[Federal Register Volume 82, Number 200 (Wednesday, October 18, 2017)]
[Rules and Regulations]
[Pages 48394-48413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-22616]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I


Comparability Determination for the European Union: Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notification of determination.

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SUMMARY: The following is the analysis and determination of the 
Commodity Futures Trading Commission (``Commission'') regarding a 
request by the European Commission (``EC'') that the Commission 
determine that laws and regulations applicable in the European Union 
(``EU'') provide a sufficient basis for an affirmative finding of 
comparability with respect to margin requirements for uncleared swaps 
applicable to certain swap dealers (``SDs'') and major swap 
participants (``MSPs'') registered with the Commission. As discussed in 
detail herein, the Commission has found the margin requirements for 
uncleared swaps under the laws and regulations of the EU comparable in 
outcome to those under the Commodity Exchange Act (``CEA'') and 
Commission regulations.

DATES: This determination was made and issued by the Commission on 
October 13, 2017.

FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, 202-418-
5213, <a href="/cdn-cgi/l/email-protection#f4999f81989f9d9ab497928097da939b82"><span class="__cf_email__" data-cfemail="573a3c223b3c3e39173431233479303821">[email protected]</span></a>, or Katherine S. Driscoll, Associate Chief 
Counsel, 202-418-5544, <a href="/cdn-cgi/l/email-protection#f19a95839882929e9d9db192978592df969e87"><span class="__cf_email__" data-cfemail="cba0afb9a2b8a8a4a7a78ba8adbfa8e5aca4bd">[email protected]</span></a>, Division of Swap Dealer and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Introduction

    Pursuant to section 4s(e) of the CEA,\1\ the Commission is required 
to promulgate margin requirements for uncleared swaps applicable to 
each SD and MSP for which there is no Prudential Regulator 
(collectively, ``Covered Swap Entities'' or ``CSEs'').\2\ The 
Commission published final margin requirements for such CSEs in January 
2016 (the ``Final Margin Rule'').\3\
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    \1\ 7 U.S.C. 1 et seq.
    \2\ See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for which there is a 
Prudential Regulator must meet the margin requirements for uncleared 
swaps established by the applicable Prudential Regulator. 7 U.S.C. 
6s(e)(1)(A). See also 7 U.S.C. 1a(39) (defining the term 
``Prudential Regulator'' to include: The Board of Governors of the 
Federal Reserve System; the Office of the Comptroller of the 
Currency; the Federal Deposit Insurance Corporation; the Farm Credit 
Administration; and the Federal Housing Finance Agency). The 
Prudential Regulators published final margin requirements in 
November 2015. See Margin and Capital Requirements for Covered Swap 
Entities, 80 FR 74840 (Nov. 30, 2015) (``Prudential Regulators' 
Final Margin Rule'').
    \3\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016). The Final 
Margin Rule, which became effective April 1, 2016, is codified in 
part 23 of the Commission's regulations. See Sec. Sec.  23.150--
23.159 and 23.161. The Commission's regulations are found in Chapter 
I of Title 17 of the Code of Federal Regulations, 17 CFR parts 1 
through 199.
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    Subsequently, on May 31, 2016, the Commission published in the 
Federal Register its final rule with respect to the cross-border 
application of the Commission's margin requirements for uncleared swaps 
applicable to CSEs (hereinafter, the ``Cross-Border Margin Rule'').\4\ 
The Cross-Border Margin Rule sets out the circumstances under which a 
CSE is allowed to satisfy the requirements under the Final Margin Rule 
by complying with comparable foreign margin requirements (``substituted 
compliance''); offers certain CSEs a limited exclusion from the 
Commission's margin requirements; and outlines a framework for 
assessing whether a foreign jurisdiction's margin requirements are 
comparable in outcome to the Final Margin Rule (``comparability 
determinations''). The Commission promulgated the Cross-Border Margin 
Rule after close consultation with the Prudential Regulators and in 
light of comments

[[Page 48395]]

from and discussions with market participants and foreign 
regulators.\5\
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    \4\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants--Cross-Border Application of the Margin 
Requirements, 81 FR 34818 (May 31, 2016). The Cross-Border Margin 
Rule, which became effective August 1, 2016, is codified in part 23 
of the Commission's regulations. See Sec.  23.160.
    \5\ In 2014, in conjunction with re-proposing its margin 
requirements, the Commission requested comment on three alternative 
approaches to the cross-border application of its margin 
requirements: (i) A transaction-level approach consistent with the 
Commission's guidance on the cross-border application of the CEA's 
swap provisions, see Interpretive Guidance and Policy Statement 
Regarding Compliance with Certain Swap Regulations, 78 FR 45292 
(July 26, 2013) (the ``Guidance''); (ii) an approach consistent with 
the Prudential Regulators' proposed cross-border framework for 
margin, see Margin and Capital Requirements for Covered Swap 
Entities, 79 FR 57348 (Sept. 24, 2014); and (iii) an entity-level 
approach that would apply margin rules on a firm-wide basis (without 
any exclusion for swaps with non-U.S. counterparties). See Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants, 79 FR 59898 (Oct. 3, 2014). Following a review of 
comments received in response to this release, the Commission's 
Global Markets Advisory Committee (``GMAC'') hosted a public panel 
discussion on the cross-border application of margin requirements. 
See GMAC Meeting (May 14, 2015), transcript and webcast available at 
http://www.cftc.gov/PressRoom/Events/opaevent_gmac051415.
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    On November 22, 2016, the EC (the ``applicant'') submitted a 
request that the Commission determine that laws and regulations 
applicable in the EU provide a sufficient basis for an affirmative 
finding of comparability with respect to the Final Margin Rule.\6\ The 
Commission's analysis and comparability determination for the EU 
regarding the Final Margin Rule is detailed below.
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    \6\ The Commission understands that competent authorities in the 
individual EU Member States have direct supervisory authority over 
CSEs in their respective Member State with respect to the EU margin 
requirements (as defined below) and are responsible for 
administering those margin requirements. Nevertheless, given that 
the EU comprises the Member States and the EU margin requirements 
are directly applicable in the Member States, the Commission 
recognizes the EC as the relevant foreign regulatory authority for 
purposes of Sec.  23.160(c)(1)(ii).
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II. Cross-Border Margin Rule

A. Regulatory Objective of Margin Requirements

    The regulatory objective of the Final Margin Rule is to further the 
congressional mandate to ensure the safety and soundness of CSEs in 
order to offset the greater risk to CSEs and the financial system 
arising from the use of swaps that are not cleared.\7\ As the 
Commission has previously stated, the primary function of margin is to 
protect a CSE from counterparty default, allowing it to absorb losses 
and continue to meet its obligations using collateral provided by the 
defaulting counterparty. While the requirement to post margin protects 
the counterparty in the event of the CSE's default, it also functions 
as a risk management tool, limiting the amount of leverage a CSE can 
utilize by requiring that it have adequate eligible collateral to enter 
into an uncleared swap. In this way, margin serves as a first line of 
defense not only in protecting the CSE but in containing the amount of 
risk in the financial system as a whole, reducing the potential for 
contagion arising from uncleared swaps.\8\
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    \7\ See 7 U.S.C. 6s(e)(3)(A).
    \8\ See Final Margin Rule, 81 FR 689.
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    However, the global nature of the swap market, coupled with the 
interconnectedness of market participants, also necessitate that the 
Commission recognize the supervisory interests of foreign regulatory 
authorities and consider the impact of its choices on market efficiency 
and competition, which the Commission believes are vital to a well-
functioning global swap market.\9\ Foreign jurisdictions are at various 
stages of implementing margin reforms. To the extent that other 
jurisdictions adopt requirements with different coverage or timelines, 
the Commission's margin requirements may lead to competitive burdens 
for U.S. entities and deter non-U.S. persons from transacting with U.S. 
CSEs and their affiliates overseas.
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    \9\ In determining the extent to which the Dodd-Frank swap 
provisions apply to activities overseas, the Commission strives to 
protect U.S. interests, as determined by Congress in Title VII, and 
minimize conflicts with the laws of other jurisdictions, consistent 
with principles of international comity. See Guidance, 78 FR 45300-
45301 (referencing the Restatement (Third) of Foreign Relations Law 
of the United States).
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B. Substituted Compliance

    To address these concerns, the Cross-Border Margin Rule provides 
that, subject to certain findings and conditions, a CSE is permitted to 
satisfy the requirements of the Final Margin Rule by complying with the 
margin requirements in the relevant foreign jurisdiction. This 
substituted compliance regime is intended to address the concerns 
discussed above without compromising the congressional mandate to 
protect the safety and soundness of CSEs and the stability of the U.S. 
financial system. Substituted compliance helps preserve the benefits of 
an integrated, global swap market by reducing the degree to which 
market participants will be subject to multiple sets of regulations. 
Further, substituted compliance builds on international efforts to 
develop a global margin framework.\10\
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    \10\ In October 2011, the Basel Committee on Banking Supervision 
(``BCBS'') and the International Organization of Securities 
Commissions (``IOSCO''), in consultation with the Committee on 
Payment and Settlement Systems and the Committee on Global Financial 
Systems, formed a Working Group on Margining Requirements to develop 
international standards for margin requirements for uncleared swaps. 
Representatives of 26 regulatory authorities participated, including 
the Commission. In September 2013, the Working Group on Margin 
Requirements published a final report articulating eight key 
principles for non-cleared derivatives margin rules. These 
principles represent the minimum standards approved by BCBS and 
IOSCO and their recommendations to the regulatory authorities in 
member jurisdictions. See BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (updated March 2015) (``BCBS/IOSCO 
Framework''), available at http://www.bis.org/bcbs/publ/d317.pdf.
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    Pursuant to the Cross-Border Margin Rule, any CSE that is eligible 
for substituted compliance under Sec.  23.160 \11\ and any foreign 
regulatory authority that has direct supervisory authority over one or 
more CSEs and that is responsible for administering the relevant 
foreign jurisdiction's margin requirements may apply to the Commission 
for a comparability determination.\12\
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    \11\ See Sec.  23.160(c)(1)(i).
    \12\ See Sec.  23.160(c)(1)(ii).
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    The Cross-Border Margin Rule requires that applicants for a 
comparability determination provide copies of the relevant foreign 
jurisdiction's margin requirements \13\ and descriptions of their 
objectives,\14\ how they differ from the BCBS/IOSCO Framework,\15\ and 
how they address the elements of the Commission's margin 
requirements.\16\ The applicant must identify the specific legal and 
regulatory provisions of the foreign jurisdiction's margin requirements 
that correspond to each element and, if necessary, whether the relevant 
foreign jurisdiction's margin requirements do not address a particular 
element.\17\
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    \13\ See Sec.  23.160(c)(2)(v).
    \14\ See Sec.  23.160(c)(2)(i).
    \15\ See Sec.  23.160(c)(2)(iii). See also Sec.  23.160(a)(3) 
(defining ``international standards'' as based on the BCBS-ISOCO 
Framework).
    \16\ See 17 CFR 23.160(c)(2)(ii) (identifying 12 particular 
elements of the Commission's margin requirements). Section 
23.160(c)(2)(ii) largely tracks the elements of the BCBS/IOSCO 
Framework but breaks them down into their components as appropriate 
to ensure ease of application.
    \17\ See id.
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C. Standard of Review for Comparability Determinations

    The Cross-Border Margin Rule identifies certain key factors that 
the Commission will consider in making a comparability determination. 
Specifically, the Commission will consider the scope and objectives of 
the relevant foreign jurisdiction's margin requirements; \18\ whether 
the relevant foreign jurisdiction's margin requirements achieve 
comparable outcomes to the Commission's

[[Page 48396]]

corresponding margin requirements; \19\ and the ability of the relevant 
regulatory authority or authorities to supervise and enforce compliance 
with the relevant foreign jurisdiction's margin requirements.\20\
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    \18\ See Sec.  23.160(c)(3)(i).
    \19\ See Sec.  23.160(c)(3)(ii). As discussed above, the 
Commission's Final Margin Rule is based on the BCBS/IOSCO Framework; 
therefore, the Commission expects that the relevant foreign margin 
requirements would conform to such Framework at minimum in order to 
be deemed comparable to the Commission's corresponding margin 
requirements.
    \20\ See Sec.  23.160(c)(3)(iii). See also Sec.  
23.160(c)(3)(iv) (indicating the Commission would also consider any 
other relevant facts and circumstances).
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    This process reflects an outcomes-based approach to assessing the 
comparability of a foreign jurisdiction's margin requirements. Instead 
of demanding strict uniformity with the Commission's margin 
requirements, the Commission evaluates the objectives and outcomes of 
the foreign margin requirements in light of foreign regulator(s)' 
supervisory and enforcement authority. Recognizing that jurisdictions 
may adopt different approaches to achieving the same outcome, the 
Commission will focus on whether the foreign jurisdiction's margin 
requirements are comparable to the Commission's in purpose and effect, 
not whether they are comparable in every aspect or contain identical 
elements.
    In keeping with the Commission's commitment to international 
coordination on margin requirements for uncleared derivatives, the 
Commission believes that the standards it has established are fully 
consistent with the BCBS/IOSCO Framework.\21\ Accordingly, where 
relevant to the Commission's comparability analysis, the BCBS/IOSCO 
Framework is discussed to explain certain internationally agreed upon 
concepts.
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    \21\ The Final Margin Rule was modified substantially from its 
proposed form to further align the Commission's margin requirements 
with the BCBS/IOSCO Framework and, as a result, the potential for 
conflict with foreign margin requirements should be reduced. For 
example, the Final Margin Rule raised the material swaps exposure 
level from $3 billion to the BCBS/IOSCO standard of $8 billion, 
which reduces the number of entities that must collect and post 
initial margin. See Final Margin Rule, 81 FR at 644. In addition, 
the definition of uncleared swap was amended to not include swaps 
cleared by derivatives clearing organizations that are not 
registered with the Commission but pursuant to Commission orders are 
permitted to clear for U.S. persons. See id. at 638. The Commission 
notes, however, that the BCBS/IOSCO Framework leaves certain 
elements open to interpretation (e.g., the definition of 
``derivative'') and expressly invites regulators to build on certain 
principles as appropriate. See, e.g., Element 4 (eligible 
collateral) (national regulators should ``develop their own list of 
eligible collateral assets based on the key principle, taking into 
account the conditions of their own markets''); Element 5 (initial 
margin) (the degree to which margin should be protected would be 
affected by ``the local bankruptcy regime, and would vary across 
jurisdictions''); Element 6 (transactions with affiliates) 
(``Transactions between a firm and its affiliates should be subject 
to appropriate regulation in a manner consistent with each 
jurisdiction's legal and regulatory framework.'').
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    The Cross-Border Margin Rule provided a detailed discussion 
regarding the facts and circumstances under which substituted 
compliance for the requirements under the Final Margin Rule would be 
available and such discussion is not repeated here. CSEs seeking to 
rely on substituted compliance based on the comparability 
determinations contained herein are responsible for determining whether 
substituted compliance is available under the Cross-Border Margin Rule 
with respect to the CSE's particular status and circumstances.

D. Conditions to Comparability Determinations

    The Cross-Border Margin Rule provides that the Commission may 
impose terms and conditions it deems appropriate in issuing a 
comparability determination.\22\ Specific terms and conditions with 
respect to margin requirements are discussed in the Commission's 
determinations detailed below.
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    \22\ See 17 CFR 23.160(c)(5).
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    As a general condition to all determinations, however, the 
Commission requires notification of any material changes to information 
submitted to the Commission by the applicant in support of a 
comparability finding, including, but not limited to, changes in the 
relevant foreign jurisdiction's supervisory or regulatory regime. The 
Commission also expects that the relevant foreign regulator will enter 
into, or will have entered into, an appropriate memorandum of 
understanding or similar arrangement with the Commission in connection 
with a comparability determination.\23\
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    \23\ Under Commission regulations 23.203 and 23.606, CSEs must 
maintain all records required by the CEA and the Commission's 
regulations in accordance with Commission regulation 1.31 and keep 
them open for inspection by representatives of the Commission, the 
U.S. Department of Justice, or any applicable prudential regulator. 
See 17 CFR 23.203, 23.606. The Commission further expects that 
prompt access to books and records and the ability to inspect and 
examine a non-U.S. CSE will be a condition to any comparability 
determination.
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    Finally, the Commission will generally rely on an applicant's 
description of the laws and regulations of the foreign jurisdiction in 
making its comparability determination. The Commission considers an 
application to be a representation by the applicant that the laws and 
regulations submitted are finalized,\24\ that the description of such 
laws and regulations is accurate and complete, and that, unless 
otherwise noted, the scope of such laws and regulations encompasses the 
swaps activities \25\ of CSEs \26\ in the relevant jurisdictions.\27\ 
Further, the Commission requires that an applicant would 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 supervisory or regulatory regime) as, depending 
on the nature of the change, the Commission's comparability 
determination may no longer be valid.\28\
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    \24\ The Commission notes that finalized rules of the foreign 
jurisdiction must be in full force and effect before a CSE may rely 
on this comparability determination for purposes of substituted 
compliance.
    \25\ ``Swaps activities'' is defined in Commission regulation 
23.600(a)(7) to mean, ``with respect to a registrant, such 
registrant's activities related to swaps and any product used to 
hedge such swaps, including, but not limited to, futures, options, 
other swaps or security-based swaps, debt or equity securities, 
foreign currency, physical commodities, and other derivatives.'' The 
Commission's regulations under 17 CFR part 23 are limited in scope 
to the swaps activities of CSEs.
    \26\ No CSE that is not legally required to comply with a law or 
regulation determined to be comparable may voluntarily comply with 
such law or regulation in lieu of compliance with the CEA and the 
relevant Commission regulation. Each CSE that seeks to rely on a 
comparability determination is responsible for determining whether 
it is subject to the laws and regulations found comparable.
    \27\ The Commission has provided the relevant foreign 
regulator(s) with opportunities to review and correct the 
applicant's description of such laws and regulations on which the 
Commission will base its comparability determination. The Commission 
relies on the accuracy and completeness of such review and any 
corrections received in making its comparability determinations. A 
comparability determination based on an inaccurate description of 
foreign laws and regulations may not be valid.
    \28\ 78 FR 45345.
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III. Margin Requirements for Swaps Activities in the EU

    As represented to the Commission by the applicant, margin 
requirements for swap activities in the EU are governed by the 
Regulatory Technical Standards for Risk-Mitigation Techniques for OTC 
Derivative Contracts Not Cleared by a Central Counterparty 
(``RTS'').\29\ The RTS supplement the requirements of EMIR with a more 
detailed direction

[[Page 48397]]

with respect to margin requirements \30\ and are directly applicable in 
all countries that are members of the EU (each country a ``Member 
State''). Article 12 of EMIR further gives Member States the authority 
to ``lay down the rules on penalties'' that apply to infringements of 
the RTS and to take all measures necessary to ensure that those rules 
are implemented.\31\
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    \29\ Regulation No. 2016/2251 of October 4, 2016 Supplementing 
Regulation (EU) No 648/2012 of the European Parliament and of the 
Council of July 4, 2012 on OTC Derivatives, Central Counterparties 
and Trade Repositories with Regard to Regulatory Technical Standards 
for Risk-Mitigation Techniques for OTC Derivative Contracts Not 
Cleared by a Central Counterparty (as corrected by Commission 
Delegated Regulation (EU) 2017/323 of January 20, 2017). Regulation 
(EU) No 648/2012 of the European Parliament and the Council of July 
4, 2012 is more commonly known as the European Market Infrastructure 
Regulation or ``EMIR.''
    \30\ Together, EMIR and RTS are referred to herein as the ``EU 
margin rules,'' ``the EU's margin regime,'' ``EU margin 
requirements'' or the ``laws of the EU.''
    \31\ See RTS, Article 40 and EMIR, Article 12(1).
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IV. Comparability Analysis

    The following section describes the regulatory objectives of the 
Commission's requirements with respect to margin for uncleared swaps 
imposed by the CEA and the Final Margin Rule and a description of such 
requirements. Immediately following a description of the requirement(s) 
of the Final Margin Rule for which a comparability determination was 
requested by the applicant, the Commission provides a description of 
the foreign jurisdiction's comparable laws, regulations, or rules. The 
Commission then provides a discussion of the comparability of, or 
differences between, the Final Margin Rule and the foreign 
jurisdiction's laws, regulations, or rules.

A. Objectives of Margin Requirements

1. Commission Statement of Regulatory Objectives
    The regulatory objectives of the Final Margin Rule are to ensure 
the safety and soundness of CSEs in order to offset the greater risk to 
CSEs and the financial system arising from the use of swaps that are 
not cleared. The primary function of margin is to protect a CSE from 
counterparty default, allowing it to absorb losses and continue to meet 
its obligations using collateral provided by the defaulting 
counterparty. While the requirement to post margin protects the 
counterparty in the event of the CSE's default, it also functions as a 
risk management tool, limiting the amount of leverage a CSE can incur 
by requiring that it have adequate eligible collateral to enter into an 
uncleared swap. In this way, margin serves as a first line of defense, 
not only in protecting the CSE, but in containing the amount of risk in 
the financial system as a whole, reducing the potential for contagion 
arising from uncleared swaps.\32\
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    \32\ See Cross-Border Margin Rule, 81 FR 34819.
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2. EC Statement of Regulatory Objectives
    The applicant states that, in the absence of clearing of OTC 
derivatives by a CCP, it is essential that counterparties apply robust 
risk-mitigation techniques to their bilateral relationships to reduce 
counterparty credit risk and to mitigate the potential systemic risk 
that could arise. Article 11 of EMIR prescribes risk-mitigation 
techniques for OTC derivative contracts not cleared by a CCP. The RTS 
supplement EMIR with regard to regulatory technical standards for risk-
mitigation techniques for OTC derivative contracts not cleared by a CCP 
and take into account the Basel Committee-IOSCO margin framework for 
non-centrally cleared OTC derivatives and the Basel Committee 
guidelines for managing settlement risk in foreign exchange 
transactions.\33\
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    \33\ See RTS, Explanatory Memorandum at 3.
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B. Products Subject to Margin Requirements

    The Commission's Final Margin Rule applies only to uncleared swaps. 
Swaps are defined in section 1a(47) of the CEA \34\ and Commission 
regulations.\35\ ``Uncleared swap'' is defined for purposes of the 
Final Margin Rule in Commission regulation Sec.  23.151 to mean a swap 
that is not cleared by a registered derivatives clearing organization, 
or by a clearing organization that the Commission has exempted from 
registration by rule or order pursuant to section 5b(h) of the Act.\36\
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    \34\ 7 U.S.C. 1a(47).
    \35\ See, e.g., Sec.  1.3(xxx), 17 CFR 1.3(xxx).
    \36\ 17 CFR 23.151.
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    The EU's margin rules apply to OTC derivatives not cleared by a CCP 
(``non-centrally cleared OTC derivative'').\37\ ``Derivative'' for 
purposes of the EU margin rules is defined in Article 2(5) of EMIR as a 
financial instrument as set out in points (4) to (10) of Section C of 
Annex I to MIFID \38\ as implemented by Articles 38 and 39 of EU 
Regulation No. 1287/2006.\39\ Initial margin need not be collected for 
physically-settled foreign exchange forwards, physically-settled 
foreign exchange swaps, or cross-currency swaps.\40\ Regarding covered 
bonds for hedging purposes, no variation margin needs to be posted by a 
covered bond issuer or covered pool but must be collected from a 
counterparty in cash and returned to a counterparty when due, and no 
initial margin required.\41\
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    \37\ See EMIR, Article 11(1) and RTS, Recital (1). CCP is 
defined in Article 2(1) of EMIR to mean ``a legal person that 
interposes itself between the counterparties to the contracts traded 
on one or more financial markets, becoming the buyer to every seller 
and the seller to every buyer.''
    \38\ Under MiFID, such financial instruments are: (4) Options, 
futures, swaps, forward rate agreements and any other derivative 
contracts relating to securities, currencies, interest rates or 
yields, or other derivatives instruments, financial indices or 
financial measures which may be settled physically or in cash; (5) 
Options, futures, swaps, forward rate agreements and any other 
derivative contracts relating to commodities that must be settled in 
cash or may be settled in cash at the option of one of the parties 
(otherwise than by reason of a default or other termination event); 
(6) Options, futures, swaps, and any other derivative contract 
relating to commodities that can be physically settled provided that 
they are traded on a regulated market and/or an MTF; (7) Options, 
futures, swaps, forwards and any other derivative contracts relating 
to commodities, that can be physically settled not otherwise 
mentioned in C.6 and not being for commercial purposes, which have 
the characteristics of other derivative financial instruments, 
having regard to whether, inter alia, they are cleared and settled 
through recognised clearing houses or are subject to regular margin 
calls; (8) Derivative instruments for the transfer of credit risk; 
(9) Financial contracts for differences; (10) Options, futures, 
swaps, forward rate agreements and any other derivative contracts 
relating to climatic variables, freight rates, emission allowances 
or inflation rates or other official economic statistics that must 
be settled in cash or may be settled in cash at the option of one of 
the parties (otherwise than by reason of a default or other 
termination event), as well as any other derivative contracts 
relating to assets, rights, obligations, indices and measures not 
otherwise mentioned in this Section, which have the characteristics 
of other derivative financial instruments, having regard to whether, 
inter alia, they are traded on a regulated market or an MTF, are 
cleared and settled through recognised clearing houses or are 
subject to regular margin calls. See MiFID, Annex I, Section C(4)-
(10).
    \39\ Article 38 of EU Regulation No. 1287/2006 further defines 
the financial instruments described in Point (7) of Section C of 
Annex I to MiFID to generally be physically-settled FX forwards and 
swaps. Article 39 of EU Regulation No. 1287/2006 further refines the 
definition of financial instruments described in Point (10) of 
Section C of Annex I to MiFID to generally be exchanges of principal 
of currency swaps.
    \40\ See RTS, Article 27.
    \41\ See RTS, Article 30.
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    An OTC derivative is a derivative which is not executed on a 
regulated market or on a third-country market considered as equivalent 
to a regulated market.\42\ While it is beyond the scope of this 
comparability determination to definitively map any differences between 
the definitions of ``swap'' and ``uncleared swap'' under the CEA and 
Commission regulations and the EU's definitions of ``OTC derivative'' 
and ``non-centrally cleared OTC derivative,'' the Commission believes 
that such definitions largely cover the same products and instruments.
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    \42\ See EMIR, Article 2(7).
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    However, because the definitions are not identical, the Commission 
recognizes the possibility that a CSE may enter into a transaction that 
is an uncleared swap as defined in the CEA and Commission regulations, 
but that is not a non-centrally cleared OTC

[[Page 48398]]

derivative as defined under the laws of the EU. In such cases, the 
Final Margin Rule would apply to the transaction but the EU's margin 
rules would not apply and thus, substituted compliance would not be 
available. The CSE could not choose to comply with the EU's margin 
rules in place of the Final Margin Rule.
    Likewise, if a transaction is a non-centrally cleared OTC 
derivative as defined under the laws of the EU but not an uncleared 
swap subject to the Final Margin Rule, a CSE could not choose to comply 
with the Final Margin Rule pursuant to this determination, unless the 
EU determines that it will permit the EU entity to follow the 
Commission's margin requirements. CSEs are solely responsible for 
determining whether a particular transaction is both an uncleared swap 
and a non-centrally cleared OTC derivative before relying on 
substituted compliance under the comparability determinations set forth 
below.

C. Entities Subject to Margin Requirements

    As stated previously, the Commission's Final Margin Rule and Cross-
Border Margin Rule apply only to CSEs, i.e., SDs and MSPs registered 
with the Commission for which there is not a Prudential Regulator.\43\ 
Thus, only such CSEs may rely on the determinations herein for 
substituted compliance, while CSEs for which there is a Prudential 
Regulator must look to the determinations of the Prudential Regulators.
---------------------------------------------------------------------------

    \43\ See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for which there is a 
Prudential Regulator must meet the margin requirements for uncleared 
swaps established by the applicable Prudential Regulator. 7 U.S.C. 
6s(e)(1)(A). See also 7 U.S.C. 1a(39) (defining the term 
``Prudential Regulator'' to include the Board of Governors of the 
Federal Reserve System; the Office of the Comptroller of the 
Currency; the Federal Deposit Insurance Corporation; the Farm Credit 
Administration; and the Federal Housing Finance Agency). The 
Prudential Regulators published final margin requirements in 
November 2015. See Prudential Regulators' Final Margin Rule, 80 FR 
74840 (Nov. 30, 2015).
---------------------------------------------------------------------------

    CSEs are not required to collect and/or post margin with every 
uncleared swap counterparty. Under the Final Margin Rule, the initial 
margin obligations of CSEs apply only to uncleared swaps with 
counterparties that meet the definition of ``covered counterparty'' in 
Sec.  23.151.\44\ Such definition provides that a ``covered 
counterparty'' is a counterparty that is a financial end user \45\ with 
material swaps exposure \46\ or a swap entity \47\ that enters into a 
swap with a CSE. The variation margin obligations of CSEs under the 
Final Margin Rule apply more broadly. Such obligations apply to 
counterparties that are swap entities and all financial end users, 
regardless of their level of material swaps exposure.\48\
---------------------------------------------------------------------------

    \44\ See Sec.  23.152.
    \45\ See definition of ``Financial end user'' in Sec.  23.150.
    \46\ See Sec.  23.150, which states that ``material swaps 
exposure'' for an entity means that the entity and its margin 
affiliates have an average daily aggregate notional amount of 
uncleared swaps, uncleared security-based swaps, foreign exchange 
forwards, and foreign exchange swaps with all counterparties for 
June, July and August of the previous calendar year that exceeds $8 
billion, where such amount is calculated only for business days. 
That provision further states that an entity shall count the average 
daily aggregate notional amount of an uncleared swap, an uncleared 
security-based swap, a foreign exchange forward, or a foreign 
exchange swap between the entity and a margin affiliate only one 
time. For purposes of this calculation, an entity shall not count a 
swap that is exempt pursuant to Sec.  23.150(b) or a security-based 
swap that qualifies for an exemption under section 3C(g)(10) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(4)) and 
implementing regulations or that satisfies the criteria in section 
3C(g)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 78-
c3(g)(4)) and implementing regulations.
    \47\ ``Swap entity'' is defined in Sec.  23.150 as a person that 
is registered with the Commission as a swap dealer or major swap 
participant pursuant to the Act.
    \48\ See Sec.  23.153.
---------------------------------------------------------------------------

    As represented by the applicant, the EU's margin rules apply to all 
financial counterparties, which include investment firms, credit 
institutions, insurance companies, and alternative investment funds 
that are authorized or registered in accordance with various EU 
directives (``FC'').\49\ CCPs not authorized as credit institutions are 
outside the scope of Article 11 of EMIR and CCPs authorized as credit 
institutions are exempt from the RTS.\50\ The EU's margin rules also 
apply to non-financial counterparties (any EU entity other than an FC 
or a CCP \51\) (``NFC'') that are above a certain clearing threshold 
(``NFC+'').\52\ Under the EU rules, no margin is required for non-
centrally cleared OTC derivatives with NFCs that fall below the 
clearing threshold (``NFC-'') or non-EU entities that would be NFC-s if 
established in the EU.\53\ However, under the EU margin rules, 
counterparties must take into account the different risk profiles of 
NFC-s when entering into non-centrally cleared OTC derivatives with 
such counterparties and determine whether or not the level of 
counterparty credit risk posed by those NFC-s needs to be mitigated 
through the exchange of collateral.\54\ Like the Final Margin Rule, the 
EU margin rules include a threshold under which initial margin 
requirements will not apply, while the variation margin requirements 
apply more broadly.\55\
---------------------------------------------------------------------------

    \49\ See EMIR, Article 11 (Risk-Mitigation Techniques for OTC 
Derivative Contracts Not Cleared by a CCP). While the definition of 
``financial counterparty'' under EMIR includes credit institutions 
authorized in accordance with Directive 2006/48/EU, CCPs that are 
authorized as credit institutions are exempted from the EU's margin 
rules. See RTS, Article 23. As explained in the RTS, since CCPs 
might be authorized as a credit institution according to Union 
legislation, it is necessary to excluded non-centrally cleared OTC 
derivative contracts that CCPs enter into during a default 
management process from the requirements of this Regulation since 
those contracts are already subject to the provisions of Commission 
Delegated Regulation (EU) No 153/2013 and therefore they are not 
subject to the provisions of these Regulations.
    \50\ See RTS, Article 23.
    \51\ See EMIR, Article 2(9).
    \52\ See EMIR, Article 11(3) (``[NFCs] . . . shall have risk-
management procedures that require the timely, accurate and 
appropriately segregated exchange of collateral with respect to OTC 
derivative contracts that are entered into on or after the clearing 
threshold is exceeded.''). The clearing threshold values are 
measured by asset class as follows:
    (a) EUR 1 billion in gross notional value for OTC credit 
derivative contracts;
    (b) EUR 1 billion in gross notional value for OTC equity 
derivative contracts;
    (c) EUR 3 billion in gross notional value for OTC interest rate 
derivative contracts;
    (d) EUR 3 billion in gross notional value for OTC foreign 
exchange derivative contracts;
    (e) EUR 3 billion in gross notional value for OTC commodity 
derivative contracts and other OTC derivative contracts not provided 
for under points (a) to (d).
    See Article 11 of Commission Delegated Regulation (EU) No 149/
2013 of December 19, 2012 Supplementing EMIR with Regard to 
Regulatory Technical Standards on Indirect Clearing Arrangements, 
the Clearing Obligation, the Public Register, Access to a Trading 
Venue, Non-Financial Counterparties, and Risk Mitigation Techniques 
for Uncleared OTC Derivatives (pursuant to Article 10(4)(b) of 
EMIR).
    \53\ See RTS, Article 24.
    \54\ See RTS, Recital (2).
    \55\ See RTS, Article 28, stating: Counterparties may provide in 
their risk management procedures that initial margins are not 
collected for all new OTC derivative contracts entered into within a 
calendar year where one of the two counterparties has an aggregate 
month-end average notional amount of non-centrally cleared OTC 
derivatives for the months March, April and May of the preceding 
year of below EUR 8 billion. The aggregate month-end average 
notional amount referred to in the first subparagraph shall be 
calculated at the counterparty level or at the group level where the 
counterparty belongs to a group.
---------------------------------------------------------------------------

    Given the definitional differences and differences in activity 
thresholds with respect to the scope of application of the Final Margin 
Rule and the EU's margin requirements, the Commission notes the 
possibility that the Final Margin Rule and the EU's margin rules may 
not apply to every uncleared swap that a CSE may enter into with a EU 
counterparty. For example, it appears possible that a financial end 
user with ``material swaps exposure'' would meet the definition of 
``covered counterparty'' under the Final Margin Rule (and thus the 
initial and variation margin

[[Page 48399]]

requirements) while at the same time fall under the EU's clearing 
threshold (an NFC-) and not be subject the EU margin requirements. It 
may also be possible that the Final Margin Rule's definition of 
``financial end user'' could capture an entity that is an NFC under the 
EU's margin regime.
    With these differences in scope in mind, the Commission reiterates 
that no CSE may rely on substituted compliance unless it and its 
transaction are subject to both the Final Margin Rule and the EU's 
margin rules; a CSE may not voluntarily comply with the EU's margin 
rules where such law does not otherwise apply. Likewise, a CSE that is 
not seeking to rely on substituted compliance should understand that 
the EU's margin rules may apply to its counterparty irrespective of the 
CSE's decision to comply with the Final Margin Rule.

D. Treatment of Inter-Affiliate Derivative Transactions

    The BCBS/IOSCO Framework recognizes that the treatment of inter-
affiliate derivative transactions will vary between jurisdictions. 
Thus, the BCBS/IOSCO Framework does not set standards with respect to 
the treatment of inter-affiliate transactions. Rather, it recommends 
that regulators in each jurisdiction review their own legal frameworks 
and market conditions and put in place margin requirements applicable 
to inter-affiliate transactions as appropriate.\56\
---------------------------------------------------------------------------

    \56\ See BCBS/IOSCO Framework, Element 6: Treatment of 
transactions with affiliates.
---------------------------------------------------------------------------

1. Commission Requirements for Treatment of Inter-Affiliate 
Transactions
    The Commission determined through its Final Margin Rule to provide 
rules for swaps between ``margin affiliates.'' In defining ``margin 
affiliate,'' those rules provide that a company is a margin affiliate 
of another company if: (1) Either company consolidates the other on a 
financial statement prepared in accordance with U.S. Generally Accepted 
Accounting Principles, the International Financial Reporting Standards, 
or other similar standards; (2) both companies are consolidated with a 
third company on a financial statement prepared in accordance with such 
principles or standards; or (3) for a company that is not subject to 
such principles or standards, if consolidation as described in (1) or 
(2) would have occurred if such principles or standards had 
applied.\57\
---------------------------------------------------------------------------

    \57\ Sec.  23.151.
---------------------------------------------------------------------------

    With respect to swaps between margin affiliates, the Final Margin 
Rule, with one exception explained below, provides that a CSE is not 
required to collect initial margin \58\ from a margin affiliate 
provided that the CSE meets the following conditions: (i) The swaps are 
subject to a centralized risk management program that is reasonably 
designed to monitor and to manage the risks associated with the inter-
affiliate swaps; and (ii) the CSE exchanges variation margin with the 
margin affiliate.\59\
---------------------------------------------------------------------------

    \58\ ``Initial margin'' is margin exchanged to protect against a 
potential future exposure and is defined in Sec.  23.151 to mean the 
collateral, as calculated in accordance with Sec.  23.154 that is 
collected or posted in connection with one or more uncleared swaps.
    \59\ See Sec.  23.159(a).
---------------------------------------------------------------------------

    In an exception to the foregoing general rule, the Final Margin 
Rule does require CSEs to collect initial margin from non-U.S. 
affiliates that are financial end users that are not subject to initial 
margin collection requirements on their own outward-facing swaps with 
financial end users that are not comparable in outcome to the Final 
Margin Rule.\60\ This provision is an important anti-evasion measure. 
It is designed to prevent the potential use of affiliates to avoid 
collecting initial margin from third parties. For example, suppose that 
an unregistered non-U.S. affiliate of a CSE enters into a swap with a 
financial end user and does not collect initial margin. Suppose further 
that the affiliate then enters into a swap with the CSE. Effectively, 
the risk of the swap with the third party would have been passed to the 
CSE without any initial margin. The rule would require this affiliate 
to post initial margin with the CSE in such cases. The rule would 
further require that the CSE collect initial margin even if the 
affiliate routed the trade through one or more other affiliates.\61\
---------------------------------------------------------------------------

    \60\ See Sec.  23.159(c).
    \61\ See id.
---------------------------------------------------------------------------

    The Commission has stated that its inter-affiliate initial margin 
requirement is consistent with its goal of harmonizing its margin rules 
as much as possible with the BCBS/IOSCO Framework. Such Framework, for 
example, states that the exchange of initial and variation margin by 
affiliated parties ``is not customary'' and that initial margin in 
particular ``would likely create additional liquidity demands.'' \62\ 
With an understanding that many authorities, such as those in Europe 
and Japan, are not expected to require initial margin for inter-
affiliate swaps, the Commission recognized that requiring the posting 
and collection of initial margin for inter-affiliate swaps generally 
would be likely to put CSEs at a competitive disadvantage to firms in 
other jurisdictions.
---------------------------------------------------------------------------

    \62\ See BCBS/IOSCO Framework, Element 6: Treatment of 
transactions with affiliates.
---------------------------------------------------------------------------

    The Final Margin Rule however, does require CSEs to exchange 
variation margin with affiliates that are SDs, MSPs, or financial end 
users (as is also required under the Prudential Regulators' rules).\63\ 
The Commission stated that marking open positions to market each day 
and requiring the posting or collection of variation margin reduces the 
risks of inter-affiliate swaps.
---------------------------------------------------------------------------

    \63\ See Sec.  23.159(b); see also Prudential Regulators' Final 
Margin Rule, 80 FR 74909.
---------------------------------------------------------------------------

2. Requirement for Treatment of Inter-Affiliate Derivatives Under the 
Laws of the EU
    Under Article 11 of EMIR, the EU's margin requirements generally 
apply to intragroup transactions as defined in Article 3 of EMIR. Such 
``intragroup transactions'' are defined differently for intragroup 
transactions in relation to an FC (``FC Intragroup Transactions'') \64\ 
and intragroup transactions in relation to an NFC (``NFC Intragroup 
Transactions'' and, together with FC Intragroup Transactions, 
``Intragroup Transactions'').\65\ What the EU defines

[[Page 48400]]

as Intragroup Transactions is generally in keeping with the 
Commission's definition of ``margin affiliate'' for purposes of the 
Final Margin Rule, discussed above.
---------------------------------------------------------------------------

    \64\ Article 3(2) of EMIR defines an ``intragroup transaction'' 
for an FC to be:
    (a) An OTC derivative contract entered into with another 
counterparty which is part of the same group, provided that the 
following conditions are met:
    (i) The financial counterparty is established in the Union or, 
if it is established in a third country, the Commission has adopted 
an implementing act under Article 13(2) in respect of that third 
country;
    (ii) the other counterparty is a financial counterparty, a 
financial holding company, a financial institution or an ancillary 
services undertaking subject to appropriate prudential requirements;
    (iii) both counterparties are included in the same consolidation 
on a full basis; and
    (iv) both counterparties are subject to appropriate centralised 
risk evaluation, measurement and control procedures;
    (b) an OTC derivative contract entered into with another 
counterparty where both counterparties are part of the same 
institutional protection scheme, referred to in Article 80(8) of 
Directive 2006/48/EC, provided that the condition set out in point 
(a)(ii) of this paragraph is met;
    (c) an OTC derivative contract entered into between credit 
institutions affiliated to the same central body or between such 
credit institution and the central body, as referred to in Article 
3(1) of Directive 2006/48/EC; or
    (d) an OTC derivative contract entered into with a non-financial 
counterparty which is part of the same group provided that both 
counterparties are included in the same consolidation on a full 
basis and they are subject to an appropriate centralised risk 
evaluation, measurement and control procedures and that counterparty 
is established in the Union or in a third-country jurisdiction for 
which the Commission has adopted an implementing act as referred to 
in Article 13(2) in respect of that third country.
    \65\ Article 3(1) of EMIR defines an ``intragroup transaction'' 
for an NFC to be:
    [A]n OTC derivative contract entered into with another 
counterparty which is part of the same group provided that both 
counterparties are included in the same consolidation on a full 
basis and they are subject to an appropriate centralised risk 
evaluation, measurement and control procedures and that counterparty 
is established in the Union or, if it is established in a third 
country, the Commission has adopted an implementing act under 
Article 13(2) in respect of that third country.
---------------------------------------------------------------------------

    For Intragroup Transactions between counterparties established in 
the same Member State, no margin requirements will apply, but only as 
long as there is no legal impediment to the prompt transfer of own 
funds or repayment of liabilities between counterparties.\66\ A legal 
impediment to the prompt transfer of own funds and repayment of 
liabilities shall be deemed to exist where there are actual or foreseen 
restrictions of a legal nature.\67\
---------------------------------------------------------------------------

    \66\ See EMIR, Article 11(5); see also RTS, Article 33 
(Applicable Criteria for the Legal Impediment to the Prompt Transfer 
of Own Funds and Repayment of Liabilities).
    \67\ See RTS, Article 33. Such restrictions include:
    (a) Currency and exchange controls;
    (b) a regulatory, administrative, legal or contractual framework 
that prevents mutual financial support or significantly affects the 
transfer of funds within the group;
    (c) any of the conditions on the early intervention, recovery 
and resolution as referred to in Directive 2014/59/EU of the 
European Parliament and of the Council (1) are met, as a result of 
which the competent authority foresees an impediment to the prompt 
transfer of own funds or repayment of liabilities;
    (d) the existence of minority interests that limit decision-
making power within entities that form the group;
    (e) the nature of the legal structure of the counterparty, as 
defined in its statutes, instruments of incorporation and internal 
rules.
    See RTS, Article 33(a)-(e).
---------------------------------------------------------------------------

    For Intragroup Transactions between counterparties established in 
different Member States, the EU margin rules generally provide, 
depending on the nature and location of the counterparties, that such 
Intragroup Transactions may be excluded from the EU margin requirements 
but only if, in addition to there being no current or legal impediment 
to the prompt transfer of own funds or repayment of liabilities between 
the counterparties, the counterparties (i) have risk management 
procedures that are sound, robust, and consistent with the level of 
complexity of the derivative transaction, and (ii) in keeping with the 
procedures established under the RTS,\68\ the counterparties have 
notified the relevant competent authority \69\ or authorities of the 
intention to use the exemption and the authority or authorities have 
reached a positive decision to allow the exemption.\70\ The 
counterparties to an exempted Intragroup Transaction must publicly 
disclose information about the exemption.\71\
---------------------------------------------------------------------------

    \68\ See RTS, Article 32.
    \69\ See EMIR, Article 2(13) for the definition of ``competent 
authority'' for purposes of the RTS.
    \70\ See EMIR, Article 11(6) to (10).
    \71\ See EMIR, Article 11(11).
---------------------------------------------------------------------------

    Where one of the two counterparties in the group is domiciled in a 
third-country for which an equivalence determination under Article 
13(2) of EMIR has not yet been provided, the group has to exchange 
variation and appropriately segregated initial margins for all the 
Intragroup Transactions with the subsidiaries in those third-
countries.\72\ However, the requirements are delayed for three years in 
these cases.\73\ This is to allow enough time for completion of the 
process to produce the equivalence determinations, while not requiring 
an inefficient allocation of resources to the groups with subsidiaries 
domiciled in third-countries.\74\ Where an equivalence decision has 
been made, counterparties may then apply for an exemption pursuant to 
the timing and process established under EMIR and the RTS.\75\
---------------------------------------------------------------------------

    \72\ See RTS, Recital (40).
    \73\ See RTS, Articles 36 and 37.
    \74\ See RTS, Recital (40).
    \75\ See RTS, Articles 36 and 37.
---------------------------------------------------------------------------

3. Commission Determination
    Having compared the outcomes of the EU's margin requirements 
applicable to Intragroup Transactions to the outcomes of the 
Commission's corresponding margin requirements applicable to inter-
affiliate swaps, the Commission finds that the treatment of inter-
affiliate transactions under the Final Margin Rule and under the EU's 
margin requirements are comparable in outcome.
    A CSE entering into a transaction with a consolidated affiliate 
under the Final Margin Rule would be required to exchange variation 
margin in accordance with Sec. Sec.  23.151 through 23.161, and in 
certain circumstances, collect initial margin in accordance with Sec.  
23.159(c). The Commission continues to deem this provision an important 
anti-evasion measure, designed to prevent the potential use of 
affiliates to avoid collecting initial margin from third parties.\76\ 
In adopting its Final Margin Rule, the Commission recognized that, in 
absence of proper anti-evasion measures, a CSE could import risk from 
another jurisdiction, one with potentially less stringent margin 
protections, through inter-affiliate trades.\77\ In analyzing the EU's 
margin rules, the Commission specifically notes that the EU margin 
rules will apply to inter-affiliate trades involving an affiliate that 
is established in a third-country (non-EU) jurisdiction, unless 
specifically excluded. Any exclusion from the EU margin rules is 
subject to an application process, which would require a finding that 
the relevant non-EU jurisdiction's margin requirements are equivalent. 
This comparability requirement provides protection to the consolidated 
entity, as the consolidated entity would not be able to import risk 
from third country jurisdictions that are not equivalent, without 
posting and collecting initial margin and exchanging variation margin. 
Therefore, the Commission believes that the EU's review process for 
finding comparability in third-country jurisdictions addresses the 
Commission's anti-evasion concerns relating to inter-affiliate 
transactions.
---------------------------------------------------------------------------

    \76\ See Final Margin Rule, 81 FR 674.
    \77\ See id.
---------------------------------------------------------------------------

    In addition, where a CSE and its inter-affiliate counterparty are 
subject to the Commission's margin requirements and the EU's margin 
requirements, all of the EU's margin requirements would apply, 
including the requirement to exchange variation margin, absent meeting 
the specific conditions detailed above. Other than where the two 
counterparties are established in the same Member State, those specific 
conditions involve a process of applying to the relevant Member State 
competent authority(ies) \78\ and receiving a positive determination 
from either or both competent authorities \79\ or upon notification to 
the relevant Member State competent authority(ies) and agreement of 
those competent authorities.\80\ All exemptions are also predicated on 
the absence of any current or foreseen practical or legal impediment to 
the prompt transfer of own funds or repayment of liabilities between 
the counterparties \81\ and on the

[[Page 48401]]

existence of adequately sound and robust risk management practices that 
are consistent with the level of complexity of the derivatives 
transaction.\82\
---------------------------------------------------------------------------

    \78\ RTS, Recital (37) states:
    When a counterparty notifies the relevant competent authority 
regarding its intention to take advantage of the exemption of 
intragroup transactions, in order for the competent authority to 
decide whether the conditions for the exemption are met, the 
counterparty should provide a complete file including all relevant 
information necessary for the competent authority to complete its 
assessment.
    \79\ See EMIR, Article 11(6), (8), and (10).
    \80\ See EMIR, Article 11(7) and (9).
    \81\ See EMIR, Article 11(6)-(10). In addition, RTS, Recital 
(39) states:
    In order for the exemption for intragroup transactions to be 
applicable, it must be certain that no legislative, regulatory, 
administrative or other mandatory provisions of applicable law could 
legally prevent the intragroup counterparties from meeting their 
obligations to transfer monies or repay liabilities or securities 
under the terms of the intragroup transactions. Similarly, there 
should be no operational or business practices of the intragroup 
counterparties or the group that could result in funds not being 
available to meet payment obligations as they fall due on a day-to-
day basis, or in prompt electronic transfer of funds not being 
possible.
    \82\ RTS, Recital (38) states:
    For a group to be deemed to have adequately sound and robust 
risk management procedures, a number of conditions have to be met. 
The group should ensure a regular monitoring of the intragroup 
exposures, and the timely settlement of the obligations resulting 
from the intragroup OTC derivative contracts should be guaranteed 
based on the monitoring and liquidity tools at group level that are 
consistent with the complexity of the intragroup transactions.
---------------------------------------------------------------------------

E. Methodologies for Calculating the Amounts of Initial and Variation 
Margin

    As an overview, the methodologies for calculating initial and 
variation margin as agreed under the BCBS/IOSCO Framework state that 
the margin collected from a counterparty should (i) be consistent 
across entities covered by the requirements and reflect the potential 
future exposure (initial margin) and current exposure (variation 
margin) associated with the particular portfolio of non-centrally 
cleared derivatives, and (ii) ensure that all counterparty risk 
exposures are covered fully with a high degree of confidence.
    With respect to the calculation of initial margin, as a minimum the 
BCBS/IOSCO Framework generally provides that:
    <bullet> Initial margin requirements will not apply to 
counterparties that have less than EUR 8 billion of gross notional in 
outstanding derivatives.
    <bullet> Initial margin may be subject to a EUR 50 million 
threshold applicable to a consolidated group of affiliated 
counterparties.
    <bullet> All margin transfers between parties may be subject to a 
de-minimis minimum transfer amount not to exceed EUR 500,000.
    <bullet> The potential future exposure of a non-centrally cleared 
derivative should reflect an extreme but plausible estimate of an 
increase in the value of the instrument that is consistent with a one-
tailed 99% confidence interval over a 10-day horizon, based on 
historical data that incorporates a period of significant financial 
stress.
    <bullet> The required amount of initial margin may be calculated by 
reference to either (i) a quantitative portfolio margin model or (ii) a 
standardized margin schedule.
    <bullet> When initial margin is calculated by reference to an 
initial margin model, the period of financial stress used for 
calibration should be identified and applied separately for each broad 
asset class for which portfolio margining is allowed.
    <bullet> Models may be either internally developed or sourced from 
the counterparties or third-party vendors but in all such cases, models 
must be approved by the appropriate supervisory authority.
    <bullet> Quantitative initial margin models must be subject to an 
internal governance process that continuously assesses the value of the 
model's risk assessments, tests the model's assessments against 
realized data and experience, and validates the applicability of the 
model to the derivatives for which it is being used.
    <bullet> An initial margin model may consider all of the 
derivatives that are approved for model use that are subject to a 
single legally enforceable netting agreement.
    <bullet> Initial margin models may account for diversification, 
hedging, and risk offsets within well-defined asset classes such as 
currency/rates, equity, credit, or commodities, but not across such 
asset classes and provided these instruments are covered by the same 
legally enforceable netting agreement and are approved by the relevant 
supervisory authority.
    <bullet> The total initial margin requirement for a portfolio 
consisting of multiple asset classes would be the sum of the initial 
margin amounts calculated for each asset class separately.
    <bullet> Derivatives for which a firm faces zero counterparty risk 
require no initial margin to be collected and may be excluded from the 
initial margin calculation.
    <bullet> Where a standardized initial margin schedule is 
appropriate, it should be computed by multiplying the gross notional 
size of a derivative by the standardized margin rates provided under 
the BCBS/IOSCO Framework and adjusting such amount by the ratio of the 
net current replacement cost to gross current replacement cost (NGR) 
pertaining to all derivatives in a legally enforceable netting set. The 
BCBS/IOSCO Framework provides the following standardized margin rates: 
\83\
---------------------------------------------------------------------------

    \83\ See BCBS/IOSCO Framework.

------------------------------------------------------------------------
                                                         Initial margin
                                                       requirement (% of
                     Asset class                            notional
                                                           exposure)
------------------------------------------------------------------------
Credit:
   0-2 year duration.................................                  2
  2-5 year duration..................................                  5
  5+ year duration...................................                 10
Commodity............................................                 15
Equity...............................................                 15
Foreign exchange.....................................                  6
Interest rate:
  0-2 year duration..................................                  1
  2-5 year duration..................................                  2
  5+ year duration...................................                  4
Other................................................                 15
------------------------------------------------------------------------

    <bullet> For a regulated entity that is already using a schedule-
based margin to satisfy requirements under its required capital regime, 
the appropriate supervisory authority may permit the use of the same 
schedule for initial margin purposes, provided that it is at least as 
conservative.
    <bullet> The choice between model- and schedule-based initial 
margin calculations should be made consistently over time for all 
transactions within the same well defined asset class.
    <bullet> Initial margin should be collected at the outset of a 
transaction, and collected thereafter on a routine and consistent basis 
upon changes in measured potential future exposure, such as when trades 
are added to or subtracted from the portfolio.
    <bullet> In the event that a margin dispute arises, both parties 
should make all necessary and appropriate efforts, including timely 
initiation of dispute resolution protocols, to resolve the dispute and 
exchange the required amount of initial margin in a timely fashion.
    With respect to the calculation of variation margin, as a minimum 
the BCBS/IOSCO Framework generally provides that:
    <bullet> The full amount necessary to fully collateralize the mark-
to-market exposure of the non-centrally cleared derivatives must be 
exchanged.
    <bullet> Variation margin should be calculated and exchanged for 
derivatives subject to a single, legally enforceable netting agreement 
with sufficient frequency (e.g., daily).
    <bullet> In the event that a margin dispute arises, both parties 
should make all necessary and appropriate efforts, including timely 
initiation of dispute resolution protocols, to resolve the dispute and 
exchange the required amount of variation margin in a timely fashion.
1. Commission Requirement for Calculation of Initial Margin
    In keeping with the BCBS/IOSCO Framework described above, with 
respect to the calculation of initial

[[Page 48402]]

margin, the Commission's Final Margin Rule generally provides that:
    <bullet> Initial margin is intended to address potential future 
exposure, i.e., in the event of a counterparty default, initial margin 
protects the non-defaulting party from the loss that may result from a 
swap or portfolio of swaps, during the period of time needed to close 
out the swap(s).\84\
---------------------------------------------------------------------------

    \84\ See Final Margin Rule, 81 FR 683.
---------------------------------------------------------------------------

    <bullet> Potential future exposure is to be an estimate of the one-
tailed 99% confidence interval for an increase in the value of the 
uncleared swap or netting portfolio of uncleared swaps due to an 
instantaneous price shock that is equivalent to a movement in all 
material underlying risk factors, including prices, rates, and spreads, 
over a holding period equal to the shorter of 10 business days or the 
maturity of the swap or netting portfolio.\85\
---------------------------------------------------------------------------

    \85\ See Sec.  23.154(b)(2)(i).
---------------------------------------------------------------------------

    <bullet> The required amount of initial margin may be calculated by 
reference to either (i) a risk-based margin model or (ii) a table-based 
method.\86\
---------------------------------------------------------------------------

    \86\ See Sec.  23.154(a)(1)(i) and (ii).
---------------------------------------------------------------------------

    <bullet> All data used to calibrate the initial margin model shall 
incorporate a period of significant financial stress for each broad 
asset class that is appropriate to the uncleared swaps to which the 
initial margin model is applied.\87\
---------------------------------------------------------------------------

    \87\ See Sec.  23.154(b)(2)(ii).
---------------------------------------------------------------------------

    <bullet> CSEs shall obtain the written approval of the Commission 
or a registered futures association to use a model to calculate the 
initial margin required.\88\
---------------------------------------------------------------------------

    \88\ See Sec.  23.154(b)(1)(i).
---------------------------------------------------------------------------

    <bullet> An initial margin model may calculate initial margin for a 
netting portfolio of uncleared swaps covered by the same eligible 
master netting agreement.\89\
---------------------------------------------------------------------------

    \89\ See Sec.  23.154(b)(2)(v).
---------------------------------------------------------------------------

    <bullet> An initial margin model may reflect offsetting exposures, 
diversification, and other hedging benefits for uncleared swaps that 
are governed by the same eligible master netting agreement by 
incorporating empirical correlations within the following broad risk 
categories, provided the CSE validates and demonstrates the 
reasonableness of its process for modeling and measuring hedging 
benefits: Commodity, credit, equity, and foreign exchange or interest 
rate.\90\
---------------------------------------------------------------------------

    \90\ See id.
---------------------------------------------------------------------------

    <bullet> Empirical correlations under an eligible master netting 
agreement may be recognized by the model within each broad risk 
category, but not across broad risk categories.\91\
---------------------------------------------------------------------------

    \91\ See id.
---------------------------------------------------------------------------

    <bullet> If the initial margin model does not explicitly reflect 
offsetting exposures, diversification, and hedging benefits between 
subsets of uncleared swaps within a broad risk category, the CSE shall 
calculate an amount of initial margin separately for each subset of 
uncleared swaps for which such relationships are explicitly recognized 
by the model and the sum of the initial margin amounts calculated for 
each subset of uncleared swaps within a broad risk category will be 
used to determine the aggregate initial margin due from the 
counterparty for the portfolio of uncleared swaps within the broad risk 
category.\92\
---------------------------------------------------------------------------

    \92\ See Sec.  23.154(b)(2)(vi).
---------------------------------------------------------------------------

    <bullet> Where a risk-based model is not used, initial margin must 
be computed by multiplying the gross notional size of a derivative by 
the standardized margin rates provided under Sec.  23.154(c)(i) \93\ 
and adjusting such amount by the ratio of the net current replacement 
cost to gross current replacement cost (NGR) pertaining to all 
derivatives under the same eligible master netting agreement.\94\
---------------------------------------------------------------------------

    \93\ The standardized margin rates provided in Sec.  
23.154(c)(i) are, in all material respects, the same as those 
provided under the BCBS/IOSCO Framework. See supra note 83 and table 
in accompanying text.
    \94\ See Sec.  23.154(c).
---------------------------------------------------------------------------

    <bullet> A CSE shall not be deemed to have violated its obligation 
to collect or post initial margin if, inter alia, it makes timely 
initiation of dispute resolution mechanisms, including pursuant to 
Sec.  23.504(b)(4).\95\
---------------------------------------------------------------------------

    \95\ See Sec.  23.152(d)(2)(i).
---------------------------------------------------------------------------

2. Commission Requirements for Calculation of Variation Margin
    In keeping with the BCBS/IOSCO Framework described above, with 
respect to the calculation of variation margin, the Commission's Final 
Margin Rule generally provides that:
    <bullet> Each business day, a CSE must calculate variation margin 
amounts for itself and for each counterparty that is an SD, MSP, or 
financial end user. Such variation margin amounts must be equal to the 
cumulative mark-to-market change in value to the CSE of each uncleared 
swap, adjusted for any variation margin previously collected or posted 
with respect to that uncleared swap.\96\
---------------------------------------------------------------------------

    \96\ See Sec.  23.155(a).
---------------------------------------------------------------------------

    <bullet> Variation margin must be calculated using methods, 
procedures, rules, and inputs that to the maximum extent practicable 
rely on recently-executed transactions, valuations provided by 
independent third parties, or other objective criteria.\97\
---------------------------------------------------------------------------

    \97\ See id.
---------------------------------------------------------------------------

    <bullet> CSEs may comply with variation margin requirements on an 
aggregate basis with respect to uncleared swaps that are governed by 
the same eligible master netting agreement.\98\
---------------------------------------------------------------------------

    \98\ See Sec.  23.153(d)(1).
---------------------------------------------------------------------------

    <bullet> A CSE shall not be deemed to have violated its obligation 
to collect or post variation margin if, inter alia, it makes timely 
initiation of dispute resolution mechanisms, including pursuant to 
Sec.  23.504(b)(4).\99\
---------------------------------------------------------------------------

    \99\ See Sec.  23.153(e)(2)(i).
---------------------------------------------------------------------------

3. EU Requirements for Calculation of Initial Margin
    In keeping with the BCBS/IOSCO Framework, with respect to the 
calculation of initial margin, the EU's margin requirements generally 
provide:
    <bullet> Initial margin protects counterparties against potential 
losses which could stem from movements in the market value of the 
derivatives position occurring between the last exchange of variation 
margin before the default of a counterparty and the time that the OTC 
derivatives are replaced or the corresponding risk is hedged.\100\ It 
is the collateral collected by a counterparty to cover its current and 
potential future exposure in the interval between the last collection 
of margin and the liquidation of positions or hedging of market risk 
following a default of the other counterparty.\101\
---------------------------------------------------------------------------

    \100\ See RTS, Recital (3).
    \101\ See RTS, Article 1.
---------------------------------------------------------------------------

    <bullet> The assumed variations in the value of the non-centrally 
cleared OTC derivative contracts within the netting set for the 
calculation of initial margins using an initial margin model shall be 
based on a one-tailed 99% confidence interval over a margin period of 
risk (``MPOR'') of at least 10 days.\102\
---------------------------------------------------------------------------

    \102\ See RTS, Article 15(1).
---------------------------------------------------------------------------

    <bullet> Counterparties shall calculate the amount of initial 
margin to be collected using either a standardized approach or an 
initial margin model or both.\103\
---------------------------------------------------------------------------

    \103\ See RTS, Article 11(1).
---------------------------------------------------------------------------

    <bullet> Parameters used in initial margin models shall be 
calibrated, at least annually, based on historical data from a time 
period with a minimum duration of three years and a maximum duration of 
five years.
    <bullet> The data used for calibrating the parameters of initial 
margin models shall include the most recent continuous period from the 
date on which the calibration is performed and at least 25% of those 
data shall be

[[Page 48403]]

representative of a period of significant financial stress (stressed 
data).\104\
---------------------------------------------------------------------------

    \104\ See RTS, Article 16(1) and (2).
---------------------------------------------------------------------------

    <bullet> Where a counterparty uses an initial margin model, that 
model may be developed by any of, or both, counterparties or by a third 
party agent.
    <bullet> Where a counterparty uses an initial margin model 
developed by a third party agent, the counterparty shall remain 
responsible for ensuring that that model complies with the EU's margin 
rules.\105\
---------------------------------------------------------------------------

    \105\ See RTS, Article 14.
---------------------------------------------------------------------------

    <bullet> Initial margin models shall only include non-centrally 
cleared OTC derivative contracts within the same netting set.\106\
---------------------------------------------------------------------------

    \106\ See RTS, Article 17(1) and (2).
---------------------------------------------------------------------------

    <bullet> Initial margin models may provide for diversification, 
hedging and risk offsets arising from the risks of the contracts within 
the same netting set, provided that the diversification, hedging or 
risk offset is only carried out within the same underlying asset class 
as referred to in these requirements.
    <bullet> Diversification, hedging, and risk offsets may only be 
carried out within the following underlying asset classes: (a) Interest 
rates, currency and inflation; (b) equity; (c) credit; (d) commodities 
and gold; (e) other.\107\
---------------------------------------------------------------------------

    \107\ See RTS, Article 17(1) and (2).
---------------------------------------------------------------------------

    <bullet> In the event of a dispute over the amount of initial 
margin due, counterparties shall provide at least the part of the 
initial margin amount that is not being disputed within the same 
business day of the calculation date determined in accordance with 
Article 9(3).\108\
---------------------------------------------------------------------------

    \108\ See RTS, Article 13(3).
---------------------------------------------------------------------------

4. EU Requirements for Calculation of Variation Margin
    In keeping with the BCBS/IOSCO Framework, with respect to the 
calculation of variation margin, the EU's margin requirements generally 
provide:
    <bullet> FCs and NFC+s shall mark-to-market on a daily basis the 
value of outstanding contracts. Where market conditions prevent 
marking-to-market, reliable and prudent marking-to-model shall be 
used.\109\
---------------------------------------------------------------------------

    \109\ See EMIR, Article 11(2); RTS, Article 9.
---------------------------------------------------------------------------

    <bullet> The amount of variation margin to be collected by a 
counterparty shall be the aggregation of the values calculated for 
purposes of variation margin of all contracts in the netting set, minus 
the value of all variation margin previously collected, minus the net 
value of each contract in the netting set at the point of entry into 
the contract, and plus the value of all variation margin previously 
posted.\110\
---------------------------------------------------------------------------

    \110\ See EMIR, Article 11(2); RTS, Article 10.
---------------------------------------------------------------------------

    <bullet> In the event of a dispute over the amount of variation 
margin due, counterparties shall provide at least the part of the 
variation margin amount that is not being disputed.\111\
---------------------------------------------------------------------------

    \111\ See RTS, Article 12(3).
---------------------------------------------------------------------------

5. Commission Determination
    Based on the foregoing and the representations of the applicant, 
the Commission has determined that the amounts of initial and variation 
margin calculated under the methodologies required under the EU's 
margin rules would be similar to those calculated under the 
methodologies required under the Final Margin Rule. Specifically, under 
the Final Margin Rule and the EU's margin rules:
    <bullet> The definitions of initial and variation margin are 
similar, including the description of potential future exposure agreed 
under the BCBS/IOSCO Framework;
    <bullet> Margin models and/or a standardized margin schedule may be 
used to calculate initial margin;
    <bullet> Criteria for historical data to be used in initial margin 
models is similar;
    <bullet> Eligibility for netting is similar;
    <bullet> Correlations may be recognized within broad risk 
categories, but not across such risk categories;
    <bullet> The required method of calculating initial margin using 
standardized margin rates is essentially identical; and
    <bullet> The proscribed standardized margin rates are essentially 
identical.
    Accordingly, the Commission finds that the methodologies for 
calculating the amounts of initial and variation margin for non-
centrally cleared OTC derivatives under the laws of the EU are 
comparable in outcome to those of the Final Margin Rule.

F. Process and Standards for Approving Margin Models

    Pursuant to the BCBS/IOSCO Framework, initial margin models may be 
either internally developed or sourced from counterparties or third-
party vendors but in all such cases, models must be approved by the 
appropriate supervisory authority.\112\
---------------------------------------------------------------------------

    \112\ See BCBS/IOSCO Framework Requirement 3.3.
---------------------------------------------------------------------------

1. Commission Requirement for Margin Model Approval
    In keeping with the BCBS/IOSCO Framework, the Final Margin Rule 
generally requires:
    <bullet> CSEs shall obtain the written approval of the Commission 
or a registered futures association to use a model to calculate the 
initial margin required.\113\
---------------------------------------------------------------------------

    \113\ See Sec.  23.154(b)(1)(i).
---------------------------------------------------------------------------

    <bullet> The Commission or a registered futures association will 
approve models that demonstrate satisfaction of all of the requirements 
for an initial margin model set forth above in Section IV(E)(1), in 
addition to the requirements for annual review; \114\ control, 
oversight, and validation mechanisms; \115\ documentation; \116\ and 
escalation procedures.\117\
---------------------------------------------------------------------------

    \114\ See Sec.  23.154(b)(4), discussed further below.
    \115\ See Sec.  23.154(b)(5), discussed further below.
    \116\ See Sec.  23.154(b)(6), discussed further below.
    \117\ See Sec.  23.154(b)(7), discussed further below.
---------------------------------------------------------------------------

    <bullet> CSEs must notify the Commission and the registered futures 
association in writing 60 days prior to extending the use of an initial 
margin model to an additional product type; making any change to the 
model that would result in a material change in the CSE's assessment of 
initial margin requirements; or making any material change to modeling 
assumptions.
    <bullet> The Commission or the registered futures association may 
rescind its approval, or may impose additional conditions or 
requirements if the Commission or the registered futures association 
determines, in its discretion, that a model no longer complies with the 
requirements for an initial margin model summarized above in Section 
IV(E)(1).
2. EU Requirement for Approval of Margin Models
    The EU's margin rules generally require:
    <bullet> Upon request, counterparties using a non-standardized 
initial margin model shall provide the competent authorities with any 
documentation relating to the risk management procedures relating to 
such model at any time.\118\
---------------------------------------------------------------------------

    \118\ See RTS, Article 2(6).
---------------------------------------------------------------------------

3. Commission Determination
    Based on the foregoing and the representations of the applicant, 
the Commission has determined that the EU margin rules' requirement 
that an FC/NFC+ make documentation supporting an initial model 
available to a competent authority at any time is comparable in outcome 
to, the regulatory approval requirements of the Final Margin Rule. 
While the Commission recognizes that keeping documents open to 
regulatory review is not the same as requiring specific pre-approval 
from a regulator, the EC has represented that competent authorities 
within the Member States responsible for supervising FCs and, where 
applicable NFC+s, as part of their ongoing prudential regulation and 
supervision will enforce applicable

[[Page 48404]]

legislation and control whether the models adopted by these entities 
comply with the requirements under the EU margin rules. Furthermore, 
Article 12 of EMIR grants the competent authorities in each Member 
State the authority to impose fines in case of infringement of the 
rules promulgated under EMIR, such as the RTS.\119\ Such infringement 
could include an FC's or NFC+'s violations of the provisions under 
Section 4 of the RTS that establish the general requirements for 
initial margin models.\120\
---------------------------------------------------------------------------

    \119\ See RTS, Article 40.
    \120\ The applicant noted that, in a November 23, 2016 report to 
the European Parliament and the Council on areas where further 
action is necessary to ensure that the objectives of EMIR are 
fulfilled ``in a more appropriate, efficient and effective manner,'' 
on the issue of margin model approval, the EC stated:
    [W]ith respect to non-cleared transactions, some respondents, 
notably financial institutions, noted the absence of a clear mandate 
for initial margin models to be endorsed by authorities, which could 
lead to uncertainty among market participants as to whether their 
calculations are considered by authorities to be fully compliant 
with regulations. A mandate for initial margin models to be endorsed 
by authorities could promote certainty for market participants and 
authorities alike.
    See November 23, 2016 Report from the EC to the European 
Parliament and the Council under Article 85(1) of EMIR on OTC 
Derivatives, Central Counterparties and Trade Repositories, section 
4.1.2 (emphasis included), at http://ec.europa.eu/finance/financial-markets/docs/derivatives/161123-report_en.pdf.
---------------------------------------------------------------------------

G. Timing and Manner for Collection or Payment of Initial and Variation 
Margin

1. Commission Requirement for Timing and Manner for Collection or 
Payment of Initial and Variation Margin
    With respect to the timing and manner for collection or posting of 
initial margin, the Final Margin Rule generally provides that:
    <bullet> Where a CSE is required to collect initial margin, it must 
be collected on or before the business day after execution of an 
uncleared swap, and thereafter the CSE must continue to hold initial 
margin in an amount equal to or greater than the required initial 
margin amount as re-calculated each business day until such uncleared 
swap is terminated or expires.
    <bullet> Where a CSE is required to post initial margin, it must be 
posted on or before the business day after execution of an uncleared 
swap, and thereafter the CSE must continue to post initial margin in an 
amount equal to or greater than the required initial margin amount as 
re-calculated each business day until such uncleared swap is terminated 
or expires.
    <bullet> Required initial margin amounts must be posted and 
collected by CSEs on a gross basis (i.e., amounts to be posted may not 
be set-off against amounts to be collected from the same counterparty).
    With respect to the timing and manner for collection or posting of 
variation margin, the Final Margin Rule generally provides that:
    <bullet> Where a CSE is required to collect variation margin, it 
must be collected on or before the business day after execution of an 
uncleared swap, and thereafter the CSE must continue to collect the 
required variation margin amount, if any, each business day as re-
calculated each business day until such uncleared swap is terminated or 
expires.\121\
---------------------------------------------------------------------------

    \121\ See Sec.  23.153(a).
---------------------------------------------------------------------------

    <bullet> Where a CSE is required to post variation margin, it must 
be posted on or before the business day after execution of an uncleared 
swap, and thereafter the CSE must continue to post the required 
variation margin amount, if any, each business day as re-calculated 
each business day until such uncleared swap is terminated or 
expires.\122\
---------------------------------------------------------------------------

    \122\ See Sec.  23.153(b).
---------------------------------------------------------------------------

    With respect to both initial and variation margin, a CSE shall not 
be deemed to have violated its obligation to collect or post margin if, 
inter alia, it makes timely initiation of dispute resolution 
mechanisms, including pursuant to Sec.  23.504(b)(4).\123\
---------------------------------------------------------------------------

    \123\ See Sec.  23.153(e)(2)(i).
---------------------------------------------------------------------------

2. EU Requirements for Timing and Manner for Collection of Initial and 
Variation Margin
    With respect to the timing and manner for collection or posting of 
initial margin, the EU's margin rules generally provide that:
    <bullet> Counterparties shall calculate initial margin no later 
than the business day following one of these events: (a) Where a new 
non-centrally cleared OTC derivative contract is executed or added to 
the netting set; (b) where an existing non-centrally cleared OTC 
derivative contract expires or is removed from the netting set; (c) 
where an existing non-centrally cleared OTC derivative contract 
triggers a payment or a delivery other than the posting and collecting 
of margins; (d) where the initial margin is calculated in accordance 
with the standardized approach and an existing contract is reclassified 
in terms of the asset category referred to by the RTS as a result of 
reduced time to maturity; (e) where no calculation has been performed 
in the preceding 10 business days.\124\
---------------------------------------------------------------------------

    \124\ See RTS, Article 9(2).
---------------------------------------------------------------------------

    <bullet> The posting counterparty shall provide the initial margin 
within the same business day of the calculation date.\125\
---------------------------------------------------------------------------

    \125\ See RTS, Article 13(2).
---------------------------------------------------------------------------

    <bullet> Where two counterparties are located in the same time-
zone, the calculation shall be based on the netting set of the previous 
business day.\126\
---------------------------------------------------------------------------

    \126\ See RTS, Article 9(3)(a).
---------------------------------------------------------------------------

    <bullet> Where two counterparties are not located in the same time-
zone, the calculation shall be based on the transactions in the netting 
set which are entered into before 16:00 hours of the previous business 
day of the time-zone where it is first 16:00 hours.\127\
---------------------------------------------------------------------------

    \127\ See RTS, Article 9(3)(b).
---------------------------------------------------------------------------

    <bullet> In the event of a dispute over the amount of initial 
margin due, counterparties shall provide at least the part of the 
initial margin amount that is not being disputed within the same 
business day of the calculation date.\128\
---------------------------------------------------------------------------

    \128\ See RTS, Article 13(3).
---------------------------------------------------------------------------

    With respect to the timing and manner for collection or posting of 
variation margin, the EU's margin rules generally provide that:
    <bullet> Counterparties shall calculate variation margin at least 
on a daily basis.\129\
---------------------------------------------------------------------------

    \129\ See RTS, Article 9(1).
---------------------------------------------------------------------------

    <bullet> The posting counterparty shall provide the variation 
margin as follows: (a) Within the same business day of the calculation 
date; (b) where certain conditions are met,\130\ within two business 
days of the calculation date.\131\
---------------------------------------------------------------------------

    \130\ The provision of variation margin within two business of 
the calculation date may only be applied to the following: (a) 
Netting sets comprising derivative contracts not subject to initial 
margin requirements in accordance with this Regulation, where the 
posting counterparty has provided, at or before the calculation date 
of the variation margin, an advance amount of eligible collateral 
calculated in the same manner as that applicable to initial margins 
in accordance with Article 15, for which the collecting counterparty 
has used a margin period of risk (MPOR) at least equal to the number 
of days in between and including the calculation date and the 
collection date; (b) netting sets comprising contracts subject to 
initial margin requirements in accordance with this Regulation, 
where the initial margin has been adjusted in one of the following 
ways: (i) By increasing the MPOR referred to in Article 15(2) by the 
number of days in between, and including, the calculation date 
determined in accordance with Article 9(3) and the collection date 
determined in accordance with paragraph 1 of this Article; (ii) by 
increasing the initial margin calculated in accordance with the 
standardised approach referred to in Article 11 using an appropriate 
methodology taking into account a MPOR that is increased by the 
number of days in between, and including, the calculation date 
determined in accordance with Article 9(3) and the collection date 
determined in accordance with paragraph 2 of this Article. For the 
purposes of point (a), in case no mechanism for segregation is in 
place between the two counterparties, those counterparties may 
offset the amounts to be provided.
    \131\ See RTS, Article 12(1).
---------------------------------------------------------------------------

    <bullet> In the event of a dispute over the amount of variation 
margin due,

[[Page 48405]]

counterparties shall provide at least the part of the variation margin 
amount that is not being disputed.\132\
---------------------------------------------------------------------------

    \132\ See RTS, Article 12(3).
---------------------------------------------------------------------------

3. Commission Determination
    Having compared the EU's margin requirements applicable to the 
timing and manner of collection and payment of initial and variation 
margin to the Commission's corresponding margin requirements, the 
Commission finds that the EU's margin requirements are, despite 
apparent differences in certain respects, comparable in outcome.
    Under the Final Margin Rule, where initial margin is required, a 
CSE must calculate the amount of initial margin each business day. The 
EU's margin rules only require initial margin to be calculated after 
certain events, including the addition or removal of a non-centrally 
cleared OTC derivative from the netting set or at least within 10 days 
after the last initial margin calculation. While this is different from 
the Final Margin Rule's requirement that the amount of initial margin 
be calculated each business day, the EC has explained that the more 
sophisticated counterparties subject to the EU margin rules actively 
operate in non-centrally cleared OTC derivatives to the point where the 
RTS requirement to recalculate whenever there is a change to the 
netting set will in practice require these types of counterparties to 
recalculate daily. Because of this, the EC views the 10-day allowance 
under Article 9(2)(e) of the RTS as a backstop only and one that is 
likely to be exercised only in the case of a static portfolio. The 
Commission believes that as a result of these entities still exchanging 
variation margin, and thereby eliminating current exposure, this 
difference will be mitigated.
    With respect to the timing of collecting/posting margin, the Final 
Margin Rule requires CSEs to collect/post any required margin amount 
within one business day of calculation which, under the Final Margin 
Rule, must occur daily. In contrast, the EU's margin rules allow for a 
variation margin posting date within two business days of the 
calculation date (T+2) when certain conditions are met.\133\ As 
explained in the Recitals to the RTS, additional time for posting of 
variation margin is allowed only where compensated by an adjustment to 
initial margin by an adequate recalculation of MPOR.\134\ Where initial 
margin is required, an adequate recalculation of MPOR under the RTS 
would occur by increasing the MPOR by the number of days in between, 
and including, the calculation and collection dates or by increasing 
the initial margin calculated with the standardized approach taking 
into account a MPOR increased by the number of days in between, and 
including, the calculation and collection dates.\135\ Where no initial 
margin requirements apply, additional time is permitted for posting of 
variation margin if the posting counterparty has provided, at or before 
the variation margin calculation date, an advance amount of eligible 
collateral calculated in the same manner as required for initial margin 
with an MPOR at least equal to the number of days in between, and 
including, the calculation and collection dates.\136\
---------------------------------------------------------------------------

    \133\ See RTS, Article 12(2).
    \134\ See RTS, Recital (20).
    \135\ See RTS, Article 12(2)(b).
    \136\ See RTS, Recital (20) and Article 12(2)(a).
---------------------------------------------------------------------------

    While the RTS conditions to a delay in the exchange of variation 
margin do not make the EU's rule in this area the same as the Final 
Margin Rule, they do serve to mitigate the potential risks, as 
described above, by increasing the initial margin's MPOR by the 
corresponding number of days associated with a delay in the exchange of 
variation margin. Furthermore, although the EU's allowance for a delay 
of up to 10 days to recalculate initial margin is not the same as the 
Final Margin Rule's daily recalculation requirement, as detailed above, 
the EC has represented that, in practice, it expects the most 
sophisticated counterparties subject to the EU margin rules to 
recalculate initial margin on a daily basis. Thus, the Commission finds 
that the requirements of the EU margin rules with respect to the timing 
and manner for collection or payment of initial and variation margin 
are comparable in outcome to the Final Margin Rule.

H. Margin Threshold Levels or Amounts

    The BCBS/IOSCO Framework provides that initial margin could be 
subject to a threshold not to exceed EUR 50 million. The threshold is 
applied at the level of the consolidated group to which the threshold 
is being extended and is based on all non-centrally cleared derivatives 
between the two consolidated groups.
    Similarly, to alleviate operational burdens associated with the 
transfer of small amounts of margin, the BCBS/IOSCO Framework provides 
that all margin transfers between parties may be subject to a de-
minimis minimum transfer amount not to exceed EUR 500,000.
1. Commission Requirement for Margin Threshold Levels or Amounts
    In keeping with the BCBS/IOSCO Framework, with respect to margin 
threshold levels or amounts the Final Margin Rule generally provides 
that:
    <bullet> CSEs may agree with their counterparties that initial 
margin may be subject to a threshold of no more than $50 million 
applicable to a consolidated group of affiliated counterparties.\137\
---------------------------------------------------------------------------

    \137\ See Sec.  23.154(a)(3) and definition of ``initial margin 
threshold'' in Sec.  23.151.
---------------------------------------------------------------------------

    <bullet> CSEs are not required to collect or to post initial or 
variation margin with a counterparty until the combined amount of 
initial margin and variation margin to be collected or posted is 
greater than $500,000 (i.e., a minimum transfer amount).\138\
---------------------------------------------------------------------------

    \138\ See Sec.  23.152(b)(3).
---------------------------------------------------------------------------

2. EU Requirement for Margin Threshold Levels or Amounts
    In keeping with the BCBS/IOSCO Framework, with respect to margin 
threshold levels or amounts, the EU's margin requirements generally 
provide that:
    <bullet> Counterparties may provide in their risk management 
procedures that initial margin collected is reduced by an amount up to 
EUR 50 million where neither counterparty belongs to any group or the 
counterparties are part of different groups; or EUR 10 million where 
both counterparties belong to the same group.\139\
---------------------------------------------------------------------------

    \139\ See RTS, Article 29(1).
---------------------------------------------------------------------------

    <bullet> Counterparties may provide in their risk management 
procedures that no collateral is collected from a counterparty where 
the amount due from the last collection of collateral is equal to or 
lower than the amount agreed by the counterparties. The minimum 
transfer amount shall not exceed EUR 500,000 or the equivalent amount 
in another currency.\140\
---------------------------------------------------------------------------

    \140\ See RTS, Article 25(1).
---------------------------------------------------------------------------

3. Commission Determination
    Based on the foregoing and the representations of the applicant, 
the Commission has determined that the EU requirements for margin 
threshold levels or amounts, in the case of FCs and NFC+s, are 
comparable in outcome to those required by the Final Margin Rule, in 
the case of CSEs.
    The Commission notes that at current exchange rates, EUR 50 million 
is approximately $59 million, while EUR 500,000 is approximately 
$588,000. Although these amounts are greater than those permitted by 
the Final Margin Rule, the Commission recognizes that

[[Page 48406]]

exchange rates will fluctuate over time and thus the Commission finds 
that such requirements under the laws of the EU are comparable in 
outcome to those of the Final Margin Rule.

I. Risk Management Controls for the Calculation of Initial and 
Variation Margin

1. Commission Requirement for Risk Management Controls for the 
Calculation of Initial and Variation Margin
    With respect to risk management controls for the calculation of 
initial margin, the Final Margin Rule generally provides that:
    <bullet> CSEs are required to have a risk management unit pursuant 
to Sec.  23.600(c)(4). Such risk management unit must include a risk 
control unit tasked with validation of a CSE's initial margin model 
prior to implementation and on an ongoing basis, including an 
evaluation of the conceptual soundness of the initial margin model, an 
ongoing monitoring process that includes verification of processes and 
benchmarking by comparing the CSE's initial margin model outputs 
(estimation of initial margin) with relevant alternative internal and 
external data sources or estimation techniques, and an outcomes 
analysis process that includes back testing the model.\141\
---------------------------------------------------------------------------

    \141\ See Sec.  23.154(b)(5).
---------------------------------------------------------------------------

    <bullet> In accordance with Sec.  23.600(e)(2), CSEs must have an 
internal audit function independent of the business trading unit and 
the risk management unit that at least annually assesses the 
effectiveness of the controls supporting the initial margin model 
measurement systems, including the activities of the business trading 
units and risk control unit, compliance with policies and procedures, 
and calculation of the CSE's initial margin requirements under this 
part.\142\
---------------------------------------------------------------------------

    \142\ See Sec.  23.154(b)(5)(iv).
---------------------------------------------------------------------------

    <bullet> At least annually, such internal audit function shall 
report its findings to the CSE's governing body, senior management, and 
chief compliance officer.\143\
---------------------------------------------------------------------------

    \143\ See Sec.  23.154(b)(5)(iv).
---------------------------------------------------------------------------

    With respect to risk management controls for the calculation of 
variation margin, the Final Margin Rule generally provides that:
    <bullet> CSEs must maintain documentation setting forth the 
variation methodology with sufficient specificity to allow a 
counterparty, the Commission, a registered futures association, and any 
applicable prudential regulator to calculate a reasonable approximation 
of the margin requirement independently.
    <bullet> CSEs must evaluate the reliability of its data sources at 
least annually, and make adjustments, as appropriate.
    <bullet> CSEs, upon request of the Commission or a registered 
futures association, must provide further data or analysis concerning 
the variation methodology or a data source, including: (a) The manner 
in which the methodology meets the requirements of the Final Margin 
Rule; (b) a description of the mechanics of the methodology; (c) the 
conceptual basis of the methodology; (d) the empirical support for the 
methodology; and (e) the empirical support for the assessment of the 
data sources.
2. EU Requirement for Risk Management Controls for the Calculation of 
Initial and Variation Margin
    With respect to risk management controls for the calculation of 
initial margin, the EU's margin requirements generally provide that:
    <bullet> Counterparties shall establish an internal governance 
process to assess the appropriateness of the initial margin model on a 
continuous basis, including all of the following: (a) An initial 
validation of the model by suitably qualified persons who are 
independent from the persons developing the model; (b) a follow up 
validation whenever a significant change is made to the initial margin 
model and at least annually; and (c) a regular audit process to assess 
the following: (i) The integrity and reliability of the data sources; 
(ii) the management information system used to run the model; (iii) the 
accuracy and completeness of data used; (iv) the accuracy and 
appropriateness of volatility and correlation assumptions.\144\
---------------------------------------------------------------------------

    \144\ See RTS, Article 1.
---------------------------------------------------------------------------

    <bullet> The documentation of the risk management procedures 
relating to the initial margin model shall meet all of the following 
conditions: (a) It shall allow a knowledgeable third-party to 
understand the design and operational detail of the initial margin 
model; (b) it shall contain the key assumptions and the limitations of 
the initial margin model; (c) it shall define the circumstances under 
which the assumptions of the initial margin model are no longer 
valid.\145\
---------------------------------------------------------------------------

    \145\ See RTS, Article 18(2).
---------------------------------------------------------------------------

    <bullet> Counterparties shall document all changes to the initial 
margin model. That documentation shall also detail the results of the 
validations carried out after those changes.\146\
---------------------------------------------------------------------------

    \146\ See RTS, Article 18(3).
---------------------------------------------------------------------------

3. Commission Determination
    Based on the foregoing and the representations of the applicant, 
the Commission has determined that the EU requirements applicable to 
FCs and NFC+s pertaining to risk management controls for the 
calculation of initial and variation margin are substantially the same 
as the corresponding requirements under the Final Margin Rule. 
Specifically, the Commission finds that under both the EU's 
requirements and the Final Margin Rule, a CSE is required to establish 
a unit that is tasked with comprehensively managing the entity's use of 
an initial margin model, including establishing controls and testing 
procedures. Accordingly, the Commission finds that the EU's 
requirements pertaining to risk management controls over the use of 
initial margin models are comparable in outcome to the controls 
required by the Final Margin Rule.

J. Eligible Collateral for Initial and Variation Margin

    As explained in the BCBS/IOSCO Framework, to ensure that 
counterparties can liquidate assets held as initial and variation 
margin in a reasonable amount of time to generate proceeds that could 
sufficiently protect collecting entities from losses on non-centrally 
cleared derivatives in the event of a counterparty default, assets 
collected as collateral for initial and variation margin purposes 
should be highly liquid and should, after accounting for an appropriate 
haircut, be able to hold their value in a time of financial stress. 
Such a set of eligible collateral should take into account that assets 
which are liquid in normal market conditions may rapidly become 
illiquid in times of financial stress. In addition to having good 
liquidity, eligible collateral should not be exposed to excessive 
credit, market and FX risk (including through differences between the 
currency of the collateral asset and the currency of settlement). To 
the extent that the value of the collateral is exposed to these risks, 
appropriately risk-sensitive haircuts should be applied. More 
importantly, the value of the collateral should not exhibit a 
significant correlation with the creditworthiness of the counterparty 
or the value of the underlying non-centrally cleared derivatives 
portfolio in such a way that would undermine the effectiveness of the 
protection offered by the margin collected. Accordingly, securities 
issued by the counterparty or its related entities should not be 
accepted as collateral. Accepted

[[Page 48407]]

collateral should also be reasonably diversified.
1. Commission Requirement for Eligible Collateral for Initial and 
Variation Margin
    With respect to eligible collateral that may be collected or posted 
to satisfy an initial margin obligation, the Final Margin Rule 
generally provides that CSEs may collect or post: \147\
---------------------------------------------------------------------------

    \147\ See Sec.  23.156(a)(1).
---------------------------------------------------------------------------

    <bullet> Cash denominated in a major currency, being United States 
Dollar (USD); Canadian Dollar (CAD); Euro (EUR); United Kingdom Pound 
(GBP); Japanese Yen (JPY); Swiss Franc (CHF); New Zealand Dollar (NZD); 
Australian Dollar (AUD); Swedish Kronor (SEK); Danish Kroner (DKK); 
Norwegian Krone (NOK); any other currency designated by the Commission; 
or any currency of settlement for a particular uncleared swap.
    <bullet> A security that is issued by, or unconditionally 
guaranteed as to the timely payment of principal and interest by, the 
U.S. Department of Treasury.
    <bullet> A security that is issued by, or unconditionally 
guaranteed as to the timely payment of principal and interest by, a 
U.S. government agency (other than the U.S. Department of Treasury) 
whose obligations are fully guaranteed by the full faith and credit of 
the U.S. government.
    <bullet> A security that is issued by, or fully guaranteed as to 
the payment of principal and interest by, the European Central Bank or 
a sovereign entity that is assigned no higher than a 20 percent risk 
weight under the capital rules applicable to SDs subject to regulation 
by a prudential regulator.
    <bullet> A publicly-traded debt security issued by, or an asset-
backed security fully guaranteed as to the timely payment of principal 
and interest by, a U.S. Government-sponsored enterprise that is 
operating with capital support or another form of direct financial 
assistance received from the U.S. government that enables the 
repayments of the U.S. Government-sponsored enterprise's eligible 
securities.
    <bullet> A security that is issued by, or fully guaranteed as to 
the payment of principal and interest by, the Bank for International 
Settlements, the International Monetary Fund, or a multilateral 
development bank as defined in Sec.  23.151.
    <bullet> Other publicly-traded debt that has been deemed acceptable 
as initial margin by a prudential regulator as defined in Sec.  23.151.
    <bullet> A publicly-traded common equity security that is included 
in the Standard & Poor's Composite 1500 Index (or any other similar 
index of liquid and readily marketable equity securities as determined 
by the Commission) or an index that a CSE's supervisor in a foreign 
jurisdiction recognizes for purposes of including publicly traded 
common equity as initial margin under applicable regulatory policy, if 
held in that foreign jurisdiction.
    <bullet> Securities in the form of redeemable securities in a 
pooled investment fund representing the security-holder's proportional 
interest in the fund's net assets and that are issued and redeemed only 
on the basis of the market value of the fund's net assets prepared each 
business day after the security-holder makes its investment commitment 
or redemption request to the fund, if the fund's investments are 
limited to securities that are issued by, or unconditionally guaranteed 
as to the timely payment of principal and interest by, the U.S. 
Department of the Treasury, and immediately-available cash funds 
denominated in U.S. dollars; or securities denominated in a common 
currency and issued by, or fully guaranteed as to the payment of 
principal and interest by, the European Central Bank or a sovereign 
entity that is assigned no higher than a 20% risk weight under the 
capital rules applicable to SDs subject to regulation by a Prudential 
Regulator, and immediately-available cash funds denominated in the same 
currency; and assets of the fund may not be transferred through 
securities lending, securities borrowing, repurchase agreements, 
reverse repurchase agreements, or other means that involve the fund 
having rights to acquire the same or similar assets from the 
transferee.
    <bullet> Gold.
    <bullet> A CSE may not collect or post as initial margin any asset 
that is a security issued by: The CSE or a margin affiliate of the CSE 
(in the case of posting) or the counterparty or any margin affiliate of 
the counterparty (in the case of collection); a bank holding company, a 
savings and loan holding company, a U.S. intermediate holding company 
established or designated for purposes of compliance with 12 CFR 
252.153, a foreign bank, a depository institution, a market 
intermediary, a company that would be any of the foregoing if it were 
organized under the laws of the United States or any State, or a margin 
affiliate of any of the foregoing institutions; or a nonbank financial 
institution supervised by the Board of Governors of the Federal Reserve 
System under Title I of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 5323).\148\
---------------------------------------------------------------------------

    \148\ See Sec.  23.156(a)(2).
---------------------------------------------------------------------------

    <bullet> The value of any eligible collateral collected or posted 
to satisfy initial margin requirements must be reduced by the following 
haircuts: an 8% discount for initial margin collateral denominated in a 
currency that is not the currency of settlement for the uncleared swap, 
except for eligible types of collateral denominated in a single 
termination currency designated as payable to the non-posting 
counterparty as part of an eligible master netting agreement; and the 
discounts set forth in the following table: \149\
---------------------------------------------------------------------------

    \149\ See Sec.  23.156(a)(3).

                      Standardized Haircut Schedule
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Cash in same currency as swap obligation................             0.0
Eligible government and related debt (e.g., central                  0.5
 bank, multilateral development bank, GSE securities
 identified in paragraph (a)(1)(iv) of this section):
 Residual maturity less than one-year...................
Eligible government and related debt (e.g., central                  2.0
 bank, multilateral development bank, GSE securities
 identified in paragraph (a)(1)(iv) of this section):
 Residual maturity between one and five years...........
Eligible government and related debt (e.g., central                  4.0
 bank, multilateral development bank, GSE securities
 identified in paragraph (a)(1)(iv) of this section):
 Residual maturity greater than five years..............
Eligible corporate debt (including eligible GSE debt                 1.0
 securities not identified in paragraph (a)(1)(iv) of
 this section): Residual maturity less than one-year....
Eligible corporate debt (including eligible GSE debt                 4.0
 securities not identified in paragraph (a)(1)(iv) of
 this section): Residual maturity between one and five
 years..................................................
Eligible corporate debt (including eligible GSE debt                 8.0
 securities not identified in paragraph (a)(1)(iv) of
 this section): Residual maturity greater than five
 years..................................................
Equities included in S&P 500 or related index...........            15.0

[[Page 48408]]

 
Equities included in S&P 1500 Composite or related index            25.0
 but not S&P 500 or related index.......................
Gold....................................................            15.0
------------------------------------------------------------------------

    With respect to eligible collateral that may be collected or posted 
to satisfy a variation margin obligation, the Final Margin Rule 
generally provides that CSEs may collect or post: \150\
---------------------------------------------------------------------------

    \150\ See Sec.  23.156(b)(1).
---------------------------------------------------------------------------

    <bullet> With respect to uncleared swaps with an SD or MSP, only 
immediately available cash funds that are denominated in: U.S. dollars, 
another major currency (as defined in Sec.  23.151), or the currency of 
settlement of the uncleared swap.
    <bullet> With respect to any other uncleared swaps for which a CSE 
is required to collect or post variation margin, any asset that is 
eligible to be posted or collected as initial margin, as described 
above.
    <bullet> The value of any eligible collateral collected or posted 
to satisfy variation margin requirements must be reduced by the same 
haircuts applicable to initial margin described above.\151\
---------------------------------------------------------------------------

    \151\ See Sec.  23.156(b)(2).
---------------------------------------------------------------------------

    Finally, CSEs must monitor the value and eligibility of collateral 
collected and posted: \152\
---------------------------------------------------------------------------

    \152\ See Sec.  23.156(c).
---------------------------------------------------------------------------

    <bullet> CSEs must monitor the market value and eligibility of all 
collateral collected and posted, and, to the extent that the market 
value of such collateral has declined, the CSE must promptly collect or 
post such additional eligible collateral as is necessary to maintain 
compliance with the margin requirements of Sec. Sec.  23.150 through 
23.161.
    <bullet> To the extent that collateral is no longer eligible, CSEs 
must promptly collect or post sufficient eligible replacement 
collateral to comply with the margin requirements of Sec. Sec.  23.150 
through 23.161.
2. EU Requirement for Eligible Collateral for Initial and Variation 
Margin
    With respect to eligible collateral that may be collected to 
satisfy an initial or variation margin obligation, the EU's margin 
requirements generally provide that counterparties may collect: \153\
---------------------------------------------------------------------------

    \153\ See RTS, Article 4.
---------------------------------------------------------------------------

    <bullet> Cash in the form of money credited to an account in any 
currency, or similar claims for the repayment of money, such as money 
market deposits.
    <bullet> Gold.
    <bullet> Debt securities issued by Member States' central 
governments or central banks.
    <bullet> Debt securities issued by Member States' regional 
governments or local authorities whose exposures are treated as 
exposures to the central government of that Member State in accordance 
with Article 115(2) of Regulation (EU) No 575/2013.
    <bullet> Debt securities issued by Member States' public sector 
entities whose exposures are treated as exposures to the central 
government, regional government or local authority of that Member State 
in accordance with Article 116(4) of Regulation (EU) No 575/2013.
    <bullet> Debt securities issued by multilateral development banks 
listed in Article 117(2) of Regulation (EU) No 575/2013.
    <bullet> Debt securities issued by the international organizations 
listed in Article 118 of Regulation (EU) No 575/2013.
    <bullet> Debt securities issued by third countries' governments or 
central banks.
    <bullet> Where the assets are not issued by the posting 
counterparty, not issued by entities that are part of the same group as 
the posting counterparty, or not otherwise subject to any wrong way 
risk, a counterparty may collect:
    [ssquf] Debt securities issued by Member States' regional 
governments or local authorities whose exposures are not treated as 
exposures to the central government of that Member State;
    [ssquf] Debt securities issued by Member States' public sector 
entities whose exposures are treated as exposures to the central 
government, regional government, or local authority of that Member 
State;
    [ssquf] Debt securities issued by third countries' regional 
governments or local authorities whose exposures are treated as 
exposures to the central government, regional government, or local 
authority of that third country;
    [ssquf] Debt securities issued by third countries' regional 
governments or local authorities whose exposures are not treated as 
exposures to the central government, regional government, or local 
authority of that third country;
    [ssquf] Debt securities issued by credit institutions or investment 
firms including bonds referred to in Article 52(4) of Directive 2009/
65/EC of the European Parliament and of the Council;
    [ssquf] Corporate bonds;
    [ssquf] The most senior tranche of a securitization, as defined in 
Article 4(61) of Regulation (EU) No 575/2013, that is not a re-
securitization as defined in Article 4(63) of that Regulation;
    [ssquf] Convertible bonds provided that they can be converted only 
into equities which are included in an index specified pursuant to 
point (a) of Article 197 (8) of Regulation (EU) No 575/2013;
    [ssquf] Equities included in an index specified pursuant to point 
(a) of Article 197(8) of Regulation (EU) No 575/2013;
    [ssquf] A counterparty may only use units or shares in undertakings 
for collective investments in transferable securities (UCITS) as 
eligible collateral where all the following conditions are met: (a) The 
units or shares have a daily public price quote; (b) the UCITS are 
limited to investing in assets that are eligible in accordance with 
Article 4(1); (c) the UCITS meet the criteria laid down in Article 
132(3) of Regulation (EU) No 575/2013. For the purposes of point (b), 
UCITS may use derivative instruments to hedge the risks arising from 
the assets in which they invest. In addition, where a UCITS invests in 
shares or units of other UCITS, these conditions shall also apply to 
those UCITS.\154\
---------------------------------------------------------------------------

    \154\ See RTS, Article 5(1).
---------------------------------------------------------------------------

    [ssquf] Where a UCITS or any of its underlying UCITS do not only 
invest in assets that are eligible collateral under the RTS, only the 
value of the unit or share of the UCITS that represents investment in 
eligible assets may be used as eligible collateral.\155\
---------------------------------------------------------------------------

    \155\ See RTS, Article 5(2).
---------------------------------------------------------------------------

    [ssquf] Where non-eligible assets of a UCITS can have a negative 
value, the value of the unit or share of the UCITS that may be used as 
eligible collateral shall be determined by deducting the maximum 
negative value of the non-eligible assets from the value of eligible 
assets.\156\
---------------------------------------------------------------------------

    \156\ See RTS, Article 5(3).
---------------------------------------------------------------------------

    <bullet> Counterparties must assess the credit quality of certain 
asset classes.\157\
---------------------------------------------------------------------------

    \157\ See RTS, Article 6.
---------------------------------------------------------------------------

    <bullet> Counterparties shall adjust the value of collected 
collateral in accordance with either a methodology prescribed by the 
RTS \158\ or a methodology using their own volatility estimates.\159\
---------------------------------------------------------------------------

    \158\ See RTS, Annex III.
    \159\ See RTS, Article 21.
---------------------------------------------------------------------------

    <bullet> There are certain concentration limits for collateral 
collected as initial margin.\160\
---------------------------------------------------------------------------

    \160\ See RTS, Article 8.

---------------------------------------------------------------------------

[[Page 48409]]

    If a counterparty chooses to not use its own volatility estimates, 
the value of any eligible collateral collected or posted to satisfy 
initial margin requirements must be reduced by the following haircuts: 
\161\
---------------------------------------------------------------------------

    \161\ See RTS, Annex II.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Cash in same currency as swap obligation................             0.0
Debt securities issued by entities describe in Article               0.5
 4(1)(c) to (e) and (h) to (k): Residual maturity less
 than one-year..........................................
Debt securities issued by entities describe in Article               2.0
 4(1)(c) to (e) and (h) to (k): Residual maturity
 between one and five years.............................
Debt securities issued by entities describe in Article               4.0
 4(1)(c) to (e) and (h) to (k): Residual maturity
 greater than five years................................
Debt securities issued by entities describe in Article               1.0
 4(1)(f), (g) and (l) to (n): Residual maturity less
 than one-year..........................................
Debt securities issued by entities describe in Article               4.0
 4(1)(f), (g) and (l) to (n): Residual maturity between
 one and five years.....................................
Debt securities issued by entities describe in Article               8.0
 4(1)(f), (g) and (l) to (n): Residual maturity greater
 than five years........................................
Securitization positions meeting the criteria in Article             2.0
 4(1)(o): Residual maturity of less than one year.......
Securitization positions meeting the criteria in Article             8.0
 4(1)(o): Residual maturity between one and five years..
Securitization positions meeting the criteria in Article            16.0
 4(1)(o): Residual maturity of more than five years.....
Equities included in main indices, bonds convertible to             15.0
 equities in main indices, and gold.....................
------------------------------------------------------------------------

    In addition to the foregoing, under the EU's margin requirements, 
for the purpose of exchanging initial margin, all cash and non-cash 
collateral posted in a currency other than the currency in which the 
payments in case of early termination or default have to be made in 
accordance with the single derivative contract, the relevant exchange 
of collateral agreement or the relevant credit support annex 
(``termination currency''). Each of the counterparties may choose a 
different termination currency. Where the agreement does not identify a 
termination currency, the haircut shall apply to the market value of 
all the assets posted as collateral.\162\
---------------------------------------------------------------------------

    \162\ See RTS, Annex II, Table 3.
---------------------------------------------------------------------------

3. Commission Determination
    Based on the foregoing and the representations of the applicant, 
the Commission finds that the EU's requirements pertaining to assets 
eligible for posting or collecting by FCs and NFC+s as collateral for 
non-centrally cleared OTC derivatives, while different than the Final 
Margin Rule in some respects, are comparable in outcome to the Final 
Margin Rule.
    For example, under the EU margin regime, cash in the form of a 
claim for the repayment of money, such as money market deposits, is 
eligible collateral while under the Final Margin Rule it is not. 
However, although the EU margin regime and Final Margin Rule take 
different approaches on this point, the Commission did recognize the 
need for flexibility provided to counterparties by money market funds 
when it allowed for the use of redeemable securities in a pooled 
investment fund that holds only securities that are issued by, or 
unconditionally guaranteed as to the timely payment of principal and 
interest by, the U.S. Department of the Treasury, and cash funds 
denominated in U.S. dollars.\163\
---------------------------------------------------------------------------

    \163\ See Final Margin Rule, 81 FR 636, 665.
---------------------------------------------------------------------------

    The EU's requirements are also different with respect to the 
eligible collateral for variation margin for non-centrally cleared OTC 
derivatives between FC/NFC+s that are CSEs and FC/NFC+s that are SDs 
and MSPs (including other CSEs). For uncleared swaps with an SD or MSP, 
the Final Margin Rule only permits variation margin to be posted or 
collected as immediately available cash funds that are denominated in 
U.S. dollars, another major currency (as defined in Sec.  23.151), or 
the currency of settlement of the uncleared swap, while the EU's margin 
requirements would permit any form of eligible collateral (as described 
above). The Commission did state in the Final Margin Rule, however, 
that requiring variation margin to be posted or collected as 
immediately available cash funds is ``consistent with regulatory and 
industry initiatives to improve standardization and efficiency in the 
OTC swaps market.'' \164\ Thus, in outcome, an SD or MSP that is also 
subject to the EU margin rules likely would, in the normal course of 
business, be exchanging variation margin in immediately available cash 
funds.
---------------------------------------------------------------------------

    \164\ See id. at 668.
---------------------------------------------------------------------------

    Other differences concern corporate bonds, the most senior tranche 
of a securitization, and convertible bonds that can be converted only 
into equities listed on specific indexes, all of which are allowed 
under the EU margin rules but not under the Final Margin Rule. However, 
the EU margin rules do address the inherent risk posed by these assets 
by including additional safeguards when using these types of 
collateral. Regarding corporate bonds and convertible bonds, a 
counterparty subject to the EU margin rules must assess the credit 
quality of the assets using a specified internal rating or a credit 
quality assessment issued by a recognized External Credit Assessment 
Institution (``ECAI'').\165\ Regarding the most senior tranche of a 
securitization, a counterparty must use an ECAI's credit quality 
assessment to assess the tranche's credit quality.\166\
---------------------------------------------------------------------------

    \165\ See RTS, Article 6(1).
    \166\ See RTS, Article 6(2).
---------------------------------------------------------------------------

    The EU's margin rules on eligible collateral also differ from the 
Final Margin Rule in ways that make the EU rules more stringent than 
the Final Margin Rule. For example, the EU margin rules require a 
larger haircut than the Final Margin Rule on government, central bank, 
and corporate debt where a credit quality assessment, as required under 
Article of the RTS, indicates low credit quality for such debt.\167\ In 
addition, the EU's margin rules impose concentration limits for initial 
margin.\168\
---------------------------------------------------------------------------

    \167\ See RTS, Articles 6 and 7.
    \168\ See RTS, Article 8.
---------------------------------------------------------------------------

    While not identical, the Commission finds that the forms of 
eligible collateral for initial and variation margin under the laws of 
the EU provide protections that are comparable in outcome, as explained 
above, to the forms of eligible collateral mandated by the Final Margin 
Rule. Specifically, the Commission finds that the EU's margin regime 
ensures that assets collected as collateral for initial and variation 
margin purposes are highly liquid and able to hold their value in a 
time of financial stress. Because under the EU's margin regime a non-
defaulting party would be able to liquidate assets held as initial and 
variation margin in a reasonable amount of time to generate proceeds 
that could sufficiently protect collecting entities from losses on 
uncleared swaps in the event of a counterparty default, the Commission 
finds the EU's margin regime with respect to the forms of eligible 
collateral for initial and variation margin for uncleared swaps is 
comparable in outcome to the Final Margin Rule.

K. Requirements for Custodial Arrangements, Segregation, and 
Rehypothecation

    As explained in the BCBS/IOSCO Framework, the exchange of initial 
margin on a net basis may be

[[Page 48410]]

insufficient to protect two market participants with large gross 
derivatives exposures to each other in the case of one firm's failure. 
Thus, the gross initial margin between such firms should be 
exchanged.\169\
---------------------------------------------------------------------------

    \169\ See BCBS/IOSCO Framework, Key principle 5.
---------------------------------------------------------------------------

    Further, initial margin collected should be held in such a way as 
to ensure that (i) the margin collected is immediately available to the 
collecting party in the event of the counterparty's default, and (ii) 
the collected margin must be subject to arrangements that protect the 
posting party to the extent possible under applicable law in the event 
that the collecting party enters bankruptcy.\170\
---------------------------------------------------------------------------

    \170\ See id.
---------------------------------------------------------------------------

1. Commission Requirement for Custodial Arrangements, Segregation, and 
Rehypothecation
    In keeping with the principles set forth in the BCBS/IOSCO 
Framework, with respect to custodial arrangements, segregation, and 
rehypothecation, the Final Margin Rule generally requires that:
    <bullet> All assets posted by or collected by CSEs as initial 
margin must be held by one or more custodians that are not the CSE, the 
counterparty, or margin affiliates of the CSE or the counterparty.\171\
---------------------------------------------------------------------------

    \171\ See Sec.  23.157(a) and (b).
---------------------------------------------------------------------------

    <bullet> CSEs must enter into an agreement with each custodian 
holding initial margin collateral that:
    [ssquf] Prohibits the custodian from rehypothecating, repledging, 
reusing, or otherwise transferring (through securities lending, 
securities borrowing, repurchase agreement, reverse repurchase 
agreement or other means) the collateral held by the custodian;
    [ssquf] May permit the custodian to hold cash collateral in a 
general deposit account with the custodian if the funds in the account 
are used to purchase an asset that qualifies as eligible collateral 
(other than equities, investment vehicle securities, or gold), such 
asset is held in compliance with Sec.  23.157, and such purchase takes 
place within a time period reasonably necessary to consummate such 
purchase after the cash collateral is posted as initial margin; and
    [ssquf] Is a legal, valid, binding, and enforceable agreement under 
the laws of all relevant jurisdictions including in the event of 
bankruptcy, insolvency, or a similar proceeding.\172\
---------------------------------------------------------------------------

    \172\ See Sec.  23.157(c)(1) and (2).
---------------------------------------------------------------------------

    <bullet> A posting party may substitute any form of eligible 
collateral for posted collateral held as initial margin.\173\
---------------------------------------------------------------------------

    \173\ See Sec.  23.157(c)(3).
---------------------------------------------------------------------------

    <bullet> A posting party may direct reinvestment of posted 
collateral held as initial margin in any form of eligible 
collateral.\174\
---------------------------------------------------------------------------

    \174\ See id.
---------------------------------------------------------------------------

    <bullet> Collateral that is collected or posted as variation margin 
is not required to be held by a third party custodian and is not 
subject to restrictions on rehypothecation, repledging, or reuse.\175\
---------------------------------------------------------------------------

    \175\ See Final Margin Rule, 81 FR at 672.
---------------------------------------------------------------------------

2. EU Requirement for Custodial Arrangements, Segregation, and 
Rehypothecation
    In keeping with the principles set forth in the BCBS/IOSCO 
Framework, with respect to custodial arrangements, segregation, and 
rehypothecation, the EU's margin rules generally require that:
    <bullet> Cash collected as initial margin must be maintained in 
cash accounts at central banks or credit institutions which fulfill all 
of the following conditions: (i) They are authorized in accordance with 
Directive 2013/36/EU or are authorized in a third country whose 
supervisory and regulatory arrangements have been found to be 
equivalent in accordance with Article 142(2) of Regulation (EU) No 575/
2013; and (ii) they are neither the posting nor the collecting 
counterparties, nor part of the same group as either of the 
counterparties.\176\
---------------------------------------------------------------------------

    \176\ See RTS, Article 19(1)(e).
---------------------------------------------------------------------------

    <bullet> Any collateral posted as initial or variation margin may 
be substituted by alternative collateral where all of the following 
conditions are met: (a) The substitution is made in accordance with the 
terms of the collateral agreement between the counterparties; (b) the 
alternative collateral is eligible under the RTS; (c) the value of the 
alternative collateral is sufficient to meet all margin requirements 
after applying any relevant haircut.\177\
---------------------------------------------------------------------------

    \177\ See RTS, Article 19(2).
---------------------------------------------------------------------------

    <bullet> Initial margin shall be protected from the default or 
insolvency of the collecting counterparty by segregating it in either 
or both of the following ways: (a) On the books and records of a third 
party-holder or custodian; (b) via other legally binding 
arrangements.\178\
---------------------------------------------------------------------------

    \178\ See RTS, Article 19(3).
---------------------------------------------------------------------------

    <bullet> Counterparties shall ensure that non-cash collateral 
exchanged as initial margin is segregated as follows: (a) Where 
collateral is held by the collecting counterparty on a proprietary 
basis, it shall be segregated from the rest of the proprietary assets 
of the collecting counterparty; (b) where collateral is held by the 
posting counterparty on a non-proprietary basis, it shall be segregated 
from the rest of the proprietary assets of the posting counterparty; 
(c) where collateral is held on the books and records of a custodian or 
other third party holder, it shall be segregated from the proprietary 
assets of that third-party holder or custodian.\179\
---------------------------------------------------------------------------

    \179\ See RTS, Article 19(5).
---------------------------------------------------------------------------

    <bullet> The collecting counterparty shall not rehypothecate, 
repledge nor otherwise reuse the collateral collected as initial 
margin.\180\
---------------------------------------------------------------------------

    \180\ See RTS, Article 20(1).
---------------------------------------------------------------------------

    <bullet> A third party holder may use the initial margin received 
in cash for reinvestment purposes.\181\
---------------------------------------------------------------------------

    \181\ See RTS, Article 20(2).
---------------------------------------------------------------------------

3. Commission Determination
    The Commission notes that in one respect, the EU's margin 
requirements with respect to custodial arrangements are less stringent 
than those of the Final Margin Rule. Under the Final Margin Rule, all 
assets posted by or collected by CSEs as initial margin must be held by 
one or more custodians that are not the CSE, the counterparty, or 
margin affiliates of the CSE or the counterparty.\182\ The EU's margin 
rules do not prohibit an FC or NFC+ from using an affiliated entity as 
custodian to hold initial margin other than cash collected from 
counterparties.
---------------------------------------------------------------------------

    \182\ See Sec.  23.157(a) and (b).
---------------------------------------------------------------------------

    However, the EC has highlighted in its application that Article 
19(3) of the RTS, which governs how initial margin must be held, leads 
with the requirement that ``initial margin shall be protected from the 
default or insolvency of the collecting counterparty.'' As the 
applicant further represented, the EC and the European Supervisory 
Authorities favor the use of third-party holders or custodians for non-
cash collateral but recognize through Article 19(3)(b) of the RTS that 
the legal framework in the EU and, in particular, the Financial 
Collateral Directive,\183\ allows Member States to authorize other 
specific legally binding arrangements with equivalent finality and 
protection. An example, according to the applicant, would be a third-
country trust bank that, while not necessarily recognized as a 
custodian in the EU or individual Member State, may offer equivalent 
collateral protection, both legally and operationally.
---------------------------------------------------------------------------

    \183\ See http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02002L0047-20140702&from=EN.
---------------------------------------------------------------------------

    To further encourage the use of arrangements that protect initial 
margin from the default or insolvency of a counterparty, FCs and NFC+s 
subject to the EU margin regime must get legal certainty (either by way 
of an internal

[[Page 48411]]

and independent opinion or via an external independent third party) as 
to whether the segregation requirements have been met.\184\ In 
addition, the RTS require counterparties to provide documentation to 
their competent authority upon request supporting that the segregation 
arrangements in all relevant jurisdictions meet these requirements. The 
RTS also require counterparties subject to the EU margin regime to have 
procedures that ensure ongoing compliance with these requirements, 
particularly to show that initial margin is freely transferable to the 
posting counterparty in a timely manner in case of default of the 
collecting counterparty.\185\
---------------------------------------------------------------------------

    \184\ See RTS, Article 19(6).
    \185\ See RTS, Article 19(1)(g).
---------------------------------------------------------------------------

    Accordingly, despite the differences in required custodial 
arrangements, the Commission has determined that the EU's margin 
requirements applicable to FCs and NFC+s pertaining to custodial 
arrangements, segregation, and rehypothecation are comparable in 
outcome to the corresponding requirements under the Final Margin Rule. 
Specifically, the Commission finds that under both the EU's 
requirements and the Final Margin Rule, a CSE/FC/NFC+ is required to 
segregate the initial margin posted by its counterparties under terms 
that ensure initial margin is protected from the default or insolvency 
of the collecting counterparty and freely transferable to the posting 
counterparty in a timely manner in case of any such default. Both 
regimes also prohibit the rehypothecation of initial margin. 
Accordingly, the Commission finds that the EU's requirements pertaining 
to custodial arrangements, segregation, and rehypothecation are 
comparable in outcome to those required by the Final Margin Rule.

L. Requirements for Margin Documentation

1. Commission Requirement for Margin Documentation
    With respect to requirements for documentation of margin 
arrangements, the Final Margin Rule generally provides that:
    <bullet> CSEs must execute documentation with each counterparty 
that provides the CSE with the contractual right and obligation to 
exchange initial margin and variation margin in such amounts, in such 
form, and under such circumstances as are required by the Final Margin 
Rule.\186\
---------------------------------------------------------------------------

    \186\ See Sec.  23.158(a).
---------------------------------------------------------------------------

    <bullet> The margin documentation must specify the methods, 
procedures, rules, inputs, and data sources to be used for determining 
the value of uncleared swaps for purposes of calculating variation 
margin; describe the methods, procedures, rules, inputs, and data 
sources to be used to calculate initial margin for uncleared swaps 
entered into between the CSE and the counterparty; and specify the 
procedures by which any disputes concerning the valuation of uncleared 
swaps, or the valuation of assets collected or posted as initial margin 
or variation margin may be resolved.\187\
---------------------------------------------------------------------------

    \187\ See Sec.  23.158(b).
---------------------------------------------------------------------------

2. EU Requirement for Margin Documentation
    With respect to requirements for documentation of margin 
arrangements, the EU's margin rules generally provide that the terms of 
all necessary agreements to be entered into by counterparties, at the 
latest, at the moment in which a non-centrally cleared OTC derivative 
contract is concluded. Such documentation shall include the terms of 
the netting agreement and the terms of the exchange of collateral 
agreement, and (a) any payment obligations arising between 
counterparties; (b) the conditions for netting payment obligations; (c) 
events of default or other termination events of the non-centrally 
cleared OTC derivative contracts; (d) all calculation methods used in 
relation to payment obligations; (e) the conditions for netting payment 
obligations upon termination, (f) the transfer of rights and 
obligations upon termination; (g) the governing law of the transactions 
of the non-centrally cleared OTC derivative contracts.\188\
---------------------------------------------------------------------------

    \188\ See RTS, Article 2(g).
---------------------------------------------------------------------------

3. Commission Determination
    Based on the foregoing and the representations of the applicant, 
the Commission has determined that the EU's margin requirements 
pertaining to margin documentation are substantially the same as the 
margin documentation requirements under the Final Margin Rule. 
Specifically, the Commission finds that under both the EU's 
requirements and the Final Margin Rule, a CSE/FC/NFC+ is required to 
enter into documentation with each OTC derivative/swap counterparty 
that sets forth the method for calculating and transferring initial and 
variation margin. Accordingly, the Commission finds that the EU's 
requirements pertaining to margin documentation are comparable in 
outcome to those required by the Final Margin Rule.

M. Cross-Border Application of the Margin Regime

1. Cross-Border Application of the Final Margin Rule
    The general cross-border application of the Final Margin Rule, as 
set forth in the Cross-Border Margin Rule, is discussed in detail in 
Section II above. However, Sec. Sec.  23.160(d) and (e) of the Cross-
Border Margin Rule also provide certain alternative requirements for 
uncleared swaps subject to the laws of a jurisdiction that does not 
reliably recognize close-out netting under a master netting agreement 
governing a swap trading relationship, or that has inherent limitations 
on the ability of a CSE to post initial margin in compliance with the 
custodial arrangement requirements \189\ of the Final Margin Rule.\190\
---------------------------------------------------------------------------

    \189\ See Sec.  23.157 and Section IV(K) above.
    \190\ See Sec.  23.160(d) and (e). Paragraph (d) of the rule 
addresses requirements for non-netting jurisdictions, and paragraph 
(e) addresses jurisdictions where compliance with custodial 
arrangement requirements is unavailable.
---------------------------------------------------------------------------

    Section 23.160(d) generally provides that where a jurisdiction does 
not reliably recognize close-out netting, the CSE must treat the 
uncleared swaps covered by a master netting agreement on a gross basis 
with respect to collecting initial and variation margin, but may treat 
such swaps on a net basis with respect to posting initial and variation 
margin.\191\
---------------------------------------------------------------------------

    \191\ See id.
---------------------------------------------------------------------------

    Section 23.160(e) generally provides that where certain CSEs are 
required to transact with certain counterparties in uncleared swaps 
through an establishment in a jurisdiction where, due to inherent 
limitations in legal or operational infrastructure, it is impracticable 
to require posted initial margin to be held by an independent custodian 
pursuant to Sec.  23.157, the CSE is required to collect initial margin 
in cash (as described in Sec.  23.156(a)(1)(i)) and post and collect 
variation margin in cash, but is not required to post initial margin. 
In addition, the CSE is not required to hold the initial margin 
collected with an unaffiliated custodian.\192\ Finally, the CSE may 
only enter into such affected transactions up to 5% of its total 
uncleared swap notional outstanding in each broad category of swaps 
described in Sec.  23.154(b)(2)(v).
---------------------------------------------------------------------------

    \192\ See Sec. Sec.  23.160(e) and 23.157(b).
---------------------------------------------------------------------------

2. Cross-Border Application of EU's Margin Regime
    With respect to cross-border transactions, the EU's margin 
requirements generally provide that the

[[Page 48412]]

EC may, in order to avoid duplicative and conflicting requirements in 
respect of derivatives transactions, adopt implementing acts declaring 
that the legal, supervisory, and enforcement arrangements of a non-EU 
country are equivalent to the margin requirements for non-centrally 
cleared OTC derivatives in Article 11 or EMIR.\193\ An implementing act 
determining equivalence shall imply that counterparties entering into a 
transaction within the scope of EMIR will be deemed to have fulfilled 
their requirements where at least one of the counterparties is 
established in the third country in respect of which the implementing 
act has been adopted, and with respect to the requirements to which the 
implementing act applies.\194\
---------------------------------------------------------------------------

    \193\ See EMIR, Article 13(2).
    \194\ See EMIR, Article 13(3).
---------------------------------------------------------------------------

    With respect to non-centrally cleared OTC derivatives subject to 
the laws of a jurisdiction where legal enforceability of netting 
agreements or collateral protection cannot be ensured, the EU's margin 
regime provides that:
    <bullet> Where counterparties enter into a netting or an exchange 
of collateral agreement, they shall perform an independent legal review 
of the enforceability of those agreements. The review may be conducted 
by an internal independent unit or by an independent third party.\195\
---------------------------------------------------------------------------

    \195\ See RTS, Article 2(3).
---------------------------------------------------------------------------

    <bullet> Counterparties shall perform an independent legal review 
in order to verify that the segregation arrangement meets the 
requirements of the RTS. The review may be conducted by an internal 
independent unit or by an independent third party.\196\
---------------------------------------------------------------------------

    \196\ See RTS, Article 19(6).
---------------------------------------------------------------------------

    <bullet> Counterparties established in the EU may provide in their 
risk management procedures that variation and initial margins are not 
required to be posted for non-centrally cleared OTC derivative 
contracts concluded with counterparties established in a third-country 
for which any of the following apply: (a) The legal review referred to 
in Article 2(3) of the RTS confirms that the netting agreement and, 
where used, the exchange of collateral agreement cannot be legally 
enforced with certainty at all times; (b) the legal review referred to 
in Article 19(6) of the RTS confirms that the segregation requirements 
of the RTS cannot be met. For the purposes of subparagraph (a), 
counterparties established in the EU shall collect margin on a gross 
basis.\197\
---------------------------------------------------------------------------

    \197\ See RTS, Article 31(1).
---------------------------------------------------------------------------

    <bullet> Counterparties established in the EU may provide in their 
risk management procedures that variation and initial margins are not 
required to be posted or collected for contracts concluded with 
counterparties established in a third-country where all of the 
following conditions apply: (a) The legal review referred to in Article 
2(3) of the RTS confirms that the netting agreement and, where used, 
the exchange of collateral agreement cannot be legally enforced with 
certainty at all times and, where applicable, the legal review referred 
to in Article 19(6) of the RTS confirms that the segregation 
requirements of the RTS cannot be met; (b) the legal reviews confirm 
that collecting collateral in accordance with this RTS is not possible, 
even on a gross basis; and (c) the OTC derivatives in a counterparty's 
portfolio from counterparties in non-netting jurisdictions is below 
2.5%.\198\
---------------------------------------------------------------------------

    \198\ See RTS, Article 31(2) and (3).
---------------------------------------------------------------------------

3. Commission Determination
    Based on the foregoing and the representations of the applicant, 
the Commission finds that the EU's margin regime with respect to its 
cross-border application is comparable in outcome to that of the Final 
Margin Rule as set forth in the Cross-Border Margin Rule.
    First, the Commission recognizes that the EU's margin regime 
permits substituted compliance to substantially the same extent as the 
Cross-Border Margin Rule. For example, where a CSE finds itself subject 
to both the Final Margin Rule and the EU's margin regime, it may be 
possible under an EC equivalence determination that such CSE's 
compliance with the Final Margin Rule will have fulfilled the 
corresponding obligation under the EU's margin regime.
    Second, with respect to transactions subject to the laws of a non-
netting jurisdiction or a jurisdiction where collateral protection 
cannot be ensured, the EU's margin regime requires that margin be 
collected on a gross basis and, where that is not possible, that the 
FC/NFC+ limit their dealings in such jurisdiction to 2.5% of the OTC 
derivatives in the FC/NFC+'s portfolio. While this framework for non-
centrally cleared OTC derivatives transacted with counterparties in 
these types of jurisdictions is not identical to the Final Margin Rule 
on this subject, the Commission recognizes that the conditions 
requiring that margin be collected on a gross basis or, where that is 
not possible, such transactions be subject to a conservative limit, 
will serve to mitigate the potential risks associated with these types 
of transactions. The RTS also provides that ``these treatments would be 
considered sufficiently prudent, because there are also other risk-
mitigation techniques as an alternative to margins.'' \199\ Moreover, 
before a counterparty may even consider collecting margin on a gross 
basis or be permitted to transact with counterparties in a non-netting 
jurisdiction up to any level, the EU margin rules obligate 
counterparties to conduct a legal review on the enforceability of 
netting agreements in the third-country jurisdiction and to obtain a 
negative independent legal review.\200\
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    \199\ See RTS, Recital (18).
    \200\ See RTS, Article 31(2).
---------------------------------------------------------------------------

    The Commission also notes that a CSE, including a CSE that would be 
operating under a substituted compliance determination, is required to 
have a risk management program pursuant Sec.  23.600, and thus the 
Commission has the authority to inquire as to the adequacy of the risk 
management covering uncleared swaps in non-netting jurisdictions.
    Having considered the similarities and differences described above, 
the Commission finds that: (1) The availability of reciprocity of 
substituted compliance available from the EU makes the EU margin regime 
comparable in outcome in this respect to that of the Final Margin Rule 
and the Cross-Border Margin Rule; and (2) the conditions that would 
allow an FC/NFC+ to engage in up to 2.5% of its OTC derivatives 
portfolio in jurisdictions that do not recognize non-netting agreements 
or where collateral protection cannot be ensured, including that a 
counterparty must obtain a negative independent legal opinion about the 
enforceability of netting agreements before even considering trading 
with counterparties in non-netting jurisdictions, plus other risk-
mitigation techniques that FC/NFC+s must have, make the EU margin 
regime comparable in outcome in this respect to that of the Final 
Margin Rule and the Cross-Border Margin Rule. Accordingly, the 
Commission finds the cross-border aspects of the EU's margin regime 
comparable in outcome to those of the Commission.

N. Supervision and Enforcement

    The Commission has a long history of regulatory cooperation with 
the Member State competent authorities, including cooperation in the 
regulation of registrants of the Commission that are also FCs.\201\ 
These competent

[[Page 48413]]

authorities, as noted above, are responsible for supervising FCs as 
part of their ongoing prudential regulation and supervision of such 
FCs, will enforce the RTS, which are directly applicable in the Member 
States, and will take all measures necessary to ensure that those rules 
are implemented. Thus, the Commission finds that the EC, through the 
competent authorities, has the necessary powers to supervise, 
investigate, and discipline entities for compliance with its margin 
requirements and recognizes the relevant competent authorities' ongoing 
efforts to detect and deter violations of, and ensure compliance with, 
the margin requirements applicable in the EU.
---------------------------------------------------------------------------

    \201\ To facilitate this cooperation, the Commission has 
concluded memoranda of understanding with many of the competent 
authorities. See the Commission's Web site at http://www.cftc.gov/International/MemorandaofUnderstanding/index.htm.
---------------------------------------------------------------------------

V. Conclusion

    As detailed above, the Commission has noted several differences 
between the Final Margin Rule and the EU margin rules. However, having 
considered the scope and objectives of the margin requirements for 
uncleared swaps under the laws of the EU,\202\ whether such margin 
requirements achieve comparable outcomes to the Commission's 
corresponding margin requirements,\203\ and the ability of the Member 
State competent authorities to supervise and enforce compliance with 
the margin requirements for non-centrally cleared OTC derivatives under 
the laws of the EU,\204\ the Commission has determined that the EU 
margin rules are comparable in outcome to the Final Margin Rule.
---------------------------------------------------------------------------

    \202\ See Sec.  23.160(c)(3)(i).
    \203\ See Sec.  23.160(c)(3)(ii). As discussed above, the 
Commission's Final Margin Rule is based on the BCBS/IOSCO Framework; 
therefore, the Commission expects that the relevant foreign margin 
requirements would conform to such Framework at minimum in order to 
be deemed comparable in outcome to the Commission's corresponding 
margin requirements.
    \204\ See Sec.  23.160(c)(3)(iii). See also Sec.  
23.160(c)(3)(iv) (indicating the Commission would also consider any 
other relevant facts and circumstances).
---------------------------------------------------------------------------

    As noted above, the Final Margin Rule's regulatory objective is to 
ensure the safety and soundness of CSEs in order to offset the greater 
risk to CSEs and the financial system arising from the use of swaps 
that are not cleared. The EU margin rules require counterparties to 
apply robust risk-mitigation techniques to their bilateral 
relationships to reduce counterparty credit risk and to mitigate the 
potential systemic risk that could arise. Moreover, the EU margin rules 
achieve comparable outcomes to the Final Margin Rule in the following 
specific areas: The products and entities subject to the EU's margin 
requirements; the treatment of inter-affiliate derivative transactions; 
the methodologies for calculating the amounts of initial and variation 
margin; the process and standards for approving models for calculating 
initial and variation margin models; the timing and manner in which 
initial and variation margin must be collected and/or paid; any 
threshold levels or amounts; risk management controls for the 
calculation of initial and variation margin; eligible collateral for 
initial and variation margin; the requirements of custodial 
arrangements, including segregation of margin and rehypothecation; 
margin documentation requirements; and the cross-border application of 
the EU's margin regime. Finally, based on the long history of 
regulatory cooperation between the Commission and Member State 
competent authorities with supervisory and enforcement authority under 
the RTS, the Commission finds that the EC, through the competent 
authorities, has the necessary powers to supervise, investigate, and 
discipline entities for compliance with its margin requirements, and 
recognizes the relevant authorities' ongoing efforts to detect and 
deter violations of, and ensure compliance with, the margin 
requirements applicable in the EU.
    Accordingly, a CSE that is subject to both the Final Margin Rule 
and the EU's margin rules with respect to an uncleared swap that is 
also a non-centrally cleared OTC derivative may rely on substituted 
compliance for all aspects of the Final Margin Rule and the Cross-
Border Margin Rule. Any such CSE that, in accordance with this 
comparability determination, complies with the EU margin rules, would 
be deemed to be in compliance with the Final Margin Rule but would 
remain subject to the Commission's examination and enforcement 
authority.\205\
---------------------------------------------------------------------------

    \205\ See Sec.  23.160(c)(4).

    Issued in Washington, DC, on October 13, 2017, by the 
Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

Appendix to Comparability Determination for the European Union: Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz 
and Behnam voted in the affirmative. No Commissioner voted in the 
negative.

[FR Doc. 2017-22616 Filed 10-17-17; 8:45 am]
 BILLING CODE 6351-01-P


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