 

in the last phases of compliance, thus 

fostering greater liquidity and 

contributing to lowering the hedging 

costs of end-users.98 Another 

commenter discussed the competitive 

disadvantage that smaller SDs might 

experience absent the alternative 

method of IM calculation.99 This 

commenter noted that large SDs may be 


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100 Id. 

101 Id. at 5. 

102Working Group 10/22/2020 Letter at 3. 

103 Id. See also STRM 10/23/2020 Letter at 2. 

104Associations 10/22/2020 Letter at 4; BPEC 10/ 

23/2020 Letter at 2; FIA 10/22/2020 Letter at 6; 

Working Group 10/22/2020 Letter at 4. 

105BPEC 10/23/2020 Letter at 5. 

106 Id. at 4. 

107 Id. See also STRM 10/23/2020 Letter at 4 

(stating that classifying individual transactions with 

other SDs as hedges and tying the hedges to 

particular client-facing transactions would impose 

a material compliance burden that could nullify any 

benefit offered by the relief in proposed Regulation 

23.154(a)(5)). 

108BPEC 10/23/2020 Letter at 4. 

109 Id. 

110 Id. 

111 Id. at 5. 

112FIA 10/22/2020 Letter at 7. 

113 Id. 

114 Id. 

115STRM 10/23/2020 Letter at 4. 

116BPEC 10/23/2020 Letter at 5. 

117Working Group 10/22/2020 Letter at 4. 

118 Id. 

119Associations 10/22/2020 Letter at 4. This 

commenter, along with another commenter, also 

argued that SIMM, whose use must be approved by 

a regulator prior to its utilization in the calculation 

of regulatory IM, is a robust framework that obviates 

the need for a safeguard, such as the hedging 

limitation, to ensure the calculation of sufficient 

amounts of IM. See Associations 10/22/2020 Letter 

at 5; FIA 10/22/2020 Letter at 9. While recognizing 

the value of standardization, the Commission 

believes that SIMM on its own does not offer the 

safeguards necessary to address the concerns raised 

by the application of the alternative method of IM 

calculation. That is because SIMM is a tool that 

must be tailored to fit each firm’s portfolio and risk 

profile, and must be subject to ongoing oversight to 

ensure adequate calibration. 

120Associations 10/22/2020 Letter at 4. 

121See generally Associations 10/22/20 Letter at 

4; BPEC 10/23/2020 Letter at 6; FIA 10/22/2020 

Letter at 7–8. 

122FIA 10/22/2020 Letter at 8. 

disincentivized from trading uncleared 

swaps with such SDs since doing so 

would require large SDs to manage riskbased model calculations with some 

entities and table-based calculation with 

smaller SDs.100 Further, this commenter 

stated that table-based IM calculations, 

which do not take into account a firm’s 

specific portfolio composition, 

including diversification and hedges, 

might produce more conservative 

results requiring the posting and 

collection of margin that is 

inappropriately high given the actual 

level of risk involved in a typical 

transaction.101

Another commenter representing a 

group of commercial firms in the energy 

industry stated that allowing smaller 

SDs to rely on their SD counterparties’ 

approved IM model calculation would 

allow them to continue to play a crucial 

role in certain discrete swaps markets, 

like the energy swaps markets, in an 

economic and cost effective manner.102

The commenter noted that the use of the 

table-based method for the calculation 

of IM by smaller SDs and IM modeling 

by larger SDs resulted in a mismatch in 

calculation methods that could lead to 

worse pricing for smaller SDs, as the 

table-based method would likely cause 

their counterparties to post more IM 

than they would under a model-based 

approach, with the cost of that margin 

being reflected in a higher price 

provided to the smaller SDs.103

Notwithstanding these expressions of 

support, many commenters objected to 

the provision in the Proposal that limits 

the application of the alternative 

method of calculation of IM to 

uncleared swaps entered into by a CSE 

and a swap entity counterparty to hedge 

the risk of customer-facing swaps 

undertaken by the CSE, namely the 

hedging limitation.104 A commenter 

stated that it would be difficult, if not 

impossible, to ensure that all 

transactions to which the alternative 

method of calculation could apply are 

entered into for hedging purposes given 

that the concept of hedging is difficult 

to administer.105 The commenter 

pointed to questions that may arise, 

including what standard should be used 

to determine whether a given swap is in 

fact a ‘‘hedge.’’ 106 The commenter asked 

whether each swap with a large SD must 

be matched one-by-one with a swap 

with a non-swap entity counterparty,107

and whether it would be feasible for an 

entity to undertake portfolio hedging or 

dynamic hedging in that context.108 The 

commenter also asked what would 

happen if the underlying swap 

transaction with a non-swap entity 

counterparty had been terminated, and 

whether anticipatory hedges could be 

counted as hedging.109 The commenter 

noted that because the swaps markets 

are dynamic, the character of swaps may 

change over time and tagging a swap as 

hedging and non-hedging may be 

impractical.110 The commenter 

concluded that given the uncertainty as 

to what constitutes hedging, CSEs may 

be reluctant to apply the alternative 

method of calculation.111

Another commenter raised similar 

concerns regarding difficulties in 

applying the concept of hedging, 

illustrated by the position limits rule 

recently adopted after many attempts by 

the Commission to implement the 

Dodd-Frank Act, noting that at the core 

of the rule lies the concept of 

hedging.112 The commenter stated that 

the concept of hedging is difficult to 

quantify and that there are many 

instances when ‘‘hedging’’ is virtually 

indistinguishable from speculation.113

In the absence of a definition in the 

Final Rule, the commenter stated, 

counterparties could be left guessing 

and may be reluctant to rely on the 

alternative method of calculation for 

fear of violating the hedging 

limitation.114 A commenter also noted 

that proposed Regulation 23.154(a)(5) 

does not define the term hedging and 

suggested replacing the term with the 

phrase ‘‘hedge or mitigate commercial 

risk.’’ 115

Another commenter stated that many 

CSEs do not separate hedging from 

dealing on a transaction-by-transaction 

basis since CSEs often manage hedging 

on a portfolio basis and, as a result, to 

implement the hedging limitation, CSEs 

would need to undertake a significant 

amount of analysis and legal review to 

make hedging determinations, making 

the relief provided by the alternative 

method of IM calculation 

impracticable.116 Similarly, another 

commenter stated that if a CSE must be 

able to demonstrate that each swap is a 

hedge of a transaction with a non-SD, 

then the CSE would not be able to 

engage in portfolio hedging if the 

portfolio includes risk related to a 

speculative swap with another SD.117

Consequently, in the commenter’s view, 

the hedging limitation would limit the 

flexibility and efficacy of a CSE’s risk 

management program.118

In line with these comments, another 

commenter stated that if a commercial 

CSE’s portfolio includes non-hedging 

transactions, the opportunity to rely on 

the IM calculations of its SD 

counterparty may not be useful since 

they would need to calculate separately 

IM for the non-hedging transactions, 

which would reduce the benefits of 

netting or diversification offered by the 

Standardized IM Model (‘‘SIMM’’).119

As a result, the commenter noted, the 

amount of IM is likely to be higher, 

disadvantaging commercial CSEs and 

their SD counterparties in a way that 

would not apply to CSE portfolios with 

non-SDs.120

Commenters also noted that CSEs and 

their counterparties typically transact 

both hedging and dealing swaps under 

a single ISDA Master Agreement or 

credit support annex, with many 

relationships put in place years ago, and 

calculate IM at the relationship or 

master contract level rather than the 

transaction level.121 A commenter stated 

that if CSEs are required to add 

additional representations confirming 

that a given transaction is a ‘‘hedging’’ 

transaction, the existing documentation 

would need to be updated.122 The 

commenter further stated that IM would 

also need to be administered on the 

basis of hedging and non-hedging 

transactions which would make the 


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123 Id. 

124See Associations 10/22/20 Letter at 4; BPEC 

10/23/2020 Letter at 6; FIA 10/22/2020 Letter at 8. 

125Working Group 10/22/2020 Letter at 4. 

126 Id. See also STRM 10/23/2020 Letter at 5. 

127FIA 10/22/2020 Letter at 8. 

128See BPEC 10/23/20 Letter at 6; FIA 10/22/2020 

Letter at 8. 129 7 U.S.C. 6a(c)(2). 

netting of all transactions under a single 

ISDA Master Agreement impossible.123

As a result, the implementation of the 

hedging limitation would be extremely 

complex and result in potentially added 

operational risk, and certain swap entity 

counterparties, given the added market 

and bankruptcy risk, may shy away 

from undertaking swaps with CSEs that 

rely on the alternative method of 

calculation of IM.124

A commenter also pointed out that 

having to use the table-based method of 

calculation for determining IM in some 

circumstances and a counterparty’s IM 

model in other circumstances would be 

operationally complex for a CSE, 

potentially to the point of being 

unworkable, and may result in the CSE 

being forced to choose between entering 

into transactions in the inter-dealer 

market or using the alternative method 

of calculation.125 The commenter 

further stated that the hedging 

limitation could have negative 

implications for liquidity in certain 

markets, as some CSEs with unique 

insights and risk profiles that are best 

situated to assume customer risk from 

other SDs may opt not to trade with 

such SDs to avoid the burden associated 

with the hedging limitation.126 Another 

commenter stated that costs associated 

with the hedging limitation, including 

operational and documentation 

burdens, could lead small CSEs to cease 

providing risk mitigation services to 

end-user counterparties, leaving endusers with unhedged risks.127

The concerns raised in the foregoing 

comments hinge on two ideas: (i) CSEs 

undertake hedging and speculative 

swaps with swap entity counterparties; 

and (ii) there is no clear standard for 

determining which swaps are entered 

into for hedging purposes. Commenters 

assert that because CSEs undertake both 

hedging and speculative swaps with 

swap entity counterparties, the 

implementation of the hedging 

limitation would add further complexity 

to the transactions and would be 

burdensome as swaps are generally 

managed on a portfolio basis and may 

be under a single master netting 

agreement or credit support annex, 

making the separation of hedging and 

non-hedging transactions challenging, if 

not impossible.128

In response to these concerns, the 

Commission acknowledges the potential 

burdens associated with the 

implementation of the hedging 

limitation. However, the Commission 

points out that the proposed addition of 

a method of calculation of IM that 

would enable a CSE to rely on a swap 

entity counterparty’s model calculation 

of IM provides an alternative to the two 

existing methods of calculation of IM. 

The alternative method provides 

flexibility to address a particular 

situation illustrated in Letter 19–29. As 

such, it is intended for use by CSEs 

whose core swaps business is with nonswap entities but that occasionally enter 

into swaps with a few swap entity 

counterparties to offset the risk of 

customer-facing swaps. Given the 

limited swaps business with swap entity 

counterparties, it is uneconomical for 

the CSEs to develop, adopt, and 

maintain a proprietary risk-based model 

for the sole purpose of engaging such 

counterparties. 

In light of the intended use for the 

alternative method of IM calculation, 

the Commission incorporated in the 

Proposal, in line with Letter 19–29, the 

hedging limitation restricting the 

application of the proposed alternative 

method of IM calculation to uncleared 

swaps entered into by a CSE to hedge 

the CSE’s customer-facing risk. The 

Commission noted in the Proposal that 

the incorporation of the hedging 

limitation would also have the effect of 

limiting the use of the proposed method 

of IM calculation. While the proposed 

alternative method of IM calculation 

was intended to make the alternative 

method set forth in Letter 19–29 more 

widely available, the Commission stated 

that its application raised some 

concerns that would be mitigated, in 

part, by limiting the use of the 

alternative method of calculation to 

hedging transactions. More specifically, 

the Commission expressed the concern 

that in calculating the amount of IM to 

be used by the CSE to determine the 

amount to be collected from the swap 

entity counterparty, the swap entity 

counterparty could miscalculate the 

amount of IM or may be motivated to 

underestimate the amount of IM in 

order to post lesser IM amounts to the 

CSE. In turn, the CSE, without a 

proprietary model to calculate IM, 

would have no meaningful way to verify 

whether the amounts generated by the 

swap entity counterparty were correct or 

to contest the amounts, potentially 

resulting in the CSE collecting 

insufficient amounts of margin to 

mitigate the risk of its swaps. 

The Commission notes that there are 

other safeguards in the Commission’s 

regulations, such as risk management 

requirements applicable to both CSEs 

and their swap entity counterparties, 

that could address the potential 

miscalculation or underestimation of 

IM; however, the Commission believes 

that these safeguards do not obviate the 

need for the hedging limitation. Rather, 

in the Commission’s view, the hedging 

limitation will work together with such 

other measures to provide effective 

protections to address the concerns 

raised by the application of the 

alternative method of calculation of IM. 

Accordingly, the Commission has 

decided to retain the hedging limitation. 

The Commission expects that 

counterparties that engage in both 

hedging and speculative transactions 

would engage in such a small number 

of speculative transactions that the 

complexity and burden of separating 

speculative and hedging transactions 

and operationally implementing the 

hedging limitation would be rather low. 

On the other hand, if the speculative 

activity between the CSE and the swap 

entity counterparty is so robust as to 

complicate the use of the alternative 

method of calculation, the CSE should 

be able to carry out its own calculation 

of IM by either adopting a proprietary 

model for the calculation of margin or 

using the table-based method of 

calculation. It follows that if the CSE 

adopts a proprietary model of 

calculation for its speculative swaps, the 

CSE should be likewise able to adopt a 

model or use the same model for 

calculating IM for its hedging swaps, 

thus obviating the need to rely on its 

counterparty’s IM calculation. 

Regarding comments asserting a lack 

of a clear standard to differentiate 

between hedging and non-hedging 

swaps, the Commission believes that the 

existing standard set out in section 

4a(c)(2)(B) of the CEA 129 to define 

‘‘bona fide hedging transaction or 

position’’ provides a suitable framework 

for determining which swaps are hedges 

for the purpose of applying the 

alternative method of calculation. By 

referring to section 4a(c)(2)(B) for this 

purpose, the Commission is setting forth 

a principles-based approach, not 

requiring strict adherence to all the 

terms of the statute, as the statute 

addresses physical markets and 

products not pertinent in this context, 

and pertains to issues (i.e., speculation 

in the physical markets) outside the 

scope of this Final Rule. Key principles 

derived from section 4a(c)(2)(B) that 

should be taken into account in 

determining whether a swap between a 

CSE and a swap entity counterparty has 

been entered into for hedging purposes 

include: (a) Whether the swap reduces 


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240 Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations 

130 17 CFR 23.402(d) (providing that an SD or 

MSP may rely on the written representations of a 

counterparty to satisfy its due diligence 

requirements under subpart H of Part 23 of the 

Commission’s regulations, which sets forth business 

conduct standards for SDs and MSPs to be applied 

in their dealings with counterparties). See also 

Position Limits for Derivatives (approved Oct. 15, 

2020) (defining ‘‘bona fide hedging transaction or 

position’’ to include pass-through swaps, as 

described in section 4a(c)(2)(B) of the CEA, 

undertaken to offset the risk of other swaps entered 

into to hedge commercial risk, and noting that a 

counterparty may rely on its counterparty’s written 

representations confirming that such counterparty 

is executing the pass-through swap to hedge 

another swap undertaken to offset commercial risk). 

131FIA 10/22/2020 Letter at 7; BPEC 10/23/2020 

Letter at 4. 

132 Id. 

133FIA 10/22/2020 Letter at 8. 

134BPEC 10/23/2020 Letter at 5. 

135FIA 10/22/2020 Letter at 8. 

136See 17 CFR 23.402(d) (allowing SDs or MSPs 

to rely on the written representations of a 

counterparty to satisfy its due diligence 

requirements concerning swaps entered into with 

the counterparty, unless the SD or MSP has 

information that would cause a reasonable person 

to question the accuracy of the representation). 

137STRM 10/23/2020 Letter at 5; Working Group 

10/23/2020 Letter at 5. 

138 5 U.S.C. 601 et seq. 

139Each counterparty to an uncleared swap must 

be an ECP, as the term is defined in section 1a(18) 

of the CEA, 7 U.S.C. 1a(18) and Regulation 1.3, 17 

CFR 1.3. See 7 U.S.C. 2(e). 

140See Registration of Swap Dealers and Major 

Swap Participants, 77 FR 2613, 2620 (Jan. 19, 2012) 

(SDs and MSPs) and Opting Out of Segregation, 66 

FR 20740, 20743 (April 25, 2001) (ECPs). 

141 44 U.S.C. 3501 et seq. 

risk attendant to another swap 

undertaken between the CSE and a nonswap entity counterparty; and (b) 

whether such other swap (i) was 

executed by the non-swap entity 

counterparty as a substitute for 

transactions made or to be made, or for 

positions taken or to be taken at a later 

time, in a commercial enterprise; (ii) is 

economically appropriate to the 

reduction of risk in the conduct and 

management by the non-swap entity 

counterparty of a commercial enterprise; 

and (iii) arises from the potential change 

in value of the non-swap entity 

counterparty’s assets, liability or 

services. To determine whether the 

criteria in (b) above have been satisfied, 

the CSE, in accordance with Regulation 

23.402(d), would be able to rely on a 

written representation from the nonswap entity counterparty, unless the 

CSE has information that would cause a 

reasonable person to question the 

accuracy of the representation.130

By using this framework, the 

Commission believes that many of the 

questions raised by the commenters in 

connection with the application of the 

hedging limitation would be addressed. 

For example, commenters asked 

whether swaps entered into by a CSE 

and an end-user and the offsetting 

swaps undertaken by the CSE and a 

swap entity counterparty must match 

one-to-one.131 The framework provides 

some flexibility permitting CSEs as part 

of the hedging strategy to match a set of 

customer-facing swaps with one or more 

hedging swaps undertaken with a swap 

entity counterparty. Commenters also 

asked what would happen if the 

customer-facing swaps were terminated, 

and whether anticipatory hedging 

would be deemed hedging in the 

context of the alternative method of 

calculation.132 Consistent with the 

framework set forth above, swaps 

undertaken by a CSE and a swap entity 

counterparty as part of a hedging 

strategy to offset the risk of customerfacing swaps—including swaps that are 

ultimately terminated and swaps that 

may be entered into in the future— 

would be deemed to be hedges for the 

purposes of the alternative method of 

IM calculation. 

The Commission confirms, consistent 

with the statutory framework set forth in 

section 4a(c)(2)(B), that both the 

underlying swap between the CSE and 

the end-user counterparty, and the 

offsetting swap between the CSE and the 

swap entity counterparty must be 

entered into for hedging purposes. More 

specifically, the swap between the CSE 

and the end-user counterparty must be 

entered into to hedge risk attendant in 

a commercial enterprise. In connection 

with this position, a commenter stated 

that the burden of compliance with the 

hedging limitation would be borne not 

only by the CSE and the swap entity 

counterparty, but also by end-users that 

are counterparties to the CSE, as they 

too would need to make an assessment 

of whether their swaps are for 

‘‘hedging’’ purposes and would need to 

update their documentation 

accordingly.133 Given that the 

alternative method of calculation is 

expected to be used in the limited 

circumstances described herein, the 

Commission believes that the chance 

that end-users may be burdened would 

be greatly reduced. 

A commenter also stated that the 

hedging limitation may not only burden 

small CSEs but also their swap entity 

counterparties.134 Another commenter 

noted that a swap entity counterparty 

may be reluctant to trade with a CSE 

fearing the CSE’s misrepresentation or 

mischaracterization of its swaps as 

hedges, which could lead the swap 

entity counterparty to violate its 

obligations under the CFTC Margin 

Rule.135 In this regard, the Commission 

notes that Regulation 23.402(d) permits 

a swap entity counterparty with respect 

to swaps with a CSE to rely on the CSE’s 

representations to satisfy its due 

diligence obligations unless the swap 

entity counterparty has any reason to 

question the CSE’s representations.136

The Commission believes that 

Regulation 23.402(d) mitigates swap 

entity counterparties’ concerns 

regarding a CSE’s potential 

misrepresentation or 

mischaracterization of its swaps as 

hedges. 

Two commenters suggested replacing 

the hedging limitation with a $750 

billion threshold, whereby CSEs with 

AANA below the threshold would be 

able to use the alternative method of IM 

calculation without imposing 

conditions on the business of CSEs that 

could have adverse market impact.137 In 

the Commission’s view, another 

threshold to determine the applicability 

of the CFTC’s margin requirements 

would add further complexity to the 

rules. In addition, the Commission 

believes that the hedging limitation as 

adopted and further discussed above is 

adequately designed to advance the 

Commission’s goals. 

III. Administrative Compliance 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires Federal agencies to 

consider whether the rules they propose 

will have a significant economic impact 

on a substantial number of small 

entities.138 As discussed in the 

Proposal, the amendments being 

adopted herein only affect SDs and 

MSPs that are subject to the CFTC 

Margin Rule and their covered 

counterparties, all of which are required 

to be eligible contract participants 

(‘‘ECPs’’).139 The Commission has 

previously determined that SDs, MSPs, 

and ECPs are not small entities for 

purposes of the RFA.140 Therefore, the 

Commission believes that the Final Rule 

will not have a significant economic 

impact on a substantial number of small 

entities, as defined in the RFA. 

Accordingly, the Chairman, on behalf 

of the Commission, hereby certifies 

pursuant to 5 U.S.C. 605(b) that the 

Final Rule 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’’) 141 imposes certain 

requirements on Federal agencies, 

including the Commission, in 

connection with their conducting or 

sponsoring any collection of 

information, as defined by the PRA. The 


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142 7 U.S.C. 19(a). 

143For the definition of the term ‘‘swap entity,’’ 

see supra note 42. 

144See ACLI 10/23/2020 Letter; Associations 10/ 

22/2020 Letter; BPEC 10/23/2020 Letter; FIA 10/22/ 

2020 Letter; ICI 10/22/2020 Letter; MFA 10/22/2020 

Letter; STRM 10/23/2020 Letter; SIFMA AMG 10/ 

22/2020 Letter; Working Group 10/22/2020 Letter. 

145See ACLI 10/23/2020 Letter at 1; Associations 

10/22/2020 Letter at 1; BPEC 10/23/2020 Letter at 

2; FIA 10/22/2020 Letter at 2–3; ICI 10/22/2020 

Letter at 1; MFA 10/22/2020 Letter at 1; STRM 10/ 

23/2020 Letter at 1; SIFMA AMG 10/22/2020 Letter 

at 1; Working Group 10/22/2020 Letter at 3. 

146See ACLI 10/23/2020 Letter. 

147See generally BPEC 10/23/2020 Letter; MFA 

10/22/2020 Letter. 

148 Id. 

149See supra note 79. 

150A starting point in determining the potential 

benefit of alignment with the BCBS/IOSCO 

Framework is various statutory provisions where 

the U.S. Congress has called on the CFTC and other 

financial regulators to align U.S. regulatory 

requirements with international standards. For 

example, the Commodity Futures Modernization 

Act of 2000 (‘‘CFMA’’) focused on the potential 

threat to competitiveness of the U.S. industry where 

there is divergence with international standards. In 

particular, section 126 of the CFMA provides that 

regulatory impediments to the operation of global 

business interests can compromise the 

competitiveness of United States businesses. See 

CFMA section 126(a), Appendix E of Pub. L. 106– 

554, 114 Stat. 2763 (2000). 151 7 U.S.C. 2(i). 

Commission may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a currently valid 

Office of Management and Budget 

control number. The Final Rule, as 

adopted, contains no requirements 

subject to the PRA. 

C. Cost-Benefit Considerations 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA.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 of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. 

The Commission is amending the 

CFTC Margin Rule to revise the method 

for calculating AANA for determining 

whether an FEU has MSE and the 

timing of compliance with the IM 

requirements after the end of the phased 

compliance schedule (‘‘timing of postphase-in compliance’’). These 

amendments align the CFTC Margin 

Rule with the BCBS/IOSCO Framework 

with respect to these matters. The 

Commission is also amending 

Regulation 23.154(a), consistent with 

Letter 19–29, to allow CSEs to use the 

risk-based model calculation of IM of a 

counterparty that is a swap entity.143

With respect to these rule 

amendments, the Commission 

considered the costs and benefits 

resulting from its discretionary 

determinations with respect to section 

15(a) considerations, and sought 

comments from interested persons 

regarding the nature and extent of such 

costs and benefits. In response to its 

request for comment, as noted earlier, 

the Commission received nine comment 

letters.144 All the comment letters 

generally expressed support for the 

Proposal.145 One commenter noted that 

it reflects the realities of the 

marketplace and further aligns the U.S. 

regulations with the global regulators.146

Other commenters stated that the 

Proposal would enable the 

implementation of the IM requirements 

in a practical and efficient manner and 

reduce the complexity and burden 

associated with the implementation of 

those requirements.147 The commenters 

added that the Proposal would foster 

greater liquidity and contribute to the 

lowering of hedging costs, particularly 

in the last phases of the compliance 

schedule.148

The baseline against which the 

benefits and costs associated with the 

Final Rule is compared is the uncleared 

swaps markets as they exist today and 

the currently applicable timing for 

compliance with the IM requirements 

after the expiration of the phased 

compliance schedule. Concerning the 

amendment to Regulation 23.154(a), the 

Commission believes that to the extent 

market participants may have relied on 

Letter 19–29, the actual costs and 

benefits of the amendment, as realized 

by the market, may not be as significant 

at a practical level. With respect to the 

amendments to align aspects of the 

CFTC Margin Rule with the BCBS/ 

IOSCO Framework, the Commission 

notes that the Dodd-Frank Act calls on 

the CFTC to ‘‘consult and coordinate on 

the establishment of consistent 

international standards’’ with respect to 

the regulation of swaps.149 The 

amendments therefore advance the 

Congressional direction towards 

harmonization of the CFTC’s 

requirements with international 

standards, thereby removing a 

regulatory impediment that might 

hinder the competitiveness of the U.S. 

swaps industry.150

The Commission notes that the 

consideration of costs and benefits 

below is based on the understanding 

that the markets function 

internationally, with many transactions 

involving U.S. firms taking place across 

international boundaries; with some 

Commission registrants being organized 

outside of the United States; with 

leading industry members typically 

conducting operations both within and 

outside the United States; and with 

industry members commonly following 

substantially similar business practices 

wherever located. Where the 

Commission does not specifically refer 

to matters of location, the following 

discussion of costs and benefits refers to 

the effects of the Final Rule on all 

activity subject to the Final Rule, 

whether by virtue of the activity’s 

physical location in the United States or 

by virtue of the activity’s connection 

with activities in, or effect on, U.S. 

commerce under section 2(i) of the 

CEA.151

1. Benefits 

By harmonizing the CFTC’s method 

for calculating AANA for determining 

MSE and the timing of post-phase-in 

compliance with the BCBS/IOSCO 

Framework, the Final Rule will create a 

benefit because it will reduce 

complexity—for example, the monthend AANA calculation method being 

adopted will require consideration of 

only three observation dates rather than 

daily AANA averaging over the threemonth calculation period—and the 

potential for confusion in the 

application of the margin requirements. 

Some entities will no longer need to 

undertake separate AANA calculations 

using different calculation periods, nor 

will they need to conform to two 

separate compliance timings, varying 

according to the location of their swap 

counterparties and jurisdictional 

requirements applicable to the 

counterparties. 

The Final Rule will affect FEUs with 

AANA between $8 billion and $50 

billion that come into the scope of 

compliance with the IM requirements 

under the CFTC Margin Rule in the last 

compliance phase beginning on 

September 1, 2022, as well as those 

entities that come into scope after the 

end of the last compliance phase. The 

Commission believes that the Final Rule 

will benefit some of these entities, 

which, given their level of swap 

activity, pose a lower risk to the 

uncleared swaps market and the U.S. 

financial system in general than entities 

that came into scope in earlier phases. 

The OCE has estimated that there are 

approximately 514 of such entities 

representing 4% of total AANA across 


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242 Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations 

152Using March-May of 2020 as the calculation 

period. The methodology for calculating AANA is 

described in Richard Haynes, Madison Lau, & Bruce 

Tuckman, Initial Margin Phase 5, at 4 (Oct. 24, 

2018), https://www.cftc.gov/sites/default/files/ 

About/Economic%20Analysis/Initial%20Margin

%20Phase%205%20v5_ada.pdf. 

153See ACLI 10/23/2020 Letter at 2; Associations 

10/22/2020 Letter at 3; FIA 10/22/2020 Letter at 4; 

SIFMA AMG 10/22/2020 Letter at 3; Working 

Group 10/22/2020 Letter at 2. 

154Margin Subcommittee Report at 49. 

all phases.152 This means that the Final 

Rule addresses entities that tend to 

engage in less uncleared swap trading 

activity and, and in the aggregate, pose 

less systemic risk than entities in 

previous phases. Because these entities 

are smaller, they presumably have fewer 

resources to devote to IM compliance 

and hence will benefit from the 

alignment of the method of calculation 

of AANA across jurisdictions without 

contributing substantially to systemic 

risk. 

For entities with AANA between $8 

billion and $50 billion that will begin 

collecting IM on September 1, 2022, 

moving the calculation period from 

June, July, and August 2021 to March, 

April, and May 2022 will better align 

with current practices. While the 

Commission cannot anticipate exactly 

how the June–August 2021 period will 

differ from the March–May 2022 period, 

based on comparable past experience, 

the OCE estimates that approximately 

75–100 entities will come into scope, 

and a similar number will fall below the 

threshold by virtue of moving the 

calculation period. The adjusted 

calculation period will reduce the 

regulatory burden for firms that have 

reduced their MSE below the $8 billion 

threshold while requiring the collection 

of margin for those firms that have 

increased their swaps business above 

the threshold. While aggregate AANA 

for firms that fall into or out of scope is 

small relative to the overall market (less 

than one percent of total aggregate 

AANA), moving the calculation period 

close to the compliance date may have 

a significant impact on entities that have 

reduced their MSE. 

The Commission also notes that the 

benefits of alignment with the BCBS/ 

IOSCO Framework will continue to 

accrue in future years, as the 

determination of MSE for an FEU under 

the CFTC Margin Rule is an annual 

undertaking, triggered by the entry into 

an uncleared swap between the FEU 

and a CSE counterparty and the need to 

determine whether the FEU has MSE, 

which triggers the application of the IM 

requirements and the exchange of 

regulatory IM between a CSE and an 

FEU for their uncleared swap 

transactions. 

With respect to the amendment to 

Regulation 23.154(a), the Commission 

believes that the uncleared swap 

markets will benefit from the extension 

of the targeted relief provided to Cargill, 

the requester in Letter 19–29, to a wider 

group of CSEs with similar unique 

swaps business models. In taking a noaction position, MPD took account of 

Cargill’s representation that its swap 

trading activity primarily involved 

physical agricultural commodities and 

certain other asset classes and that it 

‘‘may maintain positions that require 

collection of IM from SDs.’’ Cargill 

further stated that given the highly 

specialized and discrete nature of its 

swaps business, risk-based modeling 

would impose a disproportionate 

burden. 

The more widespread availability of 

the alternative method of calculation of 

IM provided by Regulation 23.154(a), as 

amended by the Final Rule, may 

incentivize some market participants to 

expand their swaps business. In 

particular, given that certain market 

participants will have the option to 

forgo the cost of risk-based modeling, 

this potential reduction in compliance 

costs may encourage certain entities to 

increase their swaps trading. By 

increasing the pool of potential swap 

counterparties, the Final Rule could 

enhance competition, increase overall 

liquidity, and facilitate price discovery 

in the uncleared swaps markets. 

2. Costs 

While the Final Rule will have the 

effect of creating efficiencies for market 

participants, the Commission 

acknowledges that the rule changes 

being adopted will also give rise to some 

costs. Among other things, the change of 

the CFTC’s AANA calculation period for 

determining MSE to align it with BCBS/ 

IOSCO’s AANA calculation period will 

reduce the time frame for determining 

whether an FEU is subject to the IM 

requirements and for preparing for 

compliance with the requirements 

during the final phase-in period of 2022. 

Under the current margin 

requirements, in the period leading to 

the final phase-in date of September 1, 

2022, FEUs would have a full year to 

prepare, as MSE for an FEU would be 

determined using the AANA for June, 

July and August of the prior year. 

However, under the Final Rule, entities 

will have only a three-month advance 

notice in 2022, as AANA will be 

calculated using the March, April and 

May period of that year. Entities will 

have a shorter time frame to engage in 

preparations to comply with IM 

requirements, including, among other 

things, procuring rule-compliant 

documentation, establishing processes 

for the exchange of regulatory IM, and 

setting up IM custodial arrangements. 

Because the Final Rule aligns the AANA 

calculation for determining MSE with 

BCBS/IOSCO’s approach and the 

compliance date remains unchanged, 

the Commission believes that the cost 

will be mitigated. In particular, the 

Commission notes that commenters 

confirmed,153 as reported in the Margin 

Subcommittee Report, that the 

differences in the U.S. regulations could 

create complexity and confusion and 

lead to additional effort, cost and 

compliance challenges for smaller 

market participants that are generally 

subject to margin requirements in 

multiple global jurisdictions.154

The Commission further notes that 

the amendment to the timing of postphase-in compliance, as proposed, will 

defer compliance with the IM 

requirements with respect to uncleared 

swaps entered into by a CSE with an 

FEU that comes into the scope of IM 

compliance after the end of the last 

compliance phase. Under the current 

rule being amended, FEUs with MSE as 

measured in June, July, and August 

2022 would have come into the scope of 

compliance post-phase-in beginning on 

January 1, 2023. On the other hand, 

under the Final Rule, FEUs with MSE as 

measured in March, April, and May 

2023 will come into scope, post-phasein compliance, beginning on September 

1, 2023. As a result, for FEUs with MSE 

in both periods, less collateral for 

uncleared swaps may be collected given 

that the Final Rule changes the 

beginning of post-phase-in compliance 

from January 1, 2023, to September 1, 

2023, rendering uncleared swap 

positions entered into between January 

1, 2023, and September 1, 2023, riskier, 

as no IM will be required to be collected 

during that period, which could 

increase the risk of contagion and the 

potential for systemic risk. The 

Commission, however, notes that under 

the Final Rule, a CSE may be required 

to exchange IM with an FEU that comes 

into scope in the last phase of 

compliance beginning on September 1, 

2022, but falls below the MSE level by 

January 1, 2023, for nine months longer 

than otherwise would have been the 

case, as post-phase-in, no assessment of 

MSE status will be required until 

September 1, 2023. 

With respect to the adoption of a 

month-end AANA methodology for the 

calculation of AANA for determining 

MSE, as proposed, the Commission 

acknowledges that there are potential 

costs. The utilization of month-end 


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155See supra note 59. 

156For explanation of legacy swaps, see supra 

note 49. 

157SIFMA AMG 10/22/2020 Letter at 3; Working 

Group 10/22/2020 Letter at 2. 

158See supra note 60. 

159 7 U.S.C. 6b. 

160See 17 CFR 23.402(a)(ii). 

AANA could result in an AANA 

calculation that is not representative of 

a market participant’s participation in 

the swaps markets. As previously 

discussed, an AANA calculation based 

on month-end AANA may result in the 

exclusion or undercounting of certain 

financial contracts that are required to 

be included in the calculation (e.g., 

uncleared swaps, uncleared securitybased swaps, foreign exchange forwards, 

or foreign exchange swaps) because of 

certain combinations of tenure and time 

of execution, such as those often present 

in some intra-month natural gas and 

electricity swaps.155 The Commission 

also notes the potential that market 

participants might ‘‘window dress’’ 

their exposures to avoid MSE status and 

compliance with the CFTC’s margin 

requirements. At the same time, it is 

possible that the month-end 

methodology, which uses only three 

data points, could result in some 

entities having an AANA calculation on 

the three end-of-month dates that is 

uncharacteristically high relative to 

their typical positions. 

If products are excluded from the 

AANA calculation, or if exposures are 

‘‘window dressed,’’ the month-end 

calculation may have the effect of 

deferring the time by which market 

participants meet the MSE classification 

resulting in additional swaps between 

market participants and CSEs being 

deemed legacy swaps that are not 

subject to the IM requirements.156 This 

may increase the level of counterparty 

credit risk to the financial system. While 

potentially meaningful, this risk will be 

mitigated because the legacy swap 

portfolios will be entered into with 

FEUs that engage in lower levels of 

notional trading. 

In addition, many larger SDs are 

under the jurisdiction of the U.S. 

prudential regulators, and these entities 

and their counterparties will apparently 

be required to continue to use the 

current AANA calculation methodology. 

Entities that trade with both SDs that are 

under the jurisdiction of the U.S. 

prudential regulators and CSEs that are 

under the CFTC’s jurisdiction will be 

required to undertake separate AANA 

calculations using different calculation 

periods, varying according to the 

regulator of their swap counterparty. 

Hence, entities that trade in other 

jurisdictions and that trade with SDs 

subject to the prudential regulators’ 

jurisdiction will be required to continue 

to undertake separate AANA 

calculations using different calculation 

periods and two separate compliance 

timings. In fact, an entity that only 

trades in the U.S. will now be required 

to conduct separate AANA calculations 

using different calculation periods and 

timings. While we received no 

quantification of the number of such 

entities, SDs regulated by U.S. 

prudential regulators represent a sizable 

share of swap trading. 

Recognizing the potential for costs to 

increase for this reason, all of the 

comments received by the Commission 

noted the benefits of alignment with the 

BCBS/IOSCO Framework, and none 

mentioned the costs associated with any 

potential misalignment with the U.S. 

prudential regulators. Further, some 

commenters stated that the CFTC 

should proceed with the amendments 

even if the prudential regulators do not 

make corresponding changes to their 

margin rules.157

In addition, the Commission notes 

that, in the aforementioned OCE 

exercise utilizing a sample of days, the 

OCE estimated that calculations based 

on end-of-month AANA would yield 

fairly similar results as the calculations 

based on the current daily average 

AANA approach (setting aside the 

window dressing issue). Based on 2020 

swap data, the OCE estimated that 

approximately 492 entities of the 514 

entities that would have come into 

scope in the last phase of the phased 

compliance schedule, based on the 

existing methodology, would also come 

into scope based on the methodology 

being adopted under the Final Rule. Put 

differently, all but 22 of the entities that 

would be above MSE under the existing 

methodology would also be above MSE 

under the Final Rule’s methodology. In 

addition, there are 20 entities that 

would be in scope under the Final 

Rule’s methodology, but would not have 

been under the existing methodology, so 

that the aggregate number of entities 

differs only by two. In aggregate, the two 

methodologies capture quite similar sets 

of entities. In addition, the entities that 

fall out of scope when one changes 

methodology tend to be among the 

smallest of entities coming into scope in 

the last phase of compliance. That is, 

entities that would have been in-scope 

under the current methodology but not 

the Final Rule’s methodology average 

$6.95 billion in AANA, compared to $20 

billion for all entities coming into scope 

in the last phase of compliance.158

Taking account of the relatively small 

percentage of aggregate AANA 

represented by FEUs that will have MSE 

for the first time in the near future, and 

thus be subject to the Commission’s IM 

requirements under the Final Rule, the 

Commission believes that the potential 

exclusion of certain financial products 

in determining MSE will have a limited 

impact on the effectiveness of the CFTC 

Margin Rule. In addition, with respect 

to the potential that a market participant 

might ‘‘window dress’’ its exposure, the 

Commission believes that the antievasion language being incorporated 

into the rule text by this Final Rule, 

discussed in more detail above, would 

reduce the risk that swap exposures or 

positions might be manipulated to 

evade the CFTC’s IM requirements. The 

Commission also notes that it has 

authority, including anti-fraud authority 

under section 4b of the CEA,159 to take 

appropriate enforcement actions against 

any market participant that may engage 

in deceptive conduct with respect to the 

AANA calculation, and that CSEs, 

under the Commission’s regulations, 

must have written policies and 

procedures in place to prevent evasion 

or the facilitation of an evasion by an 

FEU counterparty.160

Roughly 514 entities, as estimated by 

the OCE, will come into the scope of the 

IM requirements beginning on 

September 1, 2022, and will be affected 

by the Final Rule. In advance of the 

September 1, 2022 compliance date, 

many of these entities may have 

engaged in planning and preparations 

relating to the exchange of regulatory 

IM. With the revision of the AANA 

method of calculation, these entities 

may need to adjust their systems to 

reflect changes in the calculation and 

update related financial infrastructure 

arrangements. However, the 

Commission believes that the resulting 

increased costs will be negligible, and 

the amendments being adopted will 

likely be cost-reducing for those 

impacted firms. 

Regarding the amendment to 

Regulation 23.154(a), there may be 

associated costs, as CSEs will be able to 

rely on the risk-based model calculation 

of IM computed by a swap entity 

counterparty. The safeguard provided 

by the requirement that both the CSE 

and its SD counterparty maintain a riskbased IM model for any swap 

transaction for which they do not use 

the table-based method to calculate IM 

will be eliminated. A CSE that relies on 

a counterparty’s risk-based model 

calculations may forgo the adoption of 

a risk-based model and thus avoid the 

rigorous Commission requirements 


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244 Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations 

161See generally 17 CFR 23.154(b). 

162But cf. 17 CFR 23.600 (requiring SDs and 

MSPs to establish a robust risk management 

program for the monitoring and management of 

their swap activities). 

163But cf. 17 CFR 23.600 (requiring swap entities 

to have a risk management program for the 

management and monitoring of risk associated with 

their swaps, which may reduce the risk that such 

entities may act in a conflicted manner). 

164This would apply to entities that meet the 

MSE level based on their AANA during the June, 

July, and August 2022 period, and continue to have 

MSE in the March, April, and May 2023 period. Of 

course, changing the calculation period to the 

March, April, and May 2023 period may lead to the 

inclusion of entities whose AANA is below MSE in 

the June, July, and August 2022 period, but rises to 

the MSE level or above by the March, April, and 

May 2023 period. The OCE estimated that 

approximately 75–100 entities typically move from 

one side of the MSE threshold to the other between 

measurement periods. 

relating to risk-based modeling,161

which may undercut the effectiveness of 

the CSE’s risk oversight.162

In addition, the safeguard of private 

market discipline that is inherent in 

having each counterparty develop its 

own IM model, and therefore the ability 

for the parties to scrutinize each other’s 

IM model and output, will not be 

present given that under the Final Rule, 

a CSE will be permitted to rely on the 

risk-based model calculation of a swap 

entity counterparty. As such, there is 

the potential that insufficient amounts 

of IM will be generated by the swap 

entity counterparty, which may be 

attributable to a deficiency in the model 

or the fact that the swap entity may be 

inherently conflicted and interested in 

generating lower IM collectable by the 

CSE.163 Without a model, the CSE will 

lack adequate means to verify the 

amount of IM produced by the swap 

entity counterparty and will not be 

capable to contest it. As a result, 

insufficient amounts of IM may be 

collected by the CSE to protect itself 

against the risk of default by the swap 

entity counterparty, increasing the risk 

of contagion and the potential for 

systemic risk. 

The Commission, however, believes 

that these costs are mitigated by the 

Final Rule, because it reflects the 

narrow terms of Letter 19–29, which 

extends no-action relief only with 

respect to uncleared swaps entered into 

for the purpose of hedging. In addition, 

the Commission notes that there are 

other requirements in the Commission’s 

regulations that address the monitoring 

of exposures and swap risk. 

3. Section 15(a) Considerations 

In light of the foregoing, the CFTC has 

evaluated the costs and benefits of the 

Final Rule pursuant to the five 

considerations identified in section 

15(a) of the CEA as follows: 

(a) Protection of Market Participants and 

the Public 

The Final Rule aligns the CFTC’s 

method for calculating AANA for 

determining MSE and the timing of 

post-phase-in compliance with the 

BCBS/IOSCO Framework. By aligning 

these aspects of the CFTC Margin Rule 

with the international standard, the 

Final Rule will reduce the potential for 

complexity and confusion that can 

result from using different AANA 

calculation methods and different 

compliance schedules for some market 

participants that may be subject to 

margin requirements in multiple 

jurisdictions, which could result in 

errors in determining whether a 

particular entity comes within the scope 

of the CFTC Margin Rule, and, in turn, 

the failure to exchange requisite margin 

if the entity is mistakenly determined to 

be out of scope. 

The Final Rule may result in FEUs 

having less time between the calculation 

of AANA to determine whether they 

reach the MSE level, and the date on 

which CSEs would be required to 

exchange IM with the FEUs should the 

FEUs reach the MSE level. This may 

make it more difficult for such FEUs to 

prepare for the exchange of IM for their 

uncleared swaps with CSEs and to 

timely post IM, increasing the risk of 

their swap positions. 

More specifically, under the existing 

CFTC Margin Rule, beginning on 

September 1, 2022, FEUs would have 

been required to look back to the JuneAugust 2021 period to determine 

whether they have MSE and come 

within the scope of the IM 

requirements. The firms would have 

had at least twelve months to engage in 

preparations for the exchange of 

regulatory IM, by, among other things, 

procuring rule-compliant 

documentation, establishing processes 

and systems for the calculation, 

collection and posting of IM collateral, 

and setting up custodial arrangements. 

Under the Final Rule, which changes 

the AANA calculation period for 

determining MSE to March-May of the 

current year, such firms will have only 

a three-month window to engage in 

preparations to exchange IM. 

Nevertheless, the Commission notes 

that, under the current rule being 

amended, after the end of the phased 

compliance schedule, firms would have 

had only four months in subsequent 

years between calculation and required 

compliance since the calculation period 

for determining MSE status would have 

been June through August of the prior 

year, with compliance starting January 1 

of the following year. In addition, 

because the Final Rule requires the 

averaging of three month-end dates 

rather than all business days during the 

three-month calculation period, the 

potential burdens of a shorter 

preparatory period may be offset by the 

adoption of the BCBS/IOSCO 

Framework’s less onerous calculation 

method for some entities. 

Moreover, the Final Rule shifts the 

timing of post-phase-in compliance to 

September 1 of each year. As such, some 

entities that otherwise would have been 

required to exchange IM beginning 

January 1, 2023, will be able to defer 

compliance to September 1, 2023.164 As 

a result, less collateral for uncleared 

swaps may be collected between 

January 1, 2023, and September 1, 2023, 

rendering the parties’ positions riskier 

during that nine-month period, which 

could raise the risk of contagion and 

increase the potential for systemic risk. 

Firms that would have fallen out of 

scope by January 1, 2023, will also be 

subject to compliance for an additional 

nine months. 

The amendment to Regulation 

23.154(a), as proposed, will allow a CSE 

to use the risk-based model calculation 

of IM of a counterparty that is a swap 

entity. As a result, the CSE may forgo 

the adoption of a risk-based model, 

avoiding the cost and burden associated 

with the development and maintenance 

of a model. Without a model, the CSE 

may not be able to challenge the 

amounts generated by the swap entity 

counterparty, which may be insufficient 

because of model error or malfunction 

or because the swap entity, given the 

inherent conflict of interest, may be 

biased in favor of calculating and 

posting lower amounts of IM to the CSE. 

Hence, the CSE may collect insufficient 

amounts of IM to offset the risk of 

counterparty default, increasing the risk 

of contagion and the potential for 

systemic risk. 

The Commission believes that these 

risks may be mitigated by the Final 

Rule, which is narrowly tailored to 

permit reliance on a swap entity 

counterparty’s risk-based model 

calculation only with respect to 

uncleared swaps entered into for the 

purpose of hedging. In addition, 

Regulation 23.600, which requires SDs 

and MSPs to adopt a robust risk 

management program for the monitoring 

and management of risk related to their 

swap activities, imposes an additional 

safeguard by requiring the monitoring of 

exposures and swap risk. 


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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations 245 

165As noted above, for entities that only trade in 

the U.S., the Final Rule may result in separate 

compliance timings and AANA calculations. 

166As noted in footnote 60 infra, the month-end 

calculation may tend to undercount positions in 

certain physical energy swaps. 

(b) Efficiency, Competitiveness, and 

Financial Integrity of Markets 

The Final Rule aligns the CFTC 

Margin Rule’s AANA calculation 

method for determining MSE and the 

timing of post-phase-in compliance with 

the BCBS/IOSCO Framework. The Final 

Rule will thus reduce the need, at least 

for entities not also undertaking swaps 

with U.S. prudentially regulated SDs, to 

undertake separate AANA calculations 

accounting for different calculation 

methods and to conform to separate 

compliance timings, varying according 

to the location of swap counterparties 

and jurisdictional requirements 

applicable to the counterparties.165 As 

such, the Final Rule may promote 

market efficiency and may level the 

playing field for CSEs, fostering 

competitiveness and reducing the 

incentive for market participants to 

engage in regulatory arbitrage by 

identifying more accommodating 

margin frameworks. 

The amendment to Regulation 

23.154(a), as proposed, will allow CSEs 

to rely on a swap entity counterparty’s 

IM risk-based model calculation. This 

will generally result in lower IM than if 

IM were calculated using the 

standardized IM table. As such, the 

amendment may allow CSEs to more 

effectively compete in providing swaps 

to end-users. The Final Rule may thus 

promote efficiency in the uncleared 

swaps market by increasing the pool of 

swap counterparties and fostering 

competition. 

Potential costs may arise because, 

without its own model, a CSE may lack 

effective means to verify its 

counterparty’s IM calculations. As a 

result, if there are shortfalls in the 

output, the CSE may collect less IM 

collateral to offset the risk of default by 

the counterparty, which could increase 

the risk of contagion, threatening the 

integrity of the U.S. financial markets. 

The Commission, however, believes that 

the Final Rule is sufficiently targeted to 

mitigate these risks. The Final Rule will 

apply only when uncleared swaps are 

entered into for hedging, thus limiting 

widespread use and the potential for 

uncollateralized uncleared swap risk. 

(c) Price Discovery 

By aligning the CFTC Margin Rule 

and the BCBS/IOSCO Framework with 

respect to the AANA calculation 

method for determining MSE and the 

post-phase-in compliance timing, the 

Final Rule may reduce the burden and 

confusion inherent in implementing 

separate measures and processes to 

address compliance in different 

jurisdictions for some entities. The Final 

Rule may thus incentivize more firms to 

enter into uncleared swap transactions, 

increasing liquidity and leading to more 

robust pricing that reflects market 

fundamentals. 

The amendment to Regulation 

23.154(a), as proposed, may relieve 

certain CSEs from having to adopt a 

risk-based margin model to calculate IM 

or use the standardized IM table, by 

allowing them to rely on a 

counterparty’s risk-based model 

calculation of IM. Relative to the 

alternatives, being able to have IM 

calculated in this manner may lower the 

costs of trading for such entities, and 

they may increase their trading in 

uncleared swaps, which in turn may 

increase liquidity and enhance price 

discovery. On the other hand, the Final 

Rule may encourage entities to shift 

their trading from swaps that can be 

cleared, potentially reducing liquidity 

and price discovery in those markets. 

(d) Sound Risk Management 

The Final Rule may reduce the need 

for some firms to undertake separate 

AANA calculations using different 

methods and to conform to separate 

compliance timing, allowing firms to 

engage in sound risk management by 

focusing on more substantive 

requirements. 

Under the current rule, after the last 

phase of compliance, CSEs that enter 

into uncleared swaps with FEUs with 

MSE would have been required to 

exchange IM with such FEUs beginning 

on January 1, 2023. Under the Final 

Rule, CSEs will not be required to 

exchange IM with an FEU with MSE 

until September 1, 2023. As such, one 

effect of adopting the Final Rule is that 

uncleared swaps entered into between 

January 1, 2023, and September 1, 2023, 

by a CSE and FEU with MSE may now 

be uncollateralized. Given that less 

collateral may be collected during that 

nine-month period, positions created 

during that period may be riskier, 

increasing the risk of contagion and 

systemic risk. Conversely, because the 

existing January 1, 2023 compliance 

date would have required reassessment 

of MSE status on such date, certain 

FEUs that came into scope in the last 

phase of compliance may have come out 

of scope post-phase-in, resulting in the 

collection of less collateral for such 

entities than under the Final Rule. The 

Commission therefore believes that 

balancing the additional firms that will 

not be required to exchange IM until 

September 2023, against the possibility 

that some firms would have come out of 

scope under the existing requirements, 

the impact of the rule change with 

respect to the exchange of required 

collateral is likely to be relatively small. 

Also, it is possible that FEUs trading 

certain financial products may not meet 

the MSE threshold because month-end 

positions in these financial products are 

not reflective of their typical position, 

so that their month-end AANAs may be 

uncharacteristically low.166 As result, 

CSEs and such FEUs may not exchange 

IM for their uncleared swaps and their 

swaps may be insufficiently 

collateralized, increasing the risk of 

contagion and systemic risk. 

Conversely, because more than 96% of 

FEUs are unlikely to have MSE and 

come within the scope of the IM 

requirements, as estimated by the OCE, 

the exclusion of such products will have 

a limited impact on the effectiveness of 

the Commission’s IM requirements. 

Having only three observations to 

evaluate an entity’s typical position may 

lead to less precision in determining 

which entities are most likely to 

contribute to systemic risk. However, 

absent ‘‘window dressing’’ issues, the 

effect of having fewer observations is 

unlikely to be substantial. Based on 

2020 trading, OCE estimates that the 

sets of firms that will meet MSE under 

either measure are largely the same, and 

the set of entities that meet one criterion 

and not the other tends to consist of the 

smallest entities. 

In regard to ‘‘window dressing,’’ 

AANA calculations based on month-end 

AANA compared to the currently 

required daily AANA averaging may be 

more susceptible to manipulation and 

less conducive to sound risk 

management. FEUs may manage their 

exposures as they approach the monthend date during the three-month 

calculation period to avoid MSE status. 

The Commission, however, believes that 

the anti-evasion language being 

incorporated into the rule text by this 

Final Rule, discussed in more detail 

above, would reduce the risk of window 

dressing. In addition, the Commission 

notes that it has authority, including 

anti-fraud authority under section 4b of 

the CEA, to take appropriate 

enforcement actions against any market 

participant that may engage in deceptive 

conduct with respect to the AANA 

calculation, and that CSEs, under the 

Commission’s regulations, must have 

written policies and procedures in place 


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246 Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations 

167See 17 CFR 23.402(a)(ii). 168 7 U.S.C. 19(b). 

to prevent evasion or the facilitation of 

an evasion by an FEU counterparty.167

As proposed, the Final Rule allows 

CSEs to use the risk-based model 

calculation of a swap entity 

counterparty to calculate the amount of 

IM to be collected from such 

counterparty, consistent with Letter 19– 

29. As a result, CSEs may no longer be 

incentivized to adopt a proprietary riskbased model. If a CSE uses a 

counterparty’s IM model calculation 

without developing its own model, the 

CSE may lack reasonable means to 

verify the IM provided by its 

counterparty, recognize shortfalls in the 

IM calculation, and identify potential 

flaws in the swap entity counterparty’s 

risk-based model. As such, insufficient 

amounts of IM may be collected by the 

CSE to protect itself against the risk of 

default by the swap entity counterparty, 

increasing the risk of contagion and the 

potential for systemic risk. The 

Commission, however, believes that 

these risks are mitigated because, under 

the Final Rule, CSEs are able to use a 

counterparty’s risk-based model IM 

calculation only with respect to 

uncleared swaps entered into for the 

purpose of hedging. In addition, the 

Commission notes that there are other 

requirements in the Commission’s 

regulations that address the monitoring 

of exposures and swap risk. 

(e) Other Public Interest Considerations 

The Commission believes that the 

Final Rule, by aligning the CFTC Margin 

Rule with the BCBS/IOSCO Framework, 

will promote harmonization with 

international regulatory requirements 

and may reduce the potential for 

regulatory arbitrage. However, given 

that the U.S. prudential regulators have 

not amended their margin requirements 

in line with the Final Rule, the 

possibility exists that certain firms may 

undertake swaps with particular SDs 

based on which U.S. regulatory agency 

is responsible for setting margin 

requirements for such SDs. 

D. Antitrust Laws 

Section 15(b) of the CEA requires the 

Commission to take into consideration 

the public interest to be protected by the 

antitrust laws and endeavor to take the 

least anticompetitive means of 

achieving the 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)), or in requiring or 

approving any bylaw, rule or regulation 

of a contract market or registered futures 

association established pursuant to 

section 17 of the CEA.168

The Commission believes that the 

public interest to be protected by the 

antitrust laws is generally to protect 

competition. The Commission requested 

comment on whether the Proposal 

implicated any other specific public 

interest to be protected by the antitrust 

laws and received no comments. 

The Commission has considered the 

Final Rule to determine whether it is 

anticompetitive, and has identified no 

anticompetitive effects. The 

Commission requested comment on 

whether the Proposal was 

anticompetitive and, if it was, what the 

anticompetitive effects were, and 

received no comments. 

Because the Commission has 

determined that the Final Rule is not 

anticompetitive and has no 

anticompetitive effects, the Commission 

has not identified any less competitive 

means of achieving the purposes of the 

Act. 

List of Subjects in 17 CFR Part 23 

Capital and margin requirements, 

Major swap participants, Swap dealers, 

Swaps. 

For the reasons stated in the 

preamble, the Commodity Futures 

Trading Commission amends 17 CFR 

part 23 as follows: 

PART 23—SWAP DEALERS AND 

MAJOR SWAP PARTICIPANTS 

■ 1. The authority citation for part 23 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b– 

1, 6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 

16a, 18, 19, 21. 

Section 23.160 also issued under 7 U.S.C. 

2(i); Sec. 721(b), Pub. L. 111–203, 124 Stat. 

1641 (2010). 

■ 2. In § 23.151, revise the definition of 

‘‘Material swaps exposure’’ to read as 

follows: 

§ 23.151 Definitions applicable to margin 

requirements. 

* * * * * 

Material swaps exposure for an entity 

means that, as of September 1 of any 

year, the entity and its margin affiliates 

have an average month-end aggregate 

notional amount of uncleared swaps, 

uncleared security-based swaps, foreign 

exchange forwards, and foreign 

exchange swaps with all counterparties 

for March, April, and May of that year 

that exceeds $8 billion, where such 

amount is calculated only for the last 

business day of the month. Activities 

not carried out in the regular course of 

business and willfully designed to 

circumvent calculation at month-end to 

evade meeting the definition of material 

swaps exposure shall be prohibited. An 

entity shall count the average monthend aggregate notional amount of an 

uncleared swap, an uncleared securitybased swap, a foreign exchange forward, 

or a foreign exchange swap between the 

entity and a margin affiliate only one 

time. For purposes of this calculation, 

an entity shall not count a swap that is 

exempt pursuant to § 23.150(b) or a 

security-based swap that qualifies for an 

exemption under section 3C(g)(10) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c–3(g)(4)) and implementing 

regulations or that satisfies the criteria 

in section 3C(g)(1) of the Securities 

Exchange Act of 1934 (15 U.S.C. 78– 

c3(g)(4)) and implementing regulations. 

* * * * * 

■ 3. In § 23.154, add paragraph (a)(5) to 

read as follows: 

§ 23.154 Calculation of initial margin. 

(a) * * * 

(5) A covered swap entity would be 

deemed to calculate initial margin as 

required by paragraph (a)(1) of this 

section if it uses the amount of initial 

margin calculated by a counterparty that 

is a swap entity and the initial margin 

amount is calculated using the swap 

entity’s risk-based model that meets the 

requirements of paragraph (b) of this 

section or is approved by a prudential 

regulator, provided that initial margin 

calculated in such manner is used only 

with respect to uncleared swaps entered 

into by the covered swap entity and the 

swap entity for the purpose of hedging 

the covered swap entity’s swaps with 

non-swap entity counterparties. 

* * * * * 

Issued in Washington, DC, on December 

11, 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 Margin Requirements for 

Uncleared Swaps for Swap Dealers and 

Major Swap Participants—Commission 

Voting Summary 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. 


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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations 247 

1 Definition of material swap exposure under reg. 

23.151(a). 2CFTC Letter 19–29. 

1Recommendations to Improve Scoping and 

Implementation of Initial Margin Requirements for 

Non-Cleared Swaps, Report to the CFTC’s Global 

Markets Advisory Committee by the Subcommittee 

on Margin Requirements for Non-Cleared Swaps 

(April 2020) (‘‘Margin Subcommittee Report’’), 

available at https://www.cftc.gov/media/3886/ 

GMAC_051920MarginSubcommitteeReport/ 

download. 

2See generally BCBS/IOSCO, Margin 

requirements for non-centrally cleared derivatives 

(July 2019), available at https://www.bis.org/bcbs/ 

publ/d475.pdf. 

3The MSE threshold under the BCBS/IOSCO 

Framework is stated in euros rather than dollars. 

4Margin Subcommittee Report at 52. 

5Commenters made this same point. See, e.g., 

Joint Letter from ISDA, SIFMA, and GFXD at 3 

(month-end window dressing is not a realistic risk 

since unwinding and then reestablishing positions 

on a recurring basis over the three-month period 

would take considerable effort, interrupt hedging 

strategies, and require counterparties to absorb the 

costs of realized profit and loss changes); Letter 

from SIFMA Asset Management Group at 3 (it 

would be neither practicable nor financially 

desirable for parties to tear-up positions on a 

recurring basis prior to each month end); Letter 

from Investment Company Institute at 5–6 (for 

regulated funds, adjusting swap exposures over the 

course of three periodic dates solely to avoid IM 

could impose transaction costs and inhibit a fund’s 

ability to manage its portfolio risk, which may be 

inconsistent with the investment adviser’s fiduciary 

duty to act in the best interest of its client). 

Comment letters available at https://

comments.cftc.gov/PublicComments/ 

CommentList.aspx?id=4157. 

Appendix 2—Statement of Support of 

Commissioner Brian D. Quintenz 

I vote in favor of today’s final rule that 

first, amends a key definition used to 

determine whether a financial end-user must 

comply with the Commission’s uncleared 

swap margin regulations when trading with 

a swap dealer,1 and second, codifies noaction relief providing additional flexibility 

for swap dealers to use the risk-based 

calculation of initial margin.2 With regard to 

the adjustment to the definition of material 

swap exposure, I support the fact that the 

rulemaking further aligns the Commission’s 

rules to the framework agreed upon by the 

international framework established by 

BCBS–IOSCO. However, I continue to take 

issue with the reliance on notional value as 

the defining metric for determining whether 

a firm should be subject to the uncleared 

margin regulations. The philosophy behind 

such a framework is that firms with small 

levels of swaps can have outsized impacts on 

the financial system. Further, the fact that 

we, as an agency and as international 

regulators, continue to embrace a metric as 

useless, biased, and arbitrary as notional 

value is something I have long opposed, and 

I have never, not once, heard an acceptable 

or even rationale defense for doing so. 

Appendix 3—Statement of Support of 

Commissioner Dawn D. Stump 

Overview 

I am pleased to support the final 

rulemaking that the Commission is adopting 

with respect to the definition of ‘‘material 

swaps exposure’’ and an alternative margin 

calculation method in connection with the 

Commission’s margin requirements for 

uncleared swaps. 

This rulemaking addresses 

recommendations that the Commission has 

received from its Global Markets Advisory 

Committee (‘‘GMAC’’), which I am proud to 

sponsor, and is based on a comprehensive 

report prepared by GMAC’s Subcommittee on 

Margin Requirements for Non-Cleared Swaps 

(‘‘GMAC Margin Subcommittee’’).1 It 

demonstrates the value added to the 

Commission’s policymaking by its Advisory 

Committees, in which market participants 

and other interested parties come together to 

provide us with their perspectives and 

potential solutions to practical problems. 

The rulemaking we are adopting makes 

two changes to the Commission’s uncleared 

margin rules. These changes have much to 

commend them—indeed, we did not receive 

any comment letters opposing them. These 

rule changes further objectives that I have 

commented on before: 

• The imperative of harmonizing our 

margin requirements with those of our 

international colleagues in order to facilitate 

compliance and coordinated regulatory 

oversight; and 

• the benefits of codifying relief that has 

been issued by our Staff and re-visiting our 

rules, where appropriate. 

Background: A Different Universe Is Coming 

Into Scope of the Uncleared Margin Rules 

The Commission’s uncleared margin rules 

for swap dealers, like the Framework of the 

Basel Committee on Banking Supervision 

and the Board of the International 

Organization of Securities Commissions 

(‘‘BCBS/IOSCO’’) 2 on which they are based, 

were designed primarily to ensure the 

exchange of margin between the largest, most 

systemic, and interconnected financial 

institutions for their uncleared swap 

transactions with one another. Today, these 

institutions and transactions are subject to 

uncleared margin requirements that have 

taken effect since the rules were adopted. 

Pursuant to the phased implementation 

schedule of the Commission’s rules and the 

BCBS/IOSCO Framework, though, a different 

universe of market participants—presenting 

unique considerations—will soon be coming 

into scope of the margin rules. It is only now, 

as we enter the final phases of the 

implementation schedule, that the 

Commission’s uncleared margin rules will 

apply to a significant number of financial 

end-users, and we have a responsibility to 

make sure they are fit for that purpose. 

Accordingly, now is the time we must 

thoughtfully consider whether the regulatory 

parameters that we have designed for the 

largest financial institutions in the earlier 

phases of margin implementation need to be 

tailored to account for the practical and 

operational challenges posed by the exchange 

of margin when one of the counterparties is 

a pension plan, endowment, insurance 

provider, mortgage service provider, or other 

financial end-user. 

International Harmonization To Enhance 

Compliance and Coordinated Regulation 

The first rule change we are adopting 

would revise the calculation method for 

determining whether financial end-users 

come within the scope of the initial margin 

(‘‘IM’’) requirements, and the timing for 

compliance with the IM requirements after 

the end of the phased compliance schedule. 

These changes would align certain timing 

and calculation issues under the 

Commission’s margin rules with both the 

BCBS/IOSCO Framework and the manner in 

which these issues are handled by our 

regulatory colleagues in all other major 

market jurisdictions. 

Swap dealers must exchange IM with 

respect to uncleared swaps that they enter 

into with a financial end-user counterparty 

that has material swaps exposure (‘‘MSE’’). 

The Commission’s margin rules currently 

provide that after the last phase of 

compliance, MSE is to be determined on 

January 1, and that an entity has MSE if it 

has more than $8 billion in average aggregate 

notional amount (‘‘AANA’’) during June, 

July, and August of the prior year. By 

contrast, under the BCBS/IOSCO Framework 

and in virtually every other country in the 

world, an entity is determined to come into 

scope of the IM requirement on September 1, 

and an entity has MSE if it has the equivalent 

of $8 billion in AANA 3 during March, April, 

and May of that year. 

The reason the United States is out-of-step 

with the rest of the world on these timing 

and calculation issues is not because of any 

reasoned policy determination. Rather, it is 

the result of a quirk that the U.S. margin 

rules were adopted based on the BCBS/ 

IOSCO Framework that was in effect at the 

time—but the BCBS/IOSCO Framework was 

revised two years later. 

In a further disconnect, the Commission’s 

margin rules look to the daily average AANA 

during the three-month calculation period for 

determining MSE, whereas the BCBS/IOSCO 

Framework and other major market 

jurisdictions base the AANA calculation on 

an average of month-end dates during that 

period. Yet, as noted in the rulemaking 

release, the Commission’s Office of the Chief 

Economist has estimated that calculations 

based on end-of-month AANA generally 

would yield similar results as calculations 

based on the Commission’s current daily 

AANA approach. It has been suggested that 

this rule change theoretically might 

incentivize a firm to ‘‘window dress’’ its 

swap exposures as the month-end 

approaches in order to avoid margin 

requirements. But the GMAC Margin 

Subcommittee observed that it would be 

neither practicable nor financially desirable 

for parties to tear-up their positions on a 

recurring basis prior to the month-end 

calculation,4 because doing so would 

interfere with hedging strategies and cause 

the firm to incur realized profit and loss.5

Accordingly, the Commission is amending 

these timing and calculation provisions of its 

uncleared margin rules to harmonize them 

with the BCBS/IOSCO Framework and the 

approach followed by our international 

colleagues. Given the global nature of the 

derivatives markets, we should always seek 

international harmonization of our 


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248 Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations 

6See section 752(a) of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, Public Law 

111–203, Title VII, 124 Stat. 1376 (2010) (‘‘DoddFrank Act’’). 

7See Leaders’ Statement from the 2009 G–20 

Summit in Pittsburgh, Pa. at 7 (September 24–25, 

2009) (‘‘We are committed to take action at the 

national and international level to raise standards 

together so that our national authorities implement 

global standards consistently in a way that ensures 

a level playing field and avoids fragmentation of 

markets, protectionism, and regulatory arbitrage’’), 

available at https://www.treasury.gov/resourcecenter/international/g7-g20/Documents/pittsburgh_

summit_leaders_statement_250909.pdf. 

8See comments of Commissioner Dawn D. Stump 

during Open Commission Meeting on January 30, 

2020, at 183 (noting that after several years of noaction relief regarding trading on swap execution 

facilities (‘‘SEFs’’), ‘‘we have the benefit of time and 

experience and it is time to think about codifying 

some of that relief. . . . [T]he SEFs, the market 

participants, and the Commission have benefited 

from this time and we have an obligation to provide 

more legal certainty through codifying these 

provisions into rules.’’), available at https://

www.cftc.gov/sites/default/files/2020/08/ 

1597339661/openmeeting_013020_Transcript.pdf. 

9Statement of Commissioner Dawn D. Stump for 

CFTC Open Meeting on: (1) Final Rule on Position 

Limits and Position Accountability for Security 

Futures Products; and (2) Proposed Rule on Public 

Rulemaking Procedures (Part 13 Amendments) 

(September 16, 2019), available at https://

www.cftc.gov/PressRoom/SpeechesTestimony/ 

stumpstatement091619. 

10CFTC Letter No. 19–29, Request for No-Action 

Relief Concerning Calculation of Initial Margin 

(December 19, 2019), available at https://

www.cftc.gov/LawRegulation/CFTCStaffLetters/ 

letters.htm?title=&field_csl_letter_types_target_

id%5B%5D=636&field_csl_divisions_target_

id%5B%5D=596&field_csl_letter_year_

value=2019&=Apply. 

11See, e.g., Letter from BP Energy Company at 5 

(given the uncertainty as to what constitutes 

hedging, swap dealers may be reluctant to rely on 

the alternative method of IM calculation) and 6 

(limiting relief to hedge transactions may diminish 

its utility); Letter from Futures Industry Association 

at 8 (complexity and added risk of hedging 

condition will make the alternative method of IM 

calculation impractical as counterparties will shy 

away from undertaking swaps with swap dealers 

that rely on the alternative method of calculating 

IM; also, cost, operational and documentation 

burdens associated with hedging condition could 

lead small swap dealers to cease providing risk 

management services to end-user counterparties, 

leaving end users with unhedged risks). 

regulations unless a compelling reason exists 

not to do so—which is not the case here. 

Indeed, in the Dodd-Frank Act, Congress 

specifically directed the Commission, ‘‘[i]n 

order to promote effective and consistent 

global regulation of swaps,’’ to ‘‘consult and 

coordinate with foreign regulatory authorities 

on the establishment of consistent 

international standards with respect to the 

regulation . . . of swaps [and] swap 

entities. . . .’’ 6 And when the G–20 leaders 

met in Pittsburgh in the midst of the financial 

crisis in 2009, they, too, recognized that a 

workable solution for global derivatives 

markets demands coordinated policies and 

cooperation.7

Our rule change regarding MSE is true to 

the direction of Congress in the Dodd-Frank 

Act, and honors the commitment of the G– 

20 leaders at the Pittsburgh summit. 

Differences between countries in the detailed 

timing and calculation requirements with 

respect to uncleared margin compel 

participants in these global markets to run 

multiple compliance calculations—for no 

particular regulatory reason. This not only 

forces market participants to bear 

unnecessary costs, but actually hinders 

compliance with margin requirements 

because of the entirely foreseeable prospect 

of calculation errors in applying the different 

rules. 

As noted above, now is the time to address 

this disconnect in MSE timing and 

calculation requirements because the 

financial end-users to which the MSE 

definition applies are coming into scope of 

the margin rules. During the unfortunate 

events of the financial crisis, we learned that 

coordination among global regulators, 

working towards a common objective, is 

essential. That lesson remains true today, and 

we are reminded that disregarding this reality 

has the potential to weaken, rather than 

strengthen, the effectiveness of our oversight 

and the resilience of global derivatives 

markets. 

The Benefits of Codifying Staff Relief and 

Re-Visiting Our Rules 

The second rule change that we are 

adopting would codify existing Staff noaction relief in recognition of market 

realities. The Commission’s Staff often has 

occasion to issue relief or take other action 

in the form of no-action letters, interpretative 

letters, or advisories on various issues and in 

various circumstances. This affords the 

Commission a chance to observe how the 

Staff action operates in real-time, and to 

evaluate lessons learned. With the benefit of 

this time and experience, the Commission 

should then consider whether codifying such 

Staff action into rules is appropriate.8 As I 

have said before, ‘‘[i]t is simply good 

government to re-visit our rules and assess 

whether certain rules need to be updated, 

evaluate whether rules are achieving their 

objectives, and identify rules that are falling 

short and should be withdrawn or 

improved.’’ 9

This second rule change would codify the 

alternative IM calculation method set out in 

Staff no-action Letter No. 19–29.10 It would 

provide that a swap dealer may use the riskbased model calculation of IM of a 

counterparty that is a CFTC-registered swap 

dealer as the amount of IM that the former 

must collect from the latter. The release 

states the Commission’s expectation that this 

alternative method of IM collection will be 

used by swap dealers with a discrete and 

limited swap business consisting primarily of 

entering into uncleared customer-facing 

swaps with end-user counterparties, and then 

hedging the risk of those swaps with 

uncleared swaps entered into with a few 

other swap dealers. 

Simply put, not all swap dealers are 

created equal. It is therefore appropriate to 

tailor our uncleared margin regime 

accordingly. Letter No. 19–29 recognized this 

reality and smoothed the rough edges of our 

otherwise one-size-fits-all uncleared margin 

rules, and it is appropriate to codify that 

result. 

Yet, under the rule amendments being 

adopted, this alternative method is subject to 

the condition that the uncleared swaps for 

which a swap dealer uses the risk-based 

model calculation of IM of its swap dealer 

counterparty are entered into for the purpose 

of hedging the former’s own risk from 

entering into customer-facing swaps with 

non-swap dealer counterparties. This is a 

departure from the GMAC Margin 

Subcommittee, which did not recommend 

such a condition. 

I am concerned by comments we received 

suggesting that this condition may cause this 

rule change to prove unworkable in 

practice.11 I am encouraged that the 

rulemaking release addresses some of these 

comments by, among other things, 

confirming: (1) The flexibility of swap 

dealers as part of their hedging strategy to 

match a set of customer-facing swaps with 

one or more hedging swaps undertaken with 

swap dealer counterparties; and (2) that 

customer-facing swaps entered into through 

anticipatory hedging or that are subsequently 

terminated would be deemed hedges for 

purposes of the alternative method of IM 

calculation. Nevertheless, if over time, 

market participants find that the hedging 

condition causes this rule change to fail to 

fulfill its intended purpose, I urge them to 

alert the Commission so that it can consider 

appropriate adjustments. 

There Remains Unfinished Business 

While I am pleased with the steps the 

Commission is taking, there remains 

unfinished business in the implementation of 

uncleared margin requirements. As an initial 

matter, U.S. prudential regulators with 

oversight authority over bank swap dealers 

have not adopted the same rule changes. As 

a result, although commenters expressed 

support for the Commission proceeding with 

these rule changes even in the absence of 

parallel action by the U.S. prudential 

regulators, the operational difficulties 

confronting market participants that are 

coming into scope of the margin rules will 

not be fully addressed when they enter into 

uncleared swaps with bank swap dealers. I 

look forward to continuing the dialogue with 

our regulatory colleagues at other U.S. 

agencies to support addressing these 

challenges. 

In addition, the report of the GMAC Margin 

Subcommittee recommended several actions, 

beyond those that we are adopting, to address 

the hurdles associated with the application of 

uncleared margin requirements to end-users. 

Having been present for the development of 

the Dodd-Frank Act, I recall that the concerns 

expressed by many lawmakers at the time 

focused on the application of the new 

requirements to end-users. The unique 

challenges with respect to uncleared margin 

that caused uneasiness back in 2009–2010 

are now much more immediate as the margin 

requirements are being phased in to apply to 

these end-users. As the calendar turns into 

the new year, I look forward to continuing to 

work together to address the other 

recommendations included in the GMAC 

Margin Subcommittee’s report regarding 

applying the uncleared margin rules to 

financial end-users. The need to do so will 


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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations 249 

1Margin Requirements for Uncleared Swaps for 

Swap Dealers and Major Swap Participants, 81 FR 

636 (Jan. 6, 2016) (‘‘Margin Rule’’). 

2Although addressed in the final rules, there are 

currently no registered MSPs. 

3Section 4s(e) of the Commodity Exchange Act 

(‘‘CEA’’), as amended by the Dodd-Frank Act, 

requires the Commission to adopt rules for 

minimum initial and variation margin for uncleared 

swaps entered into by SDs and MSPs for which 

there is no prudential regulator. 

4BCBS/IOSCO, Margin requirements for noncentrally cleared derivatives (July 2019), available 

at https://www.bis.org/bcbs/publ/d475.pdf. The 

BCBS/IOSCO framework was originally 

promulgated in 2013 and later revised in 2015. 

5Recommendations to Improve Scoping and 

Implementation of Initial Margin Requirements for 

Non-Cleared Swaps, Report to the CFTC’s Global 

Markets Advisory Committee by the Subcommittee 

on Margin Requirements for Non-Cleared Swaps 

(Apr. 2020), available at https://www.cftc.gov/ 

media/3886/GMAC_051920MarginSubcommittee

Report/download. 

6See Margin Rule, 81 FR at 645. 

7MSE and Initial Margin Final Rule at new 

§ 23.151 (defining ‘‘Material Swaps Exposure’’). 

8The preamble to the MSE and Initial Margin 

Final Rule also notes an analysis by the CFTC’s 

Office of the Chief Economist indicating that the 

new month-end AANA calculation method captures 

substantially the same entities and total number of 

entities as the Commission’s previous daily AANA 

calculation method. As with any rulemaking, the 

Commission is free in the future to periodically 

review its data and confirm that the new AANA 

calculation method is performing as expected. 

9 7 U.S.C. 6a(c)(2). 

10MSE and Initial Margin Final Rule at section 

II(B). 

11 17 CFR 23.151. 

12Both aspects of the MTA Final Rule were the 

subject of CFTC staff no-action letters issued in 

2017 and 2019, respectively. 

only become more urgent as time marches 

on. 

Conclusion 

To be clear, these amendments to the 

uncleared margin rules are not a ‘‘roll-back’’ 

of the margin requirements that apply today 

to the largest financial institutions in their 

swap transactions with one another. Rather, 

they reflect a thoughtful refinement of our 

rules to align them with the rest of the 

international regulatory community, and to 

take account of specific circumstances in 

which the rules impose substantial practical 

and operational challenges (i.e., they are not 

workable) when applied to financial endusers that are now coming within the scope 

of their mandates. 

I am very appreciative of the many people 

whose efforts have contributed to bringing 

this rulemaking to fruition. First, the 

members of the GMAC, and especially the 

GMAC Margin Subcommittee, who devoted a 

tremendous amount of time to provide us 

with a high-quality report on complex margin 

issues during the turmoil at the start of the 

pandemic. Second, Chairman Tarbert and my 

fellow Commissioners for working with me 

on these important issues. And finally, the 

Staff of the Market Participants Division, 

whose tireless efforts have enabled us to 

advance these initiatives to assure that our 

uncleared margin rules are workable for all 

and are in line with international standards, 

thereby enhancing compliance consistent 

with our oversight responsibilities under the 

Commodity Exchange Act. 

Appendix 4—Statement of 

Commissioner Dan M. Berkovitz 

I. Introduction 

I support today’s two final rules that make 

tailored amendments to the CFTC’s Margin 

Rule.1 The Margin Rule requires swap 

dealers (‘‘SDs’’) and major swap participants 

(‘‘MSPs’’) for which there is no prudential 

regulator to post and collect, each business 

day, initial and variation margin for 

uncleared swap transactions with each 

counterparty that is an SD, MSP, or a 

financial end user with material swaps 

exposure (‘‘MSE’’).2 The Margin Rule is a 

lynchpin of the Dodd-Frank reforms for 

swaps markets, and critical to mitigating 

risks in the financial system that might 

otherwise arise from uncleared swaps.3 I 

support the final rules because they provide 

targeted, operational improvements to the 

Margin Rule; include backstops to deter any 

potential abuse; and are unlikely to increase 

risk to the U.S. financial system. 

The two final rules address: (1) The 

definition of MSE and an alternative method 

for calculating initial margin (‘‘MSE and 

Initial Margin Final Rule’’); and (2) the 

application of the minimum transfer amount 

(‘‘MTA’’) for initial and variation margin 

(‘‘MTA Final Rule’’). The final rules align 

Commission requirements with international 

frameworks developed by the Basel 

Committee on Banking Supervision and the 

International Organization of Securities 

Commissions (‘‘BCBS/IOSCO’’),4 and 

incorporate recommendations made to the 

CFTC’s Global Markets Advisory 

Committee.5 The final rules also build off 

existing CFTC staff no-action letters that in 

some cases have been in place since 2017, 

and that have operated with no apparent 

detrimental effects. 

II. MSE and Initial Margin Final Rule 

The MSE and Initial Margin Final Rule 

amends the definition of MSE to align it with 

the BCBS/IOSCO framework, including the 

method for calculating the average daily 

aggregate notional amount (‘‘AANA’’) of 

swaps. The final rule provides for 

calculations based on the average of the last 

business day in each month of a three-month 

period. The Commission previously raised 

concerns that this method of AANA 

calculation could potentially become less 

representative of an entity’s true AANA and 

swaps exposure, potentially through the use 

of ‘‘window dressing’’ to artificially reduce 

AANA during the measurement period.6

The MSE and Initial Margin Final Rule 

includes an important new provision to 

address this issue. The final rule explicitly 

prohibits any ‘‘[a]ctivities not carried out in 

the regular course of business and willfully 

designed to circumvent calculation at monthend to evade meeting the definition of 

material swaps exposure . . . .’’ 7 The 

addition of this language to the final rule’s 

regulatory text will help ensure that CFTC 

efforts at international harmonization will 

not come at the expense of the safety and 

soundness of the U.S. financial system.8 I 

thank the Chairman and the CFTC staff for 

working with my office to include this 

provision. 

The MSE and Initial Margin Final Rule will 

also allow SDs and MSPs for which there is 

no prudential regulator (‘‘Covered Swap 

Entities’’ or ‘‘CSEs’’) to rely on the initial 

margin calculations of the more sophisticated 

counterparties with whom they transact 

swaps to manage their risks. This flexibility 

is limited to circumstances where a CSE 

enters into uncleared swaps with an SD, 

MSP, or swap entity to hedge its customerfacing swaps. This amendment to the 

Commission’s existing rules could help 

promote liquidity and competition in swaps 

markets by increasing choice for end-users 

that are CSE customers. 

The MSE and Initial Margin Final Rule 

provides helpful direction regarding the 

scope of hedging swaps for purposes of 

relying on a CSE counterparty’s initial 

margin calculations. As set forth in the 

preamble to the final rule, a hedging swap 

must be consistent (although not identical) 

with the statutory definition of ‘‘bona fide 

hedging transaction or position’’ in CEA 

section 4a(c)(2)(B).9 The final rule also makes 

clear that existing Commission regulations 

require a CSE that relies on its counterparty’s 

initial margin calculations to also take steps 

to ‘‘monitor, identify, and address potential 

shortfalls in the amounts of [initial margin] 

generated by the counterparty on whose 

[initial margin] model the CSE is relying.’’ 10

III. MTA Final Rule 

To reduce operational burdens associated 

with de minimis margin transfers, the Margin 

Rule provides that a CSE is not required to 

collect or post margin until the combined 

amount of initial margin and variation 

margin that is required to be collected or 

posted and that has not been collected or 

posted with respect to the counterparty 

exceeds $500,000—the MTA.11 This MTA 

level, in part, helps limit the amount of a 

counterparty’s uncollateralized, uncleared 

swaps exposure and mitigate any systemic 

risk arising from such swaps. 

The MTA Final Rule addresses the 

application of the $500,000 MTA level to a 

counterparty’s ‘‘separately managed 

accounts,’’ as well as the use of separate 

MTAs for initial and variation margin.12 The 

MTA Final Rule codifies separate treatment 

for separately managed accounts and permits 

an MTA of $50,000 for each such account of 

a counterparty. This approach responds to 

practical limits on the ability of asset 

managers, for example, to aggregate initial 

and variation margin obligations across 

multiple separately managed accounts owned 

by the same counterparty. The MTA Final 

Rule also provides that if certain entities 

agree to separate MTAs for initial margin and 

variation margin, the respective amounts of 

MTA must be reflected in their required 

margin documentation. 

These new provisions balance concerns 

over operational inefficiencies and practical 

challenges in the Commission’s MTA rules 

against concerns that they may result in the 

exchange of less total margin than would be 

the case under the Commission’s current 


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250 Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations 

requirements. Comments in response to the 

proposed rule noted the difficulties that 

would be associated with creating numerous 

separately managed accounts solely to evade 

the comparatively low $50,000 MTA for 

separately managed accounts. The MTA 

Final Rule also defines separately managed 

account so that the swaps of such account are 

not subject to a netting of initial or variation 

margin obligations. This potentially provides 

further disincentive to create separately 

managed accounts solely for the purpose of 

evading the $50,000 MTA level for such 

accounts. 

IV. Conclusion 

Mitigating systemic risk to the U.S. 

financial system was a primary objective of 

the Dodd-Frank Act in 2010, and of 

subsequent Commission rulemakings to 

implement Dodd-Frank, including the 

Margin Rule adopted in 2016. The 

Commission must remain committed to the 

Margin Rule and vigilant for any large pool 

of uncollateralized, uncleared swaps 

exposure. Today’s targeted final rules, which 

codify existing practices, include embedded 

backstops, and provide tailored operational 

enhancements to the Margin Rule, are 

unlikely to present systemic risks. 

I thank staff of the Market Participants 

Division for their work on these final rules. 

[FR Doc. 2020–27736 Filed 1–4–21; 8:45 am] 

BILLING CODE 6351–01–P 

AGENCY FOR INTERNATIONAL 

DEVELOPMENT 

22 CFR Part 212 

RIN 0412–AB00 

Procedures for the Review and 

Clearance of USAID’s Guidance 

Documents 

AGENCY: U.S. Agency for International 

Development (USAID). 

ACTION: Final rule. 

SUMMARY: This final rule amends 

USAID’s regulations to implement 

Executive Order (E.O.) 13891, 

Promoting the Rule of Law Through 

Improved Agency Guidance Documents. 

This rule sets forth processes and 

procedures for USAID to issue guidance 

documents as defined in the E.O. in a 

manner consistent with the 

requirements of Federal law applicable 

to all employees involved in inherently 

governmental deliberative decisionmaking on policy and employees 

involved in related administrative 

processes. 

DATES: This final rule is effective 

January 5, 2021. 

FOR FURTHER INFORMATION CONTACT: 

Tyrone K. Brown, Guidance Mailbox, 

(202) 355–7450, tybrown@usaid.gov. 

SUPPLEMENTARY INFORMATION: 

Background 

On October 9, 2019 (84 FR 55235), 

President Trump issued Executive 

Order (E.O.) 13891, Promoting the Rule 

of Law Through Improved Agency 

Guidance Documents. The E.O. asserts 

that, except as mandated by applicable 

law or incorporated into a binding 

contract or agreement, Federal 

Departments and Agencies should treat 

guidance documents as non-binding on 

outside entities both in law and 

practice. To further the principle that 

Federal guidance should be transparent 

and made readily available to the 

public, Section 3 of the E.O. requires 

that Departments and Agencies make 

guidance documents available on a 

single, searchable, indexed public 

website. Section 3 also requires that 

Departments and Agencies review their 

guidance documents and, consistent 

with applicable law, rescind those that 

should no longer be in effect. Lastly, 

Section 4 requires that each Department 

and Agency put in place processes and 

procedures for issuing guidance 

documents as defined by the E.O. 

In accordance with that direction, to 

codify our processes and procedures for 

guidance documents, the U.S. Agency 

for International Development (USAID) 

is amending our Automated Directives 

System (ADS) to update ADS Chapter 

501, which governs the clearance 

process for reviewing and issuing 

Agency policy documents, to include 

guidance documents as defined by the 

E.O. USAID’s formal clearance process 

ensures that all guidance documents 

receive legal review and, when 

appropriate, review and approval from 

USAID’s Regulatory Reform Officer, 

who is the Agency’s Deputy 

Administrator. 

Before the Agency issues guidance 

documents as defined by E.O. 13891, we 

must review them to ensure they are 

written in plain language and do not 

impose any substantive legal 

requirements above and beyond statute 

or regulation. If a guidance document 

purports to describe, approve, or 

recommend specific conduct not 

required by existing laws, statutes, and 

regulations, then it must include a clear 

and prominent statement that the 

contents of the guidance document do 

not have the force and effect of law and 

are not meant to bind the public in any 

way, and that the guidance document is 

intended only to provide clarity to the 

public regarding existing requirements 

under the law or internal Agency 

policies and procedures applicable to 

our staff. 

According to E.O. 13891, guidance 

documents shall also be subject to 

notice-and-comment procedures. The 

E.O. mandates that Departments and 

Agencies shall publish a notice in the 

Federal Register to announce that a 

draft of the proposed guidance 

document is publicly available; shall 

post the draft guidance document on the 

guidance portal of the Department or 

Agency; shall invite public comment on 

the draft document for a minimum of 30 

days; and shall prepare and post a 

public response to major concerns 

raised in the comments, as appropriate, 

on its guidance portal, when the 

Department or Agency finalizes and 

issues the guidance document. 

Consistent with E.O. 13891, USAID 

proposes procedures to allow the public 

to petition for the modification or 

withdrawal of an active guidance 

document posted on the Agency’s 

guidance portal. USAID’s guidance 

portal will provide clear and specific 

instructions on how to request the 

modification or withdrawal of an active 

guidance document. 

The Office of the General Counsel 

(GC) at USAID has determined that the 

Agency has no ‘‘guidance documents’’ 

as defined under E.O. 13891. USAID’s 

internal guidance materials do not 

qualify as ‘‘guidance documents’’ under 

the E.O., nor do grant and contract 

solicitations and awards; Country and 

Regional Development Cooperation 

Strategies; Agency programmatic 

Policies and Strategies; and purely 

internal Agency policies not intended to 

have substantial effect on the behavior 

of regulated parties, such as Chapters of 

our ADS. The procedures contained in 

this final rule apply to all guidance 

documents, which USAID defines as 

any statement of Agency policy or 

interpretation that concerns a statute, 

regulation, or technical matter within 

the jurisdiction of the Agency that is 

intended to have general applicability 

and future effect on the behavior of 

regulated parties, but which is not 

intended to have the force or effect of 

law in its own right and is not otherwise 

required by statute to satisfy the 

rulemaking procedures of the 

Administrative Procedure Act. 

Notice and Comment Not Required 

This rule relates to internal Agency 

management. Therefore, pursuant to 

Section 553(a)(2) of Title 5 of the United 

States Code (U.S.C.), notice of proposed 

rulemaking and opportunity to 

comment are not required. 

Procedural Requirements 

The Office of Management and Budget 

(OMB) has determined that this 

regulatory action does not meet the 

criteria for significant regulatory action 


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