Federal Register, Volume 83 Issue 100 (Wednesday, May 23, 2018) 
[Federal Register Volume 83, Number 100 (Wednesday, May 23, 2018)]
[Proposed Rules]
[Pages 23842-23847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10995]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AE71

Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (“Commission” or
“CFTC”) is seeking comment on

[[Page 23843]]

proposed amendments to the margin requirements for uncleared swaps for
swap dealers (“SD”) and major swap participants (“MSP”) for which
there is no prudential regulator (“CFTC Margin Rule”). The Commission
is proposing these amendments in light of the rules recently adopted by
the Board of Governors of the Federal Reserve System (“Board”), the
Federal Deposit Insurance Corporation (“FDIC”), and the Office of the
Comptroller of the Currency (“OCC”) (collectively, the “QFC Rules”)
that impose restrictions on certain uncleared swaps and uncleared
security-based swaps and other financial contracts. Specifically, the
Commission proposes to amend the definition of “eligible master
netting agreement” in the CFTC Margin Rule to ensure that master
netting agreements of firms subject to the CFTC Margin Rule are not
excluded from the definition of “eligible master netting agreement”
based solely on such agreements’ compliance with the QFC Rules. The
Commission also proposes that any legacy uncleared swap (i.e., an
uncleared swap entered into before the applicable compliance date of
the CFTC Margin Rule) that is not now subject to the margin
requirements of the CFTC Margin Rule would not become so subject if it
is amended solely to comply with the QFC Rules. These proposed
amendments are consistent with proposed amendments that the Board,
FDIC, OCC, the Farm Credit Administration (“FCA”), and the Federal
Housing Finance Agency (“FHFA” and, together with the Board, FDIC,
OCC, and FCA, the “Prudential Regulators”), jointly published in the
Federal Register on February 21, 2018.

DATES: Comments must be received on or before July 23, 2018.

ADDRESSES: You may submit comments, identified by RIN 3038-AE71, by any
of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select
the “Submit Comments” link for this rulemaking and follow the
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Center, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for
Mail, above. Please submit your comments using only one of these
methods. Submissions through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (“FOIA”), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec.  145.9 of the Commission’s
regulations.1
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    1 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR chapter I.
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    The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the FOIA.

FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, (202) 418-
5213, [email protected]; Frank Fisanich, Chief Counsel, (202) 418-5949,
[email protected]; Katherine Driscoll, Associate Chief Counsel, (202)
418-5544, [email protected]; or Jacob Chachkin, Special Counsel, (202)
418-5496, [email protected], Division of Swap Dealer and Intermediary
Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

A. The Dodd-Frank Act and the CFTC Margin Rule

    On July 21, 2010, President Obama signed the Wall Street Reform and
Consumer Protection Act (“Dodd-Frank Act”).2 Title VII of the Dodd-
Frank Act amended the Commodity Exchange Act (“CEA”) 3 to establish
a comprehensive regulatory framework designed to reduce risk, to
increase transparency, and to promote market integrity within the
financial system by, among other things: (1) Providing for the
registration and regulation of SDs and MSPs; (2) imposing clearing and
trade execution requirements on standardized derivative products; (3)
creating recordkeeping and real-time reporting regimes; and (4)
enhancing the Commission’s rulemaking and enforcement authorities with
respect to all registered entities and intermediaries subject to the
Commission’s oversight.
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    2 Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
    3 7 U.S.C. 1 et seq.
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    Section 731 of the Dodd-Frank Act added a new section 4s to the CEA
setting forth various requirements for SDs and MSPs. In particular,
section 4s(e) of the CEA directs the Commission to adopt rules
establishing minimum initial and variation margin requirements on all
swaps 4 that are (i) entered into by an SD or MSP for which there is
no Prudential Regulator 5 (collectively, “covered swap entities” or
“CSEs”) and (ii) not cleared by a registered derivatives clearing
organization (“uncleared swaps”).6 To offset the greater risk to
the SD or MSP 7 and the financial system arising from the use of
uncleared swaps, these requirements must (i) help ensure the safety and
soundness of the SD or MSP and (ii) be appropriate for the risk
associated with the uncleared swaps held as an SD or MSP.8
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    4 For the definition of swap, see section 1a(47) of the CEA
and Commission regulation 1.3. 7 U.S.C. 1a(47) and 17 CFR 1.3. It
includes, among other things, an interest rate swap, commodity swap,
credit default swap, and currency swap.
    5 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; the OCC; the FDIC;
the FCA; and the FHFA). The definition further specifies the
entities for which these agencies act as Prudential Regulators. 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 Margin Rule”).
    6 See 7 U.S.C. 6s(e)(2)(B)(ii). In Commission regulation
23.151, the Commission further defined this statutory language to
mean all swaps that are not cleared by a registered derivatives
clearing organization or a derivatives clearing organization that
the Commission has exempted from registration as provided under the
CEA. 17 CFR 23.151.
    7 For the definitions of SD and MSP, see section 1a of the CEA
and Commission regulation 1.3. 7 U.S.C. 1a and 17 CFR 1.3.
    8 7 U.S.C. 6s(e)(3)(A).
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    To this end, the Commission promulgated the CFTC Margin Rule in
January 2016,9 establishing requirements for a CSE to collect and

[[Page 23844]]

post initial 10 and variation margin 11 for uncleared swaps, which
requirements vary based on the type of counterparty to such swaps.12
These requirements generally apply only to uncleared swaps entered into
on or after the compliance date applicable to a particular CSE and its
counterparty (“covered swap”).13 An uncleared swap entered into
prior to a CSE’s applicable compliance date for a particular
counterparty (“legacy swap”) is generally not subject to the margin
requirements in the CFTC Margin Rule.14
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    9 Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants, 81 FR 636 (Jan. 6, 2016). The CFTC Margin
Rule, which became effective April 1, 2016, is codified in part 23
of the Commission’s regulations. 17 CFR 23.150-23.159, 23.161.
    10 Initial margin, as defined in Commission regulation 23.151
(17 CFR 23.151), is the collateral (calculated as provided by Sec. 
23.154 of the Commission’s regulations) that is collected or posted
in connection with one or more uncleared swaps. Initial margin is
intended to secure potential future exposure following default of a
counterparty (i.e., adverse changes in the value of an uncleared
swap that may arise during the period of time when it is being
closed out), while variation margin is provided from one
counterparty to the other in consideration of changes that have
occurred in the mark-to-market value of the uncleared swap. See CFTC
Margin Rule, 81 FR at 664 and 683.
    11 Variation margin, as defined in Commission regulation
23.151 (17 CFR 23.151), is the collateral provided by a party to its
counterparty to meet the performance of its obligation under one or
more uncleared swaps between the parties as a result of a change in
the value of such obligations since the trade was executed or the
last time such collateral was provided.
    12 See Commission regulations 23.152 and 23.153, 17 CFR 23.152
and 23.153. For example, the CFTC Margin Rule does not require a CSE
to collect margin from, or post margin to, a counterparty that is
neither a swap entity nor a financial end user (each as defined in
17 CFR 23.151). Pursuant to section 2(e) of the CEA, 7 U.S.C. 2(e),
each counterparty to an uncleared swap must be an eligible contract
participant (“ECP”), as defined in section 1a(18) of the CEA, 7
U.S.C. 1a(18).
    13 Pursuant to Commission regulation 23.161, compliance dates
for the CFTC Margin Rule are staggered such that SDs must come into
compliance in a series of phases over four years. The first phase
affected SDs and their counterparties, each with the largest
aggregate outstanding notional amounts of uncleared swaps and
certain other financial products. These SDs began complying with
both the initial and variation margin requirements of the CFTC
Margin Rule on September 1, 2016. The second phase began March 1,
2017, and required SDs to comply with the variation margin
requirements of Commission regulation 23.153 with all relevant
counterparties not covered in the first phase. See 17 CFR 23.161.
    14 See CFTC Margin Rule, 81 FR at 651 and Commission
regulation 23.161. 17 CFR 23.161.
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    To the extent that more than one uncleared swap is executed between
a CSE and its covered counterparty, the CFTC Margin Rule permits the
netting of required margin amounts of each swap under certain
circumstances.15 In particular, the CFTC Margin Rule, subject to
certain limitations, permits a CSE to calculate initial margin and
variation margin, respectively, on an aggregate net basis across
uncleared swaps that are executed under the same eligible master
netting agreement (“EMNA”).16 Moreover, the CFTC Margin Rule
permits swap counterparties to identify one or more separate netting
portfolios (i.e., a specified group of uncleared swaps the margin
obligations of which will be netted only against each other) under the
same EMNA, including having separate netting portfolios for covered
swaps and legacy swaps.17 A netting portfolio that contains only
legacy swaps is not subject to the initial and variation margin
requirements set out in the CFTC Margin Rule.18 However, if a netting
portfolio contains any covered swaps, the entire netting portfolio
(including all legacy swaps) is subject to such requirements.19
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    15 See CFTC Margin Rule, 81 FR at 651 and Commission
regulations 23.152(c) and 23.153(d). 17 CFR 23.152(c) and 23.153(d).
    16 Id. The term EMNA is defined in Commission regulation
23.151. 17 CFR 23.151. Generally, an EMNA creates a single legal
obligation for all individual transactions covered by the agreement
upon an event of default following certain specified permitted
stays. For example, an International Swaps and Derivatives
Association (“ISDA”) form Master Agreement may be an EMNA, if it
meets the specified requirements in the EMNA definition.
    17 See CFTC Margin Rule, 81 FR at 651 and Commission
regulations 23.152(c)(2)(ii) and 23.153(d)(2)(ii). 17 CFR
23.152(c)(2)(ii) and 23.153(d)(2)(ii).
    18 Id.
    19 Id.
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    A legacy swap may lose its legacy treatment under the CFTC Margin
Rule, causing it to become a covered swap and causing any netting
portfolio in which it is included to be subject to the requirements of
the CFTC Margin Rule. For reasons discussed in the CFTC Margin Rule,
the Commission elected not to extend the meaning of legacy swaps to
include (1) legacy swaps that are amended in a material or nonmaterial
manner; (2) novations of legacy swaps; and (3) new swaps that result
from portfolio compression of legacy swaps.20 Therefore, and as
relevant here, a legacy swap that is amended after the applicable
compliance date may become a covered swap subject to the initial and
variation margin requirements in the CFTC Margin Rule, and netting
portfolios that were intended to contain only legacy swaps and, thus,
not be subject to the CFTC Margin Rule may become so subject.
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    20 See CFTC Margin Rule, 81 FR at 675. The Commission notes
that certain limited relief has been given from this standard. See
CFTC Staff Letter No. 17-52 (Oct. 27. 2017), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/17-52.pdf.
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B. The QFC Rules

    In late 2017, as part of the broader regulatory reform effort
following the financial crisis to promote U.S. financial stability and
increase the resolvability and resiliency of U.S. global systemically
important banking institutions (“U.S. GSIBs”) 21 and the U.S.
operations of foreign global systemically important banking
institutions (together with U.S. GSIBS, “GSIBs”), the Board, FDIC,
and OCC adopted the QFC Rules. The QFC Rules establish restrictions on
and requirements for uncleared qualified financial contracts 22
(collectively, “Covered QFCs”) of GSIBs, the subsidiaries of U.S.
GSIBs, and certain other very large OCC-supervised national banks and
Federal savings associations (collectively, “Covered QFC
Entities”).23 They are designed to help ensure that a failed
company’s passage through a resolution proceeding–such as bankruptcy
or the special resolution process created by the Dodd-Frank Act–would
be more orderly, thereby helping to mitigate destabilizing effects on
the rest of the financial system.24 To help achieve this goal, the
QFC Rules respond in two ways.25
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    21 See 12 CFR 217.402 (defining global systemically important
banking institution).
    22 Qualified financial contract (“QFC”) is defined in
section 210(c)(8)(D) of the Dodd-Frank Act to mean any securities
contract, commodity contract, forward contract, repurchase
agreement, swap agreement, and any similar agreement that the FDIC
determines by regulation, resolution, or order to be a qualified
financial contract. 12 U.S.C. 5390(c)(8)(D).
    23 See, e.g., 12 CFR 252.82(c) (defining Covered QFC). See
also 82 FR 42882 (Sep. 12, 2017) (for the Board’s QFC Rule). See
also 82 FR 50228 (Oct. 30, 2017) (for FDIC’s QFC Rule). See also 82
FR 56630 (Nov. 29, 2017) (for the OCC’s QFC Rule). The effective
date of the Board’s QFC Rule is November 13, 2017, and the effective
date for the OCC’s QFC Rule and the substance of the FDIC’s QFC Rule
is January 1, 2018. The QFC Rules include a phased-in conformance
period for a Covered QFC Entity, beginning on January 1, 2019 and
ending on January 1, 2020, that varies depending upon the
counterparty type of the Covered QFC Entity. See, e.g., 12 CFR
252.82(f).
    24 See, e.g., Board’s QFC Rule at 42883. In particular, the
QFC Rules seek to facilitate the orderly resolution of a failed GSIB
by limiting the ability of the firm’s Covered QFC counterparties to
terminate such contracts immediately upon entry of the GSIB or one
of its affiliates into resolution. Given the large volume of QFCs to
which covered entities are a party, the exercise of default rights
en masse as a result of the failure or significant distress of a
covered entity could lead to failure and a disorderly resolution if
the failed firm were forced to sell off assets, which could spread
contagion by increasing volatility and lowering the value of similar
assets held by other firms, or to withdraw liquidity that it had
provided to other firms.
    25 Id.
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    First, the QFC Rules generally require the Covered QFCs of Covered
QFC Entities to contain contractual provisions explicitly providing
that any default rights or restrictions on the transfer of the Covered
QFC are limited to the same extent as they would be

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pursuant to the Federal Deposit Insurance Act (“FDI Act”) 26 and
Title II of the Dodd-Frank Act, thereby reducing the risk that those
regimes would be challenged by a court in a foreign jurisdiction.27
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    26 12 U.S.C. 1811 et seq.
    27 See, e.g., Board’s QFC Rule at 42883 and 42890 and 12 CFR
252.83(b).
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    Second, the QFC Rules generally prohibit Covered QFCs from allowing
counterparties to Covered QFC Entities to exercise default rights
related, directly or indirectly, to the entry into resolution of an
affiliate of the Covered QFC Entity (“cross-default rights”).28
This is to ensure that counterparties of solvent affiliates of a failed
entity cannot terminate their contracts with the solvent affiliate
based solely on that failure.29
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    28 See, e.g., Board’s QFC Rule at 42883 and 12 CFR 252.84(b).
Covered QFC Entities are similarly generally prohibited from
entering into Covered QFCs that would restrict the transfer of a
credit enhancement supporting the Covered QFC from the Covered QFC
Entity’s affiliate to a transferee upon the entry into resolution of
the affiliate. See, e.g., Board’s QFC Rule at 42890 and 12 CFR
252.84(b)(2).
    29 Id.
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    Covered QFC Entities are required to enter into amendments to
certain pre-existing Covered QFCs to explicitly provide for these
requirements and to ensure that Covered QFCs entered into after the
applicable compliance date for the rule explicitly provide for the
same.30
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    30 See, e.g., 12 CFR 252.82(a) and (c). The QFC Rules require
a Covered QFC Entity to conform Covered QFCs (i) entered into,
executed, or to which it otherwise becomes a party on or after
January 1, 2019 or (ii) entered into, executed, or to which it
otherwise became a party before January 1, 2019, if the Covered QFC
Entity or any affiliate that is a Covered QFC Entity also enters,
executes, or otherwise becomes a party to a new Covered QFC with the
counterparty to the pre-existing Covered QFC or a consolidated
affiliate of the counterparty on or after January 1, 2019.
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II. Proposed Changes to the CFTC Margin Rule (“Proposal”)

A. Proposed Amendment to the Definition of EMNA in Commission
Regulation 23.151

    As noted above, the current definition of EMNA in Commission
regulation 23.151 allows for certain specified permissible stays of
default rights of the CSE. Specifically, consistent with the QFC Rules,
the current definition provides that such rights may be stayed pursuant
to a special resolution regime such as Title II of the Dodd-Frank Act,
the FDI Act, and substantially similar foreign resolution regimes.31
However, the current EMNA definition does not explicitly recognize
certain restrictions on the exercise of a CSE’s cross-default rights
required under the QFC Rules.32 Therefore, a pre-existing EMNA that
is amended in order to become compliant with the QFC Rules or a new
master netting agreement that conforms to the QFC Rules will not meet
the current definition of EMNA. A CSE that is a counterparty under such
a master netting agreement–one that does not meet the definition of
EMNA–would be required to measure its exposures from covered swaps on
a gross basis, rather than aggregate net basis, for purposes of the
CFTC Margin Rule.33
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    31 17 CFR 23.151.
    32 Id.
    33 See CFTC Margin Rule, 81 FR at 651 and Commission
regulations 23.152(c) and 23.153(d). 17 CFR 23.152(c) and 23.153(d).
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    The Commission wants to protect market participants from being
disadvantaged due to their master netting agreements not meeting the
requirements of an EMNA solely as a result of such agreements’
compliance with the QFC Rules. Accordingly, the Commission proposes to
add a new paragraph (2)(ii) to the definition of “eligible master
netting agreement” in Commission regulation 23.151 and make other
minor related changes to that definition such that a master netting
agreement may be an EMNA even though the agreement limits the right to
accelerate, terminate, and close-out on a net basis all transactions
under the agreement and to liquidate or set-off collateral promptly
upon an event of default of the counterparty to the extent necessary
for the counterparty to comply with the requirements of part 47,
subpart I of part 252, or part 382 of title 12, as applicable. These
enumerated provisions contain the relevant requirements that have been
added by the QFC Rules.

B. Proposed Amendment to Commission Regulation 23.161, Compliance Dates

    Covered QFC Entities must conform to the requirements of the QFC
Rules for Covered QFCs entered into on or after January 1, 2019 and, in
some instances, Covered QFCs entered into before that date.34 To do
so, a Covered QFC Entity may need to amend the contractual provisions
of its pre-existing Covered QFCs.35 Legacy swaps that are so amended
by a Covered QFC Entity and its counterparty would become covered swaps
under the current CFTC Margin Rule.36 Therefore, in order not to
disadvantage market participants who are parties to legacy swaps that
are required to be amended to comply with the QFC Rules, the Commission
proposes to amend the CFTC Margin Rule such that a legacy swap will not
be a covered swap under the CFTC Margin Rule if it is amended solely to
conform to the QFC Rules. That is, the Commission proposes to add a new
paragraph (d) to the end of Commission regulation 23.161, as shown in
the proposed rule text in this document.
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    34 See supra, n.30.
    35 Id.
    36 See supra, n.20. Note, therefore, that such amendment would
affect all parties to the legacy swap, not only the Covered QFC
Entity subject to the QFC Rules.
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    This proposed addition is intended to provide certainty to a CSE
and its counterparties about the treatment of legacy swaps and any
applicable netting arrangements in light of the QFC Rules. However, if,
in addition to amendments required to comply with the QFC Rules, the
parties enter into any other amendments, the amended legacy swap will
be a covered swap in accordance with the application of the existing
CFTC Margin Rule.

C. Consistent With the Proposed Amendments to the Prudential Margin
Rule

    The amendments to the CFTC Margin Rule described above are
consistent with proposed amendments to the Prudential Margin Rule that
the Prudential Regulators jointly published in the Federal Register on
February 21, 2018.37 Proposing amendments to the CFTC Margin Rule
that are consistent with those proposed by the Prudential Regulators
furthers the Commission’s efforts to harmonize its margin regime with
the Prudential Regulators’ margin regime and is responsive to
suggestions received as part of the Commission’s Project KISS
initiative.38
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    37 Margin and Capital Requirements for Covered Swap Entities;
Proposed Rule, 83 FR 7413 (Feb. 21, 2018).
    38 See Project KISS Initiatives, available at https://comments.cftc.gov/KISS/KissInitiative.aspx. The Commission received
requests to coordinate revisions to the CFTC Margin Rule with the
Prudential Regulators. See comments from Credit Suisse (“CS”), the
Financial Services Roundtable (“FSR”), ISDA, the Managed Funds
Association (“MFA”), and SIFMA Global Foreign Exchange Division
(“GFMA”). GFMA requested that the Commission coordinate with the
Prudential Regulators on proposing or making any changes to the CFTC
Margin Rule to ensure harmonization and consistency across the
respective rule sets. In addition, CS, FSR, ISDA, and MFA, as well
as GFMA requested that the Commission make certain specific changes
to the CFTC Margin Rule in coordination with the Prudential
Regulators relating to, for example, initial margin calculations and
requirements, margin settlement timeframes, netting product sets,
inter-affiliate margin exemptions, and cross-border margin issues.
Project KISS suggestions are available at https://comments.cftc.gov/KISS/KissInitiative.aspx.

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[[Page 23846]]

III. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (“PRA”) 39 imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. The Commission may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid Office of Management
and Budget control number. This Proposal contains no requirements
subject to the PRA.
—————————————————————————

    39 44 U.S.C. 3501 et seq.
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B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (“RFA”) requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities.40 This
Proposal only affects certain SDs and MSPs that are subject to the QFC
Rules and their covered counterparties, all of which are required to be
ECPs.41 The Commission has previously determined that SDs, MSPs, and
ECPs are not small entities for purposes of the RFA.42 Therefore, the
Commission believes that this Proposal will not have a significant
economic impact on a substantial number of small entities, as defined
in the RFA.
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    40 5 U.S.C. 601 et seq.
    41 See supra, n.12.
    42 See Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs and MSPs) and
Opting Out of Segregation, 66 FR 20740, 20743 (April 25, 2001)
(ECPs).
—————————————————————————

    Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that this Proposal will not have
a significant economic impact on a substantial number of small
entities. The Commission invites comment on the impact of this Proposal
on small entities.

C. Cost-Benefit Considerations

    Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA. Section 15(a) further specifies that the costs and
benefits shall be evaluated in light of the following five broad areas
of market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
considers the costs and benefits resulting from its discretionary
determinations with respect to the section 15(a) considerations.
    This Proposal prevents certain CSEs and their counterparties from
being disadvantaged because their master netting agreements do not
satisfy the definition of an EMNA, solely because such agreements’
comply with the QFC Rules or because such agreements would have to be
amended to achieve compliance. It revises the definition of EMNA such
that a master netting agreement that meets the requirements of the QFC
Rules may be an EMNA and provides that an amendment to a legacy swap
solely to conform to the QFC Rules will not cause that swap to be a
covered swap under the CFTC Margin Rule.
    The baseline against which the benefits and costs associated with
this Proposal is compared is the uncleared swaps markets as they exist
today, with the QFC Rules in effect.43 With this as the baseline for
this Proposal, the following are the benefits and costs of this
Proposal.
—————————————————————————

    43 Although, as described above, the QFC Rules will be
gradually phased in, for purposes of the cost benefit
considerations, we assume that the affected CSEs are in compliance
with the QFC Rules.
—————————————————————————

1. Benefits
    As described above, this Proposal will allow parties whose master
netting agreements satisfy the proposed revised definition of EMNA to
continue to calculate initial margin and variation margin,
respectively, on an aggregate net basis across uncleared swaps that are
executed under that EMNA. Otherwise, a CSE that is a counterparty under
a master netting agreement that complies with the QFC Rules and, thus,
does not satisfy the current definition of EMNA, would be required to
measure its exposures from covered swaps on a gross basis for purposes
of the CFTC Margin Rule. In addition, this Proposal allows legacy swaps
to maintain their legacy status, notwithstanding that they are amended
to comply with the QFC Rules. Otherwise, such swaps would become
covered swaps subject to initial and variation margin requirements
under the CFTC Margin Rule. This Proposal provides certainty to CSEs
and their counterparties about the treatment of legacy swaps and any
applicable netting arrangements in light of the QFC Rules.
2. Costs
    Because this Proposal (i) will solely expand the definition of EMNA
to potentially include those master netting agreements that meet the
requirements of the QFC Rules and allow the amendment of legacy swaps
solely to conform to the QFC Rules without causing such swaps to become
covered swaps and (ii) does not require market participants to take any
action to benefit from these changes, the Commission believes that this
Proposal will not impose any additional costs on market participants.
3. Section 15(a) Considerations
    In light of the foregoing, the CFTC has evaluated the costs and
benefits of this Proposal pursuant to the five considerations
identified in section 15(a) of the CEA as follows:
(a) Protection of Market Participants and the Public
    As noted above, this Proposal will protect market participants by
allowing them to comply with the QFC Rules without being disadvantaged
under the CFTC Margin Rule. This Proposal will allow market
participants to hedge more, because without this Proposal, posting
gross margin would be more costly to transact and thus likely reduce
the amount of hedging for market participants.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    This Proposal will make the uncleared swap markets more efficient
by not requiring the payment of gross margin under EMNAs that are
amended pursuant to the QFC Rules. Absent this Proposal, market
participants that are required to amend their EMNAs to comply with the
QFC Rules and, thereafter, required to measure their exposure on a
gross basis and to post margin on their legacy swaps, would be placed
at a competitive disadvantage as compared to those market participants
that are not so required to amend their EMNAs. Therefore, this Proposal
may increase the competitiveness of the uncleared swaps markets.
(c) Price Discovery
    This Proposal prevents the payment of gross margin, which would
result in additional costs to swaps transactions. This Proposal could
potentially reduce the cost to transact these swaps, and thus might
lead to more trading, which could potentially improve liquidity and
benefit price discovery.
(d) Sound Risk Management
    This Proposal prevents the payment of gross margin, which does not
reflect true economic counterparty credit risk for swap portfolios
transacted with counterparties. Therefore, this Proposal supports sound
risk management.

[[Page 23847]]

(e) Other Public Interest Considerations
    The Commission has not identified an impact on other public
interest considerations as a result of this Proposal.
4. Request for Comments on Cost-Benefit Considerations
    The Commission invites public comment on its cost-benefit
considerations, including the section 15(a) factors described above.
Commenters are also invited to submit any data or other information
that they may have quantifying or qualifying the costs and benefits of
the proposed amendments with their comment letters. In particular, the
Commission seeks specific comment on the following:
    (a) Has the Commission accurately identified the benefits of this
Proposal? Are there other benefits to the Commission, market
participants, and/or the public that may result from the adoption of
this Proposal that the Commission should consider? Please provide
specific examples and explanations of any such benefits.
    (b) Has the Commission accurately identified the costs of this
Proposal? Are there additional costs to the Commission, market
participants, and/or the public that may result from the adoption of
this Proposal that the Commission should consider? Please provide
specific examples and explanations of any such costs.
    (c) Does this Proposal impact the section 15(a) factors in any way
that is not described above? Please provide specific examples and
explanations of any such impact.

D. Antitrust Laws

    Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or 4c(b)
of the CEA), or in requiring or approving any bylaw, rule, or
regulation of a contract market or registered futures association
established pursuant to section 17 of the CEA.44
—————————————————————————

    44 7 U.S.C. 19(b).
—————————————————————————

    The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. The Commission
requests comment on whether this Proposal implicates any other specific
public interest to be protected by the antitrust laws.
    The Commission has considered this Proposal to determine whether it
is anticompetitive and has preliminarily identified no anticompetitive
effects. The Commission requests comment on whether this Proposal is
anticompetitive and, if it is, what the anticompetitive effects are.
    Because the Commission has preliminarily determined that this
Proposal is not anticompetitive and has no anticompetitive effects, the
Commission has not identified any less anticompetitive means of
achieving the purposes of the CEA. The Commission requests comment on
whether there are less anticompetitive means of achieving the relevant
purposes of the CEA that would otherwise be served by adopting this
Proposal.

List of Subjects in 17 CFR Part 23

    Capital and margin requirements, Major swap participants, Swap
dealers, Swaps.

    For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR part 23 as follows:

PART 23–SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

0
1. The authority citation for part 23 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1,6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
    Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),
Pub. L. 111-203, 124 Stat. 1641 (2010).

0
2. In Sec.  23.151, revise paragraph (2) of the definition of Eligible
master netting agreement to read as follows:

Sec.  23.151   Definitions applicable to margin requirements.

* * * * *
    Eligible master netting agreement * * *
    (2) The agreement provides the covered swap entity the right to
accelerate, terminate, and close-out on a net basis all transactions
under the agreement and to liquidate or set-off collateral promptly
upon an event of default, including upon an event of receivership,
conservatorship, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case:
    (i) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
    (A) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5381 et seq.), the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended (12 U.S.C. 4617), or the Farm Credit
Act of 1971, as amended (12 U.S.C. 2183 and 2279cc), or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph (2)(i)(A) in order to facilitate the
orderly resolution of the defaulting counterparty; or
    (B) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this
definition; and
    (ii) The agreement may limit the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and
to liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of 12 CFR part 47; 12 CFR part 252, subpart I; or
12 CFR part 382, as applicable;
* * * * *
0
3. In Sec.  23.161, add paragraph (d) to read as follows:

Sec.  23.161  Compliance dates.

* * * * *
    (d) For purposes of determining whether an uncleared swap was
entered into prior to the applicable compliance date under this
section, a covered swap entity may disregard amendments to the
uncleared swap that were entered into solely to comply with the
requirements of 12 CFR part 47; 12 CFR part 252, subpart I; or 12 CFR
part 382, as applicable.

    Issued in Washington, DC, on May 18, 2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note: The following appendix will not appear in the Code of
Federal Regulations.

Appendix to 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. 2018-10995 Filed 5-22-18; 8:45 am]
BILLING CODE 6351-01-P