Vol. 81 Wednesday, 

No. 3 January 6, 2016 

Part III 

Commodity Futures Trading Commission 

17 CFR Parts 23 and 140 

Margin Requirements for Uncleared Swaps for Swap Dealers and Major 

Swap Participants; Final Rule 

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636 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

1 17 CFR 145.9. Commission regulations referred 

to herein are found at 17 CFR Chapter I. 

2See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 124 

Stat. 1376 (2010). 

3 7 U.S.C. 1 et seq. 

4Section 4s(e) also directs the Commission to 

adopt capital requirements for SDs and MSPs. The 

Commission proposed capital rules in 2011. Capital 

Requirements for Swap Dealers and Major Swap 

Participants, 76 FR 27802 (May 12, 2011). The 

Commission will address capital requirements in a 

separate release. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 23 and 140 

RIN 3038–AC97 

Margin Requirements for Uncleared 

Swaps for Swap Dealers and Major 

Swap Participants 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule and interim final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is adopting regulations to 

implement a particular provision of the 

Commodity Exchange Act (‘‘CEA’’), as 

added by the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(‘‘Dodd-Frank Act’’). This provision 

requires the Commission to adopt initial 

and variation margin requirements for 

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

swap participants (‘‘MSPs’’). The final 

rules would establish initial and 

variation margin requirements for SDs 

and MSPs but would not require SDs 

and MSPs to collect margin from nonfinancial end users. 

The Commission is also adopting and 

inviting comment on an interim final 

rule that will exempt certain uncleared 

swaps with certain counterparties from 

these margin requirements. This interim 

final rule implements Title III of the 

Terrorism Risk Insurance Program 

Reauthorization Act of 2015 

(‘‘TRIPRA’’), which exempts from the 

margin rules for uncleared swaps 

certain swaps for which a counterparty 

qualifies for an exemption or exception 

from clearing under the Dodd-Frank 

Act. 

DATES: The rules will become effective 

April 1, 2016. Comments on the interim 

final rule (§ 23.150(b)) must be received 

on or before February 5, 2016. 

ADDRESSES: You may submit comments 

on the interim final rule by any of the 

following methods: 

• CFTC Web site: http://

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Comments Online process 

on the Web site. 

• Mail: Send to Christopher 

Kirkpatrick, Secretary of the 

Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

Mail, above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one of these methods. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http://

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that may be exempt from disclosure 

under the Freedom of Information Act, 

a petition for confidential treatment of 

the exempt information may be 

submitted according to the procedures 

established in § 145.9 of the 

Commission’s regulations.1

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from www.cftc.gov that it may deem to 

be inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted or removed that 

contain comments on the merits of the 

rulemaking will be retained in the 

public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: John 

C. Lawton, Deputy Director, Division of 

Clearing and Risk, 202–418–5480, 

jlawton@cftc.gov; Thomas J. Smith, 

Deputy Director, Division of Swap 

Dealer and Intermediary Oversight, 202– 

418–5495, tsmith@cftc.gov; Rafael 

Martinez, Senior Financial Risk Analyst, 

Division of Swap Dealer and 

Intermediary Oversight, 202–418–5462, 

rmartinez@cftc.gov; Francis Kuo, 

Special Counsel, Division of Swap 

Dealer and Intermediary Oversight, 202– 

418–5695, fkuo@cftc.gov; Paul 

Schlichting, Assistant General Counsel, 

Office of General Counsel, 202–418– 

5884, pschlichting@cftc.gov; Stephen A. 

Kane, Research Economist, Office of the 

Chief Economist, 202–418–5911, 

skane@cftc.gov; or Lihong McPhail, 

Research Economist, Office of the Chief 

Economist, 202–418–5722, lmcphail@

cftc.gov; Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

A. Statutory Authority 

B. International Standards 

C. Proposed Rules 

D. Subsequent Amendment to Dodd-Frank 

II. Final Rules 

A. Overview 

B. Products 

C. Participants 

D. Nature and Timing of Margin 

Requirements 

E. Calculation of Initial Margin 

F. Calculation of Variation Margin 

G. Forms of Margin 

H. Custodial Arrangements 

I. Inter-Affiliate Trades 

J. Implementation Schedule 

III. Interim Final Rule 

IV. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

V. Cost Benefit Considerations 

Appendix A to the Preamble 

Appendix B to the Preamble 

I. Background 

A. Statutory Authority 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act.2 Title VII of 

the Dodd-Frank Act amended the CEA 3

to establish a comprehensive regulatory 

framework designed to reduce risk, to 

increase transparency, and to promote 

market integrity within the financial 

system by, among other things: (1) 

Providing for the registration and 

regulation of SDs and MSPs; (2) 

imposing clearing and trade execution 

requirements on standardized derivative 

products; (3) creating recordkeeping and 

real-time reporting regimes; and (4) 

enhancing the Commission’s 

rulemaking and enforcement authorities 

with respect to all registered entities 

and intermediaries subject to the 

Commission’s oversight. 

Section 731 of the Dodd-Frank Act 

added a new section 4s to the CEA 

setting forth various requirements for 

SDs and MSPs. Section 4s(e) mandates 

the adoption of rules establishing 

margin requirements for uncleared 

swaps of SDs and MSPs.4 Each SD and 

MSP for which there is a Prudential 

Regulator, as defined below, must meet 

margin requirements for their uncleared 

swaps established by the applicable 

Prudential Regulator, and each SD and 

MSP for which there is no Prudential 

Regulator must comply with the 

Commission’s regulations governing 

margin. 

The term Prudential Regulator is 

defined in section 1a(39) of the CEA, as 

amended by Section 721 of the Doddmstockstill on DSK4VPTVN1PROD with RULES3

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5BCBS/IOSCO, Consultative Document, Margin 

requirements for non-centrally cleared derivatives 

(July 2012). 

6BCBS/IOSCO, Quantitative Impact Study, 

Margin requirements for non-centrally cleared 

derivatives (November 2012). 

7BCBS/IOSCO, Consultative Document, Margin 

requirements for non-centrally cleared derivatives 

(February 2013). 

8BCBS/IOSCO, Margin requirements for noncentrally cleared derivatives (September 2013) 

(‘‘BCBS/IOSCO Report’’). 

9Margin Requirements for Uncleared Swaps for 

Swap Dealers and Major Swap Participants, 79 FR 

59898 (Oct. 3, 2014). 

10As required by section 4s of the CEA, the 

Commission staff also has consulted with the SEC 

staff. 

11Pub. L. 114–1, 129 Stat. 3. 

Frank Act. This definition includes the 

Federal Reserve Board (‘‘FRB’’); the 

Office of the Comptroller of the 

Currency (‘‘OCC’’); the Federal Deposit 

Insurance Corporation (‘‘FDIC’’); the 

Farm Credit Administration; and the 

Federal Housing Finance Agency. 

The definition specifies the entities 

for which these agencies act as 

Prudential Regulators. These consist 

generally of federally insured deposit 

institutions, farm credit banks, federal 

home loan banks, the Federal Home 

Loan Mortgage Corporation, and the 

Federal National Mortgage Association. 

The FRB is the Prudential Regulator 

under section 4s not only for certain 

banks, but also for bank holding 

companies, certain foreign banks treated 

as bank holding companies, and certain 

subsidiaries of these bank holding 

companies and foreign banks. 

The FRB is not, however, the 

Prudential Regulator for nonbank 

subsidiaries of bank holding companies, 

some of which are required to be 

registered with the Commission as SDs 

or MSPs. Therefore, the Commission is 

required to establish margin 

requirements for uncleared swaps for all 

registered SDs and MSPs that are not 

subject to a Prudential Regulator. These 

include, among others, nonbank 

subsidiaries of bank holding companies, 

as well as certain foreign SDs and MSPs. 

Specifically, section 4s(e)(1)(B) of the 

CEA provides that each registered SD 

and MSP for which there is not a 

Prudential Regulator shall meet such 

minimum capital requirements and 

minimum initial margin and variation 

margin requirements as the Commission 

shall by rule or regulation prescribe. 

Section 4s(e)(2)(B) provides that the 

Commission shall adopt rules for SDs 

and MSPs, with respect to their 

activities as an SD or an MSP, for which 

there is not a Prudential Regulator 

imposing (i) capital requirements and 

(ii) both initial and variation margin 

requirements on all swaps that are not 

cleared by a registered derivatives 

clearing organization (‘‘DCO’’). 

Section 4s(e)(3)(A) provides that to 

offset the greater risk to the SD or MSP 

and the financial system arising from 

the use of swaps that are not cleared, the 

requirements imposed under section 

4s(e)(2) shall (i) help ensure the safety 

and soundness of the SD or MSP and (ii) 

be appropriate for the risk associated 

with the uncleared swaps. 

Section 4s(e)(3)(C) provides, in 

pertinent part, that in prescribing 

margin requirements the Prudential 

Regulator and the Commission shall 

permit the use of noncash collateral the 

Prudential Regulator or the Commission 

determines to be consistent with (i) 

preserving the financial integrity of 

markets trading swaps and (ii) 

preserving the stability of the United 

States financial system. 

Section 4s(e)(3)(D)(i) provides that the 

Prudential Regulators, the Commission, 

and the Securities and Exchange 

Commission (‘‘SEC’’) shall periodically 

(but not less frequently than annually) 

consult on minimum capital 

requirements and minimum initial and 

variation margin requirements. 

Section 4s(e)(3)(D)(ii) provides that 

the Prudential Regulators, Commission 

and SEC shall, to the maximum extent 

practicable, establish and maintain 

comparable minimum capital and 

minimum initial and variation margin 

requirements, including the use of 

noncash collateral, for SDs and MSPs. 

B. International Standards 

In October 2011, the Basel Committee 

on Banking Supervision (‘‘BCBS’’) and 

the International Organization of 

Securities Commissions (‘‘IOSCO’’), in 

consultation with the Committee on 

Payment and Settlement Systems 

(‘‘CPSS’’) and the Committee on Global 

Financial Systems (‘‘CGFS’’), formed a 

working group to develop international 

standards for margin requirements for 

uncleared swaps. Representatives of 

more than 20 regulatory authorities 

participated. From the United States, 

the CFTC, the FDIC, the FRB, the OCC, 

the Federal Reserve Bank of New York, 

and the SEC were represented. 

In July 2012, the working group 

published a proposal for public 

comment.5 In addition, the group 

conducted a Quantitative Impact Study 

(‘‘QIS’’) to assess the potential liquidity 

and other quantitative impacts 

associated with margin requirements.6

After consideration of the comments 

on the proposal and the results of the 

QIS, the group published a near-final 

proposal in February 2013 and 

requested comment on several specific 

issues.7 The group considered the 

additional comments in finalizing the 

recommendations set out in the report. 

The final report was issued in 

September 2013.8 This report (the ‘‘2013 

international framework’’) articulates 

eight key principles for non-cleared 

derivatives margin rules, which are 

described below. These principles 

represent the minimum standards 

approved by BCBS and IOSCO and their 

recommendations to the regulatory 

authorities in member jurisdictions of 

these organizations. 

C. Proposed Rules 

The Commission initially proposed 

margin requirements for SDs and MSPs 

in 2011. In response to the 2013 

international framework, the 

Commission re-proposed margin 

requirements in September 2014.9

In developing the proposed rules, the 

Commission staff worked closely with 

the staff of the Prudential Regulators.10

In most respects, the proposed rules 

would establish a framework for margin 

requirements similar to the Prudential 

Regulators’ proposal. The proposed 

rules were consistent with the 2013 

international framework. In some 

instances, as contemplated in the 

framework, the proposed rules provided 

more detail than the framework. In a 

few other instances, the proposed rules 

were stricter than the framework. 

D. Subsequent Amendment to DoddFrank 

On January 12, 2015, the President 

signed Title III of TRIPRA. Title III 

amends sections 731 and 764 of the 

Dodd-Frank Act to exempt certain 

transactions of certain commercial end 

users and others from the Commission’s 

capital and margin requirements.11

Specifically, section 302 of Title III 

amends sections 731 and 764 of the 

Dodd-Frank Act to provide that the 

Commission’s rules on margin 

requirements under those sections shall 

not apply to a swap in which a 

counterparty: (1) Qualifies for an 

exception under section 2(h)(7)(A) of 

the Commodity Exchange Act; (2) 

qualifies for an exemption issued under 

section 4(c)(1) of the Commodity 

Exchange Act for cooperative entities as 

defined in such exemption, or (3) 

satisfies the criteria in section 2(h)(7)(D) 

of the Commodity Exchange Act. 

Section 303 of TRIPRA requires that 

the Commission implement the 

provisions of Title III, ‘‘Business Risk 

Mitigation and Price Stabilization Act of 

2015,’’ by promulgating an interim final 

rule, and seeking public comment on 

the interim final rule. The Commission 

is adopting § 23.150(b) as part of this 

final rule. These exemptions are 

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638 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

12Where appropriate, the preamble uses the term 

affiliate to mean a margin affiliate and the term 

subsidiary to mean margin subsidiary, as they are 

defined in § 23.151. 

13The written submissions from the public are 

available in the comment file on www.cftc.gov. 

They include, but are not limited to those listed in 

Appendix B. In citing these comments, the 

Commission used the abbreviations set forth in the 

Appendix B. 

14Margin and Capital Requirements for Covered 

Swap Entities, 80 FR 74840 (Nov. 30, 2015). 

15Margin Requirements for Uncleared Swaps for 

Swap Dealers and Major Swap Participants, 80 FR 

41376 (July 14, 2015). 

16The term uncleared swap is defined in 

proposed Regulation 23.151. 

17A schedule of compliance dates is set forth in 

proposed Regulation 23.160. 

18 Determination of Foreign Exchange Swaps and 

Foreign Exchange Forwards Under the Commodity 

Exchange Act, 77 FR 69694 (Nov. 20, 2012). 

19See GFXD (initial margin should not apply to 

physically-settled foreign exchange swaps and 

forwards and variation margin should be applied 

via supervisory guidance or national regulation) 

and CPFM. 

20See ISDA and Sifma (any swap cleared by a 

derivatives clearing organization whether registered 

or not should be exempt from margin 

requirements). 

21See BP. To the extent that any financial 

instrument is an uncleared swap, it will be covered 

under the final rule. 

22See In the Matter of the Petition of ASX Clear 

(Futures) Pty Limited for Exemption from 

transaction-based, as opposed to 

counterparty-based. The Commission 

will be requesting comment, as required 

by TRIPRA. If necessary, the 

Commission will amend § 23.150(b) 

after receiving comments on the interim 

final rule. 

II. Final Rules 

A. Overview 

The discussion below addresses: (i) 

The products covered by the proposed 

rules; (ii) the market participants 

covered by the proposed rules; (iii); the 

nature and timing of the margin 

obligations; (iv) the methods of 

calculating initial margin; (v) the 

methods of calculating variation margin; 

(vi) permissible forms of margin; (vii) 

custodial arrangements; (viii) 

documentation requirements; (ix) the 

treatment of inter-affiliate swaps; 12 and 

(x) the implementation schedule. The 

Commission received 59 written 

comments on the proposal.13 They are 

discussed in the applicable sections. 

The rules adopted herein essentially 

provide for the same treatment as the 

rules recently adopted by the Prudential 

Regulators 14 with a few exceptions. The 

areas where there are differences are (i) 

the anti-evasion provision in the 

definition of margin affiliate, (ii) the 

model approval process, (iii) the 

calculation of variation margin and 

related documentation requirements, 

and the (iv) treatment of inter-affiliate 

trades. Each of these differences is 

discussed in the applicable section 

below. 

The Prudential Regulators also issued 

a provision addressing cross-border 

application of their margin rule. The 

Commission will address this aspect of 

the rule in a separate rulemaking.15

B. Products 

1. Proposal 

As noted above, section 4s(e)(2)(B)(ii) 

of the CEA directs the Commission to 

establish both initial and variation 

margin requirements for certain SDs and 

MSPs ‘‘on all swaps that are not 

cleared.’’ As a result, the Commission’s 

proposal covered swaps that are 

uncleared swaps 16 and that are 

executed after the applicable 

compliance date.17

The term ‘‘cleared swap’’ is defined in 

section 1a(7) of the CEA to include any 

swap that is cleared by a DCO registered 

with the Commission. The Commission 

notes, however, that SDs and MSPs also 

clear swaps through foreign clearing 

organizations that are not registered 

with the Commission. The Commission 

believes that a clearing organization that 

is not a registered DCO must meet 

certain basic standards in order to avoid 

creating a mechanism for evasion of the 

uncleared margin requirements. 

Accordingly, the Commission proposed 

to include in the definition of cleared 

swaps certain swaps that have been 

accepted for clearing by an entity that 

has received a no action letter or other 

exemptive relief from the Commission 

to clear such swaps for U.S. persons 

without being registered as a DCO. 

As a result of the determination by the 

Secretary of the Treasury to exempt 

foreign exchange swaps and foreign 

exchange forwards from the definition 

of swap,18 under the proposal the 

following transactions would not be 

subject to the requirements: (i) Foreign 

exchange swaps; (ii) foreign exchange 

forwards; and (iii) the fixed, physically 

settled foreign exchange transactions 

associated with the exchange of 

principal in cross-currency swaps. 

In a cross-currency swap, the parties 

exchange principal and interest rate 

payments in one currency for principal 

and interest rate payments in another 

currency. The exchange of principal 

occurs upon the inception of the swap, 

with a reversal of the exchange of 

principal at a later date that is agreed 

upon at the inception of the swap. The 

foreign exchange transactions associated 

with the fixed exchange of principal in 

a cross-currency swap are closely 

related to the exchange of principal that 

occurs in the context of a foreign 

exchange forward or swap. Accordingly, 

the Commission proposed to treat that 

portion of a cross-currency swap that is 

a fixed exchange of principal in a 

manner that is consistent with the 

treatment of foreign exchange forwards 

and swaps. This treatment of crosscurrency swaps was limited to crosscurrency swaps and did not extend to 

any other swaps such as non-deliverable 

currency forwards. 

2. Comments 

The Commission received several 

comments involving products. 

Commenters expressed support for the 

Commission’s decision to exempt 

foreign exchange forwards and swaps 19

and swaps cleared by an exempt 

derivatives clearing organization from 

margin requirements.20 One commenter 

asked for clarification that commodity 

trade options are not subject to the 

margin requirements.21

3. Discussion 

The Commission is adopting this 

aspect of the final regulations 

substantially as proposed. The 

Commission is modifying the definition 

of uncleared swap to eliminate the 

reference to no-action letters and to 

require that any exemptive relief be 

provided by Commission order. 

Under sections 4s(e), the Commission 

is directed to impose initial and 

variation margin requirements on all 

swaps that are not cleared by a 

registered derivatives clearing 

organization. The Commission is 

interpreting 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. 

In particular, the CEA prohibits 

persons from engaging in a swap that is 

required to be cleared unless they 

submit such swaps for clearing to a 

derivatives clearing organization that is 

either registered with the Commission 

as a derivatives clearing organization or 

exempt from registration. Section 5b(h) 

of the CEA allows the Commission to 

exempt, conditionally or 

unconditionally, a DCO from 

registration for the clearing of swaps, 

where the DCO is subject to 

‘‘comparable, comprehensive 

supervision and regulation’’ by the 

appropriate government authorities in 

its home country. The Commission has 

granted, by order, relief from 

registration to derivatives clearing 

organizations pursuant to section 

5b(h) 22 and is considering whether to 

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Registration as a Derivatives Clearing Organization 

(Aug. 18, 2015); In the Matter of the Petition of 

Japan Securities Clearing Corporation (JSCC) for 

Exemption from Registration as a Derivatives 

Clearing Organization (Oct 26, 2015); In the Matter 

of the Petition of Korea Exchange, Inc (KRX) for 

Exemption from Registration as a Derivatives 

Clearing Organization (Oct. 26, 2015). 

23This term is defined in Regulation 23.151. 

24This term is defined in Regulation 23.151 to 

include entities that are not SDs, MSPs, or financial 

entities. 

25See ISDA (contending that it will be difficult 

for a non-U.S. entity to determine which Investment 

Company Act exemption would apply if it were 

organized in the U.S.). 

26See ABA (pension plans should not be subject 

to margin and should be treated as non-financial 

end users); AIMA (benefit plans should not be 

subject to margin and there is ambiguity involving 

whether non-U.S. public and private employee 

benefit plans would be financial end users); JBA 

(securities investment funds should be exempt from 

variation margin). 

27See ISDA (structured finance vehicles should 

be excluded because they do not pose systemic risk, 

have credit support arrangements to protect 

counterparties, and lack ready access to liquid 

collateral for initial and variation margin), JBA 

(securities investment funds and securitization 

vehicles are not set up to exchange variation margin 

and should be treated as non-financial end users), 

JFMC, Sifma-AMG, SFIG, and Sifma. See also FSR 

(the Commission should explore conditions to 

minimize risk rather than impose variation margin). 

See SFIG and Sifma (requesting the Commission to 

exclude structured finance vehicles from the 

payment of variation margin). 

28See CDEU (wholly owned centralized treasury 

units of non-financial end users that execute swaps 

on behalf of those non-financial end users should 

not be treated as financial end users for margin 

purposes). 

29See KfW and ICO (entities backed by the full 

faith and credit and irrevocable guarantee of a 

sovereign nation should be either within the 

definition of a sovereign entity or excluded from the 

definition of a financial end user and hence not 

subject to margin requirements). See also FMS–WM 

(legacy portfolio entity backed by the full faith and 

credit of a sovereign government should be 

included in the definition of a sovereign). 

30See ABA (small banks that qualify for the 

clearing exemption should be excluded from 

margin requirements as subjecting them to margin 

requirements would incentivize them to clear their 

trades while imposing monitoring costs on them to 

ensure that they do not have material swaps 

exposure). 

31See CFC. 

32See ISDA (arguing that the EU proposal has 

special criteria for covered bond issuers and that 

covered bond issuers should be able to use 

collateral arrangements other than the requirements 

in the Commission’s proposal). 

33See Sifma (the Commission should align the 

definition of multilateral banks in the margin 

regulations to the definition in the clearing 

exemption and specify that the United Nations and 

International Monetary Fund are included among 

multilateral banks) and MFX (MFX contends that it, 

as a fund, should be considered a multilateral 

development bank because the U.S. government is 

a shareholder through the Overseas Private 

Investment Corporation’s involvement in the fund, 

the fund poses a similar risk profile as that of a 

multilateral development bank, and the fund 

engages in the same types of activities as a 

multilateral development bank). 

34See W&C (initial and variation margin should 

not apply to an eligible treasury affiliate as defined 

in Commission No-Action Letter No. 13–22); ABA; 

CFC (entities that are exempt from clearing such as 

exempt cooperatives should be exempt from margin 

requirements); and CDEU (special purpose vehicles 

that are subsidiaries of captive finance companies 

that are exempt from clearing should be exempt 

from margin). But see AFR (cautioning against the 

scope of the exemption provided to non-financial 

end users in the proposal and urging the 

Commission to separate the clearing and margin 

exemptions). 

35See MasterCard. 

36See CEWG; Sifma; W&C. 

37See CFTC No-Action Letter No. 13–22 (June 4, 

2013). 

grant relief to other derivatives clearing 

organizations before the implementation 

date of these rules. Accordingly, the 

Commission is excluding from the 

definition of uncleared swap, those 

swaps that are cleared by a derivatives 

clearing organization that is either 

registered with or has received an 

exemption by order or rule from 

registration. 

C. Participants 

1. Proposal 

Section 4s(e)(3)(A)(2) states that the 

margin requirements must be 

‘‘appropriate to the risks associated 

with’’ the swaps. Because different 

types of counterparties can pose 

different levels of risk, the proposed 

rules established three categories of 

counterparty: (i) SDs and MSPs, (ii) 

financial end users,23 and (iii) nonfinancial end users.24 The nature of an 

SD/MSP’s obligations under the rules 

differed depending on the nature of the 

counterparty. 

2. Comments 

Commenters generally urged the 

Commission to exclude certain entities 

from the definition of ‘‘financial end 

user.’’ For example, commenters urged 

the Commission to exclude foreign 

funds 25 and employee benefit plans 

such as pension plans,26 structured 

finance special purpose vehicles,27

certain captive finance units,28 entities 

guaranteed by a foreign sovereign,29

small financial institutions (such as 

small banks) that qualify for an 

exemption from clearing,30 certain 

financial cooperatives,31 covered bond 

issuers,32 and multilateral banks (e.g., 

International Monetary Fund and World 

Bank Group).33 Commenters also urged 

the Commission to exclude from margin 

requirements certain other entities that 

are exempt from clearing.34 One 

commenter also supported the exclusion 

of certain payment card networks and 

payment solution providers from the 

definition of a ‘‘financial end user.’’ 35

Commenters pointed out that the 

exclusion from financial end user for a 

person that qualifies for the affiliate 

exemption from clearing pursuant to 

section 2(h)(7)(D) of the Commodity 

Exchange Act requires an entity to be 

acting as agent for an affiliate and thus 

would not capture equivalent entities 

that act as principal for an affiliate.36

These commenters contended that many 

such entities act as principal for an 

affiliate and that the Commission has 

issued a no-action letter effectively 

exempting such entities from clearing.37

With respect to employee benefit 

plans, commenters generally argued that 

these plans should not be subject to 

margin requirements because they are 

highly regulated, highly creditworthy, 

have low leverage and are prudently 

managed counterparties whose swaps 

are used primarily for hedging and, as 

such, pose little risk to their 

counterparties or the broader financial 

system. One commenter urged the 

Commission to exclude both U.S. and 

non-U.S. public and private employee 

benefit plans where swaps are hedging 

risk. This commenter also contended 

that there may be ambiguity whether 

certain pension plans are financial end 

users if they are not subject to the 

Employee Retirement Income and 

Security Act of 1974 (‘‘ERISA’’) (29 

U.S.C. 1002). Another commenter 

argued that current market practice is 

not to require initial margin for pension 

plans. 

A number of commenters also 

requested that the Commission exclude 

from financial end user structured 

finance vehicles including 

securitization special purpose vehicles 

(‘‘SPVs’’) and covered bond issuers. 

These commenters argued that imposing 

margin requirements on structured 

finance vehicles would restrict their 

ability to hedge interest rate and 

currency risk and potentially force these 

vehicles to exit swap markets since 

these vehicles generally do not have 

ready access to liquid collateral. These 

commenters contended that it is 

impossible for the vast majority of these 

entities to exchange margin, including 

variation margin, and that subjecting 

them to margin requirements would 

severely restrict the ability of 

securitization vehicles to hedge interest 

rate risk and currency risk. 

Moreover, commenters argued that 

covered swap entities, as defined below, 

that enter a swap may be protected by 

other means—e.g., a security interest 

granted in the assets of a securitization 

SPV. Commenters also noted that these 

types of entities make payments on a 

monthly payment cycle using 

collections received on the underlying 

assets during the previous month and 

would not be able to make daily margin 

calls. These commenters argued that 

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38See William J. Harrington. 

39See CDEU; Joint Associations; IECA. 

40See CDEU. 

41See CDEU. 

42See ISDA and Sifma. 

43See JBA. 

44See ISDA (contending that it will be difficult 

for a non-U.S. entity to determine which Investment 

Company Act exemption would apply if it were 

organized in the U.S.); see also AIMA (arguing that 

there is ambiguity regarding whether non-U.S. 

public and private pension plans would be treated 

as financial end users). 

45See MasterCard (the definition in the margin 

regulations is commendable because it is narrower 

than the definition in Commission Regulation 

50.50. Entities that engage in financial activities 

within the meaning of Section 4(k) of the Bank 

Holding Company Act that are not a financial end 

user should be allowed to rely on the end user 

exception). 

significant structural changes would be 

necessary for securitization vehicles to 

post and collect variation margin. 

These commenters urged the 

Commission to follow the approach of 

the proposed European rules under 

which securitization vehicles would be 

defined as non-financial entities and 

would not be required to exchange 

initial or variation margin. Certain of 

these commenters also expressed 

concerns about consistency with the 

treatment under the EU proposal. One 

commenter stated that the EU proposal 

has special criteria for covered bond 

issuers and that covered bond issuers 

should be able to use collateral 

arrangements other than the 

requirements in the Commission’s 

proposal. Commenters similarly urged 

the Commission to follow the EU 

margin proposal which provided a 

special set of criteria for covered bond 

issuers and requested that the 

Commission develop rules that would 

permit covered bond issuers to use other 

forms of collateral arrangements. One 

commenter, however, argued that 

requiring SPVs and other asset-backed 

security issuers to post full margin 

against all swap contracts would defuse 

commonly used ‘‘flip clauses’’ and 

decrease the loss exposure of investors 

in asset-backed securities.38

A few commenters urged the 

Commission to remove a provision in 

the proposal allowing the Commission 

to designate entities as financial end 

users due to concerns that it would 

allow the Commission to re-categorize 

nonfinancial entities as financial end 

users.39 These commenters argued that 

in order for an entity to be treated as a 

financial end user, the Commission 

would have to provide adequate notice 

and propose an amendment to the rule 

to address such concerns.40

Commenters also pointed out 

miscellaneous concerns with the 

proposal. They have asked for 

clarification with respect to the process 

for determining whether an entity is a 

financial end user,41 suggested that the 

change in status of a counterparty over 

the life of a swap should not affect the 

classification of the counterparty,42 and 

urged the Commission to align its 

definition of ‘‘financial end user’’ with 

the definition put forth by the 

Prudential Regulators regarding 

business development companies.43

With respect to foreign counterparties, a 

few commenters argued that the test in 

the proposal concerning whether a 

foreign counterparty would be a 

financial end user if it were organized 

under the laws of the U.S. or any State 

is difficult to apply because it would 

require a covered swap entity to analyze 

a foreign counterparty’s business 

activities in light of a broad array of U.S. 

regulatory requirements.44 Finally, a 

commenter commended the 

Commission on its definition of 

financial end user.45

3. Discussion 

a. Covered Swap Entities 

As noted above, section 4s(e)(2)(B) of 

the CEA directs the Commission to 

impose margin requirements on SDs and 

MSPs for which there is no Prudential 

Regulator. These entities are defined in 

proposed § 23.151 as ‘‘covered swap 

entities’’ or ‘‘CSEs.’’ The final rule 

adopts the definition as set forth in the 

proposal. The final rule also includes 

special provisions for inter-affiliate 

swaps between a CSE and its affiliates. 

The following sections provide a 

discussion of other significant market 

participants and applicable standards 

set forth in the final rule. 

b. Financial End Users 

(i) Definition 

In order to provide certainty and 

clarity to counterparties as to whether 

they would be financial end users for 

purposes of this final rule, the financial 

end user definition provides a list of 

entities that would be financial end 

users as well as a list of entities 

excluded from the definition. In the 

final rule, as under the proposed rule, 

the Commission is relying, to the 

greatest extent possible, on the 

counterparty’s legal status as a regulated 

financial entity. The definition lists 

numerous entities whose business is 

financial in nature. 

In developing the definition, the 

Commission sought to provide clarity to 

CSEs and their counterparties about 

whether particular counterparties would 

be financial end users and subject to the 

margin requirements of the final rule. 

The definition is an attempt to capture 

all financial counterparties without 

being overly broad and capturing 

commercial firms and sovereigns. 

The Commission believes that this 

approach is consistent with the riskbased approach of the final rule, as 

financial firms generally present a 

higher level of risk than other types of 

counterparties because their 

profitability and viability are more 

tightly linked to the health of the 

financial system than other types of 

counterparties. Because financial 

counterparties are more likely to default 

during a period of financial stress, they 

pose greater systemic risk and risk to the 

safety and soundness of the CSE. 

In developing the list of financial 

entities, the Commission sought to 

include entities that engage in financial 

activities that give rise to Federal or 

State registration or chartering 

requirements, such as deposit taking 

and lending, securities and swaps 

dealing, or investment advisory 

activities. 

The Commission notes that an entity 

or person would be classified as a 

financial end user based on the nature 

of the activities of that entity or person 

regardless of the source of the funds 

used to finance such activities. For 

example, an entity or person would be 

a financial entity if it raises money from 

investors, uses its own funds, or accepts 

money from clients or customers to 

predominately engage in investing, 

dealing, or trading in loans, securities, 

or swaps. 

The list also includes asset 

management and securitization entities. 

For example, certain investment funds 

as well as securitization vehicles are 

covered, to the extent those entities 

would qualify as private funds defined 

in section 202(a) of the Investment 

Advisers Act of 1940, as amended (the 

‘‘Advisers Act’’). In addition, certain 

real estate investment companies would 

be included as financial end users as 

entities that would be investment 

companies under section 3 of the 

Investment Company Act of 1940, as 

amended (the ‘‘Investment Company 

Act’’), but for section 3(c)(5)(C), and 

certain other securitization vehicles 

would be included as entities deemed 

not to be investment companies 

pursuant to Rule 3a–7 of the Investment 

Company Act. 

Because Federal law largely looks to 

the States for the regulation of the 

business of insurance, the definition of 

financial end user in the final rule 

broadly includes entities organized as 

insurance companies or supervised as 

such by a State insurance regulator. This 

element of the final rule’s definition 

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46The Commission expects that state-chartered 

financial cooperatives that provide financial 

services to their members, such as lending to their 

members and entering into swaps in connection 

with those loans, would be treated as financial end 

users, pursuant to this aspect of the final rule’s 

coverage of credit or lending entities. However, 

these cooperatives could elect an exemption from 

clearing under Regulation 50.51, 17 CFR 50.51, and 

as a result, their uncleared swaps would also be 

exempt from the margin requirements of the final 

rule pursuant to Regulation 23.150(b). 

47The preamble more fully discusses the status of 

Farm Credit System institutions as financial end 

users and their exemptions from clearing and the 

margin requirements. 

48The National Rural Utility Cooperative Finance 

Cooperation (‘‘CFC’’) is an example of another 

financial cooperative. The CFC’s comment letter 

requested that the Commission exempt swaps 

entered into by nonprofit cooperatives from the 

margin requirement to the extent they that are 

already exempt from clearing requirements. 

Regulation 23.150(b) of the final rule responds to 

the CFC’s concerns. 

49Most cooperatives are producer, consumer, or 

supply cooperatives and, therefore, they are not 

financial end users. However, many of these 

cooperatives have financing subsidiaries and 

affiliates. These financing subsidiaries and affiliates 

would not be financial end users under this final 

rule if they qualify for an exemption under sections 

2(h)(7)(C)(iii) or 2(h)(7)(D) of the CEA. Moreover, 

certain swaps of these entities may be exempt 

pursuant to TRIRA and Regulation 23.150(b) of the 

final rule. 

50Section 2(h)(7)(C)(ii) of the CEA authorizes the 

Commission to exempt small depository 

institutions, small Farm Credit System institutions, 

and small credit unions with total assets of $10 

billion or less from the mandatory clearing 

requirements for swaps. See 7 U.S.C. 2(h)(7) and 15 

U.S.C. 78c–3(g). Additionally, the Commission, 

pursuant to its authority under section 4(c)(1) of the 

CEA, enacted 17 CFR part 50, subpart C, § 50.51, 

which allows cooperative financial entities, 

including those with total assets in excess of $10 

billion, to elect an exemption from mandatory 

clearing of swaps that: (1) They enter into in 

connection with originating loans for their 

members; or (2) hedge or mitigate commercial risk 

related to loans or swaps with their members. 

would extend to reinsurance and 

monoline insurance firms, as well as 

insurance firms supervised by a foreign 

insurance regulator. 

The Commission intends to cover, as 

financial end users, a broad variety and 

number of nonbank lending and retail 

payment firms that operate in the 

market. To this end, the Commission 

has included State-licensed or registered 

credit or lending entities and money 

services businesses under the final 

rule’s provision incorporating an 

inclusive list of the types of firms 

subject to State law. However, the 

Commission recognizes that the 

licensing of nonbank lenders in some 

states extends to commercial firms that 

provide credit to the firm’s customers in 

the ordinary course of business. 

Accordingly, the Commission is 

excluding an entity registered or 

licensed solely on account of financing 

the entity’s direct sales of goods or 

services to customers. 

Under the final rule, those 

cooperatives that are financial 

institutions,46 such as credit unions, 

Farm Credit System banks and 

associations,47 and other financial 

cooperatives 48 are financial end users 

because their sole business is lending 

and providing other financial services to 

their members, including engaging in 

swaps in connection with such loans.49

The treatment of the uncleared swaps of 

these financial cooperatives may differ 

under the final rule due to TRIPRA, 

which became law after the proposal 

was issued. More specifically, almost all 

swaps of the cooperatives that are 

financial end users qualify for an 

exemption from clearing if certain 

conditions are met,50 and therefore, 

these uncleared swaps also would 

qualify for an exemption from margin 

requirements under § 23.150(b) of the 

final rule. Uncleared swaps of financial 

cooperatives that do not qualify for an 

exemption would be treated as 

uncleared swaps of financial end users 

under the final rule. 

The final rule’s definition of 

‘‘financial end user’’ is largely similar to 

the proposed definition, with a few 

modifications. In the final rule, the 

Commission added as a financial end 

user a U.S. intermediate holding 

company (‘‘IHC’’) established or 

designated for purposes of compliance 

with the Board’s Regulation YY (12 CFR 

252.153). Pursuant to Regulation YY, a 

foreign banking organization with U.S. 

non-branch assets of $50 billion or more 

must establish a U.S. IHC and transfer 

its ownership interest in the majority of 

its U.S. subsidiaries to the IHC by July 

1, 2016. As not all IHCs will be bank 

holding companies, the Commission is 

explicitly identifying IHCs in the list of 

financial end users to clarify that they 

are included. To the extent an IHC that 

is not itself registered as a swap entity 

enters into uncleared swaps with a CSE, 

the IHC would be treated as a financial 

end user like other types of holding 

companies that are not swap entities 

(e.g., bank holding companies and 

saving and loan holding companies). 

In response to the commenters request 

to align its definition of financial end 

user with the Prudential Regulators’ 

definition, the Commission also added 

business development companies in 

subparagraph (vi) of the definition of 

financial end user. 

The Commission also has added three 

entities registered with the Commission 

to the enumerated list of financial end 

users: floor brokers, floor traders, and 

introducing brokers. As defined in 

section 1a(22) of the CEA, a floor broker 

generally provides brokering services on 

an exchange to clients in purchasing or 

selling any future, securities future, 

swap, or commodity option. As defined 

in section 1a(23) of the CEA, a floor 

trader generally purchases or sells on an 

exchange solely for that person’s 

account, any future, securities future, 

swap, or commodity option. As defined 

in section 1a(31) of the CEA, an 

introducing broker generally means any 

person who engages in soliciting or in 

accepting orders for the purchase and 

sale of any future, security future, 

commodity option, or swap. In addition, 

it also includes anyone that is registered 

with the Commission as an introducing 

broker. 

In deciding to add these entities to the 

definition of financial end user, the 

Commission determined that these 

entities’ services and activities are 

financial in nature and that these 

entities provide services, engage in 

activities, or have sources of income 

that are similar to financial entities 

already included in the definition. In 

this vein, the Commission is also adding 

to the list of financial end user securitybased swap dealers and major securitybased swap participants. The 

Commission believes that by including 

these financial entities in the definition 

of financial end user, the definition 

provides additional clarity to CSEs 

when engaging in uncleared swaps with 

these entities. As noted above, financial 

entities are considered more systemic 

than non-financial entities and as such, 

the Commission believes that these 

entities, whose activities, services, and 

sources of income are financial in 

nature, should be included in the 

definition of financial end user. The 

Commission notes, however, that if a 

commercial end user falls within the 

definition of financial end user under 

this rule because of, for example, its 

registration as a floor broker or 

otherwise, so long as its swaps qualify 

for an exemption under TRIPRA, those 

swaps will not be subject to the margin 

requirements of these rules. 

In the proposal, the Commission 

included in the definition of a financial 

end user ‘‘An entity that is, or holds 

itself out as being, an entity or 

arrangement that raises money from 

investors primarily for the purpose of 

investing in loans, securities, swaps, 

funds or other assets for resale or other 

disposition or otherwise trading in 

loans, securities, swaps, funds or other 

assets.’’ In addition to asking whether 

the definition was too broad or narrow, 

as noted above, the Commission asked 

questions as to whether this prong of the 

definition was broad enough to capture 

other types of pooled investment 

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642 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

51 79 FR at 57360 (September 24, 2014). 

52Regulation 23.151. 

53Some commenters requested additional clarity 

that certain entities would be included as 

multilateral development banks. See SIFMA; MFX. 

The definition in the final rule includes an 

enumerated list of entities in addition to any other 

entity that provides financing for national or 

regional development in which the U.S. 

government is a shareholder or contributing 

member or which the relevant Agency determines 

poses comparable credit risk. Entities that meet this 

part of the definition would be treated as 

multilateral development banks for purposes of the 

final rule. 

54A captive finance company is an entity that is 

excluded from the definition of financial entity 

under section 2(h)(7)(c)(iii) of the CEA for purposes 

of the requirement to submit certain swaps for 

clearing. That section describes it as ‘‘an entity 

whose primary business is providing financing, and 

uses derivatives for the purpose of hedging 

underlying commercial risks related to interest rate 

and foreign currency exposures, 90 percent or more 

of which arise from financing that facilitates the 

purchase or lease of products, 90 percent or more 

of which are manufactured by the parent company 

or another subsidiary of the parent company.’’ 

55An agent affiliate is an entity that is an affiliate 

of a person that qualifies for an exception from the 

requirement to submit certain trades for clearing. 

Under section 2(h)(7)(D) of the CEA, ‘‘an affiliate of 

a person that qualifies for an exception under 

subparagraph (A) (including affiliate entities 

predominantly engaged in providing financing for 

the purchase of the merchandise or manufactured 

goods of the person) may qualify for the exception 

only if the affiliate, acting on behalf of the person 

and as an agent, uses the swap to hedge or mitigate 

the commercial risk of the person or other affiliate 

of the person that is not a financial entity.’’ 

56As discussed below, captive finance companies 

and agent affiliates are excluded by TRIPRA from 

the definition of financial entity. 

vehicles that should be treated as 

financial end users. 

After reviewing all comments, the 

Commission is broadening section (xi) 

of the definition of a ‘‘financial end 

user’’ to include other types of entities 

and persons that primarily engage in 

trading, investing, or in facilitating the 

trading or investing in loans, securities, 

swaps, funds, or other assets. In 

broadening the definition, the 

Commission believes that the 

enumerated list in the proposal of 

financial end users was under-inclusive, 

not covering certain entities that 

provide or engage in services and 

activities that are financial in nature. 

Specifically, the Commission is 

concerned that the proposed definition 

did not cover certain financial entities 

that are not organized as pooled 

investment vehicles and that trade or 

invest their own or client funds (e.g., 

high frequency trading firms) or that 

provide other financial services to their 

clients. The Commission’s approach 

also addresses concerns, now or in the 

future, that one or more types of 

financial entities might escape 

classification under the specific Federal 

or State regulatory regimes included in 

the definition of ‘‘financial end user.’’ 

In order to address concerns raised by 

commenters, the final rule removes the 

provision in the definition of ‘‘financial 

end user’’ that included any other entity 

that the Commission has determined 

should be treated as a financial end 

user. The Commission will monitor the 

margin arrangements of swap 

transactions of CSEs to determine if 

certain types of counterparties, in fact, 

are financial entities that are not 

covered by the definition of ‘‘financial 

end user’’ in the final rule. In the event 

that the Commission finds that one or 

more types of financial entities escape 

classification as financial end users 

under the final rule, the Commission 

may consider another rulemaking that 

would amend the definition of 

‘‘financial end user’’ so it covers such 

entities. 

In the proposal, the Commission 

stated that ‘‘[f]inancial firms present a 

higher level of risk than other types of 

counterparties because the profitability 

and viability of financial firms is more 

tightly linked to the health of the 

financial system than other types of 

counterparties.’’ 51 Accordingly, it is 

crucial that the definition of financial 

end user include the types of firms that 

engage in the activities described above. 

Many of the provisions in the 

financial end user definitions rely on 

whether an entity’s financial activities 

trigger Federal or State registration or 

chartering requirements. In its proposal, 

the Commission included in the 

definition of ‘‘financial end user’’ any 

entity that would be a financial end user 

if it were organized under the laws of 

the United States or any State. A few 

commenters argued that the proposed 

test is difficult to apply because it 

would require a CSE to analyze a foreign 

counterparty’s business activities in 

light of a broad array of U.S. regulatory 

requirements. 

The Commission has not modified 

this provision in the final rule. The 

Commission acknowledges that the test 

imposes a greater incremental burden in 

classifying foreign counterparties than it 

does in identifying U.S. financial end 

users. The burdens associated with 

classifying counterparties as financial or 

non-financial has been a recurring 

theme during the rulemaking. To reduce 

the burden, in this instance, the 

Commission believes that CSEs may rely 

on good faith representations from their 

counterparties as to whether they are 

financial end users under the final rule. 

The Commission believes the approach 

in the final rule captures the kinds of 

entities whose profitability and viability 

are most tightly linked to the health of 

the financial system. 

In this respect, the Commission’s 

financial end user definition is broad by 

design. Exclusion from the financial end 

user definition for any enterprise 

engaged extensively in financial and 

market activities should, as a practical 

matter, be the exception rather than the 

rule. The Commission believes it is 

appropriate to require a CSE that seeks 

to exclude a foreign financial enterprise 

from the rule’s margin requirements to 

ascertain the basis for that exclusion 

under the same laws that apply to U.S. 

entities. 

The Commission has included in the 

final rule not only an entity that is or 

would be a financial end user but also 

an entity that is or would be a swap 

entity, if it were organized under the 

laws of the United States or any State. 

Since a financial end user is defined as 

‘‘a counterparty that is not a swap 

entity,’’ the purpose of this addition is 

to make clear that an entity that is not 

a registered swap entity in the U.S. but 

acts as a swap entity in a foreign 

jurisdiction would be treated as a 

financial end user under the final rule. 

As noted above, the Commission 

believes that financial firms present a 

higher level of risk than other types of 

counterparties because the profitability 

and viability of financial firms is more 

tightly linked to the health of the 

financial system than other types of 

counterparties. Accordingly, the 

Commission has adopted a definition of 

financial end user that includes the 

types of firms that engage in the 

activities described above. 

The final rule, like the proposal, 

excludes certain types of counterparties 

from the definition of financial end 

user. The definition of financial 

entities 52 excludes the government of 

any country, central banks, multilateral 

development banks,53 the Bank for 

International Settlements, captive 

finance companies,54 and agent 

affiliates.55 The exclusion for sovereign 

entities, multilateral development banks 

and the Bank for International 

Settlements is consistent with the 2013 

international framework and the 

definition of the Prudential 

Regulators.56

The Commission believes that this 

approach is appropriate as these entities 

generally pose less systemic risk to the 

financial system as their activities 

generally have a different purpose in the 

financial system leading to a lower risk 

profile in addition to posing less 

counterparty risk to a swap entity. Thus, 

the Commission believes that 

application of the margin requirements 

that would apply for financial end users 

to swaps with these counterparties is 

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57See ABA. 

58See CFC. 

59See ABA; AIMA. These commenters generally 

argued that pension plans should not be subject to 

margin requirements because they are highly 

regulated, highly creditworthy, have low leveraged 

and are prudently managed counterparties whose 

swaps are used primarily for hedging and, as such, 

pose little risk to their counterparties or the broader 

financial system. 

60See FSR; ISDA; JBA; JFMC; SIFMA AMG; SFIG. 

Commenters argued that imposing margin 

requirements on structured finance vehicles would 

restrict their ability to hedge interest rate and 

currency risk and potentially force these vehicles to 

exit swaps markets since these vehicles generally 

do not have ready access to liquid collateral. 

Certain of these commenters also expressed 

concerns about consistency with the treatment 

under the EU proposal. 

61See ISDA (arguing that the EU proposal has 

special criteria for covered bond issuers and that 

covered bond issuers should be able to use 

collateral arrangements other than the requirements 

in the Commission’s proposal). 

62A ‘‘financial entity’’ is defined to mean (i) a 

swap dealer; (ii) a security-based swap dealer; (iii) 

a major swap participant; (iv) a major securitybased swap participant; (v) a commodity pool; (vi) 

a private fund as defined in section 202(a) of the 

Investment Advisers Act of 1940; (vii) an employee 

benefit plan as defined in sections 3(3) and 3(32) 

of the Employment Retirement Income Security Act 

of 1974; (viii) a person predominantly engaged in 

activities that are in the business of banking, or in 

activities that are financial in nature, as defined in 

section 4(k) of the Bank Holding Company Act of 

1956. See 7 U.S.C. 2(h)(7)(C)(i). 

63See 7 U.S.C. 2(h)(7)(C)(ii) and 77 FR 42560 

(July 19, 2012); 77 FR 20536 (April 5, 2012). 

64The final rule defines material swaps exposure 

as an average daily aggregate notional amount of 

uncleared swaps, uncleared security-based swaps, 

foreign exchange forwards and foreign exchange 

swaps with all counterparties for June, July, and 

August of the previous calendar year that exceeds 

$8 billion, where such amount is calculated only for 

business days. 

not necessary to achieve the objectives 

of this rule. 

The Commission notes that States 

would not be excluded from the 

definition of financial end user, as the 

term ‘‘sovereign entity’’ includes only 

central governments. This does not 

mean, however, that States are 

categorically classified as financial end 

users. Whether a State or particular part 

of a State (e.g., counties, municipalities, 

special administrative districts, 

agencies, instrumentalities, or 

corporations) would be a financial end 

user depends on whether that part of the 

State is otherwise captured by the 

definition of financial end user. For 

example, a State entity that is a 

‘‘governmental plan’’ under ERISA 

would meet the definition of financial 

end user. 

As noted above, commenters 

requested that the Commission exclude 

a number of other entities from the 

definition of financial end user 

including small banks that qualify for an 

exception from clearing,57 certain 

financial cooperatives,58 pension 

plans,59 structured finance vehicles,60

and covered bond issuers.61 Depository 

institutions, financial cooperatives, 

employee benefit plans, structured 

finance vehicles, and covered bond 

issuers are financial end users for 

purposes of the final rule. The interim 

final rule addresses the comments 

raised regarding the uncleared swaps of 

small banks and certain financial 

cooperatives by providing an exemption 

for such swaps that qualify for an 

exemption from clearing. The uncleared 

swaps of small banks or financial 

cooperatives that do not qualify for the 

exemptive treatment would be treated as 

swaps of financial end users under the 

final rule. 

The Commission has not modified the 

definition of financial end user to 

exclude pension plans, structured 

finance vehicles, or covered bonds 

issuers. 

Congress explicitly listed an 

employee benefit plan as defined in 

paragraph (3) and (32) of section 3 of the 

ERISA in the definition of ‘‘financial 

entity’’ in the Dodd-Frank Act, meaning 

that a pension plan would not benefit 

from an exclusion from clearing even if 

the pension plan used swaps to hedge 

or mitigate commercial risk. The 

Commission believes that, similarly, 

when a pension plan enters into an 

uncleared swap with a CSE, the pension 

plan should be treated as a financial end 

user and subject to the requirements of 

the final rule. 

The definition of employee benefit 

plan in the final rule is the same as in 

the proposal and is defined by reference 

to paragraphs (3) and (32) of the ERISA. 

Paragraph (3) provides that the term 

‘‘employee benefit plan’’ or ‘‘plan’’ 

means an employee welfare benefit plan 

or an employee pension benefit plan or 

a plan which is both an employee 

welfare benefit plan and an employee 

pension benefit plan. Paragraph (32) 

describes certain governmental plans. In 

response to concerns raised by 

commenters, the Commission believes 

that these broad definitions would cover 

all pension plans regardless of whether 

the pension plan is subject to the 

ERISA. In addition, non-U.S. employee 

benefit plans would be included as an 

entity that would be a financial end 

user, if it were organized under the laws 

of the United States or any State thereof. 

The Commission believes that all of 

these entities should qualify as financial 

end users; their financial and market 

activities comprise the same range of 

activities as the other entities 

encompassed by the final rule’s 

definition of financial end user. The 

Commission notes that the increase in 

the size of positions necessary to 

constitute material swaps exposure in 

the final rule should address some of 

the concerns raised by these 

commenters with respect to the 

applicability of initial margin 

requirements. 

(ii) Small Banks 

As noted above, banks would be 

financial end users under the final rule. 

They would be subject to initial margin 

requirements if they entered into 

uncleared swaps with CSEs and, as 

discussed below, had material swaps 

exposure. However, TRIPRA also 

excluded certain swaps with small 

banks from the margin requirements of 

this rule. In particular, section 

2(h)(7)(A) of the Commodity Exchange 

Act excepts from clearing any swap 

where one of the counterparties is not 

a financial entity, is using the swap to 

hedge or mitigate commercial risk, and 

notifies the Commission how it 

generally meets its financial obligations 

associated with entering into uncleared 

swaps.62 As authorized by the DoddFrank Act, the Commission has 

excluded depository institutions, Farm 

Credit System Institutions, and credit 

unions with total assets of $10 billion or 

less, from the definition of ‘‘financial 

entity,’’ thereby permitting those 

institutions to avail themselves of the 

clearing exception for end users.63

Uncleared swaps with those entities 

would be eligible for the TRIPRA 

exemption in the Commission’s margin 

rules, provided they meet other 

requirements for the clearing exception. 

As a consequence of TRIPRA, if a small 

bank with total assets of $10 billion or 

less enters into a swap with a CSE that 

meets the requirements of the exception 

from clearing, that swap will not be 

subject to the margin requirements of 

these rules. 

When a bank with total assets greater 

than $10 billion enters into a swap with 

a CSE, the CSE will be required to post 

and collect initial margin pursuant to 

the rule only if the bank had a material 

swaps exposure and is not otherwise 

exempt.64 The final rule requires a CSE 

to exchange daily variation margin with 

a bank with total assets above $10 

billion, regardless of whether the bank 

has material swaps exposure. However, 

the CSE will only be required to collect 

variation margin from a bank when the 

amount of both initial margin and 

variation margin required to be 

collected exceeds the minimum transfer 

amount of $500,000. 

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644 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

65See ABA; AIMA; CEWG, CPFM; CCMR; FHLB; 

FSR; GPC; IFM, ISDA; ICI; IIB; JBA; MFA: Sifma 

AMG; Sifma; Shell TRM; NERA; and Vanguard. By 

contrast, one commenter suggested reducing the 

threshold below $3 billion. CME. Another 

commenter expressed concerns that entities below 

$3 billion could have considerable exposures. AFR. 

One commenter cautioned against the aggressive 

use of thresholds to manage liquidity. Barnard. 

66See JBA (financial institutions will abide by 

different rules depending on their counterparties’ 

jurisdiction).; see also MFA (competitive 

discrepancies may result). 

67See IFM; Sifma; ABA. See also ISDA 

(Commission’s calculations assume that a covered 

swap counterparty has all its swaps with one party). 

68For example, one commenter acknowledged 

data described by the Commission in the proposed 

rule indicating that bilateral initial margin 

exposures between one CSE and a financial end 

user could exceed $50 million for a portfolio with 

a gross notional value well below the USDequivalent of the international Ö8 billion threshold. 

But the commenter urged the Commission to shift 

its focus from the $65 million amount, as a bilateral 

constraint, and recognize that a financial end user 

will often use multiple dealers. Accordingly, the 

commenter urged the Commission to treat the 

material swaps exposure threshold as a focus on a 

financial end user’s multilateral exposures with all 

its dealers, which provides the rationale for the 

higher international threshold. 

69See JBA; Sifma. 

70See ABA; CEWG; CDEU; FSR; GPC; ICI; ISDA: 

Sifma AMG; Sifma; Shell TRM; Vanguard. 

71See ICI; ABA; ISDA; GPC; Sifma; Sifma AMG; 

Vanguard. The final rule defines ‘‘foreign exchange 

forward and foreign exchange swap’’ to mean any 

foreign exchange forward, as that term is defined in 

section 1a(24) of the Commodity Exchange Act (7 

U.S.C. 1a(24)), and foreign exchange swap, as that 

term is defined in section 1a(25) of the Commodity 

Exchange Act (7 U.S.C. 1a(25)). See Regulation 

23.151. 

72See GPC; CFC. 

73See CDEU (many non-financial end users have 

financial end users as affiliates, and certain of their 

swaps should be excluded). 

74See ABA; FHLB: IFM; ISDA; BP; Shell TRM; 

CEWG; see also GPC; SIFMA. 

75See FHLB. 

(iii) Multilateral Development Banks 

The proposed definition of the term 

‘‘multilateral development bank,’’ 

includes a provision encompassing 

‘‘[a]ny other entity that provides 

financing for national or regional 

development in which the U.S. 

government is a shareholder or 

contributing member or which the 

Commission determines poses 

comparable credit risk.’’ 

As described above, the final rule 

excludes from the definition of financial 

end user a ‘‘sovereign entity’’ defined to 

mean a central government (including 

the U.S. government) or an agency, 

department, or central bank of a central 

government. An entity guaranteed by a 

sovereign entity is not explicitly 

excluded from the definition of 

financial end user in the final rule, 

unless that entity qualifies as a central 

government agency, department, or 

central bank. The existence of a 

government guarantee does not in and 

of itself exclude the entity from the 

definition of financial end user. 

(iv) Material Swaps Exposure 

The Commission proposed a 

‘‘material swaps exposure’’ level of $3 

billion. This threshold is lower than the 

guidelines contained in WGMR and also 

in the EU’s consultation paper. The 

Commission proposed a lower threshold 

based on data it analyzed concerning 

the required margin on cleared swaps. 

A number of commenters argued that 

the Commission should raise the level 

of material swaps exposure to the 

threshold of Ö8 billion set out in the 

2013 international framework to be 

consistent with the EU and Japanese 

proposals.65 A commenter suggested 

that adopting different exposure levels 

may result in the failure of an 

international framework.66 Commenters 

suggested that the Commission conduct 

further studies on the uncleared swaps 

markets before adopting a threshold.67

Some commenters expressed the view 

that the international implementation of 

material swaps exposure threshold 

treats the threshold more as a scope 

provision, to define the group of 

financial firms in the swaps market 

whose activities rise to a level 

appropriate to the exchange of initial 

margin as a policy matter.68

Commenters representing public 

interest groups and CCPs expressed 

policy concerns about whether the $3 

billion threshold was conservative 

enough, focusing on the collective 

systemic risk posed by all smaller 

counterparties in the aggregate. Other 

commenters representing CSEs and 

financial end users expressed concerns 

about the additional initial margin they 

would be required to exchange 

compared to foreign firms, and the 

associated competitive impacts. 

Commenters also commented on the 

method for calculating material swaps 

exposure. A few commenters suggested 

that a daily aggregate notional measure 

was burdensome and the Commission 

should use a month-end notional 

amount like the EU proposal and 

consistent with the international 

framework.69 Commenters urged the 

Commission to make clear that interaffiliate swaps would not be included 

for purposes of determining the material 

swaps exposure.70 Certain of these 

commenters also argued that the 

proposal could require an entity to 

double-count inter-affiliate swaps in 

assessing material swaps exposure. 

Commenters also argued that certain 

other swaps should not be counted for 

purposes of the material swaps exposure 

calculation. A few commenters argued 

that foreign exchange swaps and foreign 

exchange forwards that are exempt from 

the definition of swap by Treasury 

determination should not be included 

for purposes of determining material 

swaps exposure.71 Other commenters 

argued that hedging positions should 

not be counted toward material swaps 

exposure.72 A commenter argued that 

the material swaps exposure calculation 

should not include swaps of all affiliates 

of a financial end user.73

A few commenters urged the 

Commission to make clear that a CSE 

may rely on representations of its 

counterparties in assessing whether it is 

transacting with a financial end user 

with material swaps exposure.74 One 

commenter urged the Commission to 

clarify what happens when a financial 

end user counterparty that had a 

material swaps exposure falls below the 

threshold.75

The final rule increases the level of 

the aggregate notional amount of 

transactions that gives rise to material 

swaps exposure to $8 billion. The 

material swaps exposure threshold of $8 

billion in the final rule is broadly 

consistent with the Ö8 billion 

established by the 2013 international 

framework and the EU and Japanese 

proposals. In the proposal, the 

Commission had calibrated the 

proposed $3 billion threshold to the size 

of a potential swap portfolio between a 

CSE and a financial end user for which 

the initial margin amount would often 

exceed the proposed initial margin 

threshold amount of $65 million, 

reducing the burden of calculating 

initial margin amounts for smaller 

portfolios. 

The material swaps exposure 

threshold of $8 billion in the final rule 

has been calibrated relative to the Ö8 

billion established by the 2013 

international framework in the manner 

described below. At this time, the 

Commission believes the better course is 

to calibrate the final rule’s material 

swaps exposure threshold to the higher 

2013 international framework amount, 

in recognition of each financial end 

user’s overall potential future swaps 

exposure to the market rather than its 

potential future exposure to one dealer. 

In this regard, the Commission notes 

that variation margin will still be 

exchanged without any threshold, and 

further that the $8 billion threshold may 

warrant further discussion among 

international regulators in future years, 

if implementation of the threshold 

proves to create concerns about market 

coverage for initial margin. 

In the final rule, ‘‘material swaps 

exposure’’ for an entity means that an 

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Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 645 

76The final rule also includes a new definition of 

‘‘business day’’ that means any day other than a 

Saturday, Sunday, or legal holiday. This definition 

is described further below. 

77A few commenters suggested that a daily 

aggregate notional measure was burdensome and 

that the Commission should use a month-end 

notional amount like the EU proposal and 

consistent with the international framework. JBA; 

SIFMA. The Commission has maintained the daily 

aggregate notional amount. 

78As a specific example of the calculation for 

material swaps exposure, consider a financial end 

user (together with its affiliates) with a portfolio 

consisting of two uncleared swaps (e.g., an equity 

swap, an interest rate swap) and one uncleared 

security-based credit swap. Suppose that the 

notional value of each swap is exactly $10 billion 

on each business day of June, July, and August of 

2016. Furthermore, suppose that a foreign exchange 

forward is added to the entity’s portfolio at the end 

of the day on July 31, 2016, and that its notional 

value is $10 billion on every business day of August 

2016. On each business day of June and July 2016, 

the aggregate notional amount of uncleared swaps, 

security-based swaps and foreign exchange 

forwards and swaps is $30 billion. Beginning on 

June 1, 2016, the aggregate notional amount of 

uncleared swaps, security-based swaps and foreign 

exchange forwards and swaps is $40 billion. The 

daily average aggregate notional value for June, July, 

August 2016 is then (22 × $30 billion + 23 × $30 

billion + 21 × $40 billion)/(22 + 20 + 23) = $33.5 

billion, in which case this entity would be 

considered to have a material swaps exposure for 

every date in 2017. 

79See ABA; WGCEF; FSR; GPC; ICI; ISDA: SIFMA 

AMG; SIFMA; Vanguard. 

80The Commission made a similar change to the 

definition of ‘‘initial margin threshold amount’’ as 

described in Regulation 23.151. 

81For example, the revised definition of 

‘‘affiliate’’ generally would not treat investment 

funds that share an investment adviser or 

investment manager as affiliates. 

82The Commission made a similar change to the 

definition of ‘‘initial margin threshold amount’’ as 

described in Regulation 23.151. 

83One commenter urged the Commission to 

conform with the 2013 international framework 

where material swaps exposure is based on 

derivatives (not swaps). See ICI. Another 

commenter urged the Commission to exclude 

registered swap dealers from the material swaps 

exposure calculation as this could cause affiliates 

of the swap dealer to exceed the material swaps 

exposure threshold. See FSR. The final rule does 

not exclude registered swap dealers from the 

material swaps exposure threshold. The 

Commission believes that financial affiliates of a 

registered swap dealer should be treated as having 

a material swaps exposure based on their level of 

risk. 

entity and its affiliates have an average 

daily aggregate notional amount of 

uncleared swaps, uncleared securitybased swaps, foreign exchange forwards, 

and foreign exchange swaps with all 

counterparties for June, July, and 

August of the previous calendar year 

that exceeds $8 billion, where such 

amount is calculated only for business 

days.76 The final rule’s definition also 

provides that an entity shall count the 

average daily aggregate notional amount 

of an uncleared swap, an uncleared 

security-based swap, a foreign exchange 

forward or a foreign exchange swap 

between the entity and an affiliate only 

one time. In addition, as discussed 

below, the calculation does not include 

a swap or security-based swap that is 

exempt pursuant to TRIPRA. 

The time period for measuring 

material swaps exposure is June, July 

and August of the previous calendar 

year under the final rule, the same 

period as under the proposal. The 

Commission believes that using the 

average daily aggregate notional 

amount 77 during June, July, and August 

of the previous year, instead of a single 

as-of date, is appropriate to gather a 

more comprehensive assessment of the 

financial end user’s participation in the 

swaps market, and to address the 

possibility that a market participant 

might ‘‘window dress’’ its exposure on 

an as-of date such as year-end, in order 

to avoid the Commissions’ margin 

requirements. Material swaps exposure 

would be calculated based on the 

previous year. For example, for the 

period January 1, 2017 through 

December 31, 2017, an entity would 

determine whether it had a material 

swaps exposure with reference to June, 

July, and August of 2016.78

The definition of material swaps 

exposure also contains a number of 

other changes from the proposed 

definition. Commenters urged the 

Commission to make clear that interaffiliate swaps would not be included 

for purposes of determining the material 

swaps exposure.79 Certain of these 

commenters also argued that the 

proposal could require an entity to 

double-count inter-affiliate swaps in 

assessing material swaps exposure. 

In order to address concerns about 

double counting affiliate swaps, the 

final rule provides that an entity shall 

count the average daily aggregate 

notional amount of an uncleared swap, 

an uncleared security-based swap, a 

foreign exchange forward or a foreign 

exchange swap between the entity and 

an affiliate only one time.80 The 

Commission also believes that the 

revised definition of affiliate in the final 

rule (described below) should help 

mitigate some of the concerns raised by 

commenters about the inclusion of an 

affiliate’s swaps in determining material 

swaps exposure.81

The final rule’s definition of material 

swaps exposure also states that for 

purposes of this calculation, an entity 

shall not count a swap that is exempt 

pursuant to § 23.150(b).82 This change is 

consistent with the statutory 

exemptions provided by Congress in 

TRIPRA 2015 and ensures that exempt 

swaps do not count toward determining 

whether an entity has material swaps 

exposure. 

As the material swaps exposure is 

designed to measure the overall 

derivatives exposure of an entity, the 

final rule’s calculation of material swaps 

exposure continues to include foreign 

exchange swaps and foreign exchange 

forwards as well as swaps used to 

hedge. The final rule also does not make 

a distinction between uncleared swaps 

entered into prior to and after the 

effective dates for mandatory clearing. 

The Commission believes that the 

increase in the level of the material 

swaps exposure to $8 billion in the final 

rule should address many of the 

concerns raised by commenters about 

the inclusion of particular categories of 

swaps. Moreover, the material swaps 

exposure threshold is intended to 

identify entities that engage in 

significant derivatives activity in order 

to determine whether their swaps 

activity should be subject to initial 

margin requirements under the final 

rule. 

The Commission believes the final 

rule’s approach is appropriate in 

assessing a swap counterparty’s overall 

size and risk exposure and providing for 

a simple and transparent measurement 

of exposure that presents only a modest 

operational burden. This approach also 

is intended to achieve consistency with 

other jurisdictions based on the 2013 

international framework which sets a 

threshold based on overall gross 

notional non-centrally cleared 

derivatives activity.83 Moreover, given 

that the Commission is viewing the final 

rule’s material swaps exposure as an 

indicator of a financial end user’s 

overall exposure in the market and 

revising the threshold upward to $8 

billion, the Commission believes the 

inclusiveness of the calculation adopted 

in the final rule is appropriate. 

Although the final rule does not 

explicitly provide how a CSE should 

determine if a financial end user 

counterparty has material swaps 

exposure, the Commission believes that 

it would be reasonable for a CSE to rely 

on good-faith representations of its 

counterparty in making such 

assessments. 

One commenter urged the 

Commission to clarify what happens 

when a financial end user counterparty 

that had a material swaps exposure falls 

below the threshold. Because the 

material swaps exposure determination 

applies to a financial end user for an 

entire calendar year, depending on 

whether the financial end user exceeded 

the threshold during the third calendar 

quarter of the previous year, it is 

possible for a CSE to have a portfolio of 

swaps with a financial end user whose 

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646 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

84The Commission notes that under the proposal 

the Commission used the terms affiliate and 

subsidiary; however in its final rule, it is using the 

term ‘‘margin affiliate’’ and ‘‘margin subsidiary’’. 

85See Better Markets. 

86See ACLI; FSR; CEWG; the GPC; IIB; ISDA; 

JBA; MFA; Sifma AMG; Sifma; Vanguard. (One 

commenter argued that the definitions of affiliate 

and control should not include relationships with 

or through the U.S. government and its 

representatives. See Freddie.) 

87See ISDA. 

88See ACLI; Commercial Energy Working Group; 

IIB; JBA; IFM; SIFMA AMG; SIFMA; TIAA–CREF; 

Vanguard. For example, one commenter argued that 

applying the initial margin threshold would be 

difficult with a 25 percent control test and it would 

be hard to agree on allocation of the threshold 

among the parties. ACLI. 

89See CCMR; IIB; SIFMA AMG. For example, one 

commenter argued that a 50 percent ownership 

threshold would conform to the EU Proposal. See 

IIB. 

90See AIMA; CCMR; ICI; SIFMA AMG; Vanguard; 

MFA. The 2013 international framework states that 

investment funds that are managed by an 

investment adviser are considered distinct entities 

that are treated separately when applying the 

threshold as long as the funds are distinct legal 

entities that are not collateralized by or otherwise 

guaranteed or supported by other investment funds 

or the investment adviser in the event of fund 

insolvency or bankruptcy. One commenter 

suggested an investment fund separateness to 

determine whether an investment fund is a separate 

legal entity. This commenter also urged the 

Commission to incorporate the concept of ‘‘effective 

control’’ as developed by the Financial Accounting 

Standards Board (‘‘FASB’’) to cover variable interest 

entities and special purpose entities. See Better 

Markets. 

91See ACLI; Sifma; Sifma AMG. One commenter 

also urged the Commission to clarify that 

independently controlled accounts are separate 

counterparties. See Sifma. 

92See Sifma AMG. 

93See ICI; Sifma AMG. 

94See GPC (arguing this could foreclose pension 

plans from using third-party custodians). 

95See FSR (arguing that how a swap entity 

allocates its initial margin threshold to the ERISA 

plan must be done in a way not to violate the 

fiduciary duty to the pension plan and that would 

requirement input from the Department of Labor). 

status under the material swaps 

exposure test changes from time to time. 

New § 23.161(c) of the final rule 

addresses this concern and explains 

what happens upon a change in 

counterparty status. 

For example, if a financial end user is 

moving below the threshold for the 

upcoming calendar year, the CSE is not 

obligated under the final rule to 

exchange initial margin with that end 

user during that calendar year, either for 

new swaps entered into that year or 

existing swaps from a prior year. Any 

margin that had been previously 

collected while the counterparty had a 

material swaps exposure would not be 

required under the final rule for as long 

as the counterparty did not have a 

material swaps exposure. In addition, a 

CSE’s swaps with a financial end user 

without material swaps exposure would 

continue to be subject to the variation 

margin requirements of the final rule. 

If a financial end user is moving 

above the threshold for the upcoming 

calendar year, the treatment of the 

existing swaps and the new swaps is the 

same as described for swaps before and 

after the rule’s compliance 

implementation date. As described in 

more detail below, the parties have the 

option to document the old and new 

swaps as separate portfolios for netting 

purposes under an eligible master 

netting agreement, and exchange initial 

margin only for the new portfolio of 

swaps entered into during the new 

calendar year after the financial end 

user triggered the material swaps 

exposure threshold determination. 

(v) Margin Affiliates and Margin 

Subsidiaries 

The proposal defined an ‘‘affiliate’’ as 

any company that controls, is controlled 

by, or is under common control with 

another company.84 The proposal 

defined the control of another company 

generally as the ownership or power to 

vote 25% or more of any class of voting 

securities of another entity; or the 

ownership of 25% or more of the total 

equity in any entity; or the power to 

elect a majority of the directors or 

trustees of an entity. An entity would be 

a subsidiary of another entity if it were 

controlled by that other entity. 

Commenters raised a number of 

concerns with the proposal’s definitions 

of ‘‘affiliate,’’ ‘‘subsidiary’’ and 

‘‘control.’’ While one commenter 

expressed support for the proposal’s 

definition of control,85 the vast majority 

of commenters argued for a modified 

definition of control that did not use the 

25 percent threshold.86 One commenter 

suggested that these terms should be 

defined by reference to whether an 

affiliate or subsidiary is consolidated 

under accounting standards.87 A 

number of these commenters urged the 

Commission to use a majority 

ownership test (51 percent or more) for 

determining control.88 Certain 

commenters expressed concern about 

the cross-border application of these 

definitions.89

Commenters also expressed particular 

concerns about the application of these 

definitions in the proposal to 

investment funds, including during the 

seeding period. A number of 

commenters urged the Commission to 

use the same criteria as the 2013 

international framework as the basis for 

determining whether or not an 

investment fund is an affiliate of a fund 

sponsor.90 Commenters also argued that 

seed capital contributed by a fund 

sponsor should not be viewed as control 

even if the ownership by the fund 

sponsor exceeds 25 percent.91 One 

commenter, for example, suggested that 

passive investors should be excluded 

even where they own more than 51 

percent of the ownership interests.92 A 

few commenters also suggested that 

registered funds may treat each 

separately managed ‘‘sleeve’’ of the fund 

as a separate registered fund.93

Commenters also expressed particular 

concerns about how the definitions 

applied to pension funds. One 

commenter argued that the sponsor of a 

pension should not be an affiliate of the 

pension fund by virtue of appointing 

trustees or directors of the pension 

fund.94 This commenter urged that 

pension plans should not be deemed to 

have any affiliates other than those 

entities to whom a CSE counterparty has 

recourse for relevant pension trades. 

Other commenters argued that pension 

plans should be exempted from the 

definition of affiliate which could 

conflict with fiduciary obligations under 

ERISA.95

The term affiliate is used in the 

definition of initial margin threshold 

amount which means a credit exposure 

of $50 million that is applicable to 

uncleared swaps between a CSE and its 

affiliates with a counterparty and its 

affiliates. The inclusion of affiliates in 

this definition is meant to make clear 

that the initial margin threshold amount 

applies to an entity and its affiliates. 

Similarly, the term ‘‘affiliate’’ is also 

used in the definition of ‘‘material 

swaps exposure,’’ as material swaps 

exposure takes into account the 

exposures of an entity and its affiliates. 

The term ‘‘affiliate’’ is also used for 

determining the compliance date for a 

CSE and its counterparty in § 23.161. 

Using financial accounting as the 

trigger for affiliation, rather than a legal 

control test, should address many of the 

concerns raised by commenters. In 

addition, the Commission believes that 

this approach reflects a more accurate 

method for discerning whether an entity 

has control over another entity. 

Although consolidation tests under any 

other accounting standard that the 

entity may use must also be applied on 

a case-by-case basis, like the proposed 

rule’s ‘‘control’’ test, the analysis has 

already been performed for companies 

that prepare their financial statements 

in accordance with relevant standards. 

For companies that do not prepare these 

statements, the Commission believes 

that industry participants are more 

familiar with the relevant accounting 

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Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 647 

96The Commission is deleting the definition of 

the term ‘‘subsidiary.’’ This term is no longer used 

in this set of rules. 

97See CFTC No-Action Letter No. 13–22 (June 4, 

2013); CFTC No-Action Letter No. 14–144 (Nov. 26, 

2014). 

98See W&C (initial and variation margin should 

not apply to an eligible treasury affiliate as defined 

in Commission No-Action Letter No. 13–22). 

99 80 FR 74840 at 74856. 

100Proposed Regulations 23.154(a)(6) and 

23.155(a)(3). 

101This is consistent with the requirement set 

forth in section 4s(h)(3)(B)(iii)(II) of the CEA that 

SDs and MSPs must disclose to counterparties who 

are not SDs or MSPs a daily mark for uncleared 

swaps. 

102See ABA; ETA; CDEU (asking the Commission 

to make explicit in the rule text the exclusion for 

non-financial end users from the margin 

requirements); COPE. 

103This commenter contended that each side of 

this matched pair of swaps could be subject to 

different margin treatment that could make these 

transactions prohibitively expensive. In particular, 

according to this commenter, the first or ‘‘frontend’’ swap in this matched pair would be between 

a non-financial end user (typically a government 

gas supply agency) and a swap entity, while the 

second swap or ‘‘back-end’’ swap generally would 

be between a swap entity and a prepaid gas supplier 

that is a swap entity or other financial entity. 

104See Public Citizen (opposed the exemption, 

citing that non-financial end users are not exempt 

by statute); AFR (suggesting that the Commission 

should separate clearing and margin exemptions 

while expressing concerns regarding the scope of 

this exemption). AFR further argued that margin 

should be required where the volume of swaps 

could present risks to the financial system or to 

affiliated entities deemed to be systemically 

important. 

standards and tests, and they will be 

less burdensome to apply.96

Additionally, the accounting 

consolidation analysis typically results 

in a positive outcome (consolidation) at 

a higher level of an affiliation 

relationship than the 25 percent voting 

interest standard of the legal control 

test. This is responsive to commenters’ 

concerns that the proposed definitions 

were over-inclusive. 

Because there are circumstances 

where an entity holds a majority 

ownership interest and would not 

consolidate, the Prudential Regulators 

have reserved the right to include any 

other entity as an affiliate or subsidiary 

based on a conclusion that either 

company provides significant support 

to, or is materially subject to the risks 

or losses of, the other company. This 

provision is meant to leave discretion to 

the Prudential Regulators in order to 

avoid evasion. The Commission has 

determined not to include this provision 

at this time. 

The Commission believes that the 

modifications to the definition of 

affiliate will address many of the 

concerns raised by commenters, 

including with respect to investment 

and pension funds. Investment funds 

generally are not consolidated with the 

asset manager other than during the 

seeding period or other periods in 

which the manager holds an outsized 

portion of the fund’s interests although 

this may depend on the facts and 

circumstances. The Commission 

believes that during these periods, when 

an entity may own up to 100 percent of 

the ownership interest of an investment 

fund, the investment fund should be 

treated as an affiliate. 

This approach to investment funds is 

similar to that in the 2013 international 

framework. The Commission 

acknowledges that some accounting 

standards, such as the GAAP and IFRS 

variable interest standards, sometimes 

require consolidation between a sponsor 

or manager and a special purpose entity 

created for asset management, 

securitization, or similar purposes, 

under circumstances in which the 

manager does not hold interests 

comparable to a majority equity or 

voting control share. On balance, the 

Commission believes it is appropriate to 

treat these consolidated entities as 

affiliates of their sponsors or managers. 

They are structured with legal 

separation to address the concerns of 

passive investors, but the manager 

retains such levels of influence and 

exposure as to indicate its status is 

beyond that of another minority or 

passive investor. 

In the case of pension funds that are 

associated with a non-financial end 

user, the Commission believes that 

consolidation of the pension fund with 

its parent would be the exception to the 

rule under applicable accounting 

standards. Even if consolidation is 

applicable for some pension funds, the 

parent would, as a general matter, be 

exempt from the rule under TRIPRA and 

would not be included in the threshold 

amount calculations. 

(vi) Treasury Affiliates Acting as 

Principal 

The Commission has issued no-action 

letters providing relief with respect to 

certain Treasury affiliates acting as 

principal from the clearing requirement 

provided that certain conditions are 

met.97 Some commenters urged the 

Commission to provide similar 

treatment here.98 The Commission has 

determined that similar treatment is 

appropriate. The Commission has 

included in the definition of financial 

end user a provision stating that the 

term shall not include an eligible 

treasury affiliate that the Commission 

has exempted by rule. The Commission 

will act to implement this approach by 

rule in a separate procedure. 

The Prudential Regulators final rules 

do not include this provision. The 

Prudential Regulators have stated, 

however, that if the CFTC acted to 

exclude these entities by rule, the 

entities would be excluded from the 

Prudential Regulators’ rule.99

c. Non-Financial End Users 

(i) Proposal 

Non-financial end users under the 

proposal included any entity that was 

not an SD, an MSP, or a financial end 

user. The proposal did not require CSEs 

to exchange margin with non-financial 

end users. The Commission believes 

that such entities, which generally are 

using swaps to hedge commercial risk, 

pose less risk to CSEs than financial 

entities. 

To ensure the safety and soundness of 

CSEs, the proposal required a CSE (i) to 

enter into certain documentation with 

all counterparties to provide clarity 

about the parties’ respective rights and 

obligations and (ii) to calculate 

hypothetical initial and variation 

margin amounts each day for positions 

held by non-financial entities that have 

material swaps exposure to the covered 

counterparty.100 That is, the CSE would 

be required to calculate what the margin 

amounts would be if the counterparty 

were another SD or MSP and compare 

them to any actual margin requirements 

for the positions.101 These calculations 

would serve as risk management tools to 

assist the CSE in measuring its exposure 

and to assist the Commission in 

conducting oversight of the CSE. 

(ii) Comments 

Many commenters supported the 

Commission’s decision not to impose 

margin requirements on non-financial 

end users.102 One commenter raised 

concerns about certain uncleared 

matched commodity swaps that 

economically offset each other and that 

are used to hedge municipal 

prepayment transactions for the supply 

of long-term natural gas or electricity 

(municipal prepayment transactions as 

described earlier).103 However, two 

commenters expressed concerns with 

this decision.104 These concerns ranged 

from fears that large market players 

(such as the type of entities that once 

included Enron, among others) would 

be able to participate in the markets on 

an unmargined basis to disappointment 

that the Commission did not at least 

include a requirement for a specific 

internal exposure limit for commercial 

counterparties. 

Many commenters opposed the 

documentation requirement in the 

proposal, citing administrative burdens 

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105See ISDA; Joint Associations; CDEU; Freddie; 

COPE; ABA; ETA; BP; Shell TRM. 106See Sifma (seeking assurance that (i) a CSE 

would not violate its obligations to maintain 

sufficient margin if it releases margin to a 

counterparty at the conclusion of a dispute 

resolution mechanism consistent with the U.S. 

implementation of Basel and the Commission is not 

requiring the parties to lock in dispositive valuation 

methods; and (ii) if a non-bank swap entity and a 

non-financial end user have not agreed to exchange 

margin, the parties will not need to modify their 

trading documentation to address matters specified 

in the proposal such as valuation methodologies 

and data sources); JBA (seeks clarification on the 

level of documentation required to ‘‘allow the 

counterparty and regulators to calculate a 

reasonable approximation of the margin 

requirement independently); FHLB (arguing that 

documentation requirement with respect to dispute 

resolution are inadequate). 

107See ISDA; Sifma; Joint Associations; JBA; FSR; 

ETA; NGCA/NCSA; CDEU; COPE; BP; Shell TRM; 

CEWG. 

108See AFR. 

109See e.g., § 23.600 of the CFTC’s regulations. 

110Commission Regulation 23.200(e) defines 

execution to mean, ‘‘an agreement by the 

counterparties (whether orally, in writing, 

electronically, or otherwise) to the terms of the 

swap transaction that legally binds the 

counterparties to such terms under applicable law.’’ 

17 CFR 23.200(e). 111Proposed §§ 23.152(a) and 23.153(d). 112Proposed § 23.152(b). 

113Proposed § 23.152(c). 

114See § 23.504(b)(4) of the CFTC’s regulations. 

115See Barnard; ICI; MFA; Public Citizen; AFR; 

CME; GPC. 

116See JBA. 

117See CCMR. 

118See JFMC; Joint Associations; JBA; Sifma; 

Sifma-AMG; ISDA; ETA; Shell TRM; BP; GPC; and 

NGSA/NGCA. 

119See ISDA; Sifma; JFMC; and JBA. 

financial end users currently use other 

forms of documentation.105 Other 

commenters asked the Commission for 

clarification with respect to aspects of 

the documentation requirement.106

The majority of commenters opposed 

the hypothetical margin calculation 

requirement for non-financial end 

users.107 Commenters generally noted 

the extra burdens this requirement may 

place on CSEs and the non-financial end 

user, who must monitor their swaps 

exposures to determine if they exceed 

the material swaps exposure threshold. 

Only one commenter expressed support 

for this requirement.108

(iii) Discussion 

In response to the comments, the 

Commission has removed the 

hypothetical margin calculation and 

documentation requirements concerning 

non-financial end users. Although the 

Commission continues to believe that its 

documentation and hypothetical margin 

calculation requirements would 

promote the financial soundness of 

CSEs, the Commission recognizes the 

additional administrative burdens that 

its proposed requirements could impose 

on CSEs and on non-financial end users. 

The Commission has other requirements 

that should address the monitoring of 

risk exposures for these entities.109

Moreover, under the interim final rule 

discussed below, certain transactions 

with certain financial counterparties are 

exempt from the Commission’s margin 

requirements. Section 23.150 of the final 

rule implements the exemptions 

enacted in Title III of TRIPRA, which 

excludes these swaps from the statutory 

directive issued to the Commission by 

section 4s of the CEA to impose margin 

requirements for all uncleared swaps. 

The Commission is implementing the 

transaction based (as opposed to 

counterparty based) TRIPRA 

exemptions in § 23.150(b) of the final 

rule. With respect to municipal 

prepayment transactions, the 

Commission notes that CSEs that are 

parties to these and other types of 

matched or offsetting swap transactions 

would need to evaluate each swap to 

determine whether the requirements of 

the final rule apply. Under the final 

rule, it is possible that one swap may be 

exempt from the requirements of the 

rule while an offsetting swap is subject 

to the final rule’s requirements as these 

requirements are set on a risk basis as 

required under the statute. 

A commenter also contended that the 

rule would cause counterparties to 

matched commodity swaps to face 

increased costs to the extent that the 

rules apply a capital charge to a CSE in 

connection with these matched swaps. 

The Commission notes that capital 

requirements of CSEs are outside the 

scope of this rulemaking and therefore 

is not addressing the capital 

implications of Municipal Prepayment 

Transactions at this time. 

D. Nature and Timing of Margin 

Requirements 

1. Initial Margin 

a. Proposal 

Subject to thresholds discussed 

below, the proposal required each CSE 

to collect initial margin from, and to 

post initial margin with, each covered 

counterparty on or before the business 

day after execution 110 for every swap 

with that counterparty.111 The proposal 

required the CSEs to continue to post 

and to collect initial margin until the 

swap is terminated or expires.112

Recognizing the greater risk that SDs, 

MSPs, and financial end users pose to 

the financial system, the Commission 

proposed to require SDs and MSPs to 

collect initial margin from, and to post 

initial margin with, one another. SDs 

and MSPs also would be required to 

collect initial margin from, and post 

initial margin to, financial end user 

counterparties that have exceeded the 

material swaps exposure threshold. SDs 

and MSPs would be required to collect 

variation margin from, and post 

variation margin to, each other and all 

financial end user counterparties. 

The proposal contains a provision 

stating that a CSE would not be deemed 

to have violated its obligation to collect 

initial or variation margin if it took 

certain steps to collect margin from its 

counterparty in the event the 

counterparty failed to post.113

Specifically, if a counterparty failed to 

pay the required initial margin to the 

CSE, the CSE would be required to make 

the necessary efforts to attempt to 

collect the initial margin, including the 

timely initiation and continued pursuit 

of formal dispute resolution 

mechanisms,114 or otherwise 

demonstrate upon request to the 

satisfaction of the Commission that it 

has made appropriate efforts to collect 

the required initial margin or 

commenced termination of the swap. 

b. Comments 

Commenters generally expressed 

support for two-way initial and 

variation margin.115 One commenter 

suggested that CSEs should not be 

required to post margin but only to 

collect margin.116 Another commenter 

further supported allowing more time to 

raise the required initial margin if an 

increase is mandated as a result of 

model recalibration.117

All commenters that addressed the 

Commission’s proposed timing 

requirement for initial margin collection 

opposed it.118 The basis for these 

objections included the fact that the 

settlement and delivery periods for 

many types of eligible margin securities 

are longer than the time allowed for 

margin collection under the proposed 

rule; the potential inability of financial 

end users to arrange for collateral 

transfers under the proposed rule’s 

timeframes; and the difficulties 

encountered where the parties are in 

distant time zones.119

Other concerns included the fact that 

valuations are typically determined after 

market close and that the proposed rule 

did not include time for portfolio 

reconciliation and dispute resolution. A 

commenter suggested that, since 

financial end users would be required to 

exchange margin with a CSE in amounts 

determined by the CSE’s models, the 

final rule should allow for a dispute 

resolution process acceptable to both 

the CSE and its counterparty. 

Commenters proposed a number of 

alternatives, including moving to a T+2 

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120See ISDA. 

121See MFA. 

122The calculation of ‘‘material swaps exposure’’ 

is addressed in more detail in the discussion of the 

definitions above. 

123Some of these commenters contrasted the 

Commission’s 2014 proposed approach with those 

of European and Japanese regulators. In the United 

States, many financial end users operate outside of 

the jurisdiction of the Commission to impose 

margin requirements. Thus, unlike the proposed 

Japanese and European requirements, which would 

cover a broader array of financial entities, a collectonly regime in the United States would be 

applicable only to CSEs and thus could leave a large 

number of financial entities with significant 

unmargined potential future exposures to their 

swap dealers. 

124The same is true with respect to the final 

rule’s requirements for eligible collateral and 

custody of initial margin collected by a CSE. 

125A ‘‘business day’’ under the final rule is not 

limited by or tied to typical business hours. A swap 

dealer seeking to post or collect margin may make 

the transfer during a ‘‘business day’’ but at a time 

which is before or after typical business hours. 

126Of course, if the initial margin amounts have 

not changed, or the change to the posting or 

collecting amount (combined with changes in the 

variation margin amount, as applicable) is less than 

the minimum transfer amount specified in § 23.151, 

no posting or collection will be required. 

127The approach is patterned on principles 

incorporated in the Commission’s rulemaking on 

clearing execution, with differences the 

Commission believes are appropriate in 

consideration of the bilateral nature of uncleared 

swap margin and the non-standardized terms of 

uncleared swaps. See Clearing Requirement 

Determination Under Section 2(h) of the CEA, 77 

FR 74,284 (Dec. 13, 2012), available at: http://

www.cftc.gov/ucm/groups/public/@

lrfederalregister/documents/file/2012-29211a.pdf. 

basis; 120 requiring prompt margin calls 

no later than a T+1 or T+2 basis with 

margin transfer occurring one or two 

days thereafter or according to the 

standard settlement cycle for the type of 

collateral; requiring margin collection 

and settlement weekly; or simply 

requiring margin collection on a prompt 

or reasonable basis. 

One commenter asked for clarification 

that the Commission would not require 

the calculation and collection of margin 

more than once a day.121

c. Discussion 

(i) Two-Way Margin 

Consistent with the proposal, the final 

rule requires a CSE to collect initial 

margin when it engages in an uncleared 

swap with another swap entity. Because 

all swap entities will be subject to a 

Prudential Regulator or Commission 

margin rule that requires them to collect 

initial margin on their uncleared swaps, 

the final rule will result in a collect-andpost system for all uncleared swaps 

between swap entities. 

When a CSE engages in an uncleared 

swap with a financial end user with 

material swaps exposure,122 the final 

rule will require the CSE to collect and 

post initial margin with respect to the 

uncleared swap. Under the final rule, a 

CSE transacting with a financial end 

user with material swaps exposure must 

(i) calculate its initial margin collection 

amount using an approved internal 

model or the standardized look-up table, 

(ii) collect an amount of initial margin 

that is at least as large as the initial 

margin collection amount less any 

permitted initial margin threshold 

amount (which is discussed in more 

detail below), and (iii) post at least as 

much initial margin to the financial end 

user with material swaps exposure as 

the CSE would be required to collect if 

it were in the place of the financial end 

user with material swaps exposure. 

The Commission is not adopting a 

‘‘collect only’’ approach for financial 

end user counterparties recommended 

by a number of financial industry 

commenters. The posting requirement 

under the final rule is one way in which 

the Commission seeks to reduce overall 

risk to the financial system, by 

providing initial margin to non-dealer 

swap market counterparties that are 

interconnected participants in the 

financial markets (i.e., financial end 

users that have material swap 

exposure).123 Commenters representing 

public interest groups and asset 

managers supported this aspect of the 

Commission’s approach, stating that it 

not only would better protect financial 

end users from concerns about failure of 

a CSE, but also would act as a discipline 

on CSEs by requiring them to post 

margin reflecting the risk of their swaps 

business. 

The final rule permits a CSE to select 

from two methods (the standardized 

look-up table or the internal margin 

model) for calculating its initial margin 

requirements as described in more 

detail in the paragraphs that follow. In 

all cases, the initial margin amount 

required under the final rule is a 

minimum requirement; CSEs are not 

precluded from collecting additional 

initial margin (whether by contract or 

subsequent agreement with the 

counterparty) in such forms and 

amounts as the CSE believes is 

appropriate. 

The provisions of the final rule 

requiring a CSE to collect initial margin 

amounts calculated under the 

standardized approach or an internal 

model apply only with respect to 

counterparties that are financial end 

users with material swaps exposure or 

swap entities.124

(ii) Timing 

The final rule establishes the timing 

under which a CSE must comply with 

the initial margin requirements set out 

in §§ 23.154 and 155. Under § 23.152 of 

the final rule, a CSE, on each business 

day, must comply with the initial 

margin requirements for a period 

beginning on or before the business day 

following the day of execution of the 

swap and ending on the date the 

uncleared swap is terminated or expires. 

‘‘Business day’’ is defined in § 23.151 to 

mean any day other than a Saturday, 

Sunday, or legal holiday. 125

In practice, each CSE typically will 

have a portfolio of swaps with a specific 

counterparty, and the CSE will collect 

and post initial margin for that portfolio 

with that counterparty on a rolling 

basis. The final rule requires the CSE to 

collect and post initial margin each 

business day for its portfolio of swaps 

with that counterparty, based on the 

initial margin amount calculated for that 

portfolio by the CSE on the previous 

business day.126

As the CSE and its counterparty enter 

into new swaps, adding them to the 

portfolio, these new swaps need to be 

incorporated into the CSE’s calculation 

of initial margin amounts to be posted 

and collected on this daily cycle. When 

a CSE and its counterparty are located 

in the same or adjacent time zones, this 

is a straightforward process. However, 

when the CSE is located in a distant 

time zone from the counterparty, or the 

two parties observe different sets of 

legal holidays, this can be less 

straightforward. 

The Commission added new 

provisions to the final rule to 

accommodate practical considerations 

that arise in these circumstances.127 The 

final rule requires the CSE to post and 

collect initial margin on or before the 

end of the business day after the ‘‘day 

of execution,’’ as defined in § 23.151 of 

the rule. The ‘‘day of execution’’ is 

determined with reference to the point 

in time at which the parties enter into 

the uncleared swap. 

When the location of the CSE is in a 

different time zone than the location of 

the counterparty, the ‘‘day of execution’’ 

definition provides three special 

accommodations for the difference. 

These accommodations are made in 

recognition of the fact that each of the 

two parties to the swap will, as a 

practical necessity, observe its own 

‘‘business day’’ in transmitting 

instructions to the third-party 

custodian. 

First, if at the time the parties enter 

into the swap, it is a different calendar 

day at the location of each party, the day 

of execution is deemed to be the later 

of the two calendar days. For example, 

if a CSE located in New York enters into 

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128For example, if the Commission provided T+3 

as the required timing for the posting of margin, the 

initial margin model’s margin period of risk of 10 

days, would only end up being 7 days, as the initial 

margin amount would not be available for another 

3 days after its calculation (i.e., 10 days (margin 

period of risk)—3 days (T+3 posting requirement) 

= 7 days). 

129Proposed §§ 23.152(c) and 23.153(c). 

130Proposed § 23.151, definition of ‘‘eligible 

master netting agreement.’’ 

131 Id. 

132The netting provisions in the proposal were in 

§ 23.153(c). 

a swap at 3:30 p.m. on Monday with a 

counterparty located in Japan, in the 

Japanese counterparty’s location, it is 

4:30 a.m. on Tuesday, and the day of 

execution (for both parties) will be 

deemed to be Tuesday. 

Second, if an uncleared swap is 

entered into between 4:00 p.m. and 

midnight in the location of a party, then 

such uncleared swap shall be deemed to 

have been entered into on the 

immediately succeeding day that is a 

business day for both parties, and both 

parties shall determine the day of 

execution with reference to that 

business day. For example, if a CSE 

located in New York enters into a swap 

at noon on Friday with a counterparty 

located in the U.K., and in the U.K. 

counterparty’s location, it is 5:00 p.m. 

on Friday, then the U.K. counterparty 

will be deemed to enter into the swap 

the following Monday. Or, if a CSE 

located in New York enters into a swap 

at noon on Friday with a counterparty 

located in Japan, and in the Japanese 

counterparty’s location, it is 1:00 a.m. 

on Saturday, then the Japanese 

counterparty will be deemed to enter 

into the swap the following Monday. In 

both examples, the day of execution (for 

both parties) will be Monday. 

Third, if the day of execution 

determined under the foregoing rules is 

not a business day for both parties, the 

day of execution shall be deemed to be 

the immediately succeeding day that is 

a business day for both parties. For 

example, this addresses the outcome 

arising from an uncleared swap entered 

into by a CSE in New York at noon on 

Friday with a counterparty in Japan, 

where it would be 1:00 a.m. on 

Saturday. Under the first provision, the 

later calendar day would be deemed the 

day of execution, which would be 

Saturday. Accordingly, this third 

provision would operate to move the 

deemed day of execution to the next 

business day for both parties, i.e. 

Monday. As a further example under the 

same circumstances, except that the 

Monday was a legal holiday in New 

York, the day of execution would then 

be deemed to be Tuesday for both 

parties. 

Section 23.152 consistently requires 

the CSE to begin posting and collecting 

initial margin reflecting that swap no 

later than the end of the business day 

following that day of execution and 

thereafter collect and post on a daily 

basis. The Commission believes the 

final rule should provide adequate time 

for the CSE to include the new swap in 

the regular initial margin cycle, under 

which the CSE calculates the initial 

margin posting and collection 

requirements each business day for a 

portfolio of swaps with a counterparty, 

and under which the independent 

custodian(s) for both parties must hold 

segregated eligible margin collateral in 

those amounts by the end of the next 

business day, pursuant to the respective 

instruction of the parties. The CSE is 

required to continue including the swap 

in its determination of the initial margin 

posting and collection requirements for 

that portfolio until the date the swap 

expires or is terminated. 

The Commission has made limited 

adjustments to the final rule to 

accommodate operational concerns 

created by differences in time zones and 

legal holidays between the 

counterparties, but otherwise has 

retained the proposed approach. The 

Commission recognizes that the final 

rule requires initial margin to be posted 

and collected so quickly that CSE and 

their counterparties may be required to 

take precautionary steps. These could 

include (i) pre-positioning eligible 

margin collateral at the custodian, (ii) 

using readily-transferrable forms of 

eligible collateral, such as cash, or (iii) 

initially supplying readily-transferrable 

forms of eligible collateral and 

subsequently arranging to substitute 

other eligible margin collateral after the 

initial margin collateral has been 

delivered to the custodian and the 

minimum margin requirements have 

been satisfied. 

The Commission also recognizes that 

the final rule will require portfolio 

reconciliation and dispute resolution to 

be performed after initial margin has 

been collected, as adjustments to the 

original margin call, rather than before. 

While the Commission recognizes the 

incremental regulatory burden created 

by the final rule’s timing requirement, 

the Commission believes the additional 

delay that would be introduced by the 

commenters’ alternatives would reduce 

the overall effectiveness of the margin 

requirements, as any further timing 

delay will result in an increased margin 

period of risk, which is not accounted 

for in calculating the initial margin 

amount.128

Under § 23.152 of the final rule, a CSE 

shall not be deemed to have violated its 

obligation to collect or post initial or 

variation margin from or to a 

counterparty if: (1) The counterparty has 

refused or otherwise failed to provide or 

accept the required margin to or from 

the CSE; and (2) the CSE has (i) made 

the necessary efforts to collect or to post 

the required margin, or has otherwise 

demonstrated upon request to the 

satisfaction of the Commission that it 

has made appropriate efforts to collect 

the required margin, or (ii) commenced 

termination of the uncleared swap with 

the counterparty promptly following the 

applicable cure period and notification 

requirements. 

Under the final rule, disputes that 

may arise between a CSE and its 

counterparty should be handled 

pursuant to the terms of the relevant 

contract or agreement and in the normal 

course of business. A CSE would not be 

deemed to have violated its obligation to 

collect or post initial or variation margin 

from or to a counterparty if the 

counterparty is acting in accordance 

with agreed-upon practices to settle a 

disputed trade. 

2. Netting Arrangements 

a. Proposal 

The proposal would permit netting of 

initial margin across swaps and 

variation margin across swaps, but 

would not permit the netting of initial 

and variation margin.129 Any netting 

would have to be done pursuant to an 

eligible master netting agreement 

(‘‘ENMA’’).130 The agreement would 

create a single legal obligation for all 

individual transactions covered by the 

agreement upon an event of default. It 

would specify the rights and obligations 

of the parties under various 

circumstances.131

The proposed rule provided that if 

uncleared swaps entered into prior to 

the applicable compliance date were 

included in the EMNA, those swaps 

would be subject to the margin 

requirements.132 Under the proposal, a 

CSE would need to establish a new 

EMNA to cover swaps entered into after 

the compliance date in order to exclude 

pre-compliance date swaps. 

b. Comments 

A number of commenters argued that, 

in order to allow close-out netting and 

contain costs, the final rule should not 

require new master agreements to 

separate pre- and post-compliance date 

swaps, and that parties should be 

permitted to use credit support annexes 

that are part of the EMNA instead of 

new master agreements to distinguish 

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133See TIAA–CREF; CPFM; ICI; Sifma; ISDA; 

Sifma-AMG; ABA; JBA; CS; AIMA; MFA; FSR; 

Freddie; ACLI; and FHLB. One commenter also 

requested clarification that the use of an EMNA 

does not prevent use of a master-master netting 

agreement. The final rule requires that any 

uncleared swaps that are netted for purposes of 

calculating the margin requirements under the final 

rule are subject to an EMNA that meets the 

definition in § 23.151 of the final rule regardless of 

whether or not there is a master-master agreement. 

134See ICI. 

135See Freddie. 

136 Initial margin and variation margin amounts 

may not be netted against each other under the final 

rule. In addition, initial margin netting is only for 

the purposes of calculating the collection amount 

or post amount under an approved initial margin 

model, which may not be netted against each other. 

137See § 23.151 (paragraph 1 of the EMNA 

definition). 

138As discussed earlier, the change in status 

might also occur as a counterparty moves in or out 

of financial end user status entirely. The final rule 

extends the separate netting portfolio treatment to 

all status changes equally. 

139The netting provisions in the proposal were in 

§ 23.153. 

140Proposed § 23.154. 

141Proposed § 23.151, definition of ‘‘initial 

margin threshold amount.’’ 

pre-and post-compliance date swaps.133

One party also asked the Commission 

for confirmation that the requirement to 

separately margin pre- and posteffective date swaps applies only to 

initial and not variation margin.134

Another party argued that ISDA should 

publish and standardize a credit support 

annex that would conform to the 

requirements of the margin regulations 

and parties should be allowed to use 

such credit support annex alongside 

other existing credit support annexes 

among the parties.135

c. Discussion 

The final rule permits a CSE to 

calculate initial margin (using an initial 

margin model) or variation margin on an 

aggregate net basis across uncleared 

swap transactions that are executed 

under an EMNA.136 Although the 

proposal provided that the margin 

requirements would not apply to 

uncleared swaps entered into before the 

rule’s compliance dates, as a general 

rule, the proposal provided that if an 

EMNA covered uncleared swaps that 

were entered into before the applicable 

compliance date, those uncleared swaps 

would be subject to the requirements of 

the rule and must be included in the 

aggregate netting portfolio for purposes 

of calculating the required margin. 

As discussed by several commenters, 

the Commission recognizes that CSEs 

and their counterparties may wish to 

separate netting portfolios under a 

single EMNA. Accordingly, the final 

rule provides that an EMNA may 

identify one or more separate netting 

portfolios that independently meet the 

requirement for close-out netting 137 and 

to which, under the terms of the EMNA, 

the collection and posting of margin 

applies on an aggregate net basis 

separate from and exclusive of any other 

uncleared swaps covered by the 

agreement. (These separate netting 

portfolios are commonly covered by 

separate credit support annexes to the 

EMNA.) 

This rule facilitates the ability of the 

parties to document two separate 

netting sets, one for uncleared swaps 

that are subject to the final rule and one 

for swaps that are not subject to the 

margin requirements. A netting portfolio 

that contains only uncleared swaps 

entered into before the applicable 

compliance date is not subject to the 

requirements of the final rule. The rule 

does not prohibit the parties from 

including one or more pre-compliancedate swaps in the netting portfolio of 

uncleared swaps subject to the margin 

rule, but they will thereby become 

subject to the final rule’s margin 

requirement, as part of the netting 

portfolio. Similarly, any netting 

portfolio that contains any uncleared 

swap entered into after the applicable 

compliance date will subject the entire 

netting portfolio to the requirements of 

the final rule. 

The netting provisions of the final 

rule also address the implications of 

status changes for counterparties. As 

discussed above, the final rule imposes 

a requirement to exchange initial margin 

only with respect to financial end users 

whose swap portfolios exceed the 

material swap exposure threshold. This 

means that a CSE may accumulate a 

portfolio of swaps with a financial end 

user below the threshold, subject to a 

variation margin requirement, and later 

if the financial end user crosses the 

threshold, only new swaps entered into 

after the change in the financial end 

user’s status will be subject to both 

initial and variation margin 

requirements. To address this 

possibility, the final rule extends the 

treatment of separate netting portfolios 

under a single ENMA beyond precompliance-date swaps to include 

separate netting portfolios for swaps 

entered into before and after a financial 

end user’s change into a higher risk 

status.138

The netting provisions in the final 

rule are modified from the proposal in 

order to provide clarifications to address 

implementation concerns raised by 

commenters. The proposed rule 

provided that if uncleared swaps 

entered into prior to the applicable 

compliance date were included in the 

EMNA, those swaps would be subject to 

the margin requirements.139 Under the 

proposal, a CSE would need to establish 

a new EMNA to cover swaps entered 

into after the compliance date in order 

to exclude pre-compliance date swaps. 

The final rule addresses the 

commenters’ concerns regarding closeout netting and preserves close-out 

netting by allowing an EMNA to 

identify one or more separate netting 

portfolios to which the requirements of 

the final rule apply on an aggregate net 

basis. Thus, under the final rule, precompliance date swaps in the same 

EMNA as post-compliance date swaps 

would be subject to the requirements of 

the final rule unless they are treated 

under the EMNA as separately 

identified netting portfolio. 

The Commission believes it would be 

inconsistent with the purposes and 

objectives of the rule to permit a CSE to 

net a counterparty’s uncleared swap 

obligations to the CSE in determining 

margin collection amounts, unless the 

CSE can conclude on a well-founded 

basis that the netting provisions of the 

agreement can be enforced against the 

counterparty (as required in accordance 

with the final rule’s definition of the 

EMNA). 

The Commission will address 

commenters’ concerns regarding the 

lack of availability of netting in foreign 

jurisdictions in its application of the 

margin rule on cross-border transaction 

final rule. 

The Commission does not believe that 

it would be appropriate for margin 

requirements for uncleared swaps to be 

offset by netting other products or 

exposures across markets against other 

products that may present different 

concerns about safety and soundness or 

financial stability, or that are not subject 

to similar associated margin 

requirements. Such treatment appears 

inconsistent with the purposes of the 

Dodd-Frank Act. 

E. Calculation of Initial Margin 

1. Overview 

a. Proposal 

Under the proposed rules, a CSE 

could calculate initial margin using 

either a model-based method or a 

standardized table-based method.140

The required amount of initial margin 

would be the amount computed 

pursuant to either an internal model or 

the table minus an initial margin 

threshold amount of $65 million.141 In 

the proposal, the initial margin 

threshold was calculated on a 

consolidated basis (i.e. including all of 

the entity’s affiliates). This amount 

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142Proposed § 23.154(a)(4). 

143Proposed § 23.151. 

144CEWG; BP; Shell TRM; ISDA; Sifma AMG. 

145Public Citizen. 

146CME. 

147See ISDA; JBA; Sifma. 

148See Sifma. 

149See ICI. 

150See Shell TRM. 

151One industry group commenter also cited as 

an example a securitization vehicle that creates 

separate issuances of asset-backed securities 

through use of a series trust. 

152 § 23.151, definition of ‘‘initial margin 

threshold amount.’’ 

153To the extent that an uncleared swap 

transaction is exempt from the margin requirements 

pursuant to § 23.150(b), consistent with TRIPRA, 

the interim final rule excludes the exempted swap 

transaction from the calculation of the initial 

margin threshold amount. 

154The threshold may be allocated among entities 

within the consolidated group, at the agreement of 

the CSE and the counterparties, but the total must 

remain below $50 million on a combined basis. For 

an example illustrating allocations, see the 2014 

proposal. 

could not be less than zero.142 The 

initial margin specified under the 

proposal would be a minimum 

requirement, and the parties would have 

been free to require more initial margin. 

To ease the transaction costs associated 

with the exchange of margin, the 

Commission also proposed a minimum 

transfer amount of $650,000.143

b. Comments 

A few commenters urged that the 

threshold should be set for individual 

legal entities within a group instead of 

at the group level,144 while at least one 

commenter expressed support for 

applying the threshold to the larger 

consolidated group.145 One commenter 

argued that firms should be required to 

disclose their aggregate uncollateralized 

exposures from use of the initial margin 

threshold as well as allocation of the 

threshold across counterparties, 

including affiliated counterparties.146

The same commenter also argued that 

the full amount of gross initial margin 

should be exchanged, and asked for 

increased disclosure requirements 

regarding uncollateralized exposures 

(e.g., exposures that fall below the 

initial margin threshold). 

Commenters also suggested that the 

minimum transfer amount should apply 

separately to initial and variation 

margin.147 A commenter also urged the 

Commission to revisit the amounts 

periodically to ensure international 

consistency.148 Another commenter 

suggested that entities for which the 

U.S. Dollar is not the common or 

transacting currency or whose payment 

obligations are in another currency 

should be allowed to use an average 

exchange rate between the U.S. Dollar 

and the foreign currency for calculating 

thresholds.149 One commenter also 

suggested that the Commission allow 

the counterparties to set a minimum 

transfer amount below $650,000.150

Another commenter requested 

confirmation that the rule allows a 

minimum transfer amount but does not 

require it. 

Commenters also asked for separate 

treatment of various arrangements under 

which the assets of a single investment 

fund or pension plan are treated as 

separate portfolios or accounts, each 

assigned some portion of the fund’s or 

plan’s total assets for purposes of 

managing them pursuant to different 

investment strategies or by different 

investment managers as agent for the 

fund or plan.151 Commenters said these 

‘‘separate accounts’’ are generally 

managed under documentation that 

caps the asset manager’s ability to incur 

liabilities on behalf of the fund or plan 

at the amount of the assets allocated to 

the account. 

c. Discussion 

As an initial matter, the final rules 

allow CSEs to choose between modelbased and table-based initial margin 

calculations. The Commission expects 

that some CSEs may choose to adopt a 

mix of internal models and standardized 

approaches to calculating initial margin 

requirements. For example, it may be 

the case that a CSE engages in some 

swap transactions on an infrequent basis 

to meet client demands but the level of 

activity does not warrant all of the costs 

associated with building, maintaining, 

and overseeing a quantitative initial 

margin model. Further, some CSE 

clients may value the transparency and 

simplicity of the standardized approach. 

In such cases, the Commission expects 

that it would be acceptable to use the 

standardized approach to margin such 

swaps. 

Under certain circumstances it may be 

appropriate to employ both a model 

based and standardized approach to 

calculating initial margins. At the same 

time, the Commission is aware that 

differences between the standardized 

approach and internal model based 

margins across different types of swaps 

could be used to ‘‘cherry pick’’ the 

method that results in the lowest margin 

requirement. Rather, the choice to use 

one method over the other should be 

based on fundamental considerations 

apart from which method produces the 

most favorable margin results. Similarly, 

the Commission does not anticipate 

there should be a need for CSEs to 

switch between the standardized or 

model-based margin methods for a 

particular counterparty, absent a 

significant change in the nature of the 

entity’s swap activities. The 

Commission expects CSEs to provide a 

rationale for changing methodologies if 

requested. The Commission will 

monitor for evasion of the swap margin 

requirements through selective 

application of the model and 

standardized approach as a means of 

lowering the margin requirements. 

The final rule does not require a CSE 

to collect or to post initial margin 

collateral to the extent that the aggregate 

un-margined exposure either to or from 

its counterparty remains below $50 

million.152 In this regard, the final rule 

is generally consistent with the 2013 

international framework and the 2014 

proposal. The initial margin threshold 

amount of $50 million has been 

adjusted relative to the $65 million 

threshold in the proposed rule in the 

manner described below. 

The Commission believes that 

allowing CSEs to apply initial margin 

thresholds of up to $50 million is 

consistent with the rule’s risk-based 

approach, as it will provide relief to 

counterparties, while ensuring that 

initial margin is collected from those 

counterparties with exposure over the 

threshold, which could pose greater 

systemic risk to the financial system. 

The initial margin threshold also should 

serve to reduce the aggregate amount of 

initial margin collateral required by the 

final rule. 

Under the final rule, the initial margin 

threshold applies on a consolidated 

entity level. It will be calculated across 

all non-exempted 153 uncleared swaps 

between a CSE and its affiliates and the 

counterparty and the counterparty’s 

affiliates.154 The requirement to apply 

the threshold on a fully consolidated 

basis applies to both the counterparty to 

which the threshold is being extended 

and the counterparty that is extending 

the threshold. Applying this threshold 

on a consolidated entity level precludes 

the possibility that CSEs and their 

counterparties could create legal entities 

and netting sets that have no economic 

basis and are constructed solely for the 

purpose of applying additional 

thresholds to evade margin 

requirements. 

Although some commenters suggested 

the Commission should not implement 

the threshold across the CSE and 

counterparties on a consolidated basis, 

and instead rely on general anti-evasion 

authority to address efforts to exploit 

the threshold, the Commission has not 

done so. The revisions to the affiliate 

and subsidiary definitions in the final 

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155Although one commenter urged the 

Commission to require CSEs to make granular 

disclosures about the use of the $65 million 

threshold to their investors, credit providers, and 

the central counterparties of which the CSE is a 

member, the suggestion is beyond the scope of this 

margin rulemaking. The Commission notes the final 

rule does not prohibit a CSE from providing this 

information, should it wish to negotiate that 

arrangement with an interested party. 

156One industry group commenter also cited as 

an example a securitization vehicle that creates 

separate issuances of asset-backed securities 

through use of a series trust. 

157Some commenters expressing this concern 

made the same point with respect to application of 

the material swaps exposure threshold, which is 

also calculated on a legal entity basis. The 

Commission has the same reservations about 

subdividing the material swaps exposure test at the 

managed account level, and these reservations are 

even somewhat compounded given that the 

Commission has revised the threshold to $8 billion 

in reflection of the financial end user’s overall 

market exposure, instead of a CSE-specific 

exposure. 

158See § 23.151 of the final rule. The minimum 

transfer amount only affects the timing of margin 

collection; it does not change the amount of margin 

that must be collected once the $500,000 threshold 

is crossed. For example, if the margin amount due 

from (or to) the counterparty were to increase from 

$500,000 to $800,000, the CSE would be required 

to collect the entire $800,000 (subject to application 

of any applicable initial margin threshold amount). 

159See § 23.154(b)(2) of the final rule. An 

exception to this requirement has been made in the 

specific case of cross-currency swaps. In a crosscurrency swap, one party exchanges with another 

party principal and interest rate payments in one 

currency for principal and interest rate payments in 

another currency, and the exchange of principal 

occurs upon the inception of the swap, with a 

reversal of the exchange of principal at a later date 

that is agreed upon at the inception of the swap. 

Under the final rule, an initial margin model need 

not recognize any risks or risk factors associated 

with the foreign exchange transactions associated 

with the fixed exchange of principal embedded in 

a cross-currency swap as defined in § 23.151 of the 

final rule. The initial margin model must recognize 

all risks and risk factors associated with all other 

payments and cash flows that occur during the life 

of the cross-currency swap. In the context of the 

standardized margin approach, described further 

below, the gross initial margin rates have been set 

equal to those for interest rate swaps. This 

treatment recognizes that cross-currency swaps are 

subject to risks arising from fluctuations in interest 

rates but does not recognize any risks associated 

with the fixed exchange of principal since principal 

is typically not exchanged on interest rate swaps. 

rule, described above, simplify 

implementation of the consolidated 

approach and should help address some 

of the concerns raised by commenters in 

this respect. 

The Commission notes that the 

threshold represents a minimum 

requirement and should not be viewed 

as preventing parties from contracting 

with each other to require the collection 

of initial margin at a lower threshold, 

using the same method as set forth in 

the final rule. For such transactions, the 

Commission expects CSEs to make their 

own internal credit assessments when 

making determinations as to the credit 

and other risks presented by their 

specific counterparties. Therefore, a CSE 

dealing with a counterparty it judges to 

be of high credit quality may determine 

that a counterparty-specific threshold of 

up to $50 million is appropriate. 

In response to commenters, and to 

clarify the Commission’s intent, the 

Commission notes that the $50 million 

threshold is measured as the amount of 

initial margin for the relevant portfolio 

of uncleared swaps pursuant to either 

the internal model or standardized 

initial margin table used by the CSE.155

The Commission has not incorporated 

suggestions by a commenter that the 

Commission permit the threshold to be 

calculated in foreign currencies. 

Conversion to USD can be readily 

accomplished and provides a measure 

of relative consistency in application 

from counterparty to counterparty 

within and across CSEs. 

In addition, the Commission has not 

incorporated suggestions by 

commenters for separate treatment of 

various arrangements under which the 

assets of a single investment fund 

vehicle or pension plan are treated as 

separate portfolios or accounts, each 

assigned some portion of the fund’s or 

plan’s total assets for purposes of 

managing them pursuant to different 

investment strategies or by different 

investment managers as agent for the 

fund or plan.156 Commenters said these 

‘‘separate accounts’’ are generally 

managed under documentation that 

caps the asset manager’s ability to incur 

liabilities on behalf of the fund or plan 

at the amount of the assets allocated to 

the account. 

While the Commission recognizes 

these types of asset management 

approaches are well-established 

industry practice, and that separate 

managers acting for the same fund or 

plan do not currently take steps to 

inform the fund or plan of their 

uncleared swap exposures on behalf of 

their principal on a frequent basis, the 

Commission is not persuaded that it 

would be appropriate to extend each 

separate account its own initial margin 

threshold. Based on the comments, it 

appears the liability cap on each 

account manager often will be reflected 

in the fund’s or plan’s contract with the 

manager. If one manager breaches its 

limit, there could be cross-default 

implications for other managed 

accounts, and in periods of market 

stress, the cumulative effect of multiple 

managers’ uncleared swaps could, in 

turn, strain the fund or plan’s resources. 

Because all the swaps are transacted on 

behalf of a single legal principal, the 

Commission does not believe that the 

subdivision of these separately managed 

accounts is sufficient to merit the 

extension of separate thresholds.157

Nevertheless, the Commission expects 

that in most cases, two separate 

investment funds of a single asset 

manager would not be consolidated 

under the relevant accounting standards 

and thus would not be affiliates under 

this rule. 

The final rule provides for a 

minimum transfer amount for the 

collection and posting of margin by 

CSEs. The final rule does not require a 

CSE to collect or post margin from or to 

any individual counterparty unless and 

until the combined amount of initial 

and variation margin that must be 

collected or posted under the final rule, 

but has not yet been exchanged with the 

counterparty, is greater than 

$500,000.158 This minimum transfer 

amount is consistent with the 2013 

international framework and has been 

adjusted relative to the amount that 

appeared in the proposal in the manner 

described below. 

The final rule has been modified from 

the proposal to make clear that the 

minimum transfer amount applies to the 

combined amount of initial and 

variation margin. The Commission 

believes that the proposal’s minimum 

transfer amount of $500,000 is 

appropriately sized to generally 

alleviate the operational burdens 

associated with making de minimis 

margin transfers and that the amount 

applies to both initial and variation 

margin transfers on a combined basis. 

The Commission also confirms that the 

minimum transfer amount is allowed 

but not required under the final rule, 

and parties are free to collect and post 

margin below that amount. 

2. Models 

As in the proposed rule, the final rule 

adopts an approach whereby CSEs may 

calculate initial margin requirements 

using an approved initial margin model. 

As in the case of the proposal, the final 

rule also requires that the initial margin 

amount be set equal to a model’s 

calculation of the potential future 

exposure of the uncleared swap 

consistent with a one-tailed 99 percent 

confidence level over a 10-day close-out 

period. More specifically, under the 

final rule, initial margin models must 

capture all of the material risks that 

affect the uncleared swap including 

material non-linear price characteristics 

of the swap.159

For example, the initial margin 

calculation for a swap that is an option 

on an underlying asset, such as an 

option on a credit default swap contract, 

would be required to capture material 

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160Proposed § 23.154(b)(1). See BCBS/IOSCO 

Report at 12: ‘‘any quantitative model that is used 

for initial margin purposes must be approved by the 

relevant supervisory authority.’’ 

161 Id. 

162Proposed § 23.154(b)(1). 

163 Id. 

164See AFR (supporting instead the adoption of 

a unified modeling capacity within the regulatory 

community). 

165See Barnard; SIFMA; GPC (cautioning that 

initial margin models must be consistent with 

commonly accepted market practice and should be 

open for review by market participants). 

166See CPFM; Sifma; MetLife; Freddie; AFR. 

167See IFM. 

168See JBA (asking the Commission to provide 

information regarding the data and documents 

necessary to the process, and also the timeline for 

the submissions); see also Shell TRM (urging the 

Commission to adopt a process for provisional 

approval of models). 

169The Commission expects that NFA will 

conduct a similar process for the models it reviews. 

170Whether an initial margin model has obtained 

a Prudential Regulators approval will be given a 

significant weight in determining whether the 

model meets the Commission’s standards. 

non-linearities arising from changes in 

the price of the underlying asset or 

changes in its volatility. Moreover, the 

margin calculations for derivatives in 

distinct product-based asset classes, 

such as equity and credit, must be 

performed separately without regard to 

derivatives contracts in other asset 

classes. Each derivative contract must 

be assigned to a single asset class in 

accordance with the classifications 

presented in the final rule (i.e., foreign 

exchange or interest rate, commodity, 

credit, and equity). The presence of any 

common risks or risk factors across asset 

classes cannot be recognized for initial 

margin purposes. 

The Commission’s belief is that these 

modeling standards should ensure a 

strong initial margin regime for 

uncleared swaps that sufficiently limits 

systemic risk and reduces potential 

counterparty exposures. 

a. Commission Approval 

The proposal required CSEs to obtain 

the written approval of the Commission 

before using a model to calculate initial 

margin.160 The CSE would have to 

demonstrate that the model satisfied all 

of the requirements of this section on an 

ongoing basis.161 In addition, a CSE 

would have to notify the Commission in 

writing before extending the use of a 

model that has been approved for one or 

more types of products to any additional 

product types, making any change to 

any initial margin model that has been 

approved that would result in a material 

change in the CSE’s assessment of initial 

margin requirements, or making any 

material change to assumptions used in 

an approved model.162 The Commission 

could rescind its approval of a model if 

the Commission determined that the 

model no longer complied with this 

section.163

(i) Comments 

While one commenter disapproved of 

the use of proprietary initial margin 

models,164 several commenters 

supported the use of either a 

proprietary 165 or a standardized 

(developed by the industry) initial 

margin model.166 One commenter urged 

the Commission to recognize a model 

that has been approved by other 

regulators, including foreign authorities 

in jurisdictions with margin 

requirements consistent with the 2013 

international standards.167 Another 

commenter suggested that the 

Commission provide more information 

regarding the process for model 

approval.168

(ii) Discussion 

Under the final regulations, all initial 

margin models must be approved before 

being used for margin calculation 

purposes. In the event that a model is 

not approved, initial margin 

calculations would have to be 

performed according to the standardized 

initial margin approach that is detailed 

in Regulation 23.154(c) and discussed 

below. 

Given the number of SDs and the 

likely complexity of the models, the 

Commission is concerned that, with its 

limited resources, it might not be able 

to review models as thoroughly and 

expeditiously as it would like. 

Accordingly, the Commission has 

determined to amend the final rules to 

provide that a CSE may use a model 

approved by a registered futures 

association (‘‘RFA’’) or the Commission. 

Currently, the National Futures 

Association (‘‘NFA’’) is the only RFA. 

As an RFA, NFA is required to 

establish minimum capital and other 

financial requirements applicable to its 

members that are at least as stringent as 

the capital and financial requirements 

imposed by the Commission. This 

requirement to establish financial 

requirements extends to SD and MSP 

margin requirements for uncleared swap 

transactions. 

The Commission anticipates that NFA 

margin rules will recognize the use of 

models, and that the minimum 

requirements for such models, including 

the quantitative and qualitative 

requirements of the models, are the 

same as, or more stringent than, the 

requirements set forth in final § 23.154. 

Accordingly, final § 23.154 provides 

that an SD or MSP may use models to 

compute initial margin requirements if 

such models have been approved by 

NFA. 

Given that CSEs may engage in highly 

specialized and complex swap dealing 

activity, it is expected that specific 

initial margin models may vary across 

CSEs. Accordingly, the specific analyses 

that will be undertaken in the context of 

any single model review may have to be 

tailored to the specific swap dealing 

activity of the CSE. Initial margin 

models will also undergo periodic 

reviews to ensure that they remain 

compliant with the requirements of the 

rule and are consistent with existing 

best practices over time. 

Given the complexity and diverse 

nature of uncleared swaps, it is 

expected that CSEs may choose to make 

use of vendor-supplied products and 

services in developing their own initial 

margin models. The final rule does not 

place any limitations or restrictions on 

the use of vendor-supplied model 

components such as specific data feeds, 

computing environments, or calculation 

engines beyond those requirements that 

must be satisfied by any initial margin 

model. In particular, the Commission 

will conduct a holistic review of the 

entire initial margin model and assess 

whether the entire model and related 

inputs and processes meet the 

requirements of the final rule.169

To the extent that a CSE uses vendorsupplied inputs in conjunction with its 

own internal inputs and processes, the 

model approval decision will apply to 

the specific initial margin model used 

by a CSE and not to a generally available 

vendor-supplied model. To the extent 

that one or more vendors provide 

models or model-related inputs (e.g., 

calculation engines) that, in conjunction 

with the CSEs’ own internal methods 

and processes, are part of an approved 

initial margin model, the Commission 

may also approve those vendor models 

and model-related inputs for use by 

other CSEs though that determination 

will be made on a case-by-case basis 

depending on the entirety of the 

processes that are employed in the 

application of the vendor-supplied 

inputs and models by a CSE. 

In many instances, CSEs whose 

margin models would be subject to 

Commission or RFA review would be 

affiliates of entities whose margin 

models would be subject to review by 

one of the Prudential Regulators. In 

such situations, the Commission or the 

RFA would coordinate with the 

Prudential Regulators in order to avoid 

duplicative efforts and to provide 

expedited approval of Prudential 

Regulator approved models.170 For 

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171This term is defined in proposed § 23.151. 

172Proposed § 23.154(b)(2). 

173 Id. 

174ACLI; FSR; Freddie; ISDA; MetLife; Sifma 

AMG; Sifma; and Vanguard. 

175One commenter urged the Commission not to 

‘‘outsource’’ the EMNA definition to ISDA, noting 

that the vast majority of existing master netting 

agreements are governed by the ISDA Master 

Agreement. The commenter argued that the ISDA 

Master Agreement contains provisions that may be 

contrary to the interests of counterparties other than 

ISDA’s large swap entity members, such as 

mandatory arbitration covenants. See Better 

Markets. So long as an agreement meets the 

requirements of the EMNA definition, however, the 

Commission is not endorsing, requiring. or 

prohibiting use of a particular master netting 

agreement in the final rule. 

176See Sifma; FHLB. 

177See ETA; Joint Associations; NGSA/NGCA. 

178See Barnard. 

179See JFMC. See also ISDA (suggesting netting 

restrictions on posting variation margin (where 

restricted by law for example) to non-netting 

counterparties). 

180AIMA; ICI; SIFMA. However, at least one 

commenter expressed concern that allowing for 

foreign jurisdiction and contractual stays could 

limit important bankruptcy protections for 

commercial end users and argued that the rule 

should recognize and clearly state that market 

participants’ rights to avoid stays and other 

limitations of their close-out rights should be 

protected. CEWG. 

181See ACLI; MetLife. 

182See ISDA; Sifma AMG (a party should be 

allowed to suspend ongoing performance where an 

event of default or potential event of default has 

occurred and is continuing); AFR (upon the default 

of a party, the non-defaulting party should be 

allowed to enter into a limited contractual stay and 

suspend payment obligation to the defaulting party 

according to the process set forth in the ISDA 2014 

Resolution Stay Protocol). 

183One commenter, for example, urged ‘‘would’’ 

should be changed to ‘‘should’’ as ‘‘would’’ is 

difficult to satisfy in bankruptcy courts making it 

difficult to state with certainty. CEWG. 184ACLI; GPC; ICI; JBA; Sifma AMG; see also 

CEWG. 185See GPC; Sifma AMG. 186This definition of ENMA aligns with the 

recently adopted definition of a ‘‘qualifying master 

netting agreement’’ for bank regulatory capital 

purposes and the Prudential Regulators’ margin 

requirements. See Regulatory Capital Rules, 

Liquidity Coverage Ratio: Interim Final Revisions to 

the Definition of Qualifying Master Netting 

Agreement and Related Definitions, 79 FR 78287 

(Dec. 30, 2014). 

example, if a Prudential Regulator had 

approved a model of an insured 

depository institution registered as an 

SD, Commission or RFA review of a 

comparable model used by its non-bank 

affiliate would be greatly facilitated. 

Similarly, the Commission or the RFA 

would coordinate with the SEC for CSEs 

that are dually registered and would 

coordinate with foreign regulators that 

had approved margin models for foreign 

CSEs. 

The provision permitting a CSE to use 

a model approved by an RFA is a point 

of distinction between the 

Commission’s rules and those of the 

Prudential Regulators. The Prudential 

Regulators do not have a comparable 

rule. 

b. Applicability to Multiple Swaps 

(i) Proposal 

The proposal provided that to the 

extent more than one uncleared swap is 

executed pursuant to an EMNA 171

between a CSE and a covered 

counterparty, the CSE would be 

permitted to calculate initial margin on 

an aggregate basis with respect to all 

uncleared swaps governed by such 

agreement.172 However, only exposures 

in certain asset classes could be offset. 

If the agreement covered uncleared 

swaps entered into before the applicable 

compliance date, those swaps would 

have to be included in the 

calculation.173

The proposal defined EMNA as any 

written, legally enforceable netting 

agreement that creates a single legal 

obligation for all individual transactions 

covered by the agreement upon an event 

of default (including receivership, 

insolvency, liquidation, or similar 

proceeding) provided that certain 

conditions are met. These conditions 

include requirements with respect to the 

CSE’s right to terminate the contract and 

to liquidate collateral and certain 

standards with respect to legal review of 

the agreement to ensure that it meets the 

criteria in the definition. 

(ii) Comments 

A number of commenters requested 

that the Commission remove the 

‘‘suspends or conditions payment’’ 

language.174 These commenters argued 

that this provision would be 

inconsistent with the ISDA Master 

Agreement which allows a nondefaulting counterparty to suspend 

payment to a defaulting counterparty.175

A few commenters urged the 

Commission to align its definition with 

that of the Prudential Regulators,176

while others argued that ISDA master 

agreements should qualify as 

ENMAs.177 One commenter supported 

the use of netting agreements,178 while 

others cautioned that entities operating 

in jurisdictions where netting is not 

enforceable may be penalized by having 

to put up a greater amount of 

collateral.179

Commenters generally expressed 

support for the recognition of foreign 

stays in the proposal’s definition of 

ENMA.180 A few commenters argued 

that a limited stay under State 

insolvency and receivership laws 

applicable to insurance companies also 

should be recognized under this 

provision.181 Some commenters also 

argued for permitting appropriate 

contractual stays.182

A number of commenters expressed 

various concerns with the provision of 

the EMNA that requires a CSE to 

conduct sufficient legal review to 

conclude with a well-founded basis 

(and maintains sufficient written 

documentation of that legal review) that 

the agreement meets the requirements 

with respect to the CSE’s right to 

terminate the contract and liquidate 

collateral and that in the event of a legal 

challenge (including one resulting from 

default or from receivership, insolvency, 

liquidation, or similar proceeding), the 

relevant court and administrative 

authorities would find the agreement to 

be legal, valid, binding, and enforceable 

under the law of the relevant 

jurisdictions.183 These commenters 

urged that requiring a legal opinion 

would be expensive and may not be able 

to be given without qualification, 

meaning parties can never be certain 

that a contract is enforceable.184 Some 

of these commenters recommended 

removing the requirement that the 

ENMA be enforceable in multiple 

jurisdictions since it would be legally 

impractical.185

(iii) Discussion 

The final rule defines an EMNA to be 

any written, legally enforceable netting 

agreement that creates a single legal 

obligation for all individual transactions 

covered by the agreement upon an event 

of default (including receivership, 

insolvency, liquidation, or similar 

proceeding) provided that certain 

conditions are met.186 These conditions 

include requirements with respect to the 

CSE’s right to terminate the contract and 

liquidate collateral and certain 

standards with respect to legal review of 

the agreement to ensure it meets the 

criteria in the definition. The legal 

review must be sufficient so that the 

CSE may conclude with a well-founded 

basis that, among other things, the 

contract would be found legal, binding, 

and enforceable under the law of the 

relevant jurisdiction and that the 

contract meets the other requirements of 

the definition. 

The EMNA definition includes a 

requirement that the agreement not 

include a walkaway clause, which is 

defined as a provision that permits a 

non-defaulting counterparty to make a 

lower payment than it otherwise would 

make under the agreement, or no 

payment at all, to a defaulter or the 

estate of a defaulter, even if the 

defaulter or the estate of the defaulter is 

a net creditor under the agreement. 

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187See § 23.151. 

188Proposed § 23.154(b)(3). 

189Pension Coalition. See also CCMR (10 day 

horizon is not risk-adjusted and the horizon should 

be set according to the type of swap); ISDA 

(liquidity horizon should be consistent with 

requirements in other jurisdictions); Sifma AMG 

(the horizon should be closer to 5 days). 

190CME. 

191See CCMR. 

192See NERA. 

193See Public Citizen; AFR. 

194See § 23.154(b)(2)(i) of the final rule. 

195 In cases where a swap has a remaining 

maturity of less than 10 days, the remaining 

maturity of the swap, rather than 10 days, may be 

used as the close-out period in the margin model 

calculation. 

The proposed EMNA definition 

included additional language in the 

definition of walkaway clause that 

would expressly preclude an EMNA 

from including a clause that permits a 

non-defaulting counterparty to 

‘‘suspend or condition payment’’ to a 

defaulter or the estate of a defaulter, 

even if the defaulter or the estate of the 

defaulter is or otherwise would be, a net 

creditor under the agreement. This 

additional language is not being 

included in the final rule’s definition of 

EMNA. Therefore, the commenters’ 

concerns regarding the impact of the 

additional proposed language on current 

provisions of the ISDA Master 

Agreement are moot. 

Like the proposal, the final rule’s 

definition of EMNA contains a stay 

condition regarding certain insolvency 

regimes where rights can be stayed. In 

particular, the second clause of this 

condition has been modified to provide 

that any exercise of rights under the 

agreement will not be stayed or avoided 

under applicable law in the relevant 

jurisdictions, other than (i) in 

receivership, conservatorship, or 

resolution by a Prudential Regulator 

exercising its statutory authority, or 

substantially similar laws in foreign 

jurisdictions that provide for limited 

stays to facilitate the orderly resolution 

of financial institutions, or (ii) in an 

agreement subject by its terms to any of 

the foregoing laws.187

The Commission did not modify the 

final rule’s definition of EMNA to 

recognize stays under State insolvency 

and receivership laws for insurance 

companies. The Commission believes 

that other changes to the rule should 

help address these concerns as 

explained further below. 

The Commission did not modify the 

provision relating to the legal 

enforceability of the EMNA definition in 

the final rule. The Commission believes 

that the legal review must be sufficient 

so that the CSE may conclude with a 

well-founded basis that, among other 

things, the contract would be found 

legal, binding, and enforceable under 

the law of the relevant jurisdiction and 

that the contract meets the other 

requirements of the definition. In some 

cases, the legal review requirement 

could be met by reasoned reliance on a 

commissioned legal opinion or an inhouse counsel analysis. In other cases, 

for example, those involving certain 

new derivative transactions or 

derivative counterparties in 

jurisdictions where a CSE has little 

experience, the CSE would be expected 

to obtain an explicit, written legal 

opinion from external or internal legal 

counsel addressing the particular 

situation. The rules set an outcomebased standard for a review that is 

sufficient so that an institution may 

conclude with a well-founded basis 

that, among other things, the contract 

would be found legal, binding, and 

enforceable under the law of the 

relevant jurisdiction and that the 

contract meets the other requirements of 

the definition. 

The Commission recognizes that there 

may be certain jurisdictions where a 

netting arrangement may not be 

enforceable; the Commission will 

address this issue in its final rule on the 

application of margin rule to crossborder transactions. 

c. Elements of a Model 

The final rule specifies a number of 

conditions that a model would have to 

meet to receive Commission 

approval.188 These conditions relate to 

the technical aspects of the model as 

well as broader oversight and 

governance standards. They include, 

among others, the following. 

(i) Ten-Day Close-Out Period 

Under the proposal, the model must 

calculate potential future exposure 

using a one-tailed 99 percent confidence 

interval for an increase in the value of 

the uncleared swap or netting set of 

uncleared swaps due to an 

instantaneous price shock that is 

equivalent to a movement in all material 

underlying risk factors, including 

prices, rates, and spreads, over a 

holding period equal to the shorter of 

ten business days or the maturity of the 

swap. 

The Commission received a number 

of comments concerning the length of 

the assumed close-out period used in 

the initial margin calculations. 

Commenters suggested that ten days 

was too long and suggested that a closeout period of three to five days was 

adequate to ensure sufficient time to 

close out or hedge a defaulting 

counterparty’s swap contract.189

Another commenter suggested that a ten 

day close out period was too short and 

that the resulting initial margins would 

not always be larger and more 

conservative than initial margins 

charged on cleared swaps.190 The same 

commenter also argued that the 

Commission should require an ex-post 

99% initial margin coverage and not 

simply a 99% confidence level sampling 

to better reflect the liquidity and risk 

profile of the uncleared markets and to 

retain incentives to promote central 

clearing. One commenter argued that 

mandating a 10 day close out period for 

all swaps is not sufficiently risksensitive as the approach fails to take 

into account the liquidity of any 

particular swap.191 Another commenter 

argued for allowing market participants 

to determine appropriate market-based 

liquidation periods.192 Two commenters 

supported the 10-day holding period.193

Since uncleared swaps are expected 

to be less liquid than cleared swaps, the 

final rule specifies a minimum close-out 

period for the initial margin model of 10 

business days, compared with a typical 

requirement of 3 to 5 business days used 

by central counterparties (CCPs).194

Accordingly, to the extent that 

uncleared swaps are expected to be less 

liquid than cleared swaps and to the 

extent that related capital rules which 

also mitigate counterparty credit risk 

similarly require a 10-day close-out 

period assumption, the Commission’s 

view is that a 10-day close-out period 

assumption for margin purposes is 

appropriate.195

At the same time, the Commission is 

aware that it may not be the case that 

the regulatory minimum required initial 

margin on an uncleared swap will 

always be larger than the initial margin 

required on any related cleared swap as 

margining practices vary among DCOs. 

In some cases, they may exceed 

minimum required margin levels due to 

the specific risk of the swap in question 

and the margining practices of the DCO. 

Moreover, given the complexity and 

diversity of the uncleared swap market, 

the Commission believes that it is not 

possible and unnecessary to prescribe a 

specific and different close-out horizon 

for each type of uncleared swap that 

may exist in the marketplace. The 

Commission does believe that it is 

appropriate for a CSE to use a close-out 

period longer than ten-days in those 

circumstances in which the specific risk 

of the swap indicates that doing so is 

prudent. In terms of specifying a 

regulatory minimum requirement, 

however, the Commission believes that 

a ten-day close-out period is sufficiently 

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196See Sifma (Bentsen) (suggesting that there are 

significant and relatively stable correlations across 

related commodity categories that should not be 

ignored for hedging and margining purposes; 

commodity index swaps are a significant source of 

uncleared commodity swap activity and these 

swaps are a significant source of uncleared 

commodity swap activity and comprise exposures 

to each of the four commodity sub-asset classes that 

were identified; implementing the proposal’s four 

separate sub-asset classes would not be 

appropriately risk sensitive and would be difficult 

and burdensome to implement for a significant 

class of commodity swaps); see also ISDA (all 

commodities should be one asset class as would be 

consistent with the 2013 international framework). 

197Sifma AMG 198CCMR; GPC; CEWG; Sifma; MFA; Sifma AMG 

(offsets should be allowed for risk across all 

instruments and asset classes subject to the same 

master netting agreement so long as there is sound 

theoretical basis and significant empirical support); 

IECA and BP (netting should be allowed across 

swaps and physical commodity forward 

transactions entered pursuant to an ISDA master 

agreement with physical annexes). 

199See ISDA (some assets may be classified as 

swaps in one jurisdiction but as some other type of 

financial instrument in another jurisdiction); Sifma; 

JBA. 200See final rule § 23.154(b)(2)(v). 

long to generally guard against the 

heightened risk of less liquid, uncleared 

swaps. 

Under the final rule, the initial margin 

model calculation must be performed 

directly over a 10-day period. In the 

context of bank regulatory capital rules, 

a long horizon calculation (such as 10 

days), under certain circumstances, may 

be indirectly computed by making a 

calculation over a shorter horizon (such 

as 1 day) and then scaling the result of 

the shorter horizon calculation to be 

consistent with the longer horizon. The 

rule does not provide this option to 

CSEs using an approved initial margin 

model. The Commission’s view is that 

the rationale for allowing such indirect 

calculations that rely on scaling shorter 

horizon calculations has largely been 

based on computational and cost 

considerations that were material in the 

past but are much less so in light of 

advances in computational speeds and 

reduced computing costs. Moreover, the 

Commission believes that the more 

accurate approach would be to use the 

10 day period rather than the scaling 

approach. Therefore, as a result of the 

less burdensome calculations, the 

Commission is retaining this 

requirement. 

(ii) Portfolio Offsets 

Under the proposal, an initial margin 

model may reflect offsetting exposures, 

diversification, and other hedging 

benefits for uncleared swaps that are 

governed by the same EMNA by 

incorporating empirical correlations 

within the broad risk categories, 

provided the CSE validates and 

demonstrates the reasonableness of its 

process for modeling and measuring 

hedging benefits. Under the proposal, 

the categories were agriculture, credit, 

energy, equity, foreign exchange/interest 

rate, metals, and other. Empirical 

correlations under an eligible master 

netting agreement could be recognized 

by the model within each broad risk 

category, but not across broad risk 

categories. In the proposal, the sum of 

the initial margins calculated for each 

broad risk category would be used to 

determine the aggregate initial margin 

due from the counterparty. 

The Commission received comments 

on a range of issues that broadly relate 

to the recognition of portfolio risk 

offsets. 

One commenter requested that the 

rule specify only a single commodity 

asset class rather than the four separate 

asset classes that were set forth in the 

proposal (agricultural commodities, 

energy commodities, metal commodities 

and other commodities).196 Another 

commenter suggested that the margin 

requirements should be more reflective 

of risk offsets that exist between 

disparate asset classes such as equity 

and commodities.197

Many commenters generally argued 

for allowing a broader set of offsets. 

Some commenters suggested that for the 

purposes of calculating model-based 

initial margin amounts portfolio offsets 

should be recognized between 

uncleared swaps, cleared swaps, and 

other products such as positions in 

securities or futures.198 Some 

commenters promoted a ‘‘risk factor 

based’’ approach and suggested that 

initial margin models should allow for 

offsets across risk factors even if these 

risk factors are present in uncleared 

swaps across multiple asset classes such 

as equity and credit.199

For example, the commenters stated 

that both an equity swap and a credit 

swap may be exposed to some amount 

of interest rate risk. The commenters 

suggested that the interest rate risk 

inherent in the equity and credit swaps 

should be recognized on a portfolio 

basis so that any offsetting interest rate 

exposure across the two swaps could be 

recognized in the initial margin model. 

This approach would effectively require 

that all uncleared swaps be described in 

terms of a number of ‘‘risk factors’’ and 

the initial margin model would consider 

the exposure to each risk factor 

separately. The initial margin amount 

required on a portfolio of uncleared 

swaps would then be computed as the 

sum of the amounts required for each 

risk factor. 

This ‘‘risk factor’’ based approach 

described above is different from the 

Commission’s proposal. Under the 

proposal, initial margin on a portfolio of 

uncleared swaps was calculated on a 

product-level basis. In terms of the 

above example, initial margin would 

have been calculated separately for the 

equity swap and calculated separately 

for the credit swap. In the case of both 

the equity and credit swap, interest rate 

risk in the swap would have been 

modeled and measured without regard 

to the interest rate exposure of the other 

swap. The total initial margin 

requirement would have been the sum 

of the initial margin requirement for the 

equity swap and the credit swap. 

Accordingly, no offset would have been 

recognized between any potentially 

offsetting interest rate exposure in the 

equity and credit swap. 

The final rule permits a CSE to use an 

internal initial margin model that 

reflects offsetting exposures, 

diversification, and other hedging 

benefits within four broad risk 

categories: Credit, equity, foreign 

exchange and interest rates (considered 

together as a single asset class), and 

commodities when calculating initial 

margin for a particular counterparty if 

the uncleared swaps are executed under 

the same EMNA.200

The rule no longer divides 

commodities into smaller asset classes. 

The Commission has decided to group 

all uncleared commodity swaps into a 

single asset class for initial margin 

calculation purposes. The Commission 

believes that there is enough 

commonality across different 

commodity categories to warrant 

recognition of conceptually sound and 

empirically justified risk offsets. 

Moreover, the Commission notes that 

both the proposal and the final rule take 

a relatively broad view of the other asset 

classes: Equity, credit, interest rates and 

foreign exchange. In prescribing the 

granularity of the asset classes there is 

a clear trade-off between simplicity and 

certainty around the stability of hedging 

relationships in narrowly defined asset 

classes and the greater flexibility and 

risk sensitivity that is provided by 

broader asset class distinctions. 

Therefore, the Commission has decided 

to adopt a commodity asset class 

definition that is consistent with the 

other three asset classes and is 

appropriate in light of current market 

practices and conventions. 

The final rule does not permit an 

initial margin model to reflect offsetting 

exposures, diversification, or other 

hedging benefits across broad risk 

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201 Id. 202http://www.bis.org/statistics/dt1920a.pdf. 

categories.201 Hence, the margin 

calculations for derivatives in distinct 

product-based asset classes, such as 

equity and credit, must be performed 

separately without regard to derivatives 

contracts in other asset classes. Each 

derivative contract must be assigned to 

a single asset class in accordance with 

the asset class classification presented 

in the standardized minimum gross 

initial margin requirements for 

uncleared swaps. The presence of any 

common risks or risk factors across asset 

classes cannot be recognized for initial 

margin purposes. 

As a specific example, if a CSE 

entered into two uncleared credit swaps 

and two uncleared commodity swaps 

with a single counterparty under an 

EMNA, the CSE could use an approved 

initial margin model to perform two 

separate initial margin calculations: The 

initial margin collection amount 

calculation for the uncleared credit 

swaps and the initial margin collection 

amount calculation for the uncleared 

commodity swaps. Each calculation 

could recognize offsetting and 

diversification within the uncleared 

credit swaps and within the uncleared 

commodity swaps. The result of the two 

separate calculations would then be 

summed together to arrive at the total 

initial margin collection amount for the 

four uncleared swaps (two uncleared 

credit swaps and two uncleared 

commodity swaps). 

The Commission believes that the 

qualitative and quantitative basis for 

allowing for risk offsets among 

uncleared swaps within a given, and 

relatively broad, asset class such as 

equities is conceptually stronger and 

better supported by historical data and 

experience than is the basis for 

recognizing such offsets across disparate 

asset classes such as foreign exchange 

and commodities. Uncleared swaps that 

trade within a given asset class, such as 

equities, are likely to be subject to 

similar market fundamentals and 

dynamics as the underlying instruments 

themselves trade in related markets and 

represent claims on related financial 

assets. In such cases, it is more likely 

that a stable and systematic relationship 

exists that can form the conceptual and 

empirical basis for applying risk offsets. 

By contrast, uncleared swaps in 

disparate asset classes such as foreign 

exchange and commodities are generally 

unlikely to be influenced by similar 

market fundamentals and dynamics that 

would suggest a stable relationship 

upon which reasonable risk offsets 

could be based. Rather, to the extent 

that empirical data and analysis suggest 

some degree of risk offset exists between 

swaps in disparate asset classes, this 

relationship may change unexpectedly 

over time in ways that could 

demonstrably weaken the assumed risk 

offset. Accordingly, the Commission has 

decided to allow for risk offsets that 

have a sound conceptual and empirical 

basis across uncleared swaps within the 

broad asset classes as listed in the final 

rule but not to allow risk offsets across 

swaps in differing asset classes. 

Moreover, the Commission notes that 

the final asset class described above is 

interest rates and foreign exchange 

taken as a group. Accordingly, the final 

rule will allow conceptually sound and 

empirically supported risk offsets 

between an interest rate swap on a 

foreign interest rate and a currency 

swap in a foreign currency. 

The Commission has considered the 

risk factor based approach described 

above and has decided not to adopt that 

approach, but to adopt the proposed 

approach in the final rule for a number 

of reasons. 

First, a product-based approach to 

calculating initial margin is clear and 

transparent. In many market segments it 

is quite common to report and measure 

swap exposures on a product-level 

basis.202 As an example, the Bank for 

International Settlements regularly 

publishes data on the outstanding 

notional amounts of OTC derivatives on 

a product-level basis. In addition, 

existing trade repositories, such as the 

DTCC global trade repositories for 

interest rate and credit swaps, report 

credit and interest rate derivatives on a 

product-level basis. Moreover, a risk 

factor based approach has the potential 

to be opaque and unwieldy. Modern 

derivative pricing models that are used 

by banks and other market participants 

may employ hundreds of risk factors 

that are not standardized across 

products or models. 

While it is the case that some swaps 

may have hybrid features that make it 

challenging to assign them to one 

specific asset class, the Commission 

believes that the incidence of this 

occurrence will be relatively uncommon 

and can be dealt with under the final 

rule. In particular, as of December 2014, 

the Bank for International Settlements 

reports that of the roughly $630 trillion 

in gross notional outstanding, roughly 

3.6 percent of these contracts cannot be 

allocated to one of the following broad 

asset categories: Foreign exchange, 

interest rate, equity, commodity and 

credit. The Commission also notes that 

this fraction has declined from roughly 

6.6 percent in June 2012 which suggests 

that the challenges associated with such 

hybrid swaps are declining over time. In 

such cases where the allocation of a 

particular uncleared swap to a specific 

asset class is not certain, the 

Commission expects an allocation to be 

made based on whichever broad asset 

class represents the preponderance of 

the uncleared swap’s overall risk 

profile. 

Second, a product-level initial margin 

model is well aligned with current 

practice for cleared swaps. Some 

clearinghouses that offer multiple swaps 

for clearing, such as the CME, do allow 

for risk offsets within an asset class but 

do not generally allow for any risk 

offsets across asset classes. Again, as a 

specific example, the CME offers both 

cleared interest rate and credit default 

swaps. The CME’s initial margin model 

is a highly sophisticated risk 

management model that does allow for 

offsetting among different credit swaps 

and among different interest rate swaps 

but does not allow for risk offsets 

between interest rate and credit swaps. 

This approach to calculating initial 

margin also provides a significant 

amount of transparency as market 

participants, regulators and the public 

can assess the extent to which trading 

activity in specific asset classes 

generates counterparty exposures that 

require initial margin. 

To the extent that some risk factors 

may cut across more than one asset 

class, the use of a risk factor-based 

margining approach would make 

evaluating the quantum of risk posed by 

the trading activity in any one set of 

products difficult to measure and 

manage on a systematic basis. This 

would also pose significant challenges 

to users of uncleared swaps as well as 

regulators and the broader public who 

have an interest in monitoring and 

evaluating the risks of different 

uncleared swap activities. 

Third, the Commission notes that the 

final rule’s product-level approach to 

initial margin explicitly allows for risk 

offsets though the precise form of these 

offsets differs from a ‘‘risk factor’’ based 

approach. The Commission believes that 

conceptually sound and empirically 

justified risk offsets for initial margin 

are appropriate and have included such 

offsets in the final rule. In general, there 

are a large number of possible 

approaches that could be taken to allow 

for such offsets. The Commission 

considered the alternatives raised by the 

commenters and adopted in the final 

rule an approach recognizing risk offsets 

that provides for a significant amount of 

hedging and diversification benefits 

while promoting transparency and 

simplicity in the margining framework. 

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203MetLife 

204See AFR. 

205See Barnard. 

206 JBA, ISDA. 

207See AFR. 

208See CME. 

209See final rule § 23.154(b)(2)(ii). 

Finally, the Commission notes that it 

may not have the authority to prescribe 

margin requirements for all the types of 

products that may be included in an 

ENMA. For example, the Commission’s 

authority to set margin requirements 

relates to certain types of swaps and 

does not extend to other products such 

as equity-linked swaps or similar 

financial instruments. Accordingly, the 

Commission believes that the margin 

requirements should be reflective of the 

risks in a CSE’s portfolio of uncleared 

swaps but may not recognize risks— 

either as offsets or sources of additional 

risk from other products that are 

themselves not uncleared swaps and not 

subject to the margin requirements of 

the final rule. 

(iii) Stress Calibration and Non-Linear 

Price Characteristics 

The proposed rule required the initial 

margin model to be calibrated to a 

period of financial stress. In addition, 

the proposal requires the model to use 

risk factors sufficient to measure all 

material price risks inherent in the 

transactions for which initial margin is 

being calculated. Under the proposal, 

the initial margin model would have 

been required to include all material 

risks arising from the nonlinear price 

characteristics of option positions or 

positions with embedded optionality 

and the sensitivity of the market value 

of the positions to changes in the 

volatility of the underlying rates, prices, 

or other material risk factors. 

One commenter suggested that the 

overall level of the proposed initial 

margin requirements were too high and 

that the proposed requirement to 

calibrate the initial margin model to a 

period of financial stress was too 

conservative.203 Another commenter 

supported the stress period calibration 

requirement.204 A third commenter 

asked for clarification on the term 

‘‘period of financial stress.’’ 205

Some commenters suggested that the 

proposal’s requirement that the initial 

margin model include all material 

nonlinear price characteristics in the 

underlying uncleared swap was too 

stringent and should be relaxed,206

while one commenter applauded the 

requirement to include risk from 

nonlinearities.207 One commenter 

argued that the initial margin model 

should incorporate the cost of 

liquidating large portfolios during 

periods of stress as well as volatility 

floors to guarantee a minimum level of 

volatility assumed.208

As noted, the final rule requires the 

initial margin model to be calibrated to 

a period of financial stress.209 In 

particular, the initial margin model 

must employ a stress period calibration 

for each broad asset class (commodity, 

credit, equity, and interest rate and 

foreign exchange). The stress period 

calibration employed for each broad 

asset class must be appropriate to the 

specific asset class in question. While a 

common stress period calibration may 

be appropriate for some asset classes, a 

common stress period calibration for all 

asset classes would be considered 

appropriate only if it is appropriate for 

each specific underlying asset class. 

Also, the time period used to inform the 

stress period calibration must include at 

least one year, but no more than five 

years of equally-weighted historical 

data. 

The final rule’s requirement is 

intended to balance the tradeoff 

between shorter and longer data spans. 

Shorter data spans are sensitive to 

evolving market conditions but may also 

overreact to short-term and 

idiosyncratic spikes in volatility. Longer 

data spans are less sensitive to shortterm market developments but may also 

place too little emphasis on periods of 

financial stress, resulting in insufficient 

initial margins. The requirement that 

the data be equally weighted will 

establish a degree of consistency in 

initial margin model calibration while 

also ensuring that particular weighting 

schemes do not result in excessive 

initial margin requirements during 

short-term bouts of heightened 

volatility. 

Calibration to a stress period helps to 

ensure that the resulting initial margin 

requirement is sufficient in a period of 

financial stress during which swap 

entities and financial end user 

counterparties are more likely to 

default, and counterparties handling a 

default are more likely to be under 

pressure. The stress calibration 

requirement also reduces the systemic 

risk associated with any increase in 

initial margin requirements that might 

occur in response to an abrupt increase 

in volatility during a period of financial 

stress, as initial margin requirements 

will already reflect a historical stress 

event. 

The Commission continues to believe 

that the overall level of the initial 

margin requirements is consistent with 

the goals of prescribing margin 

requirements that are appropriate for the 

risk of uncleared swaps and the safety 

and soundness of the CSE. Moreover, 

the requirement to calibrate the initial 

margin model to a period of financial 

stress has two important benefits. First, 

initial margin requirements that are 

consistent with a period of financial 

stress will help to ensure that 

counterparties are sufficiently protected 

against the type of severe financial 

stresses that are most likely to have 

systemic consequences. Second, 

calibrating initial margins to a period of 

financial stress should have the effect of 

reducing the extent to which margin 

changes increase stress. 

Specifically, because initial margin 

levels will be consistent with a period 

of above average market volatility and 

risk, a moderate rise in risk levels 

should not require any increase or reevaluation of initial margin levels. In 

this sense, initial margin requirements 

will be less likely to increase abruptly 

following a market shock. There may be 

circumstances in which the financial 

system experiences a significant 

financial stress that is even greater than 

the stress to which initial margins have 

been calibrated. In these cases, initial 

margin requirements will rise as margin 

levels are re-calibrated to be consistent 

with the new and greater stress level. 

The Commission expects such 

occurrences to be relatively infrequent 

and, ultimately, any risk sensitive and 

empirically based method for calibrating 

a risk model must exhibit some 

sensitivity to changing financial market 

risks and conditions. 

The Commission has decided to retain 

in the final rule the requirement that 

initial margin models must include all 

material nonlinear risks. The 

Commission is concerned that the 

uncleared swap market will be 

comprised of a large number of complex 

and customized swaps that will display 

significant nonlinear price 

characteristics that will have a direct 

effect on their risk exposure. If the 

models did not take these into account 

the initial margin amount collected 

would be inadequate to cover the swap’s 

or swap portfolio’s potential future 

exposure. Accordingly, the final rule 

requires that all material nonlinear price 

characteristics of an uncleared swap be 

considered in assessing the risk of the 

swap. 

There may be nonlinear price 

characteristics of a particular uncleared 

swap that are not material in assessing 

its risk profile. In such cases, these 

nonlinear price characteristics need not 

be explicitly included in the initial 

margin model. The Commission expects 

that in determining whether or not a 

given nonlinear price characteristic is 

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660 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

210See Sifma (these procedures allow the 

counterparties to post increased margin 

requirements resulting from the recalibration of a 

model over a period longer than one day). 

211See MFA (suggesting also that the Commission 

should modify the timing of recalculation to focus 

on the time at which a collateral taker makes a 

demand for transfer of collateral and provide that 

such transfer must be made promptly following the 

demand). 

212Section 23.154(b)(iii) of the final rule would 

require any material change to the model be 

communicated to the Commission before taking 

effect. The Commission, however, anticipates that 

some changes will be made to initial margin models 

on an ongoing basis consistent with regular and 

ongoing maintenance and oversight that will not 

require Commission notification. 

213Proposed § 23.154(b)(5). 

214See CME. 

215See ISDA; Sifma. 

216See MetLife. 

217Proposed § 23.154(b)(5). 

218Commission Regulation 23.600 requires each 

registered SD/MSP to establish a risk management 

program that identifies the risks implicated by the 

SD/MSP’s activities along with the risk tolerance 

limits set by the SD/MSP. The SD/MSP should take 

into account a variety of risks, including market, 

credit, liquidity, foreign currency, legal, 

operational, settlement, and other applicable risks. 

The risks would also include risks posed by 

affiliates. See 17 CFR 23.600. 

material, CSEs will engage in a holistic 

review of the uncleared swap’s risk 

profile and make determinations based 

on the totality of the uncleared swap’s 

risks. 

(iv) Frequency of Margin Calculation 

The proposed rule required daily 

calculation of initial margin. The use of 

an approved initial margin model may 

result in changes to the initial margin 

amount on a daily basis. 

One commenter argued that the 

Commission should follow the approach 

of the European Union and require 

parties to establish procedures for 

adjusting initial margin requirements in 

response to changing market 

conditions.210 Another commenter 

sought clarification that the initial 

margin calculation under a model 

would occur once daily based on the 

prior day’s prices.211

The final rule retains the requirement 

that an approved initial margin model 

be used to calculate the required initial 

margin collection amount on a daily 

basis. As discussed below, the 

Commission believes that swap 

portfolios and the variables that are 

used to calculate the amount of initial 

margin on those swaps are constantly 

changing. Therefore, to ensure the 

adequacy of the amount of initial 

margin the Commission is requiring 

daily calculation. In cases where the 

initial margin collection amount 

increases, this new amount must be 

used as the basis for determining the 

amount of initial margin that must be 

collected from a financial end user with 

material swaps exposure or a swap 

entity counterparty. 

In addition, when a CSE faces a 

financial end user with material swaps 

exposure, the CSE must also calculate 

the initial margin collection amount 

from the perspective of its counterparty 

on a daily basis. In the event that this 

amount increases, the CSE must use this 

new amount as the basis for determining 

the amount of initial margin that it must 

post to its counterparty. In cases where 

this amount decreases, the new amount 

would represent the new minimum 

required amount of initial margin. 

Accordingly, any previously collected 

or posted collateral in excess of this 

amount would represent additional 

initial margin collateral that, subject to 

bilateral agreement, could be returned. 

The use of an approved initial margin 

model may result in changes to the 

initial margin collection amount on a 

daily basis for a number of reasons. 

First, the characteristics of the swaps 

that have a material effect on their risk 

may change over time. As an example, 

the credit quality of a corporate 

reference entity upon which a credit 

default swap contract is written may 

undergo a measurable decline. A 

decline in the credit quality of the 

reference entity would be expected to 

have a material impact on the initial 

margin model’s risk assessment and the 

resulting initial margin collection 

amount. 

More generally, as the swaps’ relevant 

risk characteristics change, so will the 

initial margin collection amount. In 

addition, any change to the composition 

of the swap portfolio that results in the 

addition or deletion of swaps from the 

portfolio will result in a change in the 

initial margin collection amount. 

Second, the underlying parameters 

and data that are used in the model may 

change over time as underlying 

conditions change. As an example, in 

the event that a new period of financial 

stress is encountered in one or more 

asset classes, the initial margin model’s 

risk assessment of a swap’s overall risk 

may also change. While the stress 

period calibration is intended to reduce 

the extent to which small or moderate 

changes in the risk environment 

influence the initial margin model’s risk 

assessment, a significant change in the 

risk environment that affects the 

required stress period calibration could 

influence the margin model’s overall 

assessment of the risk of a swap. 

Third, quantitative initial margin 

models are expected to be maintained 

and refined on a continuous basis to 

reflect the most accurate risk assessment 

possible with available best practices 

and methods.212 As best practice risk 

management models and methods 

change, so too may the risk assessments 

of initial margin models. 

(v) Benchmarking 

The proposed rule required a model 

used for calculating initial margin 

requirements to be benchmarked 

periodically against observable margin 

standards to ensure that the initial 

margin required is not less than what a 

CCP would require for similar 

transactions.213

While one commenter supported the 

benchmarking requirement,214 other 

commenters urged the Commission to 

remove the benchmarking requirement, 

noting the differences between model 

parameters and the availability of other 

risk-mitigating factors at a CSE, such as 

capital requirements that are not 

applicable to DCOs.215 Another 

commenter suggested that any 

differences in initial margin 

requirements for cleared and uncleared 

swaps should be limited to the amount 

necessary to reflect counterparty credit 

risk.216

The Commission is retaining the 

benchmarking requirements. This 

benchmarking requirement is intended 

to ensure that any initial margin amount 

produced by a model is subject to a 

readily observable minimum. It will also 

have the effect of limiting the extent to 

which the use of models might 

disadvantage the movement of certain 

types of swaps to DCOs by setting lower 

initial margin amounts for uncleared 

transactions than for similar cleared 

transactions. 

d. Control Mechanisms 

(i) Proposal 

The proposal would have required 

CSEs to implement certain control 

mechanisms.217 They include, among 

others, the following. 

The CSE must maintain a risk 

management unit in accordance with 

existing Commission Regulation 

23.600(c)(4)(i) that reports directly to 

senior management and is independent 

from the business trading units.218 The 

unit must validate its model before 

implementation and on an ongoing 

basis. The validation process must 

include an evaluation of the conceptual 

soundness of the model, an ongoing 

monitoring process to ensure that the 

initial margin is not less than what a 

DCO would require for similar cleared 

products, and back testing. 

If the validation process revealed any 

material problems with the model, the 

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219See JBA and SIFMA and IIB 220 JBA. 221See SIFMA. 222See ISDA.; see also NERA. 223See BP (noting Commission Regulation 

23.600). 

224See GPC. 

225See ICI; GPC; MFA. 

226See FHLB. 

227 17 CFR 23.504(b)(4)(i). 

CSE would be required to notify the 

Commission of the problems, describe 

to the Commission any remedial actions 

being taken, and adjust the model to 

insure an appropriate amount of initial 

margin is being calculated. 

The CSE must have an internal audit 

function independent of the business 

trading unit that at least annually 

assesses the effectiveness of the controls 

supporting the model. The internal 

audit function must report its findings 

to the CSE’s governing body, senior 

management, and chief compliance 

officer at least annually. 

(ii) Comments 

Some commenters suggested that the 

model governance, control and 

oversight standards of the proposed rule 

were too strict and should not be so 

closely aligned with the model 

governance requirements for bank 

capital models.219 One commenter 

suggested that since initial margin 

amounts must be agreed to between 

counterparties, it is not practical to 

require strict model governance 

standards.220 Another commenter 

suggested that the initial margin model 

not be required to be back tested against 

the initial margin requirements for 

similar cleared swaps.221 One 

commenter suggested that the frequency 

with which data must be reviewed and 

revised as necessary should be annual 

rather than monthly to better align with 

other aspects of the proposal that 

require certain governance processes to 

be conducted on an annual rather than 

monthly basis.222 One commenter also 

cautioned against creating duplicative 

requirement for internal auditing since 

the effectiveness of initial and variation 

margin calculations are routinely and 

regularly evaluated as required in other 

Commission regulations.223

The Commission believes that strong 

model governance, oversight and 

control standards are crucial to ensuring 

the integrity of the initial margin model 

so as to provide for margin requirements 

that are commensurate with the risk of 

uncleared swaps. Moreover, the 

Commission is aware that there will be 

incentives to minimize the amount of 

initial margin and that strong 

governance standards that are intended 

to result in strong and risk appropriate 

initial margin amounts is of critical 

importance. 

In light of the clear competitive forces 

that will exist between cleared and 

uncleared swaps, the Commission 

believes that it is appropriate to 

compare the initial margin requirements 

of uncleared swaps to those of similar 

cleared swaps. Further, the Commission 

understands that comparable cleared 

swaps with observable initial margin 

standard may not always be available 

given the complexity and variety of 

uncleared swaps. Nevertheless, the 

Commission believes that where similar 

swaps trade on a cleared and uncleared 

basis such comparisons are useful and 

informative. 

More specifically, under the final rule 

a CSE must periodically, and no less 

than annually, review its initial margin 

model in light of developments in 

financial markets and modeling 

technologies and make appropriate 

adjustments to the model. The 

Commission believes that harmonizing 

the frequency with which certain model 

governance processes must be 

performed will reduce the costs 

associated with the regular oversight 

and maintenance of the initial margin 

model without meaningfully altering the 

overall standards for model governance. 

Accordingly, the final rule requires that 

data used in the initial margin model be 

reviewed and revised as necessary, but 

at least annually rather than monthly to 

ensure that the data is appropriate for 

the products for which initial margin is 

being calculated. The Commission notes 

that different, additional or more 

granular data series may, at certain 

times, become available that would 

provide more accurate measurements of 

the risks that the initial margin model 

is intended to capture. 

In addition to this regular review 

process, the final rule also requires that 

strong oversight, control and validation 

mechanisms be in place to ensure the 

integrity and validity of the initial 

margin model and related processes. 

More specifically, the final rule requires 

that the model be independently 

validated prior to implementation and 

on an ongoing basis which would also 

include a monitoring process that 

includes back-tests of the model and 

related analyses to ensure that the level 

of initial margin being calculated is 

consistent with the underlying risk of 

the swap being margined. Initial margin 

models must also be subject to explicit 

escalation procedures that would make 

any significant changes to the model 

subject to internal review and approval 

before taking effect. Under the final rule, 

any such review and approval must be 

based on demonstrable analysis that the 

change to the model results in a model 

that is consistent with the requirements 

of the final rule. Furthermore, under the 

final rule, any such changes or 

extensions of the initial margin model 

must be communicated to the 

Commission 60 days prior to taking 

effect to give the Commission the 

opportunity to rescind its prior approval 

or subject it to additional conditions. 

The Commission also acknowledges 

that a CSE’s internal audit department is 

required to routinely and regularly audit 

the effectiveness of initial and variation 

margin calculations. The Commission 

believes that this requirement is 

necessary to ensure compliance with a 

minimum standard. 

e. Input From Counterparties 

The Commission received comments 

regarding counterparty inputs on a 

CSE’s initial margin model. One 

commenter urged the Commission to 

allow financial end users to have a role 

in determining the margin methodology 

used and suggested that CSEs should 

not be able to switch methodologies 

without the consent of the 

counterparty.224 Other commenters 

suggested that the Commission require 

CSEs to disclose their initial margin 

models to non-CSE counterparties so 

that counterparties may validate the 

margin amount calculated 225 or 

otherwise allow financial end users 

access to the initial margin model and 

the inputs used by the CSE to allow 

them to challenge margin calls or 

demand the return of excess collateral 

during the life of a swap.226

The Commission notes that 

counterparties to a swap with a CSE 

have other mechanisms through which 

they could address their concerns 

without requiring a CSE to disclose its 

initial margin model methodologies. In 

particular, the Commission points to 

Commission Regulation 23.504(b)(4)(i) 

prescribing trade documentation 

requirements on counterparties. 

Specifically, Regulation 23.504(b)(4)(i) 

requires ‘‘written documentation in 

which the parties [to a swap] agree on 

the process, which may include any 

agreed upon 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 purposes of 

complying with the margin 

requirements . . . and regulations 

. . . .’’ 227 The Commission believes 

that the requirements on trade 

documentation specified in Regulation 

23.504(b)(4)(i) should adequately 

address the concerns of commenters and 

is not prescribing more specific 

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662 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

228Proposed § 23.154(c). 

229See 79 FR 59898, at 59911 (Oct. 3, 2014). 

230BCBS/IOSCO Report at Appendix A. 

231See JBA; CS. 

232See MFA. 

233Note that in this example, whether or not the 

counterparties have agreed to exchange variation 

margin has no effect on the net-to-gross ratio 

calculation, i.e., the calculation is performed 

without considering any variation margin 

payments. This is intended to ensure that the netto-gross ratio calculation reflects the extent to 

which the uncleared swaps generally offset each 

other and not whether the counterparties have 

agreed to exchange variation margin. As an 

example, if a swap dealer engaged in a single sold 

credit derivative with a counterparty, then the netto-gross calculation would be 1.0 whether or not the 

dealer received variation margin from its 

counterparty. 

disclosure requirements with respect to 

internal initial margin models used by 

a CSE to its counterparties in the final 

rule. 

3. Table-Based Method 

a. Method of Calculation 

Some CSEs might not have the 

internal technical resources to develop 

initial margin models or have simple 

portfolios for which they want to avoid 

the complexity of modeling. The tablebased method would allow a CSE to 

calculate its initial margin requirements 

using a standardized table.228 The table 

specifies the minimum initial margin 

amount that must be collected as a 

percentage of a swap’s notional amount. 

This percentage varies depending on the 

asset class of the swap. Except as 

modified by the net-to-gross ratio 

adjustment,229 a CSE would be required 

to calculate a minimum initial margin 

amount for each swap and sum up all 

the minimum initial margin amounts 

calculated under this section to arrive at 

the total amount of initial margin. The 

table is consistent with international 

standards.230

b. Comments 

Two commenters suggested that the 

Commission adopt an altogether 

different approach to computing 

standardized initial margins in a 

manner consistent with the 

standardized approach for measuring 

counterparty credit risk exposures that 

was finalized and published by the 

Basel Committee on Banking 

Supervision in March 2014.231 This 

approach is intended to be used in bank 

regulatory capital requirements for the 

purposes of computing capital 

requirements for counterparty credit 

risk resulting from OTC derivative 

exposures. A third commenter remarked 

that the table-based method should be 

modified to reflect greater granularity, 

including increasing the number of asset 

categories recognized by the 

standardized initial margin table.232

Among other things, this commenter 

suggested increasing the number of asset 

categories recognized by the 

standardized initial margin table. 

c. Discussion 

In the final rule, the Commission has 

adopted the proposed approach to 

standardized initial margin. The 

Commission has decided not to adopt a 

different approach advocated by the 

commenters in the final rule for several 

reasons. First, the standardized 

approach for counterparty credit risk 

has been developed for counterparty 

capital requirement purposes and, while 

clearly related to the issue of initial 

margin for uncleared swaps, it is not 

entirely clear that this framework can be 

transferred to a simple and transparent 

standardized initial margin framework 

without modification. 

Second, the standardized approach 

that has been published by the Basel 

Committee on Banking Supervision is 

not intended to become effective until 

January 2017 which follows the initial 

compliance date of the final rule. 

Accordingly, the Commission expects 

that some form of the standardized 

approach will be proposed by U.S. 

banking regulators prior to January 

2017. Following the notice and 

comment period, a final rule for 

capitalizing counterparty credit risk 

exposures will be finalized in the 

United States. Once these rules are in 

place and effective it may be 

appropriate to consider adjusting the 

approach in this rule to standardized 

initial margins. Prior to the new capital 

rules being effective in the United States 

for the purpose for which they were 

intended, the Commission does not 

believe it would be appropriate to 

incorporate the standardized approach 

to counterparty credit risk that has been 

published by the Basel Committee on 

Banking Supervision into the final 

margin requirements for uncleared 

swaps. 

The Commission acknowledges the 

desire to reflect greater granularity in 

the standardized approach but also 

notes that the approach in the final rule 

distinguishes among four separate asset 

classes and various maturities. The 

Commission also notes that no 

commenter provided a specific and fully 

articulated suggestion on how to modify 

the standardized approach to achieve 

greater flexibility without becoming 

overly burdensome. The Commission 

also notes that the standardized initial 

margins are a minimum margin 

requirement. CSEs and their 

counterparties are free to develop 

standardized margin schedules that 

reflect greater granularity than the final 

rule’s standardized approach so long as 

the resulting amounts would in all 

circumstances be at least as large as 

those required by the final rule’s 

standardized approach to initial margin. 

Accordingly, the final rule affords CSEs 

and their counterparties the opportunity 

to develop simple and transparent 

margin schedules that reflect the 

granular and specific nature of the swap 

activity being margined. 

Under the final rule, standardized 

initial margins depend on the asset class 

(commodity, equity, credit, foreign 

exchange and interest rate) and, in the 

case of credit and interest rate asset 

classes, further depend on the duration 

of the underlying uncleared swap. In 

addition, the standardized initial margin 

requirement allows for the recognition 

of risk offsets through the use of a netto-gross ratio in cases where a portfolio 

of uncleared swaps is executed under an 

EMNA. 

The net-to-gross ratio compares the 

net current replacement cost of the noncleared portfolio (in the numerator) with 

the gross current replacement cost of the 

non-cleared portfolio (in the 

denominator). The net current 

replacement cost is the cost of replacing 

the entire portfolio of swaps that are 

covered under the EMNA. The gross 

current replacement cost is the cost of 

replacing those swaps that have a 

strictly positive replacement cost under 

the EMNA. 

As an example, consider a portfolio 

that consists of two uncleared swaps 

under an EMNA in which the mark-tomarket value of the first swap is $10 

(i.e., the CSE is owed $10 from its 

counterparty) and the mark-to-market 

value of the second swap is ¥$5 (i.e., 

the CSE owes $5 to its counterparty). 

Then the net current replacement cost is 

$5 ($10¥$5), the gross current 

replacement cost is $10, and the net-togross ratio would be 5/10 or 0.5.233

The net-to-gross ratio and gross 

standardized initial margin amounts 

(provided in § 23.154(c)) are used in 

conjunction with the notional amount of 

the transactions in the underlying swap 

portfolio to arrive at the total initial 

margin requirement as follows: 

Standardized Initial Margin = 0.4 × 

Gross Initial Margin + 0.6 × NGR × 

Gross Initial Margin 

where: 

Gross Initial Margin = the sum of the notional 

value multiplied by the appropriate 

initial margin requirement percentage 

from Appendix A of each uncleared 

swap under the EMNA; and 

NGR = net-to-gross ratio 

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234Proposed § 23.155(a)(1) and current 

§ 23.504(b)(4). 

235Proposed § 23.155(a)(2). 

236Proposed § 23.153(a). 

237Proposed § 23.153(b). 

238Proposed § 23.155(b). 

As a specific example, consider the twoswap portfolio discussed above. Suppose 

further that the swap with the mark-tomarket value of $10 is a sold 5-year credit 

default swap with a notional value of $100 

and the swap with the mark-to-market value 

of ¥$5 is an equity swap with a notional 

value of $100. The standardized initial 

margin requirement would then be: 

[0.4 × (100 × 0.05 + 100 × 0.15) + 0.6 × 0.5 

× (100 × 0.05 + 100 × 0.15)] = 8 + 6 = 

14. 

The Commission further notes that 

the calculation of the net-to-gross ratio 

for margin purposes must be applied 

only to swaps subject to the same 

EMNA and that the calculation is 

performed across transactions in 

disparate asset classes within a single 

EMNA such as credit and equity in the 

above example. That is, all uncleared 

swaps subject to the same EMNA and 

subject to the final rule’s requirements 

can net against each other in the 

calculation of the net-to-gross ratio, as 

opposed to the modeling approach that 

allows netting only within each asset 

class. 

This approach is consistent with the 

standardized counterparty credit risk 

capital requirements. Also, the 

equations are designed such that 

benefits provided by the net-to-gross 

ratio calculation are limited by the 

standardized initial margin term that is 

independent of the net-to-gross ratio, 

i.e., the first term of the standardized 

initial margin equation which is 0.4 × 

Gross Initial Margin. 

Finally, if a counterparty maintains 

multiple uncleared swap portfolios 

under one or multiple EMNAs, the 

standardized initial margin amounts 

would be calculated separately for each 

portfolio with each calculation using the 

gross initial margin and net-to-gross 

ratio that is relevant to each portfolio. 

The total standardized initial margin 

would be the sum of the standardized 

initial margin amounts for each 

portfolio. 

The final rule’s standardized 

approach to initial margin depends on 

the calculation of a net-to-gross ratio. In 

the context of performing margin 

calculations, it must be recognized that 

at the time uncleared swaps are entered 

into it is often the case that both the net 

and gross current replacement cost is 

zero. This precludes the calculation of 

the net-to-gross ratio. In cases where a 

new swap is being added to an existing 

portfolio that is being executed under an 

existing EMNA, the net-to-gross ratio 

may be calculated with respect to the 

existing portfolio of swaps. In cases 

where an entirely new swap portfolio is 

being established, the initial value of the 

net-to-gross ratio should be set to 1.0. 

After the first day’s mark-to-market 

valuation has been recorded for the 

portfolio, the net-to-gross ratio may be 

re-calculated and the initial margin 

amount may be adjusted based on the 

revised net-to-gross ratio. 

The final rule requires that the 

standardized initial margin collection 

amount be calculated on a daily basis. 

In cases where the initial margin 

collection amount increases, this new 

amount must be used as the basis for 

determining the amount of initial 

margin that must be collected from a 

financial end user with material swaps 

exposure or a swap entity. In addition, 

when a CSE faces a financial end user 

with material swaps exposure, the CSE 

must also calculate the initial margin 

collection amount from the perspective 

of its counterparty on a daily basis. In 

the event that this amount increases, the 

CSE must use this new amount as the 

basis for determining the amount of 

initial margin that it must post to its 

counterparty. In the event that this 

amount decreases, this new amount 

would also serve as the basis for the 

minimum required amount of initial 

margin. Accordingly, any previously 

collected or posted initial margin over 

and above the new requirement could, 

subject to bilateral agreement, be 

returned. 

As in the case of internal-modelgenerated initial margins, the margin 

calculation under the standardized 

approach must also be performed on a 

daily basis. Because the standardized 

initial margin calculation depends on a 

standardized look-up table (in 

Regulation 23.154(c)), there are fewer 

reasons for the initial margin collection 

amounts to vary on a daily basis. 

However, there are some factors that 

may result in daily changes in the initial 

margin collection amount under the 

standardized margin calculations. 

First, any changes to the notional size 

of the swap portfolio that arise from any 

addition or deletion of swaps from the 

portfolio would result in a change in the 

standardized margin amount. As an 

example, if the notional amount of the 

swap portfolio increased as a result of 

adding a new swap to the portfolio then 

the standardized initial margin 

collection amount would increase. 

Second, changes in the net-to-gross 

ratio that result from changes in the 

mark-to-market valuation of the 

underlying swaps would result in a 

change in the standardized initial 

margin collection amount. 

Third, changes to characteristics of 

the swap that determine the gross initial 

margin would result in a change in the 

standardized initial margin collection 

amount. As an example, the gross initial 

margin applied to interest rate swaps 

depends on the duration of the swap. 

An interest rate swap with a duration 

between zero and two years has a gross 

initial margin of one percent while an 

interest rate swap with duration of 

greater than two years and less than five 

years has a gross initial margin of two 

percent. Accordingly, if an interest rate 

swap’s duration declines from above 

two years to below two years, the gross 

initial margin applied to it would 

decline from two to one percent. 

Accordingly, the standardized initial 

margin collection amount will need to 

be computed on a daily basis to reflect 

all of the factors described above. 

F. Calculation of Variation Margin 

1. Proposal 

Under the proposal, each CSE would 

be required to calculate variation margin 

for itself and for each covered 

counterparty using a methodology and 

inputs that to the maximum extent 

practicable, and in accordance with 

existing Regulation 23.504(b)(4) rely on 

recently-executed transactions, 

valuations provided by independent 

third parties, or other objective 

criteria.234 In addition, each CSE would 

need to have in place alternative 

methods for determining the value of an 

uncleared swap in the event of the 

unavailability or other failure of any 

input required to value a swap.235

Similar to the requirement for initial 

margin, the proposal would require each 

CSE to collect variation margin from, 

and to pay variation margin to, each 

counterparty that is a swap entity or a 

financial end user, on or before the end 

of the business day after execution for 

each swap with that counterparty.236

The proposed rule required the CSEs to 

continue to pay or collect variation 

margin each business day until the swap 

is terminated or expires.237

The proposal would also set forth 

several control mechanisms.238 Each 

CSE would be required to create and 

maintain documentation setting forth 

the variation margin methodology with 

sufficient specificity to allow the 

counterparty, the Commission, and any 

applicable Prudential Regulator to 

calculate a reasonable approximation of 

the margin requirement independently. 

Each CSE would be required to evaluate 

the reliability of its data sources at least 

annually, and to make adjustments, as 

appropriate. The proposal would permit 

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664 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

239See MetLife; Sifma-AMG; Freddie; FHLB 

(parties should seek prices based on recentlyexecuted transactions, valuations provided by 

independent third-parties or other objective 

criteria). 

240These commenters argued that this approach 

would result in dealer exposures being overcollateralized and their counterparties’ exposures 

being under-collateralized. 

241See ISDA. 

242See e.g., ACLI. 

243See JFMC; GPC; and ISDA. 

244See MFA. 

245See NERA. 

246See ISDA. 

247 § 23.155. 

248 § 23.151. 

249Additionally, the Commission notes that the 

final margin requirements should be viewed as 

minimums. To the extent that two counterparties 

agree to transfer collateral in addition to the 

minimum amount required by the final rule, the 

final rule will not impede them. 

the Commission to require a CSE to 

provide further data or analysis 

concerning the methodology or a data 

source. 

2. Comments 

Several commenters suggested that 

the Commission consider alternate 

methods for calculating variation 

margin.239 Commenters stated that the 

proposal appeared to require a CSE to 

determine minimum variation margin 

requirements based on the market value 

of a swap calculated only from the 

CSE’s own perspective, rather than at a 

mid-market price consistent with 

current market practice. These 

commenters urged that using midmarket swap values to determine 

variation margin would align more 

closely with industry practice and 

would not skew in favor of a CSE.240

They also remarked that all calculations 

and methodologies should be available 

to counterparties. 

Further, one commenter remarked 

that the requirements on the method for 

calculating variation margin is 

redundant because other Commission 

regulations already address variation 

margin calculation methodology.241

Additionally, commenters also 

questioned the Commission’s view of 

variation margin as a settlement or 

payment, noting for example concerns 

with the tax and accounting 

consequences.242

Many commenters urged the 

Commission to provide more time for 

the delivery of variation margin.243 One 

commenter asked for clarification that 

the collection and calculation of 

variation margin would occur only once 

a day based on the closing price of the 

previous day.244 Another commenter 

argued that the frequency of posting 

variation margin (i.e., daily) could 

possibly create liquidity pressures and 

have pro-cyclicality effects.245

One commenter also suggested that 

CSEs should not be required to 

exchange variation margin with 

financial end users whose exposures to 

the CSE fall below the material swaps 

exposure threshold.246

3. Discussion 

After carefully reviewing the 

comments, the Commission is adopting 

the variation margin requirement largely 

as proposed, but with a limited number 

of changes to address concerns raised by 

commenters with respect to the 

calculation and exchange of variation 

margin. 

When a CSE engages in an uncleared 

swap transaction with a financial end 

user, regardless of whether or not the 

financial end user has a material swaps 

exposure, the final rule will require the 

CSE to collect and post variation margin 

with respect to the uncleared swap. The 

final rule requires a CSE to collect or to 

post (as applicable) variation margin on 

uncleared swaps in an amount that is at 

least equal to the increase or decrease 

(as applicable) in the value of such 

swaps since the previous exchange of 

variation margin. 

Consistent with the proposal, a CSE 

may not establish a threshold amount 

below which it need not exchange 

variation margin on swaps with a swap 

entity or financial end user counterparty 

(although transfers below the minimum 

transfer amount would not be required). 

The Commission believes the bilateral 

exchange of variation margin will 

support CSE safety and soundness as 

well as effectively reduce systemic risk 

by protecting both the CSE and its 

counterparty from the effects of a 

counterparty default. 

Unlike the proposal, which used the 

terms ‘‘pay’’ and ‘‘paid’’ to refer to the 

transfer of variation margin, the final 

rule refers to variation margin in terms 

of ‘‘post’’ and ‘‘collect.’’ After carefully 

reviewing the comments on the 

proposal that addressed the appropriate 

characterization of the transfer of 

variation margin, the Commission has 

determined that it is more appropriate 

to refer to variation margin collateral as 

having been ‘‘posted,’’ rather than 

‘‘paid,’’ consistent with the treatment of 

initial margin. 

Among the reasons underlying the 

Commission’s proposal to refer to 

variation margin in terms of payment, 

was the existing market practice of swap 

dealers to exchange variation margin 

with other swap dealers in the form of 

cash. As is discussed below in the final 

rule’s provisions on eligible collateral, 

the Commission has concluded that it is 

appropriate to permit financial end 

users to use other, non-cash forms of 

collateral for variation margin. This 

revision to the nomenclature of the final 

rule is consistent with the Commission’s 

inclusion of eligible non-cash collateral 

for variation margin. 

In the context of cash variation 

margin, commenters also expressed 

concerns that the Commission’s choice 

of the ‘‘pay’’ nomenclature reflected an 

underlying premise of current 

settlement that may be inconsistent with 

various operational, accounting, tax, 

legal, and market practices. The 

Commission’s use of the ‘‘post’’ and 

‘‘collect’’ nomenclature for the final rule 

is not intended to reflect upon or alter 

the characterization of variation margin 

exchanges—either as a transfer and 

settlement or a provisional form of 

collateral—for other purposes in the 

market. 

Under the final rule, ‘‘variation 

margin’’ means the collateral provided 

by one 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 

value of such obligations since the last 

time such collateral was provided.247

The amount of variation margin to be 

collected or posted (as appropriate) is 

the amount equal to the cumulative 

mark-to-market change in value to a CSE 

of an uncleared swap, as measured from 

the date it is entered into (or, in the case 

of an uncleared swap that has a positive 

or negative value to a CSE on the date 

it is entered into, such positive or 

negative value plus any cumulative 

mark-to-market change in value to the 

CSE of a uncleared swap after such 

date), less the value of all variation 

margin previously collected, plus the 

value of all variation margin previously 

posted with respect to such uncleared 

swap.248 The CSE must collect this 

amount if the amount is positive, and 

post this amount if the amount is 

negative. 

The Commission wishes to clarify that 

the reference in the rule text to the 

‘‘cumulative mark-to-market change in 

value to a CSE of an uncleared swap’’ 

is not designed or intended to have the 

effect suggested by commenters. The 

market value used to determine the 

cumulative mark-to-market change will 

be mid-market prices, if that is 

consistent with the agreement of the 

parties.249 The final rule is consistent 

with market practice in this respect. The 

rule text’s reference to ‘‘change in value 

to a covered swap entity’’ refers to 

whether the value change is positive or 

negative from the CSE’s standpoint. 

This ties to the final rule’s requirement 

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250The Commission is not requiring that CSEs 

collect initial or variation margin from these socalled ‘‘commercial end user’’ counterparties. 

251Risk Mitigation Standards for Non-centrally 

Cleared OTC Derivatives, International 

Organization of Securities Commissions (January 

28, 2015). 

252See BCBS/IOSCO Report at 16. 

253Proposed § 23.156(a)(1). 

254Proposed § 23.156(a)(2). 

255See ICI; ISDA; CPFM; GPC; Sifma-AMG; IECA 

(letters of credit); Freddie; and CDEU. 

for the CSE to post variation margin 

when the variation margin amount is 

positive, or to collect variation margin 

when the variation margin amount is 

negative. 

In calculating variation margin 

amounts, the final rule permits netting 

across a portfolio of uncleared swaps 

between the CSE and a particular 

counterparty, subject to a number of 

conditions. These provisions are 

discussed in more detail above. 

Consistent with the proposal, the final 

rule requires a CSE to exchange 

variation margin for uncleared swaps 

with swap entities and financial end 

users (regardless of whether the 

financial end user has a material swaps 

exposure). However, as discussed 

earlier, the enactment of TRIPRA 

exempts certain nonfinancial 

counterparties from the scope of this 

rulemaking for uncleared swaps that 

hedge or mitigate commercial risk.250

The Commission is not requiring that 

CSEs exchange variation margin with 

respect to the swaps that are exempted 

from the margin final rule by TRIPRA. 

Overall, this aspect of the variation 

margin provisions of the final rule is 

consistent with the approach for initial 

margin. The final rule largely retains the 

proposed rule’s requirement for 

variation margin to be posted or 

collected on a T+1 timeframe. The final 

rule requires variation margin to be 

posted or collected no less than once 

per business day, beginning on the 

business day following the day of 

execution. These provisions of the final 

rule operate in the same way as those 

discussed earlier in the description of 

the final rule’s initial margin 

requirements. 

The one difference is that all 

transactions with financial end user 

counterparties are subject to the 

variation margin requirements, while 

only financial end user counterparties 

with material swaps exposure are 

subject to initial margin requirements. 

The Commission believes it is 

appropriate to apply the minimum 

variation margin requirements to nonexempted transactions with all financial 

entity counterparties, not just those with 

a material swaps exposure, because the 

daily exchange of variation margin is an 

important risk mitigant that (i) reduces 

the build-up of risk that may ultimately 

pose systemic risk; (ii) does not, in 

aggregate, reduce the amount of liquid 

assets readily available to posting and 

collecting entities because it simply 

transfers resources from one entity to 

another; and (iii) reflects both current 

market practice and a risk management 

best practice. 

The final rule in this area is consistent 

with that of the Prudential Regulators 

but is more detailed in one respect. The 

Commission’s rule requires that 

variation margin calculations use 

methods, procedures, rules, and inputs 

that, to the maximum extent practicable 

rely on recently-executed transactions, 

valuations provided by independent 

third parties, or other objective criteria. 

The Commission believes that the 

accurate valuation of positions is a 

critical element in assuring the safety 

and soundness of CSEs and in 

preserving the integrity of the financial 

system. The standard set forth in the 

Commission’s rule is consistent with 

recently-issued international 

standards.251

G. Forms of Margin 

1. Initial Margin 

a. Proposal 

In general, the Commission believes 

that margin assets should share the 

following fundamental characteristics. 

The assets should be liquid and, with 

haircuts, hold their value in times of 

financial stress. The value of the assets 

should not exhibit a significant 

correlation with the creditworthiness of 

the counterparty or the value of the 

swap portfolio.252

Guided by these principles, the 

Commission proposed that CSEs may 

only post or accept certain assets to 

meet initial margin requirements to or 

from covered counterparties.253 These 

are assets for which there are deep and 

liquid markets and, therefore, assets that 

can be readily valued and easily 

liquidated. 

Certain assets would be prohibited 

from use as initial margin because the 

Commission was concerned that the use 

of those assets could compound risk.254

These included any asset that is an 

obligation of the party providing such 

asset or an affiliate of that party. These 

also include instruments issued by bank 

holding companies, depository 

institutions, and market intermediaries. 

These restrictions reflected the 

Commission’s view that the price and 

liquidity of securities issued by the 

foregoing entities are very likely to come 

under significant pressure during a 

period of financial stress when a CSE 

may be resolving a counterparty’s 

defaulted swap position and, therefore, 

present an additional source of risk. 

b. Comments 

Commenters generally supported the 

Commission’s proposed asset categories 

or sought limited modifications. Several 

commenters argued in support of 

including other assets (such as interests 

in money market funds and high quality 

liquid debt securities) in the list of 

eligible collateral or allowing parties to 

negotiate acceptable forms of 

collateral.255 Commenters who asked 

the Commission to consider GSE 

securities as eligible collateral for 

variation margin joined many others 

who opposed limiting variation margin 

collateral to cash only. 

Commenters representing the interests 

of asset managers, mutual funds, and 

other institutional asset managers asked 

the Commission to expand the list of 

eligible collateral to include money 

market mutual funds and bank 

certificates of deposit, in the interests of 

providing financial end users with a 

higher yield than cash held by the 

margin custodian and more liquidity 

than direct holdings of government or 

corporate bonds. Some commenters 

requested that bank certificates of 

deposit be considered eligible collateral 

for margin purposes. 

Commenters stated that GSE debt 

securities already are widely used as 

collateral for uncleared swaps and 

should continue to be eligible under the 

final rule given their historically low 

levels of volatility. A smaller number of 

the commenters argued that GSE 

mortgage-backed securities (‘‘MBS’’) 

also should be eligible collateral given 

that markets have accepted GSE MBS as 

liquid, high-quality securities along 

with other GSE debt. A number of 

commenters suggested that GSE debt 

securities and MBS should qualify as 

eligible collateral, regardless of whether 

or not the GSE is operating with capital 

support or another form of financial 

assistance from the United States. 

Some commenters also questioned 

why the minimum haircut for debt 

securities of GSEs (operating without 

capital support or other financial 

assistance from the U.S.) is not lower 

than the minimum haircuts applicable 

to corporate debt. Another concern that 

some commenters raised is that the 

capital and margin rule for uncleared 

swaps is inconsistent in its treatment of 

GSE securities with the liquidity 

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256See 79 FR 61439 (October 10, 2014) (Liquidity 

Coverage Ratio: Liquidity Risk Measurement 

Standards). 

257See FHLB. 

258See Barnard. 

259See ISDA; Sifma. 

260As with all of its rules, the Commission will 

make appropriate changes if it believes it is 

necessary. 

261Although equities included in the S&P 500 

Index are also included in the S&P 1500 Composite 

Index, equities in the S&P 500 Index are subject to 

the 15 percent minimum haircut, not the 25 percent 

minimum haircut. 

coverage ratio rule that the Board, OCC, 

and FDIC issued in 2014.256

One commenter cautioned against 

classifying the debt securities of federal 

home loan banks as eligible collateral 

and stated that asset-backed securities 

issued by a U.S. Government-sponsored 

enterprises (‘‘GSE’’) should not be 

precluded from the list of eligible 

collateral solely because those securities 

are not unconditionally guaranteed by a 

GSE whose obligations are fully 

guaranteed by the U.S. government.257

Another commenter cautioned against 

including equities in the list of eligible 

collateral because of their inherent risky 

nature.258 Commenters also suggested 

that the Commission allow parties to 

model haircuts for eligible collateral.259

Commenters also requested that the 

Commission provide guidance about the 

rule’s application to current market 

practice incorporating contractual 

provisions specifying an agreed-upon 

currency of settlement, transport, transit 

currencies and termination currencies. 

Additionally, commenters urged the 

Commission to permit any crosscurrency sensitivity between the swap 

portfolio credit exposure and the margin 

collateral provided against that 

exposure to be measured as a 

component of the margin required to be 

exchanged under the rule. 

Finally, some commenters urged the 

Commission to perform annual reviews 

of the eligible collateral categories and 

the haircuts.260

c. Discussion 

With respect to initial margin, the 

final rule includes an expansive list of 

the types of collateral that is largely 

consistent with the list set forth in the 

proposal. Eligible collateral for initial 

margin includes immediately available 

cash funds denominated in any major 

currency or the currency of settlement, 

debt securities that are issued or 

guaranteed by the U.S. Department of 

Treasury or by another U.S. government 

agency, the Bank for International 

Settlements, the International Monetary 

Fund, the European Central Bank, 

multilateral development banks, certain 

GSEs’ debt securities, certain foreign 

government debt securities, certain 

corporate debt securities, certain listed 

equities, shares in certain investment 

funds, and gold. 

The Commission is including equities 

as eligible collateral in the final rule, 

with the requirement for a minimum 15 

percent haircut on equities in the S&P 

500 Index and a minimum 25 percent 

haircut for those in the S&P 1500 

Composite Index but not in the S&P 500 

Index.261 The Commission notes that, 

even with these restrictions designed to 

address liquidity and volatility, CSEs 

should also take concentrations into 

account, and prudently manage their 

acceptance of initial margin collateral, 

with the idiosyncratic risk of equity— 

and publicly traded debt—issuers in 

mind. The Commission notes that it is 

important to consider longer time 

periods incorporating periods of market 

stress, and the minimum haircuts are 

calibrated accordingly. 

To accommodate the concern of 

certain commenters that argued for an 

inclusion of money market mutual 

funds and bank certificates of deposit in 

the list of eligible collateral for initial 

margin and to provide flexibility while 

maintaining a level of safety, the final 

rule adds redeemable securities in a 

pooled investment fund that holds only 

securities that are issued by, or 

unconditionally guaranteed as to the 

timely payment of principal and interest 

by, the U.S. Department of the Treasury, 

and cash funds denominated in U.S. 

dollars. To provide a parallel collateral 

option for uncleared swap portfolios in 

denominations other than U.S. dollars, 

the pooled investment fund may be 

structured to invest in pool of securities 

that are denominated in a common 

currency and issued by, or fully 

guaranteed as to the timely payment of 

principal and interest by, the European 

Central Bank or a sovereign entity that 

is assigned no higher than a 20 percent 

risk weight under applicable regulatory 

capital rules, and cash denominated in 

the same currency. 

The final rule requires these pooled 

investment vehicles to issue redeemable 

securities representing the holder’s 

proportional interest in the fund’s net 

assets, issued and redeemed only on the 

basis of the fund’s net assets prepared 

each business day after the holder 

makes its investment commitment or 

redemption request to the fund. These 

criteria are similar to those used for 

bank trust department common trust 

funds and common investment funds, to 

facilitate liquidity of the redeemable 

securities while still protecting holders 

of the fund’s securities from dilution. 

The final rule also provides that assets 

of the fund may not be transferred 

through securities lending, securities 

borrowing, reverse repurchase 

agreements, or similar arrangements. 

This is to ensure consistency with the 

prohibition under the final rule against 

custodian rehypothecation of initial 

margin collateral. 

Consistent with the proposal, the final 

rule generally does not include assetbacked securities (‘‘ABS’’), including 

MBS, within the permissible category of 

publicly-traded debt securities. 

However, ABS are included as eligible 

collateral if they are issued by, or 

unconditionally guaranteed as to the 

timely payment of principal and interest 

by, the U.S. Department of the Treasury 

or another U.S. government agency 

whose obligations are fully guaranteed 

by the full faith and credit of the United 

States government; or if they are fully 

guaranteed by a U.S. GSE that is 

operating with capital support or 

another form of direct financial 

assistance received from the U.S. 

government that enables repayment of 

the securities. 

Publicly traded debt securities (that 

are not ABS) issued by GSEs are 

included in eligible collateral as long as 

the issuing GSE is either operating with 

capital support or another form of direct 

financial assistance received from the 

U.S. government that enables full 

repayment of principal and interest on 

these securities, or the CSE determines 

the securities are ‘‘investment grade’’ (as 

defined by the appropriate prudential 

regulator). 

Although the Commission received 

several comments concerning the 

proposal’s treatment of GSE securities, 

only modest changes have been made in 

the final rule. In the final rule, the 

Commission recognizes the unique 

nature of GSE securities by placing them 

in a category separate from both 

securities issued directly by U.S. 

government agencies and those from 

non-GSE, private sector issuers. 

However, the Commission continues to 

believe the final rule should treat GSE 

securities differently depending on 

whether or not the GSE enjoys explicit 

government support, in the interests of 

both the safety and soundness of CSE 

and the stability of the financial system. 

GSE debt obligations are not explicitly 

guaranteed by the full faith and credit 

of the U.S. government. Existing law, 

however, authorizes the United States 

Treasury to provide lines of credit, up 

to a specified amount, to certain GSEs 

in the event they face specific financial 

difficulties. An act of Congress would be 

required to provide adequate support if, 

for example, a GSE were to experience 

severe difficulty in selling its securities 

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262Congress provided such support with the 

passage of the Agricultural Credit Act of 1987 and 

with the Housing and Economic Recovery Act of 

2008. 

263Proposed § 23.156(a)(4). 

264Proposed § 23.156(b). 

265See ICI; JFMC; ISDA; CCRM; CPFM; Sifma; 

MetLife; GPC; Sifma-AMG; ABA; JBA; AIMA; MFA; 

FSR; Freddie; CDEU; FHLB; ACLI; NERA; and 

TIAA–CREF. However, commenters representing 

public interest groups generally favored the 

proposed approach. 

266See JBA. 

267See ISDA. 

268See CPFM. 

in financial markets because investors 

doubted its ability to meet its financial 

obligations.262 The treatment of GSE 

securities by market participants as if 

those securities were nearly equivalent 

to Treasury securities in the absence of 

explicit Treasury support creates a 

potential threat to financial market 

stability, especially if vulnerabilities 

arise in markets where one or more 

GSEs are dominant participants, as 

occurred during the summer of 2008. 

The final rule’s differing treatment of 

GSE collateral based on whether or not 

the GSE has explicit support of the U.S. 

government helps address this source of 

potential financial instability and 

recognizes that securities issued by an 

entity explicitly supported by the U.S. 

government might well perform better 

during a crisis than those issued by an 

entity operating without such support. 

The final rule adopts the approach that 

was used in the proposed rule and 

assigns the same minimum haircut to 

both corporate obligations and the debt 

securities of GSEs that are operating 

without capital support or another form 

of financial assistance from the U.S. 

From the Commission’s perspective, 

this approach facilitates appropriate due 

diligence when a party considers the 

creditworthiness of a GSE security that 

it may accept as collateral. 

The final rule retains the 2014 

proposal’s provision excluding any 

securities issued by the counterparty or 

any of its affiliates. To avoid the 

compounding of risk, the final rule 

continues to exclude securities issued 

by a bank holding company, a savings 

and loan holding company, a foreign 

bank, a depository institution, a market 

intermediary, or any company that 

would be one of the foregoing if it were 

organized under the laws of the United 

States or any State, or an affiliate of one 

of the foregoing institutions. For the 

same reason, the Commission has 

expanded this restriction in the final 

rule also to exclude securities issued by 

a non-bank systemically important 

financial institution designated by the 

Financial Stability Oversight Council. 

These entities are financial in nature 

and, like banks or market 

intermediaries, would be expected to 

come under significant financial stress 

in the event of a period of financial 

stress. Accordingly, the Commission 

believes that it is also appropriate to 

restrict securities issued by these 

entities as eligible margin collateral to 

ensure that collected collateral is free 

from significant sources of this type of 

risk. 

The final rule does not allow a CSE 

to fulfill the rule’s minimum margin 

requirements with any assets not 

included in the eligible collateral list, 

which is comprised of assets that should 

remain liquid and readily marketable 

during times of financial stress. The use 

of alternative types of collateral to fulfill 

regulatory margin requirements would 

introduce concerns that the changes in 

the liquidity, price volatility, or other 

risks of collateral during a period of 

financial stress could exacerbate that 

stress) and could undermine efforts to 

ensure that collateral is subject to low 

credit, market, and liquidity risk. 

Therefore, the final rule limits the 

recognition of margin collateral to the 

aforementioned list of assets. 

Counterparties that wished to rely on 

assets that do not qualify as eligible 

collateral under the proposed rule still 

would be able to pledge those assets 

with a lender in a separate arrangement, 

such as collateral transformation 

arrangements, using the cash or other 

eligible collateral received from that 

separate arrangement to meet the 

minimum margin requirements. 

The Commission wishes to note here 

that because the value of noncash 

collateral and foreign currency may 

change over time, the proposal would 

require a CSE to monitor the value of 

such collateral previously collected to 

satisfy initial margin requirements and, 

to the extent the value of such collateral 

has decreased, to collect additional 

collateral with a sufficient value to 

ensure that all applicable initial margin 

requirements remain satisfied on a daily 

basis.263

Moreover, the Commission notes that 

the proposal would not restrict the types 

of collateral that could be collected or 

posted to satisfy margin terms that are 

bilaterally negotiated above required 

amounts. For example, if, 

notwithstanding the $50 million 

threshold, a CSE decided to collect 

initial margin to protect itself against 

the credit risk of a particular 

counterparty, the CSE could accept any 

form of collateral. 

2. Variation Margin 

a. Proposal 

The proposal would require that 

variation margin be paid in U.S. dollars, 

or a currency in which payment 

obligations under the swap are required 

to be settled.264 When determining the 

currency in which payment obligations 

under the swap are required to be 

settled, a CSE would be required to 

consider the entirety of the contractual 

obligation. For example, in cases where 

a number of swaps, each potentially 

denominated in a different currency, are 

subject to a single master agreement that 

requires all swap cash flows to be 

settled in a single currency, such as the 

Euro, then that currency (Euro) may be 

considered the currency in which 

payment obligations are required to be 

settled. 

Under this proposed rule, the value of 

cash paid to satisfy variation margin 

requirements is not subject to a haircut. 

b. Comments 

The Commission received a large 

number of comments arguing for the 

broadening of the list of eligible 

collateral for variation margin to include 

noncash assets.265 These commenters 

generally argued that limiting variation 

margin to cash is inconsistent with 

current market practice for financial end 

users, is incompatible with the 2013 

international framework agreement, and 

would drain the liquidity of these 

financial end users by forcing them to 

hold more cash. The same commenters 

suggested including securities such as 

U.S. Treasuries or other government 

bonds. 

While some commenters representing 

public interest groups favored limiting 

variation margin exchanged between 

CSEs to cash, some commenters 

representing the financial sector 

expressed concern that regulators in 

other key market jurisdictions have not 

proposed comparable variation margin 

restrictions. Commenters also asked the 

Commission to consider GSE securities 

as eligible collateral for variation 

margin. 

One commenter asked for clarification 

on whether a haircut applies if variation 

margin is paid in the currency in which 

the swap is denominated.266 Another 

commenter asked for confirmation that 

a cash payment of variation margin 

would not be subject to any haircuts.267

One commenter also proposed that the 

Commission grant the counterparties the 

flexibility to specify a base currency in 

their counterparty agreements on a caseby-case basis.268

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269The final rule defines the following as a 

‘‘major currency’’: United States Dollar (USD); 

Canadian Dollar (CAD); Euro (EUR); United 

Kingdom Pound (GBP); Japanese Yen (JPY); Swiss 

Franc (CHF); New Zealand Dollar (NZD); Australian 

Dollar (AUD); Swedish Kronor (SEK); Danish 

Kroner (DKK); Norwegian Krone (NOK); and any 

other currency as determined by a Prudential 

Regulator or the Commission. 

270The 2014 proposal was formulated as ‘‘the 

currency in which payment obligations under the 

swap are required to be settled.’’ Proposed Rule, 

§ 23.156(a)(1)(iii). 

271The guidance the Commission is providing 

about currencies of settlement is specific to the 

application of this final rule on margin collecting 

and posting requirements for uncleared swaps. 

c. Discussion 

With respect to variation margin, the 

proposal would have limited eligible 

collateral to immediately available cash 

funds, denominated either in U.S. 

dollars or in the currency in which 

payment obligations under the 

uncleared swap are required to be 

settled. However, after reviewing 

comments from financial end users of 

derivatives, such as insurance 

companies, mutual funds, and pension 

funds, the Commission has expanded 

the list of eligible variation margin for 

uncleared swaps between a CSE and 

financial end users. These commenters 

generally argued that limiting variation 

margin to cash is inconsistent with 

current market practice for financial end 

users; is incompatible with the 2013 

international framework agreement; and 

would drain the liquidity of these 

financial end users by forcing them to 

hold more cash. In response to these 

comments, the final rule permits assets 

that are eligible as initial margin to also 

be eligible as variation margin for swap 

transactions between a CSE and 

financial end user, subject to the 

applicable haircuts for each type of 

eligible collateral. 

This change aligns the rule more 

closely with current market practice. 

Commenters indicated many types of 

financial end users exchange variation 

margin with their swap dealers in the 

form of non-cash collateral that consists 

of their investment assets. This practice 

permits them to maximize their 

investment income and minimize 

margin costs, even though these assets 

are subject to valuation haircuts when 

posted as variation margin. 

The Commission notes however (as 

described in the 2014 proposal) that 

most of the variation margin by total 

volume continues to be in the form of 

cash exchanged between SDs. Therefore, 

consistent with the proposal, variation 

margin exchanged by a CSE with 

another swap entity must be in the form 

of immediately available cash. The 

Commission continues to believe that 

limiting variation margin exchanged 

between a CSE and a swap entity to cash 

is consistent with regulatory and 

industry initiatives to improve 

standardization and efficiency in the 

OTC swaps market. Swap entities have 

access to cash, and its continued use as 

variation margin between swap entities 

will reduce the potential for disputes 

over the value of variation margin 

collateral, due to the absence of 

associated market and credit risks. Also, 

in periods of severe market stress, the 

ultimate liquidity of cash variation 

margin exchanged between CSEs— 

which occupy a key position to provide 

and maintain trading liquidity in the 

market for uncleared swaps—should 

assist in preserving the financial 

integrity of that market and the stability 

of the U.S. financial system. 

However, for reasons discussed 

below, the Commission is revising the 

final rule to expand the denominations 

of immediately available cash funds that 

are eligible. Whereas the proposal only 

recognized U.S. dollars or the currency 

of settlement, the final rule expands the 

category to include any major 

currency.269

3. Currency of Settlement, Collateral 

Valuation, and Haircuts 

For those assets whose values may 

show volatility during times of stress, 

the final rule imposes an 8 percent 

cross-currency haircut, and 

standardized prudential supervisory 

haircuts that vary by asset class. When 

determining how much collateral will 

be necessary to satisfy the minimum 

initial margin requirement for a 

particular transaction, a CSE must apply 

the relevant standardized prudential 

supervisory haircut to the value of the 

eligible collateral. The final rule’s 

haircuts guard against the possibility 

that the value of non-cash eligible 

margin collateral could decline during 

the period between when a counterparty 

defaults and when the CSE closes out 

that counterparty’s swap positions. 

The Commission has revised the 

cross-currency haircut applicable to 

eligible collateral under the final rule. 

The cross-currency haircut will apply 

whenever the eligible collateral posted 

(as either variation or initial margin) is 

denominated in a currency other than 

the currency of settlement, except that 

variation margin in immediately 

available cash funds in any major 

currency is never subject to the haircut. 

The amount of the cross-currency 

haircut remains 8 percent, as it was in 

the proposal. 

The Commission has decided to 

eliminate the haircut on variation 

margin provided in immediately 

available cash funds denominated in all 

major currencies because the cash funds 

are liquid at the point of counterparty 

default, and there are deep and liquid 

markets in the major currencies that 

allow conversion or hedging to the 

currency of settlement or termination at 

relatively low cost. The Commission is 

including in the final rule the crosscurrency haircut for all eligible noncash 

variation and initial margin collateral, 

in consideration of the limitations on 

market liquidity that can frequently 

arise on those assets in periods of 

market stress. 

In response to commenters’ request 

for clarification, the Commission has 

revised the final rule text for the crosscurrency haircut to refer to the 

‘‘currency of settlement,’’ and have 

eliminated the corresponding 

formulation offered for comment in the 

proposal.270 Commenters requested that 

the Commission provide guidance about 

the rule’s application to current market 

practice incorporating contractual 

provisions specifying an agreed-upon 

currency of settlement, transport 

currencies and transit, and termination 

currencies.271

In identifying the ‘‘currency of 

settlement’’ for purposes of this final 

rule, the Commission will look to the 

contractual and operational practice of 

the parties in liquidating their periodic 

settlement obligations for an uncleared 

swap in the ordinary course, absent a 

default by either party. To provide 

greater clarity, the Commission has 

added a new definition of ‘‘currency of 

settlement’’ to the rule. The Commission 

has defined ‘‘currency of settlement’’ to 

mean a currency in which a party has 

agreed to discharge payment obligations 

related to an uncleared swap or a group 

of uncleared swaps subject to a master 

agreement at the regularly occurring 

dates on which such payments are due 

in the ordinary course. 

For eligible non-cash initial margin 

collateral, the final rule expressly carves 

out of the cross-currency haircut assets 

denominated in a single termination 

currency designated as payable to the 

non-posting counterparty as part of the 

eligible master netting agreement. The 

final rule accommodates agreements 

under which each party has a different 

termination currency. If the non-posting 

counterparty has the option to select 

among more than one termination 

currency as part of the agreed-upon 

termination and close-out process, the 

agreement does not meet the final rule’s 

single termination currency condition. 

However, the single termination 

currency condition does not rule out an 

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272As discussed above, the final rule permits 

discrete netting sets under a single eligible master 

netting agreement, subject to conditions specified in 

§§ 23.152(c) and 23.153(c). 

273Protection of Collateral of Counterparties to 

Uncleared Swaps; Treatment of Securities in a 

Portfolio Margining Account in a Commodity 

Broker Bankruptcy, 78 FR 66621 (Nov. 6, 2013). 

274State Street; SIFMA; ABA, Sifma-AMG. 

275State Street. 

eligible master netting agreement 

establishing more than one discrete 

netting set and establishing separate 

margining and early termination 

provisions for such a select netting set 

with its own single termination 

currency.272

As an alternative to the 8 percent 

cross-currency haircut, commenters 

urged the Commission to permit any 

cross-currency sensitivity between the 

swap portfolio credit exposure and the 

margin collateral provided against that 

exposure to be measured as a 

component of the margin required to be 

exchanged under the rule. The 

Commission is concerned this 

alternative presupposes the CSE’s 

certain knowledge, at the time margin 

amounts must be determined, of the 

collateral denomination to be posted by 

the counterparty in response to the 

margin call and the denomination of 

future settlement payments. The 

likelihood of such information being 

predictably available to the CSE does 

not square with commenters’ depiction 

of the amount of optionality exercised 

with respect to these factors by swap 

market participants in current market 

practice. 

The 8 percent foreign currency 

haircut—to the extent it arises in 

application of the final rule—is additive 

to the final rule’s standardized 

prudential supervisory haircuts that 

vary by asset class. These haircuts are 

unchanged from the proposal. They 

have been calibrated to be broadly 

consistent with valuation changes 

observed during periods of financial 

stress, as noted above. 

Although commenters suggested that 

the Commission permit CSEs to 

determine haircuts through the firm’s 

internal models, the Commission 

believes the simpler and more 

transparent approach of the 

standardized haircuts is adequate to 

establish appropriately conservative 

discounts on eligible collateral. The 

final rule permits initial margin 

calculations to be performed using an 

initial margin model in recognition of 

the fact that swaps and swap portfolios 

are characterized by a number of 

complex and inter-related risks that 

depend on the specifics of the swap and 

swap portfolio composition and are 

difficult to quantify in a simple, 

transparent and cost-effective manner. 

The exercise of establishing appropriate 

haircuts based on asset class of eligible 

collateral across long exposure periods 

is much simpler as the risk associated 

with a position in any particular margin 

eligible asset can be reasonably and 

transparently determined with readily 

available data and risk measurement 

methods that are widely accepted. 

Finally, because the value of collateral 

may change, a CSE must monitor the 

value and quality of collateral 

previously collected or posted to satisfy 

minimum initial margin requirements. If 

the value of such collateral has 

decreased, or if the quality of the 

collateral has deteriorated so that it no 

longer qualifies as eligible collateral, the 

CSE must collect or post additional 

collateral of sufficient value and quality 

to ensure that all applicable minimum 

margin requirements remain satisfied on 

a daily basis. 

4. Other Collateral 

Consistent with the proposal, 

§ 23.156(a)(5) of the final rule states that 

CSE may collect or post initial margin 

that is not required pursuant to the rule 

in any form of collateral. 

The Dodd-Frank Act provides that in 

prescribing margin requirements, the 

Commission shall permit the use of 

noncash collateral, as the Commission 

determines to be consistent with (1) 

preserving the financial integrity of 

markets trading swaps; and (2) 

preserving the stability of the United 

States financial system. The 

Commission believes that the eligibility 

of certain non-cash collateral, subject to 

the conditions and restrictions 

contained in the final rule, is consistent 

with the Dodd-Frank Act, because the 

use of such non-cash collateral is 

consistent with preserving the financial 

integrity of markets by trading swaps 

and preserving the stability of the 

United States financial system. The noncash collateral permitted is highly 

liquid and resilient in times of stress 

and the rule does not permit collateral 

exhibiting other significant risk. The use 

of different types of eligible collateral 

pursuant to the requirements of the final 

rule should also incrementally increase 

liquidity in the financial system. 

H. Custodial Arrangements 

1. Proposal 

Under the proposal, each CSE that 

posts initial margin with respect to an 

uncleared swap would be mandated to 

require that all funds or other property 

that it provided as initial margin be held 

by one or more custodians that are not 

the CSE or the counterparty or are not 

affiliates of the CSE or the counterparty. 

Each CSE that collects initial margin 

with respect to an uncleared swap 

would be mandated to require that 

required initial margin be held at one or 

more custodians that are not the CSE or 

the counterparty or are not affiliates of 

the CSE or the counterparty. 

Each CSE would be required to enter 

into custodial agreements containing 

specified terms. These would include a 

prohibition on rehypothecating the 

margin assets and standards for the 

substitution of assets. 

The Commission previously adopted 

rules implementing section 4s(l) of the 

Act.273 The Commission proposed to 

amend those rules to reflect the 

approach set out in the proposal where 

segregation of initial margin would be 

mandatory under certain circumstances. 

2. Comments 

The Commission received several 

comments regarding custody of margin 

collateral. 

Several commenters that operate as 

custodian banks requested clarification 

whether the final rule’s prohibition 

against the custodian rehypothecating, 

repledging, reusing or otherwise 

transferring initial margin funds or 

property means that a custodian bank is 

not permitted to accept cash funds that 

it holds pursuant to § 23.157 as a 

general deposit, and use such funds as 

it would any other funds placed on 

deposit with it.274

Under § 23.156, eligible collateral for 

initial margin includes ‘‘immediately 

available cash funds’’ that are 

denominated in a major currency or the 

currency of settlement for the uncleared 

swap. It is not practical for cash funds 

to be held by a custodian as currency 

that remains the property of the posting 

party with a security interest being 

granted to its counterparty, e.g., by 

placing such currency in a safety 

deposit box or in the custodian’s vault. 

Rather, the custodian banks explained 

in their joint comment letter that, under 

their current business practices, when a 

customer provides them with cash 

funds to hold as a custodian, the 

custodian bank accepts the funds as a 

general deposit, with the cash becoming 

property of the custodian bank and the 

customer holding a contractual debt 

obligation, i.e., a general deposit 

account, of the custodian bank.275

When holding cash under the 

arrangement described by the custodian 

bank commenters, a custodian is not a 

custodian of a discrete asset but rather 

a recipient of cash under a contractual 

arrangement that establishes a debt 

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276See State Street; ICI (in addition to urging the 

Commission to require mandatory segregation for 

excess margin amounts); AFR; and Public Citizen. 

277See ISDA; Sifma; GPC; Sifma-AMG; ABA; JBA; 

MFA; JFMC. 

278See GPC. 

279See BP; Shell; TRM; GPC; ISDA (asking for 

clarification of the enforceability requirements, 

including whether the enforceability in bankruptcy 

provisions refer to the bankruptcy of the CSE or the 

counterparty); Sifma-AMG (contending that the 

Commission instead adopt disclosure instead of 

enforceability requirements). 

280See ISDA. 

281See CPFM; CCMR; IFM; ISDA; Sifma; ABA; 

CS; and FSR. 

282See ICI; Sifma-AMG; GPC; PublicCitizen; and 

AFR. 

283See Sifma-AMG and MetLife. 

284MFA. 

285As described earlier, collateral other than 

certain forms of cash is subject to a haircut. As a 

result, when cash collateral is used to purchase 

other forms of eligible collateral, a haircut will need 

to be applied. 

obligation to be paid on demand, i.e., 

the custodian is acting as a bank. When 

such a customer has pledged cash funds 

as collateral under the arrangements 

described by the commenters, the 

commenter’s property interest is the 

deposit account liability that the 

custodian bank owes to the customer. 

Several commenters supported the 

requirement that initial margin be held 

at a third party custodian that was not 

affiliated with either the CSE or its 

counterparty.276 Other commenters 

contended that the independent thirdparty custodian requirement is 

unnecessary and the Commission 

should allow for more flexibility in how 

initial margin is kept, including 

permitting the counterparties to 

negotiate acceptable custodians, 

including affiliated custodians.277 These 

commenters expressed concern about 

complexities that additional parties 

bring to the relationship, as well as 

reservations about the capacity and 

availability of established custodians in 

the marketplace. One commenter argued 

against independent third-party 

custodians, citing increased costs 

arising from the negotiation of custodial 

contracts and the cost of developing 

operational infrastructure, as it is not 

the current practice for certain financial 

entities.278

Commenters also expressed concerns 

with meeting the proposal’s requirement 

that the custodial agreement be legal, 

valid, binding, and enforceable under 

the laws of all relevant jurisdictions, 

including asking the Commission to 

specify that the only relevant 

jurisdiction is that of the custodian.279

The same commenters urged more 

flexibility in custodial agreements to be 

consistent with current market practice. 

Another commenter noted that 

custodians should not be excluded 

solely because they are affiliates of 

either the CSE or the counterparty since 

the number of custodians is limited and 

many of the largest custodians are 

affiliates of CSEs.280 The same 

commenter also argued that CSEs 

should not be required to segregate 

initial margin that is not subject to 

mandatory posting or collection. 

Several commenters recommended 

lifting the restriction on 

rehypothecation and reuse of initial 

margin collateral, either generally or on 

a conditional basis.281 One commenter 

recommended that the final rule allow 

limited rehypothecation that would 

meet the requirements of the 2013 

international framework if a model for 

such rehypothecation could be 

developed for use by counterparties. 

The commenter also noted that other 

regulators may permit rehypothecation 

and, if so, a prohibition would create a 

competitive disadvantage for market 

participants subject to the Commission’s 

rule. Other commenters supported the 

restriction on rehypothecation and 

reuse.282 Two commenters argued that 

the prohibition on rehypothecation and 

reuse of initial margin should not 

restrict the custodian’s ability to accept 

cash collateral, as cash collateral would 

be reinvested in the custodian’s 

account.283

Several commenters requested that 

the final rule allow greater flexibility in 

segregation arrangements. These 

commenters requested that the final rule 

permit arrangements such as title 

transfer and charge-back of margin, 

segregation of margin on the books of 

the CSE or within an affiliate if such 

collateral is insulated from the CSE’s 

insolvency. 

One commenter requested that the 

final rule clarify that the required 

custodian arrangements be tri-party, i.e., 

entered into pursuant to an agreement 

between the CSE, its counterparty, and 

the custodian.284 The commenter wrote 

that if a CSE’s counterparty is not a 

party to the custodial agreement, it 

would not be in contractual privity with 

the unaffiliated custodian, and the CSE 

essentially would exercise exclusive 

control over its counterparty’ initial 

margin. 

3. Discussion 

a. Initial Margin 

The final rule establishes minimum 

standards for the safekeeping of 

collateral. Section 23.157(a) addresses 

requirements for when a CSE posts any 

collateral other than variation margin. 

Posting collateral to a counterparty 

exposes a CSE to risks in recovering 

such collateral in the event of its 

counterparty’s insolvency. To address 

these risk and to protect the safety and 

soundness of the CSE, § 23.157(a) 

requires a CSE that posts any collateral 

required under the final rule other than 

variation margin with respect to a 

uncleared swap to require that such 

collateral be held by one or more 

custodians that are neither the CSE, its 

counterparty, or an affiliates of either 

counterparty. This requirement applies 

to initial margin posted by a CSE 

pursuant to § 23.152. 

Section 23.157(b) addresses 

requirements for when a CSE collects 

initial margin required by § 23.152. 

Under § 23.157(b), the CSE shall require 

that initial margin collateral collected 

pursuant to § 23.152 be held at one or 

more custodians that are neither the 

CSE, its counterparty, or an affiliate of 

either counterparty. As is the case with 

initial margin that a CSE posts, the 

§ 23.157(b) applies only to initial margin 

that a CSE collects as required by 

§ 23.154, rather than all collateral 

collected. 

For collateral subject to § 23.157(a) or 

§ 23.157(b), § 23.157(c) requires the 

custodian to act pursuant to a custodial 

agreement that is legal, valid, binding, 

and enforceable under the laws of all 

relevant jurisdictions, including in the 

event of bankruptcy, insolvency, or 

similar proceedings. Such a custodial 

agreement must prohibit the custodian 

from rehypothecating, repledging, 

reusing or otherwise transferring 

(through securities lending, repurchase 

agreement, reverse repurchase 

agreement, or other means) the funds or 

other property held by the custodian. 

Cash collateral may be held in a general 

deposit account with the custodian if 

the funds in the account are used to 

purchase other forms of eligible 

collateral, such eligible noncash 

collateral is segregated pursuant to 

§ 23.157, and such purchase takes place 

within a time period reasonably 

necessary to consummate such purchase 

after the cash collateral is posted as 

initial margin.285

In response to the comments, the 

Commission notes that the ultimate 

purpose of the custody agreement is 

twofold: (1) That the initial margin be 

available to a counterparty when its 

counterparty defaults and a loss is 

realized that exceeds the amount of 

variation margin that has been collected 

as of the time of default; and (2) initial 

margin be returned to the posting party 

after its swap obligations have been 

fully discharged. 

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The jurisdiction of the custodian is 

certainly one of the relevant 

jurisdictions. Thus, a CSE must conduct 

sufficient legal review to conclude with 

a well-founded basis and maintain 

sufficient written documentation of that 

legal review that in the event of a legal 

challenge, including one resulting from 

default or from receivership, 

conservatorship, insolvency, 

liquidation, or similar proceedings of 

the custodian, the relevant court or 

administrative authorities would find 

the custodial agreement to be legal, 

valid, binding, and enforceable under 

the law applicable to the custodian. A 

CSE would also be expected to establish 

and maintain written procedures to 

monitor possible changes in relevant 

law and to ensure that the agreement 

continues to be legal, valid, binding, 

and enforceable under that law. 

The jurisdiction of a CSE’s 

counterparty, however, is also a relevant 

jurisdiction. The CSE would have to 

ensure that if a counterparty were to 

become insolvent, or otherwise be 

placed under the control of a resolution 

authority, that there would not be a 

legal basis to set aside the custodial 

arrangement, allowing the resolution 

authority to reclaim for the estate assets 

that the counterparty had placed with 

the custodian. Thus, the CSE would 

have to conduct a sufficient legal review 

to conclude with a well-founded basis 

that in the event of a legal challenge, 

including one resulting from default or 

from receivership, conservatorship, 

insolvency, liquidation, or similar 

proceedings of the counterparty, the 

relevant court or administrative 

authorities would find the custodial 

agreement to be legal, valid, binding, 

and enforceable by the CSE under the 

law applicable to the counterparty. For 

this reason, the Commission declines to 

follow the commenters’ request that the 

Commission clarify that the only 

relevant jurisdiction is that of the 

custodian. 

Under § 23.156, eligible collateral for 

initial margin includes ‘‘immediately 

available cash funds’’ that are 

denominated in a major currency or the 

currency of settlement for the uncleared 

swap. However, permitting initial 

margin collateral to be held in the form 

of a deposit liability of the custodian 

bank is inconsistent with the final rule’s 

prohibition against rehypothecation of 

such collateral. In addition, employing 

a deposit liability of the custodian 

bank—or another depository 

institution—is inconsistent with the 

final rule’s prohibition against use of 

obligations issued by a financial firm. 

On the other hand, as a practical 

matter, it is very difficult to eliminate 

cash entirely. For example, the final 

rule’s T+1 margin collection 

requirement means that it will often be 

necessary to use cash to cover the first 

days of a margin call. In addition, 

income generated by non-cash assets in 

custody will be paid in cash. Collateral 

reinvestments involving replacement of 

one category of non-cash asset with 

another category of non-cash asset may 

create cash balances between 

settlements. While the parties all have 

strong business incentives to manage 

and limit these cash fund balances, 

eliminating them entirely would result 

in a number of inefficiencies. 

To address these concerns, the 

Commission has revised the final rule to 

allow cash funds that are placed with a 

custodian bank in return for a general 

deposit obligation to serve as eligible 

initial margin collateral only in 

specified circumstances. However, the 

rule requires the posting party to direct 

the custodian to reinvest the deposited 

funds into eligible non-cash collateral of 

some type, or the posting party to 

deliver eligible non-cash collateral to 

substitute for the deposited funds. As 

noted above, the appropriate haircut 

must be applied. This reinvestment 

must occur within a reasonable period 

of time after the initial placement of 

cash collateral to satisfy the initial 

margin requirement, and the amount of 

eligible collateral must be sufficient to 

cover the initial margin amount in light 

of the applicable haircut on the noncash collateral pursuant to the final rule. 

CSEs must appropriately oversee their 

own initial margin collateral posting 

and that of their counterparties in order 

to constrain the use of cash funds, and 

achieve efficient reinvestment of cash 

funds in excess of operational and 

liquidity needs into eligible margin 

securities. In connection with 

implementing the final rule, CSEs 

should ensure these procedures are 

adequate to assess the levels of cash 

necessary under the circumstances of 

each counterparty relationship, and to 

ensure the custodian will be directed to 

reinvest the remainder in non-cash 

collateral promptly, or that the posting 

party will substitute non-cash assets 

promptly, as applicable. 

Section 23.157(c)(2) provides that, 

notwithstanding this prohibition on 

rehypothecating, repledging, reusing or 

otherwise transferring the funds or 

property held by the custodian, the 

posting party may substitute or direct 

any reinvestment of collateral, 

including, under certain conditions, 

collateral collected pursuant to 

§ 23.152(a) or posted pursuant to 

§ 23.152(b). 

In particular, for initial margin 

collected pursuant to § 23.152(a) or 

posted pursuant to § 23.152(b), the 

posting party may substitute only funds 

or other property that meet the 

requirements for eligible collateral 

under § 23.156 and where the amount 

net of applicable haircuts described in 

§ 23.156 would be sufficient to meet the 

initial margin requirements of § 23.152. 

The posting party also may direct the 

custodian to reinvest funds only in 

assets that would qualify as eligible 

collateral under § 23.156 and ensure 

that the amount net of applicable 

haircuts described in § 23.156 would be 

sufficient to meet the initial margin 

requirements of § 23.152. In the cases of 

both substitution and reinvestment, the 

final rule requires the CSE to ensure that 

the value of eligible collateral net of 

haircuts that is collected or posted 

remains equal to or above the minimum 

requirements. 

In the cases of both substitution and 

reinvestment, the final rule requires the 

posting party to ensure that the value of 

eligible collateral net of haircuts 

remains equal to or above the minimum 

requirements contained in § 23.152. In 

addition, the restrictions on the 

substitution of collateral described 

above do not apply to cases where a CSE 

has posted or collected more initial 

margin than is required under § 23.152. 

In such cases, the initial margin that has 

been posted or collected in satisfaction 

of § 23.152 is subject to the restrictions 

on collateral substitution but any 

additional collateral that has been 

posted or collected is not subject to the 

restrictions on collateral substitution 

and, as noted above, is not subject to 

any of the requirements of § 23.157. 

The Commission is adopting the 

segregation requirement in this rule to 

help ensure the safety and soundness of 

CSEs subject to the rule and to offset the 

greater risk to the financial system 

arising from the use of uncleared swaps. 

The Commission has retained the 

requirement that the custodian be 

unaffiliated with either the CSE or its 

counterparty. In adopting this 

requirement, the Commission is more 

concerned that customer confidence in 

a particular CSE could be correlated 

with customer confidence in the 

affiliated custodian, especially in times 

of high market stress, whereas the use 

of independent custodians should offer 

counterparties a greater measure of 

confidence. Thus, the Commission 

believes that it is necessary for the 

safety and soundness of CSE and to 

minimize risk to the financial system 

that collateral be held by a custodian 

that is neither a counterparty to the 

swap nor an affiliate of either 

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672 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

286Proposed § 23.158. 

287Commission Regulation 23.504. 

288See Sifma (the Commission should clarify the 

dispute resolution and documentation provisions to 

indicate that (i) the a CSE would not violate its 

obligations if it releases margin collateral to a 

counterparty at the conclusion of a dispute 

mechanism consistent with the U.S. 

implementation of Basel; and (ii) the parties would 

not be required to lock in dispute valuation 

methods); JBA (seeking clarification on the level of 

documentation and recommending that the 

documentation required take into account the 

composition and size of derivative portfolios); ACLI 

(documentation requirements should be clarified 

and harmonized with the requirements from the 

Prudential Regulators and the SEC); and FHLB (the 

final rule should require CSEs to have 

documentation that provides for resolution of 

disputes regarding the calculation of variation and 

initial margin and the value of collateral collected 

or posted). 

289See ISDA. 

290See Freddie. 

291See CDEU (non-financial end users are already 

subject to documentation requirements in other 

Commission regulations); and COPE (noting that it 

is market practice for non-financial end users to use 

ISDAs); BP; Joint Associations. 

counterparty. This arrangement protects 

both counterparties from the risk of the 

initial margin being held as part of one 

counterparty’s estate (or its affiliate’s 

estate) in the event of failure, and 

therefore not available to the other 

counterparty. 

The Commission does not believe that 

the alternative arrangements suggested 

by the commenters (e.g., arrangements 

involving title transfer and charge back 

of margin) adequately ensure the safety 

and soundness of the CSE nor 

adequately offset the risk to the 

financial system arising from the use of 

uncleared swaps. In addition, the 

Commission believes the specific 

structure of the custody arrangements 

required by the rule are better left, on 

balance, to negotiations of the parties, in 

accordance with the specific concerns of 

those parties. Tri-party custody may be 

an optimal arrangement for some firms, 

while for others, it has not typically 

been sought under established market 

practice. 

Further, the Commission is declining 

to revise the proposed regulation to 

accommodate rehypothecation pursuant 

to some future model that may be 

developed. Commenters who argued for 

allowing limited rehypothecation did 

not propose a specific model, and hence 

the Commission is not inclined to 

permit rehypothecation at this time due 

to hypothetical scenarios that may or 

may not develop in the future. 

b. Variation Margin 

Section 23.157 does not require 

collateral that is collected or posted as 

variation margin to be held by a third 

party custodian or subject such 

collateral to restrictions on 

rehypothecation, repledging, or reuse. 

So, subject to negotiations between the 

counterparties, a CSE that is a 

depository institution could collect cash 

posted to it in satisfaction of section 

23.153 from a counterparty without 

establishing a separate account for the 

counterparty. The cash funds would be 

the property of the CSE, which would 

be permitted to reuse such funds 

without restriction. Similarly, a CSE’s 

counterparty would not be required to 

segregate cash funds posted as variation 

margin by the CSE. The same is true 

with respect to eligible non-cash 

collateral exchanged as variation margin 

with a financial end user pursuant to 

§ 23.156; the segregation and custody 

requirements of § 23.157 do not apply. 

Section 23.156(b) of the final rule 

permits eligible non-cash collateral to be 

posted as variation margin for swaps 

between a CSE and a financial end user. 

In such circumstances, a CSE or its 

financial end user counterparty could 

reach an agreement under which either 

party could itself hold non-cash 

collateral posted by the other and such 

non-cash collateral could be 

rehypothecated, repledged, or reused. 

The final rules in this area are 

consistent with those of the Prudential 

Regulators. 

I. Documentation 

1. Proposal 

The proposal sets forth 

documentation requirements for 

CSEs.286 For uncleared swaps between a 

CSE and a counterparty that is a swap 

entity or a financial end user, the 

documentation would be required to 

provide the CSE with the contractual 

right and obligation to exchange initial 

margin and variation margin in such 

amounts, in such form, and under such 

circumstances as are required by 

§ 23.150 through § 23.161 of this part. 

For uncleared swaps between a CSE and 

a non-financial end user, the 

documentation would be required to 

specify whether initial and/or variation 

margin will be exchanged and, if so, to 

include the information set forth in the 

rule. That information would include 

the methodology and data sources to be 

used to value positions and to calculate 

initial margin and variation margin, 

dispute resolution procedures, and any 

margin thresholds. 

The Commission proposal contains a 

cross-reference to an existing 

Commission rule which already 

imposes documentation requirements 

on SDs and MSPs.287 Consistent with 

that rule, the proposal would apply 

documentation requirements not only to 

covered counterparties but also to nonfinancial end users. Having 

comprehensive documentation in 

advance concerning these matters 

would allow each party to a swap to 

manage its risks more effectively 

throughout the life of the swap and to 

avoid disputes regarding issues such as 

valuation during times of financial 

turmoil. This would benefit not only the 

CSE but the non-financial end user as 

well. 

2. Comments 

The Commission received several 

comments regarding documentation. 

Commenters sought clarification over 

aspects of the documentation 

requirement.288 One commenter 

contended that the documentation 

standards are too burdensome since 

initial margin methodologies may be 

proprietary and complex while the other 

Commission regulations already address 

documentation standards for 

valuations.289 Another commenter 

argued that it would be difficult to 

comply with the documentation 

standards with respect to valuations, 

and noting that valuation standards are 

already addressed in other Commission 

regulations.290 Commenters remarked 

that non-financial end users should not 

be subject to the documentation 

requirement.291

3. Discussion 

The Commission is adopting the 

documentation requirements 

substantially as proposed, with one 

exception for non-financial end users. 

The Commission has removed the 

documentation requirements with 

respect to non-financial end users. To 

the extent that other aspects of the 

Commission’s regulations address 

similar requirements, the Commission 

believes that counterparties should be 

well-positioned to comply with the 

documentation requirements and 

should reduce any additional burdens 

in implementing this requirement. 

Under the final rule, the 

documentation must grant the CSE the 

contractual right to collect and to 

impose the obligation to post initial and 

variation margin in such amounts, in 

such form, and under such 

circumstances as are required by the 

rule. The documentation must also 

specify the methods, procedures, rules, 

and inputs for determining the value of 

each uncleared swap and the 

procedures by which any disputes 

concerning the valuation of uncleared 

swaps may be resolved. Finally, the 

documentation must also describe the 

methods, procedures, rules, and inputs 

used to calculate initial and variation 

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292See ISDA, JFMC; Sifma, ABA, JBA, CS, Shell 

TRM (if inter-affiliate transactions are subject to 

margin requirements, the Commission should 

define the term ‘‘affiliate’’ consistently with other 

Commission regulations); BP; and FSR. Sifma 

suggested excluding inter-affiliate swaps from 

margin requirements if the swaps are subject to a 

group-wide consolidated risk management program 

and the exchange of variation margin, and the CSE 

is part of a group that is subject to consolidated 

capital requirements consistent with Basel. JBA 

argued that the risks posed by inter-affiliate trades 

are generally lower and pointed out the difficulties 

associated with entering into a CSA with all 

covered counterparties within a limited timeframe. 

293See Sifma, JBA, ABA, TCH, and CS. 

294See ISDA, Sifma, and CS. 

295See ISDA, Sifma, ABA, and TCH. 

296See ISDA, ABA, TCH, and CS. 

297See ISDA. 

298See ISDA, ABA, TCH, and CS. 

299See FSR. 

300See The Clearing House. 

301 Id. 

302See ISDA. 

303See The Clearing House. 

304See § 50.52. 

305Clearing Exemption for Swaps between 

Certain Affiliated Entities, 78 FR 21750 at 21760 

(April 11, 2013). 

margin for uncleared swaps entered into 

between the CSE and the counterparty. 

J. Inter-Affiliate Trades 

1. Proposal 

The proposal effectively would have 

required two-way initial margin and 

variation margin for swaps between 

CSEs and affiliates that were swap 

entities or financial end users. The 

Prudential Regulators’ proposal set forth 

the same requirements. 

2. Comments 

Many commenters urged the 

Commission to exclude swaps between 

affiliates from margin requirements.292

Commenters generally argued that interaffiliate swaps are already centrally risk 

managed and requiring margin on interaffiliate trades could discourage 

effective risk management 293 and the 

current practice of exchanging variation 

margin should be sufficient to mitigate 

the risk posed by inter-affiliate 

trades.294 They argued that requiring 

margin generally, and initial margin in 

particular, on inter-affiliate swaps was 

unnecessary for systemic stability. They 

further argued that imposing margin 

requirements on inter-affiliate swaps 

would impose significant costs,295 tie 

up liquidity,296 be inconsistent with the 

approach taken in a number of other 

jurisdictions,297 and introduce groupwide third-party credit risk.298 Sifma 

also argued that inter-affiliate swaps 

should not count towards the margin 

thresholds and a covered swap entity’s 

material swaps exposure. Another 

commenter suggested that the 

Commission conduct a study prior to 

imposing margin on inter-affiliate 

trades.299

Commenters also suggested 

alternatives to a full two-way collectand-post regime for initial margin for 

affiliate swaps. For example, some 

commenters proposed that instead of 

each CSE posting and collecting 

segregated initial margin to and from its 

affiliate, the CSE would only collect 

from its affiliate (subject to a wholly 

owned subsidiary exemption and a de 

minimis exemption) and the CSE would 

be permitted to segregate the initial 

margin within its group, so as to prevent 

undue third-party custodial risk.300

Some suggested a CSE would only 

collect from an affiliate that is not 

subject to margin and capital 

requirements.301 These commenters 

further argued that certain highly 

regulated affiliates like U.S. bank 

holding companies should benefit from 

an exception to initial margin 

requirements.302 Some commenters also 

suggested an alternative where the 

Commission would permit the common 

parent of an affiliate pair to post a single 

amount of segregated initial margin in 

which each affiliate would have a 

security interest.303

3. Discussion 

The Commission has determined a 

CSE shall not be required to collect 

initial margin from a margin affiliate 

provided that the CSE meets the 

following conditions: (i) The swaps are 

subject to a centralized risk management 

program that is reasonably designed to 

monitor and to manage the risks 

associated with the inter-affiliate swaps; 

and (ii) the CSE exchanges variation 

margin with the margin affiliate. These 

two conditions are consistent with 

recommendations from commenters. 

They are similar to conditions that were 

previously established by the 

Commission when providing an 

exemption from the clearing 

requirement for certain inter-affiliate 

swaps.304

The Commission has determined, 

however, to require CSEs to collect 

initial margin from non-U.S. affiliates 

that are financial end users that are not 

subject to comparable initial margin 

collection requirements on their own 

outward-facing swaps with financial 

end users. For many of the reasons 

listed by the commenters, as well as in 

light of the treatment of inter-affiliate 

swaps by the prudential regulators, the 

Commission has determined not to 

otherwise require CSEs to collect initial 

margin from, or to post initial margin to, 

affiliates that are CSEs or financial end 

users. (As discussed below, pursuant to 

the Prudential Regulators’ rules, CSEs 

would be required to post initial margin 

to affiliates that are swap entities subject 

to those rules.) 

The Commission first notes that the 

Prudential Regulators decided not to 

impose a general two-way initial margin 

requirement. Instead, the Prudential 

Regulators have required swap entities 

subject to their rules to collect initial 

margin from affiliates that are swap 

entities or financial end users. Thus, if 

a CSE enters into a swap with a swap 

entity subject to the Prudential 

Regulators’ rules, the CSE will post 

initial margin but will not collect initial 

margin for the transaction. 

The Commission considered the 

comments that inter-affiliate swaps do 

not increase the overall risk profile or 

leverage of the group. The Commission 

further considered the fact that interaffiliate two-way margin would 

substantially increase the overall 

amount of margin being collected, and 

thus the cost of swap transactions 

generally, without a commensurate 

benefit to risk reduction to the overall 

group. The Commission notes that 

considering the risk exposure of the 

overall group of which a CSE is a part 

is consistent with the approach taken in 

its margin rules (and the Prudential 

Regulators’ rules) in other key areas—as 

in the calculation of material swaps 

exposure to determine overall swaps 

exposure and the calculation of the 

initial margin threshold amount to 

determine whether there is an obligation 

to collect or post initial margin. 

Second, the Commission notes that 

the treatment of inter-affiliate 

transactions is related to what the 

Commission did when it adopted an 

exemption to the clearing mandate for 

inter-affiliate transactions in 2013. In 

that rulemaking, it considered, but 

decided against, requiring the exchange 

of initial margin or variation margin as 

a condition to using the exemption. It 

stated that such requirements ‘‘would 

limit the ability of U.S. companies to 

efficiently allocate risk among affiliates 

and manage risk centrally.’’ 305

Third, the Commission considered the 

decision of the Prudential Regulators’ 

not to impose two-way initial margin 

and impose a collect only obligation 

instead. If the Commission were to 

impose two-way margin, it would be 

inconsistent with the Prudential 

Regulators’ rule. The Commission 

further considered whether to impose a 

collect-only obligation. However, this 

would result in a two-way requirement 

in transactions between a swap dealer 

subject to the Prudential Regulators’ 

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306BCBS IOSCO Report at 21. 307Proposed § 23.160. 

308See Sifma; ABA; Australian Banks. 

309See CME. 

310See JFMC; GPC; JBA; ISDA; Sifma-AMG; JBA; 

CPFM; and Freddie. ISDA further argues that 

financial end users that fall below the 

implementation schedule threshold for each 

relevant time period should not be subject to initial 

margin. 

311See GPC. 

312See Sifma. 

313See CS. 

314See ACLI; MefLife; ICI; Sifma; Sifma-AMG; 

JFMC; GPC; JBA; ISDA; ABA; Freddie; CDEU; and 

FHLB. 

rules and a CSE, a result which the 

Prudential Regulators determined not to 

impose. In addition, the Commission 

considered the difference in mission 

and overall regulatory framework 

between the Prudential Regulators and 

the Commission. For example, the 

Commission notes that the imposition of 

a collect only initial margin requirement 

on swap entities subject to the 

Prudential Regulators’ rules is similar to 

existing requirements of law, in that 

banks are subject to significant 

regulatory restrictions and requirements 

on inter-affiliate transactions under 

Sections 23A and 23B of the Federal 

Reserve Act. The same cannot be said of 

a collect-only requirement imposed on 

CSEs, since the restrictions under 

Sections 23A and 23B do not apply to 

nonbank affiliates such as CSEs. 

For purposes of symmetry, however, 

the Commission has determined to 

require a CSE that enters into an interaffiliate swap with a swap entity that is 

subject to the rules of the Prudential 

Regulators to post initial margin with 

that swap entity in an amount equal to 

the amount that the swap entity is 

required to collect under the rules of the 

Prudential Regulators. This provision 

imposes no additional burden on the 

CSE because the other swap entity 

would be required to collect the initial 

margin in any case. This provision 

simply means that a CSE will be 

required under CFTC rules to post 

initial margin to the extent that the 

other swap entity is required under 

Prudential Regulator rules to collect it. 

The Commission also considered its 

objective of harmonizing its margin 

rules as much as possible with 

international standards. The BCBS 

standards, for example, state that the 

exchange of initial and variation margin 

by affiliated parties ‘‘is not customary’’ 

and that initial margin in particular 

‘‘would likely create additional liquidity 

demands.’’ 306 The Commission 

recognized that requiring the posting 

and collection of initial margin for interaffiliate swaps would be likely to put 

CSEs at a competitive disadvantage to 

firms in other jurisdictions. The 

Commission understands that many 

authorities, such as those in Europe and 

Japan, are not expected to require initial 

margin for inter-affiliate swaps. These 

savings could enable such firms to offer 

swaps to third parties on better terms 

than firms that incur the costs of interaffiliate initial margin. 

The Commission has determined, 

however, to require CSEs to exchange 

variation margin with affiliates that are 

swap entities or financial end users, as 

is also required under the Prudential 

Regulators’ rules. Marking open 

positions to market each day and 

requiring the posting or collection of 

variation margin will reduce the risks of 

inter-affiliate swaps. 

As noted above, CSEs will be required 

to collect initial margin from non-U.S. 

affiliates that are not subject to 

comparable initial margin collection 

requirements on their own outwardfacing swaps with financial entities. 

These affiliates generally would include 

entities located in jurisdictions for 

which substituted compliance has not 

been granted with regard to the 

collection of initial margin. This 

requirement would also apply in the 

case of a series of transactions 

involving, directly or indirectly, an 

affiliate that is not subject to comparable 

initial margin collection requirements. 

That is, even if the CSE is only in privity 

of contract with an affiliate who is 

subject to such requirements, but that 

affiliate, directly or indirectly, is 

transacting with another affiliate who is 

not subject to such requirements, the 

CSE would be required to collect initial 

margin. 

This provision is an important antievasion measure. It is designed to 

prevent the potential use of affiliates to 

avoid collecting initial margin from 

third parties. For example, suppose that 

an unregistered non-U.S. affiliate of a 

CSE enters into a swap with a financial 

end user and does not collect initial 

margin. Suppose further that the 

affiliate then enters into a swap with the 

CSE. Effectively, the risk of the swap 

with the third party would have been 

passed to the CSE without any initial 

margin. The rule would require this 

affiliate to post initial margin with the 

CSE in such cases. The rule would 

further require that the CSE collect 

initial margin even if the affiliate routed 

the trade through one or more other 

affiliates. 

K. Implementation Schedule 

1. Proposal 

The proposed rules set out an 

implementation schedule for initial 

margin ranging from December 1, 2015 

to December 1, 2019.307 This extended 

schedule was designed to give market 

participants ample time to develop the 

systems and procedures necessary to 

exchange margin and to make 

arrangements to have sufficient assets 

available for margin purposes. The 

requirements would be phased-in in 

steps from the largest covered parties to 

the smallest. 

Variation margin requirements would 

be implemented on the scheduled first 

date. 

2. Comments 

Commenters generally stated that, to 

the extent practicable, there should be 

international harmonization of 

implementation dates for margin and 

capital requirements.308 While one 

commenter supported the proposed 

compliance date schedules set out in the 

2014 proposal,309 a number of 

commenters argued that compliance 

with the final rule should be delayed for 

18 months to 2 years in order to allow 

for operational changes and the need for 

additional or revised documentation 

that will be required for CSEs to comply 

with the rule.310

With respect to phasing-in the 

implementation of the initial margin 

requirements, a commenter stated that 

the phase-in provisions should be 

revised to apply only to uncleared 

swaps between CSEs.311 The commenter 

further stated that non-CSEs should not 

be required to comply with the initial 

margin requirements until December 

2019. The Commission also received a 

comment stating that the 

implementation of the compliance date 

schedule should not coincide with code 

freezes and that margin requirements for 

over-the-counter derivatives should be 

taken into consideration when finalizing 

this rule.312 Still another commenter 

argued for a delay in implementation to 

allow the use of the latest developments 

from BCBS regarding margin calculation 

best practices and the development of a 

universal model.313

Several commenters urged that the 

compliance date for variation margin 

requirements be phased in, in a manner 

similar to the compliance dates for the 

initial margin requirements.314 These 

commenters argued, among other things, 

that the phase-in of the variation margin 

requirements would allow CSEs the 

time to re-document all necessary swap 

contracts at one time. Commenters 

stated that variation margin 

requirements should be phased in based 

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315See Sifma; ABA. 

316See CS; ISDA. 

317See ISDA. 

318See ISDA. 

319See GPC (noting issues with providing 

confidential position information regarding its 

uncleared swaps to CSEs). 

320 ‘‘Foreign exchange forward’’ and ‘‘foreign 

exchange swap’’ are defined to mean any foreign 

exchange forward, as that term is defined in section 

1a(24) of the Commodity Exchange Act (7 U.S.C. 

1a(24)), and foreign exchange swap, as that term is 

defined in section 1a(25) of the Commodity 

Exchange Act (7 U.S.C. 1a(25)). 

on decreasing notional amount 

thresholds over a two-year period 

commencing upon the latter of the 

publication of the margin rules for overthe-counter derivatives in the U.S., the 

EU and Japan or the publication of the 

Commission’s comparability 

determinations with respect to the EU 

and Japan.315

Certain commenters also requested 

that the Commission extend the 

meaning of swaps entered into prior to 

the compliance date to include (1) 

swaps entered into prior to the 

applicable compliance date (legacy 

swaps) that are amended in a nonmaterial manner; (2) novations; and (3) 

new derivatives that result from 

portfolio compression of legacy 

derivatives.316 These commenters urged 

that if a general exclusion for novated 

legacy swaps is not provided, there 

should be an exclusion for novated 

swaps between affiliates resulting from 

organizational restructuring or 

regulatory requirements such as the 

swaps push-out rule. 

One commenter urged that, during the 

phase-in period, only entities whose 

swap volume currently exceeds the 

applicable threshold should be subject 

to the margin requirements.317 The 

commenter stated that, if the swap 

activity of either party to a swap 

declines below the applicable threshold, 

that party should cease being subject to 

the initial margin requirements until 

such time as it exceeds the applicable 

threshold. Another commenter asked 

how the margin requirements would 

apply in the event of a change in status 

of the counterparty.318 One commenter 

requested that the Commission revise 

the phase-in schedule so that entities 

that are not CSEs would be subject to 

the margin requirements in December 

2019.319

3. Discussion 

a. Initial Margin 

Under the proposal, the 

implementation of both initial and 

variation margin requirements would 

have started on December 1, 2015. With 

respect to initial margin requirements, 

the requirements would have been 

phased-in between December 1, 2015 

and December 1, 2019. Variation margin 

requirements for all CSE with respect to 

covered swaps with any counterparty 

would have been effective as of 

December 1, 2015. This proposed set of 

compliance dates was consistent with 

those set forth in the 2013 international 

framework. 

On March 18, 2015, the BCBS and 

IOSCO issued a press release 

announcing that the implementation of 

the 2013 international framework would 

be delayed by nine months. This 

announcement was in response to the 

fact that to date in March 2015, no 

jurisdiction had yet finalized rules for 

margin requirements for non-centrally 

cleared derivatives. Accordingly, the 

final rule has been revised to delay the 

implementation of both initial and 

variation margin requirements by nine 

months from the compliance schedule 

set forth in the proposal. This delay 

results in a uniform approach with 

respect to compliance dates across the 

final rule and the international 

framework. 

The changes to the proposed 

compliance dates should help address 

concerns raised by commenters. The 

Commission agrees that international 

harmonization of margin and capital 

requirements are prudent. In light of the 

concerns raised by the commenters and 

the delay of the implementation of the 

2013 international framework, the 

Commission has incorporated into the 

final rule provisions reflecting the 

implementation schedule for the 2013 

international framework that was 

recently set out by the BCBS and 

IOSCO. 

The final rule adopts a phase-in 

arrangement for variation margin 

requirements that is different from the 

proposal. The Commission believes that 

a phase-in of variation margin 

requirements similar to the phase-in of 

initial margin requirements is not 

necessary because the collection of daily 

variation margin is currently an 

industry best practice and will not 

require many changes in current swaps 

business operations for CSE covered 

swaps entities. However, the 

Commission has revised the 2014 

proposal to include the phase-in of 

compliance dates for variation margin as 

set forth above to align with the dates 

suggested by the BCBS and IOSCO on 

March 18, 2015. 

The Commission further believes that 

classifying new swap transactions as 

swaps entered into prior to the 

compliance date could create significant 

incentives to engage in amendments and 

novations for the purpose of evading the 

margin requirements. Moreover, 

limiting the extension to ‘‘material’’ 

amendments or ‘‘legitimate’’ novations 

is difficult to do within the final rule as 

the specific motivation for an 

amendment or novation is generally not 

observable. Finally, the Commission 

believes that classifying some new swap 

transactions and transactions entered 

into prior to the compliance date would 

make the process of identifying those 

swaps to which the rule applies overly 

complex and non-transparent. 

Accordingly, the Commission has 

elected not to extend the meaning of 

swaps entered into prior to the 

compliance date in this manner 

requested by some commenters at this 

time. The Commission recognizes that 

questions have arisen about the effect of 

compression exercises which may have 

implications in a variety of contexts. 

The Commission is open to further 

discussion before implementation about 

the best way to address these questions. 

For purposes of initial margin, as 

reflected in the table below, the 

compliance dates range from September 

1, 2016, to September 1, 2020, 

depending on the average daily 

aggregate notional amount of uncleared 

swaps, uncleared security-based swaps, 

foreign exchange forwards and foreign 

exchange swaps (‘‘covered swaps’’) of 

the CSE and its counterparty 

(accounting for their respective 

affiliates) for March, April and May of 

that year.320

Compliance date Initial margin requirements 

September 1, 2016 ......................... Initial margin where both the CSE combined with all its affiliates and its counterparty combined with all its 

affiliates have an average daily aggregate notional amount of covered swaps for March, April and May 

of 2016 that exceeds $3 trillion. 

September 1, 2017 ......................... Initial margin where both the CSE combined with all its affiliates and its counterparty combined with all its 

affiliates have an average daily aggregate notional amount of covered swaps for March, April and May 

of 2017 that exceeds $2.25 trillion. 

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321See § 23.150(b) of the final rule. 

322See Regulation 23.161. 

323As a specific example of the calculation, 

consider a U.S. based financial end user (together 

with its affiliates) with a portfolio consisting of two 

uncleared swaps (e.g., an equity swap, an interest 

rate swap) and one uncleared security-based credit 

swap. Suppose that the notional value of each swap 

is exactly $1 trillion on each business day of March, 

April and May of 2016. Furthermore, suppose that 

a foreign exchange forward is added to the entity’s 

portfolio at the end of the day on April 29, 2016, 

and that its notional value is $1 trillion on every 

business day of May 2016. On each business day 

of March and April of 2016, the aggregate notional 

amount of uncleared swaps, security-based swaps 

and foreign exchange forwards and swaps is $3 

trillion. Beginning on May 1, 2016, the aggregate 

notional amount of uncleared swaps, security-based 

swaps and foreign exchange forwards and swaps is 

$4 trillion. The daily average aggregate notional 

value for March, April and May 2016 is then (23 

× $3 trillion + 21 × $3 trillion + 21 × $4 trillion)/ 

(23 + 21 + 21) = $3.3 trillion, in which case this 

entity would have a gross notional exposure that 

would result in its compliance date beginning on 

September 1, 2016. 

Compliance date Initial margin requirements 

September 1, 2018 ......................... Initial margin where both the CSE combined with all its affiliates and its counterparty combined with all its 

affiliates have an average daily aggregate notional amount of covered swaps for March, April and May 

of 2018 that exceeds $1.5 trillion. 

September 1, 2019 ......................... Initial margin where both the CSE combined with all its affiliates and its counterparty combined with all its 

affiliates have an average daily aggregate notional amount of covered swaps for March, April and May 

of 2019 that that exceeds $0.75 trillion. 

September 1, 2020 ......................... Initial margin for any other CSE with respect to covered swaps with any other covered counterparty. 

In calculating the amount of covered 

swaps as set forth in the table above, the 

final rule provides that a CSE shall 

count the average daily aggregate 

notional amount of an uncleared swap, 

an uncleared security-based swap, a 

foreign exchange forward or a foreign 

exchange swap between the entity and 

an affiliate only one time, and shall not 

count a swap that is exempt from the 

Commission’s margin requirements 

under § 23.150(b).321 These provisions 

were not included in the proposed rule. 

The purpose of the first provision in the 

final rule is to prevent double counting 

of covered swaps between affiliates, a 

concern raised by number of 

commenters, which could artificially 

increase a CSE’s average daily aggregate 

notional amount. The purpose of the 

second provision is to ensure that swaps 

that have been exempted from the 

margin requirements are fully exempted 

and do not influence other aspects of 

the rule such as whether an entity 

maintains a material swaps exposure. 

The Commission expects that CSEs 

likely will need to make a number of 

operational and legal changes to their 

current swaps business operations in 

order to achieve compliance with the 

provisions of the final rule relating to 

the initial margin requirements, 

including potential changes to internal 

risk management and other systems, 

trading documentation, collateral 

arrangements, and operational 

technology and infrastructure. In 

addition, the Commission expects that 

CSEs that wish to calculate initial 

margin using an initial margin model 

will need sufficient time to develop 

such models and obtain regulatory 

approval for their use. Accordingly, the 

compliance dates have been structured 

to ensure that the largest and most 

sophisticated CSEs and counterparties 

that present the greatest potential risk to 

the financial system comply with the 

requirements first. These swap market 

participants should be able to make the 

required operational and legal changes 

more rapidly and easily than smaller 

entities engaging in swaps less 

frequently and pose less risk to the 

financial system. 

b. Variation Margin 

For purposes of variation margin, the 

compliance dates are September 1, 2016 

and March 1, 2017. Theses compliance 

dates also depend on the average daily 

aggregate notional amount of covered 

swaps of the CSE combined with its 

affiliates and its counterparties 

(combined with that counterparty’s 

affiliates) for March, April and May of 

that year (the ‘‘calculation period’’).322

Thus, a given CSE may have multiple 

compliance dates depending on both the 

combined average daily aggregate 

notional amount of covered swaps of the 

CSE and its affiliates during the 

calculation period as well as the 

combined average daily notional 

amount of covered swaps of its 

counterparties and that counterparty’s 

affiliates during the calculation period. 

Compliance date Initial margin requirements 

September 1, 2016 ......................... Variation margin where both the CSE combined with all its affiliates and its counterparty combined with all 

its affiliates have an average daily aggregate notional amount of covered swaps for March, April and 

May of 2016 that exceeds $3 trillion. 

March 1, 2017 ................................. Variation margin for any other CSE with respect to covered swaps with any other counterparty that is a 

swap entity or financial end user. 

Calculating the amount of covered 

swaps set forth in the table above for the 

purposes of determining variation 

margin is done in the same manner as 

calculating the amount of covered 

swaps for purposes of determining 

initial margin.323 A CSE shall count the 

average daily aggregate notional amount 

of a uncleared swap, an uncleared 

security-based swap, a foreign exchange 

forward or a foreign exchange swap 

between the entity and an affiliate only 

one time, and shall not count a swap 

that is exempt from the Commission’s 

margin requirements under § 23.150(b). 

c. Changes in Material Swaps Exposure 

Once a CSE and its counterparty must 

comply with the margin requirements 

for uncleared swaps based on the 

compliance dates set forth in § 23.161, 

the CSE and its counterparty shall 

remain subject to the margin 

requirements from that point forward. 

For example, September 1, 2017 is the 

relevant compliance date where both 

the CSE combined with all its affiliates 

and its counterparty combined with all 

its affiliates have an average aggregate 

daily notional amount of covered swaps 

that exceeds $2.25 trillion. If the 

notional amount of the swap activity for 

the CSE or the counterparty drops below 

that threshold amount of covered swaps 

in subsequent years, their swaps would 

nonetheless remain subject to the 

margin requirements. On September 1, 

2020, any CSE that did not have an 

earlier compliance date becomes subject 

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324 ‘‘Swaps’’ are defined in section 721 of the 

Dodd-Frank Act to include interest rate swaps, 

commodity-based swaps, equity swaps and credit 

default swaps. See 7 U.S.C. 1a(47). 

325See 7 U.S.C. 6s; 15 U.S.C. 78o-10. Section 731 

of the Dodd-Frank Act requires swap dealers and 

major swap participants to register with the CFTC, 

which is vested with primary responsibility for the 

oversight of the swaps market under Title VII of the 

Dodd-Frank Act. 

to the initial margin requirements with 

respect to uncleared swaps. 

The Commission has declined to 

make a change in the final rule that 

would allow a counterparty whose swap 

activity declines below the applicable 

threshold set forth in § 23.161 to cease 

being subject to margin requirements. 

The Commission believes that allowing 

entities coverage status to change over 

time results in additional complexity 

with little benefit since all entities will 

be subject to the rule as of September 1, 

2020. Accordingly, allowing an entity’s 

coverage status to fluctuate would only 

be consequential for a limited period of 

time. 

d. Changes in Counterparty Status 

The Commission has added 

§ 23.161(c) to the final rule to clarify the 

applicability of the margin requirements 

in the event a CSE ’s counterparty 

changes its status (for example, if the 

counterparty is a financial end user 

without material swaps exposure and 

becomes a financial end user without 

material swaps exposure). Under 

§ 23.161(c), in the event a counterparty 

changes its status such that an 

uncleared swap with that counterparty 

becomes subject to stricter margin 

requirements, then the CSE shall 

comply with the stricter margin 

requirements for any uncleared swap 

entered into with that counterparty after 

the counterparty changes its status. 

Section 23.161(c) states that in the 

event a counterparty changes its status 

such that a uncleared swap with that 

counterparty becomes subject to less 

strict margin requirements (such as 

when a counterparty changes status 

from a financial end user with material 

swaps exposure to a financial end user 

without material swaps exposure), then 

the CSE may comply with the less strict 

margin requirements for any swap 

entered into with that counterparty after 

the counterparty changes its status as 

well as for any outstanding uncleared 

swap entered into after the applicable 

compliance date and before the 

counterparty changed its status. As a 

specific example, if a CSE’s 

counterparty transitioned from a 

financial end user with material swaps 

exposure to a financial end user without 

material swaps exposure, initial margin 

that had been previously collected 

could be returned if agreed by both 

parties since the rule would not require 

an exchange of initial margin on preexisting or future uncleared swaps. 

e. Applicable EMNA 

A CSE may enter into swaps on or 

after the final rule’s compliance date 

pursuant to the same master netting 

agreement that governs existing swaps 

entered into with a counterparty prior to 

the compliance date. The final rule 

permits a CSE to (1) calculate initial 

margin requirements for swaps under an 

EMNA with the counterparty on a 

portfolio basis in certain circumstances, 

if it does so using an initial margin 

model; and (2) calculate variation 

margin requirements under the final 

rule on an aggregate, net basis under an 

EMNA with the counterparty. Applying 

the final rule in such a way would, in 

some cases, have the effect of applying 

it retroactively to swaps entered into 

prior to the compliance date under the 

EMNA. 

The Commission received several 

comments expressing concern that the 

proposal might require swaps entered 

into before the compliance dates to be 

documented under a different EMNA 

than swaps entered into after the 

compliance dates in order for the 

margin requirements not to apply to the 

pre-compliance dates swaps. As 

described further above, the 

Commission has revised the final rule to 

allow for the establishment of separate 

netting sets under a single ENMA to 

avoid this outcome. 

f. Standards Expressed in U.S. Dollars 

The proposal contained a number of 

numerical amounts that are expressed in 

U.S. dollar terms. The amounts include 

the effective date phase-in thresholds, 

the initial margin threshold amount, the 

material swap exposure amount, and the 

minimum transfer amount. These 

numerical amounts are expressed in the 

2013 international framework in terms 

of Euros. In the proposal, the 

Commission translated the Euro 

amounts from the 2013 international 

framework using a Euro-U.S. Dollar 

exchange rate that was broadly 

consistent with the exchange rate that 

prevailed at the time of the proposal’s 

publication. 

In the proposal, the Commission 

sought comment on how to deal with 

fluctuations in exchange rates and how 

such fluctuations may create 

inconsistencies in the numerical 

amounts that are established across 

differing jurisdictions. One commenter 

suggested using an average exchange 

rate calculated over a period of time. 

Another commenter suggested that the 

Commission should periodically 

recalibrate these amounts in response to 

broad movements in underlying 

exchange rates. 

The Commission believes that 

persistent and significant fluctuations in 

exchange rates could result in 

significant differences across 

jurisdictions that would complicate 

cross-border transactions and create 

competitive inequities. The Commission 

does not agree, however, that the final 

rule’s numerical amounts should be 

mechanically linked to either prevailing 

exchange rates or average exchange rates 

over a period of time as short term 

fluctuations in exchange rates would 

result in high frequency changes that 

would create significant operational and 

logistical burdens. Rather, and 

consistent with the view of one 

commenter, the Commission expects to 

consider periodically the numerical 

amounts expressed in the final rule and 

their relation to amounts denominated 

in other currencies in differing 

jurisdictions. The Commission will then 

propose adjustments, as appropriate, to 

these amounts. 

In the final rule, the Commission is 

adjusting the numerical amounts 

described above in light of significant 

shifts in the Euro-U.S. Dollar exchange 

rates since the publication of the 

proposal. Specifically, the Commission 

is reducing the value of each numerical 

quantity expressed in dollars to be 

consistent with a one for one exchange 

rate with the Euro. As a specific 

example, the amount of the initial 

margin threshold is being changed from 

$65 million in the proposal to $50 

million in the final rule. This change 

will align the U.S dollar denominated 

numerical amounts in the final rule 

with those in the 2013 international 

framework, will be consistent with 

amounts that have been proposed in 

margin rules by the European and 

Japanese authorities, and will be more 

consistent with the Euro-U.S. Dollar 

exchange rate prevailing at the time the 

final rule is published. 

III. Interim Final Rule 

A. Background 

Title VII of the Dodd-Frank Act 

established a comprehensive new 

regulatory framework for derivatives, 

which the Act generally characterizes as 

‘‘swaps’’ and ‘‘security-based 

swaps.’’ 324 As part of this new 

regulatory framework, sections 731 of 

the Dodd-Frank Act added a new 

section 4s to the CEA which requires 

registration with the CFTC of swap 

dealers and major swap participants.325

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678 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

326 7 U.S.C. 2(h). The CEA sets out standards that 

the Commission is required to apply when making 

determinations about clearing, which generally 

address whether a swap is sufficiently standardized 

to be cleared. 7 U.S.C. 2(h)(2)(D). To date, the 

Commission has determined that certain interest 

rate swaps and credit default swaps are required to 

be cleared. 17 CFR 50.4. 

327See 7 U.S.C. 2(h)(7). Further, the Commission 

has authority to exempt swaps from the clearing 

requirement. 7 U.S.C. 6(c)(1). 

328The final rule takes a similar approach. In 

implementing this risk-based approach, the final 

rule distinguishes among four separate types of 

swap counterparties: (i) Counterparties that are 

themselves swap entities; (ii) counterparties that are 

financial end users with a material swaps exposure; 

(iii) counterparties that are financial end users 

without a material swaps exposure, and (iv) other 

counterparties, including nonfinancial end users, 

sovereigns, and multilateral development banks. 

329 17 CFR 50.25. See 77 FR 44441 (July 30, 2012) 

330See, e.g., 17 CFR 50.50(b). 

331See 7 U.S.C. 2(h)(7)(A); 15 U.S.C. 78c–3(g)(1). 332See 7 U.S.C. 2(h)(7)(A); 15 U.S.C. 78c–3(g)(1); 

17 CFR 50.50. A ‘‘financial entity’’ is defined to 

mean (i) a swap dealer; (ii) a security-based swap 

dealer; (iii) a major swap participant; (iv) a major 

security-based swap participant; (v) a commodity 

pool; (vi) a private fund as defined in section 202(a) 

of the Investment Advisers Act of 1940; (vii) an 

employee benefit plan as defined in sections 3(3) 

and 3(32) of the Employment Retirement Income 

Security Act of 1974; (viii) a person predominantly 

engaged in activities that are in the business of 

banking, or in activities that are financial in nature, 

as defined in section 4(k) of the Bank Holding 

Company Act of 1956. See 7 U.S.C. 2(h)(7)(C)(i); 15 

U.S.C. 78c–3(g)(3). 

These registrants are collectively 

referred to in this preamble as ‘‘swap 

entities.’’ 

As noted earlier, sections 731 of the 

Dodd-Frank Act requires the 

Commission to adopt rules that apply to 

all swap dealer and major swap 

participants without a prudential 

regulator, imposing capital requirements 

and initial and variation margin 

requirements on all uncleared swaps. 

The capital and margin requirements 

under sections 731 of the Dodd-Frank 

Act apply to uncleared swaps and 

complement other provisions of the 

Dodd-Frank Act that require the 

Commission to make determinations as 

to whether certain swaps, or a group, 

category, or class of such transactions, 

should be required to be cleared.326 If 

the CFTC has made such a 

determination, it is generally unlawful 

for any person to engage in such a swap 

unless the transaction is submitted to a 

derivatives clearing organization, as 

applicable, for clearing. 

The clearing requirements, however, 

do not apply to an entity that is not a 

financial entity, is using a swap to 

hedge or mitigate commercial risk, and 

notifies the Commission, in a manner 

set forth by the Commission, how it 

generally meets its financial 

obligations.327 Thus, a particular swap 

might be subject to the capital and 

margin requirements of section 731 

either because it is not subject to the 

mandatory clearing requirement, or 

because one of the parties to the swap 

is eligible for, and elects to use, an 

exception or exemption from the 

mandatory clearing requirement. Such a 

swap is a ‘‘uncleared’’ swap for 

purposes of the capital and margin 

requirements established under sections 

731 of the Dodd-Frank Act. 

Sections 731 direct the Commission to 

impose initial and variation margin 

requirements on all swaps that are not 

cleared. Under the proposed rule, the 

Commission distinguished among 

different types of counterparties on the 

basis of risk.328

On January 12, 2015, President 

Obama signed into law TRIPRA. Title III 

of TRIPRA, the ‘‘Business Risk 

Mitigation and Price Stabilization Act of 

2015,’’ amends statutory provisions 

added by the Dodd-Frank Act relating to 

margin requirements for swaps and 

security-based swaps. Specifically, 

section 302 of TRIPRA’s Title III amends 

sections 731 and 764 of the Dodd-Frank 

Act to provide that the initial and 

variation margin requirements do not 

apply to certain transactions of specified 

counterparties that would qualify for an 

exemption or exception from clearing, 

as explained more fully below. 

Uncleared swaps that are exempt under 

section 302 of TRIPRA will not be 

subject to the Commission’s rules 

implementing margin requirements. In 

section 303 of TRIPRA, Congress 

required that the Commission 

implement the provisions of Title III by 

promulgating an interim final rule and 

seeking public comment on the interim 

final rule. 

The Commission is therefore 

promulgating this interim final rule 

with a request for comment. As noted 

above, swaps may be uncleared swaps 

either because (i) there is an exemption 

or exception from clearing available; or 

(ii) the Commission has not determined 

that such swap is required to be cleared. 

The exclusions and exemptions from 

the final margin rule will apply to both 

categories of uncleared swaps when 

they involve a counterparty that meets 

the requirements for an exception or 

exemption from clearing (e.g., a nonfinancial end user using swaps to hedge 

or mitigate commercial risk). 

Clearing requirements pursuant to the 

CEA began to take effect with respect to 

certain interest rate and credit default 

swap indices swaps on March 11, 

2013.329 CSEs have accordingly already 

established methods and procedures to 

engage in transactions with 

counterparties that are eligible for the 

clearing exceptions or exemptions and 

for recording and reporting the 

eligibility of these transactions for the 

exception or exemptions as required 

under the statute.330 The Commission 

expects these processes will function 

equally well as a basis for the parallel 

statutory exemptions from initial and 

variation margin requirements for 

uncleared swaps implemented pursuant 

to this interim final rule. 

B. Description of the Interim Final Rule 

This interim final rule, which adds a 

new section 23.150(b) to the final rule, 

adopts the statutory exemptions and 

exceptions as required under TRIPRA. 

TRIPRA provides that the initial and 

variation margin requirements do not 

apply to the uncleared swaps of three 

categories of counterparties. In 

particular, section 302 of TRIPRA 

amends section 731 so that initial and 

variation margin requirements will not 

apply to a swap in which a counterparty 

(to a CSE) is (1) a non-financial entity 

(including small financial institution 

and a captive finance company) that 

qualifies for the clearing exception 

under section 2(h)(7)(A) of the Act; (2) 

a cooperative entity that qualifies for an 

exemption from the clearing 

requirements issued under section 

4(c)(1) of the Act; or (3) a treasury 

affiliate acting as agent that satisfies the 

criteria for an exception from clearing in 

section 2(h)(7)(D) of the Act. 

1. Entities Qualifying for a Clearing 

Exception 

TRIPRA provides that the initial and 

variation margin requirements of the 

final rule shall not apply to a uncleared 

swap in which a counterparty qualifies 

for an exception under section 

2(h)(7)(A) of the CEA.331 Section 

2(h)(7)(A) excepts from clearing swaps 

where one of the counterparties is not 

a financial entity, is using the swap to 

hedge or mitigate commercial risk, and 

notifies the Commission how it 

generally meets its financial obligations 

associated with entering into uncleared 

swaps. A number of different types of 

counterparties may qualify for an 

exception from clearing under section 

2(h)(7)(A), including: Non-financial end 

users, small banks, savings associations, 

Farm Credit System Institutions, and 

credit unions. In addition, captive 

finance companies qualify for an 

exception from clearing under section 

2(h)(7)(A). 

a. Non-Financial End Users 

A counterparty that is not a financial 

entity 332 (sometimes referred to as 

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333See 7 U.S.C. 2(h)(7)(C)(ii); 17 CFR 50.50; 77 FR 

42560 (July 19, 2012); as recodified by 77 FR 74284 

(Dec 13,2012). 334See 7 U.S.C. 2(h)(7)(C)(iii). 

335See 7 U.S.C. 6(c)(1). The CFTC, pursuant to its 

authority under section 4(c)(1) of the Commodity 

Exchange Act, adopted 17 CFR 50.51, which allows 

cooperative financial entities that meet certain 

qualifications to elect not to clear certain swaps that 

are otherwise required to be cleared pursuant to 

section 2(h)(1)(A) of the Commodity Exchange Act. 

336See 7 U.S.C. 6(c)(1);17 CFR 50.51. 

337See 7 U.S.C. 2(h)(7)(D); 15 U.S.C. 78c–3(g)(4). 

This exception does not apply to a person that is 

a swap dealer, security-based swap dealer, major 

swap participant, major security-based swap 

participant, an issuer that would be an investment 

company as defined in section 3 of the Investment 

Company Act of 1940 (15 U.S.C. 80a–3) but for 

section 3(c)(1) or 3(c)(7) of that Act, a commodity 

pool, or a bank holding company with over $50 

billion in consolidated assets. 

338 5 U.S.C. 601 et seq. 

339See e.g., In Mid-Tex Electric Cooperative v. 

FERC, 773 F.2d 327 (D.C. Cir. 1985); United 

Distribution Cos. v. FERC, 88 F.3d 1105, 1170 (D.C. 

Cir. 1996); Cement Kiln Recycling Coalition v. EPA, 

255 F.3d 855 (D.C. Cir. 2001). 

340NERA’s comment is addressed below. 

341 In contrast to the proposal, the final rule does 

not require a CSE to calculate hypothetical initial 

and variation margin amounts each day for 

positions held by non-financial end users that have 

MSEs to the CSE. This should further reduce the 

possibility that small entities may be indirectly 

impacted by the final rule. 

342 47 FR 18618 (Apr. 30, 1982). 

343See 77 FR 30596, 30701 (May 23, 2012) (SDs 

and MSPs); 66 FR 20740, 20743 (April 25, 2001) 

(ECPs). 

‘‘commercial end users’’) that is using 

swaps to hedge or mitigate commercial 

risk generally would qualify for an 

exception from clearing under section 

2(h)(7)(A) and thus from the 

requirements of the final rule for 

uncleared swaps pursuant to section 

23.150(b). 

b. Small Banks, Savings Associations, 

Farm Credit System Institutions, and 

Credit Unions 

The definition of ‘‘financial entity’’ in 

section 2(h)(7)(C)(ii) provides that the 

Commission shall consider whether to 

exempt small banks, savings 

associations, Farm Credit System 

Institutions, and credit unions with total 

assets of $10 billion or less. Pursuant to 

this authority, the Commission has 

exempted small banks, savings 

associations, Farm Credit System 

Institutions, and credit unions with total 

assets of $10 billion or less from the 

definition of ‘‘financial entity,’’ thereby 

permitting these institutions to avail 

themselves of the clearing exception 

when they are using swaps to hedge or 

mitigate risk.333 As a result, these small 

financial institutions that are using 

uncleared swaps to hedge or mitigate 

commercial risk would also qualify for 

an exemption from the initial and 

variation margin requirements of the 

final rule pursuant to section 23.150(b). 

c. Captive Finance Companies 

Section 2(h)(7)(C) also provides that 

the definition of ‘‘financial entity’’ does 

not include an entity whose primary 

business is providing financing and uses 

derivatives for the purposes of hedging 

underlying commercial risks relating to 

interest rate and foreign exchange 

exposures, 90 percent or more of which 

arise from financing that facilitates the 

purchase or lease of products, 90 

percent or more of which are 

manufactured by the parent company or 

another subsidiary of the parent 

company (‘‘captive finance 

company’’).334 These entities can avail 

themselves of a clearing exception when 

they are using swaps to hedge or 

mitigate commercial risk and thus 

would be eligible for the exemption in 

the Commission’s margin rules pursuant 

to section 23.150(b). 

2. Certain Cooperative Entities 

TRIPRA provides that the initial and 

variation margin requirements shall not 

apply to an uncleared swap in which a 

counterparty qualifies for an exemption 

issued under section 4(c)(1) of the 

Commodity Exchange Act from the 

clearing requirements of section 

2(h)(1)(A) of the Commodity Exchange 

Act for cooperative entities as defined in 

such exemption.335 The Commission, 

pursuant to its authority under section 

4(c)(1) of the Commodity Exchange Act, 

adopted a regulation that allows 

cooperatives that are financial entities to 

elect an exemption from mandatory 

clearing of swaps that: (1) They enter 

into in connection with originating 

loans for their members; or (2) hedge or 

mitigate commercial risk related to 

loans to members or swaps with their 

members which are not financial 

entities or are exempt from the 

definition of financial entity.336 The 

swaps of these cooperatives that would 

qualify for an exemption from clearing 

also would qualify pursuant to section 

23.150(b) for an exemption from the 

margin requirements of the final rule. 

3. Treasury Affiliates Acting as Agent 

TRIPRA provides that the initial and 

variation margin requirements shall not 

apply to an uncleared swap in which a 

counterparty satisfies the criteria in 

section 2(h)(7)(D) of the Commodity 

Exchange Act. These sections provide 

that, where a person qualifies for an 

exception from the clearing 

requirements, an affiliate of that person 

(including an affiliate predominantly 

engaged in providing financing for the 

purchase of the merchandise or 

manufactured goods of the person) may 

qualify for the exception as well, but 

only if the affiliate is acting on behalf of 

the person and as an agent and uses the 

swap to hedge or mitigate the 

commercial risk of the person or other 

affiliate of the person that is not a 

financial entity (‘‘treasury affiliate 

acting as agent’’).337 A treasury affiliate 

acting as agent that meets the 

requirements for a clearing exemption 

would also be eligible for an exemption 

pursuant to section 23.150(b) from the 

Commission’s final rule. 

The Commission requests comments 

on all aspects of the interim final rule. 

IV. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires that agencies consider 

whether the regulations they propose 

will have a significant economic impact 

on a substantial number of small 

entities.338 The RFA does not require 

agencies to consider the impact of the 

final rule, including its indirect 

economic effects, on small entities that 

are not subject to the requirements of 

the final rule.339 In the Proposal, the 

Commission certified that the proposed 

rule would not have a significant 

economic impact on a substantial 

number of small entities. Following the 

publication of the proposal, the 

Commission received a comment on the 

potential for costs to be passed on to 

market participants using swaps, 

including small entities that are not 

subject to the margin requirements.340

The final rule implements the new 

statutory framework of Section 4s(e) of 

the CEA, added by Section 731 of the 

Dodd-Frank Act, which requires the 

Commission to adopt capital and initial 

and variation margin requirements for 

CSEs on all uncleared swaps in order to 

offset the greater risk to the swap entity 

and the financial system arising from 

the use of swaps and security-based 

swaps that are not cleared. The final 

margin requirements will apply to 

uncleared swaps between covered swap 

entities and their financial end user 

counterparties.341

As discussed in the Proposal, the 

Commission previously established 

certain definitions of ‘‘small entities’’ to 

be used in evaluating the impact of its 

regulations on small entities in 

accordance with the RFA,342 and that it 

has determined that SDs, MSPs and 

eligible contract participants (‘‘ECPs’’) 

are not small entities for purposes of the 

RFA.343 Accordingly, CSEs that are 

subject to the final rule are not small 

entities for purposes of the RFA. 

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680 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

344The RFA focuses on direct impact to small 

entities and not on indirect impacts on these 

businesses, which may be tenuous and difficult to 

discern. See Mid-Tex Elec. Coop., Inc. v. FERC, 773 

F.2d 327, 340 (D.C. Cir. 1985); Am. Trucking Assns. 

v. EPA, 175 F.3d 1027, 1043 (D.C. Cir. 1985). 

345As noted in paragraph (1)(xii) of the definition 

of ‘‘financial end user’’ in section 23.151 of the final 

rule, a financial end user includes a person that 

would be a financial entity described in paragraphs 

(1)(i)–(xi) of that definition, if it were organized 

under the laws of the United States or any State 

thereof. The Commission believes that this prong of 

the definition of financial end user would capture 

the same type of U.S. financial end users that are 

ECPs, but for them being foreign financial entities. 

Therefore, for purposes of the Commission’s RFA 

analysis, these foreign financial end users will be 

considered ECPs and therefore, like ECPs in the 

U.S., not small entities. 

346 44 U.S.C. 3501 et seq. 

347The Commission notes that certain provisions 

of Regulation 23.158 are already covered by OMB 

Control Number 3038–0104, which is not affected 

by this final rule. 

348See OMB Control No. 3038–0088, available at 

http://www.reginfo.gov/public/do/ 

PRAOMBHistory?ombControlNumber=3038-0088. 

349See 77 FR 55904 (Sept. 12, 2012). Commission 

Regulation 23.504(b) requires an SD or MSP to 

maintain written swap trading relationship 

documentation that must include all terms 

governing the trading relationship between the SD 

or MSP and its counterparty, and Commission 

Regulation 23.504(d) requires that each SD and 

MSP maintain all documents required to be created 

pursuant to Commission Regulation 23.504. 

Commission Regulation 23.502(c) requires each SD 

and MSP to notify the Commission and any 

With respect to certain financial end 

users 344 that may be impacted by the 

Proposed Rule, the Commission expects 

that such entities would be similar to 

eligible contract participants (‘‘ECPs’’) 

and, as such, they would not be small 

entities.345 As discussed above, the final 

rule applies on a cross-border basis and 

therefore, to uncleared swaps between 

CSEs and foreign financial end users. 

Even assuming that there are any foreign 

financial entities that would not be 

considered ECPs (and thus, would be 

small entities), the Commission expects 

that only a small number of foreign 

financial entities that are not ECPs, if 

any, would trade in uncleared swaps. 

The Commission notes that to the 

extent that small entities may be 

impacted, the final rule contains 

numerous provisions that are intended 

to mitigate—or have the effect of 

mitigating—the cost on such entities. 

For example, under the final rule, the 

level of the aggregate notional amount of 

transactions that give rise to material 

swaps exposure has been raised from $3 

billion to $8 billion, which should 

result in a fewer financial end users 

being required to post initial margin. In 

addition, the final rule provides an 

initial margin threshold of $50 million 

from all uncleared swaps between a 

covered swap entity and its 

counterparties, which should further 

reduce the impact of the rule on 

financial counterparties that may be 

small entities. 

For the reasons discussed above, the 

Commission finds that there will not be 

a substantial number of small entities 

impacted by the final rule. Therefore, 

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’’) 346 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. 

This final rule will result in a 

mandatory collection of information 

within the meaning of the PRA. The 

collection is necessary to implement 

section 4s(e) of the CEA, which directs 

the Commission to adopt rules 

governing margin requirements for SDs 

and MSPs. In accordance with the 

requirements of the PRA, the 

Commission may not conduct or 

sponsor, and a person is not required to 

respond to, this collections of 

information unless it displays a 

currently valid OMB control number. 

As described below, all of the 

collections of information required by 

the final rule are covered by existing 

OMB Control Number 3038–0024 and 

OMB Control Number 3038–0088, with 

OMB Control Number 3038–0024 

requiring a revision of the burden hours. 

The titles for these collections of 

information are ‘‘Regulations and Forms 

Pertaining to Financial Integrity of the 

Market Place, OMB control number 

3038–0024’’ and ‘‘Swap Trading 

Relationship Documentation 

Requirements for Swap Dealers and 

Major Swap Participants, OMB control 

number 3038–0088.’’ 347

1. Clarification of Collection 3038–0088 

The final rule contains reporting and 

recordkeeping requirements that are 

part of the existing Commission 

regulations pertaining to swap trading 

relationship documentation 

requirements. The collection of 

information related to that existing 

Commission regulation is covered by 

OMB Control Number 3038–0088.348

Specifically, under the final rule, both 

the formula employed in the 

standardized method and the approach 

of the risk-based model that reflect 

offsetting exposures require that offsets 

be reflected only for swaps that are 

subject to the same eligible master 

netting agreement (‘‘EMNA’’). 

Regulation 23.151 defines the term 

EMNA and provides that a CSE that 

relies on the agreement for purpose of 

margin calculation must establish and 

maintain written procedures for 

monitoring relevant changes in the law 

and to ensure that the agreement 

continues to satisfy the requirements of 

this section. Regulation 23.153(d) 

further specifies that a CSE must 

demonstrate upon request to the 

satisfaction of the Commission that it 

has made appropriate efforts to collect 

or post the required margin. In addition, 

Regulation 23.154 establishes standards 

for initial margin models and requires 

CSEs to describe to the Commission any 

remedial actions being taken, and report 

internal audit findings regarding the 

effectiveness of the initial margin model 

to the CSE’s board of directors or a 

committee thereof, to adequately 

documents all material aspects of its 

initial margin model; and, to adequately 

documents internal authorization 

procedures, including escalation 

procedures that require review and 

approval of any change to the initial 

margin calculation under the initial 

margin model, demonstrable analysis 

that any basis for any such change is 

consistent with the requirements of this 

section, and independent review of such 

demonstrable analysis and approval. 

Regulation 23.155(b) requires a covered 

swap entity to create and maintain 

documentation setting forth the 

variation margin methodology, evaluate 

the reliability of its data sources at least 

annually, and make adjustments, as 

appropriate. It also provides that the 

Commission at any time may require a 

covered swap entity to provide further 

data or analysis concerning the 

methodology or a data source. 

Regulation 23.157(c) requires the 

custodian to act pursuant to a custody 

agreement that prohibits the custodian 

from re-hypothecating, repledging, 

reusing, or otherwise transferring the 

funds held by the custodian. Regulation 

23.158 requires a covered swap entity to 

execute trading documentation with 

each counterparty that is either a swap 

entity or financial end user regarding 

credit support arrangements. 

The reporting and recordkeeping 

requirements of Regulations 23.154(b)(4) 

through 23.154(b)(7), and Regulations 

23.155(b), 23.157(c) and 23.158, 

described above, fall under the 

Commission Regulations 23.500 through 

23.506 349 and are covered by OMB 

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applicable Prudential Regulator of any swap 

valuation dispute in excess of $20 million if not 

resolved in specified timeframes. 

350The Commission is publishing a separate 

notice in the Federal Register to renew OMB 

Control Number 3038–0088, which will revise the 

burden estimates relating to the collection titled 

‘‘Swap Trading Relationship Documentation 

Requirements for Swap Dealers and Major Swap 

Participants.’’ 

351The Commission previously proposed to adopt 

regulations governing standards and other 

requirements for initial margin models that would 

be used by SDs and MSPs to margin uncleared swap 

transactions. See Capital Requirements of Swap 

Dealers and Major Swap Participants, 76 FR 27,802 

(May 12, 2011). As part of the October 3, 2014 

proposal, the Commission submitted proposed 

revisions to collection 3038–0024 for the estimated 

burdens associated with the margin model to OMB. 

352 7 U.S.C. 19(a). 

353The Commission notes that the costs and 

benefits considered in finalizing the margin rule, 

and highlighted below, have informed the policy 

choices described throughout this release. 

354See Appendix A for the Commission’s 

estimates of the funding costs for initial margin and 

variation margin, as well as a more detailed 

discussion of certain administrative costs. 

355For the reasons discussed in Appendix A, 

these administrative costs are difficult to quantify 

at this time. Therefore, the Commission discusses 

the administrative costs related to margin for 

uncleared swaps qualitatively instead. 

356That is, if the Commission’s margin rules are 

substantially stricter than that of the Prudential 

Regulators, such difference could make it less costly 

to conduct swaps trading in a bank swap dealer as 

compared to a non-bank swap dealer. Likewise, 

Continued 

Control Number 3038–0088. Further, 

the reporting and recordkeeping 

requirements in Regulation 23.154(b)(4) 

through 23.154(b)(7) and Regulations 

23.155(b), 23.157(c) and 23.158, would 

not materially impact the burden 

estimates currently provided for in OMB 

Control Number 3038–0088.350

2. Revisions to Collection 3038–0024 

As noted above, the final will require 

a new information collection, which is 

covered by OMB Control Number 3038– 

0024.351 However, the final rule will 

revise the burden hours associated with 

the collection, as discussed below. 

Regulation 23.154(b)(1) requires CSEs 

that wish to use initial margin models 

to obtain the Commission’s approval, 

and to demonstrate, on a continuing 

basis, to the Commission that the 

models satisfy standards established in 

Regulation 23.154. These standards 

include: (i) A requirement that a CSE 

notify the Commission in writing 60 

days before extending the use of the 

model to additional product types, 

making certain changes to the initial 

margin model, or making material 

changes to modeling assumptions; and 

(ii) a variety of quantitative 

requirements, including requirements 

that the CSE validate and demonstrate 

the reasonableness of its process for 

modeling and measuring hedging 

benefits, demonstrate to the satisfaction 

of the Commission that the omission of 

any risk factor from the calculation of its 

initial margin is appropriate, 

demonstrate to the satisfaction of the 

Commission that incorporation of any 

proxy or approximation used to capture 

the risks of the covered swap entity’s 

non-cleared swaps is appropriate, 

periodically review and, as necessary, 

revise the data used to calibrate the 

initial margin model to ensure that the 

data incorporate an appropriate period 

of significant financial stress. 

Currently, there are approximately 

106 SDs and MSPs provisionally 

registered with the Commission. The 

Commission further estimates that 

approximately 54 of the SDs and MSPs 

will be subject to the Commission’s 

margin rules as they are not subject to 

a Prudential Regulator. The Commission 

further estimates that all SDs and MSPs 

will seek to obtain Commission 

approval to use models for computing 

initial margin requirements. The 

Commission estimates that the 

information collection requirement 

associated with this aspect of the final 

rule will impose an average of 240 

burden hours per registrant. 

Based upon the above, the estimated 

additional hour burden for collection 

3038–0024 was calculated as follows: 

Number of registrants: 54. 

Frequency of collection: Initial submission 

and periodic updates. 

Estimated annual responses per registrant: 

1. 

Estimated aggregate number of annual 

responses: 54. 

Estimated annual hour burden per 

registrant: 240 hours. 

Estimated aggregate annual hour burden: 

12,960 hours [54 registrants × 240 hours per 

registrant]. 

V. Cost Benefit Considerations 

A. Introduction 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its discretionary actions 

before promulgating a regulation under 

the CEA or issuing certain orders.352

Section 15(a) further specifies that the 

costs and benefits shall be evaluated in 

light of 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. In this 

section, the Commission discusses the 

costs and benefits resulting from its 

discretionary determinations with 

respect to the section 15(a) factors.353

This rulemaking implements the new 

statutory framework of Section 4s(e) of 

the CEA, added by Section 731 of the 

Dodd-Frank Act, which requires the 

Commission to adopt capital and initial 

and variation margin requirements for 

CSEs. Section 4(s)(e) of the CEA requires 

the Commission to adopt initial and 

variation margin requirements for CSEs 

on all of their uncleared swaps, which 

should be designed to ensure the CSE’s 

safety and soundness and be 

appropriate for the risk associated with 

the uncleared swap. In addition, section 

4s(e)(3)(D) of the CEA provides that the 

Commission, the Prudential Regulators, 

and the SEC, must ‘‘to the maximum 

extent practicable’’ establish and 

maintain comparable margin rules. 

The Commission recognizes that there 

are inherent trade-offs in developing 

minimum collateral standards for 

uncleared swaps. Margin rules for 

uncleared swaps are designed to reduce 

the probability of default by the CSE 

and limit the amount of leverage that 

can be undertaken by CSEs (and other 

market participants, in the aggregate), 

which ultimately mitigates the 

possibility of a systemic event. The 

financial crisis of 2008 has had 

profound and long-lasting adverse 

effects on the economy, and therefore 

reducing the potential for another 

systemic event provides significant, if 

unquantifiable, benefits. At the same 

time, the final margin rule will entail 

new costs for CSEs and financial end 

users as they will need to provide 

liquid, high-quality collateral to meet 

those requirements that exceed current 

practice and as a result, incur costs in 

terms of lost returns from investments 

or in securing additional sources of 

funding (e.g., interest expenses 

associated with borrowing funds).354 In 

addition, CSEs and financial end users 

will face certain startup and ongoing 

costs relating to technology and other 

operational infrastructure, as well as 

new or updated legal agreements.355

The final rule reflects the Commission’s 

reasoned judgment of how best to 

ensure the safety and soundness of CSEs 

and the U.S. financial system, in a 

manner that considers the economic 

consequences of its policy choices. 

The Commission also recognizes that 

many CSEs are part of bank holding 

companies with global operations that 

are subject to overlapping jurisdictions 

by multiple supervisory authorities, 

both domestic and foreign. Significant 

disparities in margin rules can lead to 

undue competitive distortions and 

ultimately, opportunities for regulatory 

arbitrage.356 It could also lead to 

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U.S. and financial end users could be advantaged 

or disadvantaged depending on how the 

Commission’s margin rule compares with 

corresponding requirements in other jurisdictions. 

357The Commission, in a separate rulemaking, 

will address the cross-border application of the 

Commission’s margin rules, including the 

availability of substituted compliance and 

exclusion, as appropriate. The cross-border margin 

rules are intended to further promote global 

harmonization of margin rules and consequently, 

mitigate the potential for competitive distortions 

and market inefficiencies. 

358See 7 U.S.C. 2(i). Section 2(i) of the CEA states 

that the provisions of the Act relating to swaps that 

were enacted by the Wall Street Transparency and 

Accountability Act of 2010 (including any rule 

prescribed or regulation promulgated under that 

Act), shall not apply to activities outside the United 

States unless those activities (1) have a direct and 

significant connection with activities in, or effect 

on, commerce of the United States; or (2) 

contravene such rules or regulations as the 

Commission may prescribe or promulgate as are 

necessary or appropriate to prevent the evasion of 

any provision of this Act that was enacted by the 

Wall Street Transparency and Accountability Act of 

2010. 

359As foreign jurisdictions put in place their own 

margin rules in the future, the existence of these 

rules may affect the costs and benefits of the 

Commission’s rules for foreign CSEs and financial 

end users. However, the still developing state of 

foreign law in this area and the absence of specific 

information in the record of this proceeding does 

not permit a detailed evaluation of such possible 

effects in the present proceeding. As noted above, 

the Commission will be addressing certain issues 

relating to the effects of foreign margin rules, 

including the availability of substituted 

compliance, in a separate rulemaking. 

360As discussed in this release, the relevant 

comments have informed the Commission’s 

decisions regarding the final rule and are 

highlighted below. 

361As discussed above, however, certain 

uncleared swaps of CSEs with their affiliates are not 

subject to initial margin; the related cost-benefit 

considerations are addressed below. 

362The Commission recognizes that a CSE may 

enter into a swap with another non-CSE swap 

entity, which would result in the non-CSE swap 

entity collecting under the Prudential Regulators’ 

margin regime. Therefore, this section does not 

consider costs and benefits as they relate to the nonCSE swap entity. 

363 § 23.151. 

364The Commission notes that its definition of 

‘‘financial end user’’ includes security-based swap 

dealers and major security-based swap participants, 

as these entities are included in the Prudential 

Regulators’ definition of swap entities. 

operational inefficiencies as entities 

within the same corporate group may be 

precluded from utilizing congruent 

operational and compliance 

infrastructure. In light of these concerns, 

and in accordance with the statutory 

mandate, the Commission, in 

developing the final rule, closely 

consulted and coordinated with the 

Prudential Regulators and foreign 

regulators in order to harmonize our 

respective margin rules to the greatest 

extent possible.357

The baseline against which the costs 

and benefits associated with this rule 

will be compared is the status quo, i.e., 

the uncleared swaps markets as they 

exist today. At present, swap market 

participants are not legally required to 

post either initial or variation margin 

when engaging in uncleared swaps. 

Nevertheless, the Commission 

understands that, for risk management 

purposes, many CSEs collect initial 

margin from certain non-CSE 

counterparties and exchange variation 

margin with CSEs and financial end 

users for uncleared swaps. Further, 

section 4s(e), read together with section 

2(i) of the CEA,358 applies the margin 

rules to a CSE’s swap activities outside 

the United States, regardless of the 

domicile of the CSE (or its 

counterparties). Because the 

Commission found no information that 

indicates that there are material 

differences in the costs and benefits 

discussed herein between foreign and 

cross-border swaps activities of CSEs 

and financial end users affected by the 

rule, the Commission’s consideration of 

the costs and benefits of the final rule 

applies to all swap activities, domestic 

and cross-border, to which the final rule 

applies. CSEs, wherever domiciled, by 

definition are involved in a large 

volume of swaps activity in, or 

significantly affecting, United States 

markets and are registered with the 

Commission. Accordingly, they can be 

expected already to have in place 

personnel and infrastructure for 

compliance with United States law. To 

the extent that there may be differences 

in the particulars of costs to foreign 

CSEs or financial end users, the record 

of this proceeding generally did not 

provide information that would permit 

the evaluation of any such 

differences.359

In the sections that follow, the 

Commission considers: (i) The costs and 

benefits associated with its choices 

regarding the scope and extent to which 

it would apply its margin rule to 

uncleared swaps of a CSE and certain 

financial end users; (ii) the alternatives 

considered by the Commission and the 

costs and benefits relative to the 

approach adopted herein; and (iii) 

impact of the margin rule on the market 

and the public, in light of the 15(a) 

factors, as applicable. In the proposing 

release, the Commission addressed the 

costs and benefits of the proposed rules, 

taking into account the considerations 

described above. The Commission also 

requested comments on these 

assessments and for any data or other 

information that would be useful in 

estimation of the quantifiable costs and 

benefits of this rulemaking. A total of 59 

comment letters were received. Some 

commenters generally addressed the 

cost-and-benefit aspect of the proposed 

rule; 360 one commenter provided 

quantitative data and analysis of the 

Commission’s proposal. The discussion 

of the costs and benefits that follows is 

largely qualitative in nature, although 

where possible the Commission 

attempts to quantify these benefits and 

costs. 

B. Final Rule 

1. Covered Entities: CSEs and Financial 

End Users 

Margin requirements apply to 

uncleared swaps entered into by 

CSEs 361—and by extension, to the 

counterparties to such swaps. Because 

different types of counterparties can 

pose different levels of risk, the final 

rule establishes three categories of 

counterparty: (i) CSEs; (ii) financial end 

users; and (iii) non-financial end users. 

Under the final rule, the initial and 

variation margin requirements apply to 

uncleared swaps of CSEs with certain 

counterparties, namely, other CSEs, 

swap entities that are not a CSE and 

financial end users (and in the case of 

initial margin, only those financial end 

users with material swaps exposure).362

The final rule defines ‘‘financial end 

user’’ as a counterparty that is not a 

swap dealer or a major swap participant 

but which falls within one of the 

categories of entities primarily engaged 

in financial activities.363 These 

categories are nearly identical to the 

Prudential Regulators’ definition of 

‘‘financial end user.’’ 364

In developing the definition of 

financial end user, the Commission was 

mindful of the significant new costs 

associated with the new minimum 

collateral requirements and has 

attempted to tailor the definition 

carefully to avoid undue burden on 

market participants, without 

undermining the objectives of the 

margin rules. Accordingly, the 

definition is intended to capture those 

market participants that by the nature 

and scope of their financial activities 

present a higher level of risk of default 

and are integral to the financial system, 

and thus, pose greater risk to the safety 

and soundness of their CSE 

counterparties and the stability of the 

financial system. Consistent with this 

risk-based approach to the definition, 

the definition specifically excludes 

entities that may be considered financial 

in nature but that perform different 

functions in the financial system than 

those included in the definition of 

financial end user. These include, 

among others, multi-lateral 

development banks, the Bank for 

International Settlements, and a subset 

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365See SIFMA, SFIG and ISDA. 

366See ABA (pension plans should not be subject 

to margin and should be treated as non-financial 

end users); AIMA (benefit plans should not be 

subject to margin and there is ambiguity involving 

whether non-U.S. public and private employee 

benefit plans would be financial end users); JBA 

(securities investment funds should be exempt from 

variation margin). 

367 In addition, with respect to pension plans, the 

Commission notes that Congress explicitly listed 

employee benefit plans as defined in paragraph (3) 

and (32) of section 3 of the Employee Retirement 

Income Security Act of 1974 in the definition of 

‘‘financial entity’’ in the Dodd-Frank Act. As a 

result, pension plans do not benefit from an 

exclusion from clearing even where they use swaps 

to hedge or mitigate commercial risk. 

368 In this regard, the Commission recognizes that 

the definition—particularly, the test that deems an 

entity a financial end user if it were organized 

under the laws of the United States—may impose 

a greater incremental cost with respect to foreign 

counterparties. However, the Commission believes 

that it is necessary to cover all financial end users 

that are counterparties to a CSE, including those 

that are foreign-domiciled, to effectuate the 

purposes of the margin requirements. 

369The Commission made a similar change to the 

definition of ‘‘initial margin threshold amount’’ as 

described in Regulation 23.151. 

370Commenters raised the concern that the 

proposed ‘‘control’’ test was difficult to apply and 

over-inclusive. See e.g., ACLI. 

of financial entities that engage in swaps 

to hedge or mitigate commercial risks. 

A number of commenters also 

requested that the Commission exclude 

from the financial end user definition 

structured finance vehicles, including 

securitization special purpose vehicles 

(‘‘SPVs’’) and covered bond issuers.365

These commenters argued that margin 

requirements on structured finance 

vehicles would restrict their ability to 

hedge interest rate and currency risk 

and potentially force these vehicles to 

exit the swaps market since these 

vehicles generally do not have ready 

access to liquid collateral. Other 

commenters argued that pension plans 

should not be subject to margin 

requirements because they are highly 

regulated, highly creditworthy, have 

low leverage and are prudently managed 

counterparties whose swaps are used 

primarily for hedging and, as such, pose 

little risk to their counterparties or the 

broader financial system.366

The Commission is not excluding, as 

commenters urged, pension plans, and 

structured finance vehicles. The 

Commission observes that these entities 

engage in the same range of activities as 

the other entities encompassed by the 

final rule’s definition of financial end 

user. The Commission notes that the 

increase in the material swaps exposure 

threshold, as finalized in the final rule, 

should address some of the concerns 

raised by these commenters regarding 

the applicability of initial margin 

requirements.367

The enumerated list in the definition 

of financial end user is intended to 

provide enhanced clarity to ease the 

burden associated with determining 

whether a counterparty is a financial 

end user.368 The Commission also 

considered alternative definitions, 

including using a broad-based definition 

similar to that listed in section 

2(h)(7)(C) of the CEA. The Commission 

is not adopting this approach because it 

believes that it would be difficult for the 

market participants to implement and 

the Commission to monitor. In addition, 

the broad-based definition would not 

provide the level of clarity that an 

enumerated list provides market 

participants when engaging in 

uncleared swaps. 

Initial margin requirements apply 

only to those financial end users that 

meet the specified MSE threshold. The 

MSE threshold is intended to identify 

entities that engage in significant 

derivatives activity as measured by the 

end user’s overall exposure in the 

market. In the proposal, the Commission 

proposed to define materiality as $3 

billion average notional amount. The 

final rule increases the level of the 

aggregate notional amount of 

transactions that gives rise to MSE to $8 

billion, which is broadly consistent with 

the Ö8 billion established by the 2013 

international framework and consistent 

with the EU and Japanese proposals. 

The increased MSE threshold should 

further reduce the number of financial 

end users subject to the initial margin 

requirement in relation to the 

Commission’s proposal. 

The final rule defines ‘‘material swaps 

exposure’’ as the aggregate notional 

amount of swaps not only of a particular 

entity, but also of its affiliates and 

subsidiaries. The Commission 

recognizes that calculation of MSE on 

an aggregate basis across affiliates and 

subsidiaries would require new 

reporting and tracking systems. As 

discussed above, the aggregation 

requirement is primarily intended to 

address the potential circumvention, as 

CSEs may disperse their swap activities 

through their affiliates to avoid 

exceeding the MSE threshold. The 

aggregation approach provides the 

Commission with a more complete 

picture of a firm’s systemic risk profile 

by measuring the risk at the 

consolidated level. The Commission 

believes that aggregating exposure 

across affiliates is necessary to achieve 

the objectives of the margin 

requirements. 

The definition of MSE also contains a 

number of other changes from the 

proposed definition to address 

commenters’ concerns. Notably, in 

response to commenters, a financial end 

user needs to count only one side of an 

inter-affiliate swap in calculating its 

MSE. The Commission believes that 

double counting (as proposed) would 

result in an inaccurate measure of the 

swaps exposure of a financial end user 

as it would inflate the total exposure 

within the consolidated group. By 

modifying the calculation in this way, 

the Commission believes that it is 

reducing the number of financial end 

users with MSE, which should lessen 

the costs for financial entities that 

would have exceeded the $8 billion 

threshold.369

The final affiliate definition uses 

financial accounting standards as the 

trigger for affiliation, rather than a legal 

control test. The Commission believes 

that determining affiliate status based 

on whether a company is or would be 

consolidated with another company on 

financial statements prepared in 

accordance with U.S. GAAP, the 

International Financial Reporting 

Standards or other similar standards, 

reflects a more accurate method for 

discerning control and should be less 

burdensome to apply.370 The 

Commission expects that most entities 

prepare financial statements under an 

acceptable accounting standard. For 

companies that do not prepare these 

statements, the Commission believes 

that industry participants are more 

familiar with the relevant accounting 

standards and tests, and they will be 

less burdensome to apply. 

2. Initial Margin 

Initial margin is intended to address 

potential future exposure. That is, in the 

event of a counterparty default, initial 

margin protects the non-defaulting party 

from the loss that may result from a 

swap or portfolio of swaps, during the 

period of time needed to close out the 

swap(s). Initial margin augments 

variation margin, which secures the 

current mark-to-market value of swaps. 

Under the final rule, CSEs would be 

required to both collect initial margin 

from and to post initial margin to 

financial end users with material swaps 

exposure. This represents a departure 

from current industry practice and 

hence, introduces new costs for CSEs 

and their covered counterparties, but is 

in accordance with the BCBS–IOSCO 

framework and the Prudential 

Regulators’ final rules. 

These costs include the costs of the 

requisite collateral, namely, the cost of 

securing external funds or the foregone 

return from investments. It is difficult to 

estimate these costs due to the fact that 

funding costs would vary widely 

depending on the type of entities and 

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371Further, it is expected that due to the cost of 

the final rules, some market participants may be 

incentivized to use alternatives to uncleared swaps. 

Futures contracts and cleared swaps, which tend to 

be more standardized and liquid than uncleared 

swaps, typically require less initial margin; 

however, this may result in basis risk given the 

standardization of these products. A futures 

contract has a one day minimum liquidation time 

and a cleared swap has a three- to five-day 

minimum liquidation time; in contrast, under the 

final rule, a ten day minimum liquidation time is 

required for uncleared swaps. 

372To the extent that the same funding could 

have been used to fund investment opportunities, 

there is also an opportunity cost on that lost 

investment. 

373See, e.g., ISDA. 

374The Commission notes that under the latest 

EU proposal, if a counterparty to a Europeanregistered entity is a non-European registered 

entity, then the European-registered entity must 

post initial margin to the non-European registered 

entity. See, Second Consultation Paper on draft 

regulatory technical standards on risk-mitigation 

techniques for OTC-derivative contracts not cleared 

by a CCP under Article 11(15) of Regulation (EU) 

No 648/2012 (for the European Market 

Infrastructure Regulation) (Jun. 10, 2015), available 

at https://www.eba.europa.eu/documents/10180/

1106136/JC-CP-2015-002+JC+CP+on+Risk+

Management+Techniques+for+OTC+derivatives+

.pdf. 

375The excess amount held at the custodian 

would only need to be the incremental change from 

day-to-day. 

376This amount applies to both initial and 

variation margin transfers on a combined basis. 

their sources of liquidity, differences in 

funding costs over time, differences on 

their return on investments and 

differences in the rate of return on 

different collateral assets that may be 

used to satisfy the initial margin 

requirements, among other things.371

At one extreme, it may be that some 

entities providing initial margin, such as 

pension funds and asset managers, will 

provide assets as initial margin that they 

already own and would have owned 

even if no requirements were in place. 

In such cases the economic cost of 

providing initial margin collateral is 

anticipated to be low. In other cases, 

entities engaging in uncleared swaps 

will have to raise additional funds to 

secure assets that can be pledged as 

initial margin. The greater the costs of 

their funding, relative to the rates of 

return on the initial margin collateral, 

the greater the cost of providing 

collateral assets.372

At the same time, a two-way exchange 

of initial margin protects both the CSE 

and the financial end user from the 

build-up of counterparty credit risk 

from uncollateralized credit exposures. 

As noted above, these entities are 

critical to the stability of the financial 

system and therefore, need the 

protection of initial margin in the event 

of the default of a CSE, as the potential 

of a cascading event is increased 

without the collection of initial margin 

by these financial end users. In regards 

to the CSE, posting margin restricts the 

CSE from accumulating too large of an 

exposure in relation to its financial 

capacity. Therefore, the two-way 

exchange of initial margin should 

increase the overall stability of the 

financial system. 

Further, as a result of the reduced risk 

of default, the posting party could 

receive a benefit from changes to the 

relationship between the CSE and the 

counterparty. As a result of the 

reduction in the overall credit exposure 

with the CSE, the counterparty may be 

able to realize better credit terms when 

transacting with the CSE and it 

consolidated group. To the extent any 

such benefit is realized, it would offset 

a portion of the cost incurred in posting 

collateral. 

Some commenters recommended that 

the Commission adopt a ‘‘collect-only’’ 

approach with respect to foreign end 

users.373 In response, the Commission 

notes that, in contrast to the proposed 

Japanese and European margin regimes, 

which would cover a very broad array 

of financial entities, a collect-only 

regime under the U.S. regime would be 

applicable only to CSEs and thus could 

leave a large number of financial entities 

with significant uncollateralized future 

exposures to their swap dealers.374

The Commission is requiring that 

CSEs calculate initial margin on a daily 

basis and that initial margin be posted 

within one day after the date of 

execution. The Commission is adopting 

this approach to preserve the margin 

period of risk, e.g., 10 day calculation 

period for initial margin models. Daily 

calculation is necessary as the risk 

factors and the portfolio are subject to 

daily change. If the Commission were to 

adopt a less restrictive timeframe for 

posting initial margin, the margin 

period of risk would increase, reducing 

the protection provided by initial 

margin. The Commission considered 

adding days to the 10 day margin period 

of risk to account for the additional time 

given to post initial margin collateral; 

however, the Commission believes that 

it would be difficult to implement as 

models would need to be adjusted to 

account for different posting 

timeframes, which could create 

difficulties for the Commission in 

validating the initial margin model 

calculations. 

The Commission recognizes that the 

T+1 posting requirement may lead to 

additional funding costs in the form of 

excess margin being held at the 

custodian to meet the one day 

requirement.375 However, the 

Commission expects that counterparties 

will post cash or some other eligible 

assets that can be pledged in one day 

and subsequently substitute other 

eligible assets for these highly liquid 

assets, which should mitigate the 

burdens placed by this requirement. The 

Commission notes that it has modified 

the date of execution to account for 

different time zones and holidays to 

further reduce the burdens associated 

with the T+1 requirement. 

Under the final rule, consistent with 

the BCBS–IOSCO standard, initial 

margin will not be required to be 

collected or posted by a CSE to its 

covered counterparty, to the extent that 

the aggregate un-margined exposure to 

its covered counterparty remains below 

$50 million. In effect, the $50 million 

threshold will provide a certain level of 

relief to all counterparties that are 

required to post and collect initial 

margin. It should also serve to reduce 

the aggregate amount of initial margin— 

and consequently, incrementally reduce 

overall funding cost—of all covered 

counterparties. At the same time, the 

Commission recognizes that the $50 

million threshold represents 

uncollateralized risk of potential future 

exposure. However, the Commission 

believes that this amount of 

uncollateralized swaps exposure, 

calculated on a consolidated basis 

within a corporate group, is acceptable 

in the context of initial margin, 

particularly in light of the benefits to the 

financial system. To further ease the 

transaction costs associated with the 

exchange of margin, the Commission is 

not requiring a CSE to collect or post 

any amount below the transfer amount 

of $500,000.376

3. Calculation of Initial Margin 

Under the final rule, a CSE must 

calculate the required amount of initial 

margin daily, on the basis of either a 

risk-based model or a table-based 

method. The use of either model is 

predicated on the satisfaction of certain 

baseline requirements to ensure that 

initial margin is calculated in a manner 

that is sufficient to protect CSEs as 

intended. Further, the choice of two 

alternatives allows CSEs to choose the 

methodology that is the most cost 

efficient for managing their business 

risks and thereby better compete. The 

costs and benefits associated with the 

use of each approach are addressed 

below. 

a. Risk-Based Model 

Generally, the baseline requirements 

of this risk-based model reflect the 

current practice for calculating bank 

regulatory capital and value at risk 

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Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 685 

377The same model requirements have been 

proposed by the EU, Japan, and Singapore. See 

‘‘Consultation Paper: Draft regulatory technical 

standards on risk-mitigation techniques for OTCderivative contracts not cleared by a CCP under 

Article 11(15) of Regulation (EU) No 648/2012,’’ 

available at https://www.eba.europa.eu/documents/ 

10180/655149/JC+CP+2014+03+%28CP+on+risk+

mitigation+for+OTC+derivatives%29.pdf; 

‘‘Publication of draft amendments to the ‘‘Cabinet 

Office Ordinance on Financial Instruments 

Business’’ and ‘‘Comprehensive Guidelines for 

Supervision’’ with regard to margin requirements 

for non-centrally cleared derivatives,’’ available at 

http://www.fsa.go.jp/news/26/syouken/20140703-

3.html; and ‘‘Policy Consultation for Margin for 

Non-Centrally Cleared OTC Derivatives,’’ available 

at http://www.mas.gov.sg/∼/media/MAS/News

%20and%20Publications/Consultation%20Papers/

Policy%20Consultation%20on%20Margin

%20Requirements%20for%20NonCentrally

%20Cleared%20OTC%20Derivatives%201Oct.pdf. 

378Studies on capital requirements conducted by 

BCBS–IOSCO have shown that a 10 day margin 

period of risk is adequate to address the moves in 

the market. See ‘‘Margin Requirements for NonCentrally Cleared Derivatives,’’ BCBS–IOSCO, Sept. 

2013, available at http://www.bis.org/publ/

bcbs261.pdf. 

379See § 23.504(b)(4). 

380Additionally, the final rule provides that a 

CSE may use models that have been approved by 

NFA. 

(‘‘VaR’’) and conform to the BCBS/ 

IOSCO standard for calculating margin 

for uncleared swaps.377 To the extent 

CSEs are familiar with these 

requirements and have infrastructure in 

place to calculate the initial margin 

amount under this model approach, 

burdens associated with utilizing the 

model should be mitigated. 

Under this model, a CSE would be 

required to generally calculate their 

initial margin based on the assumption 

of a ‘‘holding period’’ of 10 business 

days with a one-tailed 99% confidence 

interval. The Commission believes that 

a 10 day close-out period is necessary to 

ensure that the non-defaulting party has 

sufficient time to close out and replace 

its positions in the event of counterparty 

default.378 The Commission recognizes 

that certain swaps may not require a 10 

day period to liquidate or replace and 

hence a 10 day close-out period may 

lead to excessive initial margin. 

However, the Commission expects that 

most of the instruments that could be 

liquidated in less than 10 days are 

currently being cleared, and therefore, 

the impact of the requisite 10 day closeout period may be limited. Moreover, 

the Commission believes that under 

market stress, these same instruments 

that may be replaced or liquidated in 

less than 10 days may not maintain that 

same level of liquidity. 

The Commission considered the 

alternative of setting the individual 

margin period of liquidation for separate 

instruments or by broad asset class. 

However, under these alternatives, there 

would be substantial operational 

burdens on market participants in 

determining the appropriate margin 

period of risk for each individual swap 

or broad asset class. Substantial burdens 

would be imposed on regulators as well 

as they would be required to review 

each CSE’s determination of appropriate 

liquidation periods, which would not be 

uniform across each CSE for each 

individual swap or asset class, resulting 

in disputes as a result of each CSE 

determining its own liquidation period 

for the specific swap or swap asset class. 

The Commission is also requiring that 

the data used in calculating initial 

margin be based on an equally-weighted 

historical observation period of at least 

1 year and not more than 5 years, and 

must incorporate a period of significant 

financial stress for each broad asset 

class that is appropriate to the uncleared 

swaps to which the initial margin model 

is applied. The Commission believes 

that this approach would give an 

estimation period that is more 

representative of the underlying risks 

over time and thus, mitigate the procyclical nature of initial margin 

calculations. In addition, under the final 

rule, the initial margin model must be 

recalibrated on an on-going basis to 

incorporate any change that results from 

a current period stress. The Commission 

believes that this aspect of the final rule 

is necessary as the initial margin 

calculated without a period of financial 

instability would not be adequate to 

ensure the safety and soundness of CSEs 

or the stability of financial markets 

during a period of significant market 

volatility. The Commission understands 

that this stress period element may 

increase the level of initial margin 

required; however, in a time of stress, 

any change in the required margin 

amount should be not be pro-cycle, as 

the amount requirement would already 

contain a period of stress. 

Under a risk-based model, offsetting 

risk exposures for a swap may be 

recognized only in relation to another 

swap in the same category; offsetting 

risk exposures may not be recognized 

across asset classes. This will result in 

a greater amount of initial margin, all 

things being equal. The Commission is 

concerned that cross-asset class 

correlations break down during times of 

stress, increasing the likelihood that in 

the event of default, the initial margin 

amount calculated using these 

correlations would be insufficient to 

cover the amount needed to replace the 

positions. 

The risk-based model must also 

include material risks arising from nonlinear price characteristics, as many 

swaps have optionality. The 

Commission understands that this 

requirement may increase costs in 

developing models and result in a 

greater amount of initial margin. 

However, the Commission believes that 

without this requirement the initial 

margin calculation would not be 

adequate to cover the inherent risks of 

the swap or a portfolio of swaps. 

Moreover, the Commission understands 

that these risks are already imputed in 

the price of the swap. Therefore, the 

incremental burden should be minimal. 

A CSE using a risk-based model to 

calculate initial margin would be 

required to establish and maintain a 

rigorous risk controls process to reevaluate, update, and validate the model 

as necessary to ensure its continued 

applicability and compliance with the 

baseline requirements. While certain of 

these measures may already be in place 

as part of a CSE’s risk management 

program (established under section 

23.600(c)(4)(i)), others will result in 

additional costs for CSEs.379 The 

Commission believes that these 

measures are essential to ensuring the 

efficacy of risk-based models used by 

CSEs. In addition, given that a CSE 

subject to the Commission’s margin 

rules may be affiliated with one or more 

prudentially-supervised swap entities, 

the Commission would closely 

coordinate with the Prudential 

Regulators for expedited review of the 

model. The expedited review process 

should reduce unnecessary delay or 

duplication.380

b. Standardized Approach 

As an alternative to a risk-based 

model, a CSE may calculate initial 

margin using a standardized table. The 

standardized approach could result in 

excess initial margin being calculated. 

For this reason, the standardized 

approach is likely to appeal to those 

CSEs with smaller swap portfolios with 

limited offsets, for whom a risk-based 

margin model would not be costeffective. Since many CSEs and 

financial end users with material swaps 

exposure tends to have large swaps 

positions with significant offsets, the 

Commission expects that the risk-based 

model will be more widely favored. 

c. Netting 

Netting should reduce overall initial 

margin in relation to initial margin that 

would result from a calculation based 

on a gross measure. Both the formula 

employed in the standardized method 

and the approach of the risk-based 

model require that offsets be reflected 

only for swaps that are subject to the 

same eligible master netting agreement 

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686 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

381See 12 CFR 3.2, 12 CFR 217.2, and 12 CFR 

324.2. Regulatory Capital Rules, Liquidity Coverage 

Ratio: Interim Final Revisions to the Definition of 

Qualifying Master Netting Agreement and Related 

Definitions, 79 FR 78287 (Dec. 30, 2014). 

382See TIAA–CREF; CPFM; ICI; SIFMA; ISDA; 

SIFMA–AMG; ABA; JBA; CS; AIMA; MFA; FSR; 

Freddie; ACLI; and FHLB. 

383See § 23.151 (paragraph 1 of the EMNA 

definition). 

384The next section discusses the expanded 

eligible collateral for variation margin. 

385This could also lead to a greater demand on 

a relatively few instruments. 

386See, e.g., ICI; ISDA; CPFM; GPC; SIFMA– 

AMG; IECA; Freddie; and CDEU. 

(‘‘EMNA’’). The eligibility criteria for 

netting are consistent with industry 

standards currently being used for bank 

regulatory capital purposes,381 which 

should reduce the administrative costs 

that would be incurred in connection 

with any renegotiation of the terms of 

existing netting agreements. 

A number of commenters argued that, 

in order to allow close-out netting and 

contain costs, the final rule should not 

require new master agreements to 

separate pre- and post-compliance date 

swaps, and that parties should be 

permitted to use credit support annexes 

that are part of the EMNA instead of 

new master agreements to distinguish 

pre-and post-compliance date swaps.382

In response to commenters, the final 

rule provides that an EMNA may 

identify one or more separate netting 

portfolios that independently meet the 

requirement for close-out netting 383 and 

to which, under the terms of the EMNA, 

the collection and posting of margin 

applies on an aggregate net basis 

separate from and exclusive of any other 

uncleared swaps covered by the 

agreement. This rule should facilitate 

the ability of the parties to document 

two separate netting sets, one for 

uncleared swaps that are subject to the 

final rule and one for swaps that are not 

subject to the margin requirements. A 

netting portfolio that contains only 

uncleared swaps entered into before the 

applicable compliance date is not 

subject to the requirements of the final 

rule. 

Notably, for an agreement to qualify 

as an EMNA, the CSE must conduct 

sufficient legal review to conclude with 

a well-founded basis that the agreement, 

among other things, would be legal, 

valid, binding, and enforceable under 

the law of the relevant jurisdictions. The 

Commission recognizes that the 

requisite ‘‘sufficient legal review’’ will 

require, as a practical matter, a legal 

opinion, which will adversely affect 

costs for CSEs. Additionally, to the 

extent that a ‘‘sufficient legal review’’ 

cannot be obtained (e.g., because the 

foreign jurisdiction is lacking in 

comparable close-out netting 

arrangements), a CSE would need to 

collect and post on a gross basis. 

Nevertheless, given the importance of a 

legally binding and enforceable netting 

arrangement in the event of default, the 

Commission is retaining the legal 

review requirement. 

Finally, CSEs may include legacy 

swaps in the same EMNA through the 

use of multiple CSAs. This approach 

would allow CSEs to preserve the 

benefit of close-out netting with all their 

swaps with a specific counterparty. 

However, legacy swaps may not be 

included when multiple CSAs are used 

in calculating the initial margin amount 

for that counterparty. The Commission 

designed this approach to prevent 

cherry-picking as a CSE could select 

specific legacy trades that would reduce 

the amount of initial margin required on 

any certain day. 

4. Variation Margin 

Variation margin provides an 

important risk mitigation function by 

preventing the build-up of total 

uncollateralized credit exposure of 

outstanding uncleared swaps. Under the 

final rule, a CSE must collect variation 

margin from or pay variation margin to 

its counterparty on or before the 

business day after the date of execution 

of an uncleared swap. Variation margin 

would be required for all financial end 

users, regardless of whether the entity 

has material swaps exposure. In this 

regard, the final rule is consistent with 

the Prudential Regulators’ rules and the 

2013 International Standards. In 

addition, the Commission is requiring a 

daily, two-way exchange of variation 

margin since mark-to-market is based on 

unrealized gains of either party (i.e., if 

one party has an unrealized gain, the 

other party has an unrealized loss). 

The exchange of variation margin 

would result in additional costs to CSEs 

and financial end users that currently 

are exchanging variation margin or 

exchanging variation margin less 

frequently than daily. These financial 

entities may also need to adjust their 

portfolio to ensure the availability of 

eligible collateral for exchanging 

variation margin.384

The final rule requires certain control 

and validation mechanisms for the 

calculation of variation margin to ensure 

that the variation margin calculated 

would be adequate to cover the current 

exposure of the uncleared swaps, 

including the requirement to create and 

maintain documentation setting forth 

the CSEs’ calculation methodology with 

sufficient specificity to allow the 

counterparty, the Commission and any 

applicable Prudential Regulator to 

calculate a reasonable approximation of 

the margin requirement independently; 

and evaluate the reliability of its data 

sources at least annually, and make 

adjustments, as appropriate. 

Implementation of these measures will 

result in additional costs to CSEs. 

Nevertheless, the Commission is 

adopting these control and validation 

mechanisms as they are necessary to 

ensure the accuracy of the variation 

margin calculation methodology used 

by a CSE. 

There are, however, several factors 

that should have a mitigating effect on 

the cost of variation margin. First, as 

discussed below, the final rule expands 

the list of eligible collateral for non-CSE 

financial end users, which may reduce 

funding costs. In addition, the final rule 

will include a minimum transfer 

threshold of $500,000, which should 

mitigate some of the administrative 

burdens and counter-cyclical effects 

associated with the daily exchange of 

variation margin, without resulting in 

an unacceptable level of 

uncollateralized credit risk. In addition, 

competitive disparities may be lessened 

by the fact that daily exchange of 

variation margin is required with 

respect to all financial end users under 

both the final rule and international 

standards. 

5. Eligible Collateral 

Limiting eligible collateral to the most 

highly liquid categories could limit the 

potential that a CSE would incur a loss 

following default of a counterparty 

based on changes in market values of 

less liquid collateral that occur before 

the CSE is able to sell the collateral, and 

therefore could limit the potential for a 

default by the CSE to other 

counterparties. On the other hand, an 

overly restrictive eligibility standard 

could have the effect of draining 

liquidity from the counterparty in a way 

that may not be necessary to account for 

the CSE’s potential future exposure to 

the counterparty, and may increase 

costs for both counterparties.385 The 

Commission considered these 

competing concerns in developing the 

list of eligible collateral. 

For example, the Commission is 

allowing certain equities as eligible 

collateral to prevent adverse effect on 

investment returns for collective 

investment vehicles, insurance 

companies, and pension funds.386 To 

accommodate the concern of certain 

commenters that argued for an inclusion 

of money market mutual funds and bank 

certificates of deposit in the list of 

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387The Commission recognizes that these 

haircuts apply to certain currencies, under certain 

circumstances. 

388As discussed in Appendix A, the Commission 

recognizes that due to certain investment 

constraints, including regulatory limitations, not 

every financial entity is going to be able to pledge 

all types of eligible collateral, which will have an 

effect on its funding costs of collateral. 

389The Commission would expect that under the 

model based approach, calculated haircut would be 

less than the standardized haircut approach. 

390See GPC. 

391See CPFM; CCMR; IFM; ISDA; SIFMA; ABA; 

CS; and FSR. 

eligible collateral for initial margin, the 

final rule also adds redeemable 

securities in a pooled investment fund 

that holds only securities that are issued 

by, or unconditionally guaranteed as to 

the timely payment of principal and 

interest by, the U.S. Department of the 

Treasury, and cash funds denominated 

in U.S. dollars. 

Although the Commission received 

several comments concerning the 

proposal’s treatment of the securities of 

certain GSEs, only modest changes have 

been made in the final rule. The 

Commission continues to believe the 

final rule should treat GSE securities 

differently depending on whether or not 

the GSE enjoys explicit government 

support, in the interests of both the 

safety and soundness of CSEs and the 

stability of the financial system. In other 

words, the treatment of GSE securities 

by market participants as if those 

securities were nearly equivalent to 

Treasury securities in the absence of 

explicit Treasury support creates a 

potential threat to financial market 

stability, especially if vulnerabilities 

arise in markets where one or more 

GSEs are dominant participants, as 

occurred during the summer of 2008. 

The final rule’s differing treatment of 

GSE collateral based on whether or not 

the GSE has explicit support of the U.S. 

government helps address this source of 

potential financial instability and 

recognizes that securities issued by an 

entity explicitly supported by the U.S. 

government might well perform better 

during a crisis than those issued by an 

entity operating without such support. 

In addition, the final rule prohibits 

the use of certain assets as collateral 

because their use might compound risk, 

i.e., wrong way risk. The list of 

prohibited assets include instruments 

that represent an obligation of the party 

providing such asset or an affiliate of 

that party and instruments issued by 

bank holding companies, depository 

institutions, systemically important 

financial institutions, and market 

intermediaries. The Commission notes 

that the price and liquidity of securities 

issued by these entities are likely to lose 

value at the same time that the 

counterparty’s obligation under the 

swap increases, resulting in an 

additional increase in risk. For this 

reason, notwithstanding the additional 

funding costs that may result, the 

Commission believes that including 

these instruments as eligible collateral 

would be inappropriate. 

Under the final rule, for swaps 

between a CSE and a financial end user, 

the Commission is expanding the form 

of eligible collateral that can be posted 

for variation margin to accommodate the 

assets held by the affected financial end 

users. The Commission believes that 

this should mitigate the potential for 

investment drag of financial end users, 

as well as mitigate the pro-cyclical 

effects potentially resulting from 

restricting eligible collateral to cash. 

As noted above, the Commission is 

limiting eligible collateral to cash for 

variation margin between CSEs since 

these entities pose a significant level of 

risk to the financial system and cash is 

the most liquid asset and holds its value 

in times of stress. Since CSEs currently 

exchange variation margin in cash, the 

cash-only requirement could have 

minimal impact on CSEs. On the other 

hand, the Commission understands that, 

in times of stress when cash may be 

difficult to obtain, it is possible that 

CSEs may be cash constrained and 

therefore, could fall into a technical 

default. The Commission considered 

these competing concerns in developing 

this requirement. 

The Commission is adopting 

standardized haircuts on instruments 

other than cash.387 For example, in the 

case where equities are used as eligible 

collateral, there is a requirement for a 

minimum 15 percent haircut on equities 

in the S&P 500 Index and a minimum 

25 percent haircut for those in the S&P 

1500 Composite Index but not in the 

S&P 500 Index.388 The Commission is 

not allowing CSEs to use internal 

models to calculate haircuts on eligible 

collateral. The Commission recognizes 

that, as a result, more assets would be 

required to be posted as margin, which 

may result in additional funding 

costs.389 On the other hand, a more 

conservative approach reflected in the 

final rule would result in a greater 

amount of assets posted, which provides 

a greater buffer to cover losses in the 

event of a default. 

6. Segregation 

Posted collateral must be properly 

protected in order to avoid undermining 

the benefits of the margin requirements. 

The Commission understands that, to 

the extent that the final rule’s 

segregation requirements diverge from 

existing industry practices, CSEs may 

incur substantial administrative costs. 

Under the final rule, required initial 

margin must be kept in accordance with 

the following: (1) All funds collected 

and posted as required initial margin 

must be held by a third-party custodian 

(unaffiliated with either counterparty to 

the swap); (2) the third-party custodian 

is prohibited from re-hypothecating, reusing, or re-pledging (or otherwise 

transferring) the initial margin; (3) the 

initial margin collected or posted may 

not be reinvested in any asset that 

would not qualify as eligible collateral; 

and 4) the custodial agreement is legal, 

valid, binding and enforceable in the 

event of bankruptcy, insolvency, or 

similar proceedings. 

While several commenters supported 

the mandated use of a third-party 

custodian, others objected, citing 

concerns about complexities that 

additional parties bring to the 

relationship, as well as increased costs 

arising from the negotiation of custodial 

contracts and the cost of developing 

operational infrastructure as using a 

third-party custodian is not the current 

practice for certain financial entities.390

The Commission is also aware that 

many custodians are affiliated with one 

or more CSE or financial end users; as 

a result, the mandated use of a thirdparty custodian may lead to collateral 

assets being held at a limited number of 

custodians. 

The Commission believes that it is 

necessary to require the use of an 

independent third-party custodian to 

safeguard required initial margin in 

order to best ensure that those assets 

would be available to the non-defaulting 

counterparty in the event of a 

counterparty default. A custodian that is 

affiliated with either counterparty to a 

swap raises the concern that in the 

event of a default by its affiliate 

counterparty, the custodian’s affiliation 

may compromise its ability to act 

swiftly to release funds to the nondefaulting counterparty. As to concerns 

regarding the high concentration of 

custodians that could result from the 

independence element, the Commission 

notes that segregated accounts would be 

protected—regardless of the 

concentration level of custodians—as 

they would not be part of the estate of 

the defaulting custodian under the 

current bankruptcy regime. 

Several commenters recommended 

lifting the restriction on 

rehypothecation and reuse of initial 

margin collateral, either generally or on 

a conditional basis.391 The Commission 

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688 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

392For example, a default or liquidity event that 

occurs at one link along the rehypothecation chain 

may induce further defaults or liquidity events for 

other links in the rehypothecation chain as access 

to the collateral for other positions may be 

obstructed by a default further up the chain. Also, 

in the event of one default along the chain, there 

is an increased chance that each party along the 

chain will ask for the rehypothecated collateral to 

be returned to them at the same time, leaving just 

one party with the collateral. This spiraling event 

is the result of only one asset being pledged for all 

the positions along the rehypothecation chain. 

393See ISDA; SIFMA; Joint Associations; JBA; 

FSR; ETA; NGCA/NCSA; CDEU; COPE; BP; Shell 

TRM; and CEWG. 

394See, e.g., § 23.600 of the Commission’s 

regulations. 395See ISDA. 

is not allowing the rehypothecation of 

initial margin collateral. 

Rehypothecation would allow the 

collateral posted by one counterparty to 

be used by the other counterparty as 

collateral for additional swaps, resulting 

in rehypothecation chains and 

embedded leverage throughout the 

financial system. The increased 

leverage, along with the additional 

connections between market 

participants, resulting from 

rehypothecating margin, could have a 

destabilizing effect on the financial 

system.392 The Commission 

understands that prohibition against 

rehypothecation will impose significant 

costs on market participants as this will 

increase their funding costs for margin. 

The Commission is not allowing cash 

to be posted as initial margin collateral 

without it being converted into other 

eligible collateral. As noted above, cash 

held at a custodian in a deposit account 

can be used by the custodial bank and 

as such, posting of cash as initial margin 

would run afoul of the prohibition 

against rehypothecation. This 

requirement may lead to additional 

funding costs in the form of excess 

margin being held at the custodian. 

However, the Commission expects that 

counterparties will post some other 

form of eligible collateral and 

subsequently substitute the cash with 

other eligible assets, including a sweep 

vehicle, which should mitigate the 

burdens placed by this requirement. 

7. Documentation 

Comprehensive documentation of 

counterparties’ rights and obligations to 

exchange margin allows each party to 

manage risks more effectively 

throughout the life of the swap and to 

avoid disputes regarding the terms of 

the swap during times of financial 

turmoil. In furtherance of that goal, the 

final rule requires that CSEs enter into 

contractual documentation with 

counterparties addressing, among other 

things, how swaps would be valued for 

purposes of determining margin 

amounts, and how valuation disputes 

would be resolved. To the extent that 

other Commission regulations address 

similar requirements, burdens on CSEs 

should be minimal. 

8. Non-Financial End Users 

The Commission’s proposal did not 

require CSEs to exchange margin with 

non-financial end users as the 

Commission believes that such entities, 

which generally are using swaps to 

hedge commercial risk, pose less risk to 

CSEs than financial entities. Instead, the 

proposal would have required a CSE, for 

transactions with non-financial end 

users with material swaps exposure to 

such CSE, each day to calculate both 

initial and variation margin as if they 

were a CSE. These calculations would 

serve as risk management tools to assist 

the CSE in measuring its exposure and 

to assist the Commission in conducting 

oversight of the CSE. The majority of 

commenters opposed the hypothetical 

margin calculation requirement for nonfinancial end users.393 Commenters 

generally noted the significant burdens 

this requirement may place on CSEs and 

the non-financial end user, who must 

monitor their swaps exposures to 

determine if they exceed the material 

swaps exposure threshold. 

In response to the comments, the 

Commission is not adopting the 

hypothetical margin calculation 

requirements concerning non-financial 

end users. Although the Commission 

continues to believe that hypothetical 

margin calculation requirements would 

promote the financial soundness of 

CSEs, the Commission recognizes the 

additional administrative burdens such 

measure could impose on CSEs and on 

non-financial end users. The 

Commission has determined that 

removing the hypothetical margin 

calculation is appropriate, particularly 

in light of the comprehensive risk 

management program that all CSEs are 

required to establish and maintain 

under existing Commission 

regulations.394

The proposal also would have 

required documentation between a CSE 

and a non-financial end user to state 

whether margin is required to be 

exchanged and, if so, the applicable 

thresholds below which margin is not 

required. In response to commenters’ 

concern that the standards are too 

burdensome and that other Commission 

regulations adequately address the 

subject, the Commission is not adopting 

any new documentation requirement for 

uncleared swaps with non-financial end 

users.395

9. Inter-Affiliate Swaps 

Under the final rule, the Commission 

is requiring the exchange of variation 

margin for swaps between a CSE and its 

affiliate. Initial margin is required to be 

collected from an affiliate if the affiliate 

is in a jurisdiction without comparable 

margin requirements with respect to the 

affiliate’s outward-facing (i.e., thirdparty) transaction. In addition, where 

the risk is being transferred to the CSE 

through a chain of inter-affiliate swaps, 

with the risk originating from a thirdparty transaction, that third-party 

transaction must be subject to 

comparable margin requirements with 

respect to that particular transaction; 

otherwise, the CSE must collect initial 

margin from its affiliate counterparty. 

The Commission understands that 

CSEs currently exchange variation 

margin when entering into swaps with 

their affiliates. Therefore, the 

Commission expects that CSEs will 

incur incremental costs associated with 

funding variation margin under the final 

rule. Because the Commission in most 

cases is not requiring posting and 

collection of initial margin for interaffiliate swaps, this may result in a CSE, 

in the event of a default of an affiliate 

counterparty (or the default of any of the 

affiliates in a chain of inter-affiliate 

swaps that has a cascading effect), not 

having enough margin to cover its losses 

on an inter-affiliate swap. However, 

viewed as a consolidated entity, the 

overall risk to the entity and the 

financial system, in terms of credit risk 

and leverage, should not be increased, 

as a result of the Commission’s 

requirement, as the affiliate entering 

into an outward-facing swap must 

collect margin or the CSE must collect 

margin from its affiliated counterparty. 

In addition, as these inter-affiliate trades 

are typically designed to move risk to 

the most liquid market (in terms of 

breath and depth), this will permit the 

CSE to efficiently manage that risk. In 

addition, by not posting initial margin 

on their inter-affiliate swaps, the 

affected affiliates may compete more 

effectively by passing the cost savings to 

clients. 

The Commission believes that the 

Prudential Regulators’ approach, which 

requires swap dealers subject to the 

Prudential Regulators’ margin rules to 

collect only for initial margin, would be 

too costly to the extent that the subject 

inter-affiliate trade is viewed as shifting 

risks within the consolidated group. 

This difference may make it less costly 

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396The Commission understands that under 

current practices, CSEs already use models to 

calculate initial margin requirements for certain 

clients, including hedge funds. 

397See § 23.161. 

398As a result of the cost effects on the 

Commission’s final rule, it is expected that some 

market participants may change their practice of 

using uncleared swaps to alternative instruments. 

Futures and cleared swaps, which tend to be more 

standardized and liquid than uncleared swaps, 

typically require less initial margin; however, this 

may result in basis risk, as a result of 

standardization of these products. A futures 

contract has a one day minimum liquidation time. 

A cleared swap has a three to five day minimum 

liquidation time whereas the Commission’s margin 

rules requires a ten day minimum liquidation time 

for uncleared swaps. 

to conduct inter-affiliates swaps for 

Commission-regulated swap dealers 

than prudentially regulated swap 

dealers and CSEs. As a result of higher 

costs in transacting with prudentially 

regulated swap dealers than CSEs, the 

consolidated parent would favor interaffiliates swaps with a CSE over a 

prudentially regulated swap entity. 

10. Compliance Schedule 

As discussed above, the Commission 

expects that affected entities will need 

to update their current operational 

infrastructure to comply with the 

provisions of the final rule, including 

potential changes to internal risk 

management and other systems, netting 

agreements, trading documentation, and 

collateral arrangements. In addition, the 

Commission expects that CSEs that opt 

to calculate initial margin using an 

initial margin model will modify such 

models and obtain regulatory approval 

for their use.396 In this regard, the 

Commission recognizes that CSEs and 

other affected counterparties can benefit 

from additional time to come into 

compliance with the new margin 

regime; at the same time, it is important 

that the final rule is implemented 

without undue delay so as to protect 

CSEs and the U.S. financial system as 

Congress intended. Accordingly, the 

Commission has determined to adopt a 

phase-in schedule for compliance.397

The phase-in schedule is also 

responsive to commenters supporting 

international harmonization of 

implementation dates for margin 

requirement. 

Under the phase-in schedule, the 

largest and most sophisticated covered 

swap entities that present the greatest 

potential risk to the financial system 

comply with the requirements first. The 

Commission expects that this would be 

less of a burden on these entities as they 

currently have the infrastructure in 

place to meet the requirements and 

would require the least amount of 

modification. 

C. Section 15(a) Factors 

1. Protection of Market Participants and 

the Public 

Under the final rule, the market and 

the public will benefit from the required 

collateralization of uncleared swaps. 

More specifically, the margin 

requirements should mitigate the overall 

credit risk in the financial system, 

reduce the probability of financial 

contagion, and ultimately reduce 

systemic risk. 

The primary reason for collecting 

margin from counterparties is to protect 

an entity in the event of its counterparty 

default. That is, in the event of a default 

by a counterparty, margin protects the 

non-defaulting counterparty by allowing 

it to use the margin provided by the 

defaulting entity to absorb the losses 

and to continue to meet all of its 

obligations. In addition, margin 

functions as a risk management tool by 

limiting the amount of leverage that 

either counterparty can incur. 

Specifically, the requirement to post 

margin ensures that each counterparty 

has adequate collateral to enter into an 

uncleared swap. In this way, margin 

serves as a first line of defense in 

protecting an entity from risk arising 

from uncleared swaps, which ultimately 

mitigates the possibility of a systemic 

event. 

Protecting financial entities from the 

risk of failure has direct benefit to the 

public as the failure of these entities 

could result in immediate financial loss 

to its counterparties or customers. Given 

the importance of these entities to the 

financial system, their failure could 

spill over to other parts of the broader 

economy, with detrimental impact on 

the general public. 

The final rule may also have the effect 

of promoting centralized clearing. 

Specifically, the final rule’s robust 

margin requirements for uncleared 

contracts may create incentives for 

participants to clear swaps, where 

available and appropriate for their 

needs.398 Central clearing can provide 

systemic benefits by limiting systemic 

leverage and aggregating and managing 

risks by a central counterparty. 

On the other hand, required margin 

may reduce the availability of liquid 

assets for purposes other than posting 

collateral and therefore affect the ability 

of CSEs to engage in swaps activities 

and financial end users to manage or 

hedge the risks arising from their 

business activities. In addition, as 

detailed below in Appendix A, the 

Commission’s margin requirements will 

increase the cost of entering into a swap 

transaction. The final margin rule 

incorporates various cost-mitigating 

provisions—such as the initial margin 

thresholds, expansion of eligible 

collateral for variation margin for 

financial end users, and minimum 

transfer amount—to contain potentially 

adverse impacts on the market and the 

public. 

2. Efficiency, Competitiveness, and 

Financial Integrity of Swap Markets 

In finalizing the rule, the Commission 

strived to promote efficiency and 

financial integrity of the swaps market, 

and where possible, mitigate undue 

competitive disparities. Most notably, 

the Commission, in finalizing the 

margin rule, aligned the rule with that 

of the Prudential Regulators to the 

greatest extent possible. This should 

promote greater operational efficiencies 

for those CSEs that are part of a bank 

holding company as they may be able to 

avoid creating individualized 

compliance and operational 

infrastructures to account for the final 

rule and instead, rely on the 

infrastructure supporting the bank CSE. 

The final rule also provides for builtin flexibilities that should enhance the 

efficiency in the application of the rule. 

For example, the final rule provides 

counterparties the flexibility to post a 

variety of collateral types to meet the 

margin requirements which may result 

in increased efficiencies for end users 

and promote the use of swaps to hedge 

or manage risks. For initial margin 

calculation methodology, the final rule 

provides CSEs with the choice of two 

alternatives to allow them to choose the 

methodology that is the most cost 

efficient for managing their business 

risks. 

Proper documentation of swaps is 

crucial to reducing risk in the 

bilaterally-traded swaps market. 

Accordingly, the final rule requires that 

CSEs enter into contractual 

documentation with counterparties 

addressing, among other things, how 

swaps would be valued for purposes of 

determining margin amounts, and how 

valuation disputes would be resolved. 

Documentation of counterparties’ rights 

and obligations to exchange margin 

should allow each party to manage risks 

more effectively throughout the life of 

the swap and to avoid disputes 

regarding the terms of the swap during 

times of financial turmoil. 

The safety and soundness of CSEs— 

given the nature and scope of their 

activities—are critical to the financial 

integrity of markets. As discussed 

above, margin serves as a first line of 

defense to protect a CSE in the event of 

a default by its counterparty. It also 

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690 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

399NERA provided recommendations for 

reducing the costs for the final rule; these 

recommendations are discussed above. 

400As discussed below, these studies did not 

distinguish between CSEs and prudentiallyregulated swap dealers. 

401The Commission is unable to quantify certain 

swaps that may fall under the final rule. 

Specifically, there are swaps entered into by some 

non-U.S. swap dealers and foreign counterparties 

that would be swept into this rulemaking under a 

2(i) analysis (relating to the Commission’s authority 

to regulate cross-border swaps) that are not 

reported. The Commission acknowledges that these 

costs are not reflected in the Commission’s 

estimates because the Commission does not require 

regulatory reporting of all transaction data on swaps 

transacted globally by derivatives dealers covered 

by the rule. Hence, the Commission notes the 

limitation of the estimates shown in Table A, but 

is unable to make a reasonable estimate of the 

notional amount of derivatives not covered by its 

estimates. 

402See Basel Committee on Banking Supervision 

and the International Organization of Securities 

Commissions (2013), Margin Requirements for NonCentrally Cleared Derivatives: Second Consultative 

Document, report (Basel, Switzerland: Bank for 

International Settlements, February). 

helps to reduce the risk of a systemic 

event by containing the risk of a cascade 

of defaults occurring. A cascade occurs 

when one participant defaulting causes 

subsequent defaults by its 

counterparties, and so on, resulting in a 

domino effect and a potential financial 

crisis. 

The Commission also notes that the 

final margin rule, like other 

requirements under the Dodd-Frank 

Act, could have a substantial impact on 

the relative competitive position of 

market participants operating within the 

United States and across various 

jurisdictions. U.S. or foreign firms could 

be advantaged or disadvantaged 

depending on how the Commission’s 

margin rule compares with 

corresponding requirements under 

Prudential Regulators’ margin regime or 

in other jurisdictions. To mitigate undue 

competitive disparities, the 

Commission, in developing the final 

rule, harmonized the final rule with 

those of the Prudential Regulators and 

the BCBS–IOSCO framework. 

3. Price Discovery 

The Commission is requiring a tenday margin period of risk for uncleared 

swaps, as compared to a three- to fiveday margin period of risk for cleared 

swaps. Also, the Commission is only 

allowing limited netting for uncleared 

swaps. Together, these provisions of the 

final rule may result in the use of more 

standardized products. 

Increase in the use of standardized 

products may lead to greater 

transparency in the cleared swaps and 

futures markets. If market participants 

migrate to standardized products, price 

discovery process for such swaps and 

futures may improve with higher 

volumes. Conversely, lower volumes for 

uncleared swaps may negatively impact 

the price discovery process for such 

swaps. However, the Commission 

believes that since these uncleared 

swaps are customized, the potential 

reduction in the efficacy of the price 

discovery process for uncleared swaps 

is less of a concern. 

4. Sound Risk Management Practices 

A well-designed risk management 

system helps to identify, evaluate, 

address, and monitor the risks 

associated with a firm’s business. As 

discussed above, margin plays an 

important risk management function. 

Initial margin addresses potential future 

exposure. That is, in the event of a 

counterparty default, initial margin 

protects the non-defaulting party from 

the loss that may result from a swap or 

portfolio of swaps, during the period of 

time needed to close out the swap(s). 

Initial margin augments variation 

margin, which secures the current markto-market value of swaps. This, in turn, 

forces market participants to recognize 

losses promptly and to adjust collateral 

accordingly and helps to prevent the 

accumulation of large unrecognized 

losses and exposures. 

The final rule permits CSEs to 

calculate initial margin by using either 

a risk-based model or standardized table 

method. The choice of two alternatives 

may enhance a CSE’s risk management 

program by allowing the CSE to choose 

the methodology that is the most 

effective for managing their business 

risks. 

The Commission is also requiring a 

ten-day margin period of risk for 

uncleared swaps and only a five-day 

margin period of risk for cleared swaps. 

Thus, the rule may result in the use of 

more standardized cleared swaps at the 

expense of more customized swaps 

which may be harder to evaluate and 

risk manage; however, this may 

encourage market participants to use 

less ideal hedging techniques, as noted 

above, which may result in a different 

type of risk at a firm. 

Finally, the Commission is imposing 

strong model governance, oversight and 

control standards that are designed to 

ensure the integrity of the initial margin 

model and provide margin requirements 

that are commensurate with the risk of 

uncleared swaps. For the foregoing 

reasons, the final rule promotes sound 

risk management practices by CSEs. 

5. Other Public Interest Considerations 

The Commission has not identified 

any additional public interest 

considerations related to the costs and 

benefits of the final rule. 

Appendix A to the Preamble 

In this Appendix, the Commission 

provides its estimate of the funding costs 

related to the final initial and variation 

margin requirements and discusses certain 

key aspects of overall administrative costs. 

As noted below, there are a number of 

challenges presented in conducting a 

quantitative analysis of the costs associated 

with the final rule. In this exercise, the 

Commission looked to data sources that were 

representative of the current swaps market 

and scaled the data to limit its estimate to 

CSEs and their uncleared swaps. Given the 

complexity of this final rule and its interrelationship to other rulemakings, the 

Commission’s estimate is subject to 

considerable uncertainty. The Commission’s 

estimates are based on available data and 

assumptions set out below. 

In the proposal, the Commission requested 

commenters to provide data or other 

information that would be useful in 

estimation of the quantifiable costs and 

benefits of this rulemaking. No commenters, 

with the exception of NERA, provided any 

data; NERA provided its estimate of the 

overall costs of the margin requirements 

under the Prudential Regulators’ and 

Commission’s proposed rules.399 The 

Commission’s estimate of the funding cost of 

initial margin diverges from that of NERA, as 

explained below. 

I. Margin Costs 

A. Funding Cost 

The Commission reviewed various 

industry studies estimating the total cost of 

initial margin that would be required by the 

margin rules, as proposed, by the Prudential 

Regulators and the CFTC.400 These studies 

rely on a different set of assumptions in 

calculating the funding costs of the margin 

rules, as explained below. The Commission 

used this set of industry data, which provides 

global estimates of the margin required under 

such rules, to construct its own estimates of 

costs. The cost estimates include two major 

components. The first component is an 

estimate of the amount of initial margin 

subject to the Commission’s margin regime, 

constructed by scaling the global estimates of 

the margin to the relevant basis. The second 

component is an annual funding cost. The 

Commission multiplied these two 

components in order to obtain an annual cost 

of funding margin as required by the rules. 

This methodology is similar to that used by 

the Prudential Regulators in their 

quantitative analysis in finalizing their 

margin rules. Details of the methodology are 

described in the text that follows. 

Table A, below, presents estimated 

amounts of initial margin that would be 

required for CSEs under the final rule.401

These estimates are based on the assumption 

that the final rule is effective (i.e., in the posttransitional period). 

The initial margin estimates in Table A are 

based on two different studies that estimate 

the potential impact of the 2013 international 

framework: BCBS and IOSCO 402 and 

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Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 691 

403 Documents on initial margin requirements are 

available on the International Swaps and 

Derivatives Association Web site. 

404The BCBS–IOSCO survey estimate is based on 

a global notional amount outstanding of $281.3 

trillion of uncleared swaps. We apply the ratio 

100.9/175.6 = 57% to each of the global margin 

figures to reduce them to the relevant basis for the 

rule. 

405For the purposes of this calculation, the 

impact of the $8 billion material swaps exposure 

threshold for financial end users was approximated 

in the following manner. Entities estimated to have 

had less than $8 billion total notional of open IRS 

swaps on June 5, 2015 were considered not to have 

material swaps exposure. The Commission 

understands that it is possible that its estimate of 

the number of financial end users with material 

swaps exposure may over- or underestimate the 

total number of covered counterparties as certain 

instruments that are used in the calculation are not 

included in this estimate and certain entities that 

may be excluded from the Commission’s margin 

rule may be included. 

406The Commission assumed that on June 5, 

2015, there were 54 CSEs. The Commission based 

this number on the number of provisionally 

registered swap dealers and major swap 

participants. 

407The BCBS–IOSCO impact study discusses the 

impact of several different margin regimes, e.g., 

regimes with and without an initial margin 

threshold. In addition, the estimate costs reported 

in Table A from the BCBS–IOSCO study reflects an 

estimate from the study that is most comparable to 

the Commission’s final rule. 

408The ISDA study was conducted based on the 

BCBS–IOSCO February 2013 consultative document 

which did not include any recognition of offsets in 

the standardized initial margin regime. Recognition 

of offsets was included in the final 2013 

international framework. 

Applying the standardized approach on SDR data 

for June 5, 2015, the Commission estimated total 

gross initial margin due to the new margin 

requirements at $1.174 trillion for IRS and CDS, 

which is less than the ISDA-standardized initial 

margin estimates of $1,454 billion shown in 

Table A. 

ISDA 403 studies. Each study reports an 

estimate of the global impact of margin 

requirements, which is displayed under the 

column heading ‘‘Global ($BN).’’ Most 

notably, these studies provide estimates 

based on the assumption that margin 

requirements apply to all uncleared swaps of 

all market participants covered by the 2013 

international framework. 

To estimate the funding costs of the initial 

margin requirement, the Commission 

modified the ISDA and BCBS IOSCO survey 

estimates in two stages. In the first stage, the 

Commission multiplied the survey estimates 

by 57% to align the global estimates better 

with the impact of the U.S. rules. The 

Commission utilized Swap Data Repository 

(SDR) data on uncleared interest rate swaps, 

which represent the majority of the notional 

value associated with uncleared swaps, to 

compute the 57% scale factor. The 57% 

scaling is designed to represent the notional 

amount of uncleared interest rate swaps 

reported to the SDRs as a fraction of the 

global notional amount of uncleared interest 

rate swaps represented in the surveys. The 

Commission’s Weekly Swaps Report shows 

$100.9 trillion in notional outstanding for 

uncleared interest rate swaps reported to 

SDRs as of June 5, 2015, whereas the BCBS– 

IOSCO survey represents $175.6 trillion in 

global notional outstanding of uncleared 

interest rate swaps. Hence, the ratio between 

the two is approximately 57% (100.9/175.6 = 

57.46%). The Commission applied this 57% 

scale factor to the global notional amount of 

margin estimated in each of the surveys.404

These estimates inherit the limitations of 

the global estimates provided by the 

underlying studies, which applied rules that 

are similar, but not identical, to the 

Commission’s rules. For example, the BCBS– 

IOSCO survey results do not apply the $8 

billion material swaps exposure threshold, 

and in fact did not apply any such threshold. 

It also did not exclude swaps with a nonfinancial end user as a counterparty. The 

results are likely to be conservative and 

overstate the actual impact of the U.S. rules. 

In a second stage, the Commission 

multiplied the results obtained in the first 

stage by 25%. This 25% scale factor reduces 

the estimates to account for the narrower 

scope of the Commission’s rule as compared 

to the scope of SDR data. For a variety of 

reasons, many of the uncleared swaps 

reported to the SDRs do not require margin 

under the Commission’s rule. For example, 

margin may instead be required under the 

Prudential Regulators’ rule. Alternatively, 

margin would not be required if a covered 

swap entity’s counterparty to a swap is a 

non-financial end user. The Commission has 

used SDR data to compute this 25% scale 

factor applied in its cost estimates. This scale 

factor is computed by comparing the notional 

amount of swaps covered by the 

Commission’s rule to the total notional 

amount represented by SDR data.405 The 

Commission believes that 25% is an 

appropriate scale factor to adjust the total 

notional value of uncleared swaps, reported 

to the SDR, to the relevant notional value. 

The Commission has estimated this 25% 

scale factor based on the uncleared outwardfacing open interest rate swaps reported to 

DTCC as of June 5, 2015. The scale factor 

compares the notional value of swaps 

covered by the Commission’s rule to the total 

notional value of all swaps reported to the 

SDR. Because the identity of both 

counterparties to a trade is relevant for the 

computation, notional values for each trade 

side are utilized to construct the ratio (i.e., 

notional values are double-counted). If both 

counterparties of a swap are subject to the 

Commission’s margin rule, the notional 

amount is counted twice (once for each 

counterparty).If one counterparty is subject to 

the Commission’s margin rule, but the other 

counterparty is subject to the Prudential 

Regulators’ margin rule, the notional amount 

is counted once (for the counterparty covered 

by the Commission’s rule). 

Based on the SDR data, the Commission 

estimates that the total notional amount of 

uncleared interest rate swaps subject to the 

Commission’s initial margin requirement is 

roughly $42 trillion (where both trade sides 

are potentially counted). The total notional 

value, reported to the SDR, used in this 

calculation is $202 trillion (which is twice 

the $100.9 trillion, one-sided, total notional 

value noted earlier). The ratio of these two 

values is therefore 21% (which equals 42 

divided by 202). To be conservative, the 

Commission assumes that the total notional 

amount between the CSEs and their covered 

counterparties account for roughly 25% of 

the total notional value of uncleared swaps 

reported to the SDRs.406

The net effect of applying these two scale 

factors to the survey estimates is to multiply 

the raw, survey estimates of initial margin by 

approximately 14% (57% x 25% = 14.25%). 

These estimates are displayed in Table A 

under the column heading ‘‘Covered Swap 

Entities ($BN).’’ 407

Table A presents a range of estimates based 

on the ISDA and BCBS–IOSCO studies. Both 

the ISDA’s low estimate and the BCBS– 

IOSCO estimate assume that all initial margin 

requirements are calculated according to an 

internal model with parameters consistent 

with those required by the final rule. The 

ISDA’s high estimate assumes that all initial 

margin requirements are calculated according 

to a standardized gross margin approach. 

Further, the ISDA standardized approach 

does not allow for the recognition of any 

netting offsets.408 The Commission 

anticipates that most entities will use 

internal models to calculate initial margin. 

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692 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

409 10,200 × 14.25% = 1,454. 

410 800 × 14.25% = 114. 

411 900 × 14.25% = 128. 

412The cost of funding initial margin for CSEs or 

covered counterparties is a function of the entities’ 

business model, including their financial structure, 

financial activities and services, and risk profile. 

The most direct cost of providing initial margin is 

generally the difference between the cost of funding 

the required margin, including the opportunity cost 

on the use of the margin, less the rate of return on 

the assets used as margin. In some cases, for 

example, certain registered investment companies 

will have no additional incremental funding costs, 

as they will be able to post assets that they currently 

hold on their balance sheet as eligible collateral. 

Alternatively, certain entities may have to raise 

additional funds to purchase eligible assets, as they 

may not have any or may need more of eligible 

collateral. 

413For SIC code 621, Security Brokers, Dealers, 

Flotation, the Weighted Average Cost of Capital 

(‘‘WACC’’) is computed to be 4.6% for large firms 

as of March 31, 2015 by Duff & Phelps, ‘‘2015 

Valuation Handbook: Industry Cost of Capital.’’ 

WACC is estimated over a time horizon that 

includes a stressed period. 

414 It should be noted that the entity is also 

forgoing the use of the borrowed funds, as an 

investment asset. Therefore, this opportunity cost is 

also imbedded in this cost. 

415 1,454 × 0.25% = 3.64. 

416 1,454 × 1.6% = 23.26. 

417 114 × 0.25% = 0.29. 

418 114 × 1.6% =1.82. 

419 128 × 0.25% = 0.32. 

420 128 × 1.6% =2.05. 

TABLE A—ESTIMATED INITIAL MARGIN REQUIREMENTS FOR OUTWARD FACING SWAPS, BASED ON PRIOR ESTIMATES OF

GLOBAL MARGIN REQUIRED

Source Method Global 

($BN) 

Covered swap 

entities * 

($BN) 

ISDA ............................................................................. Standardized ................................................................. 10,200 409 1,454 

ISDA ............................................................................. Model Based ................................................................. 800 410 114 

BCBS–IOSCO .............................................................. Model Based ................................................................. 900 411 128 

* Assumes uncleared swaps between CSEs and their covered counterparties is approximately 14% of global notional outstanding, as described 

in the text. 

Table B presents a matrix of the annual 

cost estimates associated with the initial 

margin requirements.412

The three rows of the matrix correspond to 

the ISDA Standardized, ISDA Model Based, 

and BCBS–IOSCO Model Based approaches 

for determining initial margin amounts that 

are presented and discussed above (in 

relation to Table A). The matrix includes four 

columns, two of which contain final fundingcost estimates for initial margin required 

under the final rule. The two funding-cost 

columns identify the Commission’s estimated 

lower-end and upper-end range for funding 

costs based on three different methods (i.e., 

BCBS–IOSCO, ISDA Model Based, and ISDA 

Standardized). 

For the purposes of this matrix, the 

Commission assumed that the opportunity 

cost of funding initial margin is between 25 

basis points and 160 basis points. The 

Commission acknowledges that this 

opportunity cost range is expansive, but 

based on the Commission’s experience and 

understanding of the entities covered by its 

margin rule (e.g., swap dealers, insurance 

companies, collective investment vehicles), it 

believes that range addresses the 

idiosyncrasies of these entities. As noted 

above, some entities covered under the 

margin rule (e.g., certain registered mutual 

funds) will be able to post eligible collateral 

that are already on their balance sheets (i.e., 

investments). Given this possibility, the 

Commission makes a conservative 

assumption that the opportunity cost of 

pledging collateral on the lower end is 25 

basis points. 

For the purposes of determining the 

higher-end of opportunity costs, the 

Commission accepted Duff & Phelps’ 

weighted average cost of capital of 4.6% for 

large security brokers and dealers, and then 

subtracted the 3% return on 30-year Treasury 

collateral to arrive at 1.6% of funding 

costs.413 The Commission assumes that the 

160 basis points address situations where, for 

example, a swap dealer does not have 

sufficient eligible collateral on its balance 

sheet. As a result, the swap dealer would 

need to raise capital by issuing debt or equity 

to purchase eligible collateral, for instance, 

30-year Treasuries to meet the final rule’s 

initial margin requirements. Under this 

hypothetical, the swap dealer’s opportunity 

costs related to posting eligible collateral are 

increased.414

Each annual funding cost estimate in table 

B is computed by multiplying the initial 

margin amount for CSEs (from Table A) 

identified in each row by the opportunity 

cost of funding initial margin identified in 

each column. The amounts presented in 

Table B are reported in billions. 

TABLE B—ESTIMATED ANNUAL COST OF INITIAL MARGIN REQUIREMENTS FOR CSES AND THEIR COVERED

COUNTERPARTIES

Source Method 

Final cost ($BN) 

Opportunity 

cost of 

funding initial 

margin 

(at 0.25%) 

Opportunity 

cost of funding 

initial margin 

(at 1.6%) 

ISDA ............................................................................. Standardized ................................................................. 415 3.64 416 23.26 

ISDA ............................................................................. Model ............................................................................ 417 0.29 418 1.82 

BCBS–IOSCO .............................................................. Model ............................................................................ 419 0.32 420 2.05 

The estimated annual cost of the initial 

margin requirements depend on the specific 

initial margin estimate (which depends in 

large part on whether the standardized or 

model approach is used) and opportunity 

cost of funding initial margin. As discussed 

above, the Commission expects the costs of 

the final margin rule to be more consistent 

with the amounts based on the model 

approach (both ISDA and BCBS–IOSCO), 

rather than the standardized approach for 

determining initial margin amounts. Using 

the estimates based on the model-based 

approaches, the Commission therefore, 

expects that the costs of the final rule would 

most likely range from $290 million to $2.05 

billion. 

B. Variation Margin 

Under the final rule, the Commission is 

requiring the daily exchange of variation 

margin. The requirement is intended to 

mitigate the build-up of uncollateralized risk 

at swap counterparties. In requiring the 

exchange of daily variation margin the 

Commission acknowledges that there will 

additional costs to some market participants, 

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421As discussed above, it should be noted that 

the Commission’s final rule includes a minimum 

transfer amount, which is designed to mitigate some 

of the costs of exchanging variation margin daily. 

422The Commission is assuming this as CSEs are 

dealers and typically do not take proprietary long 

or short positions, in contrast to other market 

participants (e.g., hedge funds). 

423According to the 2015 ISDA Margin Survey, 

each of the largest dealers receives and pays, on 

average, roughly 6 billion USD variation margin on 

a given day. When a swap dealer receives more cash 

than it needs to pay, or an equal amount, the cost 

is minimal. 

424As the final rule requires cash to be posted 

between a CSE and its swap entity counterparty, 

while permitting all types of eligible collateral 

when it transacts with a financial end user, this 

may result in a collateral mismatch. 

425For instance, this might happen when a CSE 

has posted all the non-cash collateral that it can 

with financial end users as variation margin. 

426According to the 2015 ISDA Margin Survey, 

each of the largest dealers receives and pays, on 

average, roughly 6 billion USD variation margin on 

a given day. If 1 percent of variation margin 

received is non-cash collateral which needs to be 

turned into cash using a repo agreement, then the 

daily cost will be roughly $400, which is calculated 

as 60 million × 0.24%/360. 

427This is similar to a market participant paying 

a fee to access to a revolving credit facility. 

428To the extent that these predetermined repos 

are used as a funding mechanism for the entire 

operations of the entity, these costs might not be 

completely passed on in the price or other aspect 

of the relationship between the CSE and the 

financial end user. 

429 It should be noted that this requirement may 

result in better pricing terms or possibly some other 

beneficial change in the relationship with the CSE. 

430According to the 2015 ISDA Margin Survey, 

77 percent of variation margin received and 75 

percent of variation margin delivered is in the form 

of cash. Available at https://www2.isda.org/

functional-areas/research/surveys/margin-surveys/. 

431The CSE may be able to pool liquidity needs 

for end users. Due to CSE liquidity demands, they 

may need to establish or maintain relationships 

with banks that have access to cheaper liquidity 

through the payment system and the Federal 

Reserve System, in general. 

432As suggested by NERA, this change should 

reduce the possibility of pro-cyclicality in time of 

stress. 

433 In the proposal the Commission requested 

comments regarding the administrative costs 

involved in implementing its proposed margin rule; 

however, the Commission did not receive any 

quantitative data to assist it in its analysis therefore, 

the Commission is undertaking a qualitative 

analysis. 

434As discussed above, the Commission’s final 

rule is very similar to the Prudential Regulators’ 

final margin rule and the 2013 International 

Standards. 

435Costs of these requirements are estimated 

above in the PRA section. 

436The Commission notes that some of these 

agreements will need to be re-negotiated as a result 

of the final rule. 

437The final rule’s requirements should provide 

some level of standardization. 

438 In discussions with ISDA, the Commission 

understands that these initiatives are currently in 

progress. 

particularly to those who are not currently 

exchanging variation margin daily.421

Presuming that a CSE maintains a 

relatively flat swap book,422 the cost of the 

cash only requirement is small when the 

CSEs collect enough cash to post to other 

CSEs.423 However, when a CSE needs to 

convert non-cash collaterals collected from 

financial end users into cash to post to their 

swap dealer and major swap participant 

counterparties,424 it places additional costs 

on a CSE.425 In this case, a CSE may use a 

repurchase agreement to turn non-cash 

collaterals into cash. The cost of repo 

transactions depend on many factors, 

including duration and quality of collateral 

posted. For example, on September 2, 2015, 

Bloomberg quotes one week treasury GC repo 

rate of 0.24%.426 However, in times of severe 

financial stress, the repo market may not 

provide access to market participants. If this 

happens, a CSE may not be able to turn noncash collateral into cash which might cause 

technical defaults. In order to avoid technical 

defaults, a CSE may elect to pay for a 

committed repo agreement that gives them 

the right to enter into a repurchase agreement 

for a fee at a predetermined repo rate 

(presumably at a rate significantly above the 

normal repo rate).427 This additional cost 

may be priced into a non-cleared swap 

agreement and eventually be passed onto 

financial end users who post non-cash 

collaterals.428 A CSE might also require 

financial end users to only post cash, 

matching it collateral exposure.429 Despite 

these possibilities, the Commission notes that 

most of the variation margin by total volume 

continues to be in the form of cash 

exchanged between swap dealers.430

The Commission anticipates that many 

CSEs will have cheaper access to liquidity 

than most financial end users and may be 

able to pass along this cost savings to 

financial end users.431 The cash only 

variation margin requirement only holds for 

swaps between a CSE and another swap 

entity. The cash only variation margin 

requirement does not apply to swaps 

between a CSE and a financial end user. This 

change from the proposal should provide the 

flexibility to financial end users to post and 

to hold the same types of financial 

instruments in their portfolios for variation 

margin, as they did prior to the final rule, 

which should result in less performance 

drag.432 Financial end users may still end up 

paying for the liquidity demanded on CSEs, 

but, overall, the CSEs’ costs are likely to be 

lower compared to the alternative of 

requiring cash only variation margin for 

financial end users, because CSEs may be 

able to pass on their liquidity advantage to 

financial end users. 

C. Administrative Costs 

CSEs and financial end users will face 

certain startup and ongoing costs relating to 

technology and other operational 

infrastructure, as well as new or updated 

legal agreements. These administrative costs 

related to margin for uncleared swaps are 

difficult to quantify at this time; the 

Commission will discuss these costs 

qualitatively instead.433

The per-entity costs related to changes in 

technology, infrastructure, and legal 

agreements are likely to vary widely, 

depending on each market participant’s 

existing technology infrastructure, legal 

agreements, and operations, among other 

things. As discussed in the preamble and 

below, the Commission expects that certain 

aspects of the final rule—such as minimum 

initial margin threshold and expanded list of 

eligible collaterals—will have mitigating 

impact on the overall costs to an affected 

entity. Moreover, the higher degree of 

harmonization between various regulators 

and jurisdictions should result in lower 

administrative costs.434 Longer lead times for 

industry to build out compliance systems 

will lower administrative costs, because it 

gives industry more time to plan and execute 

buildouts, which should result in less 

operational errors and costs. 

Examples of the key documents related to 

administrative costs include: (1) Certain selfdisclosure documents, (2) credit support 

annexes; and (3) tri-party segregation of 

margin collateral that have to be arranged by 

the parties involved.435

The Commission expects that 

counterparties will have to make certain 

representations regarding their status. These 

representations will impose certain costs on 

CSEs and their swap entity and financial end 

user counterparties. There are at least three 

types of information when making selfdisclosures: (a) Jurisdictional information, (b) 

status information, and (c) initial margin 

information. Jurisdictional information 

anticipates possible multi-jurisdictional 

counterparties. Status information would 

include, among other information, whether a 

party is a Commission-registered swap dealer 

and material swaps exposure information. 

Initial margin information includes among 

other information the amount of initial 

margin for the consolidated group. 

There may be multiple credit support 

annexes between counterparties executing 

swaps because, among other reasons, the 

final rule provides for a separate netting 

treatment of legacy swaps and for calculation 

of initial margin by netting sets of broad asset 

classes. Consequently, market participants 

will need to amend or enter into new credit 

support agreements to account for the 

differences from the current arrangement(s), 

resulting in additional administrative costs. 

Tri-party segregation agreements will have 

to be negotiated as well.436 These 

arrangements can be costly as they involve 

multiple parties and typically customized to 

the counterparties’ needs.437

The Commission is aware of certain 

industry initiatives to standardize 

documentation in order to create efficiencies 

and mitigate costs. For example, ISDA plans 

to implement the following: (1) ISDA Amend 

Platform, (2) ISDA bookstore for Master 

Agreements and CSAs, and (3) Protocols.438

The ISDA Amend Platform is technology that 

would allow swap contracts between 

counterparties to be standardized, but with 

customized options to reduce costs. 

ISDA is also planning to create a database 

of standardized Master Agreements and 

CSAs, updated to reflect the new margin 

requirements. This initiative should result in 

more standardized agreements and lower the 

costs to market participants. 

Finally, ISDA is considering developing 

protocols to facilitate the creation of 

multilateral agreements based on multiple 

bilateral agreements. These protocols should 

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694 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

provide efficiencies and lower the cost of 

documentation. 

Appendix B to the Preamble 

Seq. Date received Organization 

1 ........................ 11/11/2014 Chris Barnard. 

2 ........................ 11/21/2014 Japan Financial Markets Council (JFMC). 

3 ........................ 11/24/2014 ICI Global. 

4 ........................ 11/24/2014 Investment Company Institute. 

5 ........................ 11/24/2014 Committee on Capital Markets Regulation. 

6 ........................ 11/24/2014 Structured Finance Industry Group. 

7 ........................ 11/24/2014 ISDA (International Swaps and derivatives Association). 

8 ........................ 11/24/2014 Global FX Division (GFXD) of the Global Financial Markets Association (GFMA). 

9 ........................ 11/24/2014 Alberta Investment Mgt Corp; British Columbia Investment Mgt Corp; Caisse de de ́poˆt et placement du 

Que ́bec; Canada Pension Plan Investment Bd; Healthcare of Ontario Pension Plan Trust Fund; OMERS 

Administration Corp; Public Sector Pension Investment Bd. 

10 ...................... 11/24/2014 American Public Gas Association (APGA). 

11 ...................... 11/24/2014 Securities Industry and Financial Markets Association. 

12 ...................... 11/24/2014 State Street Corporation on behalf of itself, Northern Trust Corporation and Bank of New York Mellon Corporation. 

13 ...................... 11/24/2014 Metropolitan Life Insurance Company. 

14 ...................... 11/24/2014 SIFMA. 

15 ...................... 11/24/2014 Skadden, Arps, Slate, Meagher & Flom LLP (on behalf of the Global Pension Coalition). 

16 ...................... 11/24/2014 Institute of International Bankers. 

17 ...................... 11/24/2014 TIAA–CREF. 

18 ...................... 11/25/2014 Securities Industry and Financial Markets Association (SIFMA). 

19 ...................... 11/25/2014 American Bankers Association (ABA). 

20 ...................... 11/25/2014 Credit Suisse. 

21 ...................... 11/25/2014 KfW Bankengruppe. 

22 ...................... 11/26/2014 Credit Suisse. 

23 ...................... 11/27/2014 Instituto de Cre ́dito Oficial (‘‘ICO’’). 

24 ...................... 12/2/2014 Japanese Bankers Association (JBA). 

25 ...................... 12/2/2014 Alternative Investment Management Association (AIMA). 

26 ...................... 12/2/2014 Managed Funds Association. 

27 ...................... 12/2/2014 TriOptima. 

28 ...................... 12/2/2014 MFX Solutions, Inc. (MFX). 

29 ...................... 12/2/2014 The Financial Services Roundtable. 

30 ...................... 12/2/2014 White & Case LLP. 

31 ...................... 12/2/2014 FMS Wertmanagement. 

32 ...................... 12/2/2014 MasterCard International Incorporated First Data Corporation Vantiv, Inc. 

33 ...................... 12/2/2014 Public Citizen. 

34 ...................... 12/2/2014 American Gas Association American Public Power Association Edison Electric Institute Electric Power Supply Association Large Public Power Council National Rural Electric Cooperative Association. 

35 ...................... 12/2/2014 National Corn Growers Association & Natural Gas Supply Association. 

36 ...................... 12/2/2014 Freddie Mac. 

37 ...................... 12/2/2014 National Rural Utilities Cooperative Finance Corporation. 

38 ...................... 12/2/2014 CME Group. 

39 ...................... 12/2/2014 Coalition of Physical Energy Companies (COPE). 

40 ...................... 12/2/2014 Sutherland Asbill & Brennan LLP on behalf of the Federal Home Loan Banks. 

41 ...................... 12/2/2014 National Economic Research Associates, Inc. 

42 ...................... 12/2/2014 American Council of Life Insurers. 

43 ...................... 12/2/2014 International Energy Credit Association. 

44 ...................... 12/2/2014 Coalition for Derivatives End users. 

45 ...................... 12/2/2014 BP Energy Company. 

46 ...................... 12/2/2014 Shell Trading Risk Management. 

47 ...................... 12/2/2014 Sutherland Asbill & Brennan LLP on behalf of The Commercial Energy Working Group. 

48 ...................... 12/2/2014 Better Markets. 

49 ...................... 12/9/2014 Vanguard. 

50 ...................... 12/2/2014 National Rural Electric Cooperative Association (NRECA). 

51 ...................... 12/2/2014 Americans for Financial Reform (AFR). 

52 ...................... 12/3/2014 INTL FCStone Inc. 

53 ...................... 12/18/2014 KfW Bankengruppe. 

54 ...................... 12/11/2014 Australia and New Zealand Banking Group Commonwealth Bank of Australia Macquarie Bank Ltd National 

Australia Bank Ltd Westpac Banking Corp. 

55 ...................... 3/12/2015 Global Pension Coalition. 

56 ...................... 5/15/2015 Managed Funds Association. 

57 ...................... 6/1/2015 The Clearing House Association L.L.C. (TCH); American Bankers Association (ABA); ABA Securities Association (ABASA), and the Securities Industry and Financial Markets Association (SIFMA). 

58 ...................... 6/9/2015 William J Harrington. 

59 ...................... 8/7/2015 ISDA (International Swaps and Derivatives Association). 

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Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 695 

List of Subjects 

17 CFR Part 23 

Swaps, Swap dealers, Major swap 

participants, Capital and margin 

requirements. 

17 CFR Part 140 

Authority delegations (Government 

agencies), Organization and functions 

(Government agencies). 

For the reasons discussed in the 

preamble, the Commodity Futures 

Trading Commission amends 17 CFR 

chapter I as set forth below: 

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. 

■ 2. Add subpart E to part 23 to read as 

follows: 

Subpart E—Capital and Margin 

Requirements for Swap Dealers and 

Major Swap Participants 

Sec. 

23.100–23.149 [Reserved] 

23.150 Scope. 

23.151 Definitions applicable to margin 

requirements. 

23.152 Collection and posting of initial 

margin. 

23.153 Collection and posting of variation 

margin. 

23.154 Calculation of initial margin. 

23.155 Calculation of variation margin. 

23.156 Forms of margin. 

23.157 Custodial arrangements. 

23.158 Margin documentation. 

23.159 Special rules for affiliates. 

23.160 [Reserved] 

23.161 Compliance dates. 

23.162–23.199 [Reserved] 

Subpart E—Capital and Margin 

Requirements for Swap Dealers and 

Major Swap Participants 

§§ 23.100–23.149 [Reserved] 

§ 23.150 Scope. 

(a) The margin requirements set forth 

in §§ 23.150 through 23.161 shall apply 

to uncleared swaps, as defined in 

§ 23.151, that are executed after the 

applicable compliance dates set forth in 

§ 23.161. 

(b) The requirements set forth in 

§§ 23.150 through 23.161 shall not 

apply to a swap if the counterparty: 

(1) Qualifies for an exception from 

clearing under section 2(h)(7)(A) of the 

Act and implementing regulations; 

(2) Qualifies for an exemption from 

clearing under a rule, regulation, or 

order issued by the Commission 

pursuant to section 4(c)(1) of the Act 

concerning cooperative entities that 

would otherwise be subject to the 

requirements of section 2(h)(1)(A) of the 

Act; or 

(3) Satisfies the criteria in section 

2(h)(7)(D) of the Act and implementing 

regulations. 

§ 23.151 Definitions applicable to margin 

requirements. 

For the purposes of §§ 23.150 through 

23.161: 

Bank holding company has the 

meaning specified in section 2 of the 

Bank Holding Company Act of 1956 (12 

U.S.C. 1841). 

Broker has the meaning specified in 

section 3(a)(4) the Securities Exchange 

Act of 1934 (15 U.S.C. 78c(a)(4)). 

Business day means any day other 

than a Saturday, Sunday, or legal 

holiday. 

Company means a corporation, 

partnership, limited liability company, 

business trust, special purpose entity, 

association, or similar organization. 

Counterparty means the other party to 

a swap to which a covered swap entity 

is a party. 

Covered counterparty means a 

financial end user with material swaps 

exposure or a swap entity that enters 

into a swap with a covered swap entity. 

Covered swap entity means a swap 

dealer or major swap participant for 

which there is no prudential regulator. 

Cross-currency swap means a swap in 

which one party exchanges with another 

party principal and interest rate 

payments in one currency for principal 

and interest rate payments in another 

currency, and the exchange of principal 

occurs on the date the swap is entered 

into, with a reversal of the exchange of 

principal at a later date that is agreed 

upon when the swap is entered into. 

Currency of Settlement means a 

currency in which a party has agreed to 

discharge payment obligations related to 

an uncleared swap or a group of 

uncleared swaps subject to a master 

netting agreement at the regularly 

occurring dates on which such 

payments are due in the ordinary 

course. 

Day of execution means the calendar 

day at the time the parties enter into an 

uncleared swap, provided: 

(1) If each party is in a different 

calendar day at the time the parties 

enter into the uncleared swap, the day 

of execution is deemed the latter of the 

two dates; and 

(2) If an uncleared swap is— 

(i) Entered into after 4:00 p.m. in the 

location of a party; or 

(ii) Entered into on a day that is not 

a business day in the location of a party, 

then the uncleared swap is deemed to 

have been entered into on the 

immediately succeeding day that is a 

business day for both parties, and both 

parties shall determine the day of 

execution with reference to that 

business day. 

Data source means an entity and/or 

method from which or by which a 

covered swap entity obtains prices for 

swaps or values for other inputs used in 

a margin calculation. 

Dealer has the meaning specified in 

section 3(a)(5) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(5)). 

Depository institution has the 

meaning specified in section 3(c) of the 

Federal Deposit Insurance Act (12 

U.S.C. 1813(c)). 

Eligible collateral means collateral 

described in § 23.156. 

Eligible master netting agreement 

means a written, legally enforceable 

agreement provided that: 

(1) The agreement creates a single 

legal obligation for all individual 

transactions covered by the agreement 

upon an event of default following any 

stay permitted by paragraph (2) of this 

definition, including upon an event of 

receivership, conservatorship, 

insolvency, liquidation, or similar 

proceeding, of the counterparty; 

(2) The agreement provides the 

covered swap entity the right to 

accelerate, terminate, and close-out on a 

net basis all transactions under the 

agreement and to liquidate or set off 

collateral promptly upon an event of 

default, including upon an event of 

receivership, conservatorship, 

insolvency, liquidation, or similar 

proceeding, of the counterparty, 

provided that, in any such case, any 

exercise of rights under the agreement 

will not be stayed or avoided under 

applicable law in the relevant 

jurisdictions, other than: 

(i) In receivership, conservatorship, or 

resolution under the Federal Deposit 

Insurance Act (12 U.S.C. 1811 et seq.), 

Title II of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(12 U.S.C. 5381 et seq.), the Federal 

Housing Enterprises Financial Safety 

and Soundness Act of 1992, as amended 

(12 U.S.C. 4617), or the Farm Credit Act 

of 1971, as amended (12 U.S.C. 2183 

and 2279cc), or laws of foreign 

jurisdictions that are substantially 

similar to the U.S. laws referenced in 

this paragraph (2)(i) in order to facilitate 

the orderly resolution of the defaulting 

counterparty; or 

(ii) Where the agreement is subject by 

its terms to, or incorporates, any of the 

laws referenced in paragraph (2)(i) of 

this definition; 

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696 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

(3) The agreement does not contain a 

walkaway clause (that is, a provision 

that permits a non-defaulting 

counterparty to make a lower payment 

than it otherwise would make under the 

agreement, or no payment at all, to a 

defaulter or the estate of a defaulter, 

even if the defaulter or the estate of the 

defaulter is a net creditor under the 

agreement); and 

(4) A covered swap entity that relies 

on the agreement for purposes of 

calculating the margin required by this 

part must: 

(i) Conduct sufficient legal review to 

conclude with a well-founded basis 

(and maintain sufficient written 

documentation of that legal review) that: 

(A) The agreement meets the 

requirements of paragraph (2) of this 

definition; and 

(B) In the event of a legal challenge 

(including one resulting from default or 

from receivership, conservatorship, 

insolvency, liquidation, or similar 

proceeding) the relevant court and 

administrative authorities would find 

the agreement to be legal, valid, binding, 

and enforceable under the law of the 

relevant jurisdictions; and 

(ii) Establish and maintain written 

procedures to monitor possible changes 

in relevant law and to ensure that the 

agreement continues to satisfy the 

requirements of this definition. 

Financial end user means— 

(1) A counterparty that is not a swap 

entity and that is: 

(i) A bank holding company or a 

margin affiliate thereof; a savings and 

loan holding company; a U.S. 

intermediate holding company 

established or designated for purposes 

of compliance with 12 CFR 252.153; or 

a nonbank financial institution 

supervised by the Board of Governors of 

the Federal Reserve System under Title 

I of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (12 U.S.C. 

5323); 

(ii) A depository institution; a foreign 

bank; a Federal credit union or State 

credit union as defined in section 2 of 

the Federal Credit Union Act (12 U.S.C. 

1752(1) and (6)); an institution that 

functions solely in a trust or fiduciary 

capacity as described in section 

2(c)(2)(D) of the Bank Holding Company 

Act (12 U.S.C. 1841(c)(2)(D)); an 

industrial loan company, an industrial 

bank, or other similar institution 

described in section 2(c)(2)(H) of the 

Bank Holding Company Act (12 U.S.C. 

1841(c)(2)(H)); 

(iii) An entity that is state-licensed or 

registered as: 

(A) A credit or lending entity, 

including a finance company; money 

lender; installment lender; consumer 

lender or lending company; mortgage 

lender, broker, or bank; motor vehicle 

title pledge lender; payday or deferred 

deposit lender; premium finance 

company; commercial finance or 

lending company; or commercial 

mortgage company; except entities 

registered or licensed solely on account 

of financing the entity’s direct sales of 

goods or services to customers; 

(B) A money services business, 

including a check casher; money 

transmitter; currency dealer or 

exchange; or money order or traveler’s 

check issuer; 

(iv) A regulated entity as defined in 

section 1303(20) of the Federal Housing 

Enterprises Financial Safety and 

Soundness Act of 1992 (12 U.S.C. 

4502(20)) or any entity for which the 

Federal Housing Finance Agency or its 

successor is the primary federal 

regulator; 

(v) Any institution chartered in 

accordance with the Farm Credit Act of 

1971, as amended, 12 U.S.C. 2001 et 

seq. that is regulated by the Farm Credit 

Administration; 

(vi) A securities holding company; a 

broker or dealer; an investment adviser 

as defined in section 202(a) of the 

Investment Advisers Act of 1940 (15 

U.S.C. 80b–2(a)); an investment 

company registered with the Securities 

and Exchange Commission under the 

Investment Company Act of 1940 (15 

U.S.C. 80a–1 et seq.), a company that 

has elected to be regulated as a business 

development company pursuant to 

section 54(a) of the Investment 

Company Act of 1940 (15 U.S.C. 80a– 

53(a)), or a person that is registered with 

the U.S. Securities and Exchange 

Commission as a security-based swap 

dealer or a major security-based swap 

participant pursuant to the Securities 

Exchange Act of 1934 (15 U.S.C. 78a et 

seq.). 

(vii) A private fund as defined in 

section 202(a) of the Investment 

Advisers Act of 1940 (15 U.S.C. 80–b– 

2(a)); an entity that would be an 

investment company under section 3 of 

the Investment Company Act of 1940 

(15 U.S.C. 80a–3) but for section 

3(c)(5)(C); or an entity that is deemed 

not to be an investment company under 

section 3 of the Investment Company 

Act of 1940 pursuant to Investment 

Company Act Rule 3a–7 (§ 270.3a–7 of 

this title) of the Securities and Exchange 

Commission; 

(viii) A commodity pool, a commodity 

pool operator, a commodity trading 

advisor, a floor broker, a floor trader, an 

introducing broker or a futures 

commission merchant; 

(ix) An employee benefit plan as 

defined in paragraphs (3) and (32) of 

section 3 of the Employee Retirement 

Income and Security Act of 1974 (29 

U.S.C. 1002); 

(x) An entity that is organized as an 

insurance company, primarily engaged 

in writing insurance or reinsuring risks 

underwritten by insurance companies, 

or is subject to supervision as such by 

a State insurance regulator or foreign 

insurance regulator; 

(xi) An entity, person, or arrangement 

that is, or holds itself out as being, an 

entity, person, or arrangement that 

raises money from investors, accepts 

money from clients, or uses its own 

money primarily for investing or trading 

or facilitating the investing or trading in 

loans, securities, swaps, funds, or other 

assets; or 

(xii) An entity that would be a 

financial end user described in 

paragraph (1) of this definition or a 

swap entity if it were organized under 

the laws of the United States or any 

State thereof. 

(2) The term ‘‘financial end user’’ 

does not include any counterparty that 

is: 

(i) A sovereign entity; 

(ii) A multilateral development bank; 

(iii) The Bank for International 

Settlements; 

(iv) An entity that is exempt from the 

definition of financial entity pursuant to 

section 2(h)(7)(C)(iii) of the Act and 

implementing regulations; 

(v) An affiliate that qualifies for the 

exemption from clearing pursuant to 

section 2(h)(7)(D) of the Act; or 

(vi) An eligible treasury affiliate that 

the Commission exempts from the 

requirements of §§ 23.150 through 

23.161 by rule. 

Foreign bank means an organization 

that is organized under the laws of a 

foreign country and that engages 

directly in the business of banking 

outside the United States. 

Foreign exchange forward has the 

meaning specified in section 1a(24) of 

the Act. 

Foreign exchange swap has the 

meaning specified in section 1a(25) of 

the Act. 

Initial margin means the collateral, as 

calculated in accordance with § 23.154 

that is collected or posted in connection 

with one or more uncleared swaps. 

Initial margin model means an 

internal risk management model that: 

(1) Has been developed and designed 

to identify an appropriate, risk-based 

amount of initial margin that the 

covered swap entity must collect with 

respect to one or more non-cleared 

swaps to which the covered swap entity 

is a party; and 

(2) Has been approved by the 

Commission or a registered futures 

association pursuant to § 23.154(b). 

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Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 697 

Initial margin threshold amount 

means an aggregate credit exposure of 

$50 million resulting from all uncleared 

swaps between a covered swap entity 

and its margin affiliates on the one 

hand, and a covered counterparty and 

its margin affiliates on the other. For 

purposes of this calculation, an entity 

shall not count a swap that is exempt 

pursuant to § 23.150(b). 

Major currencies means— 

(1) United States Dollar (USD); 

(2) Canadian Dollar (CAD); 

(3) Euro (EUR); 

(4) United Kingdom Pound (GBP); 

(5) Japanese Yen (JPY); 

(6) Swiss Franc (CHF); 

(7) New Zealand Dollar (NZD); 

(8) Australian Dollar (AUD); 

(9) Swedish Kronor (SEK); 

(10) Danish Kroner (DKK); 

(11) Norwegian Krone (NOK); and 

(12) Any other currency designated by 

the Commission. 

Margin affiliate. A company is a 

margin affiliate of another company if: 

(1) Either company consolidates the 

other on a financial statement prepared 

in accordance with U.S. Generally 

Accepted Accounting Principles, the 

International Financial Reporting 

Standards, or other similar standards, 

(2) Both companies are consolidated 

with a third company on a financial 

statement prepared in accordance with 

such principles or standards, or 

(3) For a company that is not subject 

to such principles or standards, if 

consolidation as described in paragraph 

(1) or (2) of this definition would have 

occurred if such principles or standards 

had applied. 

Market intermediary means— 

(1) A securities holding company; 

(2) A broker or dealer; 

(3) A futures commission merchant; 

(4) A swap dealer; or 

(5) A security-based swap dealer. 

Material swaps exposure for an entity 

means that the entity and its margin 

affiliates have an average daily aggregate 

notional amount of uncleared swaps, 

uncleared security-based swaps, foreign 

exchange forwards, and foreign 

exchange swaps with all counterparties 

for June, July and August of the 

previous calendar year that exceeds $8 

billion, where such amount is 

calculated only for business days. An 

entity shall count the average daily 

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. 

Minimum transfer amount means a 

combined initial and variation margin 

amount under which no actual transfer 

of funds is required. The minimum 

transfer amount shall be $500,000. 

Multilateral development bank 

means: 

(1) The International Bank for 

Reconstruction and Development; 

(2) The Multilateral Investment 

Guarantee Agency; 

(3) The International Finance 

Corporation; 

(4) The Inter-American Development 

Bank; 

(5) The Asian Development Bank; 

(6) The African Development Bank; 

(7) The European Bank for 

Reconstruction and Development; 

(8) The European Investment Bank; 

(9) The European Investment Fund; 

(10) The Nordic Investment Bank; 

(11) The Caribbean Development 

Bank; 

(12) The Islamic Development Bank; 

(13) The Council of Europe 

Development Bank; and 

(14) Any other entity that provides 

financing for national or regional 

development in which the U.S. 

government is a shareholder or 

contributing member or which the 

Commission determines poses 

comparable credit risk. 

Non-financial end user means a 

counterparty that is not a swap dealer, 

a major swap participant, or a financial 

end user. 

Prudential regulator has the meaning 

specified in section 1a(39) of the Act. 

Savings and loan holding company 

has the meaning specified in section 

10(n) of the Home Owners’ Loan Act (12 

U.S.C. 1467a(n)). 

Securities holding company has the 

meaning specified in section 618 of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (12 U.S.C. 

1850a). 

Security-based swap has the meaning 

specified in section 3(a)(68) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(68)). 

Sovereign entity means a central 

government (including the U.S. 

government) or an agency, department, 

ministry, or central bank of a central 

government. 

State means any State, 

commonwealth, territory, or possession 

of the United States, the District of 

Columbia, the Commonwealth of Puerto 

Rico, the Commonwealth of the 

Northern Mariana Islands, American 

Samoa, Guam, or the United States 

Virgin Islands. 

Swap entity means a person that is 

registered with the Commission as a 

swap dealer or major swap participant 

pursuant to the Act. 

Uncleared security-based swap means 

a security-based swap that is not, 

directly or indirectly, submitted to and 

cleared by a clearing agency registered 

with the Securities and Exchange 

Commission pursuant to section 17A of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78a–1) or by a clearing agency 

that the U.S. Securities and Exchange 

Commission has exempted from 

registration by rule or order pursuant to 

section 17A of the Securities Exchange 

Act of 1934 (15 U.S.C. 78a–1). 

Uncleared swap means a swap that is 

not cleared by a registered derivatives 

clearing organization, or by a clearing 

organization that the Commission has 

exempted from registration by rule or 

order pursuant to section 5b(h) of the 

Act. 

U.S. Government-sponsored 

enterprise means an entity established 

or chartered by the U.S. government to 

serve public purposes specified by 

federal statute but whose debt 

obligations are not explicitly guaranteed 

by the full faith and credit of the U.S. 

government. 

Variation margin means collateral 

provided by a party to its counterparty 

to meet the performance of its obligation 

under one or more uncleared swaps 

between the parties as a result of a 

change in value of such obligations 

since the trade was executed or the last 

time such collateral was provided. 

Variation margin amount means the 

cumulative mark-to-market change in 

value to a covered swap entity of an 

uncleared swap, as measured from the 

date it is entered into (or in the case of 

an uncleared swap that has a positive or 

negative value to a covered swap entity 

on the date it is entered into, such 

positive or negative value plus any 

cumulative mark-to-market change in 

value to the covered swap entity of an 

uncleared swap after such date), less the 

value of all variation margin previously 

collected, plus the value of all variation 

margin previously posted with respect 

to such uncleared swap. 

§ 23.152 Collection and posting of initial 

margin. 

(a) Collection—(1) Initial obligation. 

On or before the business day after 

execution of an uncleared swap between 

a covered swap entity and a covered 

counterparty, the covered swap entity 

shall collect initial margin from the 

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covered counterparty in an amount 

equal to or greater than an amount 

calculated pursuant to § 23.154, in a 

form that complies with § 23.156, and 

pursuant to custodial arrangements that 

comply with § 23.157. 

(2) Continuing obligation. The 

covered swap entity shall continue to 

hold initial margin from the covered 

counterparty in an amount equal to or 

greater than an amount calculated each 

business day pursuant to § 23.154, in a 

form that complies with § 23.156, and 

pursuant to custodial arrangements that 

comply with § 23.157, until such 

uncleared swap is terminated or expires. 

(b) Posting—(1) Initial obligation. On 

or before the business day after 

execution of an uncleared swap between 

a covered swap entity and a financial 

end user with material swaps exposure, 

the covered swap entity shall post 

initial margin with the counterparty in 

an amount equal to or greater than an 

amount calculated pursuant to § 23.154, 

in a form that complies with § 23.156, 

and pursuant to custodial arrangements 

that comply with § 23.157. 

(2) Continuing obligation. The 

covered swap entity shall continue to 

post initial margin with the 

counterparty in an amount equal to or 

greater than an amount calculated each 

business day pursuant to § 23.154, in a 

form that complies with § 23.156, and 

pursuant to custodial arrangements that 

comply with § 23.157, until such 

uncleared swap is terminated or expires. 

(3) Minimum transfer amount. A 

covered swap entity is not required to 

collect or to post initial margin pursuant 

to §§ 23.150 through 23.161 with respect 

to a particular counterparty unless and 

until the combined amount of initial 

margin and variation margin that is 

required pursuant to §§ 23.150 through 

23.161 to be collected or posted and that 

has not been collected or posted with 

respect to the counterparty is greater 

than $500,000. 

(c) Netting. (1) To the extent that one 

or more uncleared swaps are executed 

pursuant to an eligible master netting 

agreement between a covered swap 

entity and covered counterparty, a 

covered swap entity may calculate and 

comply with the applicable initial 

margin requirements of §§ 23.150 

through 23.161 on an aggregate net basis 

with respect to all uncleared swaps 

governed by such agreement, subject to 

paragraph (c)(2) of this section. 

(2)(i) Except as permitted in 

paragraph (c)(2)(ii) of this section, if an 

eligible master netting agreement covers 

uncleared swaps entered into on or after 

the applicable compliance date set forth 

in § 23.161, all the uncleared swaps 

covered by that agreement are subject to 

the requirements of §§ 23.150 through 

23.161 and included in the aggregate 

netting portfolio for the purposes of 

calculating and complying with the 

margin requirements of §§ 23.150 

through 23.161. 

(ii) An eligible master netting 

agreement may identify one or more 

separate netting portfolios that 

independently meet the requirements in 

paragraph (1) of the definition of 

‘‘eligible master netting agreement’’ in 

§ 23.151 and to which collection and 

posting of margin applies on an 

aggregate net basis separate from and 

exclusive of any other uncleared swaps 

covered by the eligible master netting 

agreement. Any such netting portfolio 

that contains any uncleared swap 

entered into on or after the applicable 

compliance date set forth in § 23.161 is 

subject to the requirements of §§ 23.150 

through 23.161. Any such netting 

portfolio that contains only uncleared 

swaps entered into before the applicable 

compliance date is not subject to the 

requirements of §§ 23.150 through 

23.161. 

(d) Satisfaction of collection and 

posting requirements. A covered swap 

entity shall not be deemed to have 

violated its obligation to collect or to 

post initial margin from a covered 

counterparty if: 

(1) The covered counterparty has 

refused or otherwise failed to provide, 

or to accept, the required initial margin 

to, or from, the covered swap entity; and 

(2) The covered swap entity has: 

(i) Made the necessary efforts to 

collect or to post the required initial 

margin, including the timely initiation 

and continued pursuit of formal dispute 

resolution mechanisms, including 

pursuant to § 23.504(b)(4), if applicable, 

or has otherwise demonstrated upon 

request to the satisfaction of the 

Commission that it has made 

appropriate efforts to collect or to post 

the required initial margin; or 

(ii) Commenced termination of the 

uncleared swap with the covered 

counterparty promptly following the 

applicable cure period and notification 

requirements. 

§ 23.153 Collection and posting of 

variation margin. 

(a) Initial obligation. On or before the 

business day after the day of execution 

of an uncleared swap between a covered 

swap entity and a counterparty that is 

a swap entity or a financial end user, the 

covered swap entity shall collect the 

variation margin amount from the 

counterparty when the amount is 

positive, or post the variation margin 

amount with the counterparty when the 

amount is negative as calculated 

pursuant to § 23.155 and in a form that 

complies with § 23.156. 

(b) Continuing obligation. The 

covered swap entity shall continue to 

collect the variation margin amount 

from, or to post the variation margin 

amount with, the counterparty as 

calculated each business day pursuant 

to § 23.155 and in a form that complies 

with § 23.156 each business day until 

such uncleared swap is terminated or 

expires. 

(c) Minimum transfer amount. A 

covered swap entity is not required to 

collect or to post variation margin 

pursuant to §§ 23.150 through 23.161 

with respect to a particular counterparty 

unless and until the combined amount 

of initial margin and variation margin 

that is required pursuant to §§ 23.150 

through 23.161 to be collected or posted 

and that has not been collected or 

posted with respect to the counterparty 

is greater than $500,000. 

(d) Netting. (1) To the extent that more 

than one uncleared swap is executed 

pursuant to an eligible master netting 

agreement between a covered swap 

entity and a counterparty, a covered 

swap entity may calculate and comply 

with the applicable variation margin 

requirements of this section on an 

aggregate basis with respect to all 

uncleared swaps governed by such 

agreement subject to paragraph (d)(2) of 

this section. 

(2)(i) Except as permitted in 

paragraph (d)(2)(ii) of this section, if an 

eligible master netting agreement covers 

uncleared swaps entered into on or after 

the applicable compliance date set forth 

in § 23.161, all the uncleared swaps 

covered by that agreement are subject to 

the requirements of §§ 23.150 through 

23.161 and included in the aggregate 

netting portfolio for the purposes of 

calculating and complying with the 

margin requirements of §§ 23.150 

through 23.161. 

(ii) An eligible master netting 

agreement may identify one or more 

separate netting portfolios that 

independently meet the requirements in 

paragraph (1) of the definition of 

‘‘eligible master netting agreement’’ in 

§ 23.151 and to which collection and 

posting of margin applies on an 

aggregate net basis separate from and 

exclusive of any other uncleared swaps 

covered by the eligible master netting 

agreement. Any such netting portfolio 

that contains any uncleared swap 

entered into on or after the applicable 

compliance date set forth in § 23.161 is 

subject to the requirements of §§ 23.150 

through 23.161. Any such netting 

portfolio that contains only uncleared 

swaps entered into before the applicable 

compliance date is not subject to the 

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requirements of §§ 23.150 through 

23.161. 

(e) Satisfaction of collection and 

payment requirements. A covered swap 

entity shall not be deemed to have 

violated its obligation to collect or to 

pay variation margin from a 

counterparty if: 

(1) The counterparty has refused or 

otherwise failed to provide or to accept 

the required variation margin to or from 

the covered swap entity; and 

(2) The covered swap entity has: 

(i) Made the necessary efforts to 

collect or to post the required variation 

margin, including the timely initiation 

and continued pursuit of formal dispute 

resolution mechanisms, including 

pursuant to § 23.504(b)(4), if applicable, 

or has otherwise demonstrated upon 

request to the satisfaction of the 

Commission that it has made 

appropriate efforts to collect or to post 

the required variation margin; or 

(ii) Commenced termination of the 

uncleared swap with the counterparty 

promptly following the applicable cure 

period and notification requirements. 

§ 23.154 Calculation of initial margin. 

(a) Means of calculation. (1) Each 

business day each covered swap entity 

shall calculate an initial margin amount 

to be collected from each covered 

counterparty using: 

(i) A risk-based model that meets the 

requirements of paragraph (b) of this 

section; or 

(ii) The table-based method set forth 

in paragraph (c) of this section. 

(2) Each business day each covered 

swap entity shall calculate an initial 

margin amount to be posted with each 

financial end user with material swaps 

exposure using: 

(i) A risk-based model that meets the 

requirements of paragraph (b) of this 

section; or 

(ii) The table-based method set forth 

in paragraph (c) of this section. 

(3) Each covered swap entity may 

reduce the amounts calculated pursuant 

to paragraphs (a)(1) and (2) of this 

section by the initial margin threshold 

amount provided that the reduction 

does not include any portion of the 

initial margin threshold amount already 

applied by the covered swap entity or 

its margin affiliates in connection with 

other uncleared swaps with the 

counterparty or its margin affiliates. 

(4) The amounts calculated pursuant 

to paragraph (a)(3) of this section shall 

not be less than zero. 

(b) Risk-based models—(1) 

Commission or registered futures 

association approval. (i) A covered 

swap entity shall obtain the written 

approval of the Commission or a 

registered futures association to use a 

model to calculate the initial margin 

required in §§ 23.150 through 23.161. 

(ii) A covered swap entity shall 

demonstrate that the model satisfies all 

of the requirements of this section on an 

ongoing basis. 

(iii) A covered swap entity shall 

notify the Commission and the 

registered futures association in writing 

60 days prior to: 

(A) Extending the use of an initial 

margin model that has been approved to 

an additional product type; 

(B) Making any change to any initial 

margin model that has been approved 

that would result in a material change 

in the covered swap entity’s assessment 

of initial margin requirements; or 

(C) Making any material change to 

modeling assumptions used by the 

initial margin model. 

(iv) The Commission or the registered 

futures association may rescind 

approval of the use of any initial margin 

model, in whole or in part, or may 

impose additional conditions or 

requirements if the Commission or the 

registered futures association 

determines, in its discretion, that the 

model no longer complies with this 

section. 

(2) Elements of the model. (i) The 

initial margin model shall calculate an 

amount of initial margin that is equal to 

the potential future exposure of the 

uncleared swap or netting portfolio of 

uncleared swaps covered by an eligible 

master netting agreement. Potential 

future exposure is an estimate of the 

one-tailed 99 percent confidence 

interval for an increase in the value of 

the uncleared swap or netting portfolio 

of uncleared swaps due to an 

instantaneous price shock that is 

equivalent to a movement in all material 

underlying risk factors, including 

prices, rates, and spreads, over a 

holding period equal to the shorter of 

ten business days or the maturity of the 

swap or netting portfolio. 

(ii) All data used to calibrate the 

initial margin model shall be based on 

an equally weighted historical 

observation period of at least one year 

and not more than five years and must 

incorporate a period of significant 

financial stress for each broad asset 

class that is appropriate to the uncleared 

swaps to which the initial margin model 

is applied. 

(iii) The initial margin model shall 

use risk factors sufficient to measure all 

material price risks inherent in the 

transactions for which initial margin is 

being calculated. The risk categories 

shall include, but should not be limited 

to, foreign exchange or interest rate risk, 

credit risk, equity risk, and commodity 

risk, as appropriate. For material 

exposures in significant currencies and 

markets, modeling techniques shall 

capture spread and basis risk and shall 

incorporate a sufficient number of 

segments of the yield curve to capture 

differences in volatility and imperfect 

correlation of rates along the yield 

curve. 

(iv) In the case of an uncleared crosscurrency swap, the initial margin model 

need not recognize any risks or risk 

factors associated with the fixed, 

physically-settled foreign exchange 

transactions associated with the 

exchange of principal embedded in the 

uncleared cross-currency swap. The 

initial margin model must recognize all 

material risks and risk factors associated 

with all other payments and cash flows 

that occur during the life of the 

uncleared cross-currency swap. 

(v) The initial margin model may 

calculate initial margin for an uncleared 

swap or netting portfolio of uncleared 

swaps covered by an eligible master 

netting agreement. It may reflect 

offsetting exposures, diversification, and 

other hedging benefits for uncleared 

swaps that are governed by the same 

eligible master netting agreement by 

incorporating empirical correlations 

within the following broad risk 

categories, provided the covered swap 

entity validates and demonstrates the 

reasonableness of its process for 

modeling and measuring hedging 

benefits: Commodity, credit, equity, and 

foreign exchange or interest rate. 

Empirical correlations under an eligible 

master netting agreement may be 

recognized by the model within each 

broad risk category, but not across broad 

risk categories. 

(vi) If the initial margin model does 

not explicitly reflect offsetting 

exposures, diversification, and hedging 

benefits between subsets of uncleared 

swaps within a broad risk category, the 

covered swap entity shall calculate an 

amount of initial margin separately for 

each subset of uncleared swaps for 

which such relationships are explicitly 

recognized by the model. The sum of 

the initial margin amounts calculated 

for each subset of uncleared swaps 

within a broad risk category will be 

used to determine the aggregate initial 

margin due from the counterparty for 

the portfolio of uncleared swaps within 

the broad risk category. 

(vii) The sum of the initial margin 

calculated for each broad risk category 

shall be used to determine the aggregate 

initial margin due from the 

counterparty. 

(viii) The initial margin model shall 

not permit the calculation of any initial 

margin to be offset by, or otherwise take 

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into account, any initial margin that 

may be owed or otherwise payable by 

the covered swap entity to the 

counterparty. 

(ix) The initial margin model shall 

include all material risks arising from 

the nonlinear price characteristics of 

option positions or positions with 

embedded optionality and the 

sensitivity of the market value of the 

positions to changes in the volatility of 

the underlying rates, prices, or other 

material risk factors. 

(x) The covered swap entity shall not 

omit any risk factor from the calculation 

of its initial margin that the covered 

swap entity uses in its model unless it 

has first demonstrated to the satisfaction 

of the Commission or the registered 

futures association that such omission is 

appropriate. 

(xi) The covered swap entity shall not 

incorporate any proxy or approximation 

used to capture the risks of the covered 

swap entity’s uncleared swaps unless it 

has first demonstrated to the satisfaction 

of the Commission or the registered 

futures association that such proxy or 

approximation is appropriate. 

(xii) The covered swap entity shall 

have a rigorous and well-defined 

process for re-estimating, re-evaluating, 

and updating its internal margin models 

to ensure continued applicability and 

relevance. 

(xiii) The covered swap entity shall 

review and, as necessary, revise the data 

used to calibrate the initial margin 

model at least annually, and more 

frequently as market conditions warrant, 

to ensure that the data incorporate a 

period of significant financial stress 

appropriate to the uncleared swaps to 

which the initial margin model is 

applied. 

(xiv) The level of sophistication of the 

initial margin model shall be 

commensurate with the complexity of 

the swaps to which it is applied. In 

calculating an initial margin amount, 

the initial margin model may make use 

of any of the generally accepted 

approaches for modeling the risk of a 

single instrument or portfolio of 

instruments. 

(xv) The Commission or the registered 

futures association may in its discretion 

require a covered swap entity using an 

initial margin model to collect a greater 

amount of initial margin than that 

determined by the covered swap entity’s 

initial margin model if the Commission 

or the registered futures association 

determines that the additional collateral 

is appropriate due to the nature, 

structure, or characteristics of the 

covered swap entity’s transaction(s) or 

is commensurate with the risks 

associated with the transaction(s). 

(3) [Reserved] 

(4) Periodic review. A covered swap 

entity shall periodically, but no less 

frequently than annually, review its 

initial margin model in light of 

developments in financial markets and 

modeling technologies, and enhance the 

initial margin model as appropriate to 

ensure that it continues to meet the 

requirements for approval in this 

section. 

(5) Control, oversight, and validation 

mechanisms. (i) The covered swap 

entity shall maintain a risk management 

unit in accordance with § 23.600(c)(4)(i) 

that is independent from the business 

trading unit (as defined in § 23.600). 

(ii) The covered swap entity’s risk 

control unit shall validate its initial 

margin model prior to implementation 

and on an ongoing basis. The covered 

swap entity’s validation process shall be 

independent of the development, 

implementation, and operation of the 

initial margin model, or the validation 

process shall be subject to an 

independent review of its adequacy and 

effectiveness. The validation process 

shall include: 

(A) An evaluation of the conceptual 

soundness of (including developmental 

evidence supporting) the initial margin 

model; 

(B) An ongoing monitoring process 

that includes verification of processes 

and benchmarking by comparing the 

covered swap entity’s initial margin 

model outputs (estimation of initial 

margin) with relevant alternative 

internal and external data sources or 

estimation techniques. The 

benchmark(s) must address the model’s 

limitations. When applicable the 

covered swap entity should consider 

benchmarks that allow for non-normal 

distributions such as historical and 

Monte Carlo simulations. When 

applicable validation shall include 

benchmarking against observable 

margin standards to ensure that the 

initial margin required is not less than 

what a derivatives clearing organization 

would require for similar cleared 

transactions; and 

(C) An outcomes analysis process that 

includes back testing the model. This 

analysis shall recognize and compensate 

for the challenges inherent in back 

testing over periods that do not contain 

significant financial stress. 

(iii) If the validation process reveals 

any material problems with the model, 

the covered swap entity must promptly 

notify the Commission and the 

registered futures association of the 

problems, describe to the Commission 

and the registered futures association 

any remedial actions being taken, and 

adjust the model to ensure an 

appropriately conservative amount of 

required initial margin is being 

calculated. 

(iv) In accordance with § 23.600(e)(2), 

the covered swap entity shall have an 

internal audit function independent of 

the business trading unit and the risk 

management unit that at least annually 

assesses the effectiveness of the controls 

supporting the initial margin model 

measurement systems, including the 

activities of the business trading units 

and risk control unit, compliance with 

policies and procedures, and calculation 

of the covered swap entity’s initial 

margin requirements under this part. At 

least annually, the internal audit 

function shall report its findings to the 

covered swap entity’s governing body, 

senior management, and chief 

compliance officer. 

(6) Documentation. The covered swap 

entity shall adequately document all 

material aspects of its model, including 

management and valuation of uncleared 

swaps to which it applies, the control, 

oversight, and validation of the initial 

margin model, any review processes and 

the results of such processes. 

(7) Escalation procedures. The 

covered swap entity must adequately 

document— 

(i) Internal authorization procedures, 

including escalation procedures, that 

require review and approval of any 

change to the initial margin calculation 

under the initial margin model; 

(ii) Demonstrable analysis that any 

basis for any such change is consistent 

with the requirements of this section; 

and 

(iii) Independent review of such 

demonstrable analysis and approval. 

(c) Table-based method. If a model 

meeting the standards set forth in 

paragraph (b) of this section is not used, 

initial margin shall be calculated in 

accordance with this paragraph. 

(1) Standardized initial margin 

schedule. 

Asset class 

Gross initial 

margin 

(% of notional 

exposure) 

Credit: 0–2 year duration ...... 2 

Credit: 2–5 year duration ...... 5 

Credit: 5+ year duration ....... 10 

Commodity ............................ 15 

Equity .................................... 15 

Foreign Exchange/Currency 6 

Cross Currency Swaps: 0–2 

year duration ..................... 1 

Cross Currency Swaps: 2–5 

year duration ..................... 2 

Cross Currency Swaps: 5+ 

year duration ..................... 4 

Interest Rate: 0–2 year duration .................................... 1 

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Asset class 

Gross initial 

margin 

(% of notional 

exposure) 

Interest Rate: 2–5 year duration .................................... 2 

Interest Rate: 5+ year duration .................................... 4 

Other ..................................... 15 

(2) Net to gross ratio adjustment. (i) 

For multiple uncleared swaps subject to 

an eligible master netting agreement, the 

initial margin amount under the 

standardized table shall be computed 

according to this paragraph. 

(ii) Initial Margin = 0.4 × Gross Initial 

Margin + 0.6 × Net-to-Gross Ratio × 

Gross Initial Margin, where: 

(A) Gross Initial Margin = the sum of 

the product of each uncleared swap’s 

effective notional amount and the gross 

initial margin requirement for all 

uncleared swaps subject to the eligible 

master netting agreement; 

(B) Net-to-Gross Ratio = the ratio of 

the net current replacement cost to the 

gross current replacement cost; 

(C) Gross Current Replacement cost = 

the sum of the replacement cost for each 

uncleared swap subject to the eligible 

master netting agreement for which the 

cost is positive; and 

(D) Net Current Replacement Cost = 

the total replacement cost for all 

uncleared swaps subject to the eligible 

master netting agreement. 

(E) In cases where the gross 

replacement cost is zero, the Net-toGross Ratio shall be set to 1.0. 

§ 23.155 Calculation of variation margin. 

(a) Means of calculation. (1) Each 

business day each covered swap entity 

shall calculate variation margin for itself 

and for each counterparty that is a swap 

entity or a financial end user using 

methods, procedures, rules, and inputs 

that to the maximum extent practicable 

rely on recently-executed transactions, 

valuations provided by independent 

third parties, or other objective criteria. 

(2) Each covered swap entity shall 

have in place alternative methods for 

determining the value of an uncleared 

swap in the event of the unavailability 

or other failure of any input required to 

value a swap. 

(b) Control mechanisms. (1) Each 

covered swap entity shall create and 

maintain documentation setting forth 

the variation methodology with 

sufficient specificity to allow the 

counterparty, the Commission, the 

registered futures association, and any 

applicable prudential regulator to 

calculate a reasonable approximation of 

the margin requirement independently. 

(2) Each covered swap entity shall 

evaluate the reliability of its data 

sources at least annually, and make 

adjustments, as appropriate. 

(3) The Commission or the registered 

futures association at any time may 

require a covered swap entity to provide 

further data or analysis concerning the 

methodology or a data source, 

including: 

(i) An explanation of the manner in 

which the methodology meets the 

requirements of this section; 

(ii) A description of the mechanics of 

the methodology; 

(iii) The conceptual basis of the 

methodology; 

(iv) The empirical support for the 

methodology; and 

(v) The empirical support for the 

assessment of the data sources. 

§ 23.156 Forms of margin. 

(a) Initial margin—(1) Eligible 

collateral. A covered swap entity shall 

collect and post as initial margin for 

trades with a covered counterparty only 

the following types of collateral: 

(i) Immediately available cash funds 

denominated in: 

(A) U.S. dollars; 

(B) A major currency; 

(C) A currency of settlement for the 

uncleared swap; 

(ii) A security that is issued by, or 

unconditionally guaranteed as to the 

timely payment of principal and interest 

by, the U.S. Department of Treasury; 

(iii) A security that is issued by, or 

unconditionally guaranteed as to the 

timely payment of principal and interest 

by, a U.S. government agency (other 

than the U.S. Department of Treasury) 

whose obligations are fully guaranteed 

by the full faith and credit of the U.S. 

government; 

(iv) A security that is issued by, or 

fully guaranteed as to the payment of 

principal and interest by, the European 

Central Bank or a sovereign entity that 

is assigned no higher than a 20 percent 

risk weight under the capital rules 

applicable to swap dealers subject to 

regulation by a prudential regulator; 

(v) A publicly traded debt security 

issued by, or an asset-backed security 

fully guaranteed as to the timely 

payment of principal and interest by, a 

U.S. Government-sponsored enterprise 

that is operating with capital support or 

another form of direct financial 

assistance received from the U.S. 

government that enables the repayments 

of the U.S. Government-sponsored 

enterprise’s eligible securities; 

(vi) A security that is issued by, or 

fully guaranteed as to the payment of 

principal and interest by, the Bank for 

International Settlements, the 

International Monetary Fund, or a 

multilateral development bank; 

(vii) Other publicly-traded debt that 

has been deemed acceptable as initial 

margin by a prudential regulator; 

(viii) A publicly traded common 

equity security that is included in: 

(A) The Standard & Poor’s Composite 

1500 Index or any other similar index of 

liquid and readily marketable equity 

securities as determined by the 

Commission; or 

(B) An index that a covered swap 

entity’s supervisor in a foreign 

jurisdiction recognizes for purposes of 

including publicly traded common 

equity as initial margin under 

applicable regulatory policy, if held in 

that foreign jurisdiction; 

(ix) Securities in the form of 

redeemable securities in a pooled 

investment fund representing the 

security-holder’s proportional interest 

in the fund’s net assets and that are 

issued and redeemed only on the basis 

of the market value of the fund’s net 

assets prepared each business day after 

the security-holder makes its investment 

commitment or redemption request to 

the fund, if the fund’s investments are 

limited to the following: 

(A) Securities that are issued by, or 

unconditionally guaranteed as to the 

timely payment of principal and interest 

by, the U.S. Department of the Treasury, 

and immediately-available cash funds 

denominated in U.S. dollars; or 

(B) Securities denominated in a 

common currency and issued by, or 

fully guaranteed as to the payment of 

principal and interest by, the European 

Central Bank or a sovereign entity that 

is assigned no higher than a 20 percent 

risk weight under the capital rules 

applicable to swap dealers subject to 

regulation by a prudential regulator, and 

immediately-available cash funds 

denominated in the same currency; and 

(C) Assets of the fund may not be 

transferred through securities lending, 

securities borrowing, repurchase 

agreements, reverse repurchase 

agreements, or other means that involve 

the fund having rights to acquire the 

same or similar assets from the 

transferee, or 

(x) Gold. 

(2) Prohibition of certain assets. A 

covered swap entity may not collect or 

post as initial margin any asset that is 

a security issued by: 

(i) The covered swap entity or a 

margin affiliate of the covered swap 

entity (in the case of posting) or the 

counterparty or any margin affiliate of 

the counterparty (in the case of 

collection); 

(ii) A bank holding company, a 

savings and loan holding company, a 

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U.S. intermediate holding company 

established or designated for purposes 

of compliance with 12 CFR 252.153, a 

foreign bank, a depository institution, a 

market intermediary, a company that 

would be any of the foregoing if it were 

organized under the laws of the United 

States or any State, or a margin affiliate 

of any of the foregoing institutions, or 

(iii) A nonbank financial institution 

supervised by the Board of Governors of 

the Federal Reserve System under Title 

I of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (12 U.S.C. 

5323). 

(3) Haircuts. (i) The value of any 

eligible collateral collected or posted to 

satisfy initial margin requirements shall 

be subject to the sum of the following 

discounts, as applicable: 

(A) An 8 percent discount for initial 

margin collateral denominated in a 

currency that is not the currency of 

settlement for the uncleared swap, 

except for eligible types of collateral 

denominated in a single termination 

currency designated as payable to the 

non-posting counterparty as part of the 

eligible master netting agreement; and 

(B) The discounts set forth in the 

following table: 

STANDARDIZED HAIRCUT SCHEDULE

Cash in same currency as swap obligation .................................................................................................................................................... 0.0 

Eligible government and related debt (e.g., central bank, multilateral development bank, GSE securities identified in paragraph (a)(1)(iv) 

of this section): Residual maturity less than one-year ................................................................................................................................ 0.5 

Eligible government and related debt (e.g., central bank, multilateral development bank, GSE securities identified in paragraph (a)(1)(iv) 

of this section): Residual maturity between one and five years .................................................................................................................. 2.0 

Eligible government and related debt (e.g., central bank, multilateral development bank, GSE securities identified in paragraph (a)(1)(iv) 

of this section): Residual maturity greater than five years .......................................................................................................................... 4.0 

Eligible corporate debt (including eligible GSE debt securities not identified in paragraph (a)(1)(iv) of this section): Residual maturity 

less than one-year ....................................................................................................................................................................................... 1.0 

Eligible corporate debt (including eligible GSE debt securities not identified in paragraph (a)(1)(iv) of this section): Residual maturity between one and five years ............................................................................................................................................................................. 4.0 

Eligible corporate debt (including eligible GSE debt securities not identified in paragraph (a)(1)(iv) of this section): Residual maturity 

greater than five years ................................................................................................................................................................................. 8.0 

Equities included in S&P 500 or related index ................................................................................................................................................ 15.0 

Equities included in S&P 1500 Composite or related index but not S&P 500 or related index ..................................................................... 25.0 

Gold ................................................................................................................................................................................................................. 15.0 

Additional (additive) haircut on asset in which the currency of the swap obligation differs from that of the collateral asset ........................ 8.0 

(ii) The value of initial margin 

collateral shall be computed as the 

product of the cash or market value of 

the eligible collateral asset times one 

minus the applicable haircut expressed 

in percentage terms. The total value of 

all initial margin collateral is calculated 

as the sum of those values for each 

eligible collateral asset. 

(b) Variation margin—(1) Eligible 

collateral—(i) Swaps with a swap entity. 

(A) A covered swap entity shall post 

and collect as variation margin to or 

from a counterparty that is a swap entity 

only immediately available cash funds 

that are denominated in: U.S. dollars; 

(B) Another major currency; or 

(C) The currency of settlement of the 

uncleared swap. 

(ii) Swaps with a financial end user. 

A covered swap entity may post and 

collect as variation margin to or from a 

counterparty that is a financial end user 

any asset that is eligible to be posted or 

collected as initial margin under 

paragraphs (a)(1) and (2) of this section. 

(2) Haircuts. (i) The value of any 

eligible collateral collected or posted to 

satisfy variation margin requirements 

shall be subject to the sum of the 

following discounts, as applicable: 

(A) An 8% discount for variation 

margin collateral denominated in a 

currency that is not the currency of 

settlement for the uncleared swap 

except for immediately available cash 

funds denominated in U.S. cash funds 

or another major currency; and 

(B) The discounts for initial margin 

set forth in the table in paragraph 

(a)(3)(i)(B) of this section. 

(ii) The value of variation margin 

collateral shall be computed as the 

product of the cash or market value of 

the eligible collateral asset times one 

minus the applicable haircut expressed 

in percentage terms. The total value of 

all variation margin collateral shall be 

calculated as the sum of those values of 

each eligible collateral asset. 

(c) Monitoring obligation. A covered 

swap entity shall monitor the market 

value and eligibility of all collateral 

collected and posted to satisfy the 

margin requirements of §§ 23.150 

through 23.161. To the extent that the 

market value of such collateral has 

declined, the covered swap entity shall 

promptly collect or post such additional 

eligible collateral as is necessary to 

maintain compliance with the margin 

requirements of §§ 23.150 through 

23.161. To the extent that the collateral 

is no longer eligible, the covered swap 

entity shall promptly collect or post 

sufficient eligible replacement collateral 

to comply with the margin requirements 

of §§ 23.150 through 23.161. 

(d) Excess margin. A covered swap 

entity may collect or post initial margin 

or variation margin that is not required 

pursuant to §§ 23.150 through 23.161 in 

any form of collateral. 

§ 23.157 Custodial arrangements. 

(a) Initial margin posted by covered 

swap entities. Each covered swap entity 

that posts initial margin with respect to 

an uncleared swap shall require that all 

funds or other property that the covered 

swap entity provides as initial margin 

be held by one or more custodians that 

are not the covered swap entity, the 

counterparty, or margin affiliates of the 

covered swap entity or the counterparty. 

(b) Initial margin collected by covered 

swap entities. Each covered swap entity 

that collects initial margin required by 

§ 23.152 with respect to an uncleared 

swap shall require that such initial 

margin be held by one or more 

custodians that are not the covered 

swap entity, the counterparty, or margin 

affiliates of the covered swap entity or 

the counterparty. 

(c) Custodial agreement. Each covered 

swap entity shall enter into an 

agreement with each custodian that 

holds funds pursuant to paragraphs (a) 

or (b) of this section that: 

(1) Prohibits the custodian from 

rehypothecating, repledging, reusing, or 

otherwise transferring (through 

securities lending, securities borrowing, 

repurchase agreement, reverse 

repurchase agreement or other means) 

the collateral held by the custodian 

except that cash collateral may be held 

in a general deposit account with the 

custodian if the funds in the account are 

used to purchase an asset described in 

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§ 23.156(a)(1)(iv) through (xii), such 

asset is held in compliance with this 

section, and such purchase takes place 

within a time period reasonably 

necessary to consummate such purchase 

after the cash collateral is posted as 

initial margin; and 

(2) Is a legal, valid, binding, and 

enforceable agreement under the laws of 

all relevant jurisdictions including in 

the event of bankruptcy, insolvency, or 

a similar proceeding. 

(3) Notwithstanding paragraph (c)(1) 

of this section, a custody agreement may 

permit the posting party to substitute or 

direct any reinvestment of posted 

collateral held by the custodian, 

provided that, with respect to collateral 

posted or collected pursuant to § 23.152, 

the agreement requires the posting 

party, when it substitutes or directs the 

reinvestment of posted collateral held 

by the custodian. 

(i) To substitute only funds or other 

property that would qualify as eligible 

collateral under § 23.156, and for which 

the amount net of applicable discounts 

described in § 23.156 would be 

sufficient to meet the requirements of 

§ 23.152; and 

(ii) To direct reinvestment of funds 

only in assets that would qualify as 

eligible collateral under § 23.156, and 

for which the amount net of applicable 

discounts described in § 23.156 would 

be sufficient to meet the requirements of 

§ 23.152. 

§ 23.158 Margin documentation. 

(a) General requirement. Each covered 

swap entity shall execute 

documentation with each counterparty 

that complies with the requirements of 

§ 23.504 and that complies with this 

section, as applicable. For uncleared 

swaps between a covered swap entity 

and a counterparty that is a swap entity 

or a financial end user, the 

documentation shall provide the 

covered swap entity with the 

contractual right and obligation to 

exchange initial margin and variation 

margin in such amounts, in such form, 

and under such circumstances as are 

required by §§ 23.150 through 23.161. 

(b) Contents of the documentation. 

The margin documentation shall: 

(1) Specify the methods, procedures, 

rules, inputs, and data sources to be 

used for determining the value of 

uncleared swaps for purposes of 

calculating variation margin; 

(2) Describe the methods, procedures, 

rules, inputs, and data sources to be 

used to calculate initial margin for 

uncleared swaps entered into between 

the covered swap entity and the 

counterparty; and 

(3) Specify the procedures by which 

any disputes concerning the valuation 

of uncleared swaps, or the valuation of 

assets collected or posted as initial 

margin or variation margin may be 

resolved. 

§ 23.159 Special rules for affiliates. 

(a) Initial margin. (1) Except as 

provided in paragraph (c) of this 

section, a covered swap entity shall not 

be required to collect initial margin 

from a margin affiliate provided that the 

covered swap entity meets the following 

conditions: 

(i) The swaps are subject to a 

centralized risk management program 

that is reasonably designed to monitor 

and to manage the risks associated with 

the inter-affiliate swaps; and 

(ii) The covered swap entity 

exchanges variation margin with the 

margin affiliate in accordance with 

paragraph (b) of this section. 

(2)(i) A covered swap entity shall post 

initial margin to any margin affiliate 

that is a swap entity subject to the rules 

of a Prudential Regulator in an amount 

equal to the amount that the swap entity 

is required to collect from the covered 

swap entity pursuant to the rules of the 

Prudential Regulator. 

(ii) A covered swap entity shall not be 

required to post initial margin to any 

other margin affiliate pursuant to 

§§ 23.150 through 23.161. 

(b) Variation margin. Each covered 

swap entity shall post and collect 

variation margin with each margin 

affiliate that is a swap entity or a 

financial end user in accordance with 

all applicable provisions of §§ 23.150 

through 23.161. 

(c) Foreign margin affiliates. (1) For 

purposes of this section, the term 

outward facing margin affiliate means a 

margin affiliate that enters into swaps 

with third parties. 

(2) Except as provided in paragraph 

(c)(3) of this section, each covered swap 

entity shall collect initial margin in 

accordance with all applicable 

provisions of §§ 23.150 through 23.161 

from each margin affiliate that meets the 

following criteria: 

(i) The margin affiliate is a financial 

end user; 

(ii) The margin affiliate enters into 

swaps with third parties, or enters into 

swaps with any other margin affiliate 

that, directly or indirectly (including 

through a series of transactions), enters 

into swaps with third parties, for which 

the provisions of §§ 23.150 through 

23.161 would apply if any such margin 

affiliate were a swap entity; and 

(iii) Any such outward facing margin 

affiliate is located in a jurisdiction that 

the Commission has not found to be 

eligible for substituted compliance with 

regard to the provisions of §§ 23.150 

through 23.161 and does not collect 

initial margin for such swaps in a 

manner that would comply with the 

provisions of §§ 23.150 through 23.161. 

(3) The custodian for initial margin 

collected pursuant to paragraph (c)(1) of 

this section may be the covered swap 

entity or a margin affiliate of the 

covered swap entity. 

§ 23.160 [Reserved] 

§ 23.161 Compliance dates. 

(a) Covered swap entities shall 

comply with the minimum margin 

requirements for uncleared swaps on or 

before the following dates for uncleared 

swaps entered into on or after the 

following dates: 

(1) September 1, 2016 for the 

requirements in § 23.152 for initial 

margin and in § 23.153 for variation 

margin for any uncleared swaps where 

both— 

(i) The covered swap entity combined 

with all its margin affiliates; and 

(ii) Its counterparty combined with all 

its margin affiliates, have an average 

daily aggregate notional amount of 

uncleared swaps, uncleared securitybased swaps, foreign exchange forwards, 

and foreign exchange swaps in March, 

April, and May 2016 that exceeds $3 

trillion, where such amounts are 

calculated only for business days; and 

where 

(iii) In calculating the amounts in 

paragraphs (a)(1)(i) and (ii) of this 

section, an entity shall count the 

average daily notional amount of an 

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

or a foreign exchange swap between an 

entity or a margin affiliate only one time 

and shall not count a swap or a securitybased swap that is exempt pursuant to 

§ 23.150(b) or a security-based swap that 

is exempt pursuant to section 15F(e) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78o–10(e)). 

(2) March 1, 2017 for the requirements 

in § 23.153 for variation margin for any 

other covered swap entity for uncleared 

swaps entered into with any other 

counterparty. 

(3) September 1, 2017 for the 

requirements in § 23.152 for initial 

margin for any uncleared swaps where 

both— 

(i) The covered swap entity combined 

with all its margin affiliates; and 

(ii) Its counterparty combined with all 

its margin affiliates, have an average 

daily aggregate notional amount of 

uncleared swaps, uncleared securitybased swaps, foreign exchange forwards, 

and foreign exchange swaps in March, 

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704 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 

April, and May 2017 that exceeds $2.25 

trillion, where such amounts are 

calculated only for business days; and 

where 

(iii) In calculating the amounts in 

paragraphs (a)(3)(i) and (ii) of this 

section, an entity shall count the 

average daily notional amount of an 

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

or a foreign exchange swap between an 

entity or a margin affiliate only one time 

and shall not count a swap or a securitybased swap that is exempt pursuant to 

§ 23.150(b) or a security-based swap that 

is exempt pursuant to section 15F(e) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78o–10(e)). 

(4) September 1, 2018, for the 

requirements in § 23.152 for initial 

margin for any uncleared swaps where 

both— 

(i) The covered swap entity combined 

with all its margin affiliates; and 

(ii) Its counterparty combined with all 

its margin affiliates have an average 

daily aggregate notional amount of 

uncleared swaps, uncleared securitybased swaps, foreign exchange forwards, 

and foreign exchange swaps in March, 

April, and May 2018 that exceeds $1.5 

trillion, where such amounts are 

calculated only for business days; and 

where 

(iii) In calculating the amounts in 

paragraphs (a)(4)(i) and (ii) of this 

section, an entity shall count the 

average daily notional amount of an 

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

or a foreign exchange swap between an 

entity or a margin affiliate only one time 

and shall not count a swap or a securitybased swap that is exempt pursuant to 

§ 23.150(b) or a security-based swap that 

is exempt pursuant to section 15F(e) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78o–10(e)). 

(5) September 1, 2019 for the 

requirements in § 23.152 for initial 

margin for any uncleared swaps where 

both— 

(i) The covered swap entity combined 

with all its margin affiliates; and 

(ii) Its counterparty combined with all 

its margin affiliates have an average 

daily aggregate notional amount of 

uncleared swaps, uncleared securitybased swaps, foreign exchange forwards, 

and foreign exchange swaps in March, 

April, and May 2019 that exceeds $0.75 

trillion, where such amounts are 

calculated only for business days; and 

where 

(iii) In calculating the amounts in 

paragraphs (a)(5)(i) and (ii) of this 

section, an entity shall count the 

average daily notional amount of an 

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

or a foreign exchange swap between an 

entity or a margin affiliate only one time 

and shall not count a swap or a securitybased swap that is exempt pursuant to 

§ 23.150(b) or a security-based swap that 

is exempt pursuant to section 15F(e) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78o–10(e)). 

(6) September 1, 2020 for the 

requirements in § 23.152 for initial 

margin for any other covered swap 

entity with respect to uncleared swaps 

entered into with any other 

counterparty. 

(b) Once a covered swap entity and its 

counterparty must comply with the 

margin requirements for uncleared 

swaps based on the compliance dates in 

paragraph (a) of this section, the covered 

swap entity and its counterparty shall 

remain subject to the requirements of 

§§ 23.150 through 23.161 with respect to 

that counterparty. 

(c)(1) If a covered swap entity’s 

counterparty changes its status such that 

an uncleared swap with that 

counterparty becomes subject to a 

stricter margin requirement under 

§§ 23.150 through 23.161 (for example, 

if the counterparty’s status changes from 

a financial end user without material 

swaps exposure to a financial end user 

with material swaps exposure), then the 

covered swap entity shall comply with 

the stricter margin requirements for any 

uncleared swaps entered into with that 

counterparty after the counterparty 

changes its status. 

(2) If a covered swap entity’s 

counterparty changes its status such that 

an uncleared swap with that 

counterparty becomes subject to less 

strict margin requirement under 

§§ 23.150 through 23.161 (for example, 

if the counterparty’s status changes from 

a financial end user with material swaps 

exposure to a financial end user without 

material swaps exposure), then the 

covered swap entity may comply with 

the less strict margin requirements for 

any uncleared swaps entered into with 

that counterparty after the counterparty 

changes its status as well as for any 

outstanding uncleared swap entered 

into after the applicable compliance 

date under paragraph (a) of this section 

and before the counterparty changed its 

status. 

§§ 23.162–23.199 [Reserved] 

■ 3. In § 23.701 revise paragraphs (a)(1), 

(d), and (f) to read as follows: 

§ 23.701 Notification of right to 

segregation. 

(a) * * * 

(1) Notify each counterparty to such 

transaction that the counterparty has the 

right to require that any Initial Margin 

the counterparty provides in connection 

with such transaction be segregated in 

accordance with §§ 23.702 and 23.703 

except in those circumstances where 

segregation is mandatory pursuant to 

§ 23.157; 

* * * * * 

(d) Prior to confirming the terms of 

any such swap, the swap dealer or major 

swap participant shall obtain from the 

counterparty confirmation of receipt by 

the person specified in paragraph (c) of 

this section of the notification specified 

in paragraph (a) of this section, and an 

election, if applicable, to require such 

segregation or not. The swap dealer or 

major swap participant shall maintain 

such confirmation and such election as 

business records pursuant to § 1.31 of 

this chapter. 

* * * * * 

(f) A counterparty’s election, if 

applicable, to require segregation of 

Initial Margin or not to require such 

segregation, may be changed at the 

discretion of the counterparty upon 

written notice delivered to the swap 

dealer or major swap participant, which 

changed election shall be applicable to 

all swaps entered into between the 

parties after such delivery. 

PART 140—ORGANIZATION, 

FUNCTIONS, AND PROCEDURES OF 

THE COMMISSION 

■ 4. The authority citation for part 140 

continues to read as follows: 

Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 

13(d), 13(e), and 16(b). 

■ 5. In § 140.93, add paragraph (a)(6) to 

read as follows: 

§ 140.93 Delegation of authority to the 

Director of the Division of Swap Dealer and 

Intermediary Oversight. 

(a) * * * 

(6) All functions reserved to the 

Commission in §§ 23.150 through 

23.161 of this chapter. 

* * * * * 

Issued in Washington, DC, on December 

18, 2015, by the Commission. 

Christopher J. Kirkpatrick, 

Secretary of the Commission. 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendices to Margin Requirements for 

Uncleared Swaps for Swap Dealers and 

Major Swap Participants—Commission 

Voting Summary, Chairman’s 

Statement, and Commissioners’ 

Statements 

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Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 705 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Massad and 

Commissioner Giancarlo voted in the 

affirmative. Commissioner Bowen voted in 

the negative. 

Appendix 2—Statement of Chairman 

Timothy G. Massad 

The rule this Commission is adopting 

today is one of the most important elements 

of swaps market regulation set forth in the 

Dodd-Frank Act. Although we have 

mandated clearing for standardized swaps, 

there will always be a large part of the market 

that is not cleared. This is entirely 

appropriate, as many swaps are not suitable 

for central clearing because of limited 

liquidity or other characteristics. Our 

clearinghouses will be stronger if we exercise 

care in what is required to be cleared. 

However, we must take steps to protect 

against such activity posing excessive risk to 

the system. That is why margin requirements 

for uncleared swaps are important. 

The rule we are adopting today is strong 

and sensible. It requires swap dealers and 

major swap participants (‘‘covered swap 

entities’’ or ‘‘CSEs’’) to post and collect 

margin with financial entities with whom 

they have significant exposures. It requires 

initial margin, which is designed to protect 

against potential future loss on a default, as 

well as variation margin, which serves as 

mark-to-market protection. It allows for the 

use of a broad range of types of collateral, but 

only with appropriate haircuts. It requires a 

greater level of margin than for cleared 

swaps, given that uncleared swaps are likely 

to be less liquid. It requires segregation of 

margin with third party custodians, and 

prohibits rehypothecation. 

While there are costs to this rule, they are 

justified in light of the potential risks that 

uncleared swaps can pose. We learned this 

firsthand in the global financial crisis, which 

resulted in dramatic suffering and loss for 

American families. 

The swap activities of commercial endusers were not a source of significant risk in 

the financial crisis, and we must make sure 

that they can continue using the derivatives 

markets effectively and efficiently. 

Accordingly, an important feature of our rule 

is that these margin requirements do not 

apply to swaps with commercial end-users. 

This was an element of our proposed rule 

and is in accordance with the intent of 

Congress. Instead, our rule focuses on those 

entities that create the greatest risks to our 

system through uncleared swaps: The large 

financial institutions with the greatest 

amount of swap activity. 

Our rule is practically identical to the rules 

of the United States banking regulators, and 

substantially similar to international rules. 

Harmonization is critical to creating a sound 

international framework for regulation. 

Shortly after I took office, I committed to 

doing all we could to achieve such 

harmonization, and we have succeeded. For 

example, a year ago there were significant 

differences between proposals by the CFTC 

as well as the prudential regulators on the 

one hand, and international regulators on the 

other. But today, all these rules are 

substantially similar. This is true with 

respect to a number of provisions, including 

a two-way ‘‘post and collect’’ obligation; the 

material swaps threshold that determines 

when the requirements apply; the minimum 

transfer amount; the types of permissible 

collateral; the haircuts used in valuing types 

of collateral; the general provisions on 

models for calculating margin; segregation 

requirements; and the use of different 

currencies for collateral. We have also taken 

into account concerns related to the timing 

of when margin must be posted and made 

changes to address the complexities of crossborder transactions. 

Today’s rule is designed to address the 

potential risks that can arise if a CSE or large 

financial entity defaults on transactions with 

another CSE or large financial entity. We are 

particularly seeking to reduce the risk that 

such a default leads to further defaults by 

those counterparties, given the 

interconnectedness of our financial system. 

We became all too familiar with that risk in 

2008. Margin is designed to reduce the risk 

of cascading defaults by enabling the nondefaulting party to recover its loss. Some will 

characterize this as expensive insurance, as 

both parties must post initial margin as 

protection against potential future loss, even 

though in default, only one would actually 

recover against the margin. But we need only 

remember the costs of the crisis to our 

economy to recognize that this is, on the 

contrary, quite sensible. 

The issue of how our rule should apply to 

inter-affiliate transactions has received a lot 

of attention. I believe we should look at this 

issue in terms of the goals of the rule, which 

are first and foremost to avoid the potential 

for the buildup of excessive risk from 

bilateral transactions between unaffiliated 

parties. Inter-affiliate transactions are not 

outward-facing and thus do not increase the 

overall risk exposure of the consolidated 

enterprise to third parties. Instead, they are 

typically a means for the consolidated 

enterprise to centrally manage risk related to 

the activities of multiple subsidiaries. 

Imposing the same third-party transaction 

standards on these internal activities of 

consolidated entities is likely to significantly 

increase costs to end-users without any 

commensurate benefit. Nevertheless, we have 

imposed some protections and requirements. 

First, we must make sure that inter-affiliate 

transactions are not used as a loophole or as 

a means to escape the obligation to collect 

margin from third parties. This could occur, 

for example, if an affiliate in a jurisdiction 

that does not have comparable margin 

requirements enters into a swap with a third 

party without collecting margin, and then 

enters into an affiliate swap to transfer that 

risk. Our rule imposes a strong anti-evasion 

standard. A CSE is required to collect margin 

from an affiliate if that affiliate is, directly or 

indirectly, engaging in an outward facing 

swap in a situation where it should be, but 

is not, collecting margin. In addition, our 

proposal on the cross-border application of 

our margin rule, which is the subject of a 

separate rulemaking, also addresses this. The 

proposal provides that any affiliate that is 

consolidated with a U.S. parent is subject to 

requirements to collect margin from third 

parties no matter where the affiliate is 

located and whether or not it is guaranteed 

by the U.S. parent. 

We have seen how global financial 

institutions have changed their business 

models to ‘‘deguarantee’’ the transactions of 

their overseas swap dealers so as to 

circumvent certain U.S. requirements. 

Whether guaranteed or not, swap risk created 

by an affiliate abroad could harm our 

financial system. That is why we have a 

strong anti-evasion standard in this rule and 

why we are addressing this through the 

cross-border aspects of the rule. I hope that 

we can finalize that part of the rule early next 

year. 

In addition, our rule requires segregation of 

margin and prohibits rehypothecation, which 

prevents the affiliate that created the outward 

exposure from using the margin for 

something else, thus leaving itself more 

vulnerable to a default. 

Second, we have required that variation 

margin be exchanged for all inter-affiliate 

swaps. This provides mark-to-market 

protection to either side, and prevents the 

potential buildup of a liability owed by one 

affiliate to another. 

Third, we have required that inter-affiliate 

swaps be subject to a centralized risk 

management program that is reasonably 

designed to monitor and to manage the risks 

associated with such transactions. Some have 

suggested that, even if inter-affiliate swaps do 

not increase exposure to third parties, we 

should require initial margin for all interaffiliate swaps to enhance that internal risk 

management. But that would be a very costly 

and not very effective way for us as a 

regulator to enhance such risk management. 

For example, it would not make sense to 

have a rule that required initial margin on, 

say, a $100 million inter-affiliate swap, when 

one affiliate could loan the other $100 

million and not collect any margin. 

Similarly, a CSE could collect Treasury 

securities (or other non-cash collateral) from 

an affiliate as initial margin, but then loan 

the same amount of other securities back to 

the affiliate in a separate transaction which 

is not subject to requirements. The point is, 

if the concern is the adequacy of central risk 

management, then we should focus on that 

subject more generally. We should not 

attempt to address it by imposing on all interaffiliate trades an initial margin requirement 

that is designed to address default risk on 

trading relationships between unaffiliated 

parties. 

It is also important to remember that the 

definition of ‘‘affiliate’’ in our rule is limited 

to consolidated entities. This means that any 

swap with an affiliate that is not consolidated 

would be subject to the same margin 

requirements as third party swaps. This 

would be the case, for example, if a swap 

dealer enters into a swap with a mutual fund 

managed by an affiliate. 

The fact that we are not generally requiring 

an exchange of initial margin in inter-affiliate 

transactions is also consistent with the rule 

this Commission adopted in 2013, which 

provided an exception to the clearing 

mandate for inter-affiliate transactions. In 

that rulemaking, the Commission considered, 

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1BCBS/IOSCO, Margin requirements for noncentrally cleared derivatives (‘‘BCBS/IOSCO 

Framework’’) (September 2013). 

2 Id. at 2. 

3 Ibid. 

4 80 FR 74840 (November 30, 2015) at 74889. 

but decided against, requiring the exchange 

of initial margin or variation margin as a 

condition for electing the exemption. It did 

so out of a concern that such requirements 

‘‘would limit the ability of U.S. companies to 

efficiently allocate risk among affiliates and 

manage risk centrally.’’ A requirement to 

exchange initial margin on all uncleared 

inter-affiliate transactions would effectively 

contravene the inter-affiliate clearing 

exemption, as it would likely be cheaper to 

clear the inter-affiliate swap. However, I 

think the case for variation margin is 

different, and that is why I support imposing 

a general requirement for exchange of 

variation margin for inter-affiliate swaps. 

While this goes further than what the 

Commission did in 2013, I believe it is a 

necessary and reasonable addition to the 

overall protections of the rule. 

In addition to the goal of minimizing 

systemic risk, I also considered our desire to 

harmonize with the prudential regulators and 

international standards as much as possible, 

so that we do not create inconsistencies in 

the regulatory framework or incentives for 

regulatory arbitrage. The prudential 

regulators’ rules require the exchange of 

variation margin in inter-affiliate 

transactions, as ours do. They did not require 

the two-way exchange of initial margin; 

instead they required a ‘‘collect only’’ 

approach. This is similar to what federal law 

already requires, as Section 23 A and B of the 

Federal Reserve Act imposes requirements on 

inter-affiliate transactions by insured 

depositary institutions designed to protect 

the insured depository institutions. Those 

requirements do not apply to CSEs subject to 

our rule. In addition, if we were to adopt a 

collect only approach to initial margin, it 

would result in the two-way approach for 

transactions between the CFTC’s CSEs and 

the CSEs subject to the prudential regulators’ 

rules that the prudential regulators did not 

adopt. Instead, we have required the posting 

of initial margin to affiliated CSEs regulated 

by the prudential regulators to ensure 

consistency with the requirements of the 

prudential regulators’ rules. By doing so, we 

can help enforce the prudential regulators’ 

goal and the existing Section 23 framework. 

With respect to international 

harmonization, we expect the rules to be 

adopted soon by Europe and Japan to not 

require initial or variation margin for interaffiliate swaps. Similarly, the joint Basel 

Committee on Banking Supervision and the 

International Organization of Securities 

Commissions standards agreed upon in 2013 

stated that the exchange of initial or variation 

margin for inter-affiliate swaps is ‘‘not 

customary’’ and expressed concern that 

imposing such requirements would result in 

‘‘additional liquidity demands.’’ Our rule is 

somewhat more conservative than the 

international standards, but I believe the 

differences are not so great as to create 

significant international disparities. 

In conclusion, the differences in our views 

on inter-affiliate margin do not reflect 

differences in the level of concern about the 

safety of the system or avoiding the problems 

of the past. They reflect differences in our 

analysis of what is accomplished by interaffiliate initial margin. I believe the rule we 

are adopting today is a strong and sensible 

approach that will contribute to the strength 

and resiliency of our financial system. 

Appendix 3—Dissenting Statement of 

Commissioner Sharon Y. Bowen 

I commend the staff, the Chairman, and 

Commissioner Giancarlo for their work on 

this final rule. This rule has many benefits 

for the American public and is an important 

step towards further girding the financial 

system. Unfortunately, as compared to our 

September, 2014 proposal and the rule 

passed by the prudential regulators, this final 

rule fails to meet statutory intent and it puts 

swap dealers we regulate at greater risk in 

times of financial stress because of its 

treatment of interaffiliate margin. 

In 2008, our financial system was brought 

to its knees as a tidal wave of financial risk 

washed away the savings of many, destroyed 

confidence in the financial system, and 

swept away platitudes about large, 

sophisticated, financial players’ ability to 

manage their own credit risks. This crisis was 

considerably compounded by derivatives 

transactions that were unregulated and 

woefully under-collateralized. 

While these large players were bailed out 

by taxpayers, today they have returned to 

record profits. Many of those same taxpayers 

had no similar help. No recourse to the 

financial institutions that harmed them. No 

help to pick up the pieces and rebuild a 

financial future. 

In the aftermath, the international 

regulatory community recognized that 

margin requirements for uncleared swaps are 

a critical safeguard against repeating these 

mistakes. They provide covered entities with 

protections against counterparty default. 

Crucially, initial margin is a protection paid 

by the ‘‘defaulter.’’ These defaulter-paid 

protections help entities recognize the risk 

they take and impose on others. Variation 

margin, on the other hand, force entities to 

recognize losses they have already incurred. 

Together, variation margin and initial margin 

reduce systemic risk and excess leverage. 

They help ensure the parties have the 

capacity to perform on the swap over time. 

In 2010, the Dodd Frank Wall Street 

Reform and Consumer Protection Act (‘‘Dodd 

Frank’’) recognized the higher risk swap 

dealers faced from using uncleared swaps. 

Dodd Frank mandated margin requirements 

to protect the safety and soundness of swap 

dealers using uncleared swaps. 

In 2011, the Group of Twenty (G20) added 

margin requirements on uncleared 

derivatives to the global financial reform 

agenda. 

In September, 2013, following the G20 

agenda, the Basel Committee on Banking 

Supervision (‘‘BCBS’’) and International 

Organization for Securities Commissions 

(‘‘IOSCO’’) released a framework for margin 

requirements for uncleared derivatives (the 

‘‘BCBS/IOSCO Framework’’).1 This 

framework highlighted the increased risk 

posed by uncleared derivatives as the ‘‘same 

type of systemic contagion and spillover 

risks’’ 2 involved in the 2008 financial crisis. 

The Framework also found that margin 

requirements for uncleared derivatives would 

promote central clearing.3

In September, 2014, the Commission reproposed its 2011 rule on uncleared margin, 

updating it to reflect the Framework and 

working with the prudential regulators to 

develop a proposal that was consistent with 

theirs. 

Unfortunately, the rule before us is a 

considerable retreat from the September 

proposal. This final rule provides an 

exemption for swap dealers, excusing them 

from collecting initial margin when entering 

into transactions with most affiliated parties 

including prudentially regulated swap 

dealers, i.e., swap dealers that are also banks. 

It also includes, in most cases, undercapitalized affiliates, foreign affiliates, and 

even unregulated affiliates. 

As the prudential regulators noted in their 

recently released final rule, these swaps 

‘‘may be significant in number and notional 

amount.’’ 4 As I understand from our staff, 

interaffiliate transactions likely make up 

nearly half of all uncleared transactions by 

notional volume. 

Initial margin functions like a performance 

bond. Collected from your counterparty, it 

helps ensure that even as one party defaults 

on you, you will be able to perform on your 

obligations to others. Posted and collected 

across the financial system, it is a critical 

shock absorber for the bumps and potholes 

of our financial markets and for the risk of 

contagion and spillovers. 

The large financial institutions that benefit 

from this exemption have tremendously 

complicated organizational structures, webs 

of hundreds, sometimes thousands, of 

affiliates spread across the globe. These 

complicated structures allow these banks to 

shift risk across the globe through different 

legal entities in their quest to earn higher 

returns on capital. 

The difference in political, financial, and 

legal systems across these interconnected, 

international affiliate webs makes it difficult, 

likely impossible, to fully predict how risk 

unfolds across the global entity in a period 

of severe financial stress. 

Think of immunizations. We have them to 

protect our population against the risk of 

infectious disease, not just for us as 

individuals, but to keep disease from 

spreading across our communities. 

Immunizations are not always enough, 

people still get sick, but they are a vital 

protective measure. People do forgo them, 

perhaps hoping that they either are not going 

to get sick, or if they do, that they can be 

treated. But, we know, hope is not enough. 

The whole point of immunizations is 

protecting against dangerous, but 

preventable, risks. 

Initial margin fulfills a similar role. 

Legally, the affiliates we are talking about 

here are separate entities, even if they are 

part of a larger company structure. If their 

transactions across affiliates create risk, that 

risk should be addressed. For uncleared 

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5 7 U.S.C. 6s(e)(3)(D)(ii). 

6 7 U.S.C. 6s(e)(3)(A)(i). 

1 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Pub. L. 111–203, 124 Stat. 1376 

(2010). 

2Clearing Exemption for Swaps Between Certain 

Affiliated Entities, 78 FR 21750 (Apr. 11, 2013); 17 

CFR 50.52. 

3 Id. at 21753. 

4 Id. at 21754. 

5For example, the clearing exemption may be 

elected only if the affiliates’ financial statements are 

consolidated, which increases the likelihood that 

the affiliates will be mutually obligated to meet the 

group’s swap obligations; the affiliates must be 

subject to a centralized risk management program; 

and outward-facing swaps must be cleared or 

subject to an exemption or exception from clearing. 

Id. at 21753. 

6 Id. at 21754. 

7The costs of posting margin for uncleared swaps 

will likely be substantially higher than the costs 

associated with clearing. For example, the 

minimum liquidation time for cleared agricultural, 

energy and metals swaps is one-day for purposes of 

calculating initial margin, and five days for cleared 

interest rate and credit default swaps. Commission 

Regulation 39.13(g)(2). Under the final rule, initial 

margin for uncleared swaps may be calculated 

under either a standardized table-based method or 

a model-based method. Under the table-based 

method, initial margin for commodity swaps must 

equal 15 percent of gross notional exposure. The 

model-based method requires a ten-day close out 

period for all swaps regardless of the underlying 

liquidity characteristics. 

8Margin Requirements for Uncleared Swaps for 

Swap Dealers and Major Swap Participants; 

Proposed Rule, 79 FR 59898, 59936 (Oct. 3, 2014) 

(Statement of Commissioner J. Christopher 

Giancarlo), available at http://www.cftc.gov/idc/

Continued 

swaps, initial margin helps immunize 

individuals, institutions and ultimately the 

whole financial system from financial disease 

and contagion. 

In November of this year, the prudential 

regulators decided to allow, subject to 

conditions, dealers to collect but not post 

initial margin with affiliates. The prudential 

regulators noted this accommodation would 

meet the twin goals of ‘‘protect[ing] the safety 

and soundness of covered swap entities in 

the event of an affiliated counterparty 

default’’ while not ‘‘permit[ting] such interaffiliate swaps . . . to remain unmargined 

and thus to pose a risk to systemic stability.’’ 

According to the statute, our rules are to be 

comparable, ‘‘to the maximum practicable’’ 

to those of our fellow prudential regulators.5

While this rule today is, in many respects 

consistent with that of the prudential 

regulators, regarding interaffiliate initial 

margin it is neither comparable to that of the 

prudential regulators, nor does it protect 

safety and soundness of swap dealers we 

oversee. It places the swap dealers we 

regulate, and thus, their customers, at 

unnecessary risk in times of financial stress. 

The situation of a CFTC-regulated swap 

dealer transacting with a prudentially 

regulated swap dealer is particularly 

problematic. Not only does the CFTCregulated swap dealer not have the benefit of 

collecting initial margin, it has to post initial 

margin to the prudentially-regulated swap 

dealer. For entities with high volumes of 

affiliate transactions, this can leave these 

CFTC-regulated swap dealers in a huge hole 

in the case of default. By not collecting initial 

margin, this rule places the swap dealers we 

regulate at greater risk in times of severe 

financial stress. That cannot be consistent 

with the intent of a statute mandating us to 

protect the ‘‘safety and soundness’’ of our 

swap dealers. 

By not requiring the collection of 

interaffiliate initial margin for this significant 

number of trades, we lose a vital financial 

shock absorber that is intended to help 

immunize institutions and the system against 

the risk of default. 

We should not minimize the risk of this 

action. One could say that having our swap 

dealers collect initial margin is not necessary 

because a large financial institution is never 

going to let one of its affiliates go under. Do 

we want to risk the health of our economy 

on that bet? Especially since, relying on 

financial entities to properly risk manage, 

without regulatory limitations, did not work 

in 2008? 

The rationale noted in this rule for 

allowing this loophole seems to be in order 

to reduce the margin amount collected by the 

overall enterprise. But, we are charged with 

protecting the ‘‘safety and soundness’’ of 

swap dealers.6 We need to address the risks 

that cause a particular swap dealer to fail. 

Especially, those risks that might cause a 

swap dealer to fail to meet its obligations to 

its customers or protect its customers’ funds. 

I do not know, for a particular swap dealer, 

what circumstances might arise that would 

send it careening towards another financial 

crash. I cannot predict whether collecting 

interaffiliate initial margin will be enough to 

protect the swap dealer and ultimately its 

customers. I do know that having collateral 

in the form of initial margin makes it more 

likely the swap dealer will meet its 

obligations than not having it. 

This decision seems to reflect a 

forgetfulness about how we, as a country, 

allowed the last financial crisis to happen. It 

is easy to believe that large, complex 

financial institutions can manage their risks. 

They are smart people. They make a lot of 

money. They have to know what they are 

doing. 

However, the risks we are dealing with are 

hard to quantify. They are the kinds of risks 

that humans have shown, throughout history, 

they are quite poor at managing. 

Most institutions for whom these 

transactions are relevant, failed in 2008 to 

manage the risk of these transactions. This 

action today seems to be a return to blindly 

trusting in large financial institutions’ ability 

and willpower to manage their risks 

adequately. Are we really willing to make 

that bet again? 

I am not. 

Our prudential colleagues have agreed that 

initial margin is the correct tool to manage 

the risks of transactions across affiliates. We 

should not be trying to guess whether a large, 

complex financial institution’s global risk 

controls will be sufficient to protect the swap 

dealers we regulate. Our failure to provide 

comparable protection for our swap dealers 

is inexplicable to me. 

I have been responsible for dealing with 

customers who have lost their life savings 

when complex financial entities collapse. I 

cannot vote for a rule that places the swap 

dealers we regulate, and most importantly, 

their customers, at risk. Accordingly, I vote 

no. 

Appendix 4—Statement of 

Commissioner J. Christopher Giancarlo 

Today’s final rule regarding margin 

requirements for uncleared swaps is far from 

perfect. The Commission had the unenviable 

task of harmonizing its rule with the 

prudential regulators’ rules and with 

standards issued by the Basel Committee on 

Banking Supervision and the International 

Organization of Securities Commissions 

(BCBS/IOSCO). While there are particular 

provisions of the final rule that I do not 

support, I think the final rule is far better 

balanced than the previous proposal. 

Much of the discussion in finalizing this 

rule has been focused on margin 

requirements for inter-affiliate swaps. That 

discussion must begin with the recognition 

that inter-affiliate swaps transactions do not 

involve transactions between distinct 

financial institutions that was at issue in the 

2008 financial crisis and do not pose the 

systemic risk that the Dodd-Frank Act 1 was 

ostensibly designed to address. Congress 

expressed no particular intention to subject 

inter-affiliate transactions to clearing or interaffiliate margin. 

Accordingly, the CFTC adopted a rule in 

April 2013 to exempt certain inter-affiliate 

swaps from mandatory clearing.2 That 

rulemaking, supported by former Chairman 

Gensler and Commissioners Wetjen, Chilton 

and O’Malia, recognized that inter-affiliate 

swaps provide an important risk management 

role within corporate groups. They enable 

use of a single conduit on behalf of multiple 

affiliates to net affiliates’ trades, which 

reduces the overall risk of the corporate 

group and the number of outward-facing 

swaps into which the affiliates might 

otherwise enter. This, in turn, reduces 

operational, market, counterparty credit and 

settlement risk.3 Rather than increasing risk, 

inter-affiliate swaps allow entities within a 

corporate group to transfer risk to the group 

entity best positioned to manage it. 

Moreover, in exercising its authority under 

Section 4(c) of the Commodity Exchange Act 

to exempt qualifying inter-affiliate swaps 

from the mandatory clearing requirement, the 

Commission found that the exemption 

promotes responsible financial innovation, 

fair competition and is consistent with the 

public interest.4 It further found that the 

exemption, which was conditioned on 

having certain risk mitigating measures in 

place,5 would not have a material effect on 

the Commission’s ability to discharge its 

regulatory responsibilities.6

When the CFTC issued its proposed rule in 

September 2014, I noted that subjecting interaffiliate swaps to the higher costs of 

uncleared margin 7 could not be logically or 

prudentially justified with the clearing 

exemption for inter-affiliate swaps that the 

Commission adopted in 2013.8 The 

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groups/public/@lrfederalregister/documents/file/

2014-22962a.pdf. 

9Cost-Benefit Analysis of the CFTC’s Proposed 

Margin Requirements for Uncleared Swaps, NERA 

Economic Consulting (Dec. 2, 2014), available at 

http://www.nera.com/content/dam/nera/

publications/2014/NERA_Margin_Requirements_

Uncleared_Swaps.pdf. 

10Hearing before the Subcommittee on 

Commodity Exchanges, Energy, and Credit of the 

Committee on Agriculture, House of 

Representatives, 114th Congress, First Session, 

Serial No. 114–7, Transcript at 193–194 (Apr. 14, 

2015), available at http://agriculture.house.gov/

uploadedfiles/114-07_-_93966.pdf. 

11AIG often did not post initial margin or pay 

variation margin on its outward facing swaps. See 

Opening Statement of Commissioner Michael V. 

Dunn, Public Meeting on Proposed Rules Under 

Dodd-Frank Act (Apr. 12, 2011). Both are required 

under today’s rule. 

12 I note an inconsistency between the $8 billion 

de minimis threshold for purposes of determining 

who must register as a swap dealer or major swap 

participant and the $8 billion threshold for 

measuring material swaps exposure. Foreign 

exchange swaps, foreign exchange forwards and 

hedging swaps must be included in the calculation 

of material swaps exposure; they are not included 

in calculating the de minimis threshold. 

13See CFTC No-Action Letter No. 13–22 (Jun. 4, 

2013); CFTC No-Action Letter No. 14–144 (Nov. 26, 

2014). 

14See Margin Requirements for Uncleared Swaps 

for Swap Dealers and Major Swap Participants— 

Cross-Border Application of the Margin 

Requirements; Proposed Rule, 80 FR 41376 (Jul. 14, 

2015), available at http://www.cftc.gov/idc/groups/ 

public/@lrfederalregister/documents/file/2015- 

16718a.pdf. 

15 Id. at 41407. 

16CFTC Letter No. 13–01. 

17 Id. at 2. 

18See Chair Janet L. Yellen, Opening Statement 

on the Long-Term Debt and Total Loss-Absorbing 

Capacity Proposal and the Final Rule for Margin 

and Capital Requirements for Uncleared Swaps, 

Board of Governors of the Federal Reserve System, 

Oct. 30, 2015, available at http://

www.federalreserve.gov/newsevents/press/bcreg/

yellen-statement-20151030a.htm; see also Madigan, 

Peter, US Margin Rules Threaten Clearing 

Bottleneck, Risk.net, Dec. 14, 2015. 

Commission’s 2013 findings remain valid on 

this issue. I am aware of no facts that have 

come to light that would change the original 

assessment made by our predecessor 

Commission. 

In fact, since issuing the proposed rule for 

notice and comment, an independent costbenefit analysis of the rule recommended, 

among other things, exempting inter-affiliate 

swaps from initial margin requirements as a 

means to reduce the ‘‘excessively onerous’’ 

impact of the rule on competition, price 

discovery and overall market efficiency 

without allowing additional systemic risk.9 I 

concur with that recommendation. 

Earlier this year, I testified before the U.S. 

House of Representatives Committee on 

Agriculture Subcommittee on Commodity 

Exchanges, Energy, and Credit. In response to 

a question, I explained that the cost of any 

requirement to impose initial margin in interaffiliate transactions would have two likely 

impacts: first, it would raise the cost of 

commercial risk hedging for American endusers; and second, it would encapsulate risk 

in the U.S. marketplace and thus increase the 

risk of systemic hazard in American financial 

markets.10

The final rule before us today is not naı ̈ve 

or reckless concerning inter-affiliate swaps 

transactions. It recognizes that they are not 

without risk and sets appropriate safeguards. 

First, the rule requires operation of a 

centralized risk management program for 

such swaps. Second, variation margin will be 

required. Third, the rule requires covered 

swap entities to collect initial margin from 

non-U.S. affiliates that are not subject to 

comparable initial margin collection 

requirements for their own outward-facing 

swaps with financial entities. These 

measures appropriately address the risks 

associated with uncleared inter-affiliate 

swaps.11

In other regards, I am satisfied that the 

threshold for measuring material swaps 

exposure has been raised from $3 billion to 

$8 billion, which brings our requirement 

roughly in line with the BSBS/IOSCO 

standard of Ö8 billion.12 I am also pleased 

that the swaps of commercial end-users, 

agricultural and energy cooperatives that are 

classified as financial institutions and small 

banks will not be subject to the margin 

requirements if they qualify for an exclusion 

or exemption. That is one small assist to 

America’s remaining small banks to get their 

heads back above water in the toppling wake 

of the Dodd-Frank Act. 

I disagree, however, with the definition of 

‘‘financial end user,’’ which is overly broad. 

It includes entities that are unlikely to act as 

counterparties to swaps such as floor brokers, 

introducing brokers and futures commission 

merchants acting on behalf of customers, 

among others. These entities may not 

ultimately be captured by the rule because 

they are unlikely to have material swaps 

exposure triggering application of the rule, 

but I question the logic behind their 

inclusion. Good regulation means precisely 

crafted rules, not ones that are deliberately 

overly-broad. 

I also continue to object to the ten-day 

liquidation horizon that must be 

incorporated into initial margin models for 

all types of uncleared swaps. The ten-day 

requirement is a made up number that is not 

tailored to the true liquidity profile of the 

underlying swap instruments. I call upon my 

fellow regulators to revisit this issue as we 

gain more experience with initial margin 

models. 

Another item that requires further 

Commission action is to codify by rule the 

no-action letters providing clearing relief to 

certain Treasury affiliates acting as 

principal.13 The prudential regulators were 

unwilling to recognize the no-action relief in 

their final rules, but have indicated that if the 

Commission acts to exclude these entities by 

rule, they would also be excluded from the 

prudential regulators’ rules. The Commission 

should act to issue a rule without delay. 

In addition, I remain concerned about the 

cross-border implications for this rule, which 

remain unfinished because they were 

proposed separately from the rule finalized 

today.14 As I stated at the time of the crossborder rule proposal, I have many concerns 

and questions surrounding that rulemaking, 

including: (1) The shift away from the 

transaction-level approach set forth in the 

July 2013 Cross-Border Interpretive Guidance 

and Policy Statement; (2) the revised 

definitions of ‘‘U.S. person’’ (defined for the 

first time in an actual Commission rule) and 

‘‘guarantee’’ and how these new terms will be 

interpreted and applied by market 

participants across their entire global 

operations; (3) the scope of when substituted 

compliance is allowed; and (4) the practical 

implications of permitting substituted 

compliance, but disallowing the exclusion 

from CFTC margin requirements for certain 

non-U.S. covered swap entities.15

An appropriate framework for the crossborder application of margin requirements 

for uncleared swaps is essential if we are to 

preserve the global nature of the swaps 

market. I reiterate a few of my concerns with 

the yet-to-be-finished cross-border element of 

the margin for uncleared swaps regime 

because that proposal and this final rule must 

work in harmony. We must avoid further 

fragmenting the global swaps markets by 

imposing another regulatory framework that 

is inconsistent, confusing or burdensome. 

Doing so will only result in yet another 

competitive disadvantage between American 

institutions and their international 

counterparts. 

I am disappointed that the Commission 

decided to treat the results of portfolio 

compression of legacy swaps as new swaps 

subject to the margin rule at this time. In 

2013 the Division of Clearing and Risk (DCR) 

determined that it would not recommend 

enforcement action for the failure of market 

participants to submit to clearing amended or 

replacement swaps that are generated as part 

of a multilateral portfolio compression 

exercise and are subject to required clearing, 

provided that certain conditions are met.16

Staff recognized in issuing the no-action 

relief that ‘‘multilateral portfolio 

compression allows swap market participants 

to net down the size and/or number of 

outstanding swaps, and decrease the number 

of outstanding swaps or the aggregate 

notional value of such swaps, thereby 

reducing operational risk and, in some 

instances, reducing counterparty credit 

risk.’’ 17

Portfolio compression is of great benefit to 

the safety and soundness of the market. It 

should be incentivized, not penalized. 

Treating swaps created by compressing 

legacy swaps as new swaps subject to margin 

requirements may well discourage portfolio 

compression. Moreover, it is inconsistent 

with the DCR staff no-action relief. This is a 

missed opportunity. I urge the Commission 

to revisit this issue prior to implementation 

of the margin requirements. 

From my perspective, the most 

objectionable aspect of today’s rule is its 

foundation in the superficial logic that, if the 

cost of margining uncleared swaps is forced 

high enough, then market participants will 

use more cleared instruments.18 That 

foundation is not supported by either reason 

or experience. If no clearinghouse is willing 

to clear a particular swap, then no amount of 

punitive cost will enable it to be cleared. 

I know this because I was involved before 

the financial crisis in one of the first 

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Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Rules and Regulations 709 

19See, e.g., GFI Group Inc. and ICAP plc To 

Acquire Ownership Stakes In The Clearing 

Corporation, PRNewswire, Dec. 21, 2006, available 

at http://www.prnewswire.com/news-releases/gfigroup-inc-and-icap-plc-to-acquire-ownershipstakes-in-the-clearing-corporation-57223742.html; 

see also, Testimony Before the H. Committee on 

Financial Services on Implementation of the DoddFrank Wall Street Reform and Consumer Protection 

Act, 112th Cong. 8 (2011) (statement of J. 

Christopher Giancarlo) (‘‘In 2005, GFI Group and 

ICAP Plc, a wholesale broker and fellow member of 

the WMBAA, took minority stakes in the Clearing 

Corp and worked together to develop a clearing 

facility for credit default swaps. That initiative 

ultimately led to greater dealer participation and 

the sale of the Clearing Corp to the Intercontinental 

Exchange and the creation of ICE Trust, a leading 

clearer of credit derivative products.’’). 

20See Testimony Before the H. Committee on 

Financial Services on Implementation of the DoddFrank Wall Street Reform and Consumer Protection 

Act, 112th Cong. 8 (Feb. 21, 2011), available at dia/ 

pdf/021511giancarlo.pdf; see also WMBAA Press 

Release, WMBAA Commends Historic US Financial 

Legislation, Jul. 21, 2010, available at http://

www.wmbaa.com/wp-content/uploads/2012/01/

WMBAA-Dodd-Frank-Law-press-releasefinal123.pdf. 

21See CFTC Commissioner J. Christopher 

Giancarlo, Pro-Reform Reconsideration of the CFTC 

Swaps Trading Rules: Return to Dodd-Frank (Jan. 

29, 2015), available at http://www.cftc.gov/idc/

groups/public/@newsroom/documents/file/

sefwhitepaper012915.pdf. 

22See Opening Statement of Commissioner J. 

Christopher Giancarlo, Open Meeting on Proposed 

Rule on Margin Requirements for Uncleared Swaps 

and Final Rule on Utility Special Entities, Sept. 17, 

2014, available at http://www.cftc.gov/PressRoom/

SpeechesTestimony/giancarlostatement091714. 

independent efforts by non-Wall Street banks 

to develop a central clearing house for credit 

default swaps.19 For years, I have expressed 

my support for increased central 

counterparty clearing of swaps 20 and 

continue to support it where appropriate. 

Yet, I also recognize that central counterparty 

clearing is not a panacea for counterparty 

credit risk.21 As regulators, we must be 

intellectually honest and acknowledge that 

there are legitimate and vital needs for both 

cleared and uncleared swaps markets in a 

modern, complex economy. 

As I have previously said,22 uncleared 

swaps allow businesses to avoid basis risk 

and obtain hedge accounting treatment for 

more complex, non-standardized exposures. 

Uncleared swaps are an unmatched tool for 

customized risk management by businesses, 

governments, asset managers and other 

institutions whose operations are essential to 

American economic growth. Their precise 

risk transfer utility generally cannot be 

replicated with standardized cleared 

derivatives without resulting in improper or 

imperfect hedges or hedges that fail hedge 

accounting treatment under U.S. GAAP. 

Today’s rule also reflects a disingenuous 

reading of the Dodd-Frank Act to favor 

cleared derivatives over uncleared swaps. In 

fact, there is no provision in the law directing 

regulators to set punitive levels of margin to 

drive hedging market participants toward 

cleared products. Imposing punitive margin 

levels will hazard a range of adverse 

consequences from raising the commercial 

cost of risk hedging to reducing trading 

liquidity in uncleared swaps markets and 

incentivizing movement of products 

otherwise unsuitable for clearing into 

clearinghouses into which counterparty risk 

is already increasingly concentrated. More 

critically, punitive margin on uncleared 

swaps will increase the amount of 

inadequately hedged risk exposure on 

America’s corporate balance sheets 

exacerbating volatility in earnings and share 

prices. 

Yet, I know that my voice alone cannot 

reverse the course of the present prevalence 

of ‘‘macro-prudential’’ regulation that 

prioritizes systemic stability over investment 

opportunity, market vibrancy and economic 

growth. Only time will show that systemic 

risk cannot be managed through centralized 

economic planning. In fact, rather than being 

managed, systemic risk is being transformed 

today from counterparty credit exposure to 

jarring volatility spikes and liquidity risk 

across the breadth of financial markets, with 

ramifications that will be even harder to 

manage in the future. 

Unfortunately, today’s rule will not reverse 

these trends. I will vote for the rule, not 

because it is the right prescription for 

uncertain markets, but because it is much 

better than originally proposed and less 

harmful than likely alternatives. 

I commend the CFTC staff for their hard 

work, thoughtfulness and, ultimately, the 

generally improved rulemaking that is before 

us today. 

[FR Doc. 2015–32320 Filed 1–5–16; 8:45 am] 

BILLING CODE 6351–01–P 

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