Vol. 81 Tuesday, 

No. 104 May 31, 2016 

Part VI 

Commodity Futures Trading Commission 

17 CFR Part 23 

Margin Requirements for Uncleared Swaps for Swap Dealers and Major 

Swap Participants—Cross-Border Application of the Margin Requirements; 

Agency Information Collection Activities: Proposed Collection, Comment 

Request: Final Rule, Margin Requirements for Uncleared Swaps for Swap 

Dealers and Major Swap Participants—Cross-Border Application of the 

Margin Requirements; Final Rule and Notice 


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34818 Federal Register / Vol. 81, No. 104 / Tuesday, May 31, 2016 / Rules and Regulations 

1Public Law 111–203, 124 Stat. 1376 (2010). 

2 7 U.S.C. 1 et seq. 

3See 7 U.S.C. 6s(e)(2)(B)(ii). 

4 7 U.S.C. 6s(e)(3)(A). 

5See 7 U.S.C. 6s(e)(1)(B). Swap dealers and major 

swap participants for which there is a Prudential 

Regulator must meet the margin requirements for 

uncleared swaps established by the applicable 

Prudential Regulator. 7 U.S.C. 6s(e)(1)(A). See also 

7 U.S.C. 1a(39) (defining the term ‘‘Prudential 

Regulator’’ to include the Board of Governors of the 

Federal Reserve System; the Office of the 

Comptroller of the Currency; the Federal Deposit 

Insurance Corporation; the Farm Credit 

Administration; and the Federal Housing Finance 

Agency). The Prudential Regulators published final 

margin requirements in November 2015. See Margin 

and Capital Requirements for Covered Swap 

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

Regulators’ Final Margin Rule’’). 

6See Margin Requirements for Uncleared Swaps 

for Swap Dealers and Major Swap Participants, 81 

FR 636 (Jan. 6, 2016) (the ‘‘Final Margin Rule’’). The 

Final Margin Rule, which became effective April 1, 

2016, is codified in part 23 of the Commission’s 

regulations. See 17 CFR 23.150–159, 161. 

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

that the provisions of the CEA 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. 

8See Margin Requirements for Uncleared Swaps 

for Swap Dealers and Major Swap Participants— 

Cross-Border Application of the Margin 

Requirements, 80 FR 41376 (July 14, 2015) 

(‘‘Proposal’’). 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 23 

RIN 3038–AC97 

Margin Requirements for Uncleared 

Swaps for Swap Dealers and Major 

Swap Participants—Cross-Border 

Application of the Margin 

Requirements 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: On January 6, 2016, the 

Commodity Futures Trading 

Commission (‘‘Commission’’ or 

‘‘CFTC’’) published final regulations to 

implement section 4s(e) of the 

Commodity Exchange Act, which 

requires the Commission to adopt initial 

and variation margin requirements for 

uncleared swaps of swap dealers and 

major swap participants that do not 

have a Prudential Regulator 

(collectively, ‘‘Covered Swap Entities’’ 

or ‘‘CSEs’’). In this release, the 

Commission is adopting a rule to 

address the cross-border application of 

the Commission’s margin requirements 

for CSEs’ uncleared swaps. 

DATES: The final rule is effective August 

1, 2016. 

FOR FURTHER INFORMATION CONTACT: 

Laura B. Badian, Assistant General 

Counsel, 202–418–5969, lbadian@

cftc.gov; Paul Schlichting, Assistant 

General Counsel, 202–418–5884, 

pschlichting@cftc.gov; or Elise (Pallais) 

Bruntel, Counsel, (202) 418–5577, 

ebruntel@cftc.gov; Office of the General 

Counsel, Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

A. Introduction 

B. Key Considerations in the Cross-Border 

Application of the Margin Regulations 

II. The Final Rule 

A. Key Definitions 

1. U.S. Person 

a. Proposed Rule 

b. Comments 

c. Final Rule 

2. Guarantees 

a. Proposed Rule 

b. Comments 

c. Final Rule 

3. Foreign Consolidated Subsidiary 

(‘‘FCS’’) 

a. Proposed Rule 

b. Comments 

c. Final Rule 

4. Counterparty Representations 

B. Applicability of Margin Requirements 

To Cross-Border Uncleared Swaps 

1. Proposed Rule 

2. Substituted Compliance 

a. Comments 

b. Final Rule 

3. Exclusion 

a. Comments 

b. Final Rule 

4. Special Provisions for Non-Segregation 

Jurisdictions 

a. Comments 

b. Final Rule 

5. Special Provisions for Non-Netting 

Jurisdictions 

a. Comments 

b. Final Rule 

C. Comparability Determinations 

1. Proposed Rule 

2. Comments 

3. Final Rule 

III. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

1. Information Collection—Comparability 

Determinations 

2. Information Collection—NonSegregation Jurisdictions 

3. Information Collection—Non-Netting 

Jurisdictions 

C. Cost-Benefit Considerations 

1. Introduction 

2. Key Definitions 

a. U.S. Person 

b. Guarantees 

c. Foreign Consolidated Subsidiary 

3. Application 

a. Substituted Compliance 

b. Exclusion 

c. Non-Segregation Jurisdictions and NonNetting Jurisdictions 

4. Comparability Determinations 

5. Section 15(a) Factors 

a. Protection of Market Participants and the 

Public 

b. Efficiency, Competitiveness, and 

Financial Integrity 

c. Price Discovery 

d. Sound Risk Management Practices 

e. Other Public Interest Considerations 

Table A—Application of the Final Rule 

I. Background 

A. Introduction 

In the wake of the 2008 financial 

crisis, Congress enacted Title VII of the 

Wall Street Reform and Consumer 

Protection Act (‘‘Dodd-Frank Act’’),1

which modified the Commodity 

Exchange Act (‘‘CEA’’) 2 to establish a 

comprehensive regulatory framework 

for swaps. A cornerstone of this 

framework is the reduction of systemic 

risk to the U.S. financial system through 

the establishment of margin 

requirements for uncleared swaps. CEA 

section 4s(e), added by section 731 of 

the Dodd-Frank Act, directs the 

Commission to adopt rules establishing 

minimum initial and variation margin 

requirements on all swaps that are not 

cleared by a registered derivatives 

clearing organization (‘‘DCO’’).3 To 

offset the greater risk to the swap dealer 

or major swap participant and the 

financial system arising from the use of 

uncleared swaps, the Commission’s 

margin requirements must (i) help 

ensure the safety and soundness of the 

swap dealer or major swap participant, 

and (ii) be appropriate for the risk 

associated with the uncleared swaps 

held as a swap dealer or major swap 

participant.4 Under CEA section 4s(e), 

the Commission’s margin requirements 

apply to each swap dealer or major 

swap participant for which there is no 

Prudential Regulator (collectively, 

‘‘Covered Swap Entities’’ or ‘‘CSEs’’).5

The Commission published final margin 

requirements for CSEs in January 2016.6

In July 2015, consistent with its 

authority in CEA sections 4s(e) and 

2(i),7 the Commission proposed a rule to 

address the cross-border application of 

the Commission’s margin requirements 

(the ‘‘proposed rule’’).8 The proposed 

rule set out the circumstances under 

which a CSE would be allowed to 

satisfy the Commission’s margin 

requirements by complying with 

comparable foreign margin requirements 


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Federal Register / Vol. 81, No. 104 / Tuesday, May 31, 2016 / Rules and Regulations 34819 

9 In 2014, in conjunction with reproposing its 

margin requirements, the Commission requested 

comment on three alternative approaches to the 

cross-border application of its margin requirements: 

(i) A transaction-level approach consistent with the 

Commission’s guidance on the cross-border 

application of the CEA’s swap provisions, see 

Interpretive Guidance and Policy Statement 

Regarding Compliance with Certain Swap 

Regulations, 78 FR 45292 (July 26, 2013) 

(‘‘Guidance’’); (ii) an approach consistent with the 

Prudential Regulators’ proposed cross-border 

framework for margin, see Margin and Capital 

Requirements for Covered Swap Entities, 79 FR 

57348 (Sept. 24, 2014) (‘‘Prudential Regulators’ 

Proposed Margin Rule’’); and (iii) an entity-level 

approach that would apply margin rules on a firmwide basis (without any exclusion for swaps with 

non-U.S. counterparties). See Margin Requirements 

for Uncleared Swaps for Swap Dealers and Major 

Swap Participants, 79 FR 59898 (Oct. 3, 2014) 

(‘‘Proposed Margin Rule’’). Following a review of 

comments received in response to this release, the 

Commission’s Global Markets Advisory Committee 

(‘‘GMAC’’) hosted a public panel discussion on the 

cross-border application of margin requirements. 

10The Commission received eighteen comment 

letters in response to the Proposal: Alternative 

Investment Management Association and 

Investment Association (Sept. 11, 2015) (‘‘AIMA/

IA’’); American Bankers Association and ABA 

Securities Association (Sept. 14, 2015) (‘‘ABA/

ABASA’’); American Council of Life Insurers (Sept. 

14, 2015) (‘‘ACLI’’); Americans for Financial Reform 

(Sept. 14, 2015) (‘‘AFR’’); Chris Barnard (Sept. 14, 

2015) (‘‘Barnard’’); Better Markets, Inc. (Sept. 14, 

2015) (‘‘Better Markets’’); Financial Services 

Roundtable (Sept. 14, 2015) (‘‘FSR’’); FMSWertmanagement (Sept. 14, 2015) (‘‘FMS–WM’’); 

Institute for Agriculture and Trade Policy (Sept. 14, 

2015) (‘‘IATP’’); Investment Company Institute 

Global (Sept. 14, 2015) (‘‘ICI Global’’); International 

Swaps and Derivatives Association, Inc. (Sept. 11, 

2015) (‘‘ISDA’’); Institute of International Bankers 

and Securities Industry and Financial Markets 

Association (Sept. 14, 2015) (‘‘IIB/SIFMA’’); 

Japanese Bankers Association (Sept. 13, 2015) 

(‘‘JBA’’); LCH.Clearnet Group Ltd. (Sept. 14, 2015) 

(‘‘LCH.Clearnet’’); Managed Funds Association 

(Sept. 14, 2015) (‘‘MFA’’); PensionsEurope (Sept. 

14, 2015) (‘‘PensionsEurope’’); Asset Management 

Group of the Securities Industry and Financial 

Markets Association (Sept. 14, 2015) (‘‘SIFMA 

AMG’’); and Vanguard (Sept. 14, 2015) 

(‘‘Vanguard’’). The comment file is available at 

http://comments.cftc.gov/PublicComments/

CommentList.aspx?id=1600. 

11The Final Rule is codified at 17 CFR 23.160. 

12See 7 U.S.C. 6s(e)(3)(A). 

13See Proposal, 80 FR at 41377. 

14Although margin and capital are, by design, 

complementary, they serve equally important but 

different risk mitigation functions. Unlike margin, 

capital is difficult to rapidly adjust in response to 

changing risk exposures. Capital therefore can be 

viewed as a backstop in the event that margin is 

insufficient to cover losses resulting from a 

counterparty default. The Commission proposed 

capital rules in 2011. See Capital Requirements for 

Swap Dealers and Major Swap Participants, 76 FR 

27802 (May 12, 2011) (‘‘Proposed Capital Rule’’). 

The Commission intends to repropose capital rules 

later this year. 

15The largest U.S. banks have somewhere 

between 2,000 to 3,000 affiliated global entities, 

hundreds of which are based in the Cayman 

Islands. Data from the National Information Center 

(NIC), a repository of financial data and 

institutional characteristics of banks and other 

entities regulated by the Federal Reserve, show the 

increasing complexity of U.S. banks’ foreign 

operations. See NIC, available at http://

www.ffiec.gov/nicpubweb/nicweb/nichome.aspx. 

For instance, in 1990, there were 1,300 foreign 

nonbank subsidiaries in the database; at the end of 

2014, there were more than 6,000. Foreign 

ownership is also highly concentrated in a few large 

firms: Goldman Sachs and Morgan Stanley own 

more than 2,000 foreign nonbank subsidiaries and, 

together with General Electric, own 63 percent of 

all foreign bank subsidiaries. Citigroup, JPMorgan 

Chase, and Bank of America account for 75 percent 

of all foreign branches. 

16According to the Quarterly Report on Bank 

Trading and Derivatives Activities issued by the 

Office of the Comptroller of the Currency (OCC) for 

the second quarter of 2015, the notional value of 

derivative contracts held by insured U.S. 

commercial banks and savings associations was 

$197.9 trillion. See Office of the Comptroller of the 

Currency, Quarterly Report on Bank Trading and 

Derivatives Activities Second Quarter 2015, 1 

(2015), available at http://www.occ.gov/topics/

capital-markets/financial-markets/trading/

derivatives/dq215.pdf. At the same time, four large 

commercial banks with the most derivatives 

activity—Goldman Sachs, JPMorgan Chase Bank 

NA, Citibank, and Bank of America NA—held 

91.1% of the notional amount of these derivatives 

contracts. Id. at 11, 16. Contracts for swaps 

specifically accounted for $117.5 trillion of the 

$197.9 trillion total notional. Id. at 16. 

(‘‘substituted compliance’’); offered 

certain CSEs a limited exclusion from 

the Commission’s margin requirements 

(the ‘‘Exclusion’’); and outlined a 

framework for assessing whether a 

foreign jurisdiction’s margin 

requirements are comparable to the 

Commission’s requirements 

(‘‘comparability determinations’’). The 

Commission developed the proposed 

rule after close consultation with the 

Prudential Regulators and in light of 

comments from and discussions with 

market participants and foreign 

regulators.9

The Commission requested comment 

on all aspects of the proposed rule. After 

a careful review of the comments,10 the 

Commission is adopting a final rule 

largely as proposed but with some 

modifications, as described below (the 

‘‘Final Rule’’).11

B. Key Considerations in the CrossBorder Application of the Margin 

Regulations 

The overarching objective of the 

cross-border margin framework is to 

further the congressional mandate to 

ensure the safety and soundness of CSEs 

in order to offset the greater risk to CSEs 

and the financial system arising from 

the use of swaps that are not cleared.12

Margin’s primary function is to protect 

a CSE from counterparty default, 

allowing it to absorb losses and 

continue to meet its obligations using 

collateral provided by the defaulting 

counterparty.13 While the requirement 

to post margin protects the counterparty 

in the event of the CSE’s default, it also 

functions as a risk management tool, 

limiting the amount of leverage a CSE 

can incur by requiring that it have 

adequate eligible collateral to enter into 

an uncleared swap. In this way, margin 

serves as a first line of defense not only 

in protecting the CSE but in containing 

the amount of risk in the financial 

system as a whole, reducing the 

potential for contagion arising from 

uncleared swaps.14

The Commission recognizes that, to 

achieve the goals of the Dodd-Frank Act, 

its cross-border framework must take 

into account the global state of the swap 

market. The nature of modern financial 

markets means that risk is not static or 

contained by geographic boundaries. 

Market participants engage in swaps on 

a 24-hour basis in global markets, and 

many financial entities operate through 

a complex web of branches, 

subsidiaries, and affiliates that are 

scattered across the globe.15 These 

branches and affiliated entities are 

highly interdependent, sharing not only 

information technology and operational 

support but risk management, treasury, 

and custodial functions. Risks from a 

swap entered into by an affiliated entity 

in one jurisdiction may be transferred to 

another affiliate in a different 

jurisdiction through inter-affiliate 

transactions. As part of their risk 

management practices, swap dealers 

also commonly lay off the risk of clientfacing swaps in the interdealer market, 

which, as a result of consolidation 

among global financial institutions, has 

become concentrated among a relatively 

small number of dealers.16 These 

developments, along with others, have 

led to a highly interconnected global 

swap market, where risks originating in 

one jurisdiction and entity are easily 

transferred to other jurisdictions and 

entities, increasing the possibility of 

cascading defaults. 

As the 2008 financial crisis 

illustrated, the global nature of the swap 

market heightens the potential that risks 

assumed by a firm overseas stemming 

from its uncleared swaps can be 

transmitted across national borders to 

cause or contribute to substantial losses 

to U.S. persons and threaten the 

stability of the entire U.S. financial 

system. Complex financial and 

operational relationships among 

domestic and international affiliates, 

including guarantees from U.S. entities 

at entities like American International 

Group (AIG) and Lehman Brothers 

Holding Inc., demonstrated how the 

transfer of risk across multinational 

affiliated entities, including risk 

associated with swaps, is not always 

transparent and can be difficult to fully 

assess. More recent events, including 

major losses from J.P. Morgan Chase & 


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34820 Federal Register / Vol. 81, No. 104 / Tuesday, May 31, 2016 / Rules and Regulations 

17 In determining the extent to which the DoddFrank swap provisions apply to activities overseas, 

the Commission strives to protect U.S. interests, as 

determined by Congress in Title VII, and minimize 

conflicts with the laws of other jurisdictions, 

consistent with principles of international comity. 

See Guidance, 78 FR at 45300–01 (referencing the 

Restatement (Third) of Foreign Relations Law of the 

United States). 

18For example, under part 30 of the 

Commission’s regulations, if the Commission 

determines that the foreign regulatory regime would 

offer comparable protection to U.S. customers 

transacting in foreign futures and options and there 

is an appropriate information-sharing arrangement 

between the home supervisor and the Commission, 

the Commission has permitted foreign brokers to 

comply with their home regulations (in lieu of the 

applicable Commission regulations), subject to 

appropriate conditions. See, e.g., Foreign Futures 

and Options Transactions, 67 FR 30785 (May 8, 

2002); Foreign Futures and Options Transactions, 

71 FR 6759 (Feb. 9, 2006). 

19See 7 U.S.C. 6s(e)(3)(D)(ii). 20See Prudential Regulators’ Final Margin Rule, 

80 FR 74840. The cross-border provision is section 

_l.9 of the Prudential Regulators’ Final Margin 

Rule and is substantially similar to the 

Commission’s Final Rule. 21The Securities and Exchange Commission 

(‘‘SEC’’) has not yet finalized similar rules imposing 

margin requirements for security-based swap 

dealers and major security-based swap participants. 

The SEC proposed its margin rule in October 2012. 

See Capital, Margin, and Segregation Requirements 

for Security-Based Swap Dealers and Major 

Security-Based Swap Participants and Capital 

Requirements for Broker-Dealers, 77 FR 70214 (Nov. 

23, 2012). 

22 15 U.S.C. 8325(a) (added by section 752 of the 

Dodd-Frank Act). 

23 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 on 

Margining Requirements (‘‘WGMR’’) to develop 

international standards for margin requirements for 

uncleared swaps. Representatives of 26 regulatory 

authorities participated, including the Commission. 

In September 2013, the WGMR published a final 

report articulating eight key principles for noncleared derivatives margin rules. These principles 

represent the minimum standards approved by 

BCBS and IOSCO and their recommendations to the 

regulatory authorities in member jurisdictions. See 

BCBS/IOSCO, Margin requirements for noncentrally cleared derivatives (updated March 2015) 

(‘‘BCBS/IOSCO framework’’), available at http://

www.bis.org/bcbs/publ/d317.pdf. 

24See 7 U.S.C. 2(i). 

Co.’s ‘‘London Whale’’ or the near 

failure of FCXM Inc. following trading 

losses at its London and Singapore 

affiliates, illustrate the continued 

potential for cross-border activities to 

have a significant impact on U.S. 

entities and markets. 

The global nature of the swap market, 

coupled with the interconnectedness of 

market participants, also necessitate that 

the Commission recognize the 

supervisory interests of foreign 

regulatory authorities and consider the 

impact of its choices on market 

efficiency and competition, which are 

vital to a well-functioning global swap 

market.17 Foreign jurisdictions are at 

various stages of implementing margin 

reforms. To the extent that other 

jurisdictions adopt requirements with 

different coverage or timelines, the 

Commission’s margin requirements may 

lead to competitive burdens for U.S. 

entities and deter non-U.S. persons from 

transacting with U.S. CSEs and their 

affiliates overseas. The Commission’s 

substituted compliance regime—a 

central element of the Final Rule—is 

intended to address these concerns 

without compromising the 

congressional mandate to protect the 

safety and soundness of CSEs and the 

stability of the U.S. financial system. 

Substituted compliance has long been 

a central element of the Commission’s 

cross-border policy.18 It is an approach 

that recognizes that market participants 

in a globalized swap market are subject 

to multiple regulators and potentially 

face duplicative or conflicting 

regulations. Under the Final Rule’s 

substituted compliance regime, the 

Commission would, under certain 

circumstances, allow a CSE to satisfy 

the Commission’s margin requirements 

by instead complying with the margin 

requirements in the relevant foreign 

jurisdiction. Substituted compliance 

helps preserve the benefits of an 

integrated, global swap market by 

reducing the degree to which market 

participants will be subject to multiple 

sets of regulations. Further, substituted 

compliance encourages collaboration 

and coordination among U.S. and 

foreign regulators in establishing robust 

regulatory standards for the global swap 

market. 

The Commission is mindful of the 

challenges involved in implementing a 

substituted compliance framework for 

margin. If implemented properly, 

substituted compliance has the potential 

to enhance market efficiency and 

liquidity and foster global coordination 

of margin requirements without 

compromising the safety and soundness 

of CSEs and the U.S. financial system. 

However, if substituted compliance 

were extended to foreign jurisdictions 

that do not have adequate oversight or 

protections with regard to uncleared 

swaps, the effectiveness of the 

Commission’s margin requirements 

could be undermined, importing 

additional risk into the financial system. 

The Commission therefore believes that 

close coordination with its foreign 

counterparts is essential to ensuring that 

the benefits of substituted compliance 

are achieved. 

Consistent with the congressional 

mandate to coordinate rules ‘‘to the 

maximum extent practicable,’’ 19 in 

developing the Final Rule, Commission 

staff worked closely with staff of the 

Prudential Regulators to align the Final 

Rule with the cross-border framework in 

the Prudential Regulators’ Final Margin 

Rule.20 Aligning with the Prudential 

Regulators’ cross-border margin rule is 

particularly important given the 

composition of the global swap 

market.21 Currently, approximately 106 

swap dealers and major swap 

participants are provisionally registered 

with the Commission. Of those entities, 

an estimated 54 are CSEs subject to the 

Commission’s margin rules, with the 

remaining 52 entities falling within the 

scope of the Prudential Regulators’ 

margin rules. Of the 54 CSEs subject to 

the Commission’s margin requirements, 

approximately 33 CSEs are affiliated 

with a prudentially-regulated swap 

entity. Therefore, substantial differences 

between the Commission’s and 

Prudential Regulators’ cross-border 

regulations could lead to competitive 

disparities between affiliates within the 

same corporate structure, leading to 

market inefficiencies and incentives to 

restructure their businesses in order to 

avoid the more stringent cross-border 

margin framework. 

In granting the Commission new 

authority over swaps under the DoddFrank Act, Congress also called for 

coordination and cooperation with 

foreign regulatory authorities.22

Consistent with that mandate, and 

building on international efforts to 

develop a global margin framework,23

the Commission closely consulted with 

its foreign counterparts in developing 

the Final Rule. As other jurisdictions 

finalize their margin rules and the 

Commission implements its crossborder margin framework, the 

Commission is committed to continuing 

to coordinate with foreign regulators, 

with a view toward mitigating any 

conflicting or otherwise substantially 

divergent margin requirements for 

uncleared swaps across jurisdictions. 

II. The Final Rule 

The Commission is adopting rules 

regarding how the Commission’s margin 

requirements will apply to cross-border 

uncleared swaps. Broadly speaking, the 

final cross-border framework is 

designed to address the risks to a CSE, 

as an entity, associated with its 

uncleared swaps, consistent with CEA 

section 2(i) 24 and the statutory 

objectives of the margin requirements. 

As discussed above, section 4s(e) was 

enacted to address the risks to CSEs and 

to the U.S. financial system arising from 

uncleared swaps. The source of risk to 

a CSE is not confined to its uncleared 


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Federal Register / Vol. 81, No. 104 / Tuesday, May 31, 2016 / Rules and Regulations 34821 

25As used in this release, a ‘‘non-segregation 

jurisdiction’’ is a jurisdiction where inherent 

limitations in the legal or operational infrastructure 

of the foreign jurisdiction make it impracticable for 

the CSE and its counterparty to post initial margin 

pursuant to custodial arrangements that comply 

with the Final Margin Rule, as further described in 

section II.B.4.b. 

26As used in this release, a ‘‘non-netting 

jurisdiction’’ is a jurisdiction in which a CSE 

cannot conclude, with a well-founded basis, that 

the netting agreement with a counterparty in that 

foreign jurisdiction meets the definition of an 

‘‘eligible master netting agreement’’ set forth in the 

Final Margin Rule, as described in section II.B.5.b. 

27See, e.g., ACLI at 2–3 (Commission should 

defer to International Standards with respect to 

acceptable forms of collateral for margin); FMS– 

WM at 1–2 (legacy portfolio entity backed by full 

faith and credit of sovereign government should be 

considered a ‘‘sovereign entity’’ within scope of 

Commission’s margin requirements); ISDA at 14–15 

(inter-affiliate swaps should be exempt from initial 

margin requirements and accounting standards to 

determine consolidation should be applied 

throughout margin rules); JBA at 6 (Commission 

should work with foreign counterparts to 

harmonize aspects of its margin rules, including 

treatment of ‘‘legacy trades,’’ inter-affiliate trades, 

and forms of eligible collateral); LCH.Clearnet at 4 

(differences in approach to margin requirements 

between cleared and uncleared swaps should 

promote central clearing). 

28See, e.g., AFR at 2 (adopting cross-border 

approach to margin alone would create ‘‘serious 

problems’’); AIMA/IA at 4 (Commission should 

amend Guidance to include U.S. person definition 

in the proposed rule); Better Markets at 6 (adopting 

cross-border approach to margin alone would be ‘‘a 

disservice to the comprehensive existing 

Guidance;’’ should instead make ‘‘targeted, limited 

changes’’ to Guidance); ICI Global at 7–8 (one U.S. 

person definition should apply consistently with 

respect to cross-border application of all swap 

requirements); IIB/SIFMA at 17–19 (proposed U.S. 

person and guarantee definitions should replace 

corresponding interpretations in Guidance); ISDA at 

12 (same); JBA at 11–12 (same); SIFMA AMG at 4, 

9–13 (same); Vanguard at 5 (same). 

29For example, the Final Margin Rule raised the 

material swaps exposure level from $3 billion to the 

BCBS–IOSCO standard of $8 billion, which reduces 

the number of entities that must collect and post 

initial margin. See Final Margin Rule, 81 FR at 644. 

In addition, the definition of uncleared swaps was 

broadened to include DCOs that are not registered 

with the Commission but pursuant to Commission 

orders are permitted to clear for U.S. persons. See 

id. at 638. 

30See Guidance, 78 FR at 45297. See also United 

States v. Edge Broadcasting Co., 509 U.S. 418, 434 

(1993) (‘‘[A]n agency does not have to make 

progress on every front before it can make progress 

on any front.’’). See also Personal Watercraft Indus. 

Ass’n v. Dep’t of Commerce, 48 F.3d 540, 544 (D.C. 

Cir. 1995). 

31See, e.g., ABA/ABASA at 3 (‘‘sufficient time’’ 

for foreign jurisdictions to adopt margin rules); 

AIMA/IA at 3 (‘‘sufficient time’’ to reach agreement 

with foreign counterparts); ISDA at 16–17 (12 

months after margin rules are finalized in U.S., EU, 

and Japan, or two-year ‘‘transitional comparability 

determination,’’ providing substituted compliance 

for all foreign jurisdictions that adopt rules based 

on BCBS–IOSCO framework, while Commission 

undertakes comparability analysis); JBA at 3, 4 (at 

least 18 months after margin rules are finalized in 

the U.S., EU, and Japan); PensionsEurope at 3 (12– 

18 months); SIFMA AMG at 4, 14–15 (at least 18 

months). 

32See 17 CFR 23.160(a)(8) (defining ‘‘U.S. CSE’’ 

as a CSE that is a ‘‘U.S. person,’’ as defined in the 

Final Rule). See also 17 CFR 23.160(a)(4) (defining 

‘‘non-U.S. CSE’’ as a CSE that is not a U.S. person). 

swaps with U.S. counterparties or to 

swaps transacted within the United 

States. Risk arising from uncleared 

swaps involving non-U.S. 

counterparties can potentially have a 

substantial adverse effect on a CSE and 

therefore the stability of the U.S. 

financial system. Nevertheless, certain 

categories of uncleared swaps will be 

eligible for substituted compliance or 

the Exclusion based on the 

Commission’s consideration of comity 

principles and the impact of the Final 

Rule on market efficiency and 

competition. 

The sections that follow summarize, 

as appropriate, the approach taken in 

the proposed rule, the comments 

received in response, and the resulting 

Final Rule. Section A discusses certain 

key definitions (‘‘U.S. person,’’ 

‘‘guarantee,’’ and ‘‘Foreign Consolidated 

Subsidiary’’ or ‘‘FCS’’) in the Final Rule, 

which inform how the Commission’s 

margin requirements apply to market 

participants in the cross-border context. 

Section B describes the cross-border 

application of the Commission’s margin 

requirements, including the 

circumstances under which substituted 

compliance and the limited Exclusion 

are available and the application of two 

special provisions designed to 

accommodate swap activities in 

jurisdictions that do not have a legal 

framework to support custodial 

arrangements and netting in compliance 

with the Final Margin Rule (‘‘nonsegregation jurisdictions’’ 25 and ‘‘nonnetting jurisdictions,’’ respectively).26

Section C describes the Commission’s 

framework for issuing comparability 

determinations. 

As a preliminary matter, the 

Commission notes that several 

commenters requested Commission 

action outside the scope of the Final 

Rule, including modifications to the 

substantive margin requirements 27 or 

the Guidance.28 The Commission notes 

that concerns regarding the general 

nature and application of the initial and 

variation margin requirements were 

addressed in the Final Margin Rule. 

Notably, the Final Margin Rule included 

substantial modifications from the 

Proposed Margin Rule that further 

aligned the Commission’s margin 

requirements with the BCBS–IOSCO 

framework, which should further reduce 

the potential for conflicts with the 

margin requirements of foreign 

jurisdictions.29 With respect to the 

Guidance, the Commission reiterates its 

intention to periodically review its 

cross-border policy in light of future 

developments, including its experience 

following adoption of the Final Rule.30

Commenters also requested that the 

Commission delay the cross-border 

application of its margin rules until after 

it has made comparability 

determinations.31 Although the 

Commission declines to establish an 

open-ended delay in applying its margin 

rules, it remains committed to 

coordinating with foreign regulators to 

implement its cross-border margin 

framework in a workable manner. 

A. Key Definitions 

The extent to which substituted 

compliance and the Exclusion are 

available depends on whether the 

relevant swap involves a U.S. person, a 

guarantee by a U.S. person, or a 

‘‘Foreign Consolidated Subsidiary’’ (or 

‘‘FCS’’). The Final Rule adopts 

definitions of ‘‘U.S. person,’’ 

‘‘guarantee,’’ and ‘‘Foreign Consolidated 

Subsidiary’’ solely for purposes of the 

margin rules. These definitions are 

discussed below. 

1. U.S. Person 

Under the Final Rule, the term ‘‘U.S. 

person’’ is defined to include 

individuals or entities whose activities 

have a significant nexus to the U.S. 

market as a result of their being 

domiciled or organized in the United 

States or by virtue of the strength of 

their connection to the U.S. markets, 

even if they are domiciled or organized 

outside the United States. As discussed 

in section II.B.2.b.i. below, U.S. CSEs 32

are generally subject to the margin rules 

with only partial substituted 

compliance and are not eligible for the 

Exclusion. 

a. Proposed Rule 

In the proposed rule, the term ‘‘U.S. 

person’’ was defined to mean the 

following: 

• Any natural person who is a 

resident of the United States (proposed 

§ 23.160(a)(10)(i)); 

• Any estate of a decedent who was 

a resident of the United States at the 

time of death (proposed 

§ 23.160(a)(10)(ii)); 

• Any corporation, partnership, 

limited liability company, business or 

other trust, association, joint-stock 

company, fund or any form of entity 

similar to any of the foregoing (other 

than an entity as described in paragraph 

(a)(10)(iv) or (v) of proposed § 23.160) (a 

legal entity), in each case that is 

organized or incorporated under the 

laws of the United States or that has its 

principal place of business in the 

United States, including any branch of 


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33See proposed 17 CFR 23.160(a)(10). See also 

proposed 17 CFR 23.160(a)(5) (defining ‘‘non-U.S. 

person’’ as any person that is not a ‘‘U.S. person’’). 

34See Proposal, 80 FR at 41383 (stating that the 

definition includes any foreign operations that are 

part of the U.S. legal person, regardless of their 

location); proposed 17 CFR 23.160 (a)(10)(iii), (vi) 

(defining such U.S. persons to include ‘‘any branch 

of the legal entity’’). 

35See Proposal, 80 FR at 41383 (explaining that 

the status of a legal person as a U.S. person would 

not affect whether a separately incorporated or 

organized legal person in the affiliated corporate 

group is a U.S. person). 

36See id. (recognizing that the information 

necessary to accurately assess a counterparty’s U.S. 

person status may be available only through overly 

burdensome due diligence). 

37See Proposal, 80 FR at 41382–84. See also 

Guidance, 78 FR at 45308–17 (setting forth the 

interpretation of ‘‘U.S. person’’ for purposes of the 

Guidance). 

38See Proposal, 80 FR at 41383. See also 

Guidance, 78 FR 45313–14 (discussing the U.S. 

majority-ownership prong for purposes of the 

Guidance). The Guidance interpreted ‘‘majorityowned’’ in this context to mean the beneficial 

ownership of more than 50 percent of the equity or 

voting interests in the collective investment vehicle. 

See id. at 45314. 

39See Proposal, 80 FR at 41383. See also 

Guidance, 78 FR at 45316 (discussing the inclusion 

of the prefatory phrase ‘‘include, but not be limited 

to’’ in the interpretation of ‘‘U.S. person’’ in the 

Guidance). 

40See Proposal, 80 FR at 41383. See also 

Guidance, 78 FR at 45312–13 (discussing the 

unlimited U.S. responsibility prong for purposes of 

the Guidance). 

41See Proposal, 80 FR at 41384. See also 17 CFR 

240.3a71–3(a)(4) (setting forth the definition of 

‘‘U.S. person’’ adopted by the SEC for purposes of 

security-based swap regulation). 

42See e.g., AIMA/IA at 3–4; FSR at 2, 8; IATP at 

4; IIB/SIFMA at 18; ISDA at 12; JBA at 11; MFA at 

3, 5–6; SIFMA AMG at 10, Vanguard at 5. 

43See e.g., IIB/SIFMA at 17; ISDA at 12 (the 

absence the prefatory phrase ‘‘includes, but is not 

limited to’’ would ‘‘increase legal certainty’’); 

SIFMA AMG at 10–11. 

44See e.g., AIMA/IA at 3; FSR at 8; IATP at 4; 

IIB/SIFMA at 18 (fund owners are not direct 

counterparties to swap and their risk of loss is 

limited to extent of their investment in the fund); 

MFA at 6. 

45See e.g., AIMA/IA at 3–4 (highlighting 

challenges presented by nominee accounts); IATP at 

4 (ownership can be complex and variable over the 

life of a fund); IIB/SIFMA at 18 (highlighting 

challenges associated with funds formed before 

adoption of Guidance); SIFMA AMG at 10. But see 

MFA at 5–6 (funds organized or having a principal 

place of business in the United States are properly 

included in the U.S. person definition). 

46See AIMA/IA at 4 (‘‘comparable foreign rules’’ 

will apply to limit the likelihood and impact of a 

counterparty default); FSR at 8 (neither SEC nor EU 

regulators have proposed exercising jurisdiction 

over an entity on the basis of majority control); 

ISDA at 12 (neither BCBS–IOSCO framework nor 

proposed EU rules impose rules on funds based on 

jurisdiction of its owners). 

47See ISDA at 12. 

48See JBA at 11–12. 

49See IIB/SIFMA at 17–18 (while guarantor may 

have legal defenses to enforcement of guarantee, 

both U.S. guarantee and unlimited U.S. 

the legal entity (proposed 

§ 23.160(a)(10)(iii)); 

• Any pension plan for the 

employees, officers or principals of a 

legal entity as described in paragraph 

(a)(10)(iii) of proposed § 23.160, unless 

the pension plan is primarily for foreign 

employees of such an entity (proposed 

§ 23.160(a)(10)(iv)); 

• Any trust governed by the laws of 

a state or other jurisdiction in the 

United States, if a court within the 

United States is able to exercise primary 

supervision over the administration of 

the trust (proposed § 23.160(a)(10)(v)); 

• Any legal entity (other than a 

limited liability company, limited 

liability partnership or similar entity 

where all of the owners of the entity 

have limited liability) owned by one or 

more persons described in paragraphs 

(a)(10)(i) through (v) of proposed 

§ 23.160 who bear(s) unlimited 

responsibility for the obligations and 

liabilities of the legal entity, including 

any branch of the legal entity (proposed 

§ 23.160(a)(10)(vi)); and 

• Any individual account or joint 

account (discretionary or not) where the 

beneficial owner (or one of the 

beneficial owners in the case of a joint 

account) is a person described in 

paragraphs (a)(10)(i) through (vi) of 

proposed § 23.160 (proposed 

§ 23.160(a)(10)(vii)).33

The Commission explained that, as 

indicated in paragraphs (iii) and (vi) of 

the proposed rule, a legal entity’s status 

as a U.S. person would be determined 

at the entity level and would therefore 

include a foreign branch of a U.S. 

person.34 An affiliate or subsidiary of a 

U.S. person that is organized or 

incorporated outside the United States, 

however, would not be deemed a ‘‘U.S. 

person’’ solely by virtue of its affiliation 

with the U.S. person.35 The Commission 

also stated that a swap counterparty 

should generally be permitted to 

reasonably rely on its counterparty’s 

written representation with regard to its 

status as a U.S. person.36

The proposed rule was generally 

consistent with the U.S. person 

interpretation set forth in the Guidance, 

with certain exceptions.37 Notably, the 

proposed rule did not define ‘‘U.S. 

person’’ to include a commodity pool, 

pooled account, investment fund, or 

other collective investment vehicle that 

is majority-owned by one or more U.S. 

persons (the ‘‘U.S. majority-owned fund 

prong’’).38 The proposed rule also did 

not include a catchall provision, thereby 

limiting the definition of ‘‘U.S. person’’ 

for purposes of the margin rule to 

persons enumerated in the rule.39

Finally, paragraph (vi) of the proposed 

rule (the ‘‘unlimited U.S. responsibility 

prong’’) represented a modified version 

of a similar concept from the Guidance, 

which interprets ‘‘U.S. person’’ to 

include a legal entity ‘‘directly or 

indirectly majority-owned’’ by one or 

more U.S. person(s) that bear unlimited 

responsibility for the legal entity’s 

liabilities and obligations.40

The Commission requested comment 

on all aspects of the proposed definition 

of ‘‘U.S person,’’ including whether the 

definition should include a U.S. 

majority-owned fund prong or an 

unlimited U.S. responsibility prong and 

whether it should be identical to the 

U.S. person definition adopted by the 

SEC.41

b. Comments 

In general, commenters raised few 

objections to the proposed ‘‘U.S. 

person’’ definition. Nearly all 

commenters supported the absence of a 

U.S. majority-owned fund prong,42 and 

several expressly supported the absence 

of a catchall provision.43 With respect to 

the U.S. majority-owned funds prong, 

commenters argued that U.S. ownership 

alone is not indicative of whether a 

fund’s activities have a direct and 

significant effect on the U.S. financial 

system 44 and that identifying and 

tracking a fund’s beneficial ownership 

may pose a significant challenge in 

certain circumstances.45 Commenters 

added that characterizing such U.S. 

majority-owned funds as U.S. persons 

may lead to duplicative margin 

requirements because such funds will 

likely also be subject to foreign 

regulation.46

A few commenters, however, 

requested changes regarding the 

unlimited U.S. responsibility prong. 

ISDA and JBA recommended that, 

consistent with the Guidance, the 

Commission require that the U.S. 

person(s) bearing unlimited 

responsibility for the obligations and 

liabilities of the legal entity have a 

majority ownership stake in the entity. 

ISDA argued broadly that, to avoid 

confusion and regulatory overlap, legal 

entities that have multiple owners with 

unlimited liability for the obligations 

and liabilities of the legal entity should 

only be subject to the jurisdiction of the 

majority owner.47 JBA argued that the 

definition should be consistent with the 

Guidance in order to avoid the 

possibility that the Commission’s 

margin requirements would apply to a 

‘‘broader scope of U.S. persons relative 

to other swap regulations.’’ 48 IIB/

SIFMA requested that the unlimited 

U.S. responsibility prong be removed 

altogether, arguing that unlimited 

responsibility is ‘‘largely equivalent’’ to 

a guarantee and should therefore be 

afforded the same treatment.49


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responsibility prong create risk to U.S. persons only 

to the extent that legal entity incurs losses and fails 

to perform obligations). 

50As indicated above, several commenters 

recommended generally that the Commission 

establish a uniform definition of ‘‘U.S. person’’ that 

would apply both in the context of the cross-border 

application of the margin rules and with respect to 

the other swaps regulatory topics covered by the 

Guidance. See supra note 28. 

51See ICI Global at 5–7 (clarification is necessary 

to avoid imposing Dodd-Frank Act swap provisions 

on entities that only have ‘‘nominal nexus’’ to 

United States); SIFMA AMG at 10–12 (reclassifying 

such funds as U.S. persons solely for purposes of 

margin rule would be extremely complicated and 

burdensome for asset managers and their clients); 

Vanguard at 5. See also Guidance, 78 FR at 45314 

(providing that a collective investment vehicle that 

is publicly offered only to non-U.S. persons and not 

offered to U.S. persons generally would not fall 

within any of the prongs of the ‘‘U.S. person’’ 

interpretation in the Guidance). 

52SIFMA AMG at 12 (such language, which is not 

present in corresponding prongs of U.S. person 

interpretation in Guidance, could ‘‘cause confusion 

in terms of whether a person having any branches 

in the United States needs to take into account its 

U.S. person status, including in assessing the 

entity’s principal place of business’’). 

53See FSR at 8; JBA at 12 (while international 

financial institutions ‘‘are invested by the U.S. 

government, financial institutions generally 

separate them from the U.S. country risk in 

evaluating their credit risk in practice’’). See also 

17 CFR 240.3a71–3(a)(4)(iii) (defining ‘‘U.S. 

person’’ for purposes of the SEC’s regulation of 

security-based swaps to exclude the International 

Monetary Fund, the International Bank for 

Reconstruction and Development, the InterAmerican Development Bank, the Asian 

Development Bank, the African Development Bank, 

the United Nations, and their agencies and pension 

plans, and any other similar international 

organizations, their agencies and pension plans). 

54See IATP at 4 (intergovernmental organizations 

should ‘‘voluntarily practice’’ the margin 

requirements in order to ‘‘realize the objectives of 

the [sic] intergovernmental investment charters’’). 

55The Commission clarifies that the inclusion of 

‘‘any branch of the legal entity’’ in sections 

23.160(a)(10)(iii) and (vi) of the Final Rule is 

intended to make clear that the definition includes 

both foreign and U.S. branches of an entity and 

does not introduce any additional criteria for 

determining an entity’s U.S. person status. 

56See also 17 CFR 23.160(a)(5) (defining ‘‘nonU.S. person’’ as any person that is not a U.S. 

person). 

57See, e.g., 17 CFR 4.7(a)(1)(iv) (defining ‘‘NonUnited States person’’ for purposes of part 4 of the 

Commission regulations, which applies to 

commodity pool operators). 

58 559 U.S. 77, 80 (2010). 

59See Guidance, 78 FR at 45309–12 (providing 

guidance on application of the principal place of 

business test to funds and other collective 

investment vehicles in the context of cross-border 

swaps, including examples of how the 

Commission’s approach could apply to a 

consideration of whether the ‘‘principal place of 

business’’ of a fund is in the United States in 

particular hypothetical situations). Note that the 

examples included in the Guidance are for 

illustrative purposes only and do not purport to 

address all potential variations in the structure of 

collective investment vehicles or all factors relevant 

to determining whether a collective investment 

vehicle’s principal place of business is in the 

United States. 

60The Commission does not view the unlimited 

U.S. responsibility prong as equivalent to a U.S. 

guarantee (as ‘‘guarantee’’ is defined in the Final 

Rule). As stated in the Guidance, a guarantee does 

not necessarily provide for ‘‘unlimited 

responsibility for the obligations and liabilities of 

the guaranteed entity’’ in the same sense that the 

owner of an unlimited liability corporation bears 

such unlimited liability. See 78 FR at 45312. 

Commenters also made certain other 

recommendations to further conform the 

U.S. person definition to the 

interpretation of ‘‘U.S. person’’ in the 

Guidance.50 ICI Global, SIFMA AMG, 

and Vanguard requested that the 

Commission confirm that, as indicated 

in the Guidance, a pool, fund or other 

collective investment vehicle that is 

publicly offered only to non-U.S. 

persons and not offered to U.S. persons 

would not fall within the scope of the 

U.S. person definition.51 SIFMA AMG 

also added that language in paragraphs 

(iii) and (vi) specifying that a legal 

entity deemed a U.S. person would 

include ‘‘any branch of the legal entity’’ 

was unnecessarily confusing.52

Finally, FSR and JBA requested that, 

in the interest of harmonizing margin 

requirements and reducing compliance 

costs, the Commission should, 

consistent with the SEC’s cross-border 

rules, exclude from the U.S. person 

definition certain designated 

international organizations.53 IATP 

argued, however, that such exclusion 

would be either unnecessary or 

inappropriate.54

c. Final Rule 

The Final Rule defines ‘‘U.S. person’’ 

as proposed, but the Commission is 

providing some additional clarifications 

in response to commenters. As stated in 

the Proposal, the definition generally 

follows a traditional, territorial 

approach to defining a U.S. person, and 

the Commission believes that this 

definition offers a clear, objective basis 

for determining those individuals or 

entities that should be identified as U.S. 

persons. 

Under the Final Rule, a legal person’s 

status as a U.S. person is determined at 

the entity level and therefore includes 

any foreign operations that are part of 

the legal person, regardless of their 

location. Consistent with this approach, 

the definition includes any foreign 

branch of a U.S. person.55 The status of 

a legal entity as a U.S. person would not 

generally affect whether a separately 

incorporated or organized legal entity in 

the affiliated corporate group is a U.S. 

person. Therefore, an affiliate or a 

subsidiary of a U.S. person that is 

organized or incorporated in a non-U.S. 

jurisdiction would not be deemed a U.S. 

person solely by virtue of being 

affiliated with a U.S. person.56

Sections 23.160(a)(10)(i) through (v) 

and (vii) of the Final Rule identify 

certain persons as U.S. persons by virtue 

of being domiciled or organized in the 

United States. The Commission has 

traditionally looked to where a legal 

entity is organized or incorporated (or, 

in the case of a natural person, where he 

or she resides) to determine whether it 

is a U.S. person.57 Persons domiciled or 

organized in the United States are likely 

to have significant financial and legal 

relationships in the United States and 

are therefore appropriately included 

within the definition of ‘‘U.S. person.’’ 

Consistent with this traditional 

approach, section 23.160(a)(10)(iii) of 

the Final Rule includes persons that are 

organized or incorporated outside the 

United States but have their principal 

place of business in the United States. 

For purposes of this section, the 

Commission interprets ‘‘principal place 

of business’’ to mean the location from 

which the officers, partners, or 

managers of the legal person primarily 

direct, control, and coordinate the 

activities of the legal person. This 

interpretation is consistent with the 

Supreme Court’s decision in Hertz Corp. 

v. Friend, which described a 

corporation’s principal place of 

business, for purposes of diversity 

jurisdiction, as the ‘‘place where the 

corporation’s high level officers direct, 

control, and coordinate the 

corporation’s activities.’’ 58

The Commission is of the view that 

determining the principal place of 

business of an investment fund may 

require consideration of additional 

factors beyond those applicable to 

operating companies. In the case of a 

fund, the senior personnel that direct, 

control, and coordinate a fund’s 

activities are generally not the named 

directors or officers of the fund but 

rather persons employed by the fund’s 

investment adviser or the fund’s 

promoter. Therefore, consistent with the 

Guidance, the Commission would 

generally consider the principal place of 

business of a fund to be in the United 

States if the senior personnel 

responsible for either (1) the formation 

and promotion of the fund or (2) the 

implementation of the fund’s 

investment strategy are located in the 

United States, depending on the facts 

and circumstances that are relevant to 

determining the center of direction, 

control and coordination of the fund.59

Section 23.160(a)(10)(vi) of the Final 

Rule defines ‘‘U.S. person’’ to include 

certain legal entities owned by one or 

more U.S. person(s) and for which such 

person(s) bear unlimited responsibility 

for the obligations and liabilities of the 

legal entity.60 In such cases, the U.S. 


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61By extension, by virtue of their unlimited 

responsibility for the legal entity’s swap obligations, 

the U.S. person owner(s) have an interest in the 

swap activities of the legal entity to the same extent 

as if the swap activities were conducted by the U.S. 

person directly. 

62Such a fund may nevertheless be a U.S. person 

by virtue of fitting within the scope of 

§ 23.160(a)(10)(iii) (entities organized or having a 

principal place of business in the United States). In 

response to commenters, the Commission further 

clarifies that whether a pool, fund or other 

collective investment vehicle is publicly offered 

only to non-U.S. persons and not offered to U.S. 

persons would not be relevant in applying 

§ 23.160(a)(10)(iii). 

63See Proposal, 80 FR at 41382 n.46 (discussing 

the SEC’s ‘‘U.S. person’’ definition for purposes of 

security-based swap regulation). 

64The SEC does not include the U.S. 

responsibility prong in its U.S. person definition, 

but instead treats a legal entity where one or more 

U.S. person(s) bears unlimited responsibility for the 

obligations and liabilities of the legal entity as a 

non-U.S. person with a guarantee. The Commission 

believes that, for the reasons stated above, these 

entities should be included as a U.S. person rather 

than being treated as a non-U.S. person with a 

guarantee for purposes of the margin requirements 

for uncleared swaps. 

65Under the Final Margin Rule, the following 

international organizations are expressly considered 

non-financial end users: (1) The International Bank 

for Reconstruction and Development; (2) The 

Multilateral Investment Guarantee Agency; (3) The 

International Finance Corporation; (4) The InterAmerican 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). See 17 

CFR 23.151 (defining ‘‘financial end user,’’ ‘‘nonfinancial end user,’’ and ‘‘multilateral development 

bank’’). Under the Final Margin Rule, CSEs are not 

required to exchange margin with non-financial end 

users. 

66This release uses the term ‘‘U.S. Guaranteed 

CSE’’ for convenience only. Whether a non-U.S. 

CSE falls within the meaning of the term ‘‘U.S. 

Guaranteed CSE’’ varies on a swap-by-swap basis, 

such that a non-U.S. CSE may be considered a U.S. 

Guaranteed CSE for one swap and not another, 

depending on whether the non-U.S. CSE’s 

obligations under such swap are guaranteed by a 

U.S. person. 

67See Proposal, 80 FR at 41385. 

68See FSR at 2, 9; IATP at 5; IIB/SIFMA at 18– 

19; ISDA at 12; JBA at 12; SIFMA AMG at 4, 13. 

69See IIB/SIFMA at 18–19; ISDA at 12; JBA at 12; 

SIFMA AMG at 13. 

70See IIB/SIFMA at 18–19; ISDA at 12 

(interpretation of ‘‘guarantee’’ in Guidance requires 

facts-and-circumstances analysis to determine 

whether arrangement supports a party’s ability to 

pay or perform under swap); JBA at 12; SIFMA 

AMG at 13 (expressing approval that the proposed 

definition aligns with guarantee definition adopted 

by SEC). 

person owner(s) serve as a financial 

backstop for all of the legal entity’s 

obligations and liabilities. Creditors and 

counterparties accordingly look to the 

U.S. person owner(s) when assessing the 

risk of dealing with the entity.61

Because the U.S. person owner(s)’ 

responsibility is unlimited, the amount 

of equity the U.S. owner(s) have in the 

legal entity would not be relevant. 

In line with the proposed rule, the 

Final Rule does not include a U.S. 

majority-owned funds prong. Although 

the U.S. owners of such funds may be 

adversely impacted in the event of a 

counterparty default, the Commission 

believes that, on balance, the majorityownership test should not be included 

in the definition of U.S. person for 

purposes of the margin rules. Non-U.S. 

funds with U.S. majority-ownership, 

even if treated as a non-U.S. person, are 

excluded from the Commission’s margin 

rules only in limited circumstances 

(namely, when these funds transact with 

a non-U.S. CSE that is not a 

consolidated subsidiary of a U.S. entity 

or a U.S. branch of a non-U.S. CSE). 

This result, coupled with the 

implementation issues raised by 

commenters, persuade the Commission 

that including a U.S. majority-owned 

funds prong in the scope of the ‘‘U.S. 

person’’ definition would not be 

appropriate for purposes of the margin 

rules.62 The Final Rule’s U.S. person 

definition also does not include the 

prefatory phrase ‘‘includes, but is not 

limited to’’ that was included in the 

Guidance. As stated in the proposed 

rule, the Commission believes that this 

catchall should not be included in order 

to provide legal certainty regarding the 

application of U.S. margin requirements 

to cross-border swaps. 

The Commission notes that, as 

discussed in the proposed rule, the 

Final Rule defines ‘‘U.S. person’’ in a 

manner that is substantially similar to 

the definition used by the SEC in the 

context of cross-border regulation of 

security-based swaps.63 The 

Commission further believes that any 

differences, such as the inclusion of an 

unlimited U.S. responsibility prong, are 

necessary and appropriate in the context 

of the cross-border application of 

margin requirements for uncleared 

swaps, for the reasons discussed 

above.64 With respect to the designated 

international organizations excluded 

from the SEC’s U.S. person definition, 

the Commission notes that a similar 

exclusion is unnecessary in the context 

of the cross-border application of the 

Commission’s margin rules, given that 

such entities are generally considered 

non-financial end users under the Final 

Margin Rule and are therefore 

unaffected by application of the margin 

requirements for uncleared swaps.65

2. Guarantees 

Under the Final Rule, the term 

‘‘guarantee’’ is defined to include 

arrangements, pursuant to which one 

party to an uncleared swap has rights of 

recourse against a guarantor, with 

respect to its counterparty’s obligations 

under the uncleared swap. As discussed 

in section II.B.2.b.i. below, non-U.S. 

CSEs whose obligations under the 

relevant swap are guaranteed by a U.S. 

person (‘‘U.S. Guaranteed CSEs’’) 66 are 

eligible for substituted compliance to 

the same extent as U.S. CSEs and are 

similarly ineligible for the Exclusion. 

a. Proposed Rule 

The proposed rule defined the term 

‘‘guarantee’’ as an arrangement pursuant 

to which one party to a swap with a 

non-U.S. counterparty has rights of 

recourse against a U.S. person, with 

respect to the non-U.S. counterparty’s 

obligations under the swap. The 

proposed rule defined ‘‘rights of 

recourse’’ as a conditional or 

unconditional legally enforceable right 

to receive or otherwise collect payment, 

in whole or in part. An arrangement 

would constitute a ‘‘guarantee’’ 

regardless of whether the rights of 

recourse were conditioned upon the 

non-U.S. counterparty’s insolvency or 

failure to meet its obligations under the 

relevant swap or whether the 

counterparty seeking to enforce the 

guarantee is required to make a demand 

for payment or performance from the 

non-U.S. counterparty before 

proceeding against the U.S. guarantor. 

The Commission requested comment on 

all aspects of its proposed definition of 

‘‘guarantee,’’ including whether it 

would be appropriate to distinguish 

guarantee arrangements with a legally 

enforceable right of recourse from those 

without direct recourse.67

b. Comments 

Most commenters supported the 

proposed definition of ‘‘guarantee.’’ 68

Commenters generally preferred it to the 

broader interpretation of ‘‘guarantee’’ in 

the Guidance, which includes other 

types of financial arrangements and 

support (e.g., keepwell agreements and 

liquidity puts),69 and agreed that it 

would promote legal certainty and 

lower compliance costs as a result.70

IIB/SIFMA further argued the proposed 

definition is appropriate in the margin 

context and consistent with CEA section 

2(i) because, absent such a legal 

relationship to a U.S. person, a non-U.S. 

person would not have a sufficient 

connection with activities in U.S. 

commerce to warrant the application of 


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71See IIB/SIFMA at 18–19. See also FSR at 9 

(‘‘transaction-level’’ swap risk would not transfer 

back to United States absent right of recourse 

against a U.S. person and ‘‘entity-level’’ risk would 

be captured by other regulatory requirements, such 

as capital rules). 

72See ISDA at 12; JBA at 12; SIFMA AMG at 13. 

73AFR at 3, 5–7; Better Markets at 4. 

74See AFR at 3 (adopting different definition 

solely for purposes of margin rules would not only 

complicate overall set of cross-border rules, but 

establish an ‘‘extremely poor precedent’’ for 

narrowing guarantee concept in applying rest of 

Guidance); Better Markets at 4 (proposed definition 

is ‘‘less robust’’ than interpretation of guarantee in 

Guidance and should not be different in margin 

context). 

75See AFR at 6. 

76See id. 

77See id. at 5–6. 

78See 17 CFR 23.160(a)(2). 

79The Final Rule also includes certain technical 

edits that would not affect the substance of the rule 

as compared to the proposed rule. 

80Based on this change to the definition of 

‘‘guarantee,’’ the Final Rule differs from the 

proposed rule in that it treats certain non-U.S. 

persons as if they were U.S. persons. 

81This example is included for illustrative 

purposes only, and is not intended to cover all 

examples of swaps that could be affected by 

changes in the Final Rules. 82The Commission has determined that using the 

term ‘‘explicit recourse guarantee’’ in lieu of the 

broader ‘‘guarantee’’ would, in light of the 

Prudential Regulators’ use of the comparable term 

‘‘guarantee,’’ likely only cause confusion without 

making any substantive difference with respect to 

the cross-border application of the Commission’s 

margin requirements. 

83See proposed 17 CFR 23.160(a)(6) (defining 

‘‘ultimate parent entity’’ as the parent entity in a 

Continued 

U.S. margin rules.71 Commenters 

expressed concern, however, that 

multiple ‘‘guarantee’’ definitions could 

lead to confusion and recommended 

that the Commission apply the proposed 

‘‘guarantee’’ definition throughout its 

cross-border policy.72

AFR and Better Markets opposed the 

proposed ‘‘guarantee’’ definition.73 Both 

expressed a preference for the broader 

interpretation of ‘‘guarantee’’ in the 

Guidance and, like other commenters, 

recommended that the term have one 

consistent meaning.74 AFR argued that 

both implicit guarantees, such as when 

a parent entity faces reputational 

incentives to provide financial support 

for a subsidiary, and other formal 

agreements that obligate a U.S. person to 

provide financial support, create a 

direct and significant nexus to the U.S. 

financial system and should be included 

within the scope of the term 

‘‘guarantee.’’ 75 Accordingly, the 

proposed definition of ‘‘guarantee’’ may 

not fully capture the risk to the U.S. 

financial markets.76 AFR suggested that 

the policy objective of increasing the 

availability of substituted compliance in 

the margin context would be better 

achieved by adopting the broad 

interpretation of ‘‘guarantee’’ in the 

Guidance and instead limiting the 

availability of substituted compliance 

with respect to swaps involving an 

‘‘explicit recourse guarantee.’’ 77

c. Final Rule 

The Final Rule defines ‘‘guarantee’’ 

for purposes of the cross-border 

application of the Commission’s margin 

rules to mean an arrangement pursuant 

to which one party to an uncleared 

swap has rights of recourse against a 

guarantor, with respect to its 

counterparty’s obligations under the 

uncleared swap.78 For these purposes, a 

party to an uncleared swap has rights of 

recourse against a guarantor if the party 

has a conditional or unconditional 

legally enforceable right to receive or 

otherwise collect, in whole or in part, 

payments from the guarantor with 

respect to its counterparty’s obligations 

under the uncleared swap. A 

counterparty has a right of recourse 

against a guarantor even if the right of 

recourse is conditioned upon its 

counterparty’s insolvency or failure to 

meet its obligations under the swap, and 

regardless of whether the counterparty 

seeking to enforce the guarantee is first 

required to make a demand for payment 

or performance from its counterparty 

before proceeding against the guarantor. 

Further, the term ‘‘guarantee’’ applies 

equally regardless of whether the U.S. 

guarantor is affiliated with either 

counterparty or is an unaffiliated third 

party. In addition, the terms of the 

guarantee need not necessarily be 

included within the swap 

documentation or even otherwise 

reduced to writing, so long as a party to 

the swap has legally enforceable rights 

of recourse under the laws of the 

relevant jurisdiction. 

The Final Rule’s definition of 

guarantee is generally consistent with 

the proposed rule’s definition of 

guarantee, but reflects certain changes 

that are intended to more closely align 

it with the definition included in the 

Prudential Regulators’ Final Margin 

Rule.79 Language has been added to the 

Final Rule to address the concerns of 

the Commission and Prudential 

Regulators that swaps could be 

structured in a manner that would avoid 

application of the margin requirements 

to swaps that are guaranteed by a U.S. 

person.80 Under this additional 

language, the term ‘‘guarantee’’ also 

encompasses any arrangement pursuant 

to which the guarantor itself has a 

conditional or unconditional legally 

enforceable right to receive or otherwise 

collect, in whole or in part, payments 

from any other guarantor with respect to 

the counterparty’s obligations under the 

uncleared swap. Under the Final Rule, 

such arrangement will be deemed a 

guarantee of the counterparty’s 

obligations under the uncleared swap by 

the other guarantor. 

To illustrate, consider a swap between 

a non-U.S. CSE (‘‘Party A’’) and a nonU.S. person (‘‘Party B’’). Party B’s 

obligations under the swap are 

guaranteed by a non-U.S. affiliate 

(‘‘Party C’’), who in turn has a guarantee 

from its U.S. CSE parent entity on Party 

C’s swap obligations (‘‘Parent D’’). The 

Final Rule would deem a guarantee to 

exist between Party B and Parent D with 

respect to Party B’s obligations under 

the swap with Party A.81

The Commission is cognizant that 

many other financial arrangements or 

support, other than a recourse guarantee 

as defined in the Final Rule, may be 

provided by a U.S. person to a non-U.S. 

CSE. The Commission acknowledges 

that these other financial arrangements 

or support may transfer risk directly 

back to the U.S. financial system, with 

possible significant adverse effects, in a 

manner similar to an arrangement that 

is covered by the definition of a 

‘‘guarantee’’ in the Final Rule. However, 

the Commission believes that, in the 

context of the Final Rule, non-U.S. CSEs 

benefitting from such other forms of 

U.S. financial support will likely meet 

the definition of an FCS, a concept 

included in the final margin rules 

adopted by the Prudential Regulators, 

and thereby be adequately covered by 

the Commission’s margin requirements. 

In this way, the Commission believes 

that the Final Rule achieves the dual 

goals of protecting the U.S. markets 

while promoting a workable crossborder margin framework that closely 

tracks the cross-border application of 

the Prudential Regulators’ Final Margin 

Rule.82

3. Foreign Consolidated Subsidiary 

(‘‘FCS’’) 

Under the Final Rule, the term 

‘‘Foreign Consolidated Subsidiary’’ 

identifies non-U.S. CSEs that are 

consolidated for accounting purposes 

with an ultimate parent entity that is a 

U.S. person (a ‘‘U.S. ultimate parent 

entity’’). As further discussed in section 

II.B.2.b.ii. below, substituted 

compliance would be broadly available 

to an FCS to the same extent as any 

other non-U.S. CSE, but such an FCS 

would not be eligible for the Exclusion. 

a. Proposed Rule 

The proposed rule defined a ‘‘Foreign 

Consolidated Subsidiary’’ as a non-U.S. 

CSE in which an ‘‘ultimate parent 

entity’’ 83 that is a U.S. person has a 


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consolidated group in which none of the other 

entities in the consolidated group has a controlling 

interest, in accordance with U.S. GAAP). 

84Under U.S. GAAP, consolidated financial 

statements report the financial position, results of 

operations and statement of cash flows of a parent 

entity together with subsidiaries in which the 

parent entity has a controlling financial interest 

(which are required to be consolidated under U.S. 

GAAP). 

85See Proposal, 80 FR at 41386. See also 

Prudential Regulators’ Proposed Margin Rule, 79 FR 

at 57379. 

86See AFR at 4–5; Better Markets at 5; IATP at 

3, 5–6. 

87See AFR at 4 (FCS concept ‘‘economizes’’ 

Commission resources by tying regulatory coverage 

to ‘‘easily available’’ accounting information). See 

also Better Markets at 5 (Guidance should be 

amended to apply FCS concept to all Title VII 

requirements). 

88See AFR at 4. See also IATP at 3 (inclusion in 

another’s consolidated financial statement indicates 

a potential risk to that entity). 

89See AFR at 5 (prior to the passage of U.S. 

Financial Accounting Standards Board (‘‘U.S. 

FASB’’) Statements Nos. 166 and 167, U.S. GAAP 

accounting failed to properly require the 

consolidation of many securitization entities and 

such gaps could appear in the future). 

90See IATP at 6 (reliance on IFRS should be 

predicated on the IFRS agreeing with U.S. FASB 

participation and offering improved handling of offbalance sheet entities compared to U.S. GAAP). 

91See AFR at 4–5. 

92See AFR at 4–5; IATP at 6 (it would not be 

‘‘inconceivable’’ for U.S. CSE to spin off swaps 

trading activities as private partnerships). 

93See AFR at 5. 

94See id. 

95See, e.g., AIMA/IA at 3 (touting potential 

operational costs involved with obtaining 

counterparty representations regarding FCS status); 

FSR at 10 (FCS concept is ‘‘not necessary’’ because 

FCSs will be subject to foreign regulation); IIB/

SIFMA at 19–20 (Commission should not 

distinguish FCSs from other non-U.S. CSEs). 

96See IIB/SIFMA at 14 (‘‘chain of intervening 

factors and events,’’ including ‘‘materiality’’ of FCS 

to parent entity, that could affect a U.S. parent’s 

decision to provide support is too long and 

uncertain). 

97See FSR at 10 (a control test may not clearly 

identify the non-U.S. covered swap entities that are 

likely to raise greater supervisory concerns); IATP 

at 6; IIB/SIFMA at 19–20 (reliance on the familiar 

standards of U.S. GAAP would promote legal 

certainty); ISDA at 13 (a control test is not 

appropriate for the application of margin rules). 

98See IIB/SIFMA at 19–20. 

99See 17 CFR 23.160(a)(1). 

100See 17 CFR 23.160(a)(6). The definition of 

‘‘Foreign Consolidated Subsidiary’’ refers only to 

the U.S ultimate parent entity. The Commission 

believes that this is appropriate because 

consolidated financial statements are the financial 

statements of a group under the control of the 

ultimate parent entity. Where the ultimate parent 

entity is a non-U.S. person, the non-U.S. CSE is not 

categorized as an FCS and therefore would be 

eligible for the Exclusion (assuming that the other 

conditions of the Exclusion are satisfied), for the 

reasons discussed in section II.B.3. 

controlling interest, in accordance with 

U.S. generally accepted accounting 

principles (‘‘U.S. GAAP’’) such that the 

U.S. ultimate parent entity includes the 

non-U.S. CSE’s operating results, 

financial position and statement of cash 

flows in its consolidated financial 

statements, in accordance with U.S. 

GAAP.84 The Commission explained 

that the fact that an entity is included 

in the consolidated financial statements 

of another entity is an indication of 

potential risk to the other entity that 

offers a clear and objective standard for 

the application of margin requirements. 

The Commission further explained that, 

as a result of the FCS’ direct connection 

to, and the possible negative impact of 

its swap activities on, its U.S. ultimate 

parent entity and the U.S. financial 

system, an FCS raises a more substantial 

supervisory concern in the United 

States relative to other non-U.S. CSEs. 

The Commission requested comment 

on all aspects of its proposed FCS 

definition, including whether the 

Commission should instead adopt the 

‘‘control test’’ proposed by the 

Prudential Regulators, which focused 

solely on the level of ownership and 

control a U.S. person would have over 

a non-U.S. subsidiary.85

b. Comments 

A few commenters expressed strong 

support for the FCS concept.86 AFR and 

Better Markets characterized it as an 

improvement to the cross-border 

approach to margin taken in the 

Guidance, calling it a ‘‘logical and 

reasonable approach’’ to capturing nonU.S. subsidiaries of U.S. swap entities 

that may expect an implicit guarantee 

from a U.S. parent and an ‘‘effective 

remedy to evasion.’’ 87 AFR stated that, 

by virtue of being included in the same 

consolidated financial statement, an 

FCS has a direct financial impact on its 

U.S. ultimate parent entity, even absent 

a direct recourse guarantee.88

Nevertheless, AFR and IATP 

expressed some concern over the 

reliance on U.S. GAAP, particularly 

with respect to its ability to capture offbalance sheet entities.89 IATP suggested 

that the Commission consider including 

in the FCS definition an option to carry 

out the consolidated financial reporting 

according to International Financial 

Reporting Standards (‘‘IFRS’’).90 AFR 

also expressed concern that reliance on 

U.S. GAAP may not capture all entities 

that could expect an implicit guarantee 

from a U.S. parent, including privately 

held entities that are not required to 

prepare consolidated financial 

statements under U.S. GAAP, and 

certain variable interest entities or 

owned funds.91

AFR and IATP therefore urged the 

Commission to expand the FCS 

definition in a few ways. Both 

recommended that the FCS definition 

include entities whose U.S. parent 

entity is not required to prepare 

consolidated financial statements (e.g., a 

private partnership) but that would 

otherwise meet the standard for 

consolidation.92 AFR argued that failing 

to include such entities within the 

meaning of ‘‘FCS’’ could result in 

entities with a similar nexus to the U.S. 

financial system being treated 

differently based on factors such as 

whether the ultimate parent is publicly 

traded.93 AFR also urged the 

Commission to incorporate a facts-andcircumstances test for determining 

when a foreign subsidiary’s relationship 

with its U.S. parent may create a 

sufficient nexus to require compliance 

with U.S. margin rules.94

A few commenters opposed the FCS 

concept altogether.95 IIB/SIFMA argued 

that, absent a legal obligation to provide 

support, an FCS’s potential effect on its 

U.S. ultimate parent entity is not 

sufficiently ‘‘direct’’ to create a nexus to 

the U.S. financial system within the 

meaning of CEA section 2(i).96

Nevertheless, most commenters, 

including IIB/SIFMA, preferred the 

proposed FCS definition to the control 

test proposed by the Prudential 

Regulators.97 IIB/SIFMA also 

appreciated that the proposed FCS 

definition would foreclose the 

possibility of such a non-U.S. CSE 

having multiple parent entities.98

c. Final Rule 

The Final Rule defines ‘‘Foreign 

Consolidated Subsidiary’’ as 

proposed.99 Specifically, ‘‘Foreign 

Consolidated Subsidiary’’ means a nonU.S. CSE in which an ultimate parent 

entity that is a U.S. person has a 

controlling financial interest, in 

accordance with U.S. GAAP, such that 

the U.S. ultimate parent entity includes 

the non-U.S. CSE’s operating results, 

financial position and statement of cash 

flows in the U.S. ultimate parent entity’s 

consolidated financial statements, in 

accordance with U.S. GAAP. The term 

‘‘ultimate parent entity’’ means the 

parent entity in a consolidated group in 

which none of the other entities in the 

consolidated group has a controlling 

interest, in accordance with U.S. 

GAAP.100

The Commission believes that the 

FCS concept offers a clear, bright-line 

test for identifying those non-U.S. CSEs 

whose uncleared swap activities present 

a greater supervisory interest relative to 

other non-U.S. CSEs. Under U.S. GAAP, 

an FCS’ financial statements are 

consolidated with its U.S. ultimate 

parent entity by virtue of the parent’s 


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101The Commission notes that it has a relatively 

greater supervisory interest in FCSs than other nonU.S. CSEs, even if they have a U.S. subsidiary or 

affiliate, because an FCS’s ultimate parent entity is 

a U.S. person. 

102The Commission notes that the standards for 

consolidation under U.S. GAAP’s VIE model are 

similar to the consolidation standards that would 

apply under IFRS, as both consider control over one 

entity by the other. The Commission further notes 

that it does not believe that special purpose 

vehicles are likely to be used to conduct swaps 

business. Even if such vehicles transact in swaps 

and, consequently, register as CSEs, the ultimate 

parent entity would likely exercise control over 

them because these vehicles typically rely on 

parental support or guarantees to maintain their 

credit standards. Such control would lead to 

consolidation under U.S. GAAP. 

103The Commission notes that although privately 

held companies are not under a regulatory 

obligation to prepare and file consolidated financial 

statements pursuant to U.S. GAAP, they 

nevertheless are likely to prepare consolidated 

financial statements for other purposes (e.g., to 

provide to creditors as a condition to loan or to 

private investors), in which case their foreign 

subsidiaries may fall within the parameters of the 

FCS definition. 

104See, e.g., SIFMA AMG at 12 (standard for 

reliance on counterparty representations with 

respect to U.S. person status is consistent with that 

articulated in Guidance and Commission’s external 

business conduct rules; proposed rule could be read 

to require ‘‘further, unnecessary diligence’’). 

105See, e.g., id. 

106See 17 CFR 23.402(d). 

107See 79 FR at 57379–81. 

108U.S. CSEs would not be eligible for substituted 

compliance with respect to the requirement that 

they collect initial margin or the requirement to 

post or collect variation margin. 

controlling financial interest in the FCS. 

By virtue of having its financial 

statements consolidated with those of 

its U.S. ultimate parent, the financial 

position, operating results and 

statement of cash flows of an FCS are 

included in the financial statements of 

its U.S. ultimate parent entity and 

therefore affect the financial position, 

risk profile and market value of the U.S. 

ultimate parent. Because of the FCS’ 

direct relationship with, and the 

possible negative impact of its swap 

activities on, its U.S. ultimate parent 

entity and the U.S. financial system, an 

FCS raises greater supervisory concern 

in the United States relative to other 

non-U.S. CSEs (in each case provided 

that the obligations under the relevant 

swap are not guaranteed by a U.S. 

person).101

Further, the Commission continues to 

believe that, in the absence of a direct 

recourse guarantee from a U.S. person, 

an FCS should not be treated in the 

same manner as a U.S. CSE or U.S. 

Guaranteed CSE. In contrast with a U.S. 

Guaranteed CSE, in the event of the 

FCS’s default, the U.S. ultimate parent 

entity does not have a legal obligation 

to fulfill the obligations of the FCS. 

Rather that decision would depend on 

the business judgment of its parent. 

By relying on a consolidation test, the 

FCS concept is intended to provide a 

clear, bright-line test for identifying 

those non-U.S. CSEs whose uncleared 

swaps are likely to raise greater 

supervisory concerns relative to other 

non-guaranteed non-U.S. CSEs. The 

Commission further believes that, as 

some commenters noted, reliance on 

familiar U.S. GAAP accounting 

standards will promote legal certainty. 

In particular, the Commission notes that 

consolidation accounting is a 

longstanding part of U.S. GAAP and that 

all non-U.S. CSEs with a U.S. ultimate 

parent entity currently prepare 

consolidated financial statements. 

With respect to the definition’s 

reliance on U.S. GAAP, the Commission 

notes that since the 2008 financial 

crisis, the U.S. FASB made significant 

changes to the consolidation model for 

variable interest entities (‘‘VIEs’’) and 

that as a result of these changes, more 

VIEs (including special purpose 

vehicles) are being consolidated with 

other entities (i.e., their parent entities) 

under U.S. GAAP. Furthermore, because 

the U.S. GAAP consolidation 

requirement adequately addresses these 

VIEs, the Commission believes that the 

addition of IFRS as an option is likely 

to inject unnecessary complexity and 

costs in many circumstances.102

Accordingly, the Commission believes 

that the U.S. GAAP consolidation test in 

the FCS definition is sufficiently similar 

to the IFRS consolidation standard with 

respect to VIEs so that additional 

reliance on the IFRS standard would be 

neither necessary nor beneficial.103

4. Counterparty Representations 

The proposed rule provided that 

market participants should generally be 

permitted to reasonably rely on 

counterparty representations with 

regard to their status as a U.S. person. 

The Commission received comments 

regarding its proposed reliance 

standard 104 and a request that the 

Commission also permit reliance on 

counterparty representations with 

respect to the guarantee and FCS 

definitions.105

The Commission acknowledges that 

the information necessary for a swap 

counterparty to accurately assess the 

status of its counterparties as U.S. 

persons or FCSs, or to determine 

whether a non-U.S. counterparty’s 

obligations under a swap are guaranteed 

by a U.S. person, may be unavailable, or 

available only through overly 

burdensome due diligence. For this 

reason, the Commission believes that a 

market participant should generally be 

permitted to reasonably rely on written 

counterparty representations in each of 

these respects. The Commission clarifies 

that, consistent with the reliance 

standard articulated in the 

Commission’s external business conduct 

rules,106 market participants may 

reasonably rely on such a counterparty 

representation unless it has information 

that would cause a reasonable person to 

question the accuracy of the 

representation. 

B. Applicability of Margin Requirements 

to Cross-Border Uncleared Swaps 

The following sections discuss the 

cross-border application of the margin 

requirements to swaps between CSEs 

and their counterparties, including 

when substituted compliance and the 

Exclusion are applicable. Section 1 

provides a brief overview of the 

proposed rule; section 2 addresses the 

availability of substituted compliance; 

section 3 addresses the availability of 

the Exclusion; section 4 discusses a 

special provision in the Final Rule for 

non-segregation jurisdictions; and 

section 5 discusses a special provision 

in the Final Rule for non-netting 

jurisdictions. 

1. Proposed Rule 

Under the proposed rule, the 

application of substituted compliance 

and the scope of the Exclusion closely 

tracked the Prudential Regulators’ 

Proposed Margin Rule.107 Specifically: 

• A U.S. CSE would be required to 

comply with the Commission’s margin 

rules for all uncleared swaps but would 

be eligible for substituted compliance 

with respect to the requirement to post 

(but not the requirement to collect) 

initial margin for swaps with certain 

non-U.S. counterparties (referred to 

herein as ‘‘partial substituted 

compliance’’).108

• A U.S. Guaranteed CSE would 

receive the same treatment as a U.S. 

CSE. 

• A non-U.S. CSE whose obligations 

under the relevant swap are not 

guaranteed by a U.S. person would be 

eligible for substituted compliance 

unless the counterparty to the swap is 

a U.S. CSE or U.S. Guaranteed CSE, in 

which case substituted compliance 

would be available with respect to the 

requirement to collect (but not the 

requirement to post) initial margin (also 

referred to as ‘‘partial substituted 

compliance’’). 

• A non-U.S. CSE would be eligible 

for an exclusion from the Final Margin 

Rule when trading with a non-U.S. 

person counterparty provided that (a) 

neither party’s obligations under the 

relevant swap are guaranteed by a U.S. 


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109See Proposal, 80 FR at 41387, 88–91. 

110See, e.g., AIMA/IA at 4–5 (substituted 

compliance should be ‘‘all encompassing, and 

applicable to all parties to a transaction’’); ICI 

Global at 2, 9 (substituted compliance should be 

made available ‘‘without qualification’’ wherever 

foreign jurisdiction’s margin requirements are 

comparable); ISDA at 2, 7–8 (substituted 

compliance should be available for any transaction 

subject to foreign requirements comparable to 

BCBS–IOSCO framework); SIFMA AMG 4, 6–8 

(market participants should be allowed ‘‘to comply 

with a single set of substantive margin requirements 

for all uncleared swaps’’). See also ABA/ABASA at 

3 (market participants should be allowed to rely on 

substituted compliance ‘‘to the greatest possible 

degree across the markets in and structures through 

which they operate’’). 

111See, e.g., FSR at 7 (U.S. CSEs should be able 

to rely on substituted compliance for both posting 

and collecting of initial margin when trading with 

non-U.S. CSEs and their foreign branches be 

extended full substituted compliance); IIB/SIFMA 

at 4–9 (substituted compliance should be available 

for U.S. CSEs and U.S. Guaranteed CSEs with 

respect to all margin requirements, including 

posting and collecting both initial and variation 

margin); JBA at 8–9 (availability of substituted 

compliance for U.S. Guaranteed CSEs is too 

limited); PensionsEurope at 2 (‘‘full substituted 

compliance,’’ including collection of initial margin 

and variation margin, should be available for 

transactions between U.S. Guaranteed CSEs and 

‘‘financial institutions without a U.S. nexus’’). 

112See, e.g., AIMA/IA at 1; FSR at 3–7; ICI Global 

at 8–9. See also Vanguard at 2 (applying substituted 

compliance on a ‘‘transaction-by-transaction basis’’ 

would undermine ‘‘the fundamental risk mitigation 

tool of cross-transactional close-out netting’’). 

113See, e.g., AIMA/IA at 1 (proposed rule would 

require a ‘‘significant amount of replacement and 

additional documentation to account for different 

counterparty combinations’’); ISDA at 5 

(operational complexity of proposed substituted 

compliance regime would further increase 

operating costs); IIB/SIFMA at 7 (CSEs would not 

know sufficient information about businesses of 

their counterparties to categorize them, and nonU.S. counterparties would not be familiar with, and 

would be reluctant to hire counsel to determine, all 

U.S. laws relevant to making the determination); 

SIFMA AMG at 6 (highlighting complications in 

determining availability of substituted compliance 

on basis of counterparty status in context of block 

trades). 

114See IIB/SIFMA at 5; ISDA at 6–7. See also ICI 

Global at 9 (by not permitting substituted 

compliance in certain instances, Commission 

would effectively be determining that foreign 

margin requirements are not ‘‘good enough’’ despite 

being found comparable). 

115See IIB/SIFMA at 6–7. 

116See ISDA at 6. 

117See FSR at 7–8. See also AIMA/IA at 3 

(absence of substituted compliance for foreign 

branches of U.S. CSEs is an ‘‘apparent gap[ ]’’). 

118See, e.g., AIMA/IA at 4; FSR at 7; ISDA at 3, 

5; SIFMA AMG at 10. 

119See SIFMA AMG at 10 (highlighting 

additional complexities in calculating margin for 

clients using multiple asset managers). 

120See AIMA/IA at 4. 

121See id. 

122See ISDA at 9 (counterparties wanting to use 

a single custodian could face additional challenges, 

as the custodial arrangement would have to be 

drafted to accommodate overlapping and 

potentially inconsistent requirements for 

segregation). 

123See proposed 17 CFR 23.160(a)(3) (defining 

‘‘International Standards’’ as based on the BCBS– 

IOSCO framework). 

124See FSR at 7. 

125See IATP at 3–4 (proposed rule would provide 

‘‘the greatest opportunity for effective risk 

mitigation against swaps counterparty default’’ and 

would be a ‘‘critical step’’ to ensuring that ‘‘deguaranteed’’ swaps ‘‘will not continue to elude 

effective regulation’’). 

126See IATP at 7. 

person; (b) neither party is an FCS; and 

(c) the swap is not conducted by or 

through a U.S. branch of a non-U.S. 

CSE. 

The Commission requested comment 

on all aspects of the proposed rule, 

including how the rule should treat 

FCSs (e.g., whether they should be 

offered the same treatment as U.S. 

Guaranteed CSEs or conversely be 

offered the Exclusion), whether U.S. 

branches should be eligible for the 

Exclusion, and whether the Commission 

should provide exceptions related to 

certain ‘‘emerging markets’’ or nonnetting jurisdictions.109

2. Substituted Compliance 

a. Comments 

Most commenters argued for the 

greater availability of substituted 

compliance. Some requested that all 

CSEs, whether a U.S. persons or a nonU.S. person, be eligible for full 

substituted compliance with respect to 

all comparable foreign margin 

requirements, including any swap 

dealer in a BCBS–IOSCO frameworkcompliant jurisdiction.110 Others 

phrased their requests in narrower 

terms, arguing for the broader 

availability of substituted compliance 

for U.S. CSEs and/or U.S. Guaranteed 

CSEs when trading with non-U.S. 

persons.111 Commenters generally 

argued that requiring CSEs to comply 

with the Commission’s margin 

requirements in the face of comparable 

foreign margin requirements would 

undermine international efforts to 

develop a consistent global swaps 

regime and impose unnecessary and 

costly compliance burdens, resulting in 

competitive disparities and market 

inefficiencies.112 Several commenters 

also argued that the proposed rule 

would involve substantial operational 

costs, including categorizing market 

participants and developing appropriate 

documentation.113

With respect to U.S. CSEs and U.S. 

Guaranteed CSEs, IIB/SIFMA and ISDA 

argued that compliance with the 

Commission’s margin requirements was 

not necessary to prevent the 

transmission of risk to the U.S. financial 

system because the risk would be 

adequately addressed by comparable 

foreign margin requirements.114 IIB/

SIFMA argued that the proposed 

substituted compliance regime could 

actually increase liquidity risk by 

discouraging non-U.S. counterparties 

from trading with U.S. CSEs and U.S. 

Guaranteed CSEs in order to avoid costs 

associated with understanding and 

complying with the Commission’s 

margin requirements, and that the 

resulting increased concentration of 

bilateral credit exposures among U.S. 

CSEs and U.S. Guaranteed CSEs would 

increase the risk of contagion in U.S. 

markets.115 ISDA further argued that 

‘‘[c]omity and respect for the 

supervisory interests of non-U.S. 

regulators’’ argue in favor of full 

substituted compliance or exclusion for 

swaps involving non-U.S. person 

counterparties.116 FSR argued that 

substituted compliance is at least 

necessary for foreign branches because 

they are likely to be subject to foreign 

margin requirements and pose the same 

concerns to foreign regulators as the 

U.S. branches of non-U.S. CSEs pose to 

U.S. regulators.117

Several commenters raised concerns 

with regard to the proposal to allow 

partial substituted compliance.118

SIMFA AMG argued that partial 

substituted compliance would be 

‘‘inconsistent with the importance of 

bilateral margining,’’ add unnecessary 

costs and complexity, and increase the 

potential for margin disputes.119 AIMA/ 

IA argued that developing a legal 

agreement allowing for the transfer of 

margin amounts according to more than 

one margin regime would be 

‘‘commercially and legally 

problematic.’’ 120 As a result, market 

participants would default to complying 

with the Commission’s margin 

requirements, negating the value of 

substituted compliance.121 ISDA 

similarly argued that developing a 

standardized model for initial margin 

that could account for different margin 

rules in one netting set would be 

‘‘impractical’’ in the available timeframe 

for compliance.122 FSR argued that 

partial substituted compliance was not 

‘‘in the spirit of the International 

Standards’’ 123 and pointed out that its 

usefulness may be questionable, given 

that no other foreign jurisdiction has 

proposed a similar approach.124

IATP, on the other hand, supported 

the proposed substituted compliance 

regime.125 IATP agreed that FCSs 

should be granted substituted 

compliance but not U.S. Guaranteed 

Affiliates because losses from the swaps 

of an FCS may have a negative impact 

on the foreign jurisdiction’s 

economy.126 IATP also agreed that U.S. 

Guaranteed Affiliates should not be 

eligible for substituted compliance with 

respect to the requirement to collect 


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127See id. 

128See AFR at 7. See also id. at 4 (scope of 

substituted compliance could become ‘‘overbroad’’ 

given that proposed rule included narrow definition 

of ‘‘guarantee’’ and limited Foreign Consolidated 

Subsidiaries to subsidiaries of registered CSEs). 

129That is, if the initial margin amount required 

to be posted under the foreign rule is lower than 

the amount required under the Commission’s Final 

Margin Rule, and the parties elect for the CSE to 

post margin pursuant to the foreign margin 

requirements, the lower margin may reduce the U.S. 

CSE’s funding costs. 

130For example, if partial substituted compliance 

were available for non-U.S. counterparties that are 

guaranteed by a U.S. person, a swap between a U.S. 

CSE and a U.S. counterparty could be restructured 

as a swap between a U.S. CSE and a non-U.S. 

counterparty that is guaranteed by a U.S. person in 

order to avoid application of the Commission’s 

margin requirements. 

131The Commission similarly does not expect 

that reliance on partial substituted compliance will 

hinder the development or use of a standardized 

model for initial margin, as the Commission 

believes that a single model could be developed to 

satisfy the initial margin requirements of multiple 

jurisdictions. 

initial margin from a non-U.S. 

counterparty.127 AFR described the 

proposed rule as creating a ‘‘very 

significant scope for substituted 

compliance’’ with respect to non-U.S. 

CSEs, but suggested that the scope 

would not be a concern provided the 

substituted compliance were limited to 

foreign rules that are ‘‘very similar’’ to 

U.S. margin requirements.128

b. Final Rule 

The Commission has determined to 

adopt a cross-border framework largely 

as proposed, but with certain 

modifications to address concerns 

raised by commenters and to further 

align the rule with the cross-border 

approach adopted by the Prudential 

Regulators. Generally speaking, the 

cross-border margin framework in the 

Final Rule reflects the Commission’s 

efforts to carefully tailor the application 

of the Commission’s margin 

requirements to address comity 

considerations and mitigate potential 

adverse impact on market efficiency and 

competition without compromising the 

safety and soundness of CSEs. The 

availability of substituted compliance 

under the Final Rule therefore depends 

on the degree of nexus the CSEs and 

their counterparties have to the U.S. 

financial system, as indicated by their 

status (e.g., whether they are U.S. 

persons or non-U.S. persons whose 

obligations under the relevant swap are 

guaranteed by a U.S. person). 

i. Uncleared Swaps of U.S. CSEs and 

U.S. Guaranteed CSEs 

As a general rule, the Commission 

believes that, in light of their position in 

the U.S. financial system, U.S. persons 

and U.S. Guaranteed CSEs should be 

required to comply with the 

Commission’s margin requirements. 

Under the Final Rule, however, U.S. 

CSEs and U.S. Guaranteed CSEs would 

be eligible for substituted compliance 

with respect to the requirement to post 

(but not the requirement to collect) 

initial margin provided that the 

counterparty is a non-U.S. person whose 

obligations under the relevant swap are 

not guaranteed by a U.S. person. By 

virtue of their being domiciled or 

organized in the United States, U.S. 

CSEs give rise to greater supervisory 

interests relative to other CSEs. U.S. 

Guaranteed CSEs create a similar 

supervisory interest because, as 

discussed in the proposed rule, the 

swap of a non-U.S. CSE whose 

obligations under the swap are 

guaranteed by a U.S. person is identical, 

in relevant aspects, to a swap entered 

into directly by a U.S. person. 

Nevertheless, the Commission 

believes that, in the interest of comity, 

permitting substituted compliance for 

the limited requirement of posting 

initial margin would be reasonable. 

While requiring a CSE to post initial 

margin protects the counterparty in the 

event of default by the CSE, it also 

serves as a risk management tool 

because it limits the amount of leverage 

a CSE can incur by requiring that it have 

adequate eligible collateral to enter into 

an uncleared swap. Accordingly, when 

the counterparty is a non-U.S. person 

(whose obligations under the swap are 

not guaranteed by a U.S. person), the 

Commission believes that substituting 

the foreign margin requirements with 

regard to the initial margin posted 

would be reasonable. The Commission 

further believes that allowing 

substituted compliance in this limited 

instance may reduce transaction costs 

for U.S. CSEs when trading with nonU.S. counterparties 129 and thereby 

mitigate potential competitive 

disparities (relative to other CSEs and 

non-CFTC registered dealers operating 

in the foreign jurisdiction), while 

ensuring that the U.S. CSE is adequately 

protected in the event of default of the 

non-U.S. counterparty. The availability 

of substituted compliance is limited to 

circumstances where the non-U.S. 

counterparty’s obligations under the 

relevant swap are not guaranteed by a 

U.S. person in order to avoid 

incentivizing market participants to 

structure their swaps solely for purposes 

of avoiding application of the 

Commission’s margin requirements.130

The Commission does not believe that 

partial substituted compliance would 

prohibit the use of a single netting set 

for calculating initial margin. Under the 

Final Rule, a U.S. CSE can comply with 

the Commission’s initial margin 

requirements by posting pursuant to 

comparable foreign margin 

requirements. Accordingly, from the 

Commission’s perspective, one netting 

set could encompass swaps that comply 

with both foreign and CFTC initial 

margin requirements.131

The Commission understands that 

CSEs relying on partial substituted 

compliance may face certain costs or 

challenges not experienced by non-U.S. 

CSEs that are eligible for full substituted 

compliance. Nevertheless, as discussed 

above, the Commission believes that 

granting substituted compliance more 

broadly (e.g., permitting both collection 

and posting of initial margin pursuant to 

the foreign requirements) would not be 

appropriate for a swap transaction 

involving a U.S. CSE or a U.S. 

Guaranteed CSE. Moreover, U.S. CSEs 

and U.S. Guaranteed CSEs that elect to 

rely on partial substituted compliance 

may realize savings in the form of 

reduced funding costs (to the extent that 

foreign jurisdiction requires less initial 

margin to be posted), and their non-U.S. 

counterparties may experience lower 

operational costs as a result of only 

having to comply with their home 

jurisdiction’s requirements. 

Finally, the Commission does not 

believe it would be appropriate to 

broaden the scope of substituted 

compliance available to swaps 

conducted through foreign branches of 

U.S. CSEs. A foreign branch is legally 

indistinguishable from the U.S. CSE 

itself, such that the whole U.S. CSE, and 

not merely the foreign branch, holds 

itself out to the market and assumes the 

risks of any uncleared swap transactions 

conducted by or through the foreign 

branch. Accordingly, swaps conducted 

through a foreign branch of a U.S. CSE 

are appropriately treated the same as 

swaps of the U.S. CSE as a whole. 

Moreover, if the Commission were to 

allow broader substituted compliance 

for swaps conducted through foreign 

branches than swaps conducted 

domestically, U.S. CSEs could be 

incentivized to conduct swap activity 

through foreign branches to avoid direct 

compliance with Commission’s margin 

requirements. 

ii. Uncleared Swaps of Non-U.S. CSEs 

(Including FCSs) Whose Obligations 

Under the Relevant Swap Are Not 

Guaranteed by a U.S. Person 

Under the Final Rule, consistent with 

the Proposed Rule, non-U.S. CSEs 

(including FCSs) whose obligations 

under the relevant uncleared swap are 


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132With respect to uncleared swaps of a non-U.S. 

CSE whose obligations under the swap are not 

guaranteed by a U.S. person, on the one hand, with 

a U.S. CSE or a U.S. Guaranteed CSE, on the other 

hand, substituted compliance would only be 

available for initial margin collected by the nonU.S. CSE whose obligations under the relevant 

swap are not guaranteed by a U.S. person, as 

discussed above. 

133For example, a non-U.S. CSE relying on the 

Exclusion or non-CFTC registered swap dealers may 

be able to realize cost savings and offer better 

pricing terms to foreign clients. 

134See ICI Global at 2, 5; IIB/SIFMA at 10. 

135See id. See also ISDA at 3 (Exclusion should 

be expanded to include any swap between a nonU.S. CSE, whether or not guaranteed, and any nonU.S. person counterparty that is not guaranteed by 

a U.S. person). 

136See IIB/SIFMA at 16. 

137See IIB/SIFMA at 16; ICI Global at 10–11. 

138See ICI Global at 10–11. 

139See also ISDA at 11 (fragmenting netting sets 

could increase risk and discourage use and 

employment of U.S. personnel). 

140See ICI Global at 11. See also IIB/SIFMA at 14 

(CEA section 2(i) does not authorize the 

Commission to regulate a foreign subsidiary solely 

due to potential for support from and risk to a U.S. 

parent entity because, absent a legal obligation to 

provide support, the ‘‘chain of intervening factors 

and events’’ that might lead to such support would 

not satisfy ‘‘direct’’ requirement in CEA section 

2(i)). 

141See IIB/SIFMA at 15. 

142See id. at 7. 

143See IIB/SIFMA at 16. 

not guaranteed by a U.S. person may 

avail themselves of substituted 

compliance to a greater extent than U.S. 

CSEs and U.S. Guaranteed CSEs. 

Specifically, where the obligations of a 

non-U.S. CSE (including an FCS) under 

the relevant swap are not guaranteed by 

a U.S. person, substituted compliance is 

available with respect to its uncleared 

swaps with any counterparty, other than 

a U.S. CSE or a U.S. Guaranteed CSE.132

The broad substituted compliance 

framework available to this category of 

non-U.S. CSEs reflects the 

Commission’s recognition of foreign 

jurisdictions’ supervisory interest in 

CSEs that are domiciled and operating 

in their jurisdictions. In addition, the 

Commission understands that 

compliance with two sets of margin 

regulations may lead to costs and 

burdens for non-U.S. CSEs not faced by 

their competitors in the local 

jurisdiction and may provide 

disincentives for foreign clients to 

transact with a non-U.S. CSE. The 

Commission believes that making 

substituted compliance broadly 

available to non-U.S. CSEs that are not 

guaranteed by a U.S. person may help 

to reduce the potential adverse impact 

on market efficiency and competition, 

without compromising the protections 

for the non-U.S. CSE and the U.S. 

financial markets. 

As discussed in the next section, a 

non-U.S. CSE that is not an FCS will be 

eligible for the Exclusion from the 

Commission’s margin rules under 

certain circumstances. However, 

uncleared swaps entered into by an FCS 

will not be eligible for any exclusion 

because of its relationship with its U.S. 

ultimate parent entity, and because of 

the possible negative impact of its swap 

activities on its U.S. ultimate parent 

entity and the U.S. financial system. As 

explained in section II.A.3.c. above, the 

financial position, operating results, and 

statement of cash flows of an FCS are 

included in the financial statements of 

the U.S. ultimate parent entity and 

therefore have a direct impact on the 

consolidated entity’s financial position, 

risk profile, and market value. The 

Commission is also concerned that 

extending the Exclusion to FCSs would 

incentivize U.S. entities to conduct their 

swap activities with non-U.S. 

counterparties through non-U.S. 

subsidiaries solely in order to avoid 

application of the Dodd-Frank Act 

margin requirements, leading to further 

bifurcation between U.S. and non-U.S. 

swap business. 

The Commission recognizes that its 

decision not to extend the Exclusion to 

FCSs could put them at a disadvantage 

relative to other non-U.S. market 

participants/swap dealers (including 

those that are CSEs).133 However, given 

the supervisory concerns raised by the 

nexus between FCSs and their U.S. 

ultimate parent entity, the Commission 

believes that extending the Exclusion to 

an FCS would not further the 

paramount statutory objective of 

ensuring the safety and soundness of a 

CSE and the stability of U.S. financial 

markets. The Commission notes that 

potential competitive disparities may be 

mitigated to the extent that the relevant 

foreign jurisdiction implements 

comparable margin requirements. 

3. Exclusion 

a. Comments 

Several commenters supported the 

Exclusion because they believed that it 

recognized the absence of a U.S. 

jurisdictional nexus.134 Nevertheless, 

these commenters requested that the 

Exclusion be expanded to include U.S. 

branches of non-U.S. CSEs and FCSs.135

With respect to U.S. branches, IIB/

SIFMA argued that distinguishing them 

would not be necessary from a riskmitigation perspective because the risk 

remains with the non-U.S. CSE outside 

the United States regardless of whether 

the non-U.S. CSE involves U.S. 

personnel.136 ISDA and ICI Global 

further argued that treating U.S. 

branches differently from the rest of the 

CSE could create ‘‘significant 

operational issues and credit risks.’’ 137

ICI Global stated that the same ISDA 

Master Agreement typically governs all 

transactions involving both the U.S. and 

non-U.S. branches of a non-U.S. CSE, 

and that not granting the Exclusion to 

swaps between a non-U.S. person and a 

U.S. branch of a non-U.S. CSE (whose 

obligations are not guaranteed by a U.S. 

person) may require parties to document 

transactions with the U.S. branch under 

a separate master agreement, which 

could create operational difficulties.138

ICI Global also expressed concern that 

disparate treatment of U.S. branches 

could lead to additional credit risk 

because counterparties might lose 

netting benefits under bankruptcy 

laws.139

With respect to FCSs, ICI Global 

argued that consolidation is insufficient 

to create a ‘‘direct’’ U.S. nexus because 

the U.S. ultimate parent is not under a 

legal obligation to support the FCS.140

IIB/SIFMA added that foreign 

jurisdictions have not proposed to apply 

margin rules to foreign, non-guaranteed 

subsidiaries and that the Commission 

should extend the Exclusion to avoid 

overlapping requirements that could 

lead market participants to avoid 

trading with an FCS.141 Although 

substituted compliance would 

potentially be available in place of the 

Exclusion, ISDA asserted that the 

difference between the Exclusion and 

substituted compliance is not costless, 

as affected swap dealers would incur 

costs of complying with any conditions 

imposed with respect to substituted 

compliance and with the Commission’s 

exercise of its related examination 

authority, in addition to lost business 

that could result if substituted 

compliance is not ‘‘seamless’’ and 

counterparties are ‘‘inconvenienced’’ by 

its application.142

As an alternative to extending the 

Exclusion to FCSs, IIB/SIFMA suggested 

that the Commission grant an exclusion 

to FCSs operating without a U.S. 

guarantee when transacting with nonU.S. persons operating without a U.S. 

guarantee, up to an aggregate 5 percent 

limit on the notional trading volume in 

uncleared swaps entered into by 

commonly controlled FCSs under the 

exclusion relative to the total notional 

swap trading volume of entities within 

the common U.S. ultimate parent 

entity’s consolidated group.143 IIB/

SIFMA argued that such a limited 

exclusion would achieve the 

Commission’s risk mitigation objectives 


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144See id. 

145See AFR at 2 (proposed rule would go ‘‘some 

distance’’ toward limiting evasion of Commission’s 

margin requirements); Better Markets at 5 (proposed 

rule ‘‘adequately captures’’ many foreign affiliates 

that may have escaped U.S. margin requirements 

through de-guaranteeing). 

146See AFR at 8 (foreign subsidiary of a U.S. 

financial end user that is not a CSE would not be 

defined as an FCS even if consolidated). 

147See AFR at 3. See also Better Markets at 2 

(Exclusion is needlessly complicated and indirect 

and Commission should address issue more 

completely by reverting to and updating approach 

in Guidance). 

148The Exclusion also does not apply if the 

counterparty is a U.S. branch of a non-U.S. CSE. See 

17 CFR 23.160(b)(2)(ii). 

149The Commission disagrees that the 

Commission lacks a jurisdictional nexus with 

respect to swaps subject to the Exclusion. To the 

contrary, as discussed above, by the terms of the 

relevant statutory provision, CEA section 4s(e), and 

the underlying purpose of that provision, the 

Commission’s authority to adopt margin rules 

applies to all CSEs, U.S. and non-U.S., and extends 

to all of their uncleared swaps, regardless of the 

counterparties’ domicile or the location of the 

swaps transaction. 

150 In this regard, the Commission notes that, as 

indicated in supra note 23, representatives of 26 

regulatory authorities (comprising 17 nations) 

participated in the WGMR that developed the 

BCBS–IOSCO framework. As of today, 24 of these 

26 regulatory authorities that participated in the 

WGMR have proposed a regulatory framework for 

margin for uncleared swaps, all of which are 

consistent with the BCBS–IOSCO framework. In 

addition, these 24 regulatory authorities have 

jurisdiction over more than 90% of the swaps 

activities in the world by any measure. 

151See Proposed Capital Rule, 76 FR 27802. 

152The term ‘‘financial end user’’ is defined in 

section 23.150 of the Final Margin Rule. 

153See 17 CFR 23.159. 

154See Prudential Regulators’ Final Margin Rule, 

80 FR at 74901 (setting forth the definition of 

‘‘foreign bank’’ for purposes of the Prudential 

Regulators’ Final Margin Rule). 

without directly regulating wholly nonU.S. counterparties.144

Both AFR and Better Markets 

expressed support for the proposal not 

to extend the Exclusion to FCSs, 

describing it as a means of addressing 

the issue of de-guaranteeing.145 AFR 

nevertheless expressed concern that the 

Exclusion would apply to a non-U.S. 

CSE when entering into a swap with a 

foreign subsidiary that is a financial end 

user that has a U.S. ultimate parent, and 

suggested that the Commission also 

deny the Exclusion in this case.146 AFR 

also suggested that the Commission 

‘‘supplement’’ its approach by further 

denying the Exclusion to a nonconsolidated, non-U.S. subsidiary that 

could, based on the facts and 

circumstances, have a ‘‘major impact on 

the financial well-being of the parent,’’ 

including circumstances where the 

parent does not use U.S. GAAP 

accounting.147

b. Final Rule 

The Commission has determined to 

adopt the Exclusion largely as proposed, 

with a modification that preserves the 

Commission’s intent with respect to the 

treatment of inter-affiliate swaps under 

the Final Margin Rule. Under the Final 

Rule, an uncleared swap entered into by 

a non-U.S. CSE with a non-U.S. 

counterparty (including a non-U.S. CSE) 

is excluded from the Commission’s 

margin rules, provided that neither 

counterparty’s obligations under the 

relevant swap are guaranteed by a U.S. 

person and neither counterparty is an 

FCS.148 This approach reflects the 

Commission’s recognition of foreign 

jurisdictions’ strong supervisory interest 

in the uncleared swaps of non-U.S. 

CSEs and their non-U.S. counterparties, 

both of which are domiciled and operate 

abroad. Under these circumstances, the 

Commission believes that it is 

appropriate to make a limited exception 

to the principle of firm-wide application 

of margin requirements, consistent with 

comity principles, so as to exclude a 

narrow class of uncleared swaps 

involving a non-U.S. CSE and a nonU.S. counterparty.149

The Commission notes that a non-U.S. 

CSE that can avail itself of the Exclusion 

is still subject to the Commission’s 

margin rules with respect to all other 

uncleared swaps (i.e., those that do not 

qualify for the Exclusion), with the 

possibility of substituted compliance. 

And any excluded swaps may be 

covered by the margin requirements of 

another jurisdiction that adheres to the 

BCBS–IOSCO framework.150

Additionally, the non-U.S. CSE would 

be subject to the Commission’s capital 

requirements, which, as proposed, 

would impose a capital charge for 

uncollateralized exposures.151

The Commission considered 

comments urging a broader scope of the 

Exclusion to include, for example, any 

FCSs so long as their swaps are not 

guaranteed by a U.S. person or 

alternatively, do not exceed a ‘‘de 

minimis’’ level of swap activity. 

However, the Commission does not 

believe that extending the Exclusion to 

uncleared swaps of FCSs is appropriate 

given the nature of their relationship to 

their U.S. ultimate parent entity. The 

limited scope of the Exclusion reflects 

that the benefits of the margin 

requirement are achieved when it is 

applied to all CSEs and on a firm-wide 

basis and therefore, any exception needs 

to be carefully tailored to avoid creating 

a significant supervisory gap and 

inappropriate levels of risk to the CSE 

and the U.S. financial system. 

The Commission also disagrees with 

comments that the Exclusion is overly 

broad because it would extend to a swap 

between a non-U.S. CSE and a foreign 

subsidiary of a U.S. financial end 

user.152 The Commission notes that 

such a foreign subsidiary would not be 

an FCS even if it is consolidated with 

its U.S. parent because it is not a CSE. 

The Commission believes that a swap 

between such a foreign subsidiary and 

a non-U.S. CSE should be eligible for 

the Exclusion because financial end 

users are not covered swap entities and 

are likely to include many entities that 

do not conduct a significant level of 

swap activities; as such, their swap 

activities would not have the same 

effect on the U.S. ultimate parent entity 

as would a covered swap entity’s. 

Therefore, the Exclusion applies to 

qualifying non-U.S. CSEs when 

transacting with foreign subsidiaries 

that are financial end users that have a 

U.S. ultimate parent entity. 

Under the Final Margin Rule, a CSE 

is not required to collect initial margin 

from its affiliate, provided, among other 

things, that affiliate collects initial 

margin on its market-facing swaps or is 

subject to comparable initial margin 

collection requirements (in the case of 

non-U.S. affiliates that are financial end 

users) on its own market-facing swaps. 

In order to preserve the Commission’s 

intent with respect to the treatment of 

inter-affiliate swaps under the Final 

Margin Rule, the Exclusion is not 

available if the market-facing swap of 

the non-U.S. CSE (that is otherwise 

eligible for the Exclusion) is not subject 

to comparable initial margin collection 

requirements in the home jurisdiction 

and any of the risk associated with the 

uncleared swap is transferred, directly 

or indirectly, through inter-affiliate 

transactions, to a U.S. CSE or a U.S. 

Guaranteed CSE. This condition is 

intended to ensure that inter-affiliate 

swaps are not used to avoid the 

requirement to collect initial margin 

from third-parties.153 The limitation on 

the Exclusion is consistent with that 

rationale. 

Under the Final Rule, uncleared 

swaps of a U.S. branch of a non-U.S. 

CSE are not eligible for the Exclusion. 

The Commission does not believe 

extending the Exclusion to U.S. 

Branches would be appropriate. 

Generally speaking, U.S. branches of 

foreign banks 154 have a Prudential 

Regulator and must therefore comply 

with the Prudential Regulators’ margin 

rules. The Prudential Regulators’ Final 

Margin Rule does not grant an exclusion 

for the uncleared swaps of such U.S. 

branches on the basis that U.S. branches 

of foreign banks clearly operate within 

the United States and could pose risk to 


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155See Prudential Regulators’ Final Margin Rule, 

80 FR at 74883. 156Under the International Banking Act of 1978, 

12 U.S.C. 3101 et seq., U.S. branches are generally 

treated the same as national banks operating in that 

same location and are subject to the same laws, 

regulations, policies, and procedures that apply to 

national banks. 157That is, a U.S. branch of a non-U.S. CSE that 

is permitted to operate outside of the Commission’s 

margin requirements may, by virtue of being subject 

to reduced or even no margin requirements, be able 

to offer a more competitive price to U.S. clients 

than a U.S. CSE. 158As noted above in section II.B.3.a., some 

commenters suggested that not extending the 

Exclusion to U.S. branches of non-U.S. CSEs could 

require non-U.S. CSEs to document transactions 

with the U.S. branch under a separate ISDA Master 

Agreement, creating operational challenges. 

However, because such U.S. branches are eligible 

for substituted compliance, use of a separate credit 

support agreement to document transactions with a 

non-U.S. CSE’s U.S. branch should only be 

necessary where foreign margin requirements are 

not comparable. Although the Commission 

acknowledges that the non-U.S. CSE may need to 

use a separate credit support agreement for U.S. 

branch transactions in this limited case, the 

Commission nevertheless believes that it would not 

be appropriate to extend the Exclusion to U.S. 

branches of non-U.S. CSEs for the reasons discussed 

above. 

159The term ‘‘emerging market’’ is not used in the 

Final Rule because some jurisdictions covered by 

this provision of the Final Rule are not aptly 

described by that term. 

160See, e.g., ABA/ABASA at 3–5; IIB/SIFMA at 3, 

11–13; ISDA at 2, 9–10; JBA at 10. 

161See ABA/ABASA at 5. See also ISDA at 9–10 

(further recommending that Commission impose 

recordkeeping requirement as condition to 

exemption, as was included in Guidance). 

162See ABA/ABASA at 4–5; IIB/SIFMA at 13. See 

also ISDA at 9 (‘‘emerging market counterparty’’ 

should be defined as any non-U.S. person that is 

not guaranteed by a U.S. person and that is not 

located in one of six jurisdictions identified in 

Guidance as having submitted requests for 

comparability determinations). 

163See ABA/ABASA at 1 n.5 (exemption should 

apply to ‘‘U.S.-based banking organizations, 

however they are operating in emerging markets, 

including, but not limited to, through a foreign 

branch of a prudentially-regulated CSE’’); IIB/

SIFMA; ISDA. 

164See ABA/ABASA at 1 n.5, 3; IIB/SIFMA at 12; 

ISDA at 9. 

165See ISDA at 10 (availability of the exemption 

should be extended to FCSs if Commission does not 

otherwise make Exclusion available to them). 

166See ABA/ABASA at 5; IIB/SIFMA at 13 

(approach would be appropriate given that risk to 

U.S. guarantor provides basis for extraterritorial 

application of margin rules to U.S. Guaranteed 

CSEs). 

167See, e.g., ABA/ABASA at 4 (local banking 

sector may lack operational infrastructure to 

support daily exchange of margin or third-party 

custodial arrangements); IIB/SIFMA (local legal 

regime may not recognize concept of netting); ISDA 

at 4 (emerging market counterparties may be unable 

to comply with U.S. margin requirements). 

168See ABA/ABASA at 4 (absent an exemption, 

U.S. CSEs could lose not only derivatives business 

but associated commercial and investment banking 

relationships); IIB/SIFMA at 12 (emerging market 

counterparties are likely to move business away 

from U.S. CSEs and U.S. Guaranteed CSEs in order 

to avoid being subject to margin requirements); 

ISDA at 10 (dealing activities that would fall within 

exemption may be an ‘‘integral element’’ of CSEs’ 

global business). 

169See ABA/ABASA at 3; IIB/SIFMA at 12–13; 

ISDA at 10. 

170See IIB/SIFMA at 12 (arguing that de minimis 

nature of exemption ensures that nexus of swap 

activity to the United States is not ‘‘significant’’). 

171For convenience, the term ‘‘non-segregation 

jurisdiction’’ is used in the preamble of this release. 

172The Final Margin Rule addresses the manner 

in which the margin collected or posted by a CSE 

must be held and requires, among other things, that 

the CSE must have a custodial agreement 

prohibiting rehypothecation or otherwise transfer 

the initial margin held by the custodian. See 17 CFR 

23.157. The custodial requirements are critical to 

ensuring the proper segregation and protection of 

CSE funds. 

the U.S. financial system.155 To the 

extent that a U.S. branch of a non-U.S. 

CSE is subject to the Commission’s 

requirements rather than a Prudential 

Regulator, the Final Rule appropriately 

harmonizes with the Prudential 

Regulators.156 Additionally, given that 

U.S. branches operate within the United 

States, allowing their swaps to be 

excluded from application of the 

Commission’s margin requirements 

could disadvantage U.S. CSEs when 

competing with U.S. branches for U.S. 

clients 157 and create incentives for CSEs 

to operate through U.S. branches solely 

for purposes of avoiding the Dodd-Frank 

Act margin requirements. Accordingly, 

the Commission believes that a non-U.S. 

CSE should be subject to the 

Commission’s margin requirements 

when conducting swap activities from 

within the United States by or through 

a U.S. branch.158

4. Special Provision for Non-Segregation 

Jurisdictions 159

a. Comments 

Several commenters supported the 

creation of a de minimis exception 

similar to the emerging markets 

exemption set out in the Guidance.160

Specifically, commenters recommended 

that U.S. CSEs be exempt from the 

margin requirements when trading with 

‘‘emerging market counterparties’’ 

provided that the aggregate notional 

volume of its uncleared swaps with 

emerging market counterparties does 

not exceed 5 percent of the CSEs’ total 

notional swap trading volume, both 

cleared and uncleared.161 They further 

recommended defining ‘‘emerging 

market counterparty’’ as a non-U.S. 

person that is (a) not a registered CSE, 

(b) not guaranteed by a U.S. person, and 

(c) not located in a jurisdiction covered 

by a comparability determination for 

uncleared swaps margin rules issued by 

the Commission.162 Commenters 

generally agreed that the exception 

should apply to foreign branches of U.S. 

CSEs,163 but some commenters also 

recommended that it be extended to 

U.S. Guaranteed CSEs 164 and FCSs.165

For swaps between U.S. Guaranteed 

CSEs and emerging market 

counterparties, ABA/ABASA and IIB/

SIFMA recommended that the de 

minimis threshold apply to the 

aggregate volume of uncleared swaps 

guaranteed by a particular U.S. person, 

rather than to the trading volume of the 

U.S. Guaranteed CSE itself.166

In support of such an exception, 

commenters argued that legal and 

operational constraints in emerging 

market jurisdictions could make 

compliance with margin rules difficult, 

if not impossible.167 As a result, broad 

application of the margin requirements 

to these swaps could negatively impact 

the competitiveness of registered 

CSEs.168 Commenters argued that by 

limiting the exception to CSEs with a de 

minimis level of swaps activity, the 

Commission could accomplish the goal 

of ensuring a CSE’s safety and 

soundness but with less disruption to 

existing business relationships than the 

exchange of initial and variation margin 

would impose.169 IIB/SIFMA also 

argued that the exception would be 

consistent with CEA section 2(i), and 

encouraged the Commission to 

coordinate with foreign regulators to 

develop a consistent global approach to 

swaps with emerging market 

counterparties.170

b. Final Rule 

The Commission is adopting a special 

provision for swaps with counterparties 

in foreign jurisdictions where 

limitations in the legal or operational 

infrastructure of the jurisdiction make it 

impracticable for the CSE and its 

counterparty to comply with the 

custodial arrangement requirements in 

the Final Margin Rule (‘‘non-segregation 

jurisdictions’’).171 The Commission 

understands that CSEs may transact 

swaps with counterparties located in 

foreign jurisdictions that do not have 

legal or operational infrastructures to 

support custodial arrangements required 

under the Final Margin Rule.172 In the 

face of these legal and operational 

impediments, FCSs and foreign 

branches of U.S. CSEs would be forced 

to discontinue their swaps business 

with clients located in these 

jurisdictions. Taking these factors into 

consideration, the Commission has 

determined to include a special 

provision to accommodate this unique 

circumstance. The Commission notes 

that the Prudential Regulators adopted a 

similar provision in their final margin 

rules. 

Under section 23.160(e) of the Final 

Rule, an FCS or a foreign branch of a 

U.S. CSE would be eligible to engage in 


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173See 17 CFR 23.152(b). 

174See 17 CFR 23.157(b). The Commission notes 

that with respect to initial margin collected by a 

qualifying CSE in a non-segregation jurisdiction in 

reliance on § 23.160(e), § 23.157(c) also would not 

apply to initial margin that is collected by the CSE. 

Section 23.157(c) requires a CSE to enter a custodial 

agreement meeting specified requirements with 

respect to any funds that the CSE holds (i.e., initial 

margin posted or collected by the CSE). Because 

CSEs that rely on § 23.160(e) are not required to 

hold collateral in accordance with § 23.157(b) for 

initial margin that they collect, they also would not 

be required to comply with § 23.157(c) with respect 

to initial margin that they collect. 

175This provision only provides relief from the 

custodial requirement for collection of initial 

margin in § 23.157(b). Accordingly, FCSs and 

foreign branches of U.S. CSEs remain subject to the 

requirements of § 23.157(a) and (c) of the Final 

Margin Rule with respect to initial margin that is 

posted in a non-segregation jurisdiction (which the 

CSE would be unable to comply with in a nonsegregation jurisdiction). 

176 If the special provision for non-segregation 

jurisdictions is available, then the special provision 

for non-netting jurisdictions (discussed in the next 

section) would not be available even if the relevant 

foreign jurisdiction is also a ‘‘non-netting 

jurisdiction.’’ As explained in supra note 174, 

because CSEs that rely on § 23.160(e) are not 

required to hold collateral in accordance with 

§ 23.157(b) for initial margin that they collect, they 

would not be required to comply with § 23.157(c) 

with respect to initial margin that they collect. 

177The special provision applies where inherent 

limitations in the legal or operational infrastructure 

in the applicable foreign jurisdiction make it 

impracticable for the FCS (or foreign branch of a 

U.S. CSE) and its counterparty to post initial margin 

in compliance with the custodial requirements of 

§ 23.157 of the Final Margin Rule. The special 

provision does not apply if the CSE that is subject 

to the foreign regulatory restrictions is permitted to 

post collateral for the uncleared swap in 

compliance with the custodial arrangements of 

§ 23.157 in the United States or a jurisdiction for 

which the Commission has issued a comparability 

determination with respect to § 23.157. See 17 CFR 

23.160(e)(1) and (2). 

178The Commission would expect the CSE’s 

counterparty to be a local financial end user that is 

required to comply with the foreign jurisdiction’s 

laws and that is prevented by regulatory restrictions 

in the foreign jurisdiction from posting collateral for 

the uncleared swap in compliance with the 

custodial arrangements of § 23.157 in the United 

States or a jurisdiction for which the Commission 

has issued a comparability determination under the 

Final Rule, even using an affiliate. 

179The CSE must collect initial margin in 

accordance with § 23.152(a) on a gross basis, in the 

form of cash pursuant to § 23.156(a)(1)(i) and post 

and collect variation margin in accordance with 

§ 23.153(a) in the form of cash pursuant to 

§ 23.156(a)(1)(i). See § 23.160(e)(4) of the Final Rule. 

180Section 23.154(b)(2)(v) of the Final Margin 

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 ‘‘eligible master netting agreement.’’ 

See 17 CFR 23.154(b)(2)(v). 181See 17 CFR 23.160(e). 

uncleared swaps with certain non-U.S. 

counterparties in non-segregation 

jurisdictions, without complying with 

either the requirement to post initial 

margin 173 or the custodial arrangement 

requirements that pertain to initial 

margin collected by a CSE under the 

Final Margin Rule,174 subject to certain 

conditions.175 This special provision 

reflects the Commission’s recognition 

that CSEs would otherwise be precluded 

from engaging in any uncleared swaps 

in these foreign jurisdictions as they 

cannot satisfy the custodial 

requirements of the Final Margin Rule. 

The Commission clarifies that the 

special provision for non-segregation 

jurisdictions only provides relief from 

the specified requirements; all other 

margin rules in part 23 of the 

Commission’s regulations (with the 

exception of the special provision for 

non-netting jurisdictions) would 

continue to apply.176

This provision is narrowly tailored to 

limit its availability to FCSs (and foreign 

branches of U.S. CSEs) in foreign 

jurisdictions where compliance with the 

Final Margin Rule’s custodial 

requirements is effectively precluded 

due to impediments inherent in the 

relevant foreign jurisdiction.177 In 

addition, this provision is only available 

in such jurisdictions if the following 

conditions are satisfied. First, the CSE’s 

counterparty must be a non-U.S. person 

that is not a CSE, and the counterparty’s 

obligations under the swap must not be 

guaranteed by a U.S. person.178 Second, 

the CSE must collect initial margin in 

cash on a gross basis, and post and 

collect variation margin in cash, in 

accordance with the Final Margin 

Rule.179 The collection of margin on a 

gross basis ensures that the CSE has 

adequate collateral in the event of a 

counterparty or custodial default; 

similarly, not requiring the CSE to post 

initial margin minimizes the amount of 

collateral that may not be recovered if 

the CSE’s counterparty defaults. Third, 

for each broad risk category set out in 

section 23.154(b)(2)(v) of the Final 

Margin Rule,180 the total outstanding 

notional value of all uncleared swaps in 

that broad risk category, as to which the 

CSE is relying on section 23.160(e), may 

not exceed 5 percent of the CSE’s total 

outstanding notional value for all 

uncleared swaps in the same broad risk 

category. Accordingly, a 5 percent limit 

applies to each of the four broad risk 

categories set forth in section 

23.154(b)(2)(v): Credit, equity, foreign 

exchange and interest rates (considered 

together as a single asset class), and 

commodities. Fourth, the CSE must 

have policies and procedures ensuring 

that it is in compliance with all of the 

requirements of this exception. Fifth, 

the CSE must maintain books and 

records properly documenting that all of 

the requirements of this exception are 

satisfied.181

In adopting this provision, the 

Commission considered the various 

alternatives endorsed by commenters, 

including the adoption of a blanket 

exclusion, subject to a transactional 

volume limit (e.g., using a 5 percent 

limit patterned after a limited exclusion 

for certain jurisdictions in the Guidance, 

as discussed in section II.B.4.a. above). 

However, given the importance of the 

Final Margin Rule’s requirements to the 

protection of CSEs and the broader 

financial system, and the potential for a 

blanket exclusion to incentivize market 

participants to structure their swap 

business solely to avoid application of 

the Commission’s margin requirements, 

the Commission believes that a more 

targeted approach that provides relief 

from only from the requirement to post 

initial margin and the custodial 

arrangement requirements that pertain 

to initial margin collected by a CSE, as 

described above, is appropriate. While 

the Commission believes that the relief 

provided by the special provision is 

appropriate because FCSs and foreign 

branches of U.S. CSEs would otherwise 

be effectively precluded from entering 

swaps in non-segregation jurisdictions, 

the Commission also believes that, in 

order to protect the safety and 

soundness of FCSs and foreign branches 

of U.S. CSEs relying on the special 

provision, the exception from the 

specified requirements is appropriately 

limited, as these CSEs are integral to the 

stability of the U.S. financial system. 

Therefore, rather than provide an 

exception from all of the Commission’s 

margin requirements to CSEs that 

engage in swaps activities in nonsegregation jurisdictions up to a 5% 

limit, as suggested by some commenters, 

the special provision only excepts 

qualifying FCSs and foreign branches of 

U.S. CSEs from certain specified 

requirements, subject to specified 

conditions (including a 5 percent limit 

in each of four broad risk categories set 

forth in § 23.154(b)(2)(v)), as described 

above. The Commission believes that 

imposing a 5 percent limit in each of the 

four broad risk categories set out in 

§ 23.154(b)(2)(v) is necessary because 

the FCS (or foreign branch of a U.S. 

CSE) may have a large notional amount 

outstanding in the foreign exchange and 

interest rate category (which is 

considered together as a single class) 

which would effectively eviscerate any 

limit in other lower notional risk 

categories. 

The Commission believes that the 

total outstanding notional value of all 


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182See ABA/ABASA at 5 n.14; IIB/SIFMA at 13 

n.44; ISDA at 10 (requesting an exemption for 

jurisdictions where getting a ‘‘clean’’ netting or 

collateral opinion is ‘‘not possible’’); JBA at 10. 

183See ISDA at 10; JBA at 10. 

184See ISDA at 10 (further arguing that a CSE may 

not be able to effectively foreclose on margin in 

event of a counterparty default); JBA at 10. 

185See ISDA at 10. 

186See ISDA at 10–11 (requesting exemption from 

requirement to post initial margin); JBA at 10 

(requesting exemption from both initial and 

variation margin requirements because, under such 

conditions, amount of variation margin to be posted 

or collected cannot be fixed). 

187See ISDA at 11. 

188See id. 

189As used in this release, a ‘‘non-netting 

jurisdiction’’ is a jurisdiction in which a CSE 

cannot conclude, with a well-founded basis, that 

the netting agreement with a counterparty in that 

foreign jurisdiction meets the definition of an 

‘‘eligible master netting agreement’’ set forth in the 

Final Margin Rule. See 17 CFR 23.151. 

190The Final Margin Rule permits offsets in 

relation to either initial margin or variation margin 

calculation when (among other things), the offsets 

related to swaps are subject to the same eligible 

master netting agreement. This ensures that CSEs 

can effectively foreclose on the margin in the event 

of a counterparty default, and avoids the risk that 

the administrator of an insolvent counterparty will 

‘‘cherry-pick’’ from posted collateral to be returned. 

191As noted above, in the event that the special 

provision for non-segregation jurisdictions applies 

to a CSE, then the special provision for non-netting 

jurisdictions would not apply to the CSE even if the 

relevant jurisdiction is also a ‘‘non-netting 

jurisdiction.’’ In this circumstance, the CSE must 

collect the gross amount of initial margin in cash 

(but would not be required to post initial margin), 

and post and collect variation margin in cash in 

accordance with the requirements of the special 

provision for non-segregation jurisdictions, as 

discussed in section II.B.4.b. 

192See § 23.160(d) of the Final Rule. 

193The Commission agrees with commenters that 

without enforceable netting and collateral 

arrangements, there is a risk that the administrator 

of an insolvent counterparty will ‘‘cherry-pick’’ 

from posted collateral to be returned in the event 

of insolvency. This would result in an increase in 

the risk in posting collateral, because a CSE may not 

be able to effectively foreclose on the margin in the 

event its counterparty defaults. 

194See 17 CFR 23.160(c). 

uncleared swaps as to which an FCS 

relies on § 23.160(e) should not exceed 

5 percent of the FCS’s total outstanding 

notional amount of uncleared swaps (in 

each of the four broad risk categories), 

rather than the total notional 

outstanding amount of uncleared swaps 

of its ultimate parent entity. Using the 

ultimate parent entity’s swap activity as 

the basis for the formula could allow the 

FCS to engage in significant levels of 

swap activity in non-segregation 

jurisdictions based on swap activities of 

its affiliates, rendering the 5 percent 

limit meaningless. In addition, as an 

FCS is a registered CSE, its swap 

activities with U.S. persons were 

sufficient to require its registration in 

the United States, and therefore its swap 

activity in the non-segregation 

jurisdiction would never account for all 

of the CSE’s swap dealing activity. 

5. Special Provision for Non-Netting 

Jurisdictions 

a. Comments 

Commenters generally agreed that, at 

a minimum, the Commission should 

provide an exception for swaps with 

counterparties located in jurisdictions 

in which netting, collateral or third 

party custodial arrangements may not be 

legally effective, including in a 

counterparty’s insolvency.182 ISDA and 

JBA proposed that an exception for nonnetting jurisdictions should apply up to 

5 percent of the aggregate notional 

amount of a CSE’s uncleared swaps.183

They argued that, without enforceable 

netting and collateral arrangements, a 

bankruptcy administrator could ‘‘cherry 

pick’’ when determining the return of 

posted collateral in the event of 

insolvency.184 ISDA further argued that 

imposing margin in such cases could 

severely limit swaps activity in nonnetting jurisdictions and cause 

significant disruptions in financial 

markets.185

ISDA and JBA further recommended 

that, absent an exception for non-netting 

jurisdictions, CSEs should have at least 

some exception from the requirement to 

collect or post margin.186 According to 

ISDA, without such an exception, a CSE 

could be prevented from applying 

collateral to the obligations of the 

counterparty and face difficulties in 

recovering it.187 ISDA argued that 

posting margin could therefore increase 

risk to the CSE, while an exception 

could bypass segregation problems in 

the non-netting jurisdiction.188

b. Final Rule 

The Commission is adopting a special 

provision, also included in the 

Prudential Regulators’ Final Margin 

Rule, for non-netting jurisdictions.189

Under the Final Rule, a CSE that cannot 

conclude, with a well-founded basis, 

that the netting agreement with a 

counterparty in a foreign jurisdiction 

meets the definition of an ‘‘eligible 

master netting agreement’’ set forth in 

the Final Margin Rule may nevertheless 

net uncleared swaps in determining the 

amount of margin that it posts, provided 

that certain conditions are met.190 In 

order to avail itself of this special 

provision, the CSE must treat the 

uncleared swaps covered by the 

agreement on a gross basis in 

determining the amount of initial and 

variation margin that it must collect, but 

may net those uncleared swaps in 

determining the amount of initial and 

variation margin it must post to the 

counterparty, in accordance with the 

netting provisions of the Final Margin 

Rule.191 Requiring CSEs to calculate and 

collect initial margin on a gross basis is 

intended to ensure that the CSE can 

obtain the collateral posted with the 

counterparty in the event of 

counterparty default. As with the 

special provision for non-segregation 

jurisdictions in section 23.160(e) of the 

Final Rule, this provision is carefully 

tailored to allow CSEs to enter into 

uncleared swaps in ‘‘non-netting’’ 

jurisdictions but without abandoning 

the key protections behind the netting 

requirement under the Final Margin 

Rule. A CSE that enters into uncleared 

swaps in ‘‘non-netting’’ jurisdictions in 

reliance on this provision must have 

policies and procedures ensuring that it 

is in compliance with the special 

provision’s requirements, and maintain 

books and records properly 

documenting that all of the 

requirements of this exception are 

satisfied.192

The Commission considered ISDA’s 

request that it adopt a blanket exclusion, 

subject to a percentage limitation based 

on the level of swap activity. However, 

the Commission believes that a blanket 

exclusion, even with a transactional 

limit, presents a significant risk that the 

safety and soundness of a CSE engaged 

in swaps in non-netting jurisdictions 

would be insufficiently protected 

because, without the collection of 

sufficient margin, the CSE could be 

unduly exposed to counterparty default. 

The Commission also considered, but 

determined to not adopt, ISDA’s request 

that posting to counterparties in nonnetting jurisdictions not be required.193

Because the posting requirement serves 

to limit the ability of a CSE to assume 

excessive risk, the Commission believes 

that CSEs should be required to post 

margin in order to advance the 

objectives of the margin mandate. 

C. Comparability Determinations 

As discussed above, consistent with 

CEA section 2(i) and comity principles, 

the Final Rule permits eligible CSEs to 

rely on substituted compliance to the 

extent that the Commission determines 

the relevant foreign jurisdiction’s 

margin requirements are comparable to 

the Commission’s. Specifically, the 

Final Rule outlines a framework for the 

Commission’s comparability 

determinations, including eligibility and 

submission requirements for requesters 

and the Commission’s standard of 

review for making comparability 

determinations.194


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195See proposed 17 CFR 23.160(a)(3) (defining 

‘‘International Standards’’ as based on the BCBS– 

IOSCO framework). 

196See Proposal, 80 FR at 41389. 

197See id. 

198See id. (‘‘[T]he Commission would evaluate 

whether a foreign jurisdiction has rules and 

regulations that achieve comparable outcomes. If it 

does, the Commission believes that a comparability 

determination may be appropriate, even if there 

may be differences in the specific elements of a 

particular regulatory provision.’’). 

199The Commission also requested comment on 

the scope of the Commission’s proposed substituted 

compliance regime, whether the Commission 

should develop an interim process for 

comparability determinations that would take into 

account differing implementation timeliness for 

margin rules by other foreign jurisdictions, and the 

need for an emerging markets exception. Comments 

received in response to these questions were 

addressed above. 

200See proposed 17 CFR 23.160(c)(2)–(3); 

Proposal, 80 FR at 41389–90. 

201See, e.g., AIMA/IA at 3–4 (absent ‘‘automatic 

substituted compliance’’ for any transaction 

involving an entity from a jurisdiction that 

participated in the WGMR, Commission should 

make comparability determinations based ‘‘on 

broad comparability of requirements rather than 

detailed correspondence of rules’’); ICI Global at 9– 

10; IIB/SIFMA at 3; ISDA at 7; JBA at 9; Vanguard 

at 3. 

202See JBA at 9 (for example, while Commission’s 

proposed margin rule with respect to eligible 

collateral for variation margin was narrower in 

scope than rule proposed by European or Japanese 

authorities, foreign regulations are not necessarily 

less effective from a risk mitigation perspective). 

203See, e.g., ICI Global at 10 (proposed approach 

to determining comparability is ‘‘unnecessarily 

complicated’’ and effectively requires comparability 

with respect to ‘‘each particular aspect’’ of the 

foreign jurisdiction’s margin regime); ISDA at 7 

(‘‘complexity and specificity’’ of Commission’s 

proposed approach is ‘‘not consistent with a general 

outcome-based approach’’). 

204See IIB/SIFMA at 9 (element-by-element 

approach would result in ‘‘stricter-rule-applies’’ 

approach). 

205See id. at 10 (margin regimes that comply with 

International Standards would likely satisfy such a 

test). 

206See, e.g., PensionsEurope at 2 (there are ‘‘some 

benefits’’ to an element-by-element approach but, 

by creating potential for partial comparability 

determinations, proposed rule would add ‘‘a 

significant amount of complexity’’ and ‘‘likely 

create more problems than it solves’’); SIFMA AMG 

at 8 (‘‘the potential for piecemeal comparability 

determinations’’ would lead to ‘‘uncertainty, 

compliance difficulties and the potential for margin 

disputes’’); Vanguard at 4–5 (market participants 

would be required to develop and implement a new 

system designed to apply the Commission’s 

comparability determinations and ensure 

simultaneous compliance with two sets of rules). 

207See, e.g., ICI Global at 10; IIB/SIFMA at 9; 

SIFMA at 8 (Commission’s prior issuance of partial 

comparability determinations with respect to swap 

trading relationship documentation led to 

confusion and disagreements regarding which rule 

sections may be complied with via substituted 

compliance). 

208See IIB/SIFMA at 9; SIFMA AMG at 7. 

209See ISDA at 8 (highlighting background 

discussion of element 7 of the BCBS–IOSCO 

framework (interaction of national regimes in crossborder transactions), which encourages cooperation 

among regulatory regimes to produce ‘‘sufficiently 

consistent and non-duplicative’’ margin 

requirements). 

210See, e.g., ICI Global at 2, 10 (Commission 

should ‘‘consider [] the margin rules of a 

jurisdiction in their entirety’’ and not ‘‘mak[e] 

determinations for each element of the margin 

rules’’); IIB/SIFMA at 9–10; SIFMA AMG at 8; 

Vanguard at 4–5. 

211See, e.g., AIMA/IA at 3; FSR at 2–5; ISDA at 

7; SIFMA AMG at 8; Vanguard at 5. 

1. Proposed Rule 

As proposed, section 23.160(c) 

established a process for requesting 

comparability determinations. 

Specifically, the proposed rule 

identified persons eligible to request a 

comparability determination (CSEs 

eligible to rely on substituted 

compliance and any relevant foreign 

regulatory authorities) and the 

information and documentation they 

should provide the Commission, 

including how the relevant foreign 

jurisdiction’s margin requirements 

address the various elements of the 

Commission’s margin regime (e.g., the 

products and entities subject to margin 

requirements). 

The proposed rule also identified 

several factors the Commission would 

consider in making a comparability 

determination, such as how the relevant 

foreign margin requirements compare to 

International Standards 195 and whether 

they achieve comparable outcomes to 

the Commission’s requirements. The 

Commission explained that its analysis 

would follow an outcome-based 

approach, one that would focus on 

evaluating the outcomes and objectives 

of the foreign margin requirements and 

not require them to be identical to the 

Commission’s margin requirements.196

The Commission further explained that 

it would review a foreign margin 

regime’s comparability on an elementby-element basis, such that a foreign 

jurisdiction’s margin requirements 

could be deemed comparable with 

respect to some elements of the 

Commission’s margin requirements and 

not others.197 The Commission made 

clear, however, that consistent with its 

outcome-based approach, a 

comparability determination could be 

appropriate even if the foreign 

jurisdiction approaches an element 

differently.198

The proposed rule concluded by 

explaining the regulatory effect of 

complying with a foreign jurisdiction’s 

margin requirements in reliance on a 

comparability determination, such that 

a violation of a foreign margin 

requirement could constitute a violation 

of the Commission’s corresponding 

requirement. It also codified the 

Commission’s authority to condition or 

otherwise modify any comparability 

determination it issues. 

The Commission requested comment 

on all aspects of proposed 

§ 23.160(c).199

2. Comments 

Commenters generally focused on the 

Commission’s proposed approach to 

evaluating the comparability of a foreign 

jurisdiction’s margin regime.200

Commenters supported an approach 

that would focus on the regulatory 

objectives and outcomes of the relevant 

margin regimes and not require 

uniformity with the Commission’s rule 

provisions.201 JBA, for instance, urged 

the Commission not to deny a 

comparability determination because a 

Commission rule is ‘‘stricter,’’ but to 

focus on whether the substance of the 

foreign jurisdiction’s rules effectively 

achieves the objective of mitigating 

risk.202

Commenters expressed concern, 

however, that the Commission’s 

proposed approach was overly 

complicated and would undermine an 

outcome-based approach.203 IIB/SIFMA 

described the Commission’s proposed 

approach as too ‘‘granular,’’ requiring 

‘‘consistency at a level of detail that 

ignores the overall risk mitigating 

impact’’ of a foreign jurisdiction’s 

margin regime.204 IIB/SIFMA suggested 

that the ‘‘test for comparability’’ should 

be ‘‘whether differences between the 

regimes would, in the aggregate, create 

a significant and unacceptable level of 

risk to CSEs or the U.S. financial 

system.’’ 205

Commenters also expressed concern 

that issuing comparability 

determinations with respect to some but 

not all of a foreign jurisdiction’s margin 

requirements would be challenging and 

costly to implement.206 As a result, 

market participants would either default 

to the Commission’s margin 

requirements, undercutting the benefits 

of substituted compliance,207 or modify 

their cross-border activities to avoid 

Commission regulation, increasing 

market fragmentation.208 ISDA further 

argued that an element-by-element 

approach would be inconsistent with 

the goals of the BCBS–IOSCO 

framework to avoid ‘‘duplicative or 

conflicting margin requirements’’ and 

ensuring ‘‘substantial certainty’’ as to 

which country’s margin rules apply.209

Commenters urged the Commission to 

evaluate and issue a comparability 

determination for a foreign jurisdiction’s 

margin regime as a whole.210

A majority of commenters also 

encouraged the Commission to make 

consistency with the BCBS–IOSCO 

framework the primary focus of its 

comparability determinations.211 FSR 


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212See proposed 17 CFR 23.160(c)(3)(iii). 

213See FSR at 5–6. 

214See id. at 3–4 (pointing to differences in the 

approaches proposed by the European Market 

Infrastructure Regulation and the Commission with 

regard to certain topics (e.g., eligible collateral for 

variation margin) and expressing concern that, 

under the Proposal, the Commission would reject 

comparability even though both proposed 

approaches are consistent with BCBS–IOSCO 

framework). 

215See id. at 3. See also Vanguard at 5 (‘‘unique 

local legal or market structure issues’’ may render 

certain individual elements of a foreign 

jurisdiction’s margin regime not comparable to 

Commission’s margin rules but foreign regime’s 

‘‘overall outcome’’ may nevertheless be consistent 

with BCBS–IOSCO framework). 

216See id. at 2 (BCBS–IOSCO frameworkcompliant regimes would impose ‘‘full, daily 

variation margin requirements and stringent initial 

margin requirements’’). 

217See id. at 3 (citing Dodd-Frank section 752(a)). 

See also SIFMA AMG 7. 

218See AFR at 7. 

219See id. See also IATP at 4 (provide appendix 

illustrating ‘‘comparable and quantitative outcomes 

of swaps margining in other jurisdictions with those 

under Commission authority, once margining 

requirements and margin calculation methodology 

are agreed in those jurisdictions’’). 

220See 17 CFR 23.160(c)(1)(i). 

221See 17 CFR 23.160(c)(1)(ii). 

222See 17 CFR 23.160(c)(2)(v). 

223See 17 CFR 23.160(c)(2)(i). 

224See 17 CFR 23.160(c)(2)(iii). See also 17 CFR 

23.160(a)(3) (defining ‘‘International Standards’’ as 

based on the BCBS–IOSCO framework). 

225See 17 CFR 23.160(c)(2)(ii) (identifying the 

elements as: (A) The products subject to the foreign 

jurisdiction’s margin requirements; (B) the entities 

subject to the foreign jurisdiction’s margin 

requirements; (C) the treatment of inter-affiliate 

derivative transactions; (D) the methodologies for 

calculating the amounts of initial and variation 

margin; (E) the process and standards for approving 

models for calculating initial and variation margin 

models; (F) the timing and manner in which initial 

and variation margin must be collected and/or paid; 

(G) any threshold levels or amounts; (H) risk 

management controls for the calculation of initial 

and variation margin; (I) eligible collateral for initial 

and variation margin; (J) the requirements of 

custodial arrangements, including segregation of 

margin and rehypothecation; (K) margin 

documentation requirements; and (L) the crossborder application of the foreign jurisdiction’s 

margin regime). Section 23.160(c)(2)(ii) largely 

tracks the elements of the BCBS–IOSCO framework, 

but breaks them down into their components as 

appropriate to ensure ease of application. 226See id. 227See 17 CFR 23.160(c)(2)(iv) (requesting that 

such description discuss the powers of the foreign 

regulatory authority or authorities to supervise, 

investigate, and discipline entities for compliance 

with the margin requirements and the ongoing 

efforts of the regulatory authority or authorities to 

detect and deter violations of the margin 

requirements). 

228See 17 CFR 23.160(c)(2)(vi). See also 17 CFR 

23.160(c)(7) (delegating authority to request 

additional information and/or documentation to the 

Director of the Division of Swap Dealer and 

Intermediary Oversight, or such other employee or 

employees as the Director may designate from time 

to time). 

229See 17 CFR 23.160(c)(3)(i). See also 17 CFR 

23.160(a)(3) (defining ‘‘International Standards’’ as 

based on the BCBS–IOSCO framework). 

230See proposed 17 CFR 23.160(c)(3)(ii). As 

discussed above, the Commission’s Final Margin 

Rule is based on the International Standards; 

therefore, the Commission expects that the relevant 

foreign margin requirements would conform to the 

International Standards at minimum in order to be 

deemed comparable to the Commission’s 

corresponding margin requirements. 

231See 17 CFR 23.160(c)(3)(iii). See also supra 

note 227; 17 CFR 23.160(c)(3)(iv) (indicating the 

Commission would also consider any other relevant 

facts and circumstances). 

suggested that the Commission ignore 

whether the foreign margin 

requirements achieve comparable 

outcomes to the Commission’s margin 

requirements 212 and make consistency 

with International Standards the sole 

basis of its analysis.213 FSR argued that 

the ‘‘purpose and driving force’’ of the 

BCBS–IOSCO framework was to create a 

‘‘uniform global standard’’ and that the 

Commission would undermine that goal 

if it were to deny a comparability 

determination when the foreign margin 

regime conforms to International 

Standards.214 Thus, FSR recommended 

that the Commission issue a 

comparability determination to any 

regime that complies with the 

International Standards despite any 

divergence from the Commission’s 

rules.215 IIB/SIFMA argued that margin 

regimes that adhere to the BCBS–IOSCO 

framework are ‘‘highly unlikely’’ to 

demonstrate ‘‘material differences’’ in 

the degree to which they reduce 

aggregate risk,216 adding that issuing 

comparability determinations based on 

consistency with the BCBS–IOSCO 

framework would further the goal of 

international harmonization promoted 

by BCBS–IOSCO and Congress.217

AFR, on the other hand, argued that 

foreign margin rules should not qualify 

for substituted compliance on the basis 

that they follow International Standards 

alone.218 AFR stated that the 

Commission’s proposed margin rules 

evidenced ‘‘a number of important 

differences’’ from the BCBS–IOSCO 

framework and that, given the broad 

availability of substituted compliance in 

the proposed rule, issuing comparability 

determinations solely on the basis of 

consistency with International 

Standards could lead to ‘‘excessive 

opportunities for substituted 

compliance.’’ 219

3. Final Rule 

After a careful review of the 

comments, the Commission is adopting 

§ 23.160(c) as proposed, but is providing 

some additional clarifications in 

response to commenters. The rule 

begins by identifying persons eligible to 

request a comparability determination 

with respect to the Commission’s 

margin requirements, including any CSE 

that is eligible for substituted 

compliance under rule § 23.160 220 and 

any foreign regulatory authority that has 

direct supervisory authority over one or 

more CSEs and that is responsible for 

administering the relevant foreign 

jurisdiction’s margin requirements.221

Eligible persons may request a 

comparability determination 

individually or collectively and with 

respect to some or all of the 

Commission’s margin requirements. 

Eligible CSEs may wish to coordinate 

with their home regulators and other 

CSEs in order to simplify and streamline 

the process. The Commission will make 

comparability determinations on a 

jurisdiction-by-jurisdiction basis. 

Persons requesting comparability 

determinations should provide the 

Commission with certain documents 

and information in support of their 

request. Notably, the Final Rule 

provides that requesters should provide 

copies of the relevant foreign 

jurisdiction’s margin requirements 222

and descriptions of their objectives,223

how they differ from the International 

Standards,224 and how they address the 

elements of the Commission’s margin 

requirements.225 With regard to how the 

foreign margin requirements address the 

elements of the Commission’s margin 

requirements, the description should 

identify the specific legal and regulatory 

provisions that correspond to each 

element and, if necessary, whether the 

relevant foreign jurisdiction’s margin 

requirements do not address a particular 

element.226 Requesters should also 

provide a description of the ability of 

the relevant foreign regulatory authority 

or authorities to supervise and enforce 

compliance with the relevant foreign 

jurisdiction’s margin requirements 227

and any other information and 

documentation the Commission deems 

appropriate.228

The Final Rule identifies certain key 

factors that the Commission will 

consider in making a comparability 

determination. Specifically, the 

Commission will consider the scope and 

objectives of the relevant foreign 

jurisdiction’s margin requirements; 229

whether the relevant foreign 

jurisdiction’s margin requirements 

achieve comparable outcomes to the 

Commission’s corresponding margin 

requirements; 230 and the ability of the 

relevant regulatory authority or 

authorities to supervise and enforce 

compliance with the relevant foreign 

jurisdiction’s margin requirements.231

As indicated in the proposed rule, the 

Final Rule reflects an outcome-based 

approach to assessing the comparability 

of a foreign jurisdiction’s margin 


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232The BCBS–IOSCO framework leaves certain 

elements open to interpretation (e.g., the definition 

of ‘‘derivative’’) and expressly invites regulators to 

build on certain principles as appropriate. See, e.g., 

Element 4 (eligible collateral) (national regulators 

should ‘‘develop their own list of eligible collateral 

assets based on the key principle, taking into 

account the conditions of their own markets’’); 

Element 5 (initial margin) (the degree to which 

margin should be protected would be affected by 

‘‘the local bankruptcy regime, and would vary 

across jurisdictions’’); Element 6 (transactions with 

affiliates) (‘‘Transactions between a firm and its 

affiliates should be subject to appropriate regulation 

in a manner consistent with each jurisdiction’s legal 

and regulatory framework.’’). 

233As the Commission noted above, the Final 

Margin Rule included substantial modifications 

from the Proposed Margin Rule that further aligned 

the Commission’s margin requirements with 

International Standards and, as a result, the 

potential for conflict with foreign margin 

requirements should be reduced. See supra note 29. 

The Commission further notes that whether a 

particular margin requirement in a foreign 

jurisdiction is comparable to the Commission’s 

corresponding requirement entails a fact-specific 

analysis. 

234See 17 CFR 23.160(c)(2) (specifying that 

persons requesting comparability determinations 

should provide the Commission with 

documentation and information relating to each 

element of the Commission’s margin requirements). 

235For example, the Commission may determine 

that a foreign jurisdiction’s margin regime is 

comparable with respect to its variation margin 

requirements but not with respect to custodial 

arrangements, including segregation and 

rehypothecation requirements. 

236See 17 CFR 23.160(c)(4). 

237See 17 CFR 23.160(c)(5). 

238See 17 CFR 23.160(c)(6). For instance, a 

comparability determination may require 

modification or termination if a key basis for the 

determination ceases to be true. 

239Under Commission regulations 23.203 and 

23.606, registered swap dealers and major swap 

participants must maintain all records required by 

the CEA and the Commission’s regulations in 

accordance with Commission regulation 1.31 and 

keep them open for inspection by representatives of 

the Commission, the United States Department of 

Justice, or any applicable prudential regulator. See 

17 CFR 23.203, 23.606. The Commission further 

expects that prompt access to books and records 

and the ability to inspect and examine a non-U.S. 

CSE will be a condition to any comparability 

determination. 

requirements. Instead of demanding 

strict uniformity with the Commission’s 

margin requirements, the Commission 

will evaluate the objectives and 

outcomes of the foreign margin 

requirements in light of foreign 

regulator(s)’ supervisory and 

enforcement authority. Recognizing that 

jurisdictions may adopt different 

approaches to achieving the same 

outcome, the Commission will focus on 

whether the foreign jurisdiction’s 

margin requirements are comparable to 

the Commission’s in purpose and effect, 

not whether they are comparable in 

every aspect or contain identical 

elements. 

As commenters noted, the 

Commission was actively involved in 

developing the BCBS–IOSCO 

framework, and the Commission 

believes that the minimum standards it 

establishes are consistent with the 

objectives of the Commission’s own 

margin requirements. However, while 

the BCBS–IOSCO framework establishes 

minimum standards that are consistent 

with the objectives of the Commission’s 

own margin requirements, the 

Commission notes that just because a 

foreign jurisdiction’s margin 

requirements are consistent with 

International Standards does not 

necessarily mean that they will be 

comparable to the Commission’s 

requirements.232 Consequently, in the 

Commission’s view, consistency with 

International Standards is necessary but 

may not be sufficient to finding 

comparability.233

As stated in the proposed rule, the 

Commission will review the foreign 

margin requirements on an element-byelement basis.234 Margin regimes are 

complex structures made up of a 

number of interrelated components, and 

differences in how jurisdictions 

approach and assemble those 

components are inevitable, even among 

jurisdictions that base their margin 

requirements on the principles and 

requirements set forth in the BCBS– 

IOSCO framework. In order to arrive at 

a meaningful and complete 

comparability determination, the 

Commission must therefore engage in a 

fact-specific analysis to develop a clear 

understanding of the elements of the 

foreign margin regime and how they 

interact. The Commission believes this 

level of review will support its outcomebased approach by aiding its assessment 

of whether such differences affect 

comparability. 

As indicated in the proposed rule, the 

Commission is allowing for the 

possibility that a comparability 

determination may not include all 

elements of a foreign jurisdiction’s 

margin regime.235 The Commission 

believes that this position is preferable 

to an all-or-nothing approach, in which 

the Commission would be unable to 

make a comparability determination for 

an entire jurisdiction if one or more 

aspects of the foreign jurisdiction’s 

margin regime results in an outcome 

that is critically different from that of 

the Commission’s. 

The Final Rule provides that any CSE 

that, in accordance with a comparability 

determination, complies with a foreign 

jurisdiction’s margin requirements will 

be deemed in compliance with the 

Commission’s corresponding margin 

requirements.236 Accordingly, if the 

Commission determines that a CSE has 

failed to comply with the relevant 

foreign margin requirements, it could 

initiate an action for a violation of the 

Commission’s margin requirements. In 

addition, all CSEs remain subject to the 

Commission’s examination and 

enforcement authority regardless of 

whether they rely on a comparability 

determination. Although the Final Rule 

does not obligate the Commission to 

consult with or rely on the advice of the 

foreign regulatory authority in making 

its determination regarding whether a 

violation of foreign margin requirements 

has occurred, the Commission notes that 

Commission staff may consult with the 

relevant foreign regulatory authority to 

assist the Commission in making its 

determination. 

The Final Rule concludes by 

codifying the Commission’s authority to 

impose any terms and conditions it 

deems appropriate in issuing a 

comparability determination,237 and to 

further condition, modify, suspend, 

terminate or otherwise restrict any 

comparability determination it has 

issued in its discretion.238

Comparability determinations issued 

by the Commission will require that the 

Commission be notified of any material 

changes to information submitted in 

support of a comparability 

determination, including, but not 

limited to, changes in the relevant 

foreign jurisdiction’s supervisory or 

regulatory regime. The Commission also 

expects that the relevant foreign 

regulator will enter into, or will have 

entered into, an appropriate 

memorandum of understanding 

(‘‘MOU’’) or similar arrangement with 

the Commission in connection with a 

comparability determination.239

As stated above, the Commission 

recognizes that systemic risks arising 

from the global and interconnected 

swap market must be addressed through 

coordinated regulatory requirements for 

margin across international 

jurisdictions. Accordingly, the 

Commission will continue its practice of 

actively engaging market participants 

and consulting closely with foreign 

regulators to encourage the international 

harmonization and coordination of 

margin requirements for uncleared 

swaps and to minimize market 

disruptions. 

III. 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 


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240 5 U.S.C. 601 et seq. 

241See 47 FR 18618 (Apr. 30, 1982) (finding that 

designated contract markets, future commission 

merchants, commodity pool operators and large 

traders are not small entities for RFA purposes). 

242See 17 CFR 23.151 (defining ‘‘CSE’’ as a swap 

dealer or major swap participant for which there is 

no Prudential Regulator). 

243See 17 CFR 23.160(c). 

244See 77 FR 30596, 30701 (May 23, 2012); 77 FR 

2613, 2620 (Jan. 19, 2012) (noting that like future 

commission merchants, swap dealers will be 

subject to minimum capital requirements, and are 

expected to be comprised of large firms, and that 

major swap participants should not be considered 

to be small entities for essentially the same reasons 

that it previously had determined large traders not 

to be small entities). 

245The 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). 

246As noted in paragraph (1)(xii) of the definition 

of ‘‘financial end user’’ in § 23.151 of the Final 

Margin 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. See 17 CFR 23.151. The 

Commission believes that this prong of the 

definition of financial end user captures 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. 

247 44 U.S.C. 3501 et seq. 248 7 U.S.C. 2(i). 

entities.240 The Commission previously 

has established certain definitions of 

‘‘small entities’’ to be used in evaluating 

the impact of its regulations on small 

entities in accordance with the RFA.241

The final regulation establishes a 

mechanism for CSEs 242 to satisfy 

margin requirements by complying with 

comparable margin requirements in the 

relevant foreign jurisdiction as 

described in paragraph (c) of the Final 

Rule,243 but only to the extent that the 

Commission makes a determination that 

complying with the laws of such foreign 

jurisdiction is comparable to complying 

with the corresponding margin 

requirement(s) for which the 

determination is sought. 

The Commission previously has 

determined that swap dealers and major 

swap participants are not small entities 

for purposes of the RFA.244 Thus, the 

Commission is of the view that there 

will not be any small entities directly 

impacted by this rule. 

The Commission notes that under the 

Final Margin Rule, swap dealers and 

major swap participants would only be 

required to collect and post margin on 

uncleared swaps when the 

counterparties to the uncleared swaps 

are either other swap dealers and major 

swap participants or financial end users. 

As noted above, swap dealers and major 

swap participants are not small entities 

for RFA purposes. Furthermore, any 

financial end users that may be 

indirectly 245 impacted by the Final Rule 

would be similar to eligible contract 

participants (‘‘ECPs’’), and, as such, they 

would not be small entities.246 Further, 

to the extent that there are any foreign 

financial entities that would not be 

considered ECPs, the Commission 

expects that there would not be a 

substantial number of these entities 

significantly impacted by the Final 

Rule. As noted above, most foreign 

financial entities would likely be ECPs 

to the extent they would transact in 

uncleared swaps. The Commission 

expects that only a small number of 

foreign financial entities that are not 

ECPs, if any, would transact in 

uncleared swaps. In addition, the 

material swaps exposure threshold for 

financial end users in the Final Margin 

Rule reinforces the Commission’s 

expectation that only a small number of 

entities would be affected by the Final 

Rule. 

Accordingly, 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 proposed regulations will not have 

a significant economic impact on a 

substantial number of small entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 247 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 rulemaking will result in the 

collection of information requirements 

within the meaning of the PRA, as 

discussed below. Responses to these 

collections of information will be 

required to obtain or retain benefits. An 

agency may not conduct or sponsor, and 

a person is not required to respond to, 

a collection of information unless it 

displays a currently valid control 

number. One of the collections of 

information required by this final 

rulemaking, which is described below 

under the heading ‘‘Information 

Collection—Comparability 

Determinations,’’ was previously 

included in the proposed rule and 

discussed in the Proposal. Accordingly, 

the Commission requested from the 

Office of Management and Budget 

(‘‘OMB’’) a control number for that 

information collection. OMB assigned 

OMB control number 3038–0111. The 

title for this collection of information is 

‘‘Margin Requirements for Uncleared 

Swaps for Swap Dealers and Major 

Swap Participants; Comparability 

Determinations with Margin 

Requirements.’’ No comments were 

received on the paperwork burden 

associated with this information 

collection request. In addition, this final 

rulemaking includes two additional 

collections of information that were not 

previously proposed, which are 

described below under the headings 

‘‘Information Collection—NonSegregation Jurisdictions’’ and 

‘‘Information Collection—Non-Netting 

Jurisdictions,’’ respectively. 

Accordingly, the Commission, by 

separate notice published in the Federal 

Register concurrently with this Final 

Rule, will request approval by OMB of 

this new information collection under 

OMB Control Number 3038–0111. 

1. Information Collection— 

Comparability Determinations 

Section 731 of the Dodd-Frank Act 

amended the CEA to add, as section 

4s(e) thereof, provisions concerning the 

setting of initial and variation margin 

requirements for swap dealers and 

major swap participants. Each swap 

dealer and major swap participant for 

which there is a Prudential Regulator, as 

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

must meet margin requirements 

established by the applicable Prudential 

Regulator, and each CSE must comply 

with the Commission’s regulations 

governing margin. With regard to the 

cross-border application of the swap 

provisions enacted by Title VII of the 

Dodd-Frank Act, section 2(i) of the CEA 

provides the Commission with express 

authority over activities outside the 

United States relating to swaps when 

certain conditions are met. Section 2(i) 

of the CEA provides that the CEA’s 

provisions relating to swaps enacted by 

Title VII of the Dodd-Frank Act 

(including Commission rules and 

regulations promulgated thereunder) 

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 Title VII.248 Because 

margin requirements are critical to 

ensuring the safety and soundness of a 

CSE and supporting the stability of the 

U.S. financial markets, the Commission 

believes that its margin rules should 


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249A CSE may apply for a comparability 

determination only if the uncleared swap activities 

of the CSE are directly supervised by the authorities 

administering the foreign regulatory framework for 

uncleared swaps. Also, a foreign regulatory agency 

may make a request for a comparability 

determination only if that agency has direct 

supervisory authority to administer the foreign 

regulatory framework for uncleared swaps in the 

requested foreign jurisdiction. 

250See 17 CFR 23.160(a)(3) (defining 

‘‘International Standards’’ as based on the BCBS– 

IOSCO framework). 

251See 17 CFR 23.160(c)(2)(ii). 

252See 17 CFR 23.160(c)(2)(v) and (vi). 

253The Commission expects to impose this 

obligation as one of the conditions to the issuance 

of a comparability determination. 

apply on a cross-border basis in a 

manner that effectively addresses risks 

to the registered CSE and the U.S. 

financial system. 

As noted above, the Final Rule 

establishes margin requirements for 

uncleared swaps of CSEs, with 

substituted compliance available in 

certain circumstances, except as to a 

narrow class of uncleared swaps 

between a non-U.S. CSE and a non-U.S. 

counterparty that fall within the 

Exclusion. The Final Rule also 

establishes a procedural framework in 

which the Commission will consider 

permitting compliance with comparable 

margin requirements in a foreign 

jurisdiction to substitute for compliance 

with the Commission’s margin 

requirements in certain circumstances. 

The Commission will consider whether 

the requirements of such foreign 

jurisdiction with respect to margin of 

uncleared swaps are comparable to the 

Commission’s margin requirements. 

Specifically, the Final Rule provides 

that a CSE that is eligible for substituted 

compliance may submit a request, 

individually or collectively, for a 

comparability determination.249 Persons 

requesting a comparability 

determination may coordinate their 

application with other market 

participants and their home regulators 

to simplify and streamline the process. 

Once a comparability determination is 

made for a jurisdiction, it will apply for 

all entities or transactions in that 

jurisdiction to the extent provided in 

the determination, as approved by the 

Commission. In providing information 

to the Commission for a comparability 

determination, applicants must include, 

at a minimum, information describing 

any differences between the relevant 

foreign jurisdiction’s margin 

requirements and International 

Standards,250 and the specific 

provisions of the foreign jurisdiction 

that govern: (A) The products subject to 

the foreign jurisdiction’s margin 

requirements; (B) the entities subject to 

the foreign jurisdiction’s margin 

requirements; (C) the treatment of interaffiliate derivative transactions; (D) the 

methodologies for calculating the 

amounts of initial and variation margin; 

(E) the process and standards for 

approving models for calculating initial 

and variation margin models; (F) the 

timing and manner in which initial and 

variation margin must be collected and/ 

or paid; (G) any threshold levels or 

amounts; (H) risk management controls 

for the calculation of initial and 

variation margin; (I) eligible collateral 

for initial and variation margin; (J) the 

requirements of custodial arrangements, 

including segregation of margin and 

rehypothecation; (K) margin 

documentation requirements; and (L) 

the cross-border application of the 

foreign jurisdiction’s margin regime.251

In addition, the Commission expects 

the applicant, at a minimum, to describe 

how the foreign jurisdiction’s margin 

requirements address each of the abovereferenced elements, and identify the 

specific legal and regulatory provisions 

that correspond to each element (and, if 

necessary, whether the relevant foreign 

jurisdiction’s margin requirements do 

not address a particular element). 

Further, the applicant must describe the 

objectives of the foreign jurisdiction’s 

margin requirements, the ability of the 

relevant regulatory authority or 

authorities to supervise and enforce 

compliance with the foreign 

jurisdiction’s margin requirements, 

including the powers of the foreign 

regulatory authority or authorities to 

supervise, investigate, and discipline 

entities for noncompliance with the 

margin requirements and the ongoing 

efforts of the regulatory authority or 

authorities to detect and deter violations 

of the margin requirements. Finally, the 

applicant must furnish copies of the 

foreign jurisdiction’s margin 

requirements (including an English 

translation of any foreign language 

document) and any other information 

and documentation that the 

Commission deems appropriate.252

In issuing a comparability 

determination, the Commission may 

impose any terms and conditions it 

deems appropriate. In addition, the 

Final Rule will provide that the 

Commission may, on its own initiative, 

further condition, modify, suspend, 

terminate, or otherwise restrict a 

comparability determination in the 

Commission’s discretion. This could 

result, for example, from a situation 

where, after the Commission issues a 

comparability determination, the basis 

of that determination ceases to be true. 

In this regard, the Commission will 

require an applicant to notify the 

Commission of any material changes to 

information submitted in support of a 

comparability determination (including, 

but not limited to, changes in the 

foreign jurisdiction’s supervisory or 

regulatory regime) as the Commission’s 

comparability determination may no 

longer be valid.253

The collection of information that is 

proposed by this rulemaking is 

necessary to implement section 4s(e) of 

the CEA, which mandates that the 

Commission adopt rules establishing 

minimum initial and variation margin 

requirements for CSEs on all swaps that 

are not cleared by a registered 

derivatives clearing organization, and 

section 2(i) of the CEA, which provides 

that the provisions of the CEA relating 

to swaps that were enacted by Title VII 

of the Dodd-Frank Act (including any 

rule prescribed or regulation 

promulgated thereunder) apply to 

activities outside the United States that 

have a direct and significant connection 

with activities in, or effect on, 

commerce of the United States. Further, 

the information collection is necessary 

for the Commission to determine 

whether the requirements of the foreign 

rules are comparable to the 

Commission’s rules. 

As noted above, any CSE who is 

eligible for substituted compliance may 

make a request for a comparability 

determination. Currently, there are 

approximately 106 swap entities 

provisionally registered with the 

Commission. The Commission further 

estimates that of the approximately 106 

swap entities that are provisionally 

registered, approximately 54 are CSEs 

that are subject to the Commission’s 

margin rules as they are not subject to 

a Prudential Regulator. The Commission 

notes that any foreign regulatory agency 

that has direct supervisory authority 

over one or more CSEs and that is 

responsible to administer the relevant 

foreign jurisdiction’s margin 

requirements may also apply for a 

comparability determination. Further, 

once a comparability determination is 

made for a jurisdiction, it will apply for 

all entities or transactions in that 

jurisdiction to the extent provided in 

the determination, as approved by the 

Commission. The Commission estimates 

that it will receive requests for a 

comparability determination from 17 

jurisdictions, consisting of the 16 

jurisdictions within the G20, plus 

Switzerland, and that each request will 

impose an average of 10 burden hours. 

Based upon the above, the estimated 

hour burden for collection is calculated 

as follows: 


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254As explained further in note 174, because 

CSEs that rely on section 23.160(e) are not required 

to hold collateral in accordance with section 

23.157(b) for initial margin that they collect, they 

also would not be required to comply with 

23.157(c) with respect to initial margin that they 

collect. 

255CSEs that are not FCSs or foreign branches of 

U.S. CSEs and are not otherwise excluded from the 

Final Margin Rule could not engage in swap 

transactions in these jurisdictions. 

256As noted above, the Commission would expect 

the CSE’s counterparty to be a local financial end 

user that is required to comply with the foreign 

jurisdiction’s laws and that is prevented by 

regulatory restrictions in the foreign jurisdiction 

from posting collateral for the uncleared swap in 

the United States or a jurisdiction for which the 

Commission has issued a comparability 

determination under the Final Rule, even using an 

affiliate. 

257As noted above, the CSE must collect initial 

margin in accordance with § 23.152(a) on a gross 

basis, in the form of cash pursuant to 

§ 23.156(a)(1)(i) and post and collect variation 

margin in accordance with section 23.153(a) in the 

form of cash pursuant to section 23.156(a)(1)(i). See 

§ 23.160(e)(4) of the Final Rule. 

258See 17 CFR 23.160(e). 

259See § 23.160(d) of the Final Rule. 

260As used in this release, a ‘‘non-segregation 

jurisdiction’’ is a jurisdiction where inherent 

limitations in the legal or operational infrastructure 

of the foreign jurisdiction make it impracticable for 

the CSE and its counterparty to post initial margin 

pursuant to custodial arrangements that comply 

with the Final Margin Rule, as further described in 

section II.B.4.b. 

261As used in this release, a ‘‘non-netting 

jurisdiction’’ is a jurisdiction in which a CSE 

cannot conclude, with a well-founded basis, that 

the netting agreement with a counterparty in that 

foreign jurisdiction meets the definition of an 

‘‘eligible master netting agreement’’ set forth in the 

Final Margin Rule, as described in section II.B.5.b. 

262As stated above, the Commission estimates 

that the Final Rule will affect approximately 54 

registered swap dealers and major swap 

participants. The Commission further estimates that 

it will receive requests for a comparability 

determination from 17 jurisdictions. 

Number of respondents: 17. 

Frequency of collection: Once. 

Estimated annual responses per 

registrant: 1. 

Estimated aggregate number of 

annual responses: 17. 

Estimated annual hour burden per 

registrant: 10 hours. 

Estimated aggregate annual hour 

burden: 170 hours (17 registrants × 10 

hours per registrant). 

2. Information Collection—NonSegregation Jurisdictions 

Section 23.160(e) of the Final Rule 

provides that, in certain foreign 

jurisdictions where inherent limitations 

in the legal or operational infrastructure 

of the jurisdiction make it impracticable 

for the CSE and its counterparty to post 

initial margin for the uncleared swap 

pursuant to custodial arrangements that 

comply with the Commission’s margin 

rules, an FCS or a foreign branch of a 

U.S. CSE may be eligible to engage in 

uncleared swaps with certain non-U.S. 

counterparties without complying with 

the requirement to post initial margin, 

and without complying with the 

requirement to hold initial margin 

collected by the CSE with one or more 

custodians that are not the CSE, its 

counterparty, or an affiliate of the CSE 

or its counterparty, pursuant to section 

23.157(b) of the Final Margin Rule,254

but only if certain conditions are 

satisfied.255 In order to rely on this 

provision, an FCS or foreign branch of 

a U.S. CSE will need to satisfy all of the 

conditions of the rule, including that (1) 

inherent limitations in the legal or 

operational infrastructure of the foreign 

jurisdiction make it impracticable for 

the CSE and its counterparty to post any 

form of eligible initial margin collateral 

for the uncleared swap pursuant to 

custodial arrangements that comply 

with the Commission’s margin rules; (2) 

foreign regulatory restrictions require 

the CSE to transact in uncleared swaps 

with the counterparty through an 

establishment within the foreign 

jurisdiction and do not permit the 

posting of collateral for the swap in 

compliance with the custodial 

arrangements of section 23.157 of the 

Final Margin Rule in the United States 

or a jurisdiction for which the 

Commission has issued a comparability 

determination under the Final Rule with 

respect to section 23.157; (3) the CSE’s 

counterparty is not a U.S. person and is 

not a CSE, and the counterparty’s 

obligations under the uncleared swap 

are not guaranteed by a U.S. person; 256

(4) the CSE collects initial margin in 

cash on a gross basis, in cash, and posts 

and collects variation margin in cash, 

for the uncleared swap in accordance 

with the Final Margin Rule; 257 (5) for 

each broad risk category, as set out in 

section 23.154(b)(2)(v) of the Final 

Margin Rule, the total outstanding 

notional value of all uncleared swaps in 

that broad risk category, as to which the 

CSE is relying on section 23.160 (e), 

may not exceed 5 percent of the CSE’s 

total outstanding notional value for all 

uncleared swaps in the same broad risk 

category; (6) the CSE has policies and 

procedures ensuring that it is in 

compliance with the requirements of 

this provision; and (7) the CSE 

maintains books and records properly 

documenting that all of the 

requirements of this provision are 

satisfied.258

3. Information Collection—Non-Netting 

Jurisdictions 

Section 23.160(d) of the Final Rule 

includes a special provision for nonnetting jurisdictions. This provision 

allows CSEs that cannot conclude after 

sufficient legal review with a wellfounded basis that the netting agreement 

with a counterparty in a foreign 

jurisdiction meets the definition of an 

‘‘eligible master netting agreement’’ set 

forth in the Final Margin Rule to 

nevertheless net uncleared swaps in 

determining the amount of margin that 

they post, provided that certain 

conditions are met. In order to avail 

itself of this special provision, the CSE 

must treat the uncleared swaps covered 

by the agreement on a gross basis in 

determining the amount of initial and 

variation margin that it must collect, but 

may net those uncleared swaps in 

determining the amount of initial and 

variation margin it must post to the 

counterparty, in accordance with the 

netting provisions of the Final Margin 

Rule. A CSE that enters into uncleared 

swaps in ‘‘non-netting’’ jurisdictions in 

reliance on this provision must have 

policies and procedures ensuring that it 

is in compliance with the special 

provision’s requirements, and maintain 

books and records properly 

documenting that all of the 

requirements of this exception are 

satisfied.259

As noted above, the Commission is 

publishing a separate notice in the 

Federal Register concurrently with this 

final rule requesting comments on the 

burden estimates of both new 

information collections to amend OMB 

Control Number 3038–0111. 

C. Cost-Benefit Considerations 

1. Introduction 

As discussed above, the Final Rule 

addresses the cross-border application 

of the Commission’s margin 

requirements. Specifically, the Final 

Rule establishes certain key definitions 

(‘‘U.S. person,’’ ‘‘guarantee,’’ and 

‘‘Foreign Consolidated Subsidiary’’); 

allows CSEs to rely on substituted 

compliance where appropriate; provides 

a limited Exclusion for certain 

transactions between non-U.S. persons; 

includes special provisions for ‘‘nonsegregation jurisdictions’’ 260 and ‘‘nonnetting jurisdictions;’’ 261 and 

establishes a framework for making 

comparability determinations. 

In the sections that follow, the 

Commission discusses the costs and 

benefits associated with the Final Rule 

on CSEs and affected market 

participants and any reasonable 

alternatives.262 Given a general lack of 

useful data regarding the costs and 

benefits of the Final Rule, from 

commenters or otherwise, and the 

considerable uncertainty given that 

foreign jurisdictions are at different 


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263 81 FR 636 (Jan. 6, 2016) (codified at 17 CFR 

parts 23 and 140). As the Commission noted above, 

the Final Margin Rule included substantial 

modifications from the Proposed Margin Rule that 

further aligned the Commission’s margin 

requirements with International Standards and, as 

a result, the potential for conflict with foreign 

margin requirements should be reduced. See supra 

note 29. 

264See Final Margin Rule, 81 FR at 682. The 

Commission notes that to the extent there may be 

differences in the particulars of costs to foreign 

CSEs or financial end users, the Commission had 

not been provided with information that would 

permit the evaluation of any such differences. 

265As noted in the Final Margin Rule, as foreign 

jurisdictions adopt their own margin rules, the 

existence of those rules may affect the costs and 

benefits of the Final Margin Rule. See Final Margin 

Rule, 81 FR at 682, n.359. For example, if certain 

transactions become subject to duplicative foreign 

regulation, that could increase costs, or reduce 

benefits, of compliance with the Final Margin Rule. 

Because of the still developing state of foreign law 

in this area and the absence of specific information 

on the subject in the record, it was not possible to 

evaluate such effects in detail in the Final Margin 

Rule release. In this rulemaking, the same 

limitations do not permit a detailed evaluation of 

such possible effects in the present proceeding and 

therefore, the Commission discusses these possible 

effects in general qualitative terms. 

266But see IATP at 7 (Commission’s assumptions 

about costs and benefits of the Proposal were 

accurate considering the current ‘‘stage of foreign 

jurisdiction rulemaking’’ relating to margin 

requirements); ABA/ABASA at 3 (Proposal did not 

adequately take into account the costs of the 

proposed approach); ISDA at 5 (Proposal did not 

give ‘‘due weight’’ to its impact on price discovery, 

risk management, increased compliance and 

liquidity costs, market fragmentation, or comity). 

stages in implementing their regimes, 

the costs and benefits of the Final Rule 

are generally considered in qualitative 

terms. 

The baseline against which the costs 

and benefits of this Final Rule are being 

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

swap market as it exists as if the Final 

Margin Rule is in full effect.263 The costbenefit considerations section of the 

Final Margin Rule made clear that CEA 

section 4s(e), read together with CEA 

section 2(i), applies the margin rules to 

a CSE’s swap activities outside the 

United States, regardless of the domicile 

of the CSE or its counterparties.264

Accordingly, in considering the costs 

and benefits of this Final Rule, the 

Commission focused on the impact of 

permitting substituted compliance and 

certain exclusions from the Final 

Margin Rule.265

The Commission is mindful of the 

potentially significant tradeoffs inherent 

in the Final Rule. As discussed above, 

given the highly-interconnected, global 

swap market, overseas risk can quickly 

manifest in the United States. The crossborder application of the Commission’s 

margin rules is therefore important to 

protecting the U.S. financial system 

from this risk. At the same time, 

competitive distortions and market 

inefficiencies can result—and the 

benefits of the Commission’s crossborder framework could be reduced—if 

due consideration is not given to comity 

principles. The Commission considered 

these tradeoffs and worked to carefully 

tailor the cross-border approach in the 

Final Rule to address comity 

considerations, mitigate the potential for 

undue market distortions, and promote 

global coordination without 

compromising the safety and soundness 

of CSEs. 

Although commenters generally did 

not comment on the cost-benefit 

discussion in the proposed rule itself,266

they did discuss various costs and 

benefits associated with the 

Commission’s proposal. These 

comments are further addressed in the 

context of the Commission’s cost-benefit 

considerations below. 

2. Key Definitions 

The extent to which the Commission’s 

margin requirements apply—and the 

availability of substituted compliance 

and the Exclusion—depends on whether 

the relevant swap involves a U.S. 

person, a guarantee by a U.S. person, or 

a Foreign Consolidated subsidiary. As 

discussed above, the Final Rule adopts 

definitions of ‘‘U.S. person,’’ 

‘‘guarantee,’’ and ‘‘Foreign Consolidated 

Subsidiary’’ solely for purposes of the 

margin rules. The costs and benefits 

associated with these definitions, and 

any reasonable alternatives, are 

discussed below. In general, the 

Commission believes that the clear, 

objective nature of these terms, along 

with the ability to rely on related 

written counterparty representations, 

will promote legal certainty and help 

minimize the costs associated with 

applying the Final Rule. 

a. U.S. Person 

As discussed in section II.A.1., the 

term ‘‘U.S. person’’ identifies 

individuals or entities whose activities 

have a significant nexus to the U.S. 

market by virtue of being organized or 

domiciled in the United States or the 

depth of their connection to the U.S. 

market, even if they are domiciled or 

organized outside the United States. The 

Final Rule generally follows a 

traditional, territorial approach to 

defining a U.S. person, and the 

Commission believes that this definition 

provides an objective and clear basis for 

determining those individuals or 

entities that should be identified as a 

U.S. person. Accordingly, the 

Commission does not believe market 

participants will face significant costs in 

assessing their own U.S. person status, 

particularly given the broad similarities 

between how the Final Rule defines 

‘‘U.S. person’’ and how the term is 

defined in the SEC’s rules. The Final 

Rule also makes clear that market 

participants may reasonably rely on 

counterparty representations regarding 

their U.S. person status absent 

indications to the contrary, which 

should further reduce any operational 

costs associated with assessing U.S. 

person status. 

The Final Rule addresses many of the 

concerns commenters raised regarding 

the costs and benefits of its proposed 

approach to defining ‘‘U.S. person.’’ As 

discussed above, the Final Rule does not 

include a U.S. majority-owned prong, 

which commenters argued would create 

operational burdens for assessing U.S. 

person status and result in regulatory 

overlap. Nor does it include a catchall 

provision, limiting the Rule’s 

application to a list of enumerated 

persons. 

The Commission recognizes that, as 

commenters pointed out, legal entities 

that fall within the unlimited U.S. 

responsibility prong may also be subject 

to regulation under a foreign margin 

regime, creating the potential for 

overlapping requirements. However, as 

discussed in section II.A.1.c., the 

Commission believes that the unique 

nature of the relationship between the 

legal entity and its U.S. person owner(s) 

facilitates the legal entity’s swap 

business and creates a significant nexus 

between the legal entity and U.S. 

financial markets. While the 

Commission understands that limiting 

application of the prong to 

circumstances where the U.S. persons 

are majority owners of the legal entity 

could mitigate the potential for 

overlapping requirements, as the 

Commission explained above, the U.S. 

person owner(s) responsibility for the 

legal entity’s obligations and liabilities 

is unlimited regardless of the amount of 

equity it owns in the legal entity. 

Furthermore, excluding such legal 

entities from the scope of the U.S. 

person definition could create 

incentives for U.S. persons to establish 

such legal entities and use them as a 

pass-through for their own swap 

activities solely for purposes of avoiding 

the margin requirements of the DoddFrank Act. 

The Commission also recognizes that 

further narrowing the differences 

between the Final Rule’s U.S. person 

definition and either the SEC’s 

definition or the ‘‘U.S. person’’ 

interpretation in the Guidance could 

provide certain benefits. Namely, 

market participants could enjoy reduced 

operational costs by relying on existing 

systems and U.S. person status 


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34842 Federal Register / Vol. 81, No. 104 / Tuesday, May 31, 2016 / Rules and Regulations 

267See 17 CFR 23.160(a)(2). As noted above, 

under the Final Rule, the term ‘‘guarantee’’ applies 

whenever a party to the swap has a legally 

enforceable right of recourse against a guarantor 

with respect to its counterparty’s obligations under 

the swap, regardless of whether such right of 

recourse is conditioned upon the counterparty’s 

insolvency or failure to meet its obligations under 

the relevant swap, or whether the counterparty 

seeking to enforce the guarantee is required to make 

a demand for payment or performance from its 

counterparty before proceeding against the U.S. 

guarantor. 

268This release uses the term ‘‘U.S. Guaranteed 

CSE’’ for convenience only. Whether a non-U.S. 

CSE falls within the meaning of the term ‘‘U.S. 

Guaranteed CSE’’ varies on a swap-by-swap basis, 

such that a non-U.S. CSE may be considered a U.S. 

Guaranteed CSE for one swap and not another, 

depending on whether the non-U.S. CSE’s 

obligations under such swap are guaranteed by a 

U.S. person. 

269As further discussed above, the Final Rule 

generally treats uncleared swaps of non-U.S. CSEs, 

where the non-U.S. CSE’s obligations under the 

uncleared swap are guaranteed by a U.S. person, the 

same as uncleared swaps of a U.S. CSE. In addition, 

guarantees may affect whether full or partial 

substituted compliance is available. Further, under 

the Final Rule, the Exclusion is not available if 

either party’s obligations under the swap are 

guaranteed by a U.S. person. In addition, in order 

for an FCS or foreign branch of a U.S. CSE to engage 

in uncleared swaps in non-segregation jurisdictions 

as provided in section 23.160(e) of the Final Rule, 

one of the conditions that must be satisfied is that 

the counterparty to the swap cannot be a U.S. 

person and its obligations under the uncleared 

swap cannot be guaranteed by a U.S. person. 

270As discussed in greater detail in section II.A.3, 

although commenters suggested various 

modifications to the FCS definition, such as relying 

on IFRS instead of U.S. GAAP or including nonU.S. CSEs whose U.S. parent meets standards for 

consolidation, but is not required to prepare 

consolidated financial statements under U.S. 

GAAP, the Commission does not believe such 

modifications would offer substantial benefits. 

determinations and not having to 

support multiple meanings of the term 

‘‘U.S. person.’’ As discussed above, 

however, the Commission believes that 

the Final Rule’s ‘‘U.S. person’’ 

definition is appropriate in the context 

of the margin rule. The Commission 

further believes that the objective and 

clear definition set out in the Final Rule 

will result in a lower overall cost for 

assessing U.S. person status going 

forward. 

b. Guarantees 

As explained in section II.A.2.c., 

under the Final Rule, the term 

‘‘guarantee’’ is defined to include 

arrangements, pursuant to which one 

party to an uncleared swap has rights of 

recourse against a guarantor, with 

respect to its counterparty’s obligations 

under the uncleared swap. The Final 

Rule further defines what it means for 

a party to have rights of recourse, and 

further encompasses any arrangement 

pursuant to which the guarantor itself 

has a conditional or unconditional 

legally enforceable right to receive or 

otherwise collect, in whole or in part, 

payments from any other guarantor with 

respect to the counterparty’s obligations 

under the uncleared swap.267 As further 

explained in section II.B.2.b.i, ‘‘U.S. 

Guaranteed CSEs’’ 268 are eligible for 

substituted compliance, but are 

ineligible for the Exclusion and the 

special provision for non-segregation 

jurisdictions, to the same extent as U.S. 

CSEs (except that foreign branches of 

U.S. CSEs may be eligible for the special 

provision for non-segregation 

jurisdictions, as described in section 

II.B.4.b.).269

As commenters noted, limiting the 

scope of guarantees in the context of the 

margin requirements to arrangements 

that include a right of recourse offers the 

benefit of legal certainty, making the 

definition relatively easy to apply and 

helping keep down the cost of 

determining whether a transaction 

involves a U.S. Guaranteed CSE. 

Allowing market participants to rely on 

counterparty representations with 

regard to the presence of guarantees 

should also help market participants 

keep costs down. Although the Final 

Rule adopts a definition of guarantee 

that is different than the existing 

interpretation in the Guidance, which 

may result in market participants 

incurring additional costs to update 

their current systems, those operational 

challenges may be mitigated given that 

the definition is straight-forward and 

similar to that previously adopted by 

the SEC. In addition, while the 

inclusion of language that addresses 

indirect guarantees may result in some 

added operational challenges or 

assessment costs, the Commission 

believes the provision is necessary to 

avoid creating incentives for market 

participants to structure guarantee 

arrangements in order to avoid 

application of the Dodd-Frank margin 

requirements. The Final Rule also 

achieves substantial benefits in 

harmonizing with the guarantee 

definitions adopted by the Prudential 

Regulators. 

The Commission recognizes that, as 

discussed in section II.B.2 and as 

pointed out by commenters, the 

definition of ‘‘guarantee’’ adopted in the 

Final Rule does not encompass all forms 

of financial arrangements or support 

that may result in a direct transfer of 

risk to the U.S. financial markets, such 

as keepwells and liquidity puts. Nor 

would it include instances in which a 

parent and a subsidiary entity are 

closely related and the parent faces 

strong reputational incentives to 

support the subsidiary. As discussed 

above, however, the Commission 

believes that, in the context of the Final 

Rule, non-U.S. CSEs benefitting from 

such other forms of U.S. financial 

support will likely meet the definition 

of an FCS and thus be adequately 

covered by the Commission’s margin 

requirements. Given the further 

inclusion of language that addresses 

indirect guarantees and the mandate to 

coordinate with the Prudential 

Regulators, the Commission believes 

that a more limited ‘‘guarantee’’ 

definition is appropriate in the context 

of the cross-border application of the 

margin requirements and will not 

undermine the safety and soundness of 

CSEs or the U.S. financial markets. 

c. Foreign Consolidated Subsidiary 

As explained in section II.B.3, the 

Final Rule uses the term ‘‘Foreign 

Consolidated Subsidiary’’ to identify 

non-U.S. CSEs whose uncleared swaps 

raise substantial supervisory concern in 

the United States by virtue of their 

relationship with their U.S. ultimate 

parent entity and because their financial 

position, operating results, and 

statement of cash flows have a direct 

impact on the financial position, risk 

profile and market value of their U.S. 

ultimate parent entity. FCSs are not 

eligible for the Exclusion but are 

otherwise treated the same as any other 

non-U.S. CSEs whose obligations under 

the relevant swap are not guaranteed by 

a U.S. person. 

As commenters noted, the Final 

Rule’s use of a consolidation test that 

relies on U.S. GAAP to define ‘‘Foreign 

Consolidated Subsidiary’’ promotes 

legal certainty by articulating a clear, 

familiar, bright-line test. The 

Commission also took into account that 

the consolidation test is already being 

used in preparing financial statements, 

and as a result, should not result in 

more costs to market participants.270

The Commission further believes that 

allowing market participants to rely on 

counterparty representations with 

respect to their status as an FCS will 

reduce any operational costs that may 

be associated with determining whether 

a counterparty is an FCS, especially 

given that the Prudential Regulators 

adopted a similar definition for 

purposes of their margin rules. 

3. Application 

Section II.B describes the application 

of the Commission’s margin rules to 

cross-border uncleared swaps between 

CSEs and their counterparties, including 

the availability of substituted 

compliance and the Exclusion. The 

Final Rule also includes special 

provisions for non-segregation 


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271Similarly, a non-U.S. CSE (including an FCS) 

is eligible for substituted compliance with respect 

to the requirement to collect initial margin if its 

counterparty is a U.S. CSE or a U.S. Guaranteed 

CSE. 

272A subset of these non-U.S. CSEs may qualify 

for the Exclusion, as described in section II.B.3.b 

above. 

273The Commission recognizes that its framework 

may impose certain initial operational costs, as 

CSEs will be required to determine the status of 

their counterparties in order to determine the extent 

to which substituted compliance is available. The 

Commission however believes the ability to obtain 

and rely on counterparty representations should 

help mitigate such costs. 

274As discussed in section II.B.2.b.i above, 

because uncleared swaps of U.S. Guaranteed CSEs 

are identical in relevant respects to a swap entered 

directly by a U.S. person, the Final Rule treats these 

uncleared swaps the same as uncleared swaps of 

U.S. CSEs. 

jurisdictions and non-netting 

jurisdictions. 

a. Substituted Compliance 

As described in section II.B.2.b and as 

set out in Table A, the extent to which 

substituted compliance is available 

under the Final Rule depends on 

whether the relevant swap involves a 

U.S. person, a guarantee by a U.S. 

person, or an FCS. U.S. CSEs and U.S. 

Guaranteed CSEs are eligible for 

substituted compliance only with 

respect to the requirement to post (but 

not the requirement to collect) initial 

margin, provided that their counterparty 

is a non-U.S. person (including a nonU.S. CSE) whose obligations under the 

swap are not guaranteed by a U.S. 

person.271 On the other hand, non-U.S. 

CSEs whose obligations under the 

relevant swap are not guaranteed by a 

U.S. person are broadly eligible for 

substituted compliance (including for 

their swaps with U.S. persons that are 

not CSEs); however, only partial 

substituted compliance would be 

available for such non-U.S. CSE’s swaps 

with U.S. CSEs or U.S. Guaranteed 

CSEs.272

The Commission recognizes that the 

decision to offer any substituted 

compliance in the first instance carries 

certain trade-offs. Given the global and 

highly-interconnected nature of the 

swap market, where risk does not 

respect national borders, market 

participants are likely to be subject to 

the regulatory interest of more than one 

jurisdiction. As commenters have 

pointed out, allowing compliance with 

foreign margin requirements as an 

alternative to domestic requirements 

can therefore reduce the application of 

duplicative or conflicting requirements, 

resulting in lower compliance costs and 

facilitating a more level playing field. 

Substituted compliance also helps 

preserve the benefits of an integrated, 

global swap market by fostering and 

advancing efforts among U.S. and 

foreign regulators to collaborate in 

establishing robust regulatory standards, 

as envisioned by the BCBS–IOSCO 

framework. If not properly 

implemented, however, the 

Commission’s margin regime could lose 

some of its effectiveness. Accordingly, 

as commenters have recognized, the 

ultimate costs and benefits of 

substituted compliance are affected by 

the standard under which it is granted 

and the extent to which it is applied. 

The Commission was mindful of this 

dynamic in structuring a substituted 

compliance regime for the margin 

requirements and believes the Final 

Rule strikes an appropriate balance, 

enhancing market efficiency and 

fostering global coordination of margin 

requirements without compromising the 

safety and soundness of CSEs and the 

U.S. financial system. 

The Commission also understands 

that, as commenters pointed out, by not 

offering substituted compliance equally 

to all CSEs, the Final Rule may lead to 

certain competitive disparities between 

CSEs and between CSEs and non-CFTC 

registered dealers. For example, to the 

extent that non-U.S. CSEs whose 

obligations are not guaranteed by a U.S. 

person can rely on substituted 

compliance that is not available to U.S. 

CSEs or U.S. Guaranteed CSEs, they 

may enjoy certain cost advantages (e.g., 

avoiding the costs of potentially 

duplicative or inconsistent regulation, 

which could allow them to develop one 

enterprise-wide set of compliance and 

operational infrastructures). The nonU.S. CSEs may then be able to pass on 

these cost savings to their counterparties 

in the form of better pricing or some 

other benefit. U.S. CSEs and U.S. 

Guaranteed CSEs, on the other hand, 

could, depending on the extent to which 

foreign margin requirements apply, be 

subject to both U.S. and foreign margin 

requirements, and therefore be at a 

competitive disadvantage. 

Counterparties may also be incentivized 

to transact with CSEs that are offered 

substituted compliance in order to avoid 

being subject to duplicative or 

conflicting margin requirements, which 

could lead to increased market 

inefficiencies.273

Nevertheless, the Commission does 

not believe it is appropriate to make 

substituted compliance broadly 

available to all CSEs. As discussed 

above, the Commission has a strong 

supervisory interest in the uncleared 

swaps activity of all CSEs, including 

non-U.S. CSEs, by virtue of their 

registration with the Commission. 

Furthermore, U.S. CSEs and U.S. 

Guaranteed CSEs are particularly key 

swap market participants and their 

safety and soundness is critical to a 

well-functioning U.S. swap market and 

the stability of the U.S. financial system. 

Accordingly, in light of the 

Commission’s supervisory interest in 

the activities of U.S. persons and its 

statutory obligation to ensure the safety 

and soundness of CSEs and the U.S. 

financial markets in the context of 

uncleared swaps, the Commission 

believes that substituted compliance is 

generally not appropriate for U.S. CSEs 

and U.S. Guaranteed CSEs given their 

importance to the U.S. financial 

markets.274 With respect to other nonU.S. CSEs (including FCSs) that are not 

subject to a U.S. guarantee, however, the 

Commission believes that, in the 

interest of international comity, making 

substituted compliance broadly 

available is appropriate. 

As further discussed in section 

II.B.2.b.i., the Commission determined 

that partial substituted compliance is 

appropriate for U.S. CSEs and U.S. 

Guaranteed CSEs in the limited case of 

posting (but not collecting) initial 

margin. Contrary to commenters’ 

assertions, the Commission does not 

believe that partial substituted 

compliance is impractical or will hinder 

the development of a standardized 

model for initial margin. As discussed 

above, the Commission does not expect 

a CSE to have two netting sets as a result 

of partial substituted compliance, given 

that the U.S. CSE is always required to 

collect initial margin according to the 

Commission’s margin requirements 

while it has the option to post according 

to the Commission’s or its 

counterparty’s foreign margin 

requirements. If substituted compliance 

is elected, the U.S. CSE will be deemed 

to satisfy the Commission’s margin 

requirements by meeting the foreign 

jurisdiction’s margin requirements, 

which will result in one netting set. 

Furthermore, the Commission believes 

that permitting partial substituted 

compliance allows market participants 

to avoid some costs associated with 

complying with duplicative or 

conflicting requirements. 

The Commission acknowledges that 

foreign branches may, for the reasons 

raised by commenters and discussed 

above, be at a competitive disadvantage 

compared to non-U.S. CSEs, with whom 

they may compete in the countries in 

which they are established, by virtue of 

not being eligible for substituted 

compliance. However, as discussed in 

section II.B.2.b.i., the swap activities of 

a foreign branch of a U.S. CSE are 


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275The Commission notes that the potential 

competitive disparities could be minimized to the 

degree foreign margin requirements are harmonized 

or otherwise comparable to the Commission’s. 

276Element 2 of BCBS–IOSCO framework states: 

‘‘All covered entities (i.e. financial firms and 

systemically important non-financial entities) that 

engage in non-centrally cleared derivatives must 

exchange initial and variation margin as 

appropriate to the counterparty risks posed by such 

transactions.’’ 

277See Proposed Capital Rule, 76 FR 27802. 

278As discussed above, a commenter’s suggestion 

to exclude transactions between an FCS and 

another non-guaranteed non-U.S. person up to an 

aggregate 5 percent notional trading limit would be 

difficult to monitor and could create incentives to 

‘‘cherry-pick’’ and exclude uncleared swaps 

presenting the highest margin requirement, which 

could thereby introduce undue risk into the system. 

279See supra note 158. 

280The Prudential Regulators’ Final Margin Rule 

does not grant an exclusion for the uncleared swaps 

of such U.S. branches on the basis that U.S. 

branches of foreign banks clearly operate within the 

United States and could pose risk to the U.S. 

financial system, and the Commission believes that 

harmonization with the Prudential Regulators’ Final 

Margin Rule is appropriate. For further discussion 

of the reasons that the Exclusion does not extend 

to U.S. branches of non-U.S. CSEs, see section 

II.B.3.b above. 

281As noted above, U.S. branches of foreign banks 

(as ‘‘foreign bank’’ is defined in section __.2 of the 

Prudential Regulators’ Final Margin Rule (12 CFR 

part 237)) must comply with the Prudential 

Regulators’ margin rules, as these U.S. branches 

have a Prudential Regulator, as defined in 1(a)(39) 

of the CEA. 

legally indistinguishable from the swap 

activities of the U.S. CSE. Permitting 

more favorable treatment to foreign 

branches of U.S. CSEs than the principal 

U.S. entity could create an easy way for 

U.S. CSEs to circumvent the 

Commission’s margin requirements, 

which could undermine the safety and 

soundness of the U.S. CSE and the U.S. 

financial system.275

b. Exclusion 

Under the Final Rule, the Commission 

excludes from its margin requirements 

uncleared swaps entered into by a nonU.S. CSE with a non-U.S. counterparty 

(including a non-U.S. CSE), provided 

that neither counterparty’s obligations 

under the relevant swap are guaranteed 

by a U.S. person and neither 

counterparty is an FCS nor a U.S. 

branch of a non-U.S. CSE. As discussed 

in section II.B.3.b above, the 

Commission believes that it is 

appropriate to tailor the application of 

margin requirements in the cross-border 

context, consistent with section 4s(e) of 

the CEA and comity principles, so as to 

exclude this narrow class of uncleared 

swaps involving a non-U.S. CSE and a 

non-U.S. counterparty. 

The Commission believes that such 

non-U.S. CSEs may benefit from the 

Exclusion because it allows them to 

avoid duplicative or conflicting 

regulations where a transaction is 

subject to more than one uncleared 

swap margin regime. On the other hand, 

to the extent the Exclusion allows a 

non-U.S. CSE to rely on foreign margin 

requirements that are not comparable to 

the Commission’s, the Exclusion could 

result in a less rigorous margin regime 

for such CSE or, in the extreme, the 

absence of any margin requirements. 

This would not only increase the risk 

posed by that CSE’s swaps activities, but 

could create competitive disparities 

between non-U.S. CSEs relying on the 

Exclusion and other CSEs that are not 

eligible for the Exclusion. That is, the 

Exclusion could allow these non-U.S. 

CSEs to offer better pricing or other 

terms to their non-U.S. clients and put 

them in a better position (than CSEs 

ineligible for the Exclusion) to compete 

with non-CFTC registered dealers in the 

relevant foreign jurisdiction for foreign 

clients. The degree of competitive 

disparity will depend on the degree of 

disparity between the Commission’s 

margin framework and that of the 

relevant foreign jurisdiction. 

The Commission does not generally 

expect that the Exclusion will result in 

a significant diminution in the safety 

and soundness of the non-U.S. CSE, as 

discussed in section II.B.3.b above. This 

is based on several considerations. First, 

the Commission understands that most 

swaps are currently transacted in 

jurisdictions that have agreed to adhere 

to the BCBS–IOSCO framework, which 

covers financial entities.276

Accordingly, the Commission 

anticipates that many excluded swaps 

will nevertheless be subject to margin 

requirements in a jurisdiction that 

adheres to the BCBS–IOSCO framework. 

Second, the potential adverse effect on 

a non-U.S. CSE would be mitigated by 

the Commission’s capital requirements 

which, as proposed, would impose a 

capital charge for uncollateralized 

exposures.277

Third, a non-U.S. CSE that can avail 

itself of the Exclusion will still be 

subject to the Commission’s margin 

rules with respect to all uncleared 

swaps not meeting the criteria for the 

Exclusion, albeit with the possibility of 

substituted compliance. That the nonU.S. CSE will be subject to U.S. or 

comparable margin requirements when 

entering into a swap with U.S. 

counterparties reduces the possibility of 

a cascading event affecting U.S. 

counterparties and the U.S. financial 

markets more broadly as a result of a 

default by the non-U.S. CSE. 

The unavailability of the Exclusion to 

FCSs could disadvantage them relative 

to other non-U.S. CSEs that are eligible 

for the Exclusion or non-CFTC 

registered dealers within a foreign 

jurisdiction. As commenters noted, nonU.S. CSEs that rely on the Exclusion or 

non-CFTC registered dealers could 

realize a cost advantage over FCSs and 

thus have the potential to offer better 

pricing terms to foreign clients. The 

competitive disparity between non-U.S. 

CSEs that rely on the Exclusion and 

FCSs, however, may be somewhat 

mitigated to the extent that the relevant 

foreign jurisdiction implements the 

BCBS–IOSCO framework.278

As noted above in section II.B.3.a., 

some commenters suggested that 

treating U.S. branches of non-U.S. CSEs 

differently from the rest of the CSE with 

respect to eligibility for the Exclusion 

could present operational challenges, 

requiring non-U.S. CSEs to document 

transactions with the U.S. branch under 

a separate ISDA Master Agreement. 

However, as explained in section 

II.B.3.b., in most cases the Commission 

does not believe a separate credit 

support agreement will be necessary; 279

furthermore, in those cases where it is 

required, the Commission nevertheless 

believes that extending the Exclusion to 

U.S. branches of non-U.S. CSEs would 

not be appropriate for the reasons 

discussed in section II.B.3.b above.280 In 

addition, allowing U.S. branches to rely 

on the Exclusion would enable them to 

offer more competitive terms to nonU.S. clients than U.S. CSEs, thereby 

gaining an advantage when dealing with 

non-U.S. clients relative to other CSEs 

operating within the United States (i.e., 

U.S. CSEs). On the other hand, for the 

same reason, the Final Rule could put 

non-U.S. CSEs that conduct swaps 

business through their U.S. branches at 

a disadvantage relative either to nonU.S. CSEs that are eligible for the 

Exclusion or non-CFTC registered 

dealers that conduct swaps business 

overseas. The Commission recognizes 

that while substituted compliance will 

be broadly available to such U.S. 

branches of non-U.S. CSEs, more 

compliance costs could be incurred by 

these entities than if the Exclusion were 

made available if a foreign jurisdiction’s 

margin requirements are not 

comparable.281

In order to effectuate the 

Commission’s treatment of inter-affiliate 

swaps under the Final Margin Rule, the 

Exclusion is not available if the marketfacing transaction of the non-U.S. CSE 

(that is otherwise eligible for the 

Exclusion) is not subject to comparable 

initial margin collection requirements in 

the home jurisdiction and any of the 


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282See 17 CFR 23.157. 

283As used in this release, a ‘‘non-segregation 

jurisdiction’’ is a jurisdiction where inherent 

limitations in the legal or operational infrastructure 

of the foreign jurisdiction make it impracticable for 

the CSE and its counterparty to post initial margin 

pursuant to custodial arrangements that comply 

with the Final Margin Rule, as further described in 

section II.B.4.b. 

284As used in this release, a ‘‘non-netting 

jurisdiction’’ is a jurisdiction in which a CSE 

cannot conclude, with a well-founded basis, that 

the netting agreement with a counterparty in that 

foreign jurisdiction meets the definition of an 

‘‘eligible master netting agreement’’ set forth in the 

Final Margin Rule, as described in section II.B.5.b. 

285The Commission considered a broader 

provision, including, as requested by commenters, 

excluding these transactions from its margin rule. 

However, as netting provisions are critical to the 

overall goal of margin requirements and the 

Commission is not requiring CSEs to post margin 

on a gross basis, the Commission believes that the 

regulatory gap that a broader provision would 

create would be inconsistent with the Commission’s 

mandate to protect the safety and soundness of 

CSEs. 

risk associated with the uncleared swap 

is transferred, directly or indirectly, 

through inter-affiliate transactions, to a 

U.S. CSE. As a consequence, the 

affected non-U.S. CSEs may be placed at 

a cost disadvantage relative to non-U.S. 

CSEs that can rely on the Exclusion as 

well as non-CFTC registered dealers 

operating in the foreign jurisdiction that 

are not subject to similarly rigorous 

initial margin collection requirements. 

The Commission, however, believes that 

this limitation is necessary to ensure 

that the Exclusion does not facilitate the 

transfer of risk to a U.S. CSE through the 

use of inter-affiliate transactions that, 

per the Final Margin Rule, are generally 

not subject to the collection of initial 

margin. 

c. Non-Segregation Jurisdictions and 

Non-Netting Jurisdictions 

The Final Rule includes a special 

provision for non-segregation 

jurisdictions, where custodial 

arrangements that comply with the 

Commission’s requirements set out in 

Commission Regulation 23.157 282 are 

impracticable due to the legal or 

operational infrastructure of the foreign 

jurisdiction.283 Specifically, an FCS or a 

foreign branch of a U.S. CSE may, in 

certain circumstances, be excepted from 

the requirement to post initial margin 

for the uncleared swap in compliance 

with the custodial requirements of the 

Final Margin Rule in certain foreign 

jurisdictions where inherent limitations 

in the legal or operational infrastructure 

of the jurisdiction make it impracticable 

for the CSE and its counterparty to 

comply with that requirement, subject 

to certain conditions. 

The Commission understands from 

commenters that inherent legal and 

operational constraints in certain 

jurisdictions could make compliance 

with the custodial requirements of the 

Final Margin Rule impracticable. 

Accordingly, absent the exception, FCSs 

and foreign branches of U.S. CSEs 

would be unable to conduct uncleared 

swap business with clients based in 

such jurisdictions, contributing to 

further market inefficiencies. The 

Commission further agrees with 

commenters that an exception from the 

requirement to post (but not from the 

requirement to collect) initial margin 

when transacting with clients in nonsegregation jurisdictions will 

accomplish the goal of ensuring a CSE’s 

safety and soundness but with less 

disruption to existing business 

relationships than the exchange of 

initial and variation margin would 

impose. 

After careful consideration, the 

Commission is adding a special 

provision so that FCSs and foreign 

branches of U.S. CSEs will not be 

foreclosed from engaging in uncleared 

swaps business in non-segregation 

jurisdictions, with appropriate 

conditions, including a 5 percent 

limitation, as discussed in section 

II.B.4.b above, to avoid compromising 

the safety and soundness of CSEs. The 

Commission does not believe a blanket 

de minimis exception from the 

Commission’s margin requirements, as 

suggested by commenters, is 

appropriate. Rather, the Commission 

believes that carefully tailored relief 

from the Final Margin Rule’s 

requirement to post initial margin and 

the custodial arrangement requirements 

that pertain to initial margin collected 

by a CSE will accomplish the goal of 

allowing FCSs and foreign branches of 

U.S. CSEs to carry on their swaps 

business in non-segregation 

jurisdictions without creating the risks 

that would attend wholesale exemption 

from margin requirements in these 

jurisdictions. In addition, in light of the 

importance of FCSs and foreign 

branches of U.S. CSEs to the U.S. 

financial system, the special provision 

includes certain conditions that are 

designed to appropriately limit the swap 

activities conducted by these CSEs in 

these jurisdictions in order to help 

ensure their safety and soundness. 

Although these conditions may place 

affected entities at a relative cost 

disadvantage when compared to nonU.S. CSEs that can rely on the Exclusion 

and non-CFTC registered dealers 

engaged in swaps activity in nonsegregation jurisdictions, and may limit 

the overall swap dealing activity of 

affected entities in these jurisdictions, 

the Commission believes that the 

special provision provides a substantial 

benefit to the affected entities by 

allowing them to conduct a limited level 

of swaps business in non-segregation 

jurisdictions where they would 

otherwise be foreclosed. While 

permitting FCSs and foreign branches of 

U.S. CSEs to carry on their swaps 

business in non-segregation 

jurisdictions in accordance with this 

special provision is not without some 

risk, in that the initial margin collected 

by FCSs and foreign branches of U.S. 

CSEs in reliance on this provision is not 

subject to the custodial arrangement 

requirements of the Final Margin Rule, 

the Commission believes that the 

conditions to using this provision 

(including the 5 percent limit in each of 

four broad risk categories set forth in 

§ 23.154(b)(2)(v)) should be sufficient to 

prevent undue risk arising from 

uncleared swaps by FCSs and foreign 

branches of U.S. CSEs relying on this 

provision. 

The Final Rule also includes a special 

provision for ‘‘non-netting’’ 

jurisdictions.284 In order to avail itself of 

this provision, the CSE must treat the 

uncleared swaps covered by the netting 

agreement on a gross basis in 

determining the amount of initial and 

variation margin that it must collect, but 

may net those uncleared swaps in 

determining the amount of initial and 

variation margin it must post to the 

counterparty, in accordance with the 

netting provisions of the Final Margin 

Rule. The Commission agrees that, as 

suggested by commenters, without 

enforceable netting and collateral 

arrangements, there is a risk that a CSE 

may not be able to effectively foreclose 

on the margin in the event of a 

counterparty default, and a risk that the 

administrator of an insolvent 

counterparty will ‘‘cherry-pick’’ from 

posted collateral to be returned in the 

event of insolvency, which could result 

in an increase in the risk in posting 

collateral. As with the provision for 

non-segregation jurisdictions, this 

provision is carefully tailored to allow 

CSEs to conduct swap transactions in 

‘‘non-netting’’ jurisdictions without 

abandoning the key protections behind 

the netting requirement under the Final 

Margin Rule.285 If the Commission were 

not to adopt this special provision, then 

a CSE would have to collect and post 

margin on a gross basis, which would 

result in greater costs to the CSE and 

result in additional credit risk, and put 

them at a competitive disadvantage. It is 

possible that this would lead to CSEs 


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286Although different registrants may choose to 

staff preparation of the comparability determination 

request with different personnel, Commission staff 

estimates that, on average, an initial request could 

be prepared and submitted with 10 hours of an inhouse attorney’s time. To estimate the hourly cost 

of an in-house attorney’s attorney time, Commission 

staff reviewed data in SIFMA’s Report on 

Management and Professional Earnings in the 

Securities Industry 2013, modified by Commission 

staff to account for an 1800-hour work-year and 

multiplied by a factor of 5.35 to account for firm 

size, employee benefits and overhead. Commission 

staff believes that use of a 5.35 multiplier here is 

appropriate because some persons may retain 

outside advisors to assist in making the 

determinations under the rules. 

287See supra notes 232 and 233 and 

accompanying text. Also, as the Commission noted 

above, the Final Margin Rule included substantial 

modifications from the Proposed Margin Rule that 

further aligned the Commission’s margin 

requirements with International Standards and, as 

a result, the potential for conflict with foreign 

margin requirements should be reduced. See supra 

note 29. 

being effectively precluded from doing 

business in these jurisdictions. 

4. Comparability Determinations 

As noted in section II.C above, any 

CSE eligible for substituted compliance 

may make a request for a comparability 

determination. Currently, there are 

approximately 106 swap entities 

provisionally registered with the 

Commission. The Commission further 

estimates that of the 106 swap entities 

that are registered, approximately 54 are 

subject to the Commission’s margin 

rules, as they are not supervised by a 

Prudential Regulator. However, the 

Commission notes that any foreign 

regulatory agency that has direct 

supervisory authority to administer the 

foreign regulatory framework for margin 

of uncleared swaps in the requested 

foreign jurisdiction may apply for a 

comparability determination. Further, 

once a comparability determination is 

made for a jurisdiction, it will apply for 

all entities or transactions in that 

jurisdiction to the extent provided in 

the determination, as approved by the 

Commission. 

Although there is uncertainty 

regarding the number of requests for 

comparability determinations that will 

be made under the Final Rule, the 

Commission estimates that it will 

receive applications for comparability 

determinations from 17 jurisdictions 

representing 61 separate registrants, and 

that each request will impose an average 

of 10 burden hours per registrant. 

Based on the above, the Commission 

estimates that the preparation and filing 

of submission requests for comparability 

determinations should take no more 

than 170 hours annually in the aggregate 

(17 registrants × 10 hours). The 

Commission further estimates that the 

total aggregate cost of preparing such 

submission requests will be $64,600, 

based on an estimated cost of $380 per 

hour for an in-house attorney.286

As summarized in section II.C.2, 

several commenters complained that the 

costs and burdens to market participants 

associated with the Commission’s 

proposed framework and standard for 

making comparability determinations 

would be minimized if the Commission 

were to rely on the BCBS–IOSCO 

framework as the sole basis for its 

comparability analysis and take a 

‘‘holistic’’ approach to determining 

comparability. As the Commission 

explained above, however, while the 

BCBS–IOSCO framework establishes 

minimum standards that are consistent 

with the objectives of the Commission’s 

own margin requirements, consistency 

with International Standards is 

necessary but may not be sufficient to 

finding comparability.287 Furthermore, 

allowing for a comparability 

determination to be made based on 

comparable outcomes and objectives 

notwithstanding differences in foreign 

jurisdictions’ requirements ensures that 

substituted compliance is made 

available to the fullest extent possible. 

While the Commission recognizes that, 

to the extent that a foreign margin 

regime is not deemed comparable in all 

respects, CSEs eligible for substituted 

compliance may experience costs from 

being required to comply with more 

than one set of specified margin 

requirements, the Commission believes 

that this approach is preferable to an allor-nothing approach, in which market 

participants may be forced to comply 

with both margin regimes in their 

entirety. 

5. Section 15(a) Factors 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders. 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. The 

Commission considers the costs and 

benefits resulting from its discretionary 

determinations with respect to the 

section 15(a) factors. 

a. Protection of Market Participants and 

the Public 

As described above, CEA section 

4s(e)(2)(A) requires the Commission to 

develop rules designed to ensure the 

safety and soundness of CSEs and the 

U.S. financial system. On the one hand, 

full application of the Commission’s 

margin requirements to all uncleared 

swaps of CSEs would help to ensure the 

safety and soundness of CSEs and the 

U.S. financial system by reducing 

counterparty credit risk and the threat of 

contagion. On the other hand, extending 

substituted compliance to certain crossborder swaps reduces the potential for 

conflicting or duplicative requirements, 

which would, in turn, reduce market 

distortions and promote global 

harmonization. In addition, where 

exceptions have been permitted (i.e., 

under the Exclusion and the special 

provisions for non-segregation and nonnetting jurisdictions), the Commission 

has limited their availability to strike a 

balance between international comity 

and the continuation of important 

business activity by qualifying CSEs, on 

the one hand, and limiting risk to CSEs 

and the U.S. financial system, on the 

other hand. While the Final Rule will 

allow CSEs to comply with foreign 

margin requirements as an alternative to 

the Commission’s requirements in 

certain circumstances, such margin 

requirements must be comparable in 

outcome and objectives, and the 

Commission retains the authority to 

modify or condition the availability of 

substituted compliance as necessary. 

Furthermore, substituted compliance is 

available on a more limited basis for 

U.S. CSEs and U.S. Guaranteed CSEs. 

Additionally, while the Final Rule also 

excludes certain uncleared swap 

transactions involving non-U.S. CSEs 

whose obligations under the relevant 

swap are not subject to a U.S. guarantee 

from the Final Margin Rule and excepts 

qualifying CSEs from certain 

requirements in non-segregation 

jurisdictions and non-netting 

jurisdictions, the Exclusion and special 

provisions are narrowly tailored and 

include safeguards to protect market 

participants and the public. Overall, the 

Commission believes that the Final Rule 

takes proper account of significant, and 

sometimes competing, factors in order 

to effectively address the risk posed to 

the safety and soundness of CSEs while 

creating a workable cross-border 

framework that reduces the potential for 

undue market disruptions and 

promoting global harmonization, 

thereby benefiting market participants 

and the public. 


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288As indicated in supra note 23, representatives 

of 26 regulatory authorities participated in the 

WGMR that developed the BCBS–IOSCO 

framework. 289See Proposed Capital Rule, 76 FR 27802. 

b. Efficiency, Competitiveness, and 

Financial Integrity 

As discussed above, the Final Rule 

may have both a positive and negative 

effect on market efficiency and 

competitiveness. As an initial matter, 

substituted compliance and the 

Exclusion should improve resource 

allocation efficiency by allowing market 

participants to avoid potentially 

duplicative or conflicting requirements, 

reducing the aggregate cost to the 

market of dealing uncleared swaps. By 

granting this relief to some CSEs and not 

others, however, the Final Rule may 

afford such CSEs a cost advantage 

compared to other CSEs that may be 

required to comply with potentially 

duplicative or conflicting requirements. 

Non-U.S. counterparties may also be 

incentivized to transact with CSEs that 

are eligible for substituted compliance 

in order to avoid complying with more 

than one margin regime (or the 

Commission’s margin regime alone), 

which could contribute to market 

inefficiencies. In addition, as the 

Exclusion is not provided to all CSEs, 

those that are not permitted to use the 

Exclusion may be at a competitive 

disadvantage when competing in foreign 

jurisdictions that do not have 

comparable margin rules. The 

Commission notes, however, that to the 

extent that non-U.S. CSEs are domiciled 

in jurisdictions with comparable 

requirements, this may mitigate possible 

regulatory arbitrage by these CSEs. 

At the same time, however, the 

Commission understands that if it did 

not provide special accommodations for 

certain CSEs to enter into certain 

markets, such CSEs would be 

disadvantaged and even prohibited from 

engaging in swaps in these jurisdictions. 

Furthermore, the Commission 

believes that the Final Rule ensures that 

substituted compliance and the 

Exclusion are extended in a tailored 

fashion that is consistent with 

protecting the integrity of the swaps 

market. Substituted compliance is only 

provided in the event that the relevant 

foreign jurisdiction has a comparable 

margin rule; if not, the CSE must 

comply with the Commission’s margin 

rule. Even in instances where the 

Exclusion is available, the Commission 

notes that: (1) The Final Margin Rule 

will cover many of the swaps of the 

non-U.S. CSEs (eligible for the 

Exclusion) with other counterparties, 

namely, all U.S. counterparties; (2) the 

Exclusion is limited to a narrow set of 

swaps by non-U.S. CSEs; and (3) the 

excluded swaps may be covered by 

another foreign regulator’s margin rule 

that is based on the BCBS–IOSCO 

framework. 

c. Price Discovery 

The Commission generally believes 

that substituted compliance, by 

reducing the potential for duplicative or 

conflicting regulations, could reduce 

impediments to transact uncleared 

swaps on a cross-border basis. This, in 

turn, may enhance liquidity as more 

market participants may be willing to 

enter into uncleared swaps, thereby 

possibly improving price discovery— 

and ultimately reducing market 

fragmentation. Alternatively, if 

substituted compliance or the Exclusion 

were not made available, CSEs could be 

incentivized to consider setting up their 

swap operations outside the 

Commission’s jurisdiction, and as a 

result, increase the potential for market 

fragmentation. Additionally, exceptions 

for non-segregation and non-netting 

jurisdictions could increase price 

discovery in such jurisdictions by 

opening such markets to CSEs where, by 

virtue of the application of the 

Commission’s margin requirements, 

such CSEs would otherwise be unable to 

deal uncleared swaps. 

d. Sound Risk Management Practices 

The Commission believes that the 

Final Rule is consistent with sound risk 

management practices. The Final 

Margin Rule promotes sound risk 

management practices, and this Final 

Rule requires U.S. CSEs and U.S. 

Guaranteed CSEs to apply that rule in 

its entirety for most cross-border 

transactions. To the extent substituted 

compliance is available in limited 

fashion to these entities and more 

broadly to non-U.S. CSEs, the foreign 

margin requirements must be 

comparable to the Commission’s in 

outcome and objectives. That should 

ensure that margin’s critical risk 

management function is unaffected. 

Although the Exclusion could 

potentially lead to weaker risk 

management for eligible non-U.S. CSEs 

to the extent that they are not otherwise 

subject to comparable foreign margin 

requirements, the Commission notes 

that in jurisdictions that are BCBS– 

IOSCO compliant, such CSEs will be 

subject to margin requirements that 

satisfy the minimum International 

Standards established by the BCBS– 

IOSCO framework.288 Furthermore, 

while the Commission recognizes that a 

special provision in the Final Rule will 

excuse CSEs that are FCSs and foreign 

branches of U.S. CSEs from the 

requirement to post initial margin 

pursuant to custodial arrangements that 

comply with the Final Margin Rule, the 

Commission believes that the impact to 

risk management will be mitigated by 

the relatively small volume of such 

transactions, the conditions required to 

rely on this special provision, including 

a limit on the overall swaps using the 

special provision, and the continued 

applicability of other requirements, 

including margin with respect to other 

uncleared swaps of such FCSs and 

foreign branches and broader capital 

requirements.289 The Commission 

similarly believes that the risk 

management implications of the special 

provision for non-netting jurisdictions 

will be limited. As explained above, 

CSEs will still be required to calculate 

and collect initial margin on a gross 

basis to ensure that the CSE can obtain 

the collateral posted with the 

counterparty in the event of 

counterparty default. 

e. Other Public Interest Considerations 

The Commission has not identified 

any additional public interest 

considerations related to the costs and 

benefits of the Final Rule. 

List of Subjects in 17 CFR Part 23 

Swaps, Swap dealers, Major swap 

participants, Capital and margin 

requirements. 

For the reasons discussed in the 

preamble, the Commodity Futures 

Trading Commission amends 17 CFR 

part 23 as set forth below: 

PART 23—SWAP DEALERS AND 

MAJOR SWAP PARTICIPANTS 

■ 1. The authority citation for part 23 is 

revised to read as follows: 

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

6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 16a, 

18, 19, 21. 

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

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

1641 (2010). 

■ 2. Add § 23.160 to read as follows: 

§ 23.160 Cross-border application. 

(a) Definitions. For purposes of this 

section only: 

(1) Foreign Consolidated Subsidiary 

means a non-U.S. CSE in which an 

ultimate parent entity that is a U.S. 

person has a controlling financial 

interest, in accordance with U.S. GAAP, 

such that the U.S. ultimate parent entity 

includes the non-U.S. CSE’s operating 

results, financial position and statement 


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of cash flows in the U.S. ultimate parent 

entity’s consolidated financial 

statements, in accordance with U.S. 

GAAP. 

(2) Guarantee means an arrangement 

pursuant to which one party to an 

uncleared swap has rights of recourse 

against a guarantor, with respect to its 

counterparty’s obligations under the 

uncleared swap. For these purposes, a 

party to an uncleared swap has rights of 

recourse against a guarantor if the party 

has a conditional or unconditional 

legally enforceable right to receive or 

otherwise collect, in whole or in part, 

payments from the guarantor with 

respect to its counterparty’s obligations 

under the uncleared swap. In addition, 

in the case of any arrangement pursuant 

to which the guarantor has a conditional 

or unconditional legally enforceable 

right to receive or otherwise collect, in 

whole or in part, payments from any 

other guarantor with respect to the 

counterparty’s obligations under the 

uncleared swap, such arrangement will 

be deemed a guarantee of the 

counterparty’s obligations under the 

uncleared swap by the other guarantor. 

(3) International standards mean the 

margin policy framework for noncleared, bilateral derivatives issued by 

the Basel Committee on Banking 

Supervision and the International 

Organization of Securities in September 

2013, as subsequently updated, revised, 

or otherwise amended, or any other 

international standards, principles or 

guidance relating to margin 

requirements for non-cleared, bilateral 

derivatives that the Commission may in 

the future recognize, to the extent that 

they are consistent with United States 

law (including the margin requirements 

in the Commodity Exchange Act). 

(4) Non-U.S. CSE means a covered 

swap entity that is not a U.S. person. 

The term ‘‘non-U.S. CSE’’ includes a 

‘‘Foreign Consolidated Subsidiary’’ or a 

U.S. branch of a non-U.S. CSE. 

(5) Non-U.S. person means any person 

that is not a U.S. person. 

(6) Ultimate parent entity means the 

parent entity in a consolidated group in 

which none of the other entities in the 

consolidated group has a controlling 

interest, in accordance with U.S. GAAP. 

(7) United States means the United 

States of America, its territories and 

possessions, any State of the United 

States, and the District of Columbia. 

(8) U.S. CSE means a covered swap 

entity that is a U.S. person. 

(9) U.S. GAAP means U.S. generally 

accepted accounting principles. 

(10) U.S. person means: 

(i) A natural person who is a resident 

of the United States; 

(ii) An estate of a decedent who was 

a resident of the United States at the 

time of death; 

(iii) A corporation, partnership, 

limited liability company, business or 

other trust, association, joint-stock 

company, fund or any form of entity 

similar to any of the foregoing (other 

than an entity described in paragraph 

(a)(10)(iv) or (v) of this section) (a ‘‘legal 

entity’’), in each case that is organized 

or incorporated under the laws of the 

United States or that has its principal 

place of business in the United States, 

including any branch of such legal 

entity; 

(iv) A pension plan for the employees, 

officers or principals of a legal entity 

described in paragraph (a)(10)(iii) of this 

section, unless the pension plan is 

primarily for foreign employees of such 

entity; 

(v) A trust governed by the laws of a 

state or other jurisdiction in the United 

States, if a court within the United 

States is able to exercise primary 

supervision over the administration of 

the trust; 

(vi) A legal entity (other than a 

limited liability company, limited 

liability partnership or similar entity 

where all of the owners of the entity 

have limited liability) that is owned by 

one or more persons described in 

paragraphs (a)(10)(i) through (v) of this 

section and for which such person(s) 

bears unlimited responsibility for the 

obligations and liabilities of the legal 

entity, including any branch of the legal 

entity; or 

(vii) An individual account or joint 

account (discretionary or not) where the 

beneficial owner (or one of the 

beneficial owners in the case of a joint 

account) is a person described in 

paragraphs (a)(10)(i) through (vi) of this 

section. 

(b) Applicability of margin 

requirements. The requirements of 

§§ 23.150 through 23.161 apply as 

follows. 

(1) Uncleared swaps of U.S. CSEs or 

Non-U.S. CSEs whose obligations under 

the relevant swap are guaranteed by a 

U.S. person—(i) Applicability of U.S. 

margin requirements; availability of 

substituted compliance for requirement 

to post initial margin. With respect to 

each uncleared swap entered into by a 

U.S. CSE or a non-U.S. CSE whose 

obligations under the swap are 

guaranteed by a U.S. person, the U.S. 

CSE or non-U.S. CSE whose obligations 

under the swap are guaranteed by a U.S. 

person shall comply with the 

requirements of §§ 23.150 through 

23.161 of this part, provided that the 

U.S. CSE or non-U.S. CSE whose 

obligations under the swap are 

guaranteed by a U.S. person may satisfy 

its requirement to post initial margin to 

certain counterparties to the extent 

provided in paragraph (b)(1)(ii) of this 

section. 

(ii) Compliance with foreign initial 

margin collection requirement. A 

covered swap entity that is covered by 

paragraph (b)(1)(i) of this section may 

satisfy its requirement to post initial 

margin under this part by posting initial 

margin in the form and amount, and at 

such times, that its counterparty is 

required to collect initial margin 

pursuant to a foreign jurisdiction’s 

margin requirements, but only to the 

extent that: 

(A) The counterparty is neither a U.S. 

person nor a non-U.S. person whose 

obligations under the relevant swap are 

guaranteed by a U.S. person; 

(B) The counterparty is subject to 

such foreign jurisdiction’s margin 

requirements; and 

(C) The Commission has issued a 

comparability determination under 

paragraph (c) of this section 

(‘‘Comparability Determination’’) with 

respect to such foreign jurisdiction’s 

requirements regarding the posting of 

initial margin by the covered swap 

entity (that is covered in paragraph 

(b)(1) of this section). 

(2) Uncleared swaps of Non-U.S. CSEs 

whose obligations under the relevant 

swap are not guaranteed by a U.S. 

person—(i) Applicability of U.S. Margin 

requirements except where an exclusion 

applies; Availability of substituted 

compliance. With respect to each 

uncleared swap entered into by a nonU.S. CSE whose obligations under the 

relevant swap are not guaranteed by a 

U.S. person, the non-U.S. CSE shall 

comply with the requirements of 

§§ 23.150 through 23.161 except to the 

extent that an exclusion is available 

under paragraph (b)(2)(ii) of this section, 

provided that a non-U.S. CSE whose 

obligations under the relevant swap are 

not guaranteed by a U.S. person may 

satisfy its margin requirements under 

this part to the extent provided in 

paragraphs (b)(2)(iii) and (b)(2)(iv) of 

this section. 

(ii) Exclusion. (A) Except as provided 

in paragraph (b)(2)(ii)(B) of this section, 

a non-U.S. CSE shall not be required to 

comply with the requirements of 

§§ 23.150 through 23.161 with respect to 

each uncleared swap it enters into to the 

extent that the following conditions are 

met: 

(1) The non-U.S. CSE’s obligations 

under the relevant swap are not 

guaranteed by a U.S. person; 

(2) The non-U.S. CSE is not a U.S. 

branch of a non-U.S. CSE; 


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(3) The non-U.S. CSE is not a Foreign 

Consolidated Subsidiary; and 

(4) The counterparty to the uncleared 

swap is a non-U.S. person (excluding a 

Foreign Consolidated Subsidiary or the 

U.S. branch of a non-U.S. CSE), whose 

obligations under the relevant swap are 

not guaranteed by a U.S. person. 

(B) Notwithstanding paragraph 

(b)(2)(ii)(A) of this section, any 

uncleared swap of a non-U.S. CSE that 

meets the conditions for the Exclusion 

set forth in paragraph (b)(2)(ii)(A) must 

nevertheless comply with §§ 23.150 

through 23.161 if: 

(1) The uncleared swap of the nonU.S. CSE is not covered by a 

Comparability Determination with 

respect to the initial margin collection 

requirements in the relevant foreign 

jurisdiction in accordance with 

paragraph (c) of this section; and 

(2) The non-U.S. CSE enters into an 

inter-affiliate swap(s), transferring any 

risk arising out of the uncleared swap 

described in paragraph (b)(2)(ii)(B)(1) of 

this section directly or indirectly, to a 

margin affiliate (as the term ‘‘margin 

affiliate’’ is defined in § 23.151 of this 

part) that is a U.S. CSE or a U.S. 

Guaranteed CSE. 

(iii) Availability of substituted 

compliance where the counterparty is 

not a U.S. CSE or a non-U.S. CSE whose 

obligations under the relevant swap are 

guaranteed by a U.S. person. Except to 

the extent that an exclusion is available 

under paragraph (b)(2)(ii) of this section, 

with respect to each uncleared swap 

entered into by a non-U.S. CSE whose 

obligations under the relevant swap are 

not guaranteed by a U.S. person with a 

counterparty (except where the 

counterparty is either a U.S. CSE or a 

non-U.S. CSE whose obligations under 

the relevant swap are guaranteed by a 

U.S. person), the non-U.S. CSE whose 

obligations under the relevant swap are 

not guaranteed by a U.S. person may 

satisfy margin requirements under this 

part by complying with the margin 

requirements of a foreign jurisdiction to 

which such non-U.S. CSE (whose 

obligations under the relevant swap are 

not guaranteed by a U.S. person) is 

subject, but only to the extent that the 

Commission has issued a Comparability 

Determination under paragraph (c) of 

this section for such foreign jurisdiction. 

(iv) Availability of substituted 

compliance where the counterparty is a 

U.S. CSE or a non-U.S. CSE whose 

obligations under the relevant swap are 

guaranteed by a U.S. person. With 

respect to each uncleared swap entered 

into by a non-U.S. CSE whose 

obligations under the relevant swap are 

not guaranteed by a U.S. person with a 

counterparty that is a U.S. CSE or a nonU.S. CSE whose obligations under the 

relevant swap are guaranteed by a U.S. 

person, the non-U.S. CSE (whose 

obligations under the relevant swap are 

not guaranteed by a U.S. person) may 

satisfy its requirement to collect initial 

margin under this part by collecting 

initial margin in the form and amount, 

and at such times and under such 

arrangements, that the non-U.S. CSE 

(whose obligations under the relevant 

swap are not guaranteed by a U.S. 

Person) is required to collect initial 

margin pursuant to a foreign 

jurisdiction’s margin requirements, 

provided that: 

(A) The non-U.S. CSE (whose 

obligations under the relevant swap are 

not guaranteed by a U.S. person) is 

subject to the foreign jurisdiction’s 

regulatory requirements; and 

(B) The Commission has issued a 

Comparability Determination with 

respect to such foreign jurisdiction’s 

margin requirements. 

(c) Comparability determinations—(1) 

Eligibility requirements. The following 

persons may, either individually or 

collectively, request a Comparability 

Determination with respect to some or 

all of the Commission’s margin 

requirements: 

(i) A covered swap entity that is 

eligible for substituted compliance 

under this section; or 

(ii) A foreign regulatory authority that 

has direct supervisory authority over 

one or more covered swap entities and 

that is responsible for administering the 

relevant foreign jurisdiction’s margin 

requirements. 

(2) Submission requirements. Persons 

requesting a Comparability 

Determination should provide the 

Commission (either by hard copy or 

electronically): 

(i) A description of the objectives of 

the relevant foreign jurisdiction’s 

margin requirements; 

(ii) A description of how the relevant 

foreign jurisdiction’s margin 

requirements address, at minimum, 

each of the following elements of the 

Commission’s margin requirements. 

Such description should identify the 

specific legal and regulatory provisions 

that correspond to each element and, if 

necessary, whether the relevant foreign 

jurisdiction’s margin requirements do 

not address a particular element: 

(A) The products subject to the 

foreign jurisdiction’s margin 

requirements; 

(B) The entities subject to the foreign 

jurisdiction’s margin requirements; 

(C) The treatment of inter-affiliate 

derivative transactions; 

(D) The methodologies for calculating 

the amounts of initial and variation 

margin; 

(E) The process and standards for 

approving models for calculating initial 

and variation margin models; 

(F) The timing and manner in which 

initial and variation margin must be 

collected and/or paid; 

(G) Any threshold levels or amounts; 

(H) Risk management controls for the 

calculation of initial and variation 

margin; 

(I) Eligible collateral for initial and 

variation margin; 

(J) The requirements of custodial 

arrangements, including segregation of 

margin and rehypothecation; 

(K) Margin documentation 

requirements; and 

(L) The cross-border application of the 

foreign jurisdiction’s margin regime. 

(iii) A description of the differences 

between the relevant foreign 

jurisdiction’s margin requirements and 

the International Standards; 

(iv) A description of the ability of the 

relevant foreign regulatory authority or 

authorities to supervise and enforce 

compliance with the relevant foreign 

jurisdiction’s margin requirements. 

Such description should discuss the 

powers of the foreign regulatory 

authority or authorities to supervise, 

investigate, and discipline entities for 

compliance with the margin 

requirements and the ongoing efforts of 

the regulatory authority or authorities to 

detect and deter violations of, and 

ensure compliance with, the margin 

requirements; and 

(v) Copies of the foreign jurisdiction’s 

margin requirements (including an 

English translation of any foreign 

language document); 

(vi) Any other information and 

documentation that the Commission 

deems appropriate. 

(3) Standard of review. The 

Commission will issue a Comparability 

Determination to the extent that it 

determines that some or all of the 

relevant foreign jurisdiction’s margin 

requirements are comparable to the 

Commission’s corresponding margin 

requirements. In determining whether 

the requirements are comparable, the 

Commission will consider all relevant 

factors, including: 

(i) The scope and objectives of the 

relevant foreign jurisdiction’s margin 

requirements; 

(ii) Whether the relevant foreign 

jurisdiction’s margin requirements 

achieve comparable outcomes to the 

Commission’s corresponding margin 

requirements; 

(iii) The ability of the relevant 

regulatory authority or authorities to 


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supervise and enforce compliance with 

the relevant foreign jurisdiction’s 

margin requirements; and 

(iv) Any other facts and circumstances 

the Commission deems relevant. 

(4) Reliance. Any covered swap entity 

that, in accordance with a 

Comparability Determination, complies 

with a foreign jurisdiction’s margin 

requirements, would be deemed to be in 

compliance with the Commission’s 

corresponding margin requirements. 

Accordingly, if the Commission 

determines that a covered swap entity 

has failed to comply with the foreign 

jurisdiction’s margin requirements, it 

could initiate an action for a violation 

of the Commission’s margin 

requirements. All covered swap entities, 

regardless of whether they rely on a 

Comparability Determination, remain 

subject to the Commission’s 

examination and enforcement authority. 

(5) Conditions. In issuing a 

Comparability Determination, the 

Commission may impose any terms and 

conditions it deems appropriate. 

(6) Modifications. The Commission 

reserves the right to further condition, 

modify, suspend, terminate or otherwise 

restrict a Comparability Determination 

in the Commission’s discretion. 

(7) Delegation of authority. The 

Commission hereby delegates to the 

Director of the Division of Swap Dealer 

and Intermediary Oversight, or such 

other employee or employees as the 

Director may designate from time to 

time, the authority to request 

information and/or documentation in 

connection with the Commission’s 

issuance of a Comparability 

Determination. 

(d) Non-netting jurisdiction 

requirements. Except as provided in 

paragraph (e) of this section, if a CSE 

cannot conclude after sufficient legal 

review with a well-founded basis that 

the netting agreement described in 

§ 23.152(c) meets the definition of 

‘‘eligible master netting agreement’’ set 

forth in § 23.151, the CSE must treat the 

uncleared swaps covered by the 

agreement on a gross basis for the 

purposes of calculating and complying 

with the requirements of § 23.152(a) and 

§ 23.153(a) to collect margin, but the 

CSE may net those uncleared swaps in 

accordance with § 23.152(c) and 

§ 23.153(d) for the purposes of 

calculating and complying with the 

requirements of this part to post margin. 

A CSE that relies on this paragraph (d) 

must have policies and procedures 

ensuring that it is in compliance with 

the requirements of this paragraph, and 

maintain books and records properly 

documenting that all of the 

requirements of this paragraph (d) are 

satisfied. 

(e) Jurisdictions Where Compliance 

with Custodial Arrangement 

Requirements is Unavailable. Sections 

23.152(b), 23.157(b), and paragraph (d) 

of this section do not apply to an 

uncleared swap entered into by a 

Foreign Consolidated Subsidiary or a 

foreign branch of a U.S. CSE if: 

(1) Inherent limitations in the legal or 

operational infrastructure in the 

applicable foreign jurisdiction make it 

impracticable for the CSE and its 

counterparty to post any form of eligible 

initial margin collateral recognized 

pursuant to § 23.156 in compliance with 

the custodial arrangement requirements 

of § 23.157; 

(2) The CSE is subject to foreign 

regulatory restrictions that require the 

CSE to transact in uncleared swaps with 

the counterparty through an 

establishment within the foreign 

jurisdiction and do not accommodate 

the posting of collateral for the 

uncleared swap in compliance with the 

custodial arrangements of § 23.157 in 

the United States or a jurisdiction for 

which the Commission has issued a 

comparability determination under 

paragraph (c) of this section with 

respect to § 23.157; 

(3) The counterparty to the uncleared 

swap is a non-U.S. person that is not a 

CSE, and the counterparty’s obligations 

under the uncleared swap are not 

guaranteed by a U.S. person; 

(4) The CSE collects initial margin for 

the uncleared swap in accordance with 

§ 23.152(a) in the form of cash pursuant 

to § 23.156(a)(1)(i), and posts and 

collects variation margin in accordance 

with § 23.153(a) in the form of cash 

pursuant to § 23.156(a)(1)(i); 

(5) For each broad risk category, as set 

out in § 23.154(b)(2)(v), the total 

outstanding notional value of all 

uncleared swaps in that broad risk 

category, as to which the CSE is relying 

on this paragraph (e), may not exceed 

5% of the CSE’s total outstanding 

notional value for all uncleared swaps 

in the same broad risk category; 

(6) The CSE has policies and 

procedures ensuring that it is in 

compliance with the requirements of 

this paragraph (e); and 

(7) The CSE maintains books and 

records properly documenting that all of 

the requirements of this paragraph (e) 

are satisfied. 

Issued in Washington, DC, on May 24, 

2016, by the Commission. 

Christopher J. Kirkpatrick, 

Secretary of the Commission. 

Note: The following table and appendices 

will not appear in the Code of Federal 

Regulations. 

Table A—Application of the Final Rule 

The following table should be read in 

conjunction with the rest of the 

preamble and the text of the Final Rule, 

as well as the footnotes at the end of the 

table. 

CSE Counterparty Applicable margin requirements 

U.S. CSE ............................................................

or 

Non-U.S. CSE (including U.S. branch of a nonU.S. CSE and a Foreign Consolidated Subsidiary (‘‘FCS’’)) whose obligations under the 

relevant swap are guaranteed by a U.S. person.

• U.S. person (including U.S. CSE) ................

• Non-U.S. person (including non-U.S. CSE, 

FCS, and U.S. branch of a non-U.S. CSE) 

whose obligations under the relevant swap 

are guaranteed by a U.S. person.

U.S. (All). 

• Non-U.S. person (including non-U.S. CSE, 

FCS and U.S. branch of a non-U.S. CSE) 

whose obligations under the relevant swap 

are not guaranteed by a U.S. person.

U.S. (Initial Margin collected by CSE in column 1). 

Substituted Compliance (Initial Margin posted 

by CSE in column 1). 

U.S. (Variation Margin). 

FCS whose obligations under the relevant swap 

are not guaranteed by a U.S. person.

or 

U.S. branch of a non-U.S. CSE whose obligations under the relevant swap are not guaranteed by a U.S. person.

• U.S. CSE ......................................................

• Non-U.S. CSE (including U.S. branch of a 

non-U.S. CSE and FCS) whose obligations 

under the relevant swap are guaranteed by 

a U.S. person.

U.S. (Initial Margin posted by CSE in column 

1). 

Substituted Compliance (Initial Margin collected by CSE in column 1). 

U.S. (Variation Margin). 


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CSE Counterparty Applicable margin requirements 

• U.S. person (except as noted above for a 

CSE).

Substituted Compliance (All). 

• Non-U.S. person whose obligations under 

the swap are guaranteed by a U.S. person 

(except a non-U.S. CSE, U.S. branch of a 

non-U.S. CSE, and FCS whose obligations 

are guaranteed, as noted above).

• Non-U.S. person (including non-U.S. CSE, 

U.S. branch of a non-U.S. CSE, and a 

FCS) whose obligations under the relevant 

swap are not guaranteed by a U.S. person.

Non-U.S. CSE (that is not an FCS or a U.S. 

branch of a non-U.S. CSE) whose obligations 

under the relevant swap are not guaranteed 

by a U.S. person.

• U.S. CSE ......................................................

• Non-U.S. CSE (including U.S. branch of a 

non-U.S. CSE and FCS) whose obligations 

under the swap are guaranteed by a U.S. 

person.

U.S. (Initial Margin posted by CSE in column 

1). 

Substituted Compliance (Initial Margin collected by CSE in column 1). 

U.S. (Variation Margin). 

• U.S. person (except as noted above for a 

CSE).

Substituted Compliance (All). 

• Non-U.S. person whose obligations under 

the swap are guaranteed by a U.S. person 

(except a non-U.S. CSE whose obligations 

are guaranteed, as noted above).

• U.S. branch of a non-U.S. CSE or FCS, in 

each case whose obligations under the relevant swap are not guaranteed by a U.S. 

person.

• Non-U.S. person (including a non-U.S. 

CSE, but not an FCS or a U.S. branch of a 

non-U.S. CSE) whose obligations under the 

relevant swap are not guaranteed by a U.S. 

person.

Excluded (except in connection with certain 

inter-affiliate swaps). 

1The term ‘‘U.S. person’’ is defined in § 23.160(a)(10) of the Final Rule. A ‘‘non-U.S. person’’ is any person that is not a ‘‘U.S. person.’’ The 

term swap means an uncleared swap and is defined in § 23.151 of the Final Margin Rule. See Margin Requirements for Uncleared Swaps for 

Swap Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016). 2As used in this table, the term ‘‘Foreign Consolidated Subsidiary’’ or ‘‘FCS’’ refers to a non-U.S. CSE in which an ultimate parent entity that is 

a U.S. person has a controlling financial interest, in accordance with U.S. GAAP, such that the U.S. ultimate parent entity includes the non-U.S. 

CSE’s operating results, financial position and statement of cash flows in the U.S. ultimate parent entity’s consolidated financial statements, in 

accordance with U.S. GAAP. The term ‘‘ultimate parent entity’’ means the parent entity in a consolidated group in which none of the other entities in the consolidated group has a controlling interest, in accordance with U.S. GAAP. 3 Under § 23.160(e) of the Final Rule, in certain foreign jurisdictions where inherent limitations in the legal or operational infrastructure of the jurisdiction make it impracticable for the CSE and its counterparty to post initial margin for the uncleared swap in compliance with the custodial arrangement requirements of the Final Margin Rule, an FCS (or non-U.S. branch of a U.S. CSE) may be eligible to engage in uncleared swaps 

with certain non-U.S. counterparties, subject to a limit, but only if certain conditions are satisfied. Under the limit, for each broad risk category set 

out in § 23.154(b)(2)(v), the total outstanding notional value of all uncleared swaps in that broad risk category, as to which the CSE is relying on 

§ 23.160(e), may not exceed 5% of the CSE’s total outstanding notional value for all uncleared swaps in the same broad risk category. The specified conditions include collecting the gross amount of initial margin in cash, and posting and collecting variation margin in cash, in accordance 

with the Final Margin Rule. The CSE’s counterparty must be a non-U.S. person that is not a CSE, and the counterparty’s obligations under the 

swap must not be guaranteed by a U.S. person. This provision does not apply if the CSE that is subject to the foreign regulatory restrictions is 

permitted to post collateral for the uncleared swap in compliance with the custodial arrangements of § 23.157 in the United States or a jurisdiction for which the Commission has issued a comparability determination with respect to § 23.157. An FCS (or non-U.S. branch of a U.S. CSE) 

that relies on this special provision would not post initial margin in qualifying foreign jurisdictions, and would not be required to hold initial margin 

that they collect with one or more custodians that are not the CSE, its counterparty, or an affiliate of the CSE or its counterparty as would otherwise be required by § 23.157(b) of the Final Margin Rule. CSEs that rely on this special provision must have policies and procedures to ensure 

compliance and maintain books and records properly documenting that all of the requirements of this provision are satisfied. 

If a CSE cannot conclude after sufficient legal review with a well-founded basis that the netting agreement with a counterparty in a foreign jurisdiction meets the definition of an ‘‘eligible master netting agreement’’ set forth in the Final Margin Rule, the CSE must treat the uncleared 

swaps covered by the netting agreement on a gross basis in determining the amount of initial and variation margin that it must collect, but the 

CSE may net those uncleared swaps in accordance with the netting provisions of the Final Margin Rule in determining the amount of initial and 

variation margin that it must post to the counterparty. The CSE must have policies and procedures to ensure compliance and maintain books 

and records properly documenting that all of the requirements of this provision are satisfied. 4 In order to preserve the Commission’s intent with respect to the treatment of inter-affiliate swaps under the Final Margin Rule, the Exclusion 

is not available if the market-facing swap of the non-U.S. CSE (that is otherwise eligible for the Exclusion) is not subject to comparable initial 

margin collection requirements in the home jurisdiction and any of the risk associated with the uncleared swap is transferred, directly or indirectly, through inter-affiliate swaps, to a U.S. CSE or a U.S. Guaranteed CSE. Under the Final Margin Rule, a CSE is not required to collect initial margin from its affiliate, provided, among other things, that affiliate collects initial margin on its market-facing swaps or is subject to comparable initial margin collection requirements (in the case of non-U.S. affiliates that are financial end-users) on their own market-facing swaps. 


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34852 Federal Register / Vol. 81, No. 104 / Tuesday, May 31, 2016 / Rules and Regulations 

290Public Law 111–203, 124 Stat. 1376 (2010). 

291http://www.cftc.gov/PressRoom/

SpeechesTestimony/bowenstatement121615a. 

292Margin Requirements for Uncleared Swaps for 

Swap Dealers and Major Swap Participants, 81 FR 

636, 675 (Jan. 6, 2016). 

Appendices to Margin Requirements for 

Uncleared Swaps for Swap Dealers and 

Major Swap Participants—CrossBorder Application of the Margin 

Requirements—Commission Voting 

Summary, Chairman’s Statement, and 

Commissioners’ Statements 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Massad and 

Commissioner Bowen voted in the 

affirmative. Commissioner Giancarlo voted in 

the negative. 

Appendix 2—Statement of Chairman 

Timothy G. Massad 

I am pleased that today, the Commission 

has adopted a cross-border approach to our 

rule setting margin for uncleared swaps. 

Our margin rule is one of the most 

important elements of swaps market 

regulation set forth in the Dodd-Frank Act. 

Margin requirements help ensure that 

uncleared swaps, which will always remain 

a sizable portion of the market, do not 

generate excessive uncollateralized risk. Last 

December, the Commission adopted a strong 

and sensible margin rule. It requires swap 

dealers and major swap participants to post 

and collect margin in their transactions with 

one another, and with financial entities with 

which they have significant exposures. 

The risks our margin rule seeks to prevent 

do not only originate in the United States. 

The interconnected nature of the global 

swaps market means that risks created across 

the globe have the potential to flow back into 

the United States. We recognize that having 

a global swaps market is beneficial to all 

users. Therefore, one of the most important 

objectives we already accomplished was to 

ensure our margin rule is substantially 

similar to comparable international rules. 

Harmonization is critical to creating a sound 

international framework for regulation. 

We also recognize that not all jurisdictions 

will adopt strong margin rules. And even 

where rules are substantially harmonized, 

there will still be some differences. Because 

cross-border transactions are commonplace, 

we must clarify which rules apply in 

different situations. Today, the Commission 

has acted to provide that clarification. 

First, we have drawn a clear, reasonable 

line as to when the CFTC should take 

offshore risk into account. Today’s action 

ensures that our rule, or a comparable 

international measure, applies to swap 

dealers that are foreign consolidated 

subsidiaries of a U.S. parent. This helps 

address the risk that can flow back into the 

United States from that offshore activity, 

even when the subsidiary is not explicitly 

guaranteed by the U.S. parent. This treatment 

of foreign consolidated subsidiaries—and our 

general cross-border approach—is also 

consistent with the approach taken by the 

U.S. prudential regulators. 

At the same time, to further our efforts 

toward harmonization, and to avoid conflicts 

with the rules of other jurisdictions, we have 

provided for a broad scope of substituted 

compliance. Not only will non-U.S. swap 

dealers be eligible for substituted 

compliance, so will U.S. swap dealers with 

respect to the margin they post to non-U.S. 

persons. This approach is an appropriate 

response to the complex world created by the 

swap industry, where global swap dealers 

can book a swap in a variety of ways. Dealers 

may book swaps through different 

subsidiaries, branches or affiliates all over 

the world, and they may do so based on a 

number of considerations, such as the most 

favorable legal treatment. Our approach is 

intended to protect our markets against risk 

coming from these cross-border transactions, 

while taking into account the interests of 

other regulators. 

The process for conducting a comparability 

assessment of another jurisdiction’s rules is 

similar to what we have done in other areas. 

The rule specifies the various factors that 

should be considered, and indeed there is no 

reasonable way one can make a 

determination without evaluating those 

factors. One important consideration will be 

compliance with the international framework 

developed by the Basel Committee on 

Banking Supervision and the International 

Organization of Securities Commissions. Our 

approach will look at the elements of each 

jurisdiction’s rule set with an eye towards a 

flexible, outcome-based determination. The 

process of making comparability assessments 

can take time. In light of the impending 

September 1 compliance date, I have asked 

the CFTC staff to work closely with other 

domestic and international regulators, as well 

as industry participants, and endeavor to 

effect a smooth transition. 

The approach we have finalized today 

helps ensure the safety and soundness of 

registered swap dealers, and reduces the 

potential for conflict with the rules of other 

international regulators. I thank all those who 

provided us with important feedback on 

these issues. I also thank CFTC staff for their 

work on this rule, and my fellow 

Commissioners for their careful 

consideration of this measure. 

Appendix 3—Concurring Statement of 

Commissioner Sharon Y. Bowen 

Margin and Capital as the Pillars of Market 

Safety 

Margin and capital are two of the most 

important tools for risk mitigation for the 

derivatives markets. Thus it is very important 

that we get our rules on margin and capital 

right in order to accomplish the reform 

required under the Dodd-Frank Wall Street 

Reform and Consumer Protection Act.290 As 

many of you know, last December, I voted 

against the final margin for uncleared swaps 

rule because I did not believe that it was 

strong enough to fully protect our system. As 

I said in December, adequate margin is 

fundamental to market safety as it is a 

‘‘critical shock absorber for the bumps and 

potholes of our financial markets and for the 

risk of contagion and spillovers.’’ 291 I am 

even more confident in that view today. 

Today we vote on a critical supplement to 

that margin rule. Specifically, today’s rule 

would allow registered dealers to substitute 

the margin rules of comparable jurisdictions 

for our rules, when dealing with non-US 

counterparties, under certain conditions. 

Needless to say, cross-border regulation is 

central to our margin rule functioning 

effectively since our markets are global. 

I intend to vote yes for this cross-border 

rule because I want to give the market legal 

certainty, as the first compliance date for our 

margin rules, as well as those of regulators 

across jurisdictions—September 1, 2016— 

looms.292 It is important that market 

participants have enough time to prepare in 

advance of this date so as to minimize market 

instability. We also want to minimize the risk 

of creating regulatory arbitrage across 

jurisdictions. While my concerns about our 

margin regime remain, I recognize that there 

is no opportunity in today’s cross-border 

margin decision to remedy those errors. 

One of the major drawbacks of our margin 

rulemaking is that it was not done in 

conjunction with our capital rulemaking. 

Margin and capital are intertwined—if our 

margin rule is weak, our capital rule needs 

to be stronger to compensate. If both are 

strong, investors and consumers can be 

confident that we have learned the lessons of 

the past, and have placed adequate 

protections in place against future financial 

instability. But, if both are weak, we have 

surrendered our best defenses against 

contagion. We put the interests of our 

investors at risk when we view regulation in 

a piecemeal and non-comprehensive fashion, 

because we are not seeing the whole picture. 

So, as I vote today on cross-border margin, 

my mind is on our upcoming capital rule 

proposal. 

Any firm that aspires to be a swap dealer 

is aspiring to be a significant player in our 

economy. They must have the capacity to not 

only stand ready to be the buyer to each 

seller and the seller to each buyer, but to 

maintain those positions over years. Their 

creditworthiness must be above reproach. In 

that way, market participants, including 

commercial end-users who need to hedge, 

can be confident that their dealer will be 

there during times of stability and crisis. It 

is therefore critical to the health of our 

economy that the market trusts, and with 

good reason, that our dealers are robust and 

steadfast—that they are able to withstand the 

financial swings that are endemic to today’s 

economy. Thus while strong capital rules 

may prevent some entities from entering the 

dealing business, they ultimately benefit the 

dealers, their customers and the whole 

economy. 

In order to create a capital rule that 

appropriately manages risk for the American 

people and our critical economy, our capital 

rule proposal must: 

(1) Not Be Weaker Than Our Comparable 

Prudential Regulators’ Rule: The capital 

proposal, and subsequent final rule, must be 

as strong as those of the Prudential 

Regulators. We are required under law to 

establish minimum capital requirements that 

are ‘‘comparable’’ to our Prudential Regulator 

counterparts ‘‘to the maximum extent 


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293Commodity Exchange Act (CEA) 6s(e)(3)(D). 

294CEA 6s(e)(2)(C). 

295With the exception of the capital charge to the 

segregated customer funds that have been set aside 

to secure cleared products. See ‘‘Speech of 

Commissioner Sharon Y. Bowen at George 

Washington Law, 2016 Manuel F. Cohen Lecture,’’ 

Feb. 4, 2016, available at http://www.cftc.gov/

PressRoom/SpeechesTestimony/opabowen-8. 

296E.g., Julie Satow, ‘‘Ex-SEC Official Blames 

Agency for Blow-Up of Broker-Dealers,’’ The New 

York Sun (September 18, 2008) (‘‘[B]roker dealers 

. . . [had] debt-to-net-capital ratios, sometimes, as 

in the case of Merrill Lynch, to as high as 40-to1.’’), available at http://www.nysun.com/business/

ex-sec-official-blames-agency-for-blow-up/86130/; 

Alan S. Blinder, ‘‘Six Errors on the Path to the 

Financial Crisis,’’ New York Times (January 25, 

2009) (stating that in 2008, securities firms had 

leverage ratios of ‘‘33 to 1’’), available at http://

www.nytimes.com/2009/01/25/business/economy/

25view.html?_r=0. 

297 Jasmine Ng and David Yong, ‘‘Noble Group 

Gets $3 Billion in Credit Facilities,’’ Bloomberg.com 

(May 12, 2016), available at http://

www.bloomberg.com/news/articles/2016-05-12/

noble-group-agrees-3-billion-credit-facilities-withlenders. See also Sarah Kent, Scott Patterson, and 

Margot Patrick, ‘‘Glencore Discloses More Details 

on Financing,’’ The Wall Street Journal (October 7, 

2015), available at http://www.wsj.com/articles/

glencore-reveals-financing-deals-to-fend-off-critics1444137982. 

298See supra note 7. 

299Securities Exchange Act (SEA) Rule 15c3–1. 

1 G–20 Leaders’ Statement, The Pittsburgh 

Summit, Preamble at par. 13 (Sept. 24–25, 2009). 

2 Id. at par. 12. 

3Margin Requirements for Non-centrally Cleared 

Derivatives (Sept. 2013), available at http://

www.bis.org/publ/bcbs261.pdf, revised Mar. 2015, 

available at http://www.bis.org/bcbs/publ/d317.pdf. 

4 Id. at 23. 

5The CFTC has a long history of working 

collaboratively with foreign regulators to facilitate 

cross-border business. For example, under 

Commission Regulation 30.10, adopted in 1987, if 

the CFTC determines that a foreign regulatory 

regime offers comparable protections to U.S. 

customers transacting in foreign futures and 

options, and there is an appropriate informationsharing arrangement in place, the CFTC has allowed 

foreign brokers to comply with their home-country 

regulations in lieu of Commission regulations. 

Similarly, since 1996 the Commission has 

permitted direct access by U.S. customers to foreign 

boards of trade (‘‘FBOTs’’) without requiring the 

FBOT to register with the CFTC as a derivatives 

contract market (‘‘DCM’’). In determining the 

comparability of the foreign regulatory regime the 

Commission does not engage in a line-by-line 

examination of the foreign regulator’s approach to 

supervising the FBOT it regulates. Rather, the 

Commission conducts a principles-based review to 

determine whether the foreign regime supports and 

enforces regulatory oversight of the FBOT and its 

clearing organization in a substantially equivalent 

manner as that used by the CFTC in its oversight 

of DCMs and clearing organizations. See 

Registration of Foreign Boards of Trade, 76 FR 

80674, 80680 (Dec. 23, 2011). 

practicable.’’ 293 Not only is this our legal 

obligation, but it is a sensible one as it 

prevents entities from gaming the system, 

and organizing their businesses in order to 

have the lowest capital requirements 

possible. We do not want our regulatory 

framework to be an escape hatch from strong 

risk management. 

(2) Account for the Entire Risk to the 

Dealer: The capital proposal should also 

require dealers to hold sufficient capital to 

cover the entirety of the risk posed by the full 

gamut of derivatives products that they 

hold—including those products, which, for 

various reasons, we did not impose a margin 

requirement, such as inter-affiliate swaps and 

swaps with financial counterparties that are 

below the $8 billion threshold. This is 

consistent with our mandate under law to 

‘‘take into account the risks associated with 

other types of swaps or classes of swaps or 

categories of swaps engaged in and the other 

activities conducted by that person that are 

not otherwise subject to regulation. . . .’’ 294

This is an important requirement. The 

Congressional authors understood that just 

because a particular category of swaps that a 

dealer holds are not subject to a regulatory 

requirement, does not mean that the dealers, 

and therefore their customers, are not 

vulnerable to the risk posed by them. 

(3) Include Effective Elements of Strong 

Capital Models: Our capital proposal should 

take into consideration respected, and 

effective capital models from other 

regulators. As of now, we have two wellregarded capital models: The Basel rules for 

banks, and the Securities and Exchange 

Commission’s (SEC’s) rule for Broker-Dealers. 

The Basel rule has many positive attributes— 

including the fact that it not only has strong 

capital requirements but also a liquidity, 

leverage and funding ratio.295 We need look 

no further than financial companies before 

the 2008 crisis to understand the need for 

leverage requirements. For instance, it was 

estimated that, prior to the crisis, some firms 

had debt that was 30 to 40 times their net 

capital.296 And we have very present 

examples of commercial companies that 

evidence the need for funding 

requirements.297 The SEC’s broker dealer rule 

also has its positives including that it does 

not allow for internal models, which came 

under fire after the crisis for allowing 

excessive leverage,298 and it is liquiditybased such that the dealer is obligated to 

maintain highly liquid assets to cover its 

liabilities.299 Our capital rule proposal 

should be as strong, if not stronger, than 

these models. 

(4) Address Risks Posed by Swap-Dealing 

of Non-Financial Companies: Some 

commercial entities are also registered as 

swap dealers, and others may decide to do 

so in the future. Having commercial endusers that are engaging in more than a de 

minimis amount of swap dealing may 

increase market risk. Thus it is important that 

we are able to isolate their swap dealing 

business from the regular business, so that 

we can properly track their activities as a 

dealer. 

(5) Be Based on Data-Driven Risk 

Assessment, Not Industry Preference: As a 

regulator, anything that we propose needs to 

be based on our data-driven risk assessment, 

not on the desire to ensure that all entities 

that want to be dealers are able to maintain 

their current business models without any 

changes. In response to our proposal, market 

participants are then free to provide data to 

explain why our risk assessment may be 

inappropriate and to inform us of the 

pragmatic restraints. While encouraging more 

entrants into the market maybe a regulatory 

goal, doing all we can to prevent the next 

catastrophic financial crisis that wipes out 

pensions, is our fundamental goal. 

Experience has taught us that 

comprehensive, well-considered review is 

critical when considering major regulations. 

Ten years ago, too many people in industry 

did not engage in such well-considered 

review when crafting complicated financial 

deals. In the end, that lack of consideration 

came back to haunt us all when the mortgage 

bubble burst and unexpectedly exposed 

many large financial institutions to massive 

losses that threatened the entire financial 

system. In the end, the American public had 

to save the system at great expense, and the 

ensuing rescue left many angry, alienated, 

and disaffected. Today, nearly eight years 

later, that anger still exists. We all pay a great 

price when we move forward in finance with 

insufficient analysis and review. 

Thus, for the sake of market certainty, I am 

voting yes to this rule. But I encourage my 

fellow Commissioners to work with me to 

develop a strong, comprehensive capital rule 

so that the American people can have the 

appropriate safeguards to secure our 

economy. Thank you. 

Appendix 4—Statement of Dissent by 

Commissioner J. Christopher Giancarlo 

I respectfully dissent from the final rule on 

the cross-border application of margin 

requirements for uncleared swaps. 

In September 2009, the leaders of the G– 

20 countries agreed to launch a framework 

for ‘‘strong, sustainable and balanced global 

growth’’ to generate ‘‘a durable recovery that 

creates the good jobs our people need.’’ 1 The 

agreement included a commitment ‘‘to take 

action at the national and international level 

to raise standards together so that our 

national authorities implement global 

standards consistently in a way that ensures 

a level playing field and avoids 

fragmentation of markets, protectionism, and 

regulatory arbitrage.’’ 2

In keeping with that agreement, 

representatives of more than 20 regulatory 

authorities, including the CFTC, participated 

in consultations with the Basel Committee on 

Banking Supervision (‘‘BCBS’’) and the Board 

of the International Organization of 

Securities Commissions (‘‘IOSCO’’) to 

develop an international framework setting 

margin standards for uncleared derivatives 

(‘‘BCBS–IOSCO framework’’).3 That 2013 

framework stresses the importance of 

developing consistent requirements across 

jurisdictions to avoid conflicting or 

duplicative standards.4

Today, instead of recognizing and building 

upon the strong foundation for mutual 

recognition of foreign regulatory regimes 

created by the G–20 commitments and the 

BCBS–IOSCO framework, as well as the 

CFTC’s own history of using a principlesbased, holistic approach to comparability 

determinations,5 the Commission is adopting 

a set of preconditions to substituted 


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6Such a result would be antithetical to element 

seven of the BCBS–IOSCO framework, which 

requires that there be no application of duplicative 

or conflicting margin requirements to the same 

transaction or activity. The framework advises that 

‘‘[w]hen a transaction is subject to two sets of rules 

(duplicative requirements), the home and the host 

regulators should endeavor to (1) harmonize the 

rules to the extent possible or (2) apply only one 

set of rules, by recognizing the equivalence and 

comparability of their respective rules.’’ BCBS– 

IOSCO framework at 23. 

7 In footnote 232 of the preamble the Commission 

cites, for example, the definition of ‘‘derivative,’’ 

the list of assets eligible to post as collateral, the 

degree to which margin would be protected under 

the local bankruptcy regime, and how transactions 

with affiliates are treated. 8 I am also concerned about the Commission’s 

unwillingness to delay the cross-border application 

of its margin rules until after it has made 

comparability determinations. This will bring into 

the CFTC’s regulatory ambit many cross-border 

transactions over which U.S. jurisdiction is 

inappropriate and an undue drain on precious 

regulatory resources. 

9Bureau of Labor Statistics, The Employment 

Situation—April 2016, U.S. DEPARTMENT OF 

LABOR, May 6, 2016, http://www.bls.gov/

news.release/empsit.nr0.htm. 

compliance that is overly complex, unduly 

narrow and operationally impractical. 

First, the rule establishes a complicated 

matrix of potential cross-border 

counterparties under which substituted 

compliance is either not permitted, is 

partially permitted, or is fully permitted, 

depending upon the category in which the 

particular transaction fits. Next, where 

permitted, the CFTC will conduct an 

‘‘element-by-element’’ analysis of CFTC and 

foreign margin rules under which a 

transaction may be subject to a patchwork of 

U.S. and foreign regulation.6 The CFTC will 

follow this ‘‘element-by-element’’ approach 

instead of assessing a foreign authority’s 

margin regime as a whole. 

In response to commenters who observed 

that today’s approach will undermine the 

BCBS–IOSCO framework, the Commission 

acknowledges that consistency with the 

framework is necessary, but argues that the 

framework leaves certain elements open to 

interpretation by each regulator, including 

the CFTC.7 For these elements, the 

Commission undertakes to use an outcomebased analysis, but will also engage in a factspecific inquiry of each legal and regulatory 

provision that corresponds to each element. 

In effect, the Commission’s approach is 

somewhat principles-based, except when it is 

rules-based and somewhat objective, except 

when it is subjective. 

Today’s muddled methodology invites 

foreign regulators to respond in kind. It may 

well set us off down the same protracted, 

circuitous and uncertain path that the CFTC 

and the European Union took in the context 

of U.S. central counterparty clearinghouse 

equivalence. The approach is impractical, 

unnecessary and contrary to the cooperative 

spirit of the 2009 G–20 Pittsburgh Accords.8

Rather than conducting a granular rule-byrule comparison, the CFTC should focus on 

whether a foreign regulator’s margin regime, 

in the aggregate, provides a sufficient level of 

risk mitigation in connection with the 

execution of uncleared swaps. The BCBS– 

IOSCO framework does just that. Compliance 

with it should be straightforward and 

unconditional to prevent the ‘‘fragmentation 

of markets, protectionism, and regulatory 

arbitrage’’ that global regulators were charged 

to avoid. 

As confusing as this rule is, what is 

important is not that hard to understand. 

American workers need quality American 

jobs. They need them in factories, farms and 

offices across the United States. The 

businesses that employ them want to sell 

their goods and services both here and 

abroad. To succeed globally, American 

businesses need U.S.-based financial 

institutions to support them around the 

world with competitively priced risk 

management services. 

Unfortunately, this complicated rule will 

make it harder for U.S. financial institutions 

to compete globally and serve American 

businesses. When businesses are placed at a 

competitive disadvantage, they hire fewer 

workers. With over 94 million Americans 

now out of the workforce,9 that is 

unacceptable. Therefore, I oppose this rule— 

it’s that simple. 

[FR Doc. 2016–12612 Filed 5–27–16; 8:45 am] 

BILLING CODE 6351–01–P 


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