Vol. 80 Tuesday, 

No. 134 July 14, 2015 

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; 

Proposed Rule 


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41376 Federal Register / Vol. 80, No. 134 / Tuesday, July 14, 2015 / Proposed Rules 

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: Proposed rule. 

SUMMARY: On October 3, 2014, the 

Commission published proposed 

regulations to implement section 4s(e) 

of the Commodity Exchange Act, as 

added by section 731 of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (‘‘Dodd-Frank Act’’). This 

provision requires the Commission to 

adopt initial and variation margin 

requirements for swap dealers (‘‘SDs’’) 

and major swap participants (‘‘MSPs’’) 

that do not have a Prudential Regulator 

(collectively, ‘‘CSEs’’ or ‘‘Covered Swap 

Entities’’). In the October 3, 2014 

proposing release, the Commission also 

issued an Advance Notice of Proposed 

Rulemaking (‘‘ANPR’’) requesting public 

comment on the cross-border 

application of such margin 

requirements. In this release, the 

Commission is proposing a rule for the 

application of the Commission’s margin 

requirements to cross-border 

transactions. 

DATES: Comments must be received on 

or before September 14, 2015. 

ADDRESSES: You may submit comments, 

identified by RIN 3038–AC97 and 

‘‘Margin Requirements for Uncleared 

Swaps for Swap Dealers and Major 

Swap Participants—Cross-Border 

Application of the Margin 

Requirements’’ by any of the following 

methods: 

• CFTC Web site: http://

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Comments Online process 

on the Web site. 

• Mail: Send to Christopher 

Kirkpatrick, Secretary of the 

Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

Mail, above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one of these methods. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http://

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that may be exempt from disclosure 

under the Freedom of Information Act, 

a petition for confidential treatment of 

the exempt information may be 

submitted according to the established 

procedures in § 145.9 of the 

Commission’s regulations, 17 CFR 

145.9. 

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from www.cftc.gov that it may deem to 

be inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted, or removed that 

contain comments on the merits of the 

rulemaking will be retained in the 

public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Laura B. Badian, Assistant General 

Counsel, 202–418–5969, lbadian@

cftc.gov, or Paul Schlichting, Assistant 

General Counsel, 202–418–5884, 

pschlichting@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. Dodd-Frank Act and the Scope of This 

Rulemaking 

B. Key Considerations in the Cross-Border 

Application of the Margin Regulations 

C. Advance Notice of Proposed 

Rulemaking 

1. Guidance Approach 

2. Prudential Regulators’ Approach 

3. Entity-Level Approach 

4. Comments on the Alternative 

Approaches Discussed in the ANPR 

II. The Proposed Rule 

A. Overview 

1. Use of Hybrid, Firm-Wide Approach 

B. Key Definitions 

1. U.S. Person 

2. Guarantees 

3. Foreign Consolidated Subsidiaries 

C. Applicability of Margin Requirements to 

Cross-Border Uncleared Swaps 

1. Uncleared Swaps of U.S. CSEs or NonU.S. CSEs Whose Obligations Under the 

Relevant Swap Are Guaranteed by a U.S. 

Person 

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

(Including Foreign Consolidated 

Subsidiaries) Whose Obligations Under 

the Relevant Swap Are Not Guaranteed 

by a U.S. Person 

3. Exclusion for Uncleared Swaps of NonU.S. CSEs Where Neither Counterparty’s 

Obligations Under the Relevant Swap 

Are Guaranteed by a U.S. Person and 

Neither Counterparty Is a Foreign 

Consolidated Subsidiary Nor a U.S. 

Branch of a Non-U.S. CSE 

4. U.S. Branches of Non-U.S. CSEs 

D. Substituted Compliance 

E. General Request for Comments 

III. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

C. Cost-Benefit Considerations 

1. Introduction 

2. Proposed Rule 

a. U.S. Person 

b. Availability of Substituted Compliance 

and Exclusion 

i. Uncleared Swaps of U.S. CSEs or of NonU.S. CSEs Whose Obligations Under the 

Relevant Swap Are Guaranteed by a U.S. 

Person 

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

Whose Obligations Under the Relevant 

Swap Are Not Guaranteed by a U.S. 

Person 

iii. Exclusion for Uncleared Swaps of NonU.S. CSEs Where Neither Counterparty’s 

Obligations Under the Relevant Swap 

Are Guaranteed by a U.S. Person and 

Neither Counterparty Is a Foreign 

Consolidated Subsidiary Nor a U.S. 

Branch of a Non-U.S. CSE 

iv. Foreign Consolidated Subsidiaries 

v. U.S. Branch of a Non-U.S. CSE 

c. Alternatives 

d. Comparability Determinations 

3. Section 15(a) Factors 

a. Protection of Market Participants and the 

Public 

b. Efficiency, Competitiveness, and 

Financial Integrity 

i. Efficiency 

ii. Competitiveness 

iii. Financial Integrity of Markets 

c. Price Discovery 

d. Sound Risk Management Practices 

e. Other Public Interest Considerations 

4. General Request for Comment 

I. Background 

A. Dodd-Frank Act and the Scope of 

This Rulemaking 

In the fall of 2008, as massive losses 

spread throughout the financial system 

and many major financial institutions 

failed or narrowly escaped failure with 

government intervention, confidence in 

the financial system was replaced by 

panic, credit markets seized up, and 

trading in many markets grounded to a 

halt. The financial crisis revealed the 

vulnerability of the U.S. financial 

system to widespread systemic risk 

resulting from, among other things, 

excessive leverage, poor risk 

management practices at financial firms, 

and the lack of integrated supervisory 

oversight of financial institutions and 


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1See Financial Crisis Inquiry Commission, ‘‘The 

Financial Crisis Inquiry Report: Final Report of the 

National Commission on the Causes of the 

Financial and Economic Crisis in the United 

States,’’ Jan. 2011, at xviii–xxv, 307–8, 363–5, 386, 

available at http://www.gpo.gov/fdsys/pkg/GPOFCIC/pdf/GPO-FCIC.pdf. 

2 Id. at xxiv–xxv, 49–51. 

3Pub. L. 111–203, 124 Stat. 1376 (2010). 

4The Financial Crisis Inquiry Commission stated 

in its report that the failure of American 

International Group, Inc. (‘‘AIG’’) was possible 

because the sweeping deregulation of over-thecounter derivatives (including credit default swaps) 

effectively eliminated federal and state regulation of 

these products, including capital and margin 

requirements that would have reduced the 

likelihood of AIG’s failure. Id. at 352. 

5Section 4s(e)(3)(A)(i) of the CEA, 7 U.S.C. 

6s(e)(3)(A)(i). 

6The term ‘‘Prudential Regulator’’ is defined in 

section 1a(39) of the CEA, as amended by section 

721 of the Dodd-Frank Act. This definition includes 

the Board of Governors of the Federal Reserve 

System (‘‘FRB’’); the Office of the Comptroller of the 

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

Corporation (‘‘FDIC’’); the Farm Credit 

Administration; and the Federal Housing Finance 

Agency. 

7See section 4s(e)(3)(D)(ii) of the CEA, 7 U.S.C. 

6s(e)(3)(D)(ii), which was added by section 731 of 

the Dodd-Frank Act. The Prudential Regulators, the 

Commission, and the SEC are also required to 

consult periodically (but not less frequently than 

annually) on minimum capital requirements and 

minimum initial and variation margin 

requirements. See section 4s(e)(3)(D)(i) of the CEA, 

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

8See 7 U.S.C. 2(i). Section 2(i) of the CEA states 

that the provisions of the Act relating to swaps that 

were enacted by the Wall Street Transparency and 

Accountability Act of 2010 (including any rule 

prescribed or regulation promulgated under that 

Act), shall not apply to activities outside the United 

States unless those activities—(1) have a direct and 

significant connection with activities in, or effect 

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

contravene such rules or regulations as the 

Commission may prescribe or promulgate as are 

necessary or appropriate to prevent the evasion of 

any provision of the Act [CEA] that was enacted by 

the Wall Street Transparency and Accountability 

Act of 2010. 

9The Commission’s Proposed Margin Rules are 

set forth in proposed rules §§ 23.150 through 23.159 

of part 23 of the Commission’s regulations, 

proposed as 17 CFR 23.150 through 23.159. See 

Margin Requirements for Uncleared Swaps for 

Swap Dealers and Major Swap Participants, 79 FR 

59898 (Oct. 3, 2014). In September 2014, the 

Prudential Regulators published proposed 

regulations to implement initial and variation 

margin requirements for SDs and MSPs that have 

a Prudential Regulator. See Margin and Capital 

Requirements for Covered Swap Entities, 79 FR 

53748 (Sept. 24, 2014), available at http://www.gpo.

gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf. 

The Commission originally proposed margin rules 

for public comment in 2011. See Margin 

Requirements for Uncleared Swaps for Swap 

Dealers and Major Swap Participants, 76 FR 23732 

(April 28, 2011). 

financial markets.1 The financial crisis 

also highlighted the contagion risks of 

under-collateralized counterparty 

exposures in a highly interconnected 

financial system.2

In the wake of the financial crisis, 

Congress enacted the provisions of the 

Commodity Exchange Act (‘‘CEA’’) 

relating to swaps in Title VII of the 

Dodd-Frank Act,3 which establishes a 

comprehensive new regulatory 

framework for swaps. One of the 

cornerstones of this regulatory 

framework is the reduction of systemic 

risk to the U.S. financial system through 

the establishment of margin 

requirements for uncleared swaps.4

Section 731 of the Dodd-Frank Act 

added a new section 4s, which directs 

the Commission to adopt rules 

establishing minimum initial and 

variation margin requirements for SDs 

and MSPs on all swaps that are not 

cleared by a registered derivatives 

clearing organization. Section 4s(e) 

further provides that the margin 

requirements must: (i) Help ensure the 

safety and soundness of the SD or MSP; 

and (ii) be appropriate for the risk 

associated with the uncleared swaps 

held as a SD or MSP.5

The Dodd-Frank Act also requires that 

the Prudential Regulators,6 in 

consultation with the Commission and 

the Securities and Exchange 

Commission (‘‘SEC’’), adopt a joint 

margin rule. Accordingly, each SD and 

MSP for which there is a Prudential 

Regulator must meet margin 

requirements established by the 

applicable Prudential Regulator, and 

each SD and MSP for which there is no 

Prudential Regulator must comply with 

the Commission’s margin requirements. 

Further, the Dodd-Frank Act requires 

that the Commission, the Prudential 

Regulators and the SEC, to the 

maximum extent practicable, establish 

and maintain comparable minimum 

capital and minimum initial and 

variation margin requirements, 

including the use of noncash collateral, 

for SDs and MSPs.7

In determining whether, and the 

extent to which, section 4s(e) should 

apply to a CSE’s swap activities outside 

the United States, the Commission 

focused on the text and objectives of 

that provision together with the 

language of section 2(i) of the CEA.8 As 

discussed further below, the primary 

reason for the margin requirement is to 

protect CSEs in the event of a 

counterparty default. That is, in the 

event of a default by a counterparty, 

margin protects the CSE by allowing it 

to absorb the losses using collateral 

provided by the defaulting entity and to 

continue to meet all of its obligations. In 

addition, margin functions as a risk 

management tool by limiting the 

amount of leverage that a CSE can incur. 

Specifically, by requiring a CSE to post 

margin to its counterparties, the margin 

requirements ensure that a CSE has 

adequate eligible collateral to enter into 

an uncleared swap. 

Risk arising from uncleared swaps can 

potentially have a substantial adverse 

effect on any CSE—irrespective of its 

domicile or the domicile of its 

counterparties—and therefore the 

stability of the U.S. financial system 

because each CSE has a sufficient nexus 

to the U.S. financial system to require 

registration as a CSE. In light of the role 

of margin in ensuring the safety and 

soundness of CSEs and preserving the 

stability of the U.S. financial system, 

and consistent with section 2(i), section 

4s(e)’s margin requirements extend to 

all CSEs on a cross-border basis. 

Pursuant to its new section 4s(e) 

authority, on October 3, 2014, the 

Commission published reproposed 

regulations to implement initial and 

variation margin requirements on 

uncleared swaps (‘‘Proposed Margin 

Rules’’) for SDs and MSPs that do not 

have a Prudential Regulator 

(collectively, ‘‘CSEs’’ or ‘‘Covered Swap 

Entities’’).9 In the same release, the 

Commission also published an ANPR 

requesting public comment on the crossborder application of such margin 

requirements. In this release, the 

Commission is proposing a rule for the 

application of the Commission’s 

uncleared swap margin requirements to 

cross-border transactions (referred to 

herein as the ‘‘Proposed Rule’’). 

B. Key Considerations in the CrossBorder Application of the Margin 

Regulations 

The swaps market is global in nature. 

Swaps are routinely entered into 

between counterparties located in 

different jurisdictions. Dealers and other 

market participants conduct their swaps 

business through subsidiaries, affiliates, 

and branches dispersed across 

geographical boundaries. The global and 

highly interconnected nature of the 

swaps market heightens the potential 

that risks assumed by a firm overseas 

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. Therefore, it is 

important that margin requirements for 

uncleared swaps apply on a crossborder basis in a manner that effectively 

addresses risks to U.S. persons and the 

U.S. financial system. 

The Commission recognizes that nonU.S. CSEs and non-U.S. counterparties 

may be subject to comparable or 

different rules in their home 

jurisdictions. Conflicting and 

duplicative requirements between U.S. 

and foreign margin regimes could 

potentially lead to market inefficiencies 


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10 In developing the proposed cross-border 

framework, the Commission is guided by principles 

of international comity, which counsels due regard 

for the important interests of foreign sovereigns. See 

Restatement (Third) of Foreign Relations Law of the 

United States (the ‘‘Restatement’’). The Restatement 

provides that even where a country has a basis for 

jurisdiction, it should not prescribe law with 

respect to a person or activity in another country 

when the exercise of such jurisdiction is 

unreasonable. See Restatement section 403(1). The 

reasonableness of such an exercise of jurisdiction, 

in turn, is to be determined by evaluating all 

relevant factors, including certain specifically 

enumerated factors where appropriate: (a) The link 

of the activity to the territory of the regulating state, 

i.e., the extent to which the activity takes place 

within the territory, or has substantial, direct, and 

foreseeable effect upon or in the territory; (b) the 

connections, such as nationality, residence, or 

economic activity, between the regulating state and 

the persons principally responsible for the activity 

to be regulated, or between that state and those 

whom the regulation is designed to protect; (c) the 

character of the activity to be regulated, the 

importance of regulation to the regulating state, the 

extent to which other states regulate such activities, 

and the degree to which the desirability of such 

regulation is generally accepted; (d) the existence of 

justified expectations that might be protected or 

hurt by the regulation; (e) the importance of the 

regulation to the international political, legal, or 

economic system; (f) the extent to which the 

regulation is consistent with the traditions of the 

international system; (g) the extent to which 

another state may have an interest in regulating the 

activity; and (h) the likelihood of conflict with 

regulation by another state. See Restatement section 

403(2). 

Notably, the Restatement does not preclude 

concurrent regulation by multiple jurisdictions. 

However, where concurrent jurisdiction by two or 

more jurisdictions creates conflict, the Restatement 

recommends that each country evaluate its own 

interests in exercising jurisdiction and those of the 

other jurisdiction, and where possible, to consult 

with each other. 

11 15 U.S.C. 8325(a) (added by section 752 of the 

Dodd-Frank Act). Also, before commencing any 

rulemaking or issuing an order regarding swaps, the 

Commission must consult and coordinate to the 

extent possible with the SEC and the Prudential 

Regulators for the purposes of assuring regulatory 

consistency and comparability, to the extent 

possible. See 15 U.S.C. 8302(a)(1) (added by section 

712(a)(1) of the Dodd-Frank Act). 

12See Margin Requirements for Non-centrally 

Cleared Derivatives (Sept. 2013), available at 

http://www.bis.org/publ/bcbs261.pdf. 

13See European Banking Authority, European 

Securities and Markets Authority, and European 

Insurance and Occupational Pensions Authority, 

Consultation Paper on draft regulatory technical 

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

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

the European Market Infrastructure Regulation) 

(April 14, 2014), available at https://www.eba.

europa.eu/documents/10180/655149/JC+CP+2014+

03+%28CP+on+risk+mitigation+for+OTC+

derivatives%29.pdf, and Second Consultation Paper 

on draft regulatory technical standards on riskmitigation techniques for OTC-derivative contracts 

not cleared by a CCP under Article 11(15) of 

Regulation (EU) No 648/2012 (for the European 

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

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

10180/1106136/JC-CP-2015-002+JC+CP+on+Risk+

Management+Techniques+for+OTC+derivatives+.

pdf; Financial Services Agency of Japan, draft 

amendments to the ‘‘Cabinet Office Ordinance on 

Financial Instruments Business’’ and 

‘‘Comprehensive Guidelines for Supervision’’ with 

regard to margin requirements for non-centrally 

cleared derivatives (July 3, 2014). Available in 

Japanese at http://www.fsa.go.jp/news/26/syouken/

20140703-3.html. 

14 Interpretative Guidance and Policy Statement 

Regarding Compliance with Certain Swap 

Regulations, 78 FR 45292 (July 26, 2013) 

(‘‘Guidance’’). The Commission addressed, among 

other things, how the swap provisions in the DoddFrank Act (including the margin requirement for 

uncleared swaps) generally would apply on a crossborder basis. In this regard, the Commission stated 

that as a general policy matter it expected to apply 

the margin requirement as a transaction-level 

requirement. 

and regulatory arbitrage, as well as 

competitive disparities that undermine 

the relative position of U.S. CSEs and 

their counterparties. Therefore, it is 

essential that a cross-border margin 

framework takes into account the global 

nature of the swaps market and the 

supervisory interests of foreign 

regulators with respect to entities and 

transactions covered by the 

Commission’s margin regime.10

In granting the Commission new 

authorities under the Dodd-Frank Act, 

Congress also reaffirmed and called for 

coordination and cooperation among 

domestic and foreign regulators. Section 

752(a) of the Dodd-Frank Act requires 

the Commission, the Prudential 

Regulators, and the SEC to consult and 

coordinate with foreign regulatory 

authorities on the ‘‘establishment of 

consistent international standards’’ with 

respect to the regulation of swaps.11 In 

this regard, the Commission recognizes 

that efforts are underway by other 

domestic and foreign regulators to 

implement margin reform and that 

regulatory harmonization and 

coordination are indispensable to 

achieving a workable cross-border 

framework. 

In developing a cross-border 

framework for margin regulations, the 

Commission aims to strike the proper 

balance among these sometimes 

competing considerations. To that end, 

the Commission has consulted and 

coordinated with the Prudential 

Regulators and foreign regulatory 

authorities. Commission staff worked 

closely with the staff of the Prudential 

Regulators, and the Proposed Rule is 

closely aligned with the cross-border 

proposal that was published by the 

Prudential Regulators in September 

2014. In addition, Commission staff has 

participated in numerous bilateral and 

multilateral discussions with foreign 

regulatory authorities addressing 

national efforts to implement margin 

reform and the possibility of conflicts 

and overlaps between U.S. and foreign 

regulatory regimes. Recognizing that 

systemic risks arising from global and 

interconnected swaps market must be 

addressed through coordinated 

regulatory requirements for margin 

across international jurisdictions, the 

Commission has played an active role in 

encouraging international 

harmonization and coordination of 

margin requirements for uncleared 

swaps. 

The Commission notes that its 

collaboration with the Basel Committee 

on Banking Supervision (‘‘BCBS’’) and 

the Board of the International 

Organization of Securities Commissions 

(‘‘IOSCO’’) as a member of the Working 

Group on Margining Requirements 

(‘‘WGMR’’) resulted in the issuance of a 

final margin policy framework for noncleared, bilateral derivatives in 

September 2013 (referred to herein as 

the ‘‘BCBS–IOSCO framework’’).12

Individual regulatory authorities across 

major jurisdictions (including the EU, 

Japan, and the United States) have since 

started to develop their own margin 

rules.13 The Proposed Rule is consistent 

with the standards in the final BCBS– 

IOSCO framework, and we have been in 

continuous communication with 

regulators in the EU and Japan as we 

developed our cross-border margin 

proposal. Although at this time foreign 

jurisdictions do not yet have their 

margin regimes in place, the 

Commission has participated in 

ongoing, collaborative discussions with 

regulatory authorities in the EU and 

Japan regarding their cross-border 

approaches to the margin rules, 

including the anticipated scope of 

application of margin requirements in 

their jurisdiction to cross-border swaps, 

their plans for recognizing foreign 

margin regimes, and their anticipated 

timelines. 

The Commission believes that its 

ongoing bilateral and multilateral 

discussions with foreign regulatory 

authorities in major jurisdictions 

(including the EU and Japan) are critical 

to fostering international cooperation 

and harmonization and in reducing 

conflicting and duplicative regulatory 

requirements. The Commission expects 

that these discussions will continue as 

it finalizes and then implements its 

framework for the application of margin 

requirements to cross-border 

transactions, and as other jurisdictions 

develop their own respective 

approaches. 

C. Advance Notice of Proposed 

Rulemaking 

The ANPR sought public comment on 

three potential alternative approaches to 

the cross-border application of its 

margin requirements: (1) A transactionlevel approach that is consistent with 

the Commission’s cross-border guidance 

(‘‘Guidance Approach’’); 14 (2) an 


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15See Margin and Capital Requirements for 

Covered Swap Entities, 79 FR 53748 (Sept. 24, 

2014), available at http://www.gpo.gov/fdsys/pkg/

FR-2014-09-24/pdf/2014-22001.pdf. 

16See Interpretative Guidance and Policy 

Statement Regarding Compliance with Certain 

Swap Regulations, 78 FR 45292 (July 26, 2013). 

17The scope of the term ‘‘U.S. person’’ as used 

in the Cross-Border Guidance Approach and the 

Entity-Level Approach would be the same as under 

the Guidance. See Guidance at 45316–45317 for a 

summary of the Commission’s interpretation of the 

term ‘‘U.S. person.’’ 

18Under the Guidance, id. at 45318, the term 

‘‘guaranteed affiliate’’ refers to a non-U.S. person 

that is an affiliate of a U.S. person and that is 

guaranteed by a U.S. person. The scope of the term 

‘‘guarantee’’ under the Guidance Approach and the 

Entity-Level Approach would be the same as under 

note 267 of the Guidance and accompanying text. 

19Under the approach discussed in the Guidance, 

id. at 45359, the factors that are relevant to the 

consideration of whether a person is an ‘‘affiliate 

conduit’’ include whether: (i) The non-U.S. person 

is majority-owned, directly or indirectly, by a U.S. 

person; (ii) the non-U.S. person controls, is 

controlled by, or is under common control with the 

U.S. person; (iii) the non-U.S. person, in the regular 

course of business, engages in swaps with non-U.S. 

third party(ies) for the purpose of hedging or 

mitigating risks faced by, or to take positions on 

behalf of, its U.S. affiliate(s), and enters into 

offsetting swaps or other arrangements with such 

U.S. affiliate(s) in order to transfer the risks and 

benefits of such swaps with third-party(ies) to its 

U.S. affiliates; and (iv) the financial results of the 

non-U.S. person are included in the consolidated 

financial statements of the U.S. person. Other facts 

and circumstances also may be relevant. 

20Where the uncleared swap is between a nonU.S. SD/MSP (whether or not it is a guaranteed 

affiliate or an affiliate conduit) and a foreign branch 

of a U.S. bank that is a SD/MSP, substituted 

compliance would be available if certain conditions 

are met. 

21See section 9 of the proposed rule on Margin 

and Capital Requirements for Covered Swap 

Entities, 12 CFR part 237 (Sept. 24, 2014) for a 

complete description of the proposed cross-border 

application of margin requirements to swaps by the 

Prudential Regulators, available at http://www.gpo.

gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf. 

22A summary of the Prudential Regulators’ 

Approach to the cross-border application of their 

proposed margin requirements is included in the 

ANPR. See Margin Requirements for Uncleared 

Swaps for Swap Dealers and Major Swap 

Participants, 79 FR 59917(Oct. 3, 2014). For further 

information on the Prudential Regulators’ Approach 

generally, see Margin and Capital Requirements for 

Covered Swap Entities, 79 FR 53748 (Sept. 24, 

2014), available at http://www.gpo.gov/fdsys/pkg/

FR-2014-09-24/pdf/2014-22001.pdf. 

23The Prudential Regulators define a ‘‘foreign 

covered swap entity’’ as any covered swap entity 

that is not (i) an entity organized under U.S. or State 

law, including a U.S. branch, agency, or subsidiary 

of a foreign bank; (ii) a branch or office of an entity 

organized under U.S. or State law; or (iii) an entity 

controlled by an entity organized under U.S. or 

State law. Under the Prudential Regulators’ 

proposal, a ‘‘foreign non-cleared swap’’ would 

include any non-cleared swap of a foreign covered 

swap entity to which neither the counterparty nor 

any guarantor (on either side) is (i) an entity 

organized under U.S. or State law, including a U.S. 

branch, agency, or subsidiary of a foreign bank; (ii) 

a branch or office of an entity organized under U.S. 

or State law; or (iii) a covered swap entity 

controlled by an entity organized under U.S. or 

State law. 

24A summary of the Entity-Level Approach to the 

cross-border application of the Proposed Margin 

Rules is included in the ANPR. See Margin 

Requirements for Uncleared Swaps for Swap 

Dealers and Major Swap Participants, 79 FR 59917 

(Oct. 3, 2014). 

25Comment letters received in response to the 

ANPR may be found on the Commission’s Web site 

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

CommentList.aspx?id=1528. 

approach that is consistent with the 

approach proposed by the Prudential 

Regulators (the ‘‘Prudential Regulators’ 

Approach’’); 15 and (3) an entity-level 

approach described in the ANPR 

(‘‘Entity-Level Approach’’). To provide 

context for the discussion of the 

Proposed Rule, the three alternative 

approaches discussed in the ANPR are 

summarized below. 

1. Guidance Approach 

Under the first alternative discussed 

in the ANPR, the Commission’s margin 

requirements would be applied on a 

transaction-level basis, consistent with 

its cross-border Guidance.16 The 

Commission stated in the Guidance that 

it would generally treat its margin 

requirements for uncleared swaps as a 

transaction-level requirement. 

Consistent with the rationale stated in 

the Guidance, under this transactionlevel approach, the Commission’s 

Proposed Margin Rules would apply to 

a U.S. SD/MSP (other than a foreign 

branch of a U.S. bank that is a SD/MSP) 

for all of its uncleared swaps, regardless 

of whether its counterparty is a U.S. 

person,17 without substituted 

compliance. 

However, under this approach the 

margin requirements would apply to a 

non-U.S. SD/MSP (whether or not it is 

a ‘‘guaranteed affiliate’’ 18 or an ‘‘affiliate 

conduit’’ 19) only with respect to its 

uncleared swaps with a U.S. person 

counterparty and a non-U.S. 

counterparty that is a guaranteed 

affiliate or an affiliate conduit; the 

margin requirements would not apply to 

uncleared swaps with a non-U.S. person 

counterparty that is not a guaranteed 

affiliate or an affiliate conduit. Where 

the non-U.S. counterparty is a 

guaranteed affiliate or an affiliate 

conduit, the Commission would allow 

substituted compliance (i.e., the nonU.S. SD/MSP would be permitted to 

comply with the margin requirements of 

its home country’s regulator if the 

Commission determines that such 

requirements are comparable to the 

Commission’s margin requirements).20

2. Prudential Regulators’ Approach 

The second alternative discussed in 

the ANPR was the Prudential 

Regulators’ Approach to cross-border 

application of the margin 

requirements.21 Under the Prudential 

Regulators’ proposal issued in 

September 2014 (the ‘‘September 

proposal’’), the Prudential Regulators 

would apply the margin requirements to 

all uncleared swaps of CSEs under their 

supervision with a limited exception.22

Specifically, the Prudential Regulators 

would not apply their margin 

requirements to any foreign non-cleared 

swap of a foreign covered swap entity.23

This exclusion would only be available 

where neither the non-U.S. SD/MSP’s 

nor the non-U.S. counterparty’s 

obligations under the relevant swap are 

guaranteed by a U.S. person and neither 

party is ‘‘controlled’’ by a U.S. person. 

Under the ‘‘control’’ test used in the 

September proposal, the term ‘‘control’’ 

of another company means: (1) 

Ownership, control, or power to vote 25 

percent or more of a class of voting 

securities of the company, directly or 

indirectly or acting through one or more 

other persons; (2) ownership or control 

of 25 percent or more of the total equity 

of the company, directly or indirectly or 

acting through one or more other 

persons; or (3) control in any manner of 

the election of a majority of the directors 

or trustees of the company. 

3. Entity-Level Approach 

Under the third alternative discussed 

in the ANPR, margin requirements 

would be treated as an entity-level 

requirement. Under this Entity-Level 

Approach, the Commission would apply 

its proposed cross-border rules on 

margin on a firm-wide level—that is, to 

all uncleared swaps activities of a SD/ 

MSP registered with the Commission, 

irrespective of whether the counterparty 

is a U.S. person, and with no possibility 

of exclusion. This approach takes into 

account that a non-U.S. SD/MSP 

entering into uncleared swaps faces 

counterparty credit risk regardless of 

where the swap is executed or whether 

the counterparty is a U.S. person.24 That 

risk, if it leads to a default by the nonU.S. SD/MSP, could cause adverse 

consequences to its U.S. counterparties 

and the U.S. financial system. At the 

same time, in recognition of 

international comity, under this 

approach the Commission would 

consider, where appropriate, allowing 

CSEs to avail themselves of substituted 

compliance. 

4. Comments on the Alternative 

Approaches Discussed in the ANPR 

After publishing the ANPR, the 

Commission received comments that 

responded to the three alternative 

approaches.25 There was no consensus 


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26See International Swaps and Derivatives 

Association, Inc. (‘‘ISDA’’) (Nov. 24, 2014), 

Managed Funds Association (‘‘MFA’’) (Dec. 2, 

2014), and INTL FCStone Inc. (Dec. 3, 2014). 27See ISDA (Nov. 24, 2014) and MFA (Dec. 2, 

2014). 28See ISDA (Nov. 24, 2014). 29See MFA (Dec. 2, 2014). 30See ISDA (Nov. 24, 2014) and American 

Bankers Association (Nov. 25, 2014). 31See INTL FCStone Inc. (Dec. 3, 2014). 32See Alternative Investment Management 

Association (‘‘AIMA’’) (Dec. 2, 2014). 

33See Americans for Financial Reform (‘‘AFR’’) 

(Dec. 2, 2014). 34See Securities Industry and Financial Markets 

Association, Asset Management Group (Nov. 24, 

2014). 35See Public Citizen (Dec. 2, 2014). 

36See Better Markets, Inc. (Dec. 2, 2014). 

37See AIMA (Dec. 2, 2014). 

38See AFR (Dec. 2, 2014). 

39See Committee on Capital Markets Regulation 

(Nov. 24, 2014). 

among commenters on a preferable 

approach. 

Several commenters supported the 

Guidance Approach, with 

modifications, on the basis that margin 

rules should not apply to swaps 

between a foreign swap dealer and a 

foreign, non-guaranteed counterparty.26

Some of these commenters suggested 

modifications to the availability of 

substituted compliance in the approach 

described in the Guidance.27 For 

example, one commenter suggested that 

the Commission should treat non-U.S. 

margin requirements that conform to the 

BCBS–IOSCO framework as ‘‘essentially 

identical’’ to the Commission’s regime 

and therefore accessible to all SDs as a 

means of complying with the 

Commission’s margin requirements.28

Another commenter suggested that the 

Commission modify its approach to 

substituted compliance outlined in the 

Guidance to allow substituted 

compliance for trades between U.S. 

persons and non-U.S. persons at such 

parties’ mutual agreement.29 In 

addition, some commenters that 

supported the Guidance Approach 

expressed the view that it should 

include an emerging markets 

exception.30 Still another commenter 

argued that the Commission’s Guidance 

correctly classified margin as a 

transaction-level rather than an entitylevel requirement because, as with the 

clearing requirement, it is practicable to 

separate out transactions which are 

subject to the margin requirements and 

transactions which are not. This 

commenter stated that it would be an 

odd result if the Commission were to 

determine that the reach of the clearing 

requirement was not as great as that of 

the margin requirement, given that both 

requirements are intended to address 

counterparty credit risk.31

In contrast, some commenters argued 

against adopting the Guidance 

Approach. One commenter argued that 

the Guidance Approach has become a 

significant driver of conflict between 

U.S. and European regulatory 

requirements, and is undermining the 

goal of a globally coordinated regulatory 

framework.32 Another commenter 

argued that this approach provides an 

excessively broad exemption for ‘‘nonguaranteed’’ foreign affiliates of U.S. 

banks, and that it is completely 

inappropriate to apply such an 

exemption to a crucial prudential 

requirement such as derivatives margin, 

which could pose major risks to the 

financial system by encouraging a race 

to the bottom among jurisdictions 

concerning margin requirements.33

Other commenters generally 

supported the Entity-Level Approach, 

with modifications, on the basis that it 

captures all registrants’ uncleared 

trades, regardless of the domicile of the 

registrant or the counterparty. These 

commenters generally favored this 

approach because, rather than 

exempting foreign to foreign 

transactions, it makes substituted 

compliance available for these 

transactions. One commenter stated that 

the Entity-Level Approach is the most 

appropriate choice because it provides 

market participants with more certainty 

in determining which jurisdiction’s 

margin requirements apply. Further, 

this commenter stated that the EntityLevel Approach is consistent with how 

collateral is currently handled under a 

single master agreement and would 

mitigate legal uncertainty and 

operational errors that can arise if trades 

are subject to different margin 

requirements under the same master 

agreement.34 Another commenter 

favored the Entity-Level Approach 

because it imposes prudential rules on 

all swaps activities of U.S.- 

headquartered firms, regardless of 

where the swap transaction is booked. 

This commenter stated that both the 

Prudential Regulators’ Approach and 

the Guidance Approach provide a 

means for U.S. firms to escape U.S. 

oversight.35

Another commenter supported a 

cross-border approach that combines the 

Guidance Approach with certain 

enhancements found in the Entity-Level 

Approach. This commenter suggested 

that the Entity-Level Approach correctly 

subjects certain non-U.S. SDs and MSPs 

to U.S. regulations—at least with respect 

to variation margin and the collection of 

initial margin—where the Guidance 

Approach would permit substituted 

compliance to both parties in all 

respects. However, this commenter 

stated that the Entity-Level Approach 

also contains provisions that are 

significantly weaker than the Guidance 

Approach, such as making substituted 

compliance available to certain non-U.S. 

counterparties of U.S. SDs or MSPs. 

This commenter also expressed the view 

that the Guidance Approach correctly 

requires both counterparties to fully 

comply with U.S. rules in all 

transactions involving a U.S. SD or 

MSP.36

Commenters generally did not 

support the Prudential Regulators’ 

Approach as their first choice, but two 

commenters thought it might be 

workable with modifications. The first 

commenter stated that if the 

Commission elects not to adopt the 

‘‘Entity-Level’’ Approach, the Prudential 

Regulators’ Approach might be 

workable, although this commenter had 

reservations about situations where 

different jurisdictions’ regimes apply to 

the same transaction.37 The other 

commenter argued that if its first choice, 

the Entity-Level Approach, is not 

adopted, the Prudential Regulators’ 

Approach is greatly superior to the 

Guidance Approach, as it would apply 

margin requirements to foreign affiliates 

of U.S. banks that are classified as SDs 

or MSPs, regardless of whether such 

affiliates are nominally guaranteed. 

However, this commenter argued that 

the Prudential Regulators’ Approach is 

flawed in that, like the Guidance 

Approach, it would exempt controlled 

foreign subsidiaries of U.S. banks that 

are not registered with the Commission 

as swaps entities.38

Two commenters specifically argued 

against the Prudential Regulators’ 

Approach. One commenter contended 

that the Prudential Regulators’ 

Approach provides limited clarity on 

how the ‘‘control’’ test should be 

applied, which means that foreign bank 

subsidiaries of U.S. banks cannot be 

certain whether they are subject to U.S. 

rules or foreign rules, and provides 

limited guidance as to how foreign 

covered swaps entities can determine 

whether a financial end-user 

counterparty is a U.S. entity or a foreign 

entity, in comparison to the clear ‘‘U.S. 

person’’ standard in the Guidance.39

The other commenter is concerned with 

the Prudential Regulators’ Approach as 

it relates to funds. This commenter 

stated that the Prudential Regulators’ 

definition of ‘‘foreign non-cleared 

swap’’ effectively classifies funds 

organized outside of the United States, 

but with a U.S. principal place of 

business (e.g., funds with a U.S.-based 

manager), as foreign entities. This 


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40See MFA (Dec. 2, 2014). 

41See Institute of International Bankers (Nov. 24, 

2014). This commenter also stated that these foreign 

swaps would have little effect on the U.S. financial 

system in the event of a default; further, under the 

Dodd-Frank Act, the risk to the United States of a 

default by the foreign-headquartered swap entity on 

its swaps with U.S. counterparties would already be 

mitigated by capital and margin collection 

requirements. 

42See Securities Industry and Financial Markets 

Association (‘‘SIFMA’’) (Nov. 24, 2014). 

43The Commission’s consideration of the costs 

and benefits associated with the Proposed Rule is 

discussed in section III.C. below. 

44See BCBS and IOSCO, Margin requirements for 

non-centrally cleared derivatives (Sept. 2013) at 3, 

available at http://www.bis.org/publ/bcbs261.pdf. 

45Section 4s(e) of the CEA, 7 U.S.C. 6s(e), directs 

the Commission to adopt capital requirements for 

SDs and MSPs. The Commission proposed capital 

rules in 2011. See Capital Requirements for Swap 

Dealers and Major Swap Participants, Notice of 

proposed rulemaking, 76 FR 27802 (May 12, 2011). 

commenter stated that if funds with a 

U.S.-based manager are not considered 

‘‘U.S. persons’’ subject to U.S. 

derivatives regulation, even though they 

have a substantial U.S. nexus, they 

would likely be required to margin their 

covered swaps in accordance with the 

foreign margin rules to which their nonU.S. CSE counterparty is subject, which 

would give too much deference to the 

foreign regulatory regime.40

One commenter asserted that both the 

Prudential Regulators’ Approach and 

the Guidance Approach would 

appropriately exclude swaps between 

foreign-headquartered swap entities that 

are not controlled or guaranteed by a 

U.S. person and a non-U.S. person that 

is not guaranteed by a U.S. person from 

the scope of the margin rules, noting 

that if U.S. rules require the foreignheadquartered swap entity to post 

margin, this would create the potential 

for conflicts or inconsistencies with its 

home country margin requirements.41

One commenter did not explicitly 

support any of the three approaches, 

noting that all of the proposals diverge 

in potentially significant ways from the 

final framework developed by BCBS and 

IOSCO and the OTC margin framework 

proposed in April 2014 by European 

supervisory agencies, and that none of 

the proposals embrace substituted 

compliance in a comprehensive manner 

that would address cross-border 

conflicts or inconsistencies that could 

arise. This commenter suggested that 

the Commission should use an 

outcomes-based approach that looks to 

whether giving full recognition to an 

equivalent foreign OTC margin 

framework as a whole would ensure an 

acceptable reduction of aggregate 

unmargined risk.42

II. The Proposed Rule 

A. Overview 

Based on, among other things, 

consideration of the comments to the 

ANPR and after close consultation with 

the Prudential Regulators, the 

Commission is proposing a rule for the 

application of the Commission’s 

Proposed Margin Rules to cross-border 

transactions (as noted above, the 

proposed cross-border margin rule is 

referred to herein as the ‘‘Proposed 

Rule’’). As discussed above, a crossborder framework for margin necessarily 

involves consideration of significant, 

and sometimes competing, legal and 

policy considerations, including the 

impact on market efficiency and 

competition.43 The Commission, in 

developing the Proposed Rule, aims to 

balance these considerations to 

effectively address the risk posed to the 

safety and soundness of CSEs, while 

creating a workable framework that 

reduces the potential for undue market 

disruptions and promotes global 

harmonization. The Commission also 

recognizes that there are other possible 

approaches to applying the margin rules 

in the cross-border context. 

Accordingly, the Commission invites 

public comment regarding all aspects of 

the Proposed Rule. 

1. Use of Hybrid, Firm-Wide Approach 

The Proposed Rule is a combination 

of the entity- and transaction-level 

approaches and is closely aligned with 

the Prudential Regulators’ Approach. In 

general, under the Proposed Rule, 

margin requirements are designed to 

address the risks to a CSE, as an entity, 

associated with its uncleared swaps 

(entity-level); nevertheless, certain 

uncleared swaps would be eligible for 

substituted compliance or excluded 

from the Commission’s margin rules 

based on the counterparties’ nexus to 

the United States relative to other 

jurisdictions (transaction-level). 

Although margin is calculated for 

individual transactions or positions, and 

therefore, could be applied on a 

transaction-level basis, the Commission 

believes that as a general matter margin 

requirements should apply on a firmwide basis, irrespective of the domicile 

of the counterparties or where the trade 

is executed. The primary reason for 

collecting margin from counterparties is 

to protect an entity in the event of a 

counterparty default. That is, in the 

event of a default by a counterparty, 

margin protects the non-defaulting 

counterparty by allowing it to absorb the 

losses using collateral provided by the 

defaulting entity and to continue to 

meet all of its obligations. In addition, 

margin functions as a risk management 

tool by limiting the amount of leverage 

that a CSE can incur. Specifically, by 

requiring a CSE to post margin to its 

counterparties, the margin requirements 

ensure that a CSE has adequate eligible 

collateral to enter into an uncleared 

swap. In this way, margin serves as a 

first line of defense to protect a CSE as 

a whole from risk arising from 

uncleared swaps. 

The source of counterparty credit risk 

to a CSE, however, is not confined to its 

uncleared swaps with U.S. 

counterparties. Risk arising from 

uncleared swaps involving non-U.S. 

counterparties can potentially have a 

substantial adverse effect on a CSE— 

including a non-U.S. CSE—and 

therefore the stability of the U.S. 

financial system because CSEs have a 

sufficient nexus to the U.S. financial 

system to require registration as a CSE. 

Given the function of margin, the 

Commission believes that margin 

should be treated as an entity-level 

requirement in the cross-border context, 

and thus not take into account the 

domicile of CSE counterparties or where 

the trade is executed. 

The Commission also believes that 

treating margin as an entity-level 

requirement is consistent with the role 

of margin in a CSE’s overall risk 

management program. Margin, by 

design, is complementary to capital.44

That is, margin and capital requirements 

serve different but equally important 

risk mitigation functions that are best 

implemented at the entity-level. Unlike 

margin, capital is difficult to rapidly 

adjust in response to changing risk 

exposures; thus, capital can be viewed 

as a backstop, in the event that the 

margin is not enough to cover all of the 

losses that resulted from the 

counterparty default. Standing alone, 

either capital or margin may not be 

enough to prevent a CSE from failing, 

but together, they are designed to reduce 

the probability of default by the CSE 

and limit the amount of leverage that 

can be undertaken by CSEs (and other 

market participants), which ultimately 

mitigates the possibility of a systemic 

event.45

At the same time, the Commission 

recognizes that a CSE’s uncleared swaps 

with a particular counterparty may 

implicate the supervisory interests of 

foreign regulators and it is important to 

calibrate the cross-border application of 

the margin requirements to mitigate, to 

the extent possible and consistent with 

the Commission’s regulatory interests, 

the potential for conflicts or duplication 

with other jurisdictions. Therefore, the 

Proposed Rule, while applying margin 


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46 In addition, the Commission notes that the 

proposed definition of ‘‘U.S. person’’ is similar to 

the definition of ‘‘U.S. person’’ used by the SEC in 

the context of cross-border security-based swaps. In 

the SEC’s August 2014 release adopting rules and 

providing guidance regarding the application of 

Title VII of the Dodd-Frank Act to cross-border 

security-based swap activities and persons engaged 

in those activities, the SEC defined the term ‘‘U.S. 

person’’ in Rule 240.3a71–3(a)(4)(i) under the 

Securities Exchange Act of 1934 to mean, except as 

provided in paragraph (a)(4)(iii) of the rule, any 

person that is (1) A natural person resident in the 

United States (Rule 240.3a71–3(a)(4)(i)(A)); (2) A 

partnership, corporation, trust, investment vehicle, 

or other legal person organized, incorporated, or 

established under the laws of the United States or 

having its principal place of business in the United 

States (Rule 240.3a71–3(a)(4)(i)(B)); (3) An account 

(whether discretionary or non-discretionary) of a 

U.S. person (Rule 240.3a71–3(a)(4)(i)(C)); or (4) An 

estate of a decedent who was a resident of the 

United States at the time of death(Rule 240.3a71– 

3(a)(4)(i)(D)). 

Paragraph (a)(4)(ii) of SEC Rule 240.3a71–3 also 

defines, for purposes of that section, ‘‘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. With respect to an 

externally managed investment vehicle, this 

location is the office from which the manager of the 

vehicle primarily directs, controls, and coordinates 

the investment activities of the vehicle. 

Paragraph (a)(4)(iii) of SEC Rule 240.3a71–3 states 

that the term ‘‘U.S. person’’ does not include the 

International Monetary Fund, the International 

Bank for Reconstruction and Development, the 

Inter-American Development Bank, the Asian 

Development Bank, the African Development Bank, 

the United Nations, and their agencies and pension 

plans, and any other similar international 

organizations, their agencies and pension plans. 

Paragraph (a)(4)(iv) of SEC Rule 240.3a71–3 states 

that a person shall not be required to consider its 

counterparty to a security-based swap to be a U.S. 

person if such person receives a representation from 

the counterparty that the counterparty does not 

satisfy the criteria set forth in paragraph (a)(4)(i) of 

that section, unless such person knows or has 

reason to know that the representation is not 

accurate; for the purposes of this final rule a person 

would have reason to know the representation is 

not accurate if a reasonable person should know, 

under all of the facts of which the person is aware, 

that it is not accurate. 

See Application of ‘‘Security-Based Swap Dealer’’ 

and ‘‘Major Security-Based Swap Participant’’ 

Definitions to Cross-Border Security-Based Swap 

Activities; Final rule; interpretation 

(Republication), 79 FR 47371 (Aug. 12, 2014). 

47See § 23.160(a)(10) of the Proposed Rule. 

48See § 23.160(a)(5) of the Proposed Rule. 

requirements to a CSE as a whole, also 

permits a U.S. CSE or non-U.S. CSE to 

avail itself of substituted compliance (to 

the extent applicable under the 

Proposed Rule) by complying with the 

margin requirements of the relevant 

foreign jurisdiction in lieu of 

compliance with the Commission’s 

margin requirements, provided that the 

Commission finds that such 

jurisdiction’s margin requirements are 

comparable to the Commission’s margin 

requirements, as further discussed in 

section II.D. below. 

In addition, the Proposed Rule 

provides for a limited exclusion of 

uncleared swaps between non-U.S. 

CSEs and non-U.S. counterparties (the 

‘‘Exclusion’’) in certain circumstances. 

The Commission recognizes that the 

supervisory interest of foreign regulators 

in certain uncleared swaps between 

non-U.S. CSEs and their non-U.S. 

counterparties may equal or exceed the 

supervisory interest of the United 

States. The Proposed Rule takes into 

account the interests of other 

jurisdictions and balances those 

interests with the supervisory interests 

of the United States in order to calibrate 

the application of margin rules to nonU.S. CSEs’ swaps with non-U.S. 

counterparties. Accordingly, the 

Commission believes that it would be 

appropriate to not apply the 

Commission’s margin rules to uncleared 

swaps meeting the criteria for the 

Exclusion, which is described in section 

II.C.3. below. 

B. Key Definitions 

The Proposed Rule uses certain key 

definitions to establish a proposed 

framework for the application of margin 

requirements in a cross-border context. 

Specifically, the Proposed Rule defines 

the terms ‘‘U.S. person,’’ ‘‘guarantee,’’ 

and ‘‘Foreign Consolidated Subsidiary’’ 

in order to identify those persons or 

transactions that, because of their 

substantial connection or impact on the 

U.S. market, raise or implicate greater 

supervisory interest relative to other 

CSEs, counterparties, and uncleared 

swaps that are subject to the 

Commission’s margin rules. These 

definitions are discussed below. 

1. U.S. Person 

Generally speaking, the term ‘‘U.S. 

person’’ would be defined to include 

those individuals or entities whose 

activities have a significant nexus to the 

U.S. market by virtue of their 

organization or domicile in the United 

States or the depth of their connection 

to the U.S. market, even if domiciled or 

organized outside the United States. The 

proposed definition generally follows 

the 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.46

The Proposed Rule would define a 

‘‘U.S. person’’ for purposes of the crossborder application of the margin rules to 

mean: 

(1) Any natural person who is a 

resident of the United States (Proposed 

Rule § 23.160(a)(10)(i)); 

(2) Any estate of a decedent who was 

a resident of the United States at the 

time of death (Proposed Rule 

§ 23.160(a)(10)(ii)); 

(3) 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 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 having its 

principal place of business in the 

United States, including any branch of 

the legal entity (Proposed Rule 

§ 23.160(a)(10)(iii)); 

(4) Any pension plan for the 

employees, officers or principals of a 

legal entity described in paragraph 

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

the pension plan is primarily for foreign 

employees of such entity (Proposed 

Rule § 23.160(a)(10)(iv)); 

(5) 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 Rule 

§ 23.160(a)(10)(v)); 

(6) 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 (a)(10)(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 

Rule § 23.160(a)(10)(vi)); and 

(7) 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 (a)(10)(vi) 

of proposed § 23.160 (Proposed Rule 

§ 23.160(a)(10)(vii)).47

A non-U.S. person is defined to be 

any person that is not a U.S. person.48

The proposed definition is generally 

consistent with the definition of this 

term set forth in the Guidance, with 

certain exceptions discussed below. 

Prongs (1), (2), (3), (4), (5), and (7) 

(Proposed Rule § 23.160(a)(10)(i), (ii), 

(iii), (iv), (v), and (vii)) identify certain 

persons as a ‘‘U.S. person’’ by virtue of 

their domicile or organization within 

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 


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49See, e.g., 17 CFR 4.7(a)(1)(iv) (defining ‘‘NonUnited States person’’ for purposes of part 4 of the 

Commission regulations relating to commodity pool 

operators). 

50See Hertz Corp. v. Friend, 559 U.S. 77, 80 

(2010). 

51See the Guidance, 78 FR 45309–45312, for 

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. However, 

because of variations in the structure of collective 

investment vehicles as well as the factors that are 

relevant to the consideration of whether a collective 

investment vehicle has its principal place of 

business in the United States under the Guidance, 

these examples were included in the Guidance for 

illustrative purposes only. 

52The Commission’s definition of the term ‘‘U.S. 

person’’ as used in the Guidance included a prong 

(iv) which covered ‘‘any commodity pool, pooled 

account, or collective investment vehicle (whether 

or not it is organized or incorporated in the United 

States) of which a majority ownership is held, 

directly or indirectly, by a U.S. person(s).’’ 

is a U.S. person.49 In the Commission’s 

view, these persons—by virtue of their 

decision to organize or locate in the 

United States and because they are 

likely to have significant financial and 

legal relationships in the United 

States—are appropriately included 

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

for purposes of the proposed crossborder margin framework. 

Under prong (3) (Proposed Rule 

§ 23.160(a)(10)(iii)), consistent with its 

traditional approach, the Commission 

proposes to define ‘‘U.S. person’’ also to 

include 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 prong, the Commission 

proposes to interpret ‘‘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.’’ 50

The Commission is of the view that 

the application of the principal place of 

business concept to a fund may require 

consideration of additional factors 

beyond those applicable to operating 

companies. In the case of a fund, the 

Commission notes that the senior 

personnel that direct, control, and 

coordinate a fund’s activities are 

generally not the persons who are 

named as directors or officers of the 

fund, but rather are persons who work 

for the fund’s investment adviser or the 

fund’s promoter. Therefore, consistent 

with the Guidance, the Commission 

generally would 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.51

Prong (6) (Proposed Rule 

§ 23.160(a)(10)(vi)) of the proposed 

definition of ‘‘U.S. person’’ would 

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. As noted 

above, the Guidance included a similar 

concept in the definition of the term 

‘‘U.S. person;’’ however the definition 

contained in the Guidance would 

generally characterize a legal entity as a 

U.S. person if the entity were ‘‘directly 

or indirectly majority-owned’’ by one or 

more persons falling within the term 

‘‘U.S. person’’ and such U.S. person(s) 

bears unlimited responsibility for the 

obligations and liabilities of the legal 

entity. Where a U.S. person serves as a 

financial backstop for all of a legal 

entity’s obligations and liabilities, 

creditors and counterparties look to the 

U.S. person when assessing the risk in 

dealing with the entity, regardless of the 

amount of equity owned by the U.S. 

person. Under such circumstances, 

because the U.S. person has unlimited 

responsibility for all of the legal entity’s 

obligations, the Commission believes 

that the legal entity should be deemed 

to be a U.S. person. 

The Proposed Rule would not include 

the U.S. majority-ownership prong that 

was included in the Guidance (50% 

U.S. person ownership of a fund or 

other collective investment vehicle).52

Some commenters have argued that a 

majority ownership test for funds 

should not be included on the basis that 

ownership alone is not indicative of 

whether the activities of a non-U.S. fund 

with a non-U.S.-based manager has a 

direct and significant effect on the U.S. 

financial system, and that it is difficult 

to determine the identity of the 

beneficial owner of a fund in certain 

fund structures (e.g., fund-of-funds or 

master-feeder). Alternatively, an 

argument for retaining the majorityownership test would be that many of 

these funds have large U.S. investors, 

who can be adversely impacted in the 

event of a counterparty default. On 

balance, the Commission believes the 

majority-ownership test should not be 

included in the definition of U.S. person 

for purposes of the margin rules. NonU.S. funds with U.S. majorityownership, even if treated as a non-U.S. 

person, would be excluded from the 

Commission’s margin rules only in 

limited circumstances (namely, when 

these funds trade with a non-U.S. CSE 

that is not a consolidated subsidiary of 

a U.S. entity or a U.S. branch of a nonU.S. CSE). This, coupled with the 

implementation issues raised by 

commenters, persuades the Commission 

not to propose to define those funds that 

are majority-owned by U.S. persons 

(and that would otherwise not fall 

within the definition of a ‘‘U.S. 

person’’), as U.S. persons. 

The proposed definition of ‘‘U.S. 

person’’ determines a legal person’s 

status at the entity level and thus 

includes any foreign operations that are 

part of the U.S. legal person, regardless 

of their location. Consistent with this 

approach, the definition of ‘‘U.S. 

person’’ under the Proposed Rule would 

include a foreign branch of a U.S. 

person. 

Under the proposed definition, 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. 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 its 

relationship with a U.S. person. 

The proposed ‘‘U.S. person’’ 

definition does not include the prefatory 

phrase ‘‘includes, but is not limited to’’ 

that was included in the Guidance. The 

Commission believes that this prefatory 

phrase should not be included in order 

to provide legal certainty regarding the 

application of U.S. margin requirements 

to cross-border swaps. 

The Commission understands that the 

information necessary for a swap 

counterparty to accurately assess the 

status of its counterparties as U.S. 

persons may not be available, or may be 

available only through overly 

burdensome due diligence. For this 

reason, the Commission believes that a 

swap counterparty generally should be 

permitted to reasonably rely on its 

counterparty’s written representation in 

determining whether the counterparty is 

within the definition of the term ‘‘U.S. 

person.’’ In this context, the 

Commission’s policy is to interpret the 

‘‘reasonable’’ standard to be satisfied 


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53The Commission notes that under the External 

Business Conduct Rules, a SD or MSP generally 

meets its due diligence obligations if it reasonably 

relies on counterparty representations, absent 

indications to the contrary. As in the case of the 

External Business Rules, the Commission believes 

that allowing for reasonable reliance on 

counterparty representations encourages objectivity 

and avoids subjective evaluations, which in turn 

facilitates a more consistent and foreseeable 

determination of whether a person is within the 

Commission’s interpretation of the term ‘‘U.S. 

person.’’ 

54See § 23.160(a)(5) of the Proposed Rule. 

55Under the Proposed Rule, a ‘‘U.S. CSE’’ is a 

CSE that is a U.S. person. The term ‘‘U.S. CSE’’ 

includes a foreign branch of a U.S. CSE. A ‘‘nonU.S. CSE’’ is any CSE that is not a U.S. person. 

56See § 23.160(a)(2) of the Proposed Rule. 57Further, the definition of ‘‘guarantee’’ is 

intended to encompass any swap of a non-U.S. 

person where the counterparty to the swap has 

rights of recourse, regardless of the form of the 

arrangement, against at least one U.S. person (either 

individually or jointly or severally with others) for 

the non-U.S. person’s obligations under the swap. 

58 In the Guidance, the Commission interpreted 

the term ‘‘guarantee’’ generally to include not only 

traditional guarantees of payment or performance of 

the related swaps, but also other formal 

arrangements that, in view of all the facts and 

circumstances, support the non-U.S. person’s 

ability to pay or perform its swap obligations with 

respect to its swaps. 

when a party to a swap conducts 

reasonable due diligence on its 

counterparties, with what is reasonable 

in a particular situation to depend on 

the relevant facts and circumstances.53

Under the Proposed Rule, a ‘‘non-U.S. 

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

person’’ (as defined in the Proposed 

Rule).54 References in this preamble to 

a ‘‘U.S. counterparty’’ are to a swap 

counterparty that is a ‘‘U.S. person’’ 

under the Proposed Rule, and references 

to a ‘‘non-U.S. counterparty’’ are to a 

swap counterparty that is a ‘‘non-U.S. 

person’’ under the Proposed Rule.55

Request for Comment. The 

Commission requests comment on all 

aspects of the proposed definition of 

‘‘U.S. person,’’ including the following: 

1. Does the proposed definition of 

‘‘U.S. person’’ appropriately identify all 

individuals or entities that should be 

designated as U.S. persons? Is the 

proposed definition too narrow or 

broad? Why? 

2. Should the definition of ‘‘U.S. 

person’’ include the U.S. majorityownership prong for funds and other 

collective investment vehicles, as set 

forth in the Guidance? Please explain. 

3. Should the definition of ‘‘U.S. 

person’’ include certain legal entities 

owned by one or more persons 

described in prongs (1), (2), (3), (4), or 

(5) (Proposed Rule § 23.160(a)(10)(i), (ii), 

(iii), (iv) or (v)) of the proposed U.S. 

person definition who bear(s) unlimited 

responsibility for the obligations and 

liabilities of the legal entity? Please 

explain. 

4. Should the definition of ‘‘U.S. 

person’’ be identical to the definition of 

‘‘U.S. person’’ that the SEC adopted in 

its August 2014 rulemaking? For 

example: 

a. Should the definition of ‘‘U.S. 

person’’ exclude certain designated (and 

any similar) international organizations, 

their agencies and pension plans, with 

headquarters in the United States? 

b. Should the Commission define the 

term ‘‘principal place of business’’ as 

the location from which the officers, 

partners, or managers of a legal person 

primarily direct, control, and coordinate 

the activities of the legal person, and 

specify that in the case of an externally 

managed investment vehicle, this 

location is the office from which the 

manager of the vehicle primarily directs, 

controls, and coordinates the 

investment activities of the vehicle? 

c. Should the Commission delete 

prong (6) (Proposed Rule 

§ 23.160(a)(10)(vi)) of the proposed 

definition of ‘‘U.S. person’’ which 

includes 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 and instead 

treat such arrangements as recourse 

guarantees? 

d. Should any other changes be made 

to the proposed definition of ‘‘U.S. 

person’’ to conform it to the definition 

adopted by the SEC? 

2. Guarantees 

Under the Proposed Rule, uncleared 

swaps of non-U.S. CSEs, where the nonU.S. CSE’s obligations under the 

uncleared swap are guaranteed by a U.S. 

person, would be treated the same as 

uncleared swaps of a U.S. CSE. The 

Commission believes that this treatment 

is appropriate because the swap of a 

non-U.S. CSE whose obligations under 

the swap are guaranteed by a U.S. 

person is identical, in relevant respects, 

to a swap entered directly by a U.S. 

person. That is, by virtue of the 

guarantee, the U.S. guarantor is 

responsible for the swap it guarantees in 

a manner similar to a direct 

counterparty to the swap. The U.S. 

person guarantor effectively acts jointly 

with the non-U.S. person whose swap it 

guarantees to engage in swaps 

transactions. The counterparty, 

pursuant to the recourse guarantee, 

looks to both the direct non-U.S. 

counterparty and its U.S. guarantor in 

entering into the swap. 

The Proposed Rule would define the 

term ‘‘guarantee’’ as an arrangement 

pursuant to which one party to a swap 

transaction with a non-U.S. 

counterparty has rights of recourse 

against a U.S. person guarantor (whether 

such guarantor is affiliated with the 

non-U.S. counterparty or is an 

unaffiliated third party) with respect to 

the non-U.S. counterparty’s obligations 

under the relevant swap transaction. 

Under the Commission’s proposal, a 

party to a swap transaction has rights of 

recourse against the U.S. person 

guarantor if the party has a conditional 

or unconditional legally enforceable 

right, in whole or in part, to receive 

payments from, or otherwise collect 

from, the U.S. person in connection 

with the non-U.S. person’s obligations 

under the swap.56 Accordingly, the term 

‘‘guarantee’’ would apply whenever a 

party to the swap has a legally 

enforceable right of recourse against the 

U.S. guarantor of a non-U.S. 

counterparty’s obligations under the 

relevant swap, regardless of whether 

such right of recourse is conditioned 

upon the non-U.S. counterparty’s 

insolvency or failure to meet its 

obligations under the relevant swap, 

and regardless of 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. 

Under the Proposed Rule, the terms of 

the guarantee need not necessarily be 

included within the swap 

documentation or even otherwise 

reduced to writing (so long as legally 

enforceable rights are created under the 

laws of the relevant jurisdiction), 

provided that a swap counterparty has 

a conditional or unconditional legally 

enforceable right, in whole or in part, to 

receive payments from, or otherwise 

collect from, the U.S. person in 

connection with the non-U.S. person’s 

obligations under the swap.57

Further, the Commission’s proposed 

definition of guarantee would not be 

affected by whether the U.S. guarantor 

is an affiliate of the non-U.S. CSE 

because, in each case, the swap 

counterparty has a conditional or 

unconditional legally enforceable right, 

in whole or in part, to receive payments 

from, or otherwise collect from, the U.S. 

person in connection with the non-U.S. 

person’s obligations under the swap. 

The Commission notes that the 

definition of ‘‘guarantee’’ in the 

Proposed Rule is narrower in scope than 

the one used in the Guidance.58 In 

proposing this definition, the 

Commission is cognizant that many 

other types of financial arrangements or 

support, other than a guarantee as 

defined in the Proposed Rule, may be 

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

CSE (e.g., keepwells and liquidity puts, 


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59Under the Proposed Rule, 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. 

60The Exclusion under the Proposed Rule is 

discussed in section II.C.3. below. 

61For example, when General Electric announced 

on April 10, 2015 that it would guarantee 

repayment of approximately $210 billion of debt 

from GE Capital, the prices of some GE Capital 

bonds reportedly went up as much as 1.5% even 

though previously the parent company had 

provided other support but not an unconditional 

guarantee. According to an article in the Wall Street 

Journal, Russell Solomon, an analyst at Moody’s 

Investors Service, stated: ‘‘We’ve always assumed 

that GE would support GE Capital almost no matter 

what . . . But now this says they’ll support it no 

matter what.’’ Similarly, the article reports that 

Standard & Poor’s Rating Services stated that 

General Electric’s decision to back GE Capital debt 

‘‘strengthens our view of GE’s support, by 

buttressing the parent’s proven willingness and 

ability to support its subsidiary with a contractual 

obligation to do so.’’ See Mike Cherney and Katy 

Burne, WSJ, Apr. 10, 2015, available at http://www.

wsj.com/articles/ges-move-alters-the-bond-market1428707800. 

certain types of indemnity agreements, 

master trust agreements, liability or loss 

transfer or sharing agreements). The 

Commission understands that these 

other financial arrangements or support 

transfer risk directly back to the U.S. 

financial system, with possible 

significant adverse effects, in a manner 

similar to a guarantee with a direct 

recourse to a U.S. person. The 

Commission, however, believes that 

application of a narrower definition of 

guarantee for purposes of identifying 

those uncleared swaps that should be 

treated like uncleared swaps of a U.S. 

CSEs would reduce the potential for 

conflict with the non-U.S. CSE’s home 

regulator. Moreover, the Commission 

believes that a non-U.S. CSE that has 

been provided with financial 

arrangements or support from a U.S. 

person that do not fall within the term 

‘‘guarantee’’ as defined in the Proposed 

Rule in many cases is likely to meet the 

definition of a ‘‘Foreign Consolidated 

Subsidiary’’ and therefore, as discussed 

in the next section, would be subject to 

the Commission’s margin requirements, 

with substituted compliance (but not 

the Exclusion) available. Therefore, the 

Commission believes that a narrow 

definition of guarantee would achieve a 

more workable framework for non-U.S. 

CSEs, without undermining protection 

of U.S. persons and U.S. financial 

system. 

The Commission is aware that some 

non-U.S. CSEs removed guarantees in 

order to fall outside the scope of certain 

Dodd-Frank requirements. The 

proposed coverage of foreign 

subsidiaries of a U.S. person as a 

‘‘Foreign Consolidated Subsidiary,’’ 

which is discussed in the next section, 

and whose swaps would not be eligible 

for the Exclusion under any 

circumstances (as discussed in section 

II.C.3. below), would address the 

concern that even without a guarantee, 

as defined under the Guidance or in the 

Proposed Rule, foreign subsidiaries of a 

U.S. person with a substantial nexus to 

the U.S. financial system are adequately 

covered by the margin requirements. 

Request for Comment. The 

Commission seeks comment on all 

aspects of the proposed definition of 

‘‘guarantee,’’ including the following: 

1. Should the broader use of the term 

‘‘guarantee’’ in the Guidance be used 

instead of the proposed definition, and 

if so, why? Would an alternative 

definition be more effective in light of 

the purpose of the margin requirements, 

and if so, why? 

2. Is the Commission’s assumption 

that a non-U.S. CSE is likely to meet the 

definition of a ‘‘Foreign Consolidated 

Subsidiary’’ when it has been provided 

with financial arrangements or support 

from a U.S. person that do not fall 

within the term ‘‘guarantee’’ (as defined 

in the Proposed Rule) correct? If not, 

why not? 

3. Is it appropriate to distinguish, for 

purposes of the Proposed Rule, between 

those arrangements under which a party 

to the swap has a legally enforceable 

right of recourse against the U.S. 

guarantor and those arrangements where 

there is not direct recourse against a 

U.S. guarantor? 

3. Foreign Consolidated Subsidiaries 

The Proposed Rule uses the term 

‘‘Foreign Consolidated Subsidiary’’ in 

order to identify swaps of those nonU.S. CSEs whose obligations under the 

relevant uncleared swap are not 

guaranteed by a U.S. person but that 

raise substantial supervisory concern in 

the United States, as a result of the 

possible negative impact on their U.S. 

parent entities and the U.S. financial 

system. 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. generally accepted 

accounting principles (‘‘GAAP’’)). In the 

Commission’s view, the fact that an 

entity is included in the consolidated 

financial statements of another is an 

indication of potential risk to the other 

entity that offers a clear and objective 

standard for the application of margin 

requirements. 

Specifically, the Proposed Rule 

defines the term ‘‘Foreign Consolidated 

Subsidiary’’ as a non-U.S. CSE in which 

an ultimate parent entity 59 that is a U.S. 

person has a controlling 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. 

In the case of Foreign Consolidated 

Subsidiaries whose obligations under 

the relevant swap are not guaranteed by 

a U.S. person, substituted compliance 

would be broadly available under the 

Proposed Rule to the same extent as 

other non-U.S. CSEs whose obligations 

under the relevant swap are not 

guaranteed by a U.S. person, even 

though the financial position, operating 

results, and statement of cash flows of 

the Foreign Consolidated Subsidiary 

have a direct impact on the financial 

position, risk profile and market value 

of the consolidated group (which 

includes a U.S. parent entity); however, 

the Exclusion would not be available for 

swaps with a Foreign Consolidated 

Subsidiary because their swap activities 

have a direct impact on the financial 

position, risk profile, and market value 

of a U.S. parent entity that consolidates 

the Foreign Consolidated Subsidiary’s 

financial statements and a potential 

spill-over effect on the U.S. financial 

system.60

The Commission believes that not 

extending the Exclusion to Foreign 

Consolidated Subsidiaries under the 

Proposed Rule would be appropriate 

because the U.S. parent entity that 

consolidates the Foreign Consolidated 

Subsidiary’s financial statements may 

have an incentive to provide support to 

a Foreign Consolidated Subsidiary, or 

the Foreign Consolidated Subsidiary 

may pose financial risk to the U.S. 

parent entity. In addition, market 

participants (including counterparties) 

may have the expectation that the 

parent entity will provide support to the 

Foreign Consolidated Subsidiary 

although, whether the U.S. parent entity 

actually steps in to fulfill the obligations 

of the Foreign Consolidated Subsidiary 

would depend on a business judgment 

rather than a legal obligation.61 Notably, 

although consolidation has a direct 

impact on the U.S. parent entity, the 

U.S. parent entity stands in a different 

legal position than a U.S. guarantor 

because, in the absence of a direct 

recourse guarantee, the U.S. parent 

entity has no legal obligation to pay or 

perform under the relevant swap if the 

Foreign Consolidated Subsidiary 

defaults on its swap obligations. 

Therefore, the Commission believes 

that, in the absence of a direct recourse 


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62Under the Prudential Regulators’ proposal, the 

term ‘‘control’’ of another company means: (1) 

Ownership, control, or power to vote 25 percent or 

more of a class of voting securities of the company, 

directly or indirectly or acting through one or more 

other persons; (2) ownership or control of 25 

percent or more of the total equity of the company, 

directly or indirectly or acting through one or more 

other persons; or (3) control in any manner of the 

election of a majority of the directors or trustees of 

the company. 

63The Commission’s Proposed Margin Rules are 

set forth in proposed §§ 23.150 through 23.159 of 

part 23 of the Commission’s regulations, proposed 

as 17 CFR 23.150 through 23.159. 

64Foreign branches of a U.S. CSE are treated as 

part of the related principal entity and hence an 

uncleared swap executed by or through a foreign 

branch would be treated as an uncleared swap of 

a U.S. CSE. 

guarantee from a U.S. person, uncleared 

swaps with a Foreign Consolidated 

Subsidiary should not be treated the 

same as swaps with a U.S. CSE or a nonU.S. CSE whose obligations under the 

relevant swap are guaranteed by a U.S. 

person. 

The Commission considered 

proposing a ‘‘control’’ test similar to that 

proposed by the Prudential Regulators. 

The ‘‘control test’’ in the Prudential 

Regulators’ proposal is based solely on 

an entity’s ownership level and control 

of the election of the board,62 which 

may or may not clearly identify, 

depending on the facts and 

circumstances, those non-U.S. CSEs that 

are likely to raise greater supervisory 

concerns than other non-U.S. CSEs (in 

each case whose obligations under the 

relevant swap are not guaranteed by a 

U.S. person). Therefore, the Commission 

is using a ‘‘consolidation test’’ rather 

than a ‘‘control test’’ in the proposed 

definition of a ‘‘Foreign Consolidated 

Subsidiary’’ in order to provide a clear, 

bright-line test for identifying those 

non-U.S. CSEs whose uncleared swaps 

are likely to raise greater supervisory 

concerns. 

Request for Comment. The 

Commission seeks comment on all 

aspects of the Proposed Rule’s 

definition of ‘‘Foreign Consolidated 

Subsidiary,’’ including: 

1. Does the proposed definition of a 

‘‘Foreign Consolidated Subsidiary’’ 

appropriately capture those non-U.S. 

CSEs that should not be eligible for the 

Exclusion? If not, please explain and 

provide an alternative(s). 

2. The consolidation test in the 

definition of a ‘‘Foreign Consolidated 

Subsidiary’’ 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. Should 

the proposed consolidation test be used 

in lieu of the control test proposed by 

the Prudential Regulators? Why or why 

not? Should the Commission use both a 

consolidation test and a control test? If 

so, please explain. Would any other 

tests or criteria be more appropriate? If 

so, please explain what tests or criteria 

should be used and why they are more 

appropriate. 

3. Under the definition of Foreign 

Consolidated Subsidiary, the 

Commission is using U.S. GAAP as the 

standard for purposes of determining 

whether an entity consolidates another 

entity. In reviewing registration data of 

CSEs, the Commission believes that this 

definition balances the goals of the 

statute and the burdens placed on the 

industry; however, should the 

Commission also consider including in 

the definition of Foreign Consolidated 

Subsidiary, non-U.S. CSEs whose U.S. 

ultimate parent entity uses a different 

standard than U.S. GAAP in 

determining whether a parent entity 

must consolidate an entity for financial 

reporting purposes? If so, please explain 

why. 

4. Should the Commission also 

include in the definition of ‘‘Foreign 

Consolidated Subsidiary’’ those nonU.S. CSEs whose U.S. ultimate parent 

entity is not required to prepare 

consolidated financial statements under 

any accounting standard or for any other 

reason (e.g., the U.S. ultimate parent 

entity is not a public company under 

federal securities laws and is not 

required to prepare consolidated 

financial statements by private investors 

or debtholders as a condition to 

investing or financing), but which 

would consolidate the non-U.S. CSE if 

it were required to prepare consolidated 

financial statements in accordance with 

U.S. GAAP? If so, please explain why? 

5. Under the definition of Foreign 

Consolidated Subsidiary, the 

Commission is only including non-U.S. 

CSEs whose financial statements are 

consolidated by an ultimate parent 

entity that is a U.S. person. Should the 

Commission also include immediate 

and intermediate parent entities of the 

non-U.S. CSE in the definition? If so, 

please explain why? 

C. Applicability of Margin Requirements 

to Cross-Border Uncleared Swaps 

The following section describes the 

application of the Commission’s margin 

rules to cross-border swaps between 

CSEs and various types of 

counterparties, as well as when the 

Exclusion from the Commission’s 

margin requirements would be 

applicable. Table A to this release (see 

below) illustrates how the Proposed 

Rule would apply to specific 

transactions between various types of 

counterparties, and should be read in 

conjunction with the rest of the 

preamble and the text of the Proposed 

Rule. 

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 

Under the Proposed Rule, the 

Commission’s margin rules 63 would 

apply to all uncleared swaps of U.S. 

CSEs,64 with no exclusions. By their 

nature, U.S. CSEs have a significant 

impact on the U.S. swaps market, and 

the Commission therefore has a strong 

interest in ensuring their viability. 

However, substituted compliance would 

be available with respect to initial 

margin posted to (but not collected 

from) any non-U.S. counterparty 

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

obligations under the uncleared swap 

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

Commission proposes to provide 

substituted compliance in this situation 

(assuming that the non-U.S. 

counterparty is subject to comparable 

margin requirements in a foreign 

jurisdiction) because the swap 

counterparty is a non-U.S. person and 

where its swap obligations are not 

guaranteed by a U.S. person, the foreign 

regulator may have equal or greater 

interest in the collection of margin by 

the non-U.S. counterparty. However, 

substituted compliance would not apply 

to the collection of margin by the U.S. 

CSE from the non-U.S. counterparty, as 

the Commission has a significant 

regulatory interest in the collection of 

margin by the U.S. CSE, which protects 

the U.S. CSE and the U.S. financial 

system from counterparty credit risk. 

The same treatment that applies to 

U.S. CSEs would also apply to a nonU.S. CSE whose obligations under the 

relevant swap are guaranteed by a U.S. 

person. The Commission believes that 

this result is appropriate because the 

economics of the transaction are no 

different from a trade entered directly 

by the U.S. guarantor, as discussed in 

section II.B.2. above. In addition, the 

Commission believes that treating 

uncleared swaps of these entities 

differently from those of U.S. CSEs 

would lead to unwarranted competitive 

distortions. That is, the non-U.S. CSE 

that enters into a swap with a direct 

recourse guarantee from a U.S. person 

would be positioned to benefit from 

more competitive pricing when dealing 

with non-U.S. counterparties (as 

compared to U.S. CSEs) to the extent 


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65With respect to uncleared swaps with a U.S. 

CSE or a non-U.S. CSE whose obligations under the 

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

substituted compliance would only be available for 

initial margin collected by the non-U.S. CSE whose 

obligations under the relevant swap are not 

guaranteed by a U.S. person, as discussed in section 

II.C.1. 

66See § 23.160(b)(2)(ii) of the Proposed Rule. 

67Section 4s(e)(3)(A) of the CEA, 7 U.S.C. 

6s(e)(3)(A). The section calls for, among other 

things, that margin requirements ‘‘be appropriate 

for the risks associated with the non-cleared swaps 

held as a swap dealer or major market participant.’’ 

that either substituted compliance or the 

Exclusion would be available. 

The Commission believes that 

requiring U.S. CSEs and non-U.S. CSEs 

whose obligations under the relevant 

swap are guaranteed by a U.S. person to 

comply with its margin requirements, 

with only limited substituted 

compliance for margin posted to (but 

not collected from) any non-U.S. 

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

whose obligations under the uncleared 

swap are not guaranteed by a U.S. 

person, would help ensure their safety 

and soundness and support the stability 

of the U.S. financial markets, reducing 

the likelihood of another financial crisis 

affecting the U.S. economy. 

Request for Comment. The 

Commission requests comments on all 

aspects of the proposed treatment of 

uncleared swaps of U.S. CSEs and/or 

non-U.S. CSEs whose obligations under 

the relevant swap are guaranteed by a 

U.S. person, including: 

1. Is the Proposed Rule’s treatment of 

U.S. CSEs and non-U.S. CSEs whose 

obligations under the swap are 

guaranteed by a U.S. person 

appropriate? If not, please explain. If a 

different treatment should apply to U.S. 

CSEs or non-U.S. CSEs whose 

obligations under the swap are 

guaranteed by a U.S. person, please 

describe the alternative treatment that 

should apply and explain why. 

2. What are the competitive 

implications of the proposed treatment 

of uncleared swaps of non-U.S. CSEs 

whose obligations under the swap are 

guaranteed by a U.S. person? 

3. Does the proposed treatment of 

non-U.S. CSEs whose obligations under 

the swap are guaranteed by a U.S. 

person appropriately take into account 

the supervisory interest of a non-U.S. 

CSE’s home jurisdiction? 

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

(Including Foreign Consolidated 

Subsidiaries) Whose Obligations Under 

the Relevant Swap Are Not Guaranteed 

by a U.S. Person 

Under the Proposed Rule, non-U.S. 

CSEs (including Foreign Consolidated 

Subsidiaries) whose obligations under 

the relevant uncleared swap are not 

guaranteed by a U.S. person may avail 

themselves of substituted compliance to 

a greater extent than if their obligations 

under the swap were guaranteed by a 

U.S. person. The Commission believes 

that this approach is appropriate since 

a non-U.S. CSE whose swap obligations 

are not guaranteed by a U.S. person 

(including a Foreign Consolidated 

Subsidiary), on balance, may implicate 

equal or greater supervisory concerns on 

the part of a foreign regulator relative to 

the supervisory interest of the 

Commission (in comparison to U.S. 

CSEs or non-U.S. CSEs whose 

obligations under the relevant swap are 

guaranteed by a U.S. person, because 

the Commission has a significant 

regulatory interest in uncleared swaps 

of these CSEs). Under the Proposed 

Rule, where the obligations of a nonU.S. CSE (including a Foreign 

Consolidated Subsidiary) under the 

relevant swap are not guaranteed by a 

U.S. person, substituted compliance 

would be available with respect to its 

uncleared swaps with any counterparty, 

except 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.65

Further, uncleared swaps entered into 

by Foreign Consolidated Subsidiaries 

would not be eligible for the Exclusion 

under the Proposed Rule. As described 

above, the financial position, operating 

results, and statement of cash flows of 

a Foreign Consolidated Subsidiary are 

incorporated into the financial 

statements of the U.S. ultimate parent 

entity and therefore, likely have a direct 

impact on the consolidated entity’s 

financial position, risk profile, and 

market value. Under these 

circumstances, and given the 

importance of margin in mitigating 

counterparty credit risk, the 

Commission has greater supervisory 

concerns with respect to the uncleared 

swaps of a Foreign Consolidated 

Subsidiary than other non-U.S. CSEs. 

Therefore, the Commission believes that 

extending the Exclusion to a Foreign 

Consolidated Subsidiary would not 

further the goal of ensuring the safety 

and soundness of a CSE and the stability 

of U.S. financial markets. The 

Commission is also concerned that 

extending the Exclusion to Foreign 

Consolidated Subsidiaries would 

encourage a U.S. entity to use their nonU.S. subsidiaries to conduct their swap 

activities with non-U.S. counterparties, 

possibly bifurcating the U.S. entity’s 

U.S. and non-U.S.-facing businesses, 

and potentially resulting in separate 

pools of liquidity. 

Request for Comment. The 

Commission requests comments on all 

aspects of the proposed treatment of 

uncleared swaps of non-U.S. CSEs 

(including Foreign Consolidated 

Subsidiaries) whose obligations under 

the relevant swap are not guaranteed by 

a U.S. person, including: 

1. The Proposed Rule makes 

substituted compliance more broadly 

available to a Foreign Consolidated 

Subsidiary whose obligations under the 

relevant swap are not guaranteed by a 

U.S. person than a non-U.S. CSE 

(including a Foreign Consolidated 

Subsidiary) whose obligations under the 

relevant swap are guaranteed by a U.S. 

person. Should Foreign Consolidated 

Subsidiaries be treated the same as nonU.S. CSEs that are guaranteed by a U.S. 

person and if not, what treatment is 

appropriate? 

2. What are the competitive 

implications of the proposed treatment 

of Foreign Consolidated Subsidiaries 

(relative to other non-U.S. CSEs)? Does 

the proposed treatment appropriately 

take into account the supervisory 

interest of a non-U.S. CSE’s home 

jurisdiction? 

3. Exclusion for Uncleared Swaps of 

Non-U.S. CSEs Where Neither 

Counterparty’s Obligations Under the 

Relevant Swap Are Guaranteed by a 

U.S. Person and Neither Counterparty Is 

a Foreign Consolidated Subsidiary Nor 

a U.S. Branch of a Non-U.S. CSE 

Under the Proposed Rule, an 

uncleared swap entered into by a nonU.S. CSE with a non-U.S. person 

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

would be 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 a Foreign Consolidated 

Subsidiary nor a U.S. branch of a nonU.S. CSE.66

As discussed above, the Commission 

believes that, given the importance of 

margin to the safety and soundness of a 

CSE, as a general matter, margin 

requirements should apply to the 

uncleared swaps of a CSE, without 

regard to the domicile of the 

counterparty or where the trade is 

executed. At the same time, the 

Commission believes that it is 

appropriate to make a limited exception 

to this principle of firm-wide 

application of margin requirements in 

the cross-border context, consistent with 

section 4s(e) of the CEA 67 and comity 

principles, so as to exclude a narrow 

class of uncleared swaps involving a 


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68See Capital Requirements of Swap Dealers and 

Major Swap Participants, Notice of proposed 

rulemaking, 76 FR 27802 (May 12, 2011). 

69The non-U.S. CSE that qualifies for the 

exclusion would be eligible for substituted 

compliance, with respect to all margin 

requirements, if its counterparty to the uncleared 

swap is a U.S. person that is not a CSE. If the 

uncleared swap is with a U.S. CSE, substituted 

compliance would only be available with respect to 

initial margin posed by the U.S. CSE counterparty. 

70With respect to uncleared swaps with a U.S. 

CSE or a non-U.S. CSE whose obligations under the 

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

substituted compliance would only be available for 

initial margin collected by the U.S. branch of a nonU.S. CSE whose obligations under the relevant 

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

section II.C.1. 

71Under the Volcker rule, personnel that arrange, 

negotiate, or execute a purchase or sale conducted 

under the exemption for trading activity of a foreign 

banking entity must be located outside of the 

United States. See Prohibitions and Restrictions on 

Proprietary Trading and Certain Interests in, and 

Relationships With, Hedge Funds and Private 

Equity Funds; Final Rule, 79 FR 5808 (Jan. 31, 

2014). Thus, for example, personnel in the United 

States cannot solicit or sell to or arrange for trades 

conducted under this exemption. Personnel in the 

United States also cannot serve as decision makers 

in transactions conducted under this exemption. 

Personnel that engage in back-office functions, such 

as clearing and settlement of trades, would not be 

considered to arrange, negotiate, or execute a 

purchase or sale for purposes of this provision. Id. 

at 5927, n.1526. 

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

counterparty. 

The Commission notes that a non-U.S. 

CSE that can avail itself of the Exclusion 

would 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. 

The non-US CSE would also be subject 

to the Commission’s capital 

requirements, which, as proposed, 

would impose a capital charge for 

uncollateralized exposures.68

Additionally, any excluded swaps 

would most likely be covered by the 

margin requirements of another 

jurisdiction that adheres to the BCBS– 

IOSCO framework.69

The Commission also recognizes that 

the supervisory interest of foreign 

regulators in the uncleared swaps of 

non-U.S. CSEs (and their non-U.S. 

counterparties) that are eligible for the 

Exclusion may equal or exceed the 

supervisory interest of the United States 

in such uncleared swaps. Both 

counterparties are domiciled outside the 

United States and likely would be 

subject to the supervision of a foreign 

regulator. As discussed above, the 

Commission believes that a workable 

cross-border framework must take into 

account the interests of other 

jurisdictions and balance those interests 

with the supervisory interests of the 

United States in order to calibrate the 

application of margin rules to non-U.S. 

CSEs’ swaps with non-U.S. 

counterparties. Such an approach would 

help mitigate the potential for conflicts 

with other jurisdictions and ultimately 

promote global harmonization. For all of 

the foregoing reasons, the Commission 

believes that it would be appropriate to 

not apply the Commission’s margin 

rules to uncleared swaps meeting the 

criteria for the Exclusion. 

The Commission acknowledges that 

similar mitigating factors and comity 

considerations may apply to Foreign 

Consolidated Subsidiaries, but as 

discussed above, a Foreign Consolidated 

Subsidiary’s financial position, 

operating results, and statement of cash 

flows are directly reflected in its U.S. 

Ultimate Parent entity’s financial 

statements, which implicates greater 

supervisory concerns. Therefore, the 

Commission believes that it has a 

greater regulatory interest in Foreign 

Consolidated Subsidiaries than other 

non-U.S. CSEs (that are not guaranteed 

by a U.S. person), and that the 

uncleared swaps of Foreign 

Consolidated subsidiaries should not be 

excluded from the margin requirements. 

Further, the Commission believes that 

the uncleared swaps of a U.S. branch of 

a non-U.S. CSE should not be excluded 

from the margin requirements for the 

reasons discussed in the next section. 

Request for Comment. The 

Commission is requesting comments on 

all aspects of the proposed Exclusion, 

including: 

1. In light of the mitigating factors 

cited above and the Commission’s 

supervisory interest in the safety and 

soundness of all CSEs and the critical 

role that margin plays in helping ensure 

the safety and soundness of CSEs, is the 

proposed Exclusion appropriate, and if 

not, please explain why not? Is the 

scope of the Exclusion appropriate, or 

should it be broader or narrower, and if 

so, why? 

2. Under the Proposed Rule, 

uncleared swaps with a Foreign 

Consolidated Subsidiary would not be 

eligible for the Exclusion from the 

Commission’s margin requirements. 

Should Foreign Consolidated 

Subsidiaries be eligible for the 

Exclusion and if so, why? 

4. U.S. Branches of Non-U.S. CSEs 

The Proposed Rule treats uncleared 

swaps executed through or by a U.S. 

branch of a non-U.S. CSE the same as 

those swaps of a non-U.S. CSE, except 

that the Exclusion from the margin rules 

would not be available to a U.S. branch 

of a non-U.S. CSE. 

Generally speaking, because the risks 

posed by uncleared swaps are borne by 

a CSE as a whole, it should not matter 

if the transaction is entered by or 

through a U.S. branch or office within 

the United States. Nevertheless, the 

Commission believes that extending the 

Exclusion (to the extent than the 

Exclusion might otherwise apply to the 

non-U.S. CSE, as discussed above) 

would not be appropriate in the case of 

uncleared swaps executed by or through 

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

The Commission notes that non-U.S. 

CSEs can conduct their swap dealing 

business within the United States 

utilizing a number of different legal 

structures, including a U.S. subsidiary 

or a U.S. branch or office. Excluding 

uncleared swaps conducted by or 

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

would give these non-U.S. CSEs an 

unfair advantage when dealing with 

non-U.S. clients relative to U.S. CSEs 

(including those CSEs that are 

subsidiaries of foreign entities). That is, 

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

permitted to operate outside of the 

Commission’s margin requirements 

would be able to offer a more 

competitive price to non-U.S. clients 

than a U.S. CSE. The Commission 

believes that when a non-U.S. CSE is 

conducting its swap activities within 

the United States through a branch or 

office located in the United States, it 

should be subject to U.S. margin laws. 

However, the Commission also believes 

that, consistent with comity principles, 

substituted compliance should be 

available for uncleared swaps executed 

by or through a U.S. branch of a nonU.S. CSE whose obligations under the 

relevant swap are not guaranteed by a 

U.S. person with any counterparty 

(except 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).70

Request for Comment. The 

Commission seeks comment on the 

Proposed Rule’s treatment of uncleared 

swaps conducted by or through a ‘‘U.S. 

branch of a non-U.S. CSE.’’ In 

particular, the Commission requests 

comment on the following questions: 

1. How should the Commission 

determine whether a swap is executed 

through or by a U.S. branch of a nonU.S. CSE for purposes of applying the 

Commission’s margin rules on a crossborder basis? Should the Commission 

base the determination of whether the 

swap activity is conducted at a U.S. 

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

of applying the Commission’s margin 

rules on a cross-border basis on the 

same analysis as is used in the Volcker 

rule? 71

2. The Commission seeks comment on 

the proposed treatment of U.S. branches 


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72Under Commission regulations 23.203 and 

23.606, all records required by the CEA and the 

Commission’s regulations to be maintained by a 

registered swap dealer or MSP shall be maintained 

in accordance with Commission regulation 1.31 and 

shall be open for inspection by representatives of 

the Commission, the United States Department of 

Justice, or any applicable prudential regulator. The 

Commission believes that, before a non-U.S. CSE 

should be permitted to rely on substituted 

compliance, it should assure the Commission that 

it can provide the Commission with prompt access 

to books and records and submit to onsite 

inspection and examination. The Commission 

further expects that 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. 

73As noted below, because the Commission 

would make comparability determinations on an 

element-by-element basis, it is possible that a 

foreign jurisdiction’s margin requirements would be 

comparable with respect to some, but not all, 

elements of the margin requirements. 

74Under the Proposed Rule, the term 

‘‘international standards’’ means the margin policy 

framework for non-cleared, bilateral derivatives 

issued by the Basel Committee on Banking 

Supervision and the International Organization of 

Securities Commissions 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). See § 23.160(a)(3) of 

the Proposed Rule. For further information 

regarding 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, see note 12, supra. 

75See note 13, supra. 

76See § 23.160(c)(2)(iii) of the Proposed Rule. 

77See § 23.160(c)(2) of the Proposed Rule. 

of non-U.S. CSEs, including whether 

these branches should be eligible for the 

Exclusion in light of the policy 

objectives outlined above. If the 

Exclusion should be available, please 

explain why. The Commission also 

seeks comment regarding whether the 

scope of substituted compliance for U.S. 

branches of non-U.S. CSEs under the 

Proposed Rule is appropriate. If not, 

please explain why. 

D. Substituted Compliance 

As noted above, consistent with CEA 

section 2(i) and comity principles, the 

Commission would allow CSEs to 

comply with comparable margin 

requirements in a foreign jurisdiction 

under certain circumstances. In this 

release, we are proposing to establish a 

standard of review that will apply to 

Commission determinations regarding 

whether some or all of the relevant 

foreign jurisdiction’s margin 

requirements are comparable to the 

Commission’s corresponding margin 

requirements, as well as procedures for 

requests for comparability 

determinations, including eligibility 

requirements and submission 

requirements. 

Specifically, the Commission would 

permit a U.S. CSE or a non-U.S. CSE, as 

applicable, to avail itself of substituted 

compliance (to the extent applicable 

under the Proposed Rule) by complying 

with the margin requirements of the 

relevant foreign jurisdiction in lieu of 

compliance with the Commission’s 

margin requirements, provided that the 

Commission finds that such 

jurisdiction’s margin requirements are 

comparable to the Commission’s margin 

requirements. Failure to comply with 

the applicable foreign margin 

requirements could result in a violation 

of the Commission’s margin 

requirements. Further, all CSEs, 

regardless of whether they rely on a 

comparability determination, would 

remain subject to the Commission’s 

examination and enforcement 

authority.72

The Commission is proposing a 

comparability standard that is outcomebased with a focus on whether the 

margin requirements in the foreign 

jurisdiction achieve the same regulatory 

objectives as the CEA’s margin 

requirements. Under this outcome-based 

approach, the Commission would not 

look to whether a foreign jurisdiction 

has implemented specific rules and 

regulations that are identical to rules 

and regulations adopted by the 

Commission. Rather, the 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.73

In evaluating whether a foreign 

jurisdiction’s margin requirements are 

comparable to the Commission’s margin 

requirements, the Commission would 

consider whether the foreign 

jurisdiction’s margin rules are 

consistent with international 

standards.74 That is, the Commission 

would determine, considering all 

relevant facts and circumstances, 

whether a foreign jurisdiction has 

adopted margin rules that adequately 

address the BCBS–IOSCO framework. 

The Commission believes that 

considering this factor is appropriate 

because BCBS and IOSCO established 

this framework to ensure globally 

harmonized margin rules for uncleared 

derivative transactions. Individual 

regulatory authorities across major 

jurisdictions (including the EU, Japan, 

and the United States) have started to 

develop their own margin rules 

consistent with the final BCBS–IOSCO 

framework for non-centrally cleared, 

bilateral derivatives.75 If the foreign 

jurisdiction’s margin rules are not 

consistent with international standards, 

then the Commission may not find the 

rules comparable. In providing 

information to the Commission for a 

determination, applicants should 

include, among other things, 

information describing any difference 

between the foreign jurisdiction’s 

margin requirements and international 

standards.76

Under the proposal, once the 

Commission has determined that a 

foreign jurisdiction’s margin 

requirements adhere to the BCBS– 

IOSCO framework, the Commission 

would evaluate the various elements of 

the foreign jurisdiction’s margin 

requirements.77 Because the 

Commission is not proposing to make a 

binary determination of comparability 

(i.e., all or nothing), but instead would 

make comparability determinations on 

an element-by-element basis, it is 

possible that a foreign margin system 

would be comparable with respect to 

some, but not all, elements of the 

margin requirements. For instance, a 

foreign jurisdiction may impose 

variation margin requirements on a nonU.S. CSE’s uncleared swaps with 

financial end-users that achieve 

outcomes comparable to the 

Commission’s margin requirements, but 

the same foreign jurisdiction may not 

achieve comparable regulatory 

outcomes with respect to segregation 

and rehypothecation requirements. By 

assessing each of the relevant elements 

separately, the Commission would have 

the flexibility to determine, with respect 

to one element of the requirements, that 

the outcomes are comparable, but not 

another. The elements that the 

Commission would be analyzing, among 

others, would include, but not be 

limited to: (i) The transactions subject to 

the foreign jurisdiction’s margin 

requirements; (ii) the entities subject to 

the foreign jurisdiction’s margin 

requirements; (iii) the methodologies for 

calculating the amounts of initial and 

variation margin; (iv) the process and 

standards for approving models for 

calculating initial and variation margin 

models; (v) the timing and manner in 

which initial and variation margin must 

be collected and/or paid; (vi) any 

threshold levels or amounts; (vii) risk 

management controls for the calculation 

of initial and variation margin; (viii) 

eligible collateral for initial and 

variation margin; (ix) the requirements 

of custodial arrangements, including 


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78See § 23.160(c)(3) of the Proposed Rule. 

79The submission should include a description of 

the ability of the relevant foreign 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 compliance 

with the margin requirements and the ongoing 

efforts of the regulatory authority or authorities to 

detect, deter, and ensure compliance with the 

margin requirements. See § 23.160(c)(2)(iv) of the 

Proposed Rule. 

80The violation of such terms and conditions may 

constitute a violation of the Commission’s margin 

requirements and/or result in the modification or 

revocation of the comparability determination. 

81The Commission expects to impose this 

obligation as one of the conditions to the issuance 

of a comparability determination. 82See the Guidance, 78 FR 45351. 

rehypothecation and the segregation of 

margin; (x) documentation requirements 

relating to margin; and (xi) the crossborder application of the foreign 

jurisdiction’s margin regime. 

Moreover, the Commission would 

expect that the applicant, at a minimum, 

describe how the foreign jurisdiction’s 

margin requirements addresses each of 

the above-referenced elements, and 

identify the specific legal and regulatory 

provisions that correspond to each 

element (and, if necessary, whether the 

foreign jurisdiction’s margin 

requirements do not address a particular 

element), and describe the objectives of 

the foreign jurisdiction’s margin 

requirements. Further, the applicant 

would be required to furnish copies of 

the foreign jurisdiction’s margin 

requirements (including an English 

translation of any foreign language 

document) and any other information or 

documentation that the Commission 

deems appropriate. 

In addition, in paragraph (c)(3) of the 

Proposed Rule,78 the Commission sets 

out its standard of review that would 

take into consideration all other relevant 

factors, including but not limited to, the 

scope and objectives of the foreign 

jurisdiction’s margin requirement(s) for 

uncleared swaps; how the foreign 

jurisdiction’s margin requirements 

compare to international standards; 

whether the foreign jurisdiction’s 

margin requirements achieve 

comparable outcomes to the 

Commission’s corresponding margin 

requirements; the ability of the relevant 

regulatory authority or authorities to 

supervise and enforce compliance with 

the foreign jurisdiction’s margin 

requirements; and any other facts and 

circumstances the Commission deems 

relevant.79

The Proposed Rule provides that any 

CSE that is eligible for substituted 

compliance may apply, either 

individually or collectively. In addition, 

the Proposed Rule provides that 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 may submit a request for 

a comparability determination with 

respect to some or all of the 

Commission’s margin requirements. 

Persons requesting a comparability 

determination may want to 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 Proposed Rule and the 

determination, subject to any conditions 

specified by the Commission. 

The Commission expects that the 

comparability determination process 

would require close consultation, 

cooperation, and coordination with 

other appropriate U.S. regulators and 

relevant foreign regulators. Further, the 

Commission expects that, in connection 

with a comparability determination, the 

foreign regulator(s) would enter into, or 

would have entered into, an appropriate 

memorandum of understanding 

(‘‘MOU’’) or similar arrangement with 

the Commission. 

In issuing a Comparability 

Determination, the Commission may 

impose any terms and conditions it 

deems appropriate.80 Further, the 

Proposed Rule would 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 would 

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 

relevant foreign jurisdiction’s 

supervisory or regulatory regime) as the 

Commission’s comparability 

determination may no longer be valid.81

Request for Comment. The 

Commission is seeking comments on all 

aspects of the proposed standard of 

review that will apply to Commission 

determinations regarding whether some 

or all of the relevant foreign 

jurisdiction’s margin requirements are 

comparable to the Commission’s 

corresponding margin requirements, as 

well as proposed procedures for 

requests for comparability 

determinations, including eligibility 

requirements and submission 

requirements. Among other things, 

commenters may wish to submit 

comments on the following questions: 

1. Please provide comments on the 

appropriate standard of review for 

comparability determinations and the 

degree of comparability and 

comprehensiveness that should be 

applied to comparability 

determinations. 

2. Are the proposed procedures, 

including eligibility requirements and 

submission requirements, for 

comparability determinations 

appropriate? 

3. Many foreign jurisdictions are in 

the process of implementing margin 

reform. Should the Commission develop 

an interim process that takes into 

account a different implementation 

timeline? Please provide details and 

address competitive implications for 

U.S. CSEs and non-U.S. CSEs that are 

required to comply with the 

Commission’s margin regulations. 

4. In the Guidance, the Commission 

discussed ‘‘a de minimis’’ exemption 

with respect to transaction-level 

requirements for foreign branches of 

U.S. swap dealers located in ‘‘emerging 

markets’’ that, in the aggregate, 

constitute less than 5 percent of the 

firm’s notional swaps.82 The Proposed 

Rule does not contain an exemption for 

CSEs operating in ‘‘emerging markets.’’ 

Should the Commission develop an 

exemption for emerging markets? If so, 

what should be the eligibility criteria or 

conditions? For example, should the 

Commission provide an exemption 

where a non-U.S. CSE is operating in a 

jurisdiction that does not permit the 

related collateral to be held outside that 

jurisdiction and/or that lacks legal or 

operational infrastructure relating to 

proper segregation of initial margin? 

Should the Commission require the CSE 

to collect initial and variation margin 

from its counterparty in eligible 

emerging market jurisdictions, but only 

require the CSE to post variation 

margin? Should the Commission limit 

the type of eligible collateral that could 

be used in eligible emerging market 

jurisdictions? Which jurisdictions, if 

any, should qualify as ‘‘emerging 

markets’’ for purposes of the exemption? 

What should be the process for 

determining that the qualifying criteria 

are met? Please provide quantitative 

data, to the extent practical. 

5. As some emerging market 

jurisdictions’ laws may not support 

legally enforceable netting 


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83 5 U.S.C. 601 et seq. 

84 47 FR 18618 (Apr. 30, 1982). 

85Section 23.151 of the Proposed Margin Rules 

defines CSEs as a SD or MSP for which there is no 

prudential regulator. 

86See § 23.160(c) of the Proposed Rule. 

87See 77 FR 30596, 30701 (May 23, 2012). 

88The 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). 

89As noted in paragraph (1)(xii) of the definition 

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

Margin Rules, a financial end-user includes a 

person that would be a financial entity described 

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

organized under the laws of the United States or 

any State thereof. The Commission believes that 

this prong of the definition of financial end-user 

would capture the same type of U.S. financial endusers 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. 

90 7 U.S.C. 1 et seq. 

arrangements, which would then, under 

the Proposed Margin Rules and under 

certain circumstances, require that a 

CSE and its counterparty post and 

collect gross margin, should the 

Commission, if it does not provide for 

an emerging markets exception, permit 

the CSE and its counterparty to collect/ 

post variation margin on a net basis? If 

so, what conditions, if any, should the 

Commission place on this requirement 

to ensure that CSEs and the U.S. 

financial system are adequately 

protected? 

6. Is the scope of substituted 

compliance under the Proposed Rule 

appropriate? Should additional or fewer 

transactions be eligible for substituted 

compliance, and if so, how should the 

Proposed Rule be modified? 

E. General Request for Comments 

In addition to the specific requests for 

comments included above, the 

Commission seeks comment on all 

aspects of the Proposed Rule. 

Commenters are encouraged to address, 

among other things, the scope and 

application of the Proposed Rule, costs 

and benefits of the Proposed Rule, 

alternatives to the Proposed Rule, 

practical implications for CSEs and 

other market participants and the 

market generally related to the Proposed 

Rule, whether the Proposed Rule 

sufficiently supports the statutory goals 

of ensuring the safety and soundness of 

the CSE and protecting the financial 

system against the risks associated with 

uncleared swaps, and whether the 

Proposed Rule sufficiently takes into 

account principles of international 

comity. In particular, the Commission 

requests comment on the following: 

1. Does the Proposed Rule’s approach 

to the cross-border application of 

margin requirements satisfy the 

Commission’s statutory requirements, 

including the requirement to help 

ensure the safety and soundness of 

CSEs, and the requirement that the 

Commission, the Prudential Regulators, 

and the SEC, to the maximum extent 

practicable, establish and maintain 

comparable minimum initial and 

variation margin requirements? 

2. Would it be more appropriate to 

apply the margin requirements at the 

entity-level, without any exclusion? If 

yes, please explain. 

3. Would it be more appropriate to 

apply the margin requirements at a 

transaction-level? If yes, please explain. 

4. Is the scope of the Proposed Rule 

appropriate, or should it be changed, 

and if so, how? 

5. Would an alternative approach to 

the Proposed Rule better achieve the 

Commission’s statutory requirements or 

otherwise be preferable or more 

appropriate? If yes, please explain. 

6. Does the Commission’s Proposed 

Rule strike the right balance between 

the Commission’s supervisory interest 

in offsetting the risk to CSEs and the 

financial system arising from the use of 

uncleared swaps and international 

comity principles? If not, please 

explain. 

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 

entities.83 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.84

The proposed regulation establishes a 

mechanism for CSEs 85 to satisfy margin 

requirements by complying with 

comparable margin requirements in the 

relevant foreign jurisdiction as 

described in paragraph (c) of the 

Proposed Rule,86 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 SDs and MSPs are not 

small entities for purposes of the RFA.87

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 

Proposed Margin Rules, SDs and MSPs 

would only be required to collect and 

post margin on uncleared swaps when 

the counterparties to the uncleared 

swaps are either other SDs and MSPs or 

financial end users. As noted above, SDs 

and MSPs are not small entities for RFA 

purposes. Furthermore, any financial 

end users that may be indirectly 88

impacted by the Proposed Rule would 

be similar to eligible contract 

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

would not be small entities.89 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 Proposed 

Rule. As noted above, most foreign 

financial entities would likely be ECPs 

to the extent they would trade in 

uncleared swaps. The Commission 

expects that only a small number of 

foreign financial entities that are not 

ECPs, if any, would trade in uncleared 

swaps. 

Accordingly, the Commission finds 

that there will not be a substantial 

number of small entities impacted by 

the Proposed 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’’) 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 proposed rulemaking would result 

in the collection of information 

requirements within the meaning of the 

PRA, as discussed below. The proposed 

rulemaking contains collections of 

information for which the Commission 

has not previously received control 

numbers from the Office of Management 

and Budget (‘‘OMB’’). If adopted, 

responses to this collection of 

information would 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. The 

Commission has submitted to OMB an 

information collection request to obtain 

an OMB control number for the 

collections contained in this proposal. 

Section 731 of the Dodd-Frank Act, 

amended the CEA,90 to add, as section 


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91 7 U.S.C. 2(i). 

92A 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. 

93See note 74, supra, for a discussion of the 

definition of ‘‘international standards’’ under the 

Proposed Rule. See also § 23.160(a)(3) of the 

Proposed Rule. 94See § 23.160(c)(2) of the Proposed Rule for 

submission requirements. 

95See § 23.160(c)(2)(v) and (vi) of the Proposed 

Rule. 

96The violation of such terms and conditions may 

constitute a violation of the Commission’s margin 

requirements and/or result in the modification or 

revocation of the comparability determination. 

97The Commission expects to impose this 

obligation as one of the conditions to the issuance 

of a comparability determination. 

4s(e) thereof, provisions concerning the 

setting of initial and variation margin 

requirements for SDs and MSPs. Each 

SD and MSP 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 provisions of the 

CEA 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.91

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 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 Proposed Rule 

would establish margin requirements for 

uncleared swaps of CSEs on a firmwide, entity-level basis (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 Proposed Rule would 

establish a procedural framework in 

which the Commission would 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 would 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 Proposed Rule would 

provide that a CSE who is eligible for 

substituted compliance may submit a 

request, individually or collectively, for 

a comparability determination.92

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 would 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,93 and the specific provisions 

of the foreign jurisdiction that govern: 

(i) The transactions subject to the 

foreign jurisdiction’s margin 

requirements; (ii) the entities subject to 

the foreign jurisdiction’s margin 

requirements; (iii) the methodologies for 

calculating the amounts of initial and 

variation margin; (iv) the process and 

standards for approving models for 

calculating initial and variation margin 

models; (v) the timing and manner in 

which initial and variation margin must 

be collected and/or paid; (vi) any 

threshold levels or amounts; (vii) risk 

management controls for the calculation 

of initial and variation margin; (viii) 

eligible collateral for initial and 

variation margin; (ix) the requirements 

of custodial arrangements, including 

rehypothecation and the segregation of 

margin; (x) documentation requirements 

relating to margin; and (xi) the crossborder application of the foreign 

jurisdiction’s margin regime.94

In addition, the Commission would 

expect the applicant, at a minimum, to 

describe how the foreign jurisdiction’s 

margin requirements addresses each of 

the above-referenced 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 compliance with the margin 

requirements and the ongoing efforts of 

the regulatory authority or authorities to 

detect, deter, and ensure compliance 

with 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.95

In issuing a Comparability 

Determination, the Commission may 

impose any terms and conditions it 

deems appropriate.96 In addition, the 

Proposed Rule would 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 would 

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.97

The collection of information that is 

proposed by this rulemaking is 

necessary to implement sections 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 


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98Section 2(i) of the CEA 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), 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 of the CEA. 

99Because the Commission’s proposed margin 

requirements are based on the BCBS–IOSCO 

framework and one of the factors that the 

Commission will consider in making its 

determination is the comparability to these 

international standards, the Commission estimates 

that in all likelihood, it will receive applications 

from all 16 jurisdictions within the G20, plus 

Switzerland. 100 7 U.S.C. 19(a). 

101The Commission’s Proposed Margin Rules are 

set forth in proposed §§ 23.150 through 23.159 of 

part 23 of the Commission’s regulations, proposed 

as 17 CFR 23.150 through 23.159. See Margin 

Requirements for Uncleared Swaps for Swap 

Dealers and Major Swap Participants, 79 FR 59898 

(Oct. 3, 2014). 

102See Margin Requirements for Uncleared 

Swaps for Swap Dealers and Major Swap 

Participants, 79 FR 59920–59926 (Oct. 3, 2014). 

activities outside the United States that 

have a direct and significant connection 

with activities in, or effect on, 

commerce of the United States.98 The 

information collection would be 

necessary for the Commission to 

consider whether the requirements of 

the foreign rules are comparable to the 

applicable requirements of 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 102 CSEs provisionally 

registered with the Commission. The 

Commission further estimates that of the 

approximately 102 CSEs, approximately 

61 CSEs would be subject to the 

Commission’s margin rules as they are 

not subject to a Prudential Regulator. 

However, 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 

apply for a comparability determination. 

Further, once a comparability 

determination is made for a jurisdiction, 

it would 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,99 and that 

each request would impose an average 

of 10 burden hours. 

Based upon the above, the estimated 

hour burden for collection is calculated 

as follows: 

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). 

Information Collection Comments. 

The Commission invites the public and 

other Federal agencies to comment on 

any aspect of the reporting burdens 

discussed above. Pursuant to 44 U.S.C. 

3506(c)(2)(B), the Commission solicits 

comments in order to: (1) Evaluate 

whether the proposed collection of 

information is necessary for the proper 

performance of the functions of the 

Commission, including whether the 

information will have practical utility; 

(2) evaluate the accuracy of the 

Commission’s estimate of the burden of 

the proposed collection of information; 

(3) determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information to be collected; and 

(4) minimize the burden of the 

collection of information on those who 

are to respond, including through the 

use of automated collection techniques 

or other forms of information 

technology. 

Comments may be submitted directly 

to the Office of Information and 

Regulatory Affairs, by fax at (202) 395– 

6566 or by email at OIRAsubmissions@

omb.eop.gov. Please provide the 

Commission with a copy of submitted 

comments so that all comments can be 

summarized and addressed in the final 

rule preamble. Refer to the ADDRESSES

section of this notice of proposed 

rulemaking for comment submission 

instructions to the Commission. A copy 

of the supporting statements for the 

collections of information discussed 

above may be obtained by visiting 

RegInfo.gov. OMB is required to make a 

decision concerning the collection of 

information between 30 and 60 days 

after publication of this document in the 

Federal Register. Therefore, a comment 

is best assured of having its full effect 

if OMB receives it within 30 days of 

publication. 

C. Cost-Benefit Considerations 

1. Introduction 

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.100

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. 

In promulgating the Proposed Margin 

Rules,101 the Commission considered 

the costs and benefits associated with its 

choices regarding the scope and extent 

to which it would apply its proposed 

margin requirements to uncleared swaps 

of a CSE, including those related to the 

setting of the material swap exposure for 

financial entities, and related 

substantive requirements, such as the 

determination of eligible collateral and 

acceptable custodial arrangements. In 

addition, in light of the fact that section 

4s(e), by its terms, applies to uncleared 

swaps of all CSEs, regardless of the 

domicile of the CSE (or its 

counterparties), the costs and benefits 

discussed in the Proposed Margin Rules’ 

Federal Register release relate both to 

the domestic and cross-border 

application of the margin rule.102 The 

cost and benefit considerations (‘‘CBC’’) 

set out in this proposal are intended to 

augment the CBC set forth in the 

Proposed Margin Rules’ Federal 

Register release and address cost and 

benefit considerations related to the 

Commission’s choices regarding the 

extent to which it would recognize 

compliance with comparable foreign 

requirements as an alternative means of 

compliance with the Commission’s 

margin rules (‘‘substituted compliance’’) 

and the extent to which it would 

exclude uncleared swaps from the 

Commission’s margin rules. Further, in 

considering the relevant costs and 

benefits of the Proposed Margin Rules, 

the Commission used as its baseline the 

swaps market as it existed at the time of 

the Proposed Margin Rules’ Federal 

Register release; because this Proposed 

Rule addresses the cross-border 

application of the Proposed Margin 

Rules, the Commission is using as its 

baseline the swaps market as it would 

operate once the Proposed Margin Rules 

were fully implemented. 

As discussed in section I.B. above, in 

developing the proposed cross-border 

framework in the Proposed Rule, the 


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103See European Banking Authority, European 

Securities and Markets Authority, and European 

Insurance and Occupational Pensions Authority, 

Consultation Paper on draft regulatory technical 

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

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

the European Market Infrastructure Regulation) 

(April 14, 2014), available at https://www.eba.

europa.eu/documents/10180/655149/JC+CP+2014+

03+%28CP+on+risk+mitigation+for+OTC+

derivatives%29.pdf, and Second Consultation Paper 

on draft regulatory technical standards on riskmitigation techniques for OTC-derivative contracts 

not cleared by a CCP under Article 11(15) of 

Regulation (EU) No 648/2012 (for the European 

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

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

10180/1106136/JC-CP-2015-002+JC+CP+on+Risk+

Management+Techniques+for+OTC+derivatives+.

pdf. 

104See Financial Services Agency of Japan, draft 

amendments to the ‘‘Cabinet Office Ordinance on 

Financial Instruments Business’’ and 

‘‘Comprehensive Guidelines for Supervision’’ with 

regard to margin requirements for non-centrally 

cleared derivatives (July 3, 2014). Available in 

Japanese at http://www.fsa.go.jp/news/26/syouken/

20140703-3.html. 

105See Margin Requirements for Non-centrally 

Cleared Derivatives, Sept. 2013, available at http:// 

www.bis.org/publ/bcbs261.pdf. The Commission is 

not incorporating the details of the EU and Japanese 

proposals in this CBC, because they have not been 

adopted and would be subject to change upon 

adoption. 

106As discussed in section I.B. above, in the 

interest of promoting global harmonization, the 

Commission has consulted and coordinated with 

the Prudential Regulators and foreign regulatory 

authorities. In addition, the Commission staff has 

participated in numerous bilateral and multilateral 

discussions with foreign regulatory authorities 

discussing national efforts to implement margin 

reform and the possibility of conflicts and overlaps 

between U.S. and foreign regulatory regimes. 

Although at this time foreign jurisdictions do not 

yet have their margin regimes in place, the 

Commission has participated in ongoing, 

collaborative discussions with regulatory 

authorities in the EU and Japan regarding their 

cross-border approaches to the margin rules, 

including the anticipated scope of application of 

margin requirements in their jurisdiction to crossborder swaps, their plans for recognizing foreign 

margin regimes, and their anticipated timelines. 

The Commission expects that these discussions will 

continue as it finalizes and then implements its 

margin rules, and as other jurisdictions develop 

their own margin rules and approaches to crossborder applications. 

Commission is mindful of the global 

and highly interconnected nature of the 

swaps market—and that risk exposures 

overseas can quickly manifest in the 

United States and pose substantial 

threat to the U.S. financial system. At 

the same time, the Commission also 

recognizes that competitive distortions 

and market inefficiencies can result— 

and the benefits of the BCBS–IOSCO 

framework lost—if due consideration is 

not given to comity principles. The 

Commission has also carefully 

considered the impact of its choices in 

determining whether (and, if so, under 

what circumstances) substituted 

compliance would be available or 

whether (and, if so, under what 

circumstances) swaps would be deemed 

excluded, including the effect of its 

choices on efficiency, competition, 

market integrity and transparency. 

The Commission is aware of the 

potentially significant trade-offs 

inherent in its policy decisions. For 

instance, the Commission’s choice not 

to exclude from its margin requirements 

certain foreign-facing swaps involving 

U.S. CSEs and non-U.S. CSEs whose 

obligations under the relevant swap are 

guaranteed by a U.S. person may make 

it more costly for such firms to conduct 

their swaps business, particularly in 

foreign jurisdictions, and put them at a 

competitive disadvantage relative to 

non-U.S. CSEs whose obligations under 

the relevant swap are not guaranteed by 

a U.S. person. It could also make foreign 

counterparties less willing to deal with 

U.S. CSEs and non-U.S. CSEs whose 

obligations under the relevant swap are 

guaranteed by a U.S. person. On the 

other hand, full application of the 

margin requirements to these CSEs may 

enhance the safety and soundness of 

these CSEs and consequently, the U.S. 

financial system. In addition, the extent, 

if any, to which either of the 

aforementioned disadvantages would 

arise depends on whether competitors 

of such CSEs must comply with 

comparable margin requirements. In 

developing the proposed cross-border 

framework in the Proposed Rule, the 

Commission has attempted to 

appropriately consider competing 

concerns in seeking to effectively 

address the risk posed to the safety and 

soundness of CSEs, while creating a 

workable framework that mitigates the 

potential for undue market distortions 

and that promotes global harmonization. 

The Commission’s consideration of 

the costs and benefits associated with 

the proposed framework is complicated 

by the fact that other jurisdictions may 

adopt requirements with different scope 

or on different timelines. Currently, no 

foreign jurisdiction has finalized rules 

for margin of uncleared swaps. 

However, the EU 103 and Japan 104 have 

proposed such rules, each of which are 

based on the BCBS–IOSCO 

framework.105 The extent to which, if at 

all, foreign jurisdictions will follow the 

BCBS–IOSCO framework and the 

differences between the requirements 

implemented overseas and the 

Commission’s margin requirements will 

affect the costs and benefits related to 

the Proposed Rule. Thus, for example, if 

a margin rule in a particular foreign 

jurisdiction is less rigorous than the 

Commission’s margin rule, those CSEs 

(U.S. and non-U.S. CSEs) that are 

subject to the Commission’s margin rule 

may be competitively disadvantaged 

relative to those dealers that are eligible 

for Exclusion from the Commission’s 

margin rule for certain swaps or are 

outside the Commission’s 

jurisdiction.106

In sum, given that foreign 

jurisdictions do not yet have in place 

their margin rules, it is not possible to 

fully evaluate the costs and benefits 

associated with the Proposed Rule, and 

in particular, the implications for the 

safety and soundness of CSEs and 

competition. However, to the extent that 

a foreign regime’s margin requirements 

are comparable, any differences between 

the Commission’s margin requirements 

and foreign margin requirements would 

be insignificant and, therefore, mitigate 

the potential for undue risk to the CSE 

and competitive distortions. However, if 

a foreign regime’s margin requirements 

are not deemed comparable, this may 

put a CSE at a competitive disadvantage 

when competing with non-U.S. firms 

that are not registered with the 

Commission because these non-CFTC 

registered dealers would have a cost 

advantage that could affect their pricing 

terms to clients. 

In the sections that follow, the 

Commission considers: (i) Costs and 

benefits associated with the proposed 

definition of U.S. person; (ii) the 

proposed framework for substituted 

compliance; (iii) the proposed exclusion 

from the margin rule; (iv) the 

submission of requests for a 

comparability determination; and (v) 

alternatives considered and the cost and 

benefit of such alternatives. Wherever 

reasonably feasible, the Commission has 

endeavored to quantify the costs and 

benefits of this proposed rulemaking. In 

a number of instances, the Commission 

currently lacks the data and information 

required to precisely estimate costs and 

benefits. Where it was not feasible to 

quantify (e.g., because of the lack of 

accurate data or appropriate metrics), 

the Commission has endeavored to 

consider the costs and benefits of these 

rules in qualitative terms. 

2. Proposed Rule 

The Proposed Rule sets forth a 

definition of ‘‘U.S. person,’’ describing 

the circumstances under which 

substituted compliance or the exclusion 

would be available, and would establish 

a process for the submission of requests 

for a comparability determination. In 

addition to issues related to financial 

integrity of markets, competition and 

market distortions noted above, the U.S. 

person definition and comparability 

determination process entail monetary 

costs for CSEs and market participants 

because a market participant may have 


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107The Commission’s definition of the term ‘‘U.S. 

person’’ as used in the Guidance included a prong 

(iv) which covered ‘‘any commodity pool, pooled 

account, or collective investment vehicle (whether 

or not it is organized or incorporated in the United 

States) of which a majority ownership is held, 

directly or indirectly, by a U.S. person(s).’’ 

108At this time, we do not have information as 

to what portion of the funds that would have been 

covered by the U.S. majority-ownership prong are 

hedge funds. 

109Further, as noted earlier, a non-U.S. CSE that 

can avail itself of the Exclusion would 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. The Commission further 

believes that the possibility of a cascading event 

affecting U.S. counterparties and the U.S. market 

more broadly as a result of a default by the nonU.S. CSE would also be mitigated because the nonU.S. CSE would be subject to U.S. margin 

requirements (with the possibility of substituted 

compliance to the extent applicable) when entering 

into a swap with U.S. counterparties. 

110As discussed in section II.B.2, under the 

Proposed Rule the Commission is defining a 

Continued 

to expend resources to determine 

whether it (or its counterparty) is a U.S. 

person. A CSE seeking to rely on 

substituted compliance could incur 

costs in connection with the submission 

of a request for a comparability 

determination, although this would not 

be the case in circumstances where the 

relevant jurisdiction has itself attained a 

comparability finding from the 

Commission. In this section, we 

describe the most significant 

considerations that we have taken into 

account in formulating the Proposed 

Rule. 

a. U.S. Person 

Under the Proposed Rule, the term 

‘‘U.S. person’’ would be defined so as to 

identify activities having a substantial 

nexus to the U.S. market because they 

are undertaken by individuals or 

entities organized or domiciled in the 

United States or because of other 

connections to the U.S. market. The 

definition is intended to identify those 

individuals and entities whose swap 

activities have a substantial nexus to 

U.S. markets even when they transact in 

swaps with a non-U.S. CSE. As noted in 

section II.B.1. above, this proposed 

definition generally follows the 

traditional, territorial approach to 

defining a U.S. person. The chief benefit 

of this territorial approach is that it is 

objective and clear—and the 

Commission believes that the industry 

has largely followed a similar definition 

of ‘‘U.S. person’’ included in the 

Guidance. 

The Commission considered 

including the U.S. majority-ownership 

prong that was included in the 

Guidance (50% U.S. person ownership 

of a fund or other collective investment 

vehicle), but has determined not to 

propose it.107 The Commission 

understands that unlike other corporate 

structures, certain types of funds, 

specifically fund-of-funds and masterfeeder structures, would require an 

adviser or administrator to look through 

to other fund entities in the fund 

structure, in ascertaining whether a 

beneficial owner of the fund is a U.S. 

person. The Commission further 

understands that this may be difficult to 

determine in some cases. In addition, 

the Commission believes that other 

elements of the U.S. person definition 

would in many circumstances cover 

these funds as a ‘‘U.S. person.’’ 

Even if a non-U.S. fund with U.S. 

majority-ownership is treated as a nonU.S. person, such fund would be 

excluded from the Commission’s margin 

rules only in limited circumstances 

(namely, when the fund trades 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). Additionally, 

any excluded swaps would most likely 

be covered by another jurisdiction that 

adheres to the BCBS–IOSCO standards. 

The Commission anticipates that nonU.S. CSEs will generally be required, in 

their home jurisdiction, to collect 

margin from these non-U.S. funds.108

Therefore, non-U.S. CSEs would 

generally be protected in the event of a 

default by a non-U.S. fund even if the 

uncleared swap with the non-U.S. fund 

falls within the Exclusion.109

Accordingly, the Commission believes 

that treatment of non-U.S. funds with 

U.S. majority-ownership as non-U.S. 

persons will not have a substantial 

impact on the safety and soundness of 

CSEs or the stability of the U.S. 

financial system; at the same time, the 

Commission believes that excluding the 

majority-ownership prong would 

alleviate any burden associated with 

determining whether a fund qualifies as 

a U.S. person under this criterion. 

As noted in section II.B.1. above, 

prong (6) (Proposed Rule 

§ 23.160(a)(10)(vi)) of the proposed 

‘‘U.S. person’’ definition would capture 

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. In the case of the Guidance, 

the ‘‘U.S. person’’ definition would 

generally characterize a legal entity as a 

U.S. person if the entity were ‘‘directly 

or indirectly majority-owned’’ by one or 

more persons falling within the term 

‘‘U.S. person’’ and such U.S. person(s) 

bears unlimited responsibility for the 

obligations and liabilities of the legal 

entity. Because this prong of the 

proposed definition of ‘‘U.S. person’’ is 

broader in scope, the Commission 

believes that this may result in more 

legal entities meeting the U.S. person 

definition. In addition, to the extent that 

this prong of the proposed definition of 

‘‘U.S. person’’ expands the number of 

market participants that would be 

deemed to be a ‘‘U.S. person,’’ the 

Commission believes that the benefits 

that would have been provided to 

otherwise non-U.S. CSEs from being 

able to avail themselves of substituted 

compliance and the Exclusion would 

not be realized. 

The proposed ‘‘U.S. person’’ 

definition does not include the prefatory 

phrase ‘‘includes, but is not limited to’’ 

that was included in the Guidance. The 

Commission believes that this prefatory 

phrase should not be included in the 

Proposed Rule in order to provide legal 

certainty regarding the application of 

U.S. margin requirements to crossborder swaps. 

Finally, the Commission believes that 

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

a clear and objective basis upon which 

to identify a U.S. person, and that 

identifying whether a counterparty is a 

‘‘U.S. person’’ should be relatively 

straightforward because, as noted above, 

the Commission believes that a swap 

counterparty generally should be 

permitted to reasonably rely on its 

counterparty’s written representation in 

determining whether the counterparty is 

within the definition of the term ‘‘U.S. 

person.’’ 

b. Availability of Substituted 

Compliance and Exclusion 

i. Uncleared Swaps of U.S. CSEs or of 

Non-U.S. CSEs Whose Obligations 

Under the Relevant Swap Are 

Guaranteed by a U.S. Person 

As set out in Table A to this release, 

under the Proposed Rule, the 

Commission’s margin rules would 

generally apply to all uncleared swaps 

of U.S. CSEs. For U.S. CSEs, substituted 

compliance would only be available 

with respect to the requirement to post 

initial margin and only if the 

counterparty is a non-U.S. person 

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

obligations under the uncleared swap 

are not guaranteed by a U.S. person. 

Uncleared swaps with U.S. CSEs would 

never qualify for the Exclusion. Under 

the Proposed Rule, non-U.S. CSEs 

whose obligations under the relevant 

swap are guaranteed by a U.S. person 

would receive the same treatment as 

U.S. CSEs.110 The Commission believes 


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guarantee narrower than in the Guidance, and in 

doing so, the Commission has broadened the 

availability of substituted compliance and the 

Exclusion to certain non-U.S. CSEs that would not 

have the ability to avail themselves of these if the 

broader definition of guarantee used in the 

Guidance were used in the Proposed Rule instead 

of the narrower definition. However, the 

Commission believes that as a result of its decision 

to define certain non-U.S. CSEs as Foreign 

Consolidated Subsidiaries, some of these same nonU.S. CSEs that would have been able to avail 

themselves of substituted compliance and the 

Exclusion, as a result of the narrow definition of a 

guarantee, would not be eligible for the Exclusion 

(but would benefit from the full application of 

substituted compliance instead of a limited 

application). The costs and benefits related to 

substituted compliance and the Exclusion are set 

out in this section and below. 

111The Commission notes that of the 

approximately 61 CSEs that would be subject to the 

Commission’s margin rules, 21 are non-U.S. CSEs. 

Of those 21 non-U.S. CSEs, 20 are domiciled in 

jurisdictions that participated in the development 

of the BCBS–IOSCO framework. Although 

harmonization among these jurisdictions may 

mitigate some competitive disadvantages, the 

associated costs and benefits cannot be reasonably 

determined as no jurisdictions have finalized their 

margin rules. 

112The Commission notes that the costs of 

developing the margin infrastructure needed to 

comply with Commission margin requirements in 

the context of cross-border transactions, as well as 

the costs of complying with the Commission’s 

margin requirements more generally in the context 

of cross-border transactions, could vary 

significantly for different CSEs based on factors 

specific to each firm (e.g., organizational structure, 

status as a U.S. CSE or non-U.S. CSE (including 

whether the firm is a Foreign Consolidated 

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

jurisdictions in which uncleared swaps activities 

are conducted, applicable margin requirements in 

the U.S. and other jurisdictions, the location and 

status of counterparties, existence of an appropriate 

MOU or similar arrangement with the relevant 

jurisdictions, existence of Comparability 

Determinations in the relevant jurisdictions and any 

conditions in such determinations, and firm 

policies and procedures for the posting and 

collection of margin). The Commission further 

notes that currently no foreign jurisdiction has 

finalized rules for margin of uncleared swaps. 

However, the EU and Japan have proposed such 

rules, each of which are based on the BCBS–IOSCO 

framework. Accordingly, the Commission lacks the 

data and information required to reasonably 

estimate costs related to developing the appropriate 

margin infrastructure or the costs of complying with 

that this result is appropriate because a 

swap of an entity guaranteed by that 

U.S. person will have economic and 

financial implications that are likely to 

be very similar to the economic and 

financial implications of a swap entered 

into directly by the U.S. guarantor, as 

discussed in section II.B.2. above. 

The Commission understands that the 

Proposed Rule may place U.S. CSEs and 

non-U.S. CSEs whose obligations under 

the relevant swap are guaranteed by a 

U.S. person at a disadvantage when 

competing with either non-U.S. CSEs 

that are able to rely on the Exclusion or 

with non-CFTC registered dealers for 

foreign clients, though whether such a 

disadvantage exists would depend on 

whether these competitors are subject to 

comparable margin rules in other 

jurisdictions. For example, the ability of 

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

a U.S. person (and that is not a Foreign 

Consolidated Subsidiary or a U.S. 

branch of a non-U.S. CSE) to rely on the 

Exclusion could allow it to gain a cost 

advantage over a U.S. CSE or a non-U.S. 

CSE that is guaranteed by a U.S. person 

and thus offer better pricing terms to 

foreign clients, unless it is subject to 

another jurisdiction’s margin rules that 

are comparable. U.S. CSEs and non-U.S. 

CSEs whose obligations under the 

relevant swap are guaranteed by a U.S. 

person may also be at a disadvantage 

when competing for clients with nonU.S. CSEs that are able to rely on 

substituted compliance more broadly if 

the clients believe complying with the 

foreign jurisdiction’s margin 

requirements would be less burdensome 

or costly than when transacting with a 

U.S. CSE under the Proposed Rule, as 

the amount posted by the non-U.S. 

counterparty would need to comply 

with U.S. margin requirements. 

However, the Commission believes that 

the requirement that the relevant foreign 

jurisdiction’s margin requirements have 

comparable outcomes should operate to 

narrow any competitive disadvantage, 

thereby diminishing opportunities for 

regulatory arbitrage.111

In addition, because the Proposed 

Rule provides for limited substituted 

compliance for U.S. CSEs and non-U.S. 

CSEs whose obligations under the 

relevant swap are guaranteed by a U.S. 

person (relative to other CSEs), those 

CSEs may be subject to conflicting or 

duplicative regulations, and 

consequently, would incur costs 

associated with developing multiple 

sets of policies and procedures and 

operational infrastructures. The 

Commission recognizes that such costs 

would vary for firms depending on the 

nature and scope of the individual 

firm’s business, and costs relative to 

other competitors would depend on 

whether the competitors are subject to 

other jurisdictions’ margin rules. The 

Commission requests data from 

commenters to assist the Commission in 

considering the quantitative effect of the 

limited substituted compliance for U.S. 

CSEs and non-U.S. CSEs whose 

obligations under the relevant swap are 

guaranteed by a U.S. person. 

On the other hand, the Commission 

believes that requiring U.S. CSEs and 

non-U.S. CSEs whose obligations under 

the relevant swap are guaranteed by a 

U.S. person to comply with its margin 

requirements would foster the stability 

of the U.S. financial markets. By their 

nature, U.S. CSEs and non-U.S. CSEs 

whose swap obligations are guaranteed 

by a U.S. person have a significant 

impact on the U.S. financial markets, 

and the Commission therefore has a 

strong interest in ensuring their 

viability. As discussed in section II.C.1. 

above, the Commission believes that 

requiring U.S. CSEs and non-U.S. CSEs 

whose swap obligations are guaranteed 

by a U.S. person to comply with the 

Commission’s margin requirements, 

with only limited substituted 

compliance, is important to maintaining 

well-functioning U.S. financial markets 

and ensuring the sound risk 

management practices of key market 

participants in the U.S. swaps market. 

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

Whose Obligations Under the Relevant 

Swap Are Not Guaranteed by a U.S. 

Person 

As set out in Table A to this release, 

under the Proposed Rule, non-U.S. CSEs 

whose obligations under the relevant 

uncleared swap are not guaranteed by a 

U.S. person, including Foreign 

Consolidated Subsidiaries, are eligible 

for substituted compliance to a greater 

extent relative to U.S. CSEs or non-U.S. 

CSEs whose obligations under the 

relevant uncleared swap are guaranteed 

by a U.S. person. A subset of these nonU.S. CSEs may qualify for the Exclusion, 

as described in section II.C.3. above. As 

noted in section II.C.2., the Commission 

believes that the proposed approach is 

appropriate since a non-U.S. CSE whose 

swap obligations are not guaranteed by 

a U.S. person (including a Foreign 

Consolidated Subsidiary), may 

implicate equal or greater supervisory 

concerns on the part of a foreign 

regulator relative to the Commission’s 

supervisory interests (in comparison to 

U.S. CSEs or non-U.S. CSEs whose 

obligations under the relevant swap are 

guaranteed by a U.S. person, because 

the Commission has a significant 

regulatory interest in uncleared swaps 

of these CSEs). 

Substituted compliance would benefit 

such non-U.S. CSEs by allowing them to 

avoid conflicting or duplicative 

regulations and choose the most 

appropriate set of rules when 

transacting with each other. 

Furthermore, eligible non-U.S. CSEs 

could further benefit from developing 

one enterprise-wide set of compliance 

and operational infrastructures.112 And 


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the Commission’s margin requirements generally in 

the context of cross-border transactions. 

113Section 4s(e)(3)(A) of the CEA, 7 U.S.C. 

6s(e)(3)(A). The section provides, among other 

things, that margin requirements ‘‘be appropriate 

for the risks associated with the non-cleared swaps 

held as a swap dealer or major market participant.’’ 114See section II.A.1. 

because substituted compliance is 

contingent on the Commission’s 

determination that the relevant 

jurisdiction’s margin rules are 

comparable, the potential for undue risk 

to the CSE and competitive distortions 

between those registrants that are 

eligible for substituted compliance and 

those that are not would be mitigated. 

However, if the foreign jurisdiction’s 

margin requirements are not deemed 

comparable, these CSEs will be at a 

disadvantage to non-CFTC registered 

dealers when competing for client 

business. 

iii. Exclusion for Uncleared Swaps of 

Non-U.S. CSEs Where Neither 

Counterparty’s Obligations Under the 

Relevant Swap Are Guaranteed by a 

U.S. Person and Neither Counterparty Is 

a Foreign Consolidated Subsidiary Nor 

a U.S. Branch of a Non-U.S. CSE 

As discussed in section II.C.3., under 

the Proposed Rule, the Commission 

would exclude from its margin rules 

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

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 a 

Foreign Consolidated Subsidiary nor a 

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

discussed in section II.C.3. above, the 

Commission believes that it would be 

appropriate to tailor the application of 

margin requirements in the cross-border 

context, consistent with section 4s(e) of 

the CEA 113 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 conflicting or duplicative 

regulations where a transaction would 

be subject to more than one uncleared 

swap margin regime. On the other hand, 

to the extent a non-U.S. CSE would be 

able to rely on the margin requirements 

of a foreign jurisdiction, as opposed to 

the Commission’s margin requirements, 

and such other margin requirements are 

not comparable, the Exclusion could 

result in a less rigorous margin regime 

for such CSE. This, in turn, could create 

competitive disparities between nonU.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 to their non-U.S. clients, which 

would give them a competitive 

advantage relative to those CSEs that are 

not eligible for the Exclusion (e.g., U.S. 

CSEs, non-U.S. CSEs whose obligations 

under the relevant swap are not 

guaranteed by a U.S. person, or Foreign 

Consolidated Subsidiaries). However, 

whether these competitive effects occur 

will also depend on whether the 

relevant foreign jurisdiction has 

comparable margin rules. In addition, 

non-U.S. CSEs that are eligible for the 

Exclusion could be in a better position 

to compete with non-CFTC registered 

dealers in the relevant foreign 

jurisdiction for foreign clients. 

As noted above, at this time, given 

that foreign jurisdictions do not yet have 

in place their margin regimes, it is not 

possible to fully evaluate the Proposed 

Rule’s eventual implications for the 

safety and soundness of CSEs and 

competition. Assuming, however, for 

the sake of analysis that the relevant 

foreign jurisdiction does not have 

comparable margin requirements, the 

Commission preliminarily believes that 

the Exclusion would not result in a 

significant diminution in the safety and 

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

discussed in section II.C.3. above. This 

is based on several considerations. First, 

the potential adverse effect on a nonU.S. CSE would be substantially 

mitigated by the Commission’s capital 

requirements.114 Additionally, any 

excluded swaps would most likely be 

covered by another jurisdiction that 

adheres to the BCBS–IOSCO standards 

because the Commission believes that 

most swaps are currently undertaken in 

jurisdictions that already have agreed to 

adhere to the BCBS–IOSCO margin 

standards. 

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

itself of the Exclusion would 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. The 

Commission further believes that 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 

would also be mitigated because the 

non-U.S. CSE would be subject to U.S. 

margin requirements (with the 

possibility of substituted compliance to 

the extent applicable) when entering 

into a swap with U.S. counterparties. 

iv. Foreign Consolidated Subsidiaries 

Under the Proposed Rule, substituted 

compliance is more broadly available to 

a Foreign Consolidated Subsidiary 

whose obligations under the relevant 

swap are not guaranteed by a U.S. 

person than a U.S. CSE or a non-U.S. 

CSE whose obligations under the 

relevant swap are guaranteed by a U.S. 

person. Further, a Foreign Consolidated 

Subsidiary would be able to avail itself 

of substituted compliance to the same 

extent as other non-U.S. CSEs, but 

would not be eligible for the Exclusion. 

A Foreign Consolidated Subsidiary’s 

financial position, operating results, and 

statement of cash flows are directly 

reflected in its ultimate U.S. parent 

entity’s financial statements. Given the 

nature of a Foreign Consolidated 

Subsidiary’s direct relationship to a U.S. 

person, the Commission believes that 

the uncleared swaps of Foreign 

Consolidated Subsidiaries should not be 

excluded from the margin requirements, 

as discussed in section II.C.3. above. 

The unavailability of the Exclusion 

could disadvantage Foreign 

Consolidated Subsidiaries relative to 

other non-U.S. CSEs that would be 

eligible for the Exclusion (i.e., non-U.S. 

CSEs where neither counterparty’s 

obligations under the relevant swap are 

guaranteed by a U.S. person and neither 

counterparty is a Foreign Consolidated 

Subsidiary nor a U.S. branch of a nonU.S. CSE) or non-CFTC registered 

dealers within a foreign jurisdiction. 

Non-U.S. CSEs that rely on the 

Exclusion or non-CFTC registered 

dealers could realize a cost advantage 

over Foreign Consolidated Subsidiaries 

and thus have the potential to offer 

better pricing terms to foreign clients. 

The competitive disparity between nonU.S. CSEs that rely on the Exclusion and 

Foreign Consolidated Subsidiaries, 

however, may be somewhat mitigated to 

the extent that the relevant foreign 

jurisdiction implements the BCBS– 

IOSCO framework. 

v. U.S. Branch of a Non-U.S. CSE 

Under the Proposed Rule, the 

Exclusion from the margin rules would 

not be available to a U.S. branch of a 

non-U.S. CSE. The Commission believes 

that when a non-U.S. CSE conducts its 

swap activities within the United States 

through a branch or office located in the 

United States, it should be subject to 

U.S. margin requirements, but with the 

possibility of substituted compliance, 

consistent with comity principles. The 

Commission believes that the Proposed 

Rule’s Exclusion should not be available 

in this case, because U.S. branches of 

non-U.S. CSEs are operating within the 


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115Non-U.S. CSEs are also likely to conduct 

swaps business with U.S. clients from locations 

outside the United States; nevertheless, U.S. 

branches are likely to have greater U.S. clientorientation relative to such foreign operations. 

116See note 99, supra. 

117Although 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. 

U.S. market and competing with U.S. 

CSEs for business, including from nonU.S. counterparties. 

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

were permitted to use the Exclusion it 

could be able to offer more competitive 

terms to non-U.S. clients than U.S. 

CSEs, and thereby gain an unwarranted 

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 Proposed Rule could put 

non-U.S. CSEs that conduct swaps 

business through their U.S. branches at 

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

Exclusion or non-CFTC registered 

dealers that conduct swaps business 

overseas. However, to the extent that the 

U.S. branch of a non-U.S. CSE is able to 

rely on substituted compliance, the 

competitive disparities relative to those 

non-U.S. CSEs that are eligible for the 

Exclusion should be reduced to the 

extent that the relevant foreign 

jurisdiction implements BCBS–IOSCO 

framework standards.115

The unavailability of the Exclusion 

could also result in the U.S. branch of 

a non-U.S. CSE being subject to 

conflicting or duplicative margin 

requirements. However, the 

Commission believes that overall any 

resulting costs may not be significant to 

the extent that the U.S. branch is able 

to avail itself of substituted compliance 

in that jurisdiction. 

c. Alternatives 

The Commission believes that the 

Proposed Rule effectively addresses the 

risk posed to the safety and soundness 

of CSEs, while creating a workable 

framework that reduces the potential for 

undue market disruptions and promotes 

global harmonization by taking into 

account the interests of other 

jurisdictions and balancing those 

interests with the supervisory interests 

of the United States. 

The Commission has determined not 

to propose the Guidance Approach 

because it believes that if the Guidance 

Approach were adopted, too many 

swaps would be excluded from the 

margin rules to ensure the safety and 

soundness of CSEs and the U.S. 

financial system. In particular, under 

the Guidance Approach, uncleared 

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

non-U.S. person whose uncleared swap 

obligations are not guaranteed by a U.S. 

person would be excluded from the 

Commission’s margin rules without 

regard to whether the non-U.S CSE is 

guaranteed or its financial statements 

are consolidated with a U.S. parent 

entity under U.S. generally accepted 

accounting principles. 

The Commission has also determined 

not to propose the Entity-Level 

Approach. On the one hand, the EntityLevel Approach (where the margin 

requirements would apply to all 

uncleared swaps of a CSE, with no 

possibility of any exclusion) is arguably 

appropriate because margin 

requirements are critical in ensuring the 

safety and soundness of a CSE and in 

supporting the stability of the U.S. 

financial markets. As a result of CSEs 

engaging in a level of uncleared swap 

activity that is significant enough to 

warrant U.S. registration, their 

uncleared swaps have a direct and 

significant nexus to the U.S. financial 

system, irrespective of whether their 

counterparty is a U.S. or non-U.S. 

entity. However, the Commission 

believes that the Entity-Level Approach 

does not adequately consider the 

relative supervisory interests of U.S. and 

foreign regulators. 

d. Comparability Determinations 

As noted in section II.D. above, any 

CSE who is eligible for substituted 

compliance may make a request for a 

comparability determination. Currently, 

there are approximately 102 CSEs 

provisionally registered with the 

Commission. The Commission further 

estimates that of the 102 CSEs that are 

registered, approximately 61 CSEs 

would be 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 would apply 

for all entities or transactions in that 

jurisdiction to the extent provided in 

the determination, as approved by the 

Commission. 

The Commission assumes that a CSE 

or foreign regulatory agency will apply 

for a comparability determination only 

if the anticipated benefits warrant the 

costs attendant to submission of a 

request for a comparability 

determination. Although there is 

uncertainty regarding the number of 

requests that would be made under the 

Proposed Rule, the Commission 

estimates that it would receive 

applications for comparability 

determinations from 17 jurisdictions 

representing 61 separate registrants, and 

that each request would impose an 

average of 10 burden hours per 

registrant.116

Based upon 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 would be $64,600, 

based on an estimated cost of $380 per 

hour for an in-house attorney.117

3. Section 15(a) Factors 

As discussed above, the Proposed 

Rule is intended to apply the Proposed 

Margin Rules on a cross-border basis in 

a manner that effectively addresses risks 

to U.S. persons and the U.S. financial 

system, while mitigating the potential 

for conflicts and duplications that could 

lead to market distortions and undue 

competitive disparities. The discussion 

that follows supplements the related 

cost and benefit considerations 

addressed in the preceding section and 

addresses the overall effect of the 

Proposed Rule in terms of the factors set 

forth in section 15(a) of the CEA. 

a. Protection of Market Participants and 

the Public 

CEA section 15(a)(2)(A) requires the 

Commission to evaluate the costs and 

benefits of a proposed regulation in light 

of considerations of protection of market 

participants and the public. 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. In developing the 

Proposed Rule, the Commission’s 

primary focus was on the relationship or 

trade-offs between the benefits 

associated with applying the 

Commission’s margin requirement and 

the costs associated with extending 

substituted compliance or the 


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118The Commission notes, however, that of the 

approximately 61 CSEs that would be subject to the 

Commission’s margin rules, 21 are non-U.S. CSEs. 

Of those 21 non-U.S. CSEs, 20 are domiciled in 

jurisdictions that participated in the development 

of the BCBS–IOSCO framework, which may 

mitigate possible regulatory arbitrage between these 

dealers. 

Exclusion. On the one hand, full 

application of the Commission’s margin 

requirements 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 or the Exclusion 

to CSEs would reduce the potential for 

conflicting or duplicative requirements, 

which would, in turn, reduce market 

distortions and promote global 

harmonization. Substituted compliance 

in particular should not reduce the 

safety and soundness benefit of the 

Proposed Rule because substituted 

compliance will not be available unless 

the Commission determines that foreign 

margin regulations are comparable to 

the Commission’s margin regulations. 

Granting the Exclusion to certain CSEs 

should not significantly undermine 

these purposes, because other 

requirements and circumstances 

discussed above should mitigate the risk 

those CSEs pose to the U.S. financial 

system. 

b. Efficiency, Competitiveness, and 

Financial Integrity 

CEA section 15(a)(2)(B) requires the 

Commission to evaluate the costs and 

benefits of a proposed regulation in light 

of efficiency, competitiveness and 

financial integrity considerations. 

i. Efficiency 

The availability of substituted 

compliance to CSEs following 

comparable margin requirements in a 

foreign jurisdiction may incentivize 

global implementation of the BCBS– 

IOSCO framework. Greater 

harmonization across markets lessens 

the potential for conflicting or 

duplicative requirements, which, in 

turn, would promote greater operational 

efficiencies as a CSE would be able to 

avoid creating individualized 

compliance and operational 

infrastructures to account for the unique 

requirements of each jurisdiction in 

which it conducts swaps business. Also, 

to the extent that margin regimes across 

jurisdictions are comparable, 

substituted compliance should help to 

mitigate regulatory arbitrage. 

ii. Competitiveness 

Under the Proposed Rule, the 

availability of substituted compliance 

would turn primarily on the nature of 

the non-U.S. CSE’s relationship to a U.S. 

person and the national status of the 

non-U.S. CSE’s counterparty. For 

example, in the case of a non-U.S. CSE 

whose swap obligations are not 

guaranteed by a U.S. person, substituted 

compliance would be available for any 

swap with a counterparty that is not a 

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

obligations are guaranteed by a U.S. 

person. Further, under the Proposed 

Rule, an uncleared swap entered into by 

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

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

would be 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 a Foreign Consolidated 

Subsidiary nor a U.S. branch of a nonU.S. CSE. 

The availability of substituted 

compliance and/or the Exclusion could 

create competitive disparities between 

those CSEs that are eligible for 

substituted compliance and/or the 

Exclusion relative to those that are not 

eligible. 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 to 

that of the Commission relative to nonCFTC registered dealers for foreign 

clients.118 Because the Proposed Rule 

offers to U.S. CSEs (and non-U.S. CSEs 

with respect to swaps whose obligations 

are guaranteed by a U.S. person) only a 

minimal degree of substituted 

compliance and no Exclusion, these 

CSEs may be particularly impacted. As 

discussed in section II.C.1., however, 

the Commission believes that the 

Proposed Margin Rules should apply to 

the maximum degree to such CSEs in 

order to ensure the safety and 

soundness of U.S. CSEs (and U.S. 

guarantor) and the U.S. financial 

system. Furthermore, to the extent that 

that a relevant foreign jurisdiction’s 

margin rules are comparable to that of 

the Commission’s margin rules, such 

competitive disparities could be 

reduced. 

iii. Financial Integrity of Markets 

The safety and soundness of CSEs are 

critical to the financial integrity of 

markets. Further, as discussed in section 

II.A. above, margin serves as a first line 

of defense to protect a CSE as a whole 

in the event of a default by a 

counterparty. Together with capital, 

margin represents a key element in a 

CSE’s overall risk management program, 

which ultimately mitigates the 

possibility of a systemic event. 

At the same time, the Commission 

recognizes that a CSE’s uncleared swaps 

with a particular counterparty may 

implicate the supervisory interests of 

foreign regulators, and it is important to 

calibrate the cross-border application of 

the margin requirements to mitigate, to 

the extent possible, consistent with the 

Commission’s regulatory interests, the 

potential for conflict or duplication with 

other jurisdictions. Therefore, the 

Proposed Rule also allows for 

substituted compliance and an 

Exclusion in certain circumstances. 

The Commission believes that the 

Proposed Rule strikes the right balance 

between the two competing 

considerations to ensure that substituted 

compliance and the Exclusion are not 

extended in a way that could pose 

substantial risk to the integrity of the 

U.S. financial system. Substituted 

compliance is predicated on the 

Commission’s determination that the 

relevant foreign jurisdiction has 

comparable margin rules; if the 

Commission does not find a foreign 

jurisdiction’s rules comparable, the CSE 

would then need to comply with the 

Commission’s rules. Even in instances 

where the Exclusion would be available, 

the Commission has taken into account 

that the risk to the integrity of the 

financial markets would be mitigated by 

the Commission’s expectation that: (1) 

The Proposed Margin Rules would 

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 would 

be limited to a narrow set of swaps by 

non-U.S. CSEs; (3) the capital 

requirements would apply on an entitylevel basis to all CSEs; and (4) the 

excluded swaps will most likely be 

covered by another foreign regulator’s 

margin rules that are based on the 

BCBS–IOSCO framework. 

c. Price Discovery 

CEA section 15(a)(2)(C) requires the 

Commission to evaluate the costs and 

benefits of a proposed regulation in light 

of price discovery considerations. The 

Commission generally believes that 

substituted compliance, by reducing the 

potential for conflicting or duplicative 

regulations, could reduce impediments 

to transact uncleared swaps on a crossborder basis. This, in turn, may enhance 

liquidity as more market participants 

would 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, it would 


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incentivize CSEs to consider setting up 

their swap operations outside the 

Commission’s jurisdiction, and as a 

result, increase the potential for market 

fragmentation. 

d. Sound Risk Management Practices 

CEA section 15(a)(2)(D) requires the 

Commission to evaluate the costs and 

benefits of a proposed regulation in light 

of sound risk management practices. 

Margin is a critical element of a firm’s 

sound risk management program that, 

among other things, can prevent the 

accumulation of counterparty credit 

risk. As international regulators and the 

Commission harmonize their margin 

regulations for uncleared swaps, market 

participants may be able to manage their 

risk more effectively on an enterprisewide basis. On the other hand, to the 

extent that a CSE relies on the Exclusion 

for eligible swaps and the relevant 

foreign jurisdiction does not have 

comparable margin requirements, the 

Proposed Rule could lead to weaker risk 

management practices. 

e. Other Public Interest Considerations 

CEA section 15(a)(2)(E) requires the 

Commission to evaluate the costs and 

benefits of a proposed regulation in light 

of other public interest considerations. 

The Commission has not identified any 

additional public interest considerations 

related to the costs and benefits of the 

Proposed Rule. 

4. General Request for Comment 

The Commission requests comment 

on all aspects of the costs and benefits 

relating to the cross-border application 

of the Proposed Rule, including the 

nature and extent of the costs and 

benefits discussed above and any other 

costs and benefits that could result from 

adoption of the Proposed Rule. 

Commenters are encouraged to discuss 

the costs and benefits to U.S. CSEs and 

non-U.S. CSEs covered by the Proposed 

Rule, as well as any costs and benefits 

to other market participants, the swap 

markets, or the general public, and to 

the extent such costs and benefits can be 

quantified, monetary and other 

estimates thereof. The Commission 

requests that commenters provide any 

data or other information that would be 

useful in estimating the quantifiable 

costs and benefits of this rulemaking. 

Among other things, commenters may 

wish to submit comments on the 

following questions: 

1. Are the Commission’s assumptions 

about the costs and benefits of the 

Proposed Rule accurate? If not, please 

explain and provide any data or other 

information that you have quantifying 

or qualifying the costs and benefits of 

the Proposed Rule. 

2. Did the Commission consider all of 

the appropriate costs and benefits 

related to the Proposed Rule? If not, 

what additional costs and benefits 

should the Commission consider? 

Please explain why these additional 

costs and benefits should be considered 

and provide any data or other 

information that you have quantifying 

or qualifying the costs and benefits of 

these additional costs of the Proposed 

Rule. 

3. Please provide any data or other 

information relating to costs associated 

with the definition of ‘‘U.S. person’’ in 

the Proposed Rule, and in particular, as 

the proposed definition relates to the 

definition of ‘‘U.S. person’’ that was 

included in the Guidance. 

4. Will allowing substituted 

compliance or the Exclusion for swaps 

between certain categories of non-U.S. 

persons lead to fragmentation (e.g., 

creating separate or multiple swap 

markets) of the liquidity in swaps 

markets for uncleared swaps to the 

detriment of price discovery? Is swap 

market fragmentation detrimental to 

various market participants when there 

is post-trade price transparency of 

swaps? Commenters are encouraged to 

quantify when practicable. Does the 

Proposed Rule have any significant 

effects on price discovery? Indeed, to 

what extent are the impacts on price 

discovery the result of other 

requirements, such as the margin for 

uncleared swaps or the trade execution 

mandate, and not the Proposed Rule per 

se? 

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 proposes to amend 

17 CFR chapter I 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 subpart E to part 23 to read as 

follows: 

Subpart E—Capital and Margin 

Requirements for Swap Dealers and Major 

Swap Participants 

Sec. 

23.100–23.149 [Reserved] 

23.150–23.159 [Reserved] 

23.160 Cross-border application. 

23.161–23.199 [Reserved] 

Subpart E—Capital and Margin 

Requirements for Swap Dealers and 

Major Swap Participants 

§§ 23.100–23.149 [Reserved] 

§§ 23.150–23.159 [Reserved] 

§ 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 

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 a swap 

transaction with a non-U.S. person 

counterparty has rights of recourse 

against a U.S. person, with respect to 

the non-U.S. person counterparty’s 

obligations under the swap transaction. 

For these purposes, a party to a swap 

transaction has rights of recourse against 

a U.S. person if the party has a 

conditional or unconditional legally 

enforceable right to receive or otherwise 

collect, in whole or in part, payments 

from the U.S. person in connection with 

the non-U.S. person counterparty’s 

obligations under the swap. 

(3) International standards means 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 


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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 having 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—(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 

23.159, 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 23.159 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 (iv) of this 

section. 

(ii) Exclusion. A non-U.S. CSE shall 

not be required to comply with the 

requirements of §§ 23.150 through 

23.159 with respect to each uncleared 

swap it enters into to the extent: 

(A) The non-U.S. CSE’s obligations 

under the relevant swap are not 

guaranteed by a U.S. person; 

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

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

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

Consolidated Subsidiary with a nonU.S. person counterparty (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. 

(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: 


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(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 transactions subject to the 

foreign jurisdiction’s margin 

requirements; 

(B) The entities subject to the foreign 

jurisdiction’s margin requirements; 

(C) The methodologies for calculating 

the amounts of initial and variation 

margin; 

(D) The process and standards for 

approving models for calculating initial 

and variation margin models; 

(E) The timing and manner in which 

initial and variation margin must be 

collected and/or paid; 

(F) Any threshold levels or amounts; 

(G) Risk management controls for the 

calculation of initial and variation 

margin; 

(H) Eligible collateral for initial and 

variation margin; 

(I) The requirements of custodial 

arrangements, including 

rehypothecation and the segregation of 

margin; 

(J) Documentation requirements 

relating to margin; and 

(K) 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, deter, 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) How the relevant foreign 

jurisdiction’s margin requirements 

compare to the International Standards; 

(iii) Whether the relevant foreign 

jurisdiction’s margin requirements 

achieve comparable outcomes to the 

Commission’s corresponding margin 

requirements; 

(iv) The ability of the relevant 

regulatory authority or authorities to 

supervise and enforce compliance with 

the relevant foreign jurisdiction’s 

margin requirements; and 

(v) 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, the failure of such a 

covered swap entity to comply with the 

foreign jurisdiction’s margin 

requirements may constitute 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. The 

violation of such terms and conditions 

may constitute a violation of the 

Commission’s margin requirements and/ 

or result in the modification or 

revocation of the Comparability 

Determination. 

(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. 

§§ 23.161—23.199 [Reserved] 

Note: The following table will not appear 

in the Code of Federal Regulations. 

TABLE A—APPLICATION OF THE PROPOSED RULE 123

CSE Counterparty Proposed approach 

U.S. CSE or Non-U.S. CSE (including U.S. 

branch of a non-U.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). 


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TABLE A—APPLICATION OF THE PROPOSED RULE 123—Continued 

CSE Counterparty Proposed approach 

• 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). 

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

CSE). 

• 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. 

Substituted Compliance (All). 

Non-U.S. CSE (that is not a 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). 

• 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. 

Substituted Compliance (All). 

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

CSE, but not a 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. 

1This table should be read in conjunction with the rest of the preamble and the text of the Proposed Rule. 

2The term ‘‘U.S. person’’ is defined in § 23.160(a)(10) of the Proposed 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 Proposed Margin Rules. See Margin Requirements for Uncleared 

Swaps for Swap Dealers and Major Swap Participants, 79 FR 59898 (Oct. 3, 2014). 3As 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. 

Issued in Washington, DC, on July 2, 2015, 

by the Commission. 

Christopher J. Kirkpatrick, 

Secretary of the Commission. 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendices to Margin Requirements for 

Uncleared Swaps for Swap Dealers and 

Major Swap Participants—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 

Commissioners Wetjen, Bowen, and 

Giancarlo voted in the affirmative. No 

Commissioner voted in the negative. 

Appendix 2—Statement of Chairman 

Timothy G. Massad 

Today the Commission voted unanimously 

to issue a proposal on the cross-border 

application of our previously proposed rules 

on margin for uncleared swaps. I thank my 

fellow Commissioners for their work and 

input on this proposal, and I also want to 

thank our staff for their hard work. 

The proposed rule on margin for uncleared 

swaps, which we issued last fall, is one of the 

most important rules for the regulation of the 

over-the-counter swaps market. 

That is because there will always be a large 

part of the swaps market that is not cleared 

through central counterparties. Although we 

are mandating clearing for certain swaps, we 

should not mandate clearing for all swaps. 

Some products are not appropriate for such 


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a mandate because of their risk or liquidity 

characteristics. 

Margin can be an effective tool for 

addressing counterparty credit risk arising 

from uncleared swaps. Our rule will make 

sure that registered swap dealers post and 

collect margin in their transactions with 

other registered swap dealers and financial 

institutions that are above certain thresholds. 

That helps lower the risk to the financial 

system and the overall economy. I also note 

that the requirements do not apply to 

commercial end users. 

We saw what happened in 2008 when 

there was a build-up of excessive risk in 

bilateral swaps. That risk intensified and 

accelerated the financial crisis like gasoline 

poured on a fire. And that crisis cost our 

economy eight million jobs and untold 

suffering for American families. 

Moreover, we saw how that risk could be 

created offshore, outside our borders, but still 

jeopardize our financial stability and our 

economy. 

The excessive swap risk taken on by AIG 

was initiated from its overseas operation. In 

order to prevent the failure of AIG, our 

government had to commit over $180 billion. 

We got all that money back, but that is a 

painful example of why the cross-border 

application of the margin rule is important. 

The proposal we are issuing today 

addresses the possibility that risk created 

offshore can flow back into the U.S. And so 

it applies to activities of non-U.S. swap 

dealers that are registered with us. At the 

same time, our proposal recognizes the 

importance of harmonizing rules with other 

jurisdictions. 

If a transaction by an offshore swap dealer 

is guaranteed by a U.S. person, such as the 

parent of the dealer, the risk of that 

transaction can flow back into the U.S. But 

the same can occur even if the transaction is 

not guaranteed by the U.S. parent. Our 

proposal addresses that. By doing so, I 

believe our proposal is a good way to address 

the risk that can arise from uncleared swaps 

in that situation. 

The proposal draws a line as to when we 

should take this offshore risk into account 

that is both reasonable and clear. The line we 

are proposing is this: If the financial results 

and position of the non-U.S. swap dealer are 

consolidated in the financial statements of 

the U.S. parent, then we should take that into 

account, whether or not there is an explicit 

guarantee. 

This is how the proposal works: U.S. swap 

dealers would be required to comply with the 

rule in all their transactions, but in their 

transactions with certain non-U.S. 

counterparties, they would be entitled to 

substituted compliance with respect to 

margin they post, but not the margin they 

collect. Non-U.S. swap dealers whose swap 

obligations are guaranteed by a U.S. person 

would be treated the same way. Substituted 

compliance would be available in the case of 

the laws of those jurisdictions which we have 

deemed comparable. 

For non-U.S. swap dealers registered with 

us, whose obligations are not guaranteed by 

a U.S. person, they must still comply, but 

they would be entitled to substituted 

compliance to a greater extent. Generally, 

they could avail themselves of full 

substituted compliance unless the 

counterparty was a U.S. swap dealer or a 

swap dealer guaranteed by a U.S. person. 

And, transactions between a non-U.S. swap 

dealer (but not conducted through its U.S. 

branch) and a non-U.S. counterparty would 

be excluded from the margin rules, if neither 

party’s obligations under the relevant swap 

are guaranteed by a U.S. person nor 

consolidated in the financial statements of its 

U.S. parent. 

Limiting the exclusion from our rule to 

only those transactions where neither party 

is guaranteed or consolidated with a U.S. 

person helps address the concern that there 

is risk to the U.S. even if there is no explicit 

guarantee. 

Lastly, when foreign banks conduct their 

swaps business within the U.S. through their 

branches located in the U.S., in direct 

competition with U.S. swap dealers, the 

exclusion would not apply. However, U.S. 

branches would be eligible for substituted 

compliance, which would reduce the 

potential for conflicts with foreign 

jurisdictions. 

The broad scope of substituted compliance 

recognizes that we must work together with 

other jurisdictions to regulate this market, 

and we should design our rules to avoid 

conflict and duplication as much as possible. 

And the proposal may reduce competitive 

disparities that would otherwise result from 

different sets of rules applying to swap 

dealers engaged in essentially the same 

activity. 

The proposal we are making today is very 

similar to the approach proposed last fall by 

the prudential regulators. That is appropriate, 

because the law requires us and the 

prudential regulators to harmonize our 

margin rules as much as possible. It also 

makes sense when you look at the 

composition of the registered swap dealers. 

There are approximately 100 swap dealers 

registered with us. Approximately 40 of those 

will be subject to the margin rules of the 

prudential regulators, while approximately 

60 will be subject to our rules. About two 

thirds of those 60 swap dealers that will be 

subject to our margin rule have affiliates who 

will be subject to the margin rules of the 

prudential regulators. For example, of the 

approximately 60 swap dealers subject to our 

margin rules, over half are subsidiaries of just 

five major U.S. bank holding companies. 

Each of those large bank holding companies 

has other subsidiaries that are, subject to the 

margin rules of the prudential regulators. 

Therefore, if our margin rules are 

substantially different from the margin rules 

of the prudential regulators, then we have 

created incentives for firms to move activity 

from one entity to another solely to take 

advantage of potential differences in the 

rules. That is an outcome we should try very 

hard to avoid. 

We also wish to coordinate our rules with 

the margin rules of other jurisdictions. That 

is why our proposal today provides for 

substituted compliance. In addition, at my 

direction, our staff is actively engaged with 

their counterparts in other jurisdictions to try 

to harmonize the rules as much as possible. 

Although much work remains to be done, 

and the Commission must take final action, 

I am hopeful that our final rules will be 

similar on many critical issues to those 

currently being developed in other major 

jurisdictions. 

I would also like to say a word about our 

Cross-Border Guidance, which discussed 

how the Commission would generally apply 

Dodd-Frank requirements to cross-border 

swap activities. In doing so, the Commission 

recognized that the market is complex and 

dynamic and that a flexible approach is 

necessary. As stated in the Guidance, ‘‘the 

Commission will continue to follow 

developments as foreign regulatory regimes 

and the global swaps market continue to 

evolve. In this regard, the Commission will 

periodically review this Guidance in light of 

future developments.’’ That is essentially 

what we are doing here. With each area of 

our rules, the implications of cross-border 

transactions for our policy objectives may 

vary. Margin for uncleared swaps is intended 

to protect the safety and soundness of swap 

dealers and ultimately, to ensure the stability 

of the U.S. financial system. Therefore, it is 

appropriate to take into account whether that 

risk flows back into the United States by 

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

financial consolidation with a U.S. person. 

But the approach we are proposing today for 

margin may not be appropriate with respect 

to other areas of regulation—such as swaps 

reporting or trading. 

In conclusion, I believe the approach we 

are proposing today combines the best 

elements of the various approaches proposed 

last fall. It strikes the right balance between 

the Commission’s supervisory interest in 

ensuring the safety and soundness of 

registered swap dealers and the need to 

recognize principles of international comity 

and reduce the potential for conflict with 

foreign regulatory requirements. 

Appendix 3—Statement of 

Commissioner Mark P. Wetjen 

Today’s release lays out a proposed 

framework for the application of the 

Commission’s margin rules to un-cleared 

swaps (the ‘‘Margin Rule’’) in cross-border 

transactions. Interestingly, the release states 

that there was no consensus among those 

who filed comments in response to the 

Commission’s Advance Notice of Proposed 

Rulemaking (‘‘ANPR’’) last fall, which laid 

out three alternative, cross-border 

approaches: The Guidance Approach, the 

Prudential Regulators’ Approach, and the 

Entity Approach. To the extent, therefore, 

that the release was designed to identify a 

consensus view concerning which of these 

three approaches was best, it failed. 

The comment letters, however, provided a 

great deal of useful discussion that has aided 

the Commission’s thinking about the extraterritorial application of its rules. Ultimately, 

the agency was guided by those comments to 

propose today an approach that is essentially 

an entity approach, but because of more 

availability of substituted compliance, 

appears most similar to the Prudential 

Regulators’ Approach in terms of its practical 

implementation. 

I am comfortable supporting today’s 

release, but for the reasons discussed below, 


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1See 7 U.S.C. 19(a). 

2See section 3(b) of the Commodity Exchange Act 

(‘‘CEA’’), 7 U.S.C. 5(b). 3See section 3(b) of the CEA, 7 U.S.C. 5(b). 

continue to harbor some doubts as to whether 

we have selected the approach that best 

balances the Commission’s interests in 

protecting the financial system and U.S. 

taxpayers, meeting its statutory mandate to 

preserve an appropriate competitive 

landscape for participants in the global 

swaps market, and adopting policies whose 

costs to those affected do not exceed their 

benefits.1

The Commission’s Responsibilities 

Regarding the Margin Rule 

To begin, it is important to understand the 

scope of the Commission’s responsibilities 

with respect to implementing and enforcing 

the Margin Rule. As was made plain by the 

proposal seeking comment on the Margin 

Rule released last fall, the rulemaking is one 

of the most important component parts of the 

risk-focused requirements under Title VII of 

Dodd-Frank. The statute divides up 

responsibilities for implementing and 

enforcing the Margin Rule among this 

Commission, the U.S. prudential regulators, 

and the Securities and Exchange 

Commission. Those responsibilities are 

weighty, requiring, among others, the review 

and approval of margin methodologies 

submitted by the covered swap entities under 

each authority’s jurisdiction. 

As of today, five U.S. bank holding 

companies regulated by the Board of 

Governors of the Federal Reserve System (the 

‘‘Board’’) have 17 U.S. registered swap 

dealers that would fall exclusively within the 

CFTC’s jurisdiction for margin purposes. 

These same five U.S. bank holding 

companies have 15 non-U.S. registered swap 

dealers that would fall exclusively within the 

CFTC’s jurisdiction for margin purposes (the 

‘‘U.S. Foreign-Affiliate Dealers’’). That is a 

total of 32 registered swap dealers that the 

commission would have to oversee, 

supervise, and enforce compliance with 

respect to the Margin Rule. 

There are another three non-U.S. parent 

entities regulated by the Board, which 

altogether have four entities registered with 

the Commission as swap dealers, due to the 

level of swap-dealing activity they engage in 

with U.S. counterparties (‘‘Non-U.S. 

Dealers’’). There are only three non-U.S. 

registered swap dealers that do not have a 

parent entity regulated by the Board and that 

would fall exclusively within the CFTC’s 

jurisdiction for margin purposes (the ‘‘Truly 

Foreign Dealers’’), or just a fraction of the 

number of firms that are either based in the 

U.S. or controlled by a U.S. regulated parent. 

This brings to 39 the total number of swap 

dealers whose un-cleared swap activities 

would be subjected to the Commission’s 

Margin Rule. 

The Commission’s regulatory interests in 

each of these categories of registered swap 

dealers is different, notwithstanding the fact 

the Commission has responsibility over all of 

them. In most respects, the Commission (and 

other U.S. policymakers and swap-market 

stakeholders) should be primarily concerned 

about the U.S. Foreign-Affiliate Dealers when 

thinking through and developing a crossborder framework to determine when these 

entities should follow U.S. law. This 

statement is based on the fact that concerns 

about risk importation into the U.S. are much 

lower, relatively speaking, when it comes to 

the activities of the Non-U.S. Dealers and 

Truly Foreign Dealers (none of the Non-U.S. 

Dealers or Truly Foreign Dealers would 

appear to meet the control test under the 

prudential regulators’ September 2014 

margin rule proposal). Instead, these latter 

categories of swap dealers raise different 

issues related to the Commission’s mandates 

to enhance market integrity and promote fair 

competition.2

Appropriately, when Non-U.S. Dealers and 

Truly Foreign Dealers face other non-U.S. 

counterparties, they are excluded from 

having to comply with the Margin Rule 

under the proposal, so long as neither the 

registered swap dealer’s nor its 

counterparty’s obligations benefit from a 

guarantee by a U.S. person. Under the 

Guidance Approach, these Non-U.S. Dealers 

and Truly Foreign Dealers would be 

excluded from the Margin Rule as well, so 

long as neither the swap dealer’s nor its 

counterparty’s obligations benefit from a 

guarantee by a U.S. person. 

I review the scope and weight of these 

responsibilities here because the context to 

deciding how much supervisory 

responsibilities to assert over the crossborder swap activities of entities located 

outside of the U.S. is important, both in 

understanding the practical implications of 

claiming those responsibilities as well as the 

potential effect on international comity. The 

review of the different categories of swapdealer registrants also makes it clear to me 

that to pursue the Entity Approach without 

allowing substituted compliance, as some 

commenters suggested, is neither necessary 

for the Commission to meet its statutory 

responsibilities nor advisable, not to mention 

impractical. 

When the Commission voted on the ANPR, 

I noted the potential benefits of the proposal 

set forth by the Prudential Regulators’ 

Approach, which would effectively apply the 

margin rule as an entity-level rule with 

certain exclusions for foreign swap activities. 

At that time, however, I expressed my view 

that applying the margin rule as a 

transaction-level requirement under the 

Guidance Approach was the better option. In 

part, that view was shaped by the practical 

reality that it would be difficult for the 

Commission to meet its challenge to 

supervise U.S. swap dealers’ compliance 

with the margin rule, let alone the activities 

of the U.S. Foreign-Affiliate Dealers and 

Truly Foreign Dealers. 

Policy Advantages of Today’s Proposal 

As it relates to the Truly Foreign Dealers, 

compliance obligations under today’s 

proposal would be effectively the same as 

under the cross-border guidance, so 

presumably no new burdens or competitive 

considerations would be created here for 

those firms (as discussed above). 

Additionally, as it relates to the U.S. ForeignAffiliate Dealers (some of which have 

affiliates not supervised by the commission 

and engaged in swap activities), today’s 

proposal could dis-incentivize firms from 

moving swap activity transacted by an 

affiliated entity regulated by a U.S. 

prudential regulator, into the U.S. ForeignAffiliate Dealer. Such a market response is 

conceivable given the fact there could be 

different compliance obligations under the 

proposal as compared to the Guidance 

Approach depending on whether the U.S. 

Foreign-Affiliate Dealer is a Foreign 

Consolidated Subsidiary, and whether the 

dealer’s un-cleared swap is supported by a 

guarantee. Presumably, there is swap activity 

of some of these U.S. Foreign-Affiliate 

Dealers that would be required to comply 

with the Margin Rule under today’s proposal, 

that would not have been subjected to the 

Margin Rule under the Guidance Approach. 

U.S. domestic regulators should not 

knowingly create an opportunity for affiliates 

within a U.S. bank holding company to move 

swap activity from one affiliate to another for 

no other reason than to avoid application of 

U.S. law (even if there are legitimate policy 

reasons that U.S. law would not apply). 

Indeed, this is why the Dodd-Frank Act 

requires the relevant agencies implementing 

the Margin Rule to coordinate their efforts as 

closely as possible. Knowingly allowing such 

a result also would be inconsistent with the 

Commission’s statutory duty to promote fair 

competition.3

Similarly, the Commission should be 

careful to avoid adopting a significantly 

different cross-border approach from the U.S. 

prudential regulators if it would incentivize 

affiliates of U.S. Foreign-Affiliate Dealers to 

move their swap activity to the U.S. ForeignAffiliate Dealer in order to exploit the 

relative dearth of resources available to the 

Commission for supervising and enforcing 

compliance. The CFTC currently is understaffed. Meeting the challenge to monitor 

compliance with the complex and technical 

requirements of the Margin Rule as it applies 

to the swap activity conducted by U.S. 

Foreign-Affiliate Dealers today would be 

difficult. A cross-border approach that is 

substantively similar to the Prudential 

Regulators’ Approach may facilitate the 

Commission in meeting its supervisory 

challenge. 

Relatedly, I am also cognizant of market 

efforts to develop a standard initial-margin 

methodology for un-cleared swaps, which I 

believe would be supported by the hybrid 

approach set forth in today’s proposal. I am 

in favor of these efforts because the use of a 

standard initial margin methodology has the 

potential to reduce dispute burdens by using 

a common approach for reconciliation, 

promote the efficient use of limited market 

resources, and enhance fairness and 

transparency in the global OTC derivatives 

markets. As such, the Commission should, if 

possible, avoid adopting a cross-border 

approach that would discourage the 

development of a standard initial-margin 

methodology, or would otherwise encourage 

the development of different margin 

methodologies across affiliated entities and/ 

or the broader marketplace. This outcome 


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41406 Federal Register / Vol. 80, No. 134 / Tuesday, July 14, 2015 / Proposed Rules 

4See section 2(i) of the CEA, 7 U.S.C. 2(i). 

5See BCBS and IOSCO, Margin requirements for 

non-centrally cleared derivatives (Sept. 2013) at 22, 

available at http://www.bis.org/publ/bcbs261.pdf. 

The BCBS–IOSCO Framework also provides that 

regulators should recognize the equivalence and 

comparability of their respective rules and apply 

only one set of rules to the transaction. 

6See id. 

7See Interpretive Guidance and Policy Statement 

Regarding Compliance with Certain Swap 

Regulations, 78 FR 45292 (July 26, 2013). 

would complicate the jobs of all supervisory 

authorities involved, perhaps especially the 

U.S. prudential regulators. 

Policy Advantages of the Guidance 

Approach 

Generally speaking, the Commission in 

adopting its cross-border guidance intended 

to strike a reasonable balance in assuring that 

the swaps markets were brought under the 

new regulatory regime as directed by 

Congress and consistent with section 2(i) of 

the CEA.4 We should not depart from those 

important policy judgments without a 

compelling reason to do so. 

One advantage of the Guidance Approach, 

therefore, is that it would harmonize the 

Commission’s own cross-border policies as 

they related to both cleared and un-cleared 

swap activity. Because many firms under the 

Commission’s jurisdiction have incurred 

significant costs by building systems and 

practices designed to follow the 

Commission’s cross-border guidance, overall 

costs to registered swap dealers might be 

lower if the Guidance Approach were 

adopted, which obviously is relevant to the 

Commission’s mandate to consider the 

benefits and costs of its policies. But of 

course, with harmony of the Commission’s 

cross-border policies comes disharmony with 

the U.S. prudential regulators. 

Another advantage to the Guidance 

Approach is that it provides a more elegant 

way for U.S. Foreign-Affiliate Dealers, NonU.S. Dealers and Truly Foreign Dealers to 

comply with their regulatory obligations 

when the Commission has made a 

substituted-compliance determination 

regarding another jurisdiction’s margin 

requirements. Under the Guidance Approach, 

an affected swap dealer’s obligations to post 

margin and collect margin would follow the 

same law or regulation of another jurisdiction 

if the Commission had made such a 

substituted-compliance determination; which 

is to say, margin payments going in both 

directions would follow the same set of rules. 

This outcome has the added benefit of being 

consistent with the Basel Committee on 

Banking Supervision’s (‘‘BCBS’’) and the 

Board of the International Organization of 

Securities Commissions’ (‘‘IOSCO’’) final 

margin policy framework for margin 

requirements for non-centrally cleared 

derivatives (the ‘‘BCBS–IOSCO Framework’’), 

which states that when a transaction is 

subject to two sets of rules, the regulators 

should endeavor to harmonize their rules to 

the extent possible.5

Given the relatively broad agreement 

among key jurisdictions about how the global 

framework for margin requirements ought to 

be structured, such a result should be an 

acceptable way to address any remaining 

concerns about risk from overseas activity 

transferring back to the U.S. Again, those 

concerns primarily would arise from the uncleared swap activities of the U.S. ForeignAffiliate Dealers. The proposal, on the other 

hand, would require a non-U.S. covered 

swap entity guaranteed by a U.S. person to 

follow U.S. initial margin rules, but only 

permit substituted compliance for the posting 

of initial margin when such non-U.S. covered 

swap entity trades with a non-U.S. 

counterparty. 

In this scenario, it would be possible for 

two separate laws to apply to the same 

transaction. Under this framework, I question 

whether market participants engaging in uncleared swaps would have the necessary legal 

certainty as to which margin requirements 

they would face. While this framework is 

proposed ostensibly to help ensure the safety 

and soundness of covered swap entities and 

to support the stability of the U.S. financial 

markets, these goals arguably will be 

accomplished only if the framework is 

workable. The Guidance Approach would 

arguably provide greater certainty as to the 

law applicable to a particular transaction, 

and render the Commission’s policy more 

consistent with the BCBS–IOSCO 

Framework.6

To that end, I look forward to hearing 

additional comments on whether a swap 

between a non-U.S. covered swap entity and 

a non-U.S. counterparty should receive 

substituted compliance for the entire swap, 

rather than subject the swap to both U.S. and 

foreign margin requirements. Ideally, such 

comments would give the Commission a 

better understanding of the feasibility of 

designing systems to assist the covered swap 

entity comply with two separate margin 

requirements for the same transaction. 

To the degree that the Commission should 

be concerned about deferring to other 

regulators to supervise the posting and 

collecting of margin for un-cleared swaps— 

as it would in the wake of a substitutedcompliance determination—context again is 

important to remember here. As mentioned, 

there is relatively broad agreement among 

key jurisdictions about how the global 

framework for margin requirements should 

be structured, as a result of the issuance of 

the BCBS–IOSCO Framework. It’s equally 

important to remember that the 

Commission’s capital rule is treated as an 

entity-level rule under the Commission’s 

cross-border guidance.7 As I stated when the 

Commission released its proposal for the 

Margin Rule, credit risks not addressed 

through the Margin Rule could be addressed, 

at least in part, through indirect capital 

requirements at the holding company level, 

and direct capital requirements at the 

registrant level for those swap dealers relying 

on substituted compliance (or otherwise). 

Yet another advantage to the Guidance 

Approach is that it might better avoid further 

diminishments to liquidity that the 

marketplace has experienced recently, as 

well as better avoid regulatory market 

fragmentation that materialized after the 

Commission’s new swap-execution 

framework went into effect. Several 

commenters expressed strong concerns that 

the Entity Approach could further fragment 

the swaps markets and impair liquidity, 

promote regulatory arbitrage, and place the 

foreign affiliates of U.S. entities at a 

competitive disadvantage beyond the 

circumstances they face in the cleared swap 

environment under the Commission crossborder guidance. I have recognized and 

spoken about market fragmentation for years, 

and so do not take lightly such concerns 

being raised again in this context. 

Clarifications of the Commission’s Definition 

of ‘‘Guarantee’’ and ‘‘U.S. Person’’ 

The proposal includes two important 

clarifications for market participants that I 

would like to acknowledge. First, I am 

supportive of the proposed removal of the 

U.S. majority-ownership prong from the U.S. 

person definition. For certain types of funds, 

it is extremely difficult for advisors or 

administrators to accurately determine 

whether, and how many of, the beneficial 

owners of fund entities within the fund 

structure are U.S. persons. Given this 

complexity and the other elements of the 

U.S. person definition that would capture 

those funds that have a substantial nexus to 

the U.S. markets, I believe this exclusion is 

necessary and appropriate. I also support the 

release’s proposed definition of ‘‘guarantee’’. 

This clearer definition will help market 

participants better identify those transactions 

that raise or implicate greater supervisory 

interest by the Commission. 

Conclusion 

The questions asked in this proposal are 

intended to solicit comment in hopes of 

further clarifying the most appropriate way 

for the Commission to meet its regulatory 

objectives as well as finding more consensus 

on the important issues raised in the release. 

As discussed above, I am open to the 

approach taken in this proposal and 

recognize its merits. I look forward to seeing 

whether comments filed in response to 

today’s release can further build the case for 

the Commission adopting the proposal, 

rather than the Guidance Approach. 

Appendix 4—Concurring Statement of 

Commissioner Sharon Y. Bowen 

I’m pleased to support this new proposed 

rule on cross-border application of uncleared 

margin requirements for swap dealers and 

major swap participants. Margin 

requirements for uncleared swaps, needless 

to say, are a core piece of the new regulatory 

regime we are establishing as required by the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act. 

It is imperative that we get all aspects of 

our margin requirements right, and that 

includes getting the cross-border element of 

the requirements right. The swaps market is 

a global one—the market has organically 

evolved to rely on the ability of U.S. entities 

to trade with European entities as a matter of 

course. It is incumbent on us that our rules 

not severely restrict this flow of commerce, 

just as it is incumbent on us that our rules 

provide rigorous regulations on this market 

for the protection of investors, consumers, 

and the broader financial system. 


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Federal Register / Vol. 80, No. 134 / Tuesday, July 14, 2015 / Proposed Rules 41407 

1 Interpretive Guidance and Policy Statement 

Regarding Compliance With Certain Swap 

Regulations, 78 FR 45292 (Jul. 26, 2013). 

2 15 U.S.C. 8325(a) (added by section 752 of the 

Dodd-Frank Act). 

3See Margin Requirements for Non-centrally 

Cleared Derivatives (Sep. 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 regulatory objectives of requiring margin for 

uncleared swaps, as stated in the Dodd-Frank Act, 

are to help insure the safety and soundness of the 

swap dealer or major swap participant, the financial 

integrity of the markets and the stability of the U.S. 

financial system. Section 4s(e)(3)(A), (C), 7 U.S.C. 

6s(e)(3)(A), (C). 

6See, e.g., Comparability Determination for the 

European Union: Certain Transaction-Level 

Requirements, 78 FR 78878 (Dec. 27, 2013). 

7 Id. at 78881. 

8 Id. at 78889. 

9 I note that the ‘‘through or by’’ language appears 

in the preamble to the rule, not the rule text. 

To that end, I look forward to receiving 

comments on this proposal from a wide 

swath of stakeholders, from market 

participants to financial reform advocates. I 

hope we will receive comments on whether 

this rule is workable, whether it is 

sufficiently robust, and what changes would 

make the rule more effective on both of those 

metrics. 

Appendix 5—Statement of 

Commissioner J. Christopher Giancarlo 

The Commission’s proposal for the crossborder application of margin requirements 

for uncleared swaps is a highly complicated 

labyrinth. I look forward to the jolt to U.S. 

economic growth that will occur in the 3rd 

quarter of 2015 as a result of the thousands 

of billable hours that will be expended by 

lawyers and other professionals, who will 

have to read, interpret and respond to this 

tangled regulatory construct. 

I have many concerns and questions 

regarding the proposal, including: 

1. The shift from the transaction-level 

approach set forth in the July 2013 CrossBorder Interpretive Guidance and Policy 

Statement 1 (‘‘Guidance’’) to a hybrid 

approach and what this means for the status 

of the Guidance moving forward; 

2. the revised definitions of ‘‘U.S. person’’ 

(defined for the first time in an actual 

Commission rule) and ‘‘guarantee’’ and how 

these new terms will be interpreted and 

applied by market participants across their 

entire global operations; 

3. the scope of when substituted 

compliance is allowed; and 

4. the practical implications of permitting 

substituted compliance, but disallowing the 

exclusion from CFTC margin requirements 

(‘‘Exclusion’’) for non-U.S. covered swap 

entities (‘‘CSEs’’) who qualify as Foreign 

Consolidated Subsidiaries. 

My concerns extend to the standards set 

forth for determining comparability. An 

appropriate framework for the cross-border 

application of margin requirements for 

uncleared swaps is essential if we are to 

preserve the global nature of the swaps 

market. Congress recognized this when it 

instructed the CFTC, the SEC and the 

prudential regulators to ‘‘coordinate with 

foreign regulatory authorities on the 

establishment of consistent international 

standards with respect to the regulation . . . 

of swaps.’’ 2 Towards that end, 

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’’), which 

resulted in the issuance of a final BCBS– 

IOSCO framework in September 2013 that 

establishes minimum margin standards for 

uncleared swaps (‘‘BCBS–IOSCO 

framework’’).3

Element seven of the BCBS–IOSCO 

framework discusses the cross-border 

application of margin requirements and 

stresses the importance of developing 

consistent requirements across jurisdictions 

to ensure that implementation at a national 

jurisdictional level is appropriately 

interactive: 

that is, that each national jurisdiction’s rule 

is territorially complementary such that (i) 

regulatory arbitrage opportunities are limited, 

(ii) a level playing field is maintained, (iii) 

there is no application of duplicative or 

conflicting margin requirements to the same 

transaction or activity, and (iv) there is 

substantial certainty as to which national 

jurisdiction’s rules apply. When 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.4

Regulatory authorities in major financial 

centers continue to collaborate in the 

development of their rules and I commend 

CFTC staff for their continued dialogue with 

fellow domestic and foreign regulators. 

Nevertheless, there are bound to be 

differences across jurisdictions in the final 

rule sets that are ultimately adopted. 

Comparability determinations allowing for 

substituted compliance with the margin 

requirements of foreign jurisdictions will be 

essential to achieving a workable crossborder framework. I am concerned that the 

standards for making comparability 

determinations outlined in the Commission’s 

proposal may be too restrictive. 

The Commission states that it will employ 

an outcome-based comparability standard 

focusing on whether the margin requirements 

in a foreign jurisdiction achieve the same 

regulatory objectives as the CFTC’s margin 

requirements and will not require specific 

rules identical to the Commission’s rules. 

The Commission states further, however, that 

it will make its outcome-based 

determinations on an element-by-element 

basis that will include, but not be limited to, 

analyzing: (i) The transactions subject to the 

foreign jurisdiction’s margin requirements; 

(ii) the entities subject to the foreign 

jurisdiction’s margin requirements; (iii) the 

methodologies for calculating the amounts of 

initial and variation margin; (iv) the process 

and standards for approving models for 

calculating initial and variation margin 

models; (v) the timing and manner in which 

initial and variation margin must be collected 

and/or paid; (vi) any threshold levels or 

amount; (vii) risk management controls for 

the calculation of initial and variation 

margin; (viii) eligible collateral for initial and 

variation margin; (ix) the requirements of 

custodial arrangements, including 

rehypothecation and segregation of margin; 

(x) documentation requirements relating to 

margin; and (xi) the cross-border application 

of the foreign jurisdiction’s margin regime. 

As proposed, the Commission will not be 

assessing whether the foreign authority’s 

margin regime as a whole meets the broad 

regulatory objectives of requiring margin for 

uncleared swaps.5 Rather, in looking at each 

element (and any other factor not included in 

the foregoing list) the Commission may 

determine that a foreign regime is 

comparable as to some elements, but not 

others, in which case substituted compliance 

might be allowed, for example, with respect 

to the methodologies for calculating initial 

and variation margin, but not for the eligible 

collateral. 

Depending on how it is put into practice, 

this element-by-element approach may be 

difficult to distinguish from the rule-by-rule 

analysis the Commission claims to eschew. 

We have seen this before when the 

Commission made its comparability 

determinations for certain foreign countries 

regarding certain transaction-level 

requirements for swap dealers and major 

swap participants.6 There, the Commission 

made its determinations on a ‘‘requirementby-requirement’’ basis, rather than on the 

basis of the foreign regime as a whole.7

Former Commissioner Scott O’Malia 

observed in that instance that this was a 

‘‘rule-by-rule’’ analysis, which was contrary 

to the recommendations of the OTC 

Derivatives Regulators Group and afforded 

only limited substituted compliance relief.8

Will our ‘‘element-by-element’’ analysis be 

any different than the ‘‘requirement-byrequirement’’ method the Commission 

employed then? 

I fear that the proposed element-byelement approach will be outcome-based in 

name only. In a perfect world all G–20 

countries will adopt comparable margin 

requirements, but we cannot let the perfect 

be the enemy of the good. For substituted 

compliance to work, we must focus on broad 

objectives, not specific requirements. 

I am also troubled by the provision of the 

proposed rule that would not permit swaps 

executed ‘‘through or by’’ a U.S. branch of a 

non-U.S. CSE to qualify for the Exclusion for 

non-U.S. CSEs who qualify as Foreign 

Consolidated Subsidiaries. Under the 

proposal, uncleared swaps entered into by a 

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

counterparty (purely foreign-to-foreign 

swaps), where neither counterparty is a 

Foreign Consolidated Subsidiary or 

guaranteed by a U.S. person, would be 

excluded from the Commission’s margin 

rules. The Exclusion is not available, 

however, if the swap is executed ‘‘through or 

by’’ the U.S. branch of a non-U.S. CSE.9 The 


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10See Prohibitions and Restrictions on 

Proprietary Trading and Certain Interests in, and 

Relationships With, Hedge Funds and Private 

Equity Funds, 79 FR 5808, 5927 & n.1526 (Jan. 31, 

2014). 

11CFTC Staff Advisory No. 13–69 (Nov. 14, 

2013), available at http://www.cftc.gov/ucm/

groups/public/@lrlettergeneral/documents/letter/

13-69.pdf. 

12CFTC Letter No. 14–140, Extension of NoAction Relief: Transaction-Level Requirements for 

Non-U.S. Swap Dealers (Nov. 14, 2014), available 

at http://www.cftc.gov/ucm/groups/public/@lrletter

general/documents/letter/14-140.pdf. 

request for comment following this 

discussion asks how the Commission should 

determine whether a swap is executed 

‘‘through or by’’ a U.S. branch and suggests 

using the same analysis used in the 

Commission’s Volcker Rule, which required 

that personnel that ‘‘arrange, negotiate, or 

execute’’ a purchase or sale conducted under 

the exemption for trading activity of a foreign 

banking entity must be located outside the 

U.S.10

Prior to its appearance in the Commission’s 

final Volcker Rule this concept appeared in 

a hastily issued, November 2013 Staff 

Advisory 13–69 (sometimes referred to in the 

industry as the ‘‘elevator rule’’) that imposed 

swaps transaction rules on trades between 

non-U.S. persons whenever anyone on U.S. 

soil ‘‘arranged, negotiated, or executed’’ the 

trade.11 The effective date of this Staff 

Advisory has been delayed four times.12 As 

I have stated before, the elevator rule is 

causing many overseas trading firms to 

consider cutting off all activity with U.S.- 

based trade support personnel to avoid 

subjecting themselves to the CFTC’s flawed 

swaps trading rules. The Staff Advisory, if it 

goes into effect, will jeopardize the role of 

bank sales personnel in U.S. financial centers 

like Boston, Charlotte, Chicago, New Jersey 

and New York. It will likely have a ripple 

effect on technology staff supporting U.S. 

electronic trading systems, along with the 

thousands of jobs tied to the vendors who 

provide food services, office support, 

custodial services and transportation for the 

U.S. financial series industry. With this 

proposal, rather than recognizing the myriad 

of problematic issues arising from the Staff 

Advisory, the Commission is proposing to 

expand its scope from trading rules to margin 

rules. 

Despite my many questions and concerns, 

I support issuing the proposed rule only so 

that the public may provide thorough 

analysis and thoughtful comment. My vote to 

issue the proposal for public comment 

should not signal, however, my agreement 

with it. I look forward to reviewing public 

comment. 

[FR Doc. 2015–16718 Filed 7–13–15; 8:45 am] 

BILLING CODE 6351–01–P 


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