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Timestamp: 2019-11-21 21:09:32
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Matched Legal Cases: ['art 237', 'art 237', 'art 45', 'art 237', 'art 349', 'art 624', 'art 1221', 'art 1', 'arts 230', 'arts 240']

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 12 CFR Part 237 Docket No. R-1415 RIN: 7100-AD74 - PDF Free Download
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1 DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 45 Docket No. OCC RIN: 1557-AD00 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 12 CFR Part 237 Docket No. R-1415 RIN: 7100-AD74 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 349 RIN: 3064-AE21 FARM CREDIT ADMINISTRATION 12 CFR Part 624 RIN: 3052-AC69 FEDERAL HOUSING FINANCE AGENCY 12 CFR Part 1221 RIN: 2590-AA45 MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES AGENCIES: Office of the Comptroller of the Currency, Treasury ( OCC ); Board of Governors of the Federal Reserve System ( Board ); Federal Deposit Insurance Corporation ( FDIC ); Farm Credit Administration ( FCA ); and the Federal Housing Finance Agency ( FHFA ). ACTION: Interim final rule and request for comment.
2 SUMMARY: The OCC, Board, FDIC, FCA, and FHFA (each an Agency and, collectively, the Agencies ) are adopting and invite comment on an interim final rule that will exempt certain non-cleared swaps and non-cleared security-based swaps with certain counterparties that qualify for an exception or exemption from clearing from the initial and variation margin requirements promulgated under sections 731 and 764 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act or the Act ). This interim final rule implements Title III of the Terrorism Risk Insurance Program Reauthorization Act of 2015 ( TRIPRA ), which exempts from the Agencies swap margin rules non-cleared swaps and non-cleared security-based swaps in which a counterparty qualifies for an exemption or exception from clearing under the Dodd-Frank Act. This interim final rule is a companion rule to the final rules adopted by the Agencies to implement section 731 and 764 of the Dodd-Frank Act. DATES: The interim final rule is effective April 1, Comments should be received on or before January 31, ADDRESSES: Interested parties are encouraged to submit written comments jointly to all of the Agencies. Commenters are encouraged to use the title Margin and Capital Requirements for Covered Swap Entities to facilitate the organization and distribution of comments among the Agencies. Office of the Comptroller of the Currency. Because paper mail in the Washington, DC area and at the OCC is subject to delay, commenters are encouraged to submit comments by the Federal erulemaking Portal or , if possible. Please use the title Margin and Capital Requirements for Covered Swap Entities to facilitate the organization 2
3 and distribution of the comments. You may submit comments by any of the following methods: Federal erulemaking Portal regulations.gov : Go to Enter Docket ID OCC in the Search Box and click Search. Results can be filtered using the filtering tools on the left side of the screen. Click on Comment Now to submit public comments. Click on the Help tab on the Regulations.gov home page to get information on using Regulations.gov, including instructions for submitting public comments. Mail: Legislative and Regulatory Activities Division, Office of the Comptroller of the Currency, th Street, SW, Suite 3E-218, Mail Stop 9W-11, Washington, DC Hand Delivery/Courier: th Street, SW, Suite 3E-218, Mail Stop 9W-11, Washington, DC Fax: (571) Instructions: You must include OCC as the agency name and Docket ID OCC in your comment. In general, OCC will enter all comments received into the docket and publish them on the Regulations.gov Web site without change, including any business or personal information that you provide such as name and address information, addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. 3
4 Do not enclose any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure. You may review comments and other related materials that pertain to this rulemaking action by any of the following methods: Viewing Comments Electronically: Go to Enter Docket ID OCC in the Search box and click Search. Comments can be filtered by Agency using the filtering tools on the left side of the screen. Click on the Help tab on the Regulations.gov home page to get information on using Regulations.gov, including instructions for viewing public comments, viewing other supporting and related materials, and viewing the docket after the close of the comment period. Viewing Comments Personally: You may personally inspect and photocopy comments at the OCC, 400 7th Street, SW, Washington, DC. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) Upon arrival, visitors will be required to present valid government-issued photo identification and to submit to a security screening in order to inspect and photocopy comments. Docket: You may also view or request available background documents and project summaries using the methods described above. Board of Governors of the Federal Reserve System: You may submit comments, identified by Docket No. R-1415 and RIN 7100 AD74, by any of the following methods: 4
5 Agency Web Site: Follow the instructions for submitting comments at Federal erulemaking Portal: Follow the instructions for submitting comments. Include the docket number in the subject line of the message. Fax: (202) or (202) Mail: Address to Robert dev. Frierson, Secretary, Board of Governors of the Federal Reserve System, 20 th Street and Constitution Avenue, NW, Washington, DC All public comments will be made available on the Board s web site at as submitted, unless modified for technical reasons. Accordingly, comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper form in Room 3515, 1801 K Street N.W. (between 18th and 19th Street N.W.), Washington, DC between 9:00 a.m. and 5:00 p.m. on weekdays. Federal Deposit Insurance Corporation: You may submit comments, identified by RIN 3064-AE21, by any of the following methods: Agency Web Site: Follow instructions for submitting comments on the Agency Web Site. Include RIN 3064-AE21 on the subject line of the message. 5
6 Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, th Street, NW, Washington, DC Hand Delivery: Comments may be hand delivered to the guard station at the rear of the th Street Building (located on F Street) on business days between 7:00 a.m. and 5:00 p.m. Instructions: All comments received must include the agency name and RIN for this rulemaking and will be posted without change to laws/federal/, including any personal information provided. Federal Housing Finance Agency: You may submit your written comments on the interim final rulemaking, identified by regulatory information number: RIN 2590-AA45, by any of the following methods: Agency Website: Federal erulemaking Portal: Follow the instructions for submitting comments. If you submit your comment to the Federal erulemaking Portal, please also send it by to FHFA at to ensure timely receipt by the Agency. Please include RIN 2590-AA45 in the subject line of the message. Hand Delivery/Courier: The hand delivery address is: Alfred M. Pollard, General Counsel, Attention: Comments/ RIN 2590-AA45, Federal Housing Finance Agency, Constitution Center (OGC Eighth Floor), th St., SW, Washington, DC Deliver the package to the Seventh Street entrance Guard Desk, First Floor, on business days between 9:00 a.m. and 5:00 p.m. 6
7 U.S. Mail, United Parcel Service, Federal Express, or Other Mail Service: The mailing address for comments is: Alfred M. Pollard, General Counsel, Attention: Comments/ RIN 2590-AA45, Federal Housing Finance Agency, Constitution Center (OGC Eighth Floor), th St., SW, Washington, DC All comments received by the deadline will be posted for public inspection without change, including any personal information you provide, such as your name, address, address and telephone number on the FHFA website at Copies of all comments timely received will be available for public inspection and copying at the address above on government-business days between the hours of 10 a.m. and 3 p.m. To make an appointment to inspect comments please call the Office of General Counsel at (202) Farm Credit Administration: We offer a variety of methods for you to submit your comments. For accuracy and efficiency reasons, commenters are encouraged to submit comments by or through the FCA s Web site. As facsimiles (fax) are difficult for us to process and achieve compliance with section 508 of the Rehabilitation Act, we are no longer accepting comments submitted by fax. Regardless of the method you use, please do not submit your comments multiple times via different methods. You may submit comments by any of the following methods: Send us an at FCA Web site: Select Law & Regulation, then FCA Regulations, then Public Comments, then follow the directions for Submitting a Comment. 7
8 Federal erulemaking Portal: Follow the instructions for submitting comments. Mail: Barry F. Mardock, Deputy Director, Office of Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA You may review copies of all comments we receive at our office in McLean, Virginia or on our Web site at Once you are in the Web site, select Law & Regulation, then FCA Regulations, then Public Comments, and follow the directions for Reading Submitted Public Comments. We will show your comments as submitted, including any supporting data provided, but for technical reasons we may omit items such as logos and special characters. Identifying information that you provide, such as phone numbers and addresses, will be publicly available. However, we will attempt to remove addresses to help reduce Internet spam. FOR FURTHER INFORMATION CONTACT: OCC: Kurt Wilhelm, Director, Financial Markets Group, (202) , or Carl Kaminski, Special Counsel, Legislative and Regulatory Activities Division, (202) , for persons who are deaf or hard of hearing, TTY (202) , Office of the Comptroller of the Currency, th Street, SW, Washington, DC Board: Sean D. Campbell, Associate Director, (202) , or Elizabeth MacDonald, Manager, Division of Banking Supervision and Regulation, (202) ; Anna M. Harrington, Counsel, (202) , or Victoria M. Szybillo, Counsel, Legal Division, (202) , Board of Governors of the Federal Reserve System, 20th and C Streets, NW, Washington, D.C
9 FDIC: Bobby R. Bean, Associate Director, Capital Markets Branch, Jacob Doyle, Capital Markets Policy Analyst, Division of Risk Management Supervision, (202) ; Thomas F. Hearn, Counsel, or Catherine Topping, Counsel, Legal Division, Federal Deposit Insurance Corporation, th Street, NW, Washington, DC FCA: J.C. Floyd, Associate Director, Finance & Capital Market Team, Timothy T. Nerdahl, Senior Policy Analyst Capital Markets, Jeremy R. Edelstein, Senior Policy Analyst, Office of Regulatory Policy, (703) , TTY (703) , or Richard A. Katz, Senior Counsel, Office of General Counsel, (703) , TTY (703) , Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA FHFA: Robert Collender, Principal Policy Analyst, Office of Policy Analysis and Research, (202) , or Peggy K. Balsawer, Associate General Counsel, Office of General Counsel, (202) , Federal Housing Finance Agency, Constitution Center, th St., SW, Washington, DC The telephone number for the Telecommunications Device for the Hearing Impaired is (800)
10 SUPPLEMENTARY INFORMATION: I. Background. The Dodd-Frank Act was enacted on July 21, Title VII of the Dodd-Frank Act established a comprehensive new regulatory framework for derivatives, which the Act generally characterizes as swaps and security-based swaps. 2 As part of this new regulatory framework, sections 731 and 764 of the Dodd-Frank Act added, respectively, a new section 4s to the Commodity Exchange Act of 1936 (the Commodity Exchange Act ), and a new section 15F to the Securities Exchange Act of 1934 (the Securities Exchange Act ), which require registration with the U.S. Commodity Futures Trading Commission ( CFTC ) of swap dealers and major swap participants and with the U.S. Securities and Exchange Commission (the SEC ) of security-based swap dealers and major security-based swap participants. 3 These registrants are collectively referred to in this preamble as swap entities. 1 Pub. L , 124 Stat (2010). 2 Swaps are defined in section 721 of the Dodd-Frank Act to include interest rate swaps, commodity-based swaps, equity swaps and credit default swaps, and security-based swaps are defined in section 761 of the Dodd-Frank Act to include a swap based on a single security or loan or on a narrow-based security index. See 7 U.S.C. 1a(47); 15 U.S.C. 78c(a)(68). 3 See 7 U.S.C. 6s; 15 U.S.C. 78o-10. Section 731 of the Dodd-Frank Act requires swap dealers and major swap participants to register with the CFTC, which is vested with primary responsibility for the oversight of the swaps market under Title VII of the Dodd-Frank Act. Section 764 of the Dodd-Frank Act requires security-based swap dealers and major securitybased swap participants to register with the SEC, which is vested with primary responsibility for the oversight of the security-based swaps market under Title VII of the Dodd-Frank Act. Section 712(d)(1) of the Dodd-Frank Act requires the CFTC and SEC to issue joint rules further defining the terms swap, security-based swap, swap dealer, major swap participant, security-based swap dealer, and major security-based swap participant. The CFTC and SEC issued final joint rulemakings with respect to these definitions in May 2012 and August 2012, respectively. See 77 FR (May 23, 2012); 77 FR (July 5, 2012) (correction of footnote in the Supplementary Information accompanying the rule); and 77 FR (August 13, 2012). 17 CFR part 1; 17 CFR parts 230, 240 and
11 Sections 731 and 764 of the Dodd-Frank Act require the Agencies to adopt joint rules that apply to all swap entities for which any one of the Agencies is the prudential regulator, 4 imposing capital requirements and initial and variation margin requirements on all swaps and security-based swaps not cleared by a registered derivatives clearing organization or clearing agency ( non-cleared swaps ). 5 The Agencies initially proposed a joint rule to implement the capital and margin requirements of sections 731 and 764 on May 11, and re-proposed the rule on September 24, in light of the comments received by the Agencies on the original proposal and subsequent recommendations regarding the international framework for margin requirements on non-cleared derivatives finalized by the Basel Committee on Banking Supervisions ( BCBS ) and the Board of the International Organization of Securities Commissions ( IOSCO ) in September In a separate action, the Agencies have adopted a joint final rule to implement these Dodd-Frank Act requirements (the joint final rule ). The capital and margin requirements under sections 731 and 764 of the Dodd- Frank Act apply to non-cleared swaps and complement other provisions of the Dodd- Frank Act that require the CFTC and SEC to make determinations as to whether certain swaps or security-based swaps, or a group, category, or class of such transactions, should 4 Section 1a(39) of the Commodity Exchange Act defines the term prudential regulator for purposes of the capital and margin requirements applicable to swap dealers, major swap participants, security-based swap dealers and major security-based swap participants. 7 U.S.C. 1a(39) See 7 U.S.C. 6s(e)(2)(A); 15 U.S.C. 78o-10(e)(2)(A). 76 FR (May 11, 2011). 79 FR (September 24, 2014). 8 See BCBS and IOSCO Margin requirements for non-centrally cleared derivatives, (September 2013), available at 11
12 be required to be cleared. 9 If the CFTC or SEC has made such a determination, it is generally unlawful for any person to engage in such a swap or security-based swap unless the transaction is submitted to a derivatives clearing organization or clearing agency, as applicable, for clearing. The clearing requirements, however, do not apply to an entity that is not a financial entity, is using a swap or security-based swap to hedge or mitigate commercial risk, and notifies the applicable Commission, in a manner set forth by that Commission, how it generally meets its financial obligations. 10 Thus, a particular swap or securitybased swap might be subject to the capital and margin requirements of section 731 and 764 either because it is not subject to the mandatory clearing requirement, or because one of the parties to the swap is eligible for, and elects to use, an exception or exemption from the mandatory clearing requirement. Such a swap is a non-cleared swap for purposes of the capital and margin requirements established under sections 731 and 764 of the Dodd-Frank Act. Sections 731 and 764 direct the Agencies to impose initial and variation margin requirements on all swaps that are not cleared. Under the proposed rule, the Agencies distinguished among different types of counterparties on the basis of risk, 11 and the 9 7 U.S.C. 2(h); 15 U.S.C. 78c-3. The Commodity Exchange Act and the Securities Exchange Act set out standards that the CFTC and the SEC are required to apply when making determinations about clearing, which generally address whether a swap or security-based swap is sufficiently standardized to be cleared. 7 U.S.C. 2(h)(2)(D); 15 U.S.C. 78c-3(b)(4). To date, the CFTC has determined that certain interest rate swaps and credit default swaps are required to be cleared. 17 CFR See 7 U.S.C. 2(h)(7); 15 U.S.C. 78c-3(g). Further, the CFTC has authority to exempt swaps from the clearing requirement. 7 U.S.C. 6(c)(1). 11 The joint final rule takes a similar approach. In implementing this risk-based approach, the final rule distinguishes among four separate types of swap counterparties: 12
13 Agencies addressed swaps for certain other counterparties including commercial end users by providing that a covered swap entity s collection of margin from them was subject to the judgment of the covered swap entity. In particular, a covered swap entity was not required to collect initial and variation margin from these other counterparties as a matter of course; a covered swap entity was allowed to collect initial or variation margin at such times and in such forms and amounts (if any) as the covered swap entity determines appropriate in its overall credit risk management of the its exposure to the customer. 12 On January 12, 2015, President Obama signed into law TRIPRA. 13 Title III of TRIPRA, the Business Risk Mitigation and Price Stabilization Act of 2015, amends the statutory provisions added by the Dodd-Frank Act relating to margin requirements for non-cleared swaps and non-cleared security-based swaps. Specifically, section 302 of TRIPRA s Title III amends sections 731 and 764 of the Dodd-Frank Act to provide that the initial and variation margin requirements do not apply to certain transactions of specified counterparties that would qualify for an exemption or exception from clearing, as explained more fully below. Non-cleared swaps and non-cleared security-based swaps that are exempt under section 302 of TRIPRA will not be subject to the Agencies rules implementing margin requirements. In section 303 of TRIPRA, Congress required that (i) counterparties that are themselves swap entities; (ii) counterparties that are financial end users with a material swaps exposure; (iii) counterparties that are financial end users without a material swaps exposure, and (iv) other counterparties, including nonfinancial end users, sovereigns, and multilateral development banks See.3(d) and.4(c) of the proposed rule. Pub. L , 129 Stat. 3 (2015). 13
14 the Agencies implement the provisions of Title III by promulgating an interim final rule and seeking public comment on the interim final rule. 14 The Agencies are therefore promulgating this interim final rule with request for comment. The proposed rule of September 2014 would have allowed covered swap entities to collect initial or variation margin from certain other counterparties, at their discretion. Additionally, covered swap entities would have been required to exchange variation margin with all financial end users, and initial margin with financial end users with material swap exposure. The effect of the interim final rule is to grant an exception from the margin requirements of the joint final rule for non-cleared swaps meeting certain criteria that covered swap entities enter into with certain other counterparties and certain financial end users. 15 As noted above, swaps may be non-cleared swaps either because (i) there is an exemption or exception from clearing available; or (ii) the CFTC or SEC, as applicable, has not determined that such swap or security-based swap is required to be cleared. The exclusions and exemptions from the joint final margin rule described below will apply to 14 Section 303 requires that [t]he amendments made by this title to the Commodity Exchange Act shall be implemented... through the promulgation of an interim final rule... The Agencies are interpreting this provision to apply to the amendments made by TRIPRA to the Securities Exchange Act as well. 15 The joint final rule also contains provisions allowing a covered swap entity to continue with the current practice of collecting initial or variation margin at such times and in such forms and amounts (if any) as the covered swap entity determines appropriate in its overall credit risk management of the swap entity s exposure to the customer for other counterparties. The TRIPRA exemptions are transaction-based, as opposed to counterpartybased. For example, if a commercial end user enters into a non-cleared swap with a covered swap entity and the transaction does not qualify for an exception or exemption as described below, then the covered swap entity would treat the swap in accordance with the other counterparties provisions in.3 and.4 of the joint final rule. See.3(d) and.4(c) of the joint final rule. 14
15 both categories of non-cleared swaps when they involve a counterparty that meets the requirements for an exception or exemption from clearing (e.g., a non-financial end user using swaps to hedge or mitigate commercial risk). Clearing requirements pursuant to the Commodity Exchange Act began to take effect with respect to certain interest rate and credit default swap indices swaps on March 11, Covered swap entities have accordingly already established methods and procedures to engage in transactions with counterparties that are eligible for the clearing exceptions or exemptions and for recording and reporting the eligibility of these transactions for the exception or exemptions as required under the statute. 17 The Agencies expect these processes will function equally well as a basis for the parallel statutory exemptions from initial and variation margin requirements for non-cleared swaps implemented pursuant to this interim final rule. II. Description of the Interim Final Rule. This interim final rule, which adds a new section.1(d) to the joint final rule, adopts the statutory exemptions and exceptions as required under TRIPRA. TRIPRA provides that the initial and variation margin requirements do not apply to the noncleared swaps and non-cleared security-based swaps of three categories of counterparties. In particular, section 302 of TRIPRA amends sections 731 and 764 so that initial and variation margin requirements will not apply to a swap or security-based swap in which a counterparty (to a covered swap entity) is: CFR See 77 FR (July 30, 2012) 17 See, e.g., 17 CFR 50.50(b). 15
16 (1) A non-financial entity (including small financial institution and a captive finance company) that qualifies for the clearing exception under section 2(h)(7)(A) of the Commodity Exchange Act or section 3C(g)(1) of the Securities Exchange Act; (2) A cooperative entity that qualifies for an exemption from the clearing requirements issued under section 4(c)(1) of the Commodity Exchange Act; or (3) An treasury affiliate acting as agent that satisfies the criteria for an exception from clearing in section 2(h)(7)(D) of the Commodity Exchange Act or section 3C(g)(4) of the Securities Exchange Act. A. Non-financial entities TRIPRA provides that the initial and variation margin requirements of the joint final rule shall not apply to a non-cleared swap in which a counterparty qualifies for an exception under section 2(h)(7)(A) of the Commodity Exchange Act or section 3C(g)(1) of the Securities Exchange Act. 18 Section 2(h)(7)(A) and section 3C(g)(1) except from clearing swaps where one of the counterparties is not a financial entity, is using the swap to hedge or mitigate commercial risk, and notifies the CFTC or SEC how it generally meets its financial obligations associated with entering into non-cleared swaps. A number of different types of counterparties may qualify for an exception from clearing under section 2(h)(7)(A) and section 3C(g)(1), including: non-financial end users, small banks, savings associations, Farm Credit System institutions, and credit unions. In addition, captive finance companies qualify for an exception from clearing under section 2(h)(7)(A) See 7 U.S.C. 2(h)(7)(A); 15 U.S.C. 78c-3(g)(1). 19 There is no corresponding exclusion under section 3C(g)(1) of the Securities Exchange Act for captive finance companies, likely because these entities generally do not engage in security-based swaps. 16
17 Non-financial end users: A counterparty that is not a financial entity 20 DRAFT (sometimes referred to as non-financial end users or commercial end users ) that is using swaps to hedge or mitigate commercial risk generally would qualify for an exception from clearing under section 2(h)(7)(A) or section 3C(g)(1) and thus from the requirements of the joint final rule for non-cleared swaps and non-cleared security-based swaps pursuant to section.1(d). Small banks, savings associations, Farm Credit System institutions, and credit unions: The definition of financial entity in section 2(h)(7)(C)(ii) provides that the CFTC shall consider whether to exempt small banks, savings associations, Farm Credit System institutions, and credit unions with total assets of $10 billion or less. Pursuant to this authority, the CFTC has exempted small banks, savings associations, Farm Credit System institutions, and credit unions with total assets of $10 billion or less from the definition of financial entity, thereby permitting these institutions to avail themselves of the clearing exception when they are using swaps to hedge or mitigate risk. 21 As a result, these small financial institutions that are using non-cleared swaps to hedge or 20 See 7 U.S.C. 2(h)(7)(A); 15 U.S.C. 78c-3(g)(1); 17 CFR A financial entity is defined to mean (i) a swap dealer; (ii) a security-based swap dealer; (iii) a major swap participant; (iv) a major security-based swap participant; (v) a commodity pool; (vi) a private fund as defined in section 202(a) of the Investment Advisers Act of 1940; (vii) an employee benefit plan as defined in sections 3(3) and 3(32) of the Employment Retirement Income Security Act of 1974; (viii) a person predominantly engaged in activities that are in the business of banking, or in activities that are financial in nature, as defined in section 4(k) of the Bank Holding Company Act of See 7 U.S.C. 2(h)(7)(C)(i); 15 U.S.C. 78c- 3(g)(3). 21 See 7 U.S.C. 2(h)(7)(C)(ii); 17 CFR 50.50; 77 FR (July 19, 2012); as recodified by 77 FR (Dec 13,2012). 17
18 mitigate commercial risk would also qualify for an exemption from the initial and variation margin requirements of the joint final rule pursuant to section.1(d). Similarly, section 3C(g) provides that the SEC shall consider whether to exempt small banks, savings associations, Farm Credit System institutions, and credit unions with total assets of $10 billion or less. 22 If the SEC were to implement an exclusion for such entities from clearing, non-cleared security-based swaps with those entities would be eligible for the exemption in the Agencies margin rules pursuant to section.1(d) as required under TRIPRA, provided they met the other requirements for the clearing exemption. 23 Captive finance companies: Section 2(h)(7)(C) also provides that the definition of financial entity does not include an entity whose primary business is providing financing and uses derivatives for the purposes of hedging underlying commercial risks relating to interest rate and foreign exchange exposures, 90 percent or more of which arise from financing that facilitates the purchase or lease of products, 90 percent or more of which are manufactured by the parent company or another subsidiary of the parent company ( captive finance company ). 24 These entities can avail themselves of a clearing exception when they are using swaps to hedge or mitigate commercial risk and thus would be eligible for the exemption in the Agencies margin rules pursuant to section.1(d). 22 See 15 U.S.C. 78c 3(g)(3)(B). 23 On December 21, 2010, the SEC proposed to exempt security-based swaps used by small depository institutions, small Farm Credit System institutions, and small credit unions with total assets of $10 billion or less from clearing. See 75 FR (December 21, 2010). 24 See 7 U.S.C. 2(h)(7)(C)(iii). 18
19 B. Treasury affiliates acting as agent TRIPRA provides that the initial and variation margin requirements shall not apply to a non-cleared swap in which a counterparty satisfies the criteria in section 2(h)(7)(D) of the Commodity Exchange Act or section 3C(g)(4) of the Securities Exchange Act. These sections provide that, where a person qualifies for an exception from the clearing requirements, an affiliate of that person (including an affiliate predominantly engaged in providing financing for the purchase of the merchandise or manufactured goods of the person) may qualify for the exception as well, but only if the affiliate is acting on behalf of the person and as an agent and uses the swap to hedge or mitigate the commercial risk of the person or other affiliate of the person that is not a financial entity ( treasury affiliate acting as agent ). 25 A treasury affiliate acting as agent that meets the requirements for a clearing exemption would also be eligible for an exemption pursuant to section.1(d) from the Agencies joint final rule. C. Certain cooperative entities TRIPRA provides that the initial and variation margin requirements shall not apply to a non-cleared swap in which a counterparty qualifies for an exemption issued under section 4(c)(1) of the Commodity Exchange Act from the clearing requirements of section 2(h)(1)(A) of the Commodity Exchange Act for cooperative entities as defined in 25 See 7 U.S.C. 2(h)(7)(D); 15 U.S.C. 78c-3(g)(4). This exception does not apply to a person that is a swap dealer, security-based swap dealer, major swap participant, major security-based swap participant, an issuer that would be an investment company as defined in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(1) or 3(c)(7) of that Act, a commodity pool, or a bank holding company with over $50 billion in consolidated assets. 19
20 such exemption. 26 The CFTC, pursuant to its authority under section 4(c)(1) of the Commodity Exchange Act, adopted a regulation that allows cooperatives that are financial entities to elect an exemption from mandatory clearing of swaps that: (1) they enter into in connection with originating loans for their members; or (2) hedge or mitigate commercial risk related to loans to members or swaps with their members which are not financial entities or are exempt from the definition of financial entity. 27 The swaps of these cooperatives that would qualify for an exemption from clearing also would qualify pursuant to section.1(d) for an exemption from the margin requirements of the joint final rule. III. Request for Comments. The Agencies request comment on all aspects of the interim final rule. IV. Administrative Law Matters. A. Administrative Procedures Act. Pursuant to the Administrative Procedure Act (the APA ), at 5 U.S.C. 553(b)(B), notice and comment are not required prior to the issuance of a final rule if an agency, for good cause, finds that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest. As discussed above, this interim final rule implements Title III of TRIPRA. In section 303 of TRIPRA, Congress required that the Agencies implement the provisions of Title III by promulgating an interim final rule 26 See 7 U.S.C. 6(c)(1). The CFTC, pursuant to its authority under section 4(c)(1) of the Commodity Exchange Act, adopted 17 CFR 50.51, which allows cooperative financial entities that meet certain qualifications to elect not to clear certain swaps that are otherwise required to be cleared pursuant to section 2(h)(1)(A) of the Commodity Exchange Act. 27 See 7 U.S.C. 6(c)(1);17 CFR
21 and seeking public comment on the interim final rule. Given the statutory requirement for an interim final rule, the Agencies find that prior notice and comment in accordance with 5 U.S.C. 553(b) is impracticable. The Agencies are providing, however, an opportunity for comment before the effective date of the interim final rule (April 1, 2016). B. Solicitation of Comments on Use of Plain Language. Section 722 of the Gramm-Leach-Bliley Act, Pub. L , sec. 722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the OCC, Board and FDIC to use plain language in all proposed and final rules published after January 1, The OCC, Board and FDIC invite your comments on how to make this proposal easier to understand. For example: Have we organized the material to suit your needs? If not, how could this material be better organized? Are the requirements in the regulation clearly stated? If not, how could the regulation be more clearly stated? Does the regulation contain language or jargon that is not clear? If so, which language requires clarification? Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes to the format would make the regulation easier to understand? What else could we do to make the regulation easier to understand? C. Paperwork Reduction Act Analysis. Certain provisions of the interim final rule contain collection of information requirements within the meaning of the Paperwork Reduction Act (PRA) of 1995 (44 21
22 U.S.C ). In accordance with the requirements of the PRA, the Agencies may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. The OMB control number for the OCC is , the FDIC is , and the Board is The information collection requirements contained in this joint notice of interim final rulemaking have been submitted to OMB for review and approval by the OCC and FDIC under section 3507(d) of the PRA and section of OMB s implementing regulations (5 CFR 1320). The Board reviewed the interim final rule under the authority delegated to the Board by OMB. The interim final rule contains requirements subject to the PRA. The reporting requirements are found in _.1(d). The interim final rule implements statutory language that requires certain swaps of certain counterparties to qualify for a statutory exemption or exception from clearing in order to not be subject to the initial and variation margin requirements of the joint final rule. Comments are invited on: (a) Whether the collections of information are necessary for the proper performance of the Agencies functions, including whether the information has practical utility; (b) The accuracy of the estimates of the burden of the information collections, including the validity of the methodology and assumptions used; (c) Ways to enhance the quality, utility, and clarity of the information to be collected; (d) Ways to minimize the burden of the information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and 22
23 (e) Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information. All comments will become a matter of public record. Comments on aspects of this notice that may affect reporting or recordkeeping requirements and burden estimates should be sent to the addresses listed in the ADDRESSES section of this Supplementary Information. A copy of the comments may also be submitted to the OMB desk officer for the Agencies: By mail to U.S. Office of Management and Budget, th Street NW, #10235, Washington, DC or by facsimile to , Attention, Federal Banking Agency Desk Officer. Proposed Information Collection Title of Information Collection: Reporting and Recordkeeping Requirements Associated with Margin and Capital Requirements for Covered Swap Entities. Frequency of Response: Annual, daily, and event-generated. Affected Public: The affected public of the OCC, FDIC, and Board is assigned generally in accordance with the entities covered by the scope and authority section of their respective interim final rule. Businesses or other for-profit. Respondents: OCC: Any national bank or a subsidiary thereof, Federal savings association or a subsidiary thereof, or Federal branch or agency of a foreign bank that is registered as a swap dealer, major swap participant, security-based swap dealer, or major security-based swap participant. FDIC: Any FDIC-insured state-chartered bank that is not a member of the Federal Reserve System or FDIC-insured state-chartered savings association that is registered as 23
24 a swap dealer, major swap participant, security-based swap dealer, or major securitybased swap participant. Board: Any state member bank (as defined in 12 CFR 208.2(g)), bank holding company (as defined in 12 U.S.C. 1841), savings and loan holding company (as defined in 12 U.S.C. 1467a), foreign banking organization (as defined in 12 CF (o)), foreign bank that does not operate an insured branch, state branch or state agency of a foreign bank (as defined in 12 U.S.C. 3101(b)(11) and (12)), or Edge or agreement corporation (as defined in 12 CFR 211.1(c)(2) and (3)) that is registered as a swap dealer, major swap participant, security-based swap dealer, or major security-based swap participant. Abstract: This interim final rule implements Title III of the Terrorism Risk Insurance Program Reauthorization Act of 2015 ( TRIPRA ), which exempts from the Agencies swap margin rules non-cleared swaps and non-cleared security-based swaps in which a counterparty qualifies for an exemption or exception from clearing under the Dodd-Frank Act. This interim final rule is a companion rule to the final rules adopted by the Agencies to implement section 731 and 764 of the Dodd-Frank Act. Reporting Requirements The interim final rule implements statutory language that requires certain swaps of certain counterparties to qualify for a statutory exemption or exception from clearing in order to not be subject to the initial and variation margin requirements of the joint final rule. The reporting requirements are found in section.1(d) pursuant to crossreferences to other statutory provisions that set forth the conditions for an exemption from clearing. For example, TRIPRA provides that the initial and variation margin requirements of the joint final rule shall not apply to a non-cleared swap or non-cleared 24
25 security-based swap in which a counterparty qualifies for an exception under section 2(h)(7)(A) of the Commodity Exchange Act or section 3C(g)(1) of the Securities Exchange Act, which includes certain reporting requirements established by the applicable Commission. 28 Certain other counterparties that are exempt from clearing pursuant to other provisions are also required to meet these reporting requirements to notify the respective Commissions. 29 Thus, in certain cases, the statutory exemption from clearing requires a notification to the CFTC or SEC. These counterparties would be required to meet the same notification requirements that are required for an exception or exemption from clearing in order to qualify for an exception or exemption pursuant to section.1(d) from the initial and variation margin requirements established by the Agencies under sections 731 and 764 of the Dodd-Frank Act. Since this interim final rule serves to implement exemptions and exceptions by reference to existing statutory provisions, section.1(d) imposes new reporting requirements that are required under the relevant statutory provisions. Estimated Burden per Response: _.1(d) 1 hour. OCC Number of respondents: 20. Proposed revisions only estimated annual burden: 20,000 hours. 28 See, e.g., 17 CFR 50.50(b). 29 For example, certain exempt cooperatives must meet these reporting requirements to qualify for an exemption from clearing. See 17 CFR 50.51(c). Similarly, exempt treasury affiliates also must be an affiliate of a person that qualifies for an exception from clearing that notifies the applicable Commission how it generally meets its financial obligations associated with entering into non-cleared swaps. See 7 U.S.C. 2(h)(7)(D); 15 U.S.C. 78c-3(g)(4). 25
26 Total estimated annual burden: 34,780 hours. FDIC 30 Number of respondents: 1. Proposed revisions only estimated annual burden: 1,000 hours. Total estimated annual burden: 1,739 hours. Board Number of respondents: 50. Proposed revisions only estimated annual burden: 50,000 hours. Total estimated annual burden: 86,964 hours. FCA: The FCA has determined that the interim final rule does not involve a collection of information pursuant to the Paperwork Reduction Act for Farm Credit System institutions because Farm Credit System institutions are Federally chartered instrumentalities of the United States and instrumentalities of the United States are specifically excepted from the definition of collection of information contained in 44 U.S.C. 3502(3). FHFA: With respect to any regulated entity as defined in section 1303(2) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4502(2)), the interim final rule does not contain any collection of information that requires the approval of the OMB under the PRA. D. Regulatory Flexibility Act Analysis. 30 The FDIC had initially estimated that three of its institutions might register as a swap dealer, major swap participant, security-based swap dealer or major security-based swap participant but no state non-member bank nor any state savings association has so registered, so FDIC is reducing its estimate to one as a placeholder for its information collection. 26
27 Board: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) ( RFA ) 31 generally requires an agency that is issuing a proposed rule to prepare and make available for public comment an initial regulatory flexibility analysis that describes the impact of the proposed rule on small entities. The Board observes that the interim final rule would not have a significant economic impact on a substantial number of small entities. The Board requests comment on its conclusion that the new interim final rule should not have a significant economic impact on a substantial number of small entities. As explained in detail above, this interim final rule implements section 302 of TRIPRA, which provides that initial and variation margin requirements will not apply to specified non-cleared swaps or non-cleared security-based swaps of certain counterparties (to a covered swap entity). This interim final rule may have an effect on the following types of small entities: (i) covered swap entities that are subject to the joint final rule s capital and margin requirements; and (ii) certain counterparties (e.g., nonfinancial end users and certain other small financial counterparties) that engage in swap transactions with covered swap entities. 32 Under Small Business Administration (the SBA ) regulations, the finance and insurance sector includes commercial banking, savings institutions, credit unions, other depository credit intermediation and credit card issuing entities ( financial institutions ), 31 See 5 U.S.C. 601 et seq. 32 The Board notes that the RFA does not require the Board to consider the impact of the interim final rule, including its indirect economic effects, on small entities that are not subject to the requirements of the interim final rule. See e.g., In Mid-Tex Electric Cooperative v. FERC, 773 F.2d 327 (D.C. Cir. 1985); United Distribution Cos. v. FERC, 88 F.3d 1105, 1170 (D.C. Cir. 1996); Cement Kiln Recycling Coalition v. EPA, 255 F.3d 855 (D.C. Cir. 2001). 27
28 which generally are considered small if they have assets of $550 million or less. 33 Covered swap entities would be considered financial institutions for purposes of the RFA in accordance with SBA regulations. The Board does not expect that any covered swap entity is likely to be a small financial institution, because a small financial institution is unlikely to engage in the level of swap activity that would require it to register as a swap dealer or major swap participant. 34 None of the currently registered covered swap entities are small entities. The interim final rule would have an indirect effect on certain counterparties to non-cleared swaps and non-cleared security-based swaps. Many of these counterparties would be considered small under the SBA s regulations. 35 However, the effect of TRIPRA and the interim final rule will be to exempt many of the non-cleared swaps and non-cleared security-based swaps of these counterparties from the margin requirements of the Agencies joint final rule. 33 See 13 CFR (effective December 2, 2014); see also 13 CFR (a)(6) (noting factors that the SBA considers in determining whether an entity qualifies as a small business, including receipts, employees, and other measures of its domestic and foreign affiliates). 34 The CFTC has published a list of provisionally registered swap dealers (as of September 22, 2015) and provisionally registered major swap participants (as of March 1, 2013) that does not include any small financial institutions. See and The SEC has not provided a similar list since it only recently adopted rules to provide for the registration of security-based swap dealers and major security-based swap participants. See 80 FR (August 14, 2015); 17 CFR parts 240, See 13 CFR In additional to small financial institutions with assets of $550 or less, swap counterparties could also include other small entities defined in regulations issued by the SBA, including firms within the Securities, Commodity Contracts, and Other Financial Investments and Related Activities sector with assets of $38.5 million or less and Funds, Trusts and Other Financial Vehicles with assets of $32.5 million or less. 28
29 As described above, this interim final rule implements statutory language that requires certain swaps of certain counterparties to qualify for a statutory exemption or exception from the applicable clearing requirements in order to not be subject to the initial and variation margin requirements of the joint final rule. The reporting requirements are found in section.1(d) of this interim final rule pursuant to crossreferences to other statutory provisions that set forth the conditions for an exemption or exception from clearing. In certain cases, the statutory exemption from clearing and related regulations may require a counterparty to report information, such as how it meets its swaps obligations, to the CFTC or SEC. These counterparties would be required to meet the same notification requirements that are required for an exception or exemption from the relevant CFTC and SEC regulations. Other than this potential overlap of reporting obligations of this interim final rule and the relevant CFTC and SEC regulations, the Board is aware of any other Federal rules that duplicate, overlap, or conflict with this interim final rule. In light of the exemptions provided for the noncleared swaps and non-cleared security-based swaps of many small entities, the Board does not believe that the interim final rule would have a significant economic impact on a substantial number of small entity counterparties. Since this interim final rule is required by section 303 of TRIPRA, the Board does not believe that there are any significant alternatives to the rule which would accomplish the stated objectives of the applicable statute. However, the Agencies welcome comment on any significant alternatives that would minimize the impact of the rule on small entities. 29