44 See § .6 and appendix B of the final rule for a complete description of the eligible collateral requirements, including an additive 8 percent cross-currency haircut. The terms “haircut” and “discount” are used interchangeably. 45 The segregation requirement therefore applies only to the minimum amount of initial margin that a covered swap entity is required to collect by the rule from a swap entity or financial end
.4(c) of the final rule. 77 See BCBS and IOSCO “Margin requirements for non-centrally cleared derivatives,” (March 2015), available at / which extends the original compliance dates set out in the 2013 international framework by nine months.
rule.100 Rather, the Agencies have included provisions in the final rule that would require covered swap entities to subject these “other counterparties” to margin requirements to the extent that their own internal risk management procedures would require that these counterparty relationships be margined. A few commenters argued that the exclusion from financial end user for a person that qualifies for the affiliate exemption from clearing pursuant to section 2(h)(7)(D) of the Commodity Exchange Act requires an entity to be acting as agent for an affiliate and thus would not capture equivalent entities that act as principal for an affiliate. These commenters contended that many such entities act as principal for an affiliate and that the CFTC has issued no-action letters, effectively exempting such entities from clearing.101 As noted above, the Agencies intend to align the exclusions from the definition of financial end user as much as possible with statutory exceptions as well as exclusions implemented by the CFTC by rule. The Agencies note that to the extent the CFTC acts to exempt such entities from clearing by rule, these entities would also be excluded from the definition of financial end user for purposes of this rule. A few commenters requested that the Agencies exclude from the definition of financial end user those entities guaranteed by a foreign sovereign or multilateral development bank.102 100 As further discussed below, the final rule specifically excludes these entities from the definition of “financial end users.” Instead, they are treated as “other counterparties” with respect to the rule’s initial and variation margin requirements to the extent the swaps they enter into with covered swap entities are not otherwise exempt from the requirements of this rule. With respect to the initial margin requirements, the “other counterparties” category also includes financial end users that do not have a material swaps exposure. 101 See CFTC No-Action Letter No. 13-22 (June 4, 2013); CFTC No-Action Letter No. 14-144 (Nov. 26, 2014). 102 Some commenters requested additional clarity that certain entities would be included as multilateral development banks. The definition in the final rule includes any other entity that provides financing for national or regional development in which the U.S. government is a shareholder or contributing member or which the relevant Agency determines poses comparable
or control of 25 percent or more of the total equity of the company, directly or indirectly or 117 The proposal’s definitions of “affiliate” and “subsidiary” was similar to the definitions in the Bank Holding Company (“BHC”) Act and the Board’s Regulation Y. See sections 2(d) & 2(k)
Third, the Agencies note that the final rule’s product-level approach to initial margin explicitly allows for risk offsets though the precise form of these offsets differs from a “risk factor” based approach. The Agencies believe that conceptually sound and empirically justified risk offsets for initial margin are appropriate and have included such offsets in the final rule. In general, there are a large number of possible approaches that could be taken to allow for such offsets. The Agencies have considered the alternatives raised by the commenters and have adopted in the final rule an approach to recognizing risk offsets that provides for a significant amount of hedging and diversification benefits while also promoting transparency and simplicity in the margining framework. Product offsets. Some commenters suggested that for the purposes of calculating model-based initial margin amounts, portfolio offsets should be recognized between non-cleared swaps, cleared swaps and other products such as positions in securities. The Agencies’ authority under the Dodd-Frank Act for prescribing margin requirements on non-cleared swaps relates only to non- cleared swaps and not to other products even if those products are themselves, at times, traded in conjunction with non-cleared swaps. In particular, sections 731 and 764 of the Dodd-Frank Act require that the margin requirements be “imposed on all swaps that are not cleared” and that those requirements “be appropriate for the risk associated with non-cleared swaps held as a swap dealer or major swap participant.”178 The Agencies believe that it is appropriate for the margin requirements to be reflective of the risks in a covered swap entity’s portfolio of non-cleared
puts, another commenter argued that a guarantee should be defined to constitute an express, legally enforceable arrangement providing foreign counterparties with recourse to the U.S. guarantor. Another commenter argued that cross-default provisions would not generally give a swap counterparty any direct right of access against the specified entity and should not be treated as a guarantee. In order to provide additional clarity on the meaning of guarantee for purposes of § . 9, the final rule requires one party to have rights of recourse against a third-party guarantor; however, in order to address potential concerns about evasion, the Agencies will deem a guarantee to exist, if the third-party guarantor has a guarantee from one or more additional third- party guarantors, with respect to the obligations under the non-cleared swap. The Agencies believe that a definition of “guarantee” that is narrowly targeted to the particular swap obligation provides clarity through a bright-line test that can be applied consistently and is appropriately limited in scope. For example, if a foreign registered German Bank covered swap entity (“Party W”) enters into a swap with a non-covered swap entity, foreign subsidiary of a U.S. covered swap entity (“Party X”), and Party X has a guarantee from a third-party guarantor that is a foreign affiliate of Party X (“Party Y”), who then, in turn has a guarantee from its U.S. covered swap entity parent entity (“Parent Z”), the Agencies would deem a guarantee to exist between Party X and Parent Z, on Party X’s swap obligations. Substituted compliance. In addition to the exclusion for certain swaps described above, the final rule would permit certain covered swap entities to comply with a foreign regulatory framework for swaps if the Agencies jointly determine that such foreign regulatory framework is comparable to the requirements of the Agencies’ rule. The development of the 2013
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 final rule. Businesses or other for-profit. Respondents: OCC: Any national bank or subsidiary thereof, Federal savings association or 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 a swap dealer, major swap participant, security-based swap dealer, or major security-based 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 CFR 211.21(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
217 See 5 U.S.C. 603(a). 218 See 79 FR 57348 (September 24, 2014). 219 See 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o-10(e)(3)(A).
cleared swaps and non-cleared security-based swaps with respect to a particular counterparty on the compliance dates in paragraph (e) of this section, the covered swap entity shall remain subject to the requirements of this [part] with respect to that counterparty. (g)(1) If a covered swap entity’s counterparty changes its status such that a non-cleared swap or non-cleared security-based swap with that counterparty becomes subject to stricter margin requirements under this [part] (such as if the counterparty’s status changes from a financial end user without material swaps exposure to a financial end user with material swaps exposure), then the covered swap entity shall comply with the stricter margin requirements for any non-cleared swap or non-cleared security-based swap entered into with that counterparty after the counterparty changes its status. If a covered swap entity’s counterparty changes its status such that a non-cleared swap or non-cleared security-based swap with that counterparty becomes subject to less strict margin requirements under this [part] (such as if the counterparty’s status changes from a financial end user with material swaps exposure to a financial end user without material swaps exposure), then the covered swap entity may comply with the less strict margin requirements for any non-cleared swap or non-cleared security-based swap entered into with that counterparty after the counterparty changes its status as well as for any outstanding non-cleared swap or non- cleared security-based swap entered into after the applicable compliance date in paragraph (e) of this section and before the counterparty changed its status. § .2 Definitions. Affiliate. A company is an affiliate of another company if:
Non-cleared swap means a swap that is not cleared by a derivatives clearing organization registered with the Commodity Futures Trading Commission pursuant to section 5b(a) of the Commodity Exchange Act of 1936 (7 U.S.C. 7a-1(a)) or by a clearing organization that the Commodity Futures Trading Commission has exempted from registration by rule or order pursuant to section 5b(h) of the Commodity Exchange Act of 1936 (7 U.S.C. 7a-1(h)). Non-cleared security-based swap means a security-based swap that is not, directly or indirectly, submitted to and cleared by a clearing agency registered with the U.S. Securities and Exchange Commission pursuant to section 17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1) or by a clearing agency that the U.S. Securities and Exchange Commission has exempted from registration by rule or order pursuant to section 17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1). Prudential regulator has the meaning specified in section 1a(39) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(39)). Savings and loan holding company has the meaning specified in section 10(n) of the Home Owners’ Loan Act (12 U.S.C. 1467a(n)). Securities holding company has the meaning specified in section 618 of the Dodd- Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 1850a). Security-based swap has the meaning specified in section 3(a)(68) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68)). Sovereign entity means a central government (including the U.S. government) or an agency, department, ministry, or central bank of a central government. State means any State, commonwealth, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, or the United States Virgin Islands. Subsidiary. A company is a subsidiary of another company if:
§349.16 [Amended] Amend newly redesignated §349.16 by: Removing “349.8” and adding in its place “349.20”; and Removing “349.6” and adding in its place “349.18”. §349.19 [Amended] Amend newly redesignated §349.19 by: Removing “section 349.6(b)” and adding in its place “§349.18(b)”; Removing “section 349.9” and adding in its place “§349.21”; and Removing “section 349.10” and adding in its place “§349.22”. §349.22 [Amended] Amend newly redesignated §349.22 by removing “§349.9(c)” and adding in its place “§349.21(c)”. Add subpart A to part 349 as set forth at the end of the Common Preamble.