Federal Register, Volume 83 Issue 168 (Wednesday, August 29, 2018) 
[Federal Register Volume 83, Number 168 (Wednesday, August 29, 2018)]
[Proposed Rules]
[Pages 44001-44012]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18618]

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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 83, No. 168 / Wednesday, August 29, 2018 /
Proposed Rules

[[Page 44001]]

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 50

RIN 3038-AE33

Amendments to Clearing Exemption for Swaps Entered Into by
Certain Bank Holding Companies, Savings and Loan Holding Companies, and
Community Development Financial Institutions

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

———————————————————————–

SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing rule amendments pursuant to its authority under section
4(c) of the Commodity Exchange Act (CEA) to exempt from the clearing
requirement set forth in section 2(h)(1) of the CEA certain swaps
entered into by certain bank holding companies, savings and loan
holding companies, and community development financial institutions.

DATES: Comments must be received on or before October 29, 2018.

ADDRESSES: You may submit comments, identified by RIN number 3038-AE33
by any of the following methods:
     CFTC website: http://comments.cftc.gov. Follow the
instructions for submitting comments through the Comments Online
process on the website.
     Mail: Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Same as Mail above.
    Please submit your comments using only one method.
    All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that 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 section 145.9 of the Commission’s
regulations.1
—————————————————————————

    1 Commission regulation 145.9. Commission regulations referred
to herein are found on the Commission’s website at: http://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
—————————————————————————

    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 http://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the FOIA.

FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Deputy Director,
at 202-418-5684 or [email protected]; Megan A. Wallace, Senior
Special Counsel, at 202-418-5150 or [email protected]; or Melissa
D’Arcy, Special Counsel, at 202-418-5086 or [email protected]; Division
of Clearing and Risk or Ayla Kayhan, Office of the Chief Economist, at
202-418-5947 or [email protected], in each case at the Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street NW,
Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Project KISS
    B. Swap Clearing Requirement
    C. Swaps With Small Banks, Savings Associations, Farm Credit
System Institutions, and Credit Unions in Commission Regulation Not
Subject to the Clearing Requirement
    D. DCR No-Action Letter for Relief From the Clearing Requirement
for Certain Bank Holding Companies and Savings and Loan Holding
Companies With Consolidated Assets of $10 Billion or Less
    E. DCR No-Action Letter for Relief From the Clearing Requirement
for Community Development Financial Institutions
II. Proposed Amendments to Commission Regulation 50.5
    A. Proposed Definition of Bank Holding Company and Savings and
Loan Holding Company
    B. Proposed Definition of Community Development Financial
Institution
    C. Proposed Exemptions From the Clearing Requirement for Certain
Bank Holding Companies, Certain Savings and Loan Holding Companies,
and Community Development Financial Institutions
    1. Certain Bank Holding Companies and Savings and Loan Holding
Companies
    2. Community Development Financial Institutions
    D. The Commission’s Section 4(c) Authority
III. Proposed Rules Do Not Effect Margin Requirements for Uncleared
Swaps
IV. Cost-Benefit Considerations
    A. Statutory and Regulatory Background
    B. Consideration of the Costs and Benefits of the Commission’s
Action
    1. Costs
    2. Benefits
    C. Section 15(a) Factors
    1. Protection of Market Participants and the Public
    2. Efficiency, Competitiveness, and Financial Integrity of Swap
Markets
    3. Price Discovery
    4. Sound Risk Management Practices
    5. Other Public Interest Considerations
    D. General Request for Comment
    E. Antitrust Considerations
V. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act

I. Background

A. Project KISS

    On May 9, 2017, the Commission published in the Federal Register a
request for information 2 pursuant to the Commission’s “Project
K.I.S.S.” initiative seeking suggestions from the public for
simplifying the Commission’s regulations and practices, removing
unnecessary burdens, and reducing costs. In response, a number of
commenters asked the Commission to adopt certain staff no-action
letters and codify Commission guidance through rulemakings.3 In its
review, the Commission has identified a number of

[[Page 44002]]

CFTC staff letters that it preliminarily believes should be codified in
rulemakings, including the no-action letters that the Commission’s
Division of Clearing and Risk (DCR) issued in 2016 4 providing that
DCR would not recommend the Commission take enforcement action against
certain small bank holding companies, savings and loan holding
companies, and community development financial institutions, as such
entities were described in the letters, for not clearing swaps covered
by the clearing requirement of section 2(h)(1) of the CEA (Clearing
Requirement), if they satisfied the terms and conditions in the
letters. This proposed rulemaking is consistent with those no-action
letters. Specifically, the Commission is proposing to adopt regulatory
revisions pursuant to its authority in section 4(c) of the CEA to
exempt from the Clearing Requirement certain swaps entered into with
certain bank holding companies, savings and loan holding companies, and
community development financial institutions.
—————————————————————————

    2 See 82 FR 21494 (May 6, 2017) and 82 FR 23765 (May 24,
2017).
    3 See, e.g., Comment Letter from the Institute of
International Banking, International Swaps and Derivatives
Association, Inc., and Securities Industry and Financial Markets
Association dated July 24, 2017, at 2.
    4 CFTC Letter No. 16-01 (Jan. 8, 2016); CFTC Letter No. 16-02
(Jan. 8, 2016). Chatham Financial filed a comment letter recognizing
the value of codifying and refining staff guidance and no-action
relief where appropriate, and recommending codifying no-action
letters on which several of Chatham’s clients rely, including CFTC
Letter No. 16-01. See Comment Letter from Chatham Financial, at 7
(Sept. 29, 2017); see also Comment Letter from ISDA, at 12 (Sept.
29, 2017) (commenting that the current end-user exception applicable
to non-financial institutions and to banks, savings associations,
farm credit institutions, and credit unions with total assets of $10
billion or less is too narrow and unnecessarily burdensome as it
fails to cover other types of entities that trade minimally and do
not pose risks to the U.S. financial system, and supporting a shift
from an asset size-based threshold applicable to certain financial
institutions to a more risk-based threshold).
—————————————————————————

    As discussed more fully below, the proposed revisions to Commission
regulation 50.5 would exempt from the Clearing Requirement a swap
entered into to hedge or mitigate commercial risk if one of the
counterparties to the swap is either (a) a bank holding company or
savings and loan holding company, each having no more than $10 billion
in consolidated assets, or (b) a community development financial
institution transacting in certain types and quantities of swaps. The
Commission believes that this proposal would be consistent with the
exemption from the Clearing Requirement the Commission granted for
transactions entered into with small banks, savings associations, farm
credit institutions, and credit unions.5
—————————————————————————

    5 See End-User Exception to the Clearing Requirement for
Swaps, 77 FR 42560 (Jul. 19, 2012) (2012 End-User Exception final
rule).
—————————————————————————

B. Swap Clearing Requirement

    The CEA, as amended by Title VII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act),6 establishes a
comprehensive regulatory framework for swaps. The CEA requires a swap:
(1) To be cleared through a derivatives clearing organization (DCO)
that is registered under the CEA, or a DCO that is exempt from
registration under the CEA, if the Commission has determined that the
swap is required to be cleared, unless an exception to the Clearing
Requirement applies; 7 (2) to be reported to a swap data repository
(SDR) or the Commission; 8 and (3) if the swap is subject to the
Clearing Requirement, to be executed on a designated contract market
(DCM), or swap execution facility (SEF) that is registered with the
Commission pursuant to section 5h of the CEA or a SEF that has been
exempted from registration pursuant to section 5h(g) of the CEA, unless
no DCM or SEF has made the swap available to trade.9
—————————————————————————

    6 Public Law 111-203, 124 Stat. 1376 (2010).
    7 Section 2(h)(1)(A) of the CEA.
    8 See Sections 2(a)(13)(G), and 4r, and 21(b) of the CEA.
    9 Section 2(h)(8) of the CEA.
—————————————————————————

    Pursuant to section 2(h)(1)(A) of the CEA, if a swap is subject to
the Clearing Requirement, it shall be unlawful for any person to engage
in a swap unless that person submits such swap for clearing to a DCO
that is registered under the CEA or a DCO that is exempt from
registration under the CEA.10 In 2012, the Commission issued its
first clearing requirement determination, pertaining to four classes of
interest rate swaps and two classes of credit default swaps.11 In
2016, the Commission expanded the classes of interest rate swaps
subject to the Clearing Requirement to cover fixed-to-floating interest
rate swaps denominated in nine additional currencies, as well as
certain additional basis swaps, forward rate agreements, and overnight
index swaps.12
—————————————————————————

    10 Section 2(h)(1)(A) of the CEA.
    11 Clearing Requirement Determination Under Section 2(h) of
the CEA, 77 FR 74284 (Dec. 13, 2012).
    12 Clearing Requirement Determination Under Section 2(h) of
the CEA for Interest Rate Swaps, 81 FR 71202 (Oct. 14, 2016).
—————————————————————————

C. Swaps With Small Banks, Savings Associations, Farm Credit System
Institutions, and Credit Unions Not Subject to the Clearing Requirement

    Section 2(h)(7)(A) of the CEA provides that the Clearing
Requirement of section 2(h)(1)(A) of the CEA shall not apply to a swap
if one of the counterparties to the swap: (i) Is not a financial
entity; (ii) is using swaps to hedge or mitigate commercial risk; and
(iii) notifies the Commission, in a manner set forth by the Commission,
how it generally meets its financial obligations associated with
entering into non-cleared swaps.13 Section 2(h)(7)(C)(ii) of the CEA
further directed the Commission to consider whether to exempt from the
definition of “financial entity” small banks, savings associations,
farm credit system institutions, and credit unions, including: (I)
Depository institutions with total assets of $10 billion or less; (II)
farm credit system institutions with total assets of $10 billion or
less; or (III) credit unions with total assets of $10 billion or
less.14
—————————————————————————

    13 Section 2(h)(7)(A) of the CEA.
    14 Section 2(h)(7)(C)(ii) of the CEA.
—————————————————————————

    In the 2012, End-User Exception final rule implementing sections
2(h)(7)(A) and 2(h)(7)(C) of the CEA,15 the Commission adopted
Commission regulation 50.50(d) which allows a counterparty to elect not
to clear swaps used to hedge or mitigate commercial risk if entered
into with small banks, savings associations, farm credit system
institutions, and credit unions with total assets of $10 billion or
less (small financial institutions).16
—————————————————————————

    15 Commission regulation 50.50; see also 2012 End-User
Exception final rule, 77 FR 42560.
    16 Commission regulation 50.50(d) exempts for the purposes of
the Clearing Requirement, a person that is a “financial entity”
solely because of section 2(h)(7(C)(i)(VIII) of the CEA if the
person: (1) Is organized as a bank, as defined in section 3(a) of
the Federal Deposit Insurance Act, the deposits of which are insured
by the Federal Deposit Insurance Corporation; a savings association,
as defined in section 3(b) of the Federal Deposit Insurance Act, the
deposits of which are insured by the Federal Deposit Insurance
Corporation; a farm credit system institution chartered under the
Farm Credit Act of 1971; or an insured Federal credit union or
State-chartered credit union under the Federal Credit Union Act; and
(2) has total assets of $10,000,000,000 or less on the last day of
such person’s most recent fiscal year. Commission regulation
50.50(d) does not excuse the affected persons from compliance with
any other applicable requirements of the CEA or in the Commission’s
regulations.
—————————————————————————

    In adopting Commission regulation 50.50(d), the Commission noted
that these small financial institutions tend to serve smaller, local
markets and are well situated to provide swaps to the customers in
their markets for the purpose of hedging commercial risk.17 The
Commission also acknowledged that, as indicated by commenters, a large
portion of the swaps executed by small financial institutions with
customers likely hedge interest rate risk associated with commercial
loans.18

[[Page 44003]]

The Commission also noted that small financial institutions typically
hedge customer swaps by entering into matching swaps, and if those
swaps had to be cleared, small financial institutions would have to
post margin to satisfy the requirements of the DCO–which could raise
the costs for small financial institutions of hedging the risks related
to these types of customer swaps to the extent they need to fund the
cost of the margin posted.19 The Commission acknowledged that some of
these small financial institutions may incur initial and annual fixed
clearing fees and other expenses that may be incrementally higher
relative to the number of swaps executed over a given period of
time.20 Finally, the Commission stated that given the relatively low
notional volume swap books held by these small institutions, and the
commercial customer purposes these swaps satisfy, the Commission
believed that the swaps executed by these entities were what Congress
was considering when it directed the Commission to consider an
exemption from the definition of “financial entity,” thereby allowing
these entities to elect not to clear swaps that are otherwise eligible
for the End-User Exception.21
—————————————————————————

    17 77 FR at 42578.
    18 Id. The Commission noted that many of these loans and the
related swaps are not secured by cash or other highly liquid
collateral, but by less liquid assets of the customer such as the
property or inventory purchased with the loan proceeds. Id.
    19 See id.
    20 Id.
    21 Id. The Commission noted that because the End-User
Exception only applies to a swap if one of the counterparties to the
swap is using swaps to hedge or mitigate commercial risk small
financial institutions are not exempt from the Clearing Requirement
for speculative trades. Id. n.79.
—————————————————————————

D. DCR No-Action Letter for Relief From the Clearing Requirement for
Certain Bank Holding Companies and Savings and Loan Holding Companies
With Consolidated Assets of $10 Billion or Less

    In 2016, in response to a request from the American Bankers
Association (ABA), DCR issued a no-action letter stating that DCR would
not recommend that the Commission take enforcement action against bank
holding companies and savings and loan holding companies with no more
than $10 billion in consolidated assets 22 for failure to comply with
the Clearing Requirement if they elect not to clear a swap in
accordance with the requirements of Commission regulation 50.50.23
Because section 2(h)(7)(C)(ii) of the CEA and Commission regulation
50.50(d) only apply to depository institutions and savings associations
themselves and not to bank holding companies and savings and loan
holding companies, bank holding companies and savings and loan holding
companies are not eligible to use the End-User Exception.
—————————————————————————

    22 Under CFTC Letter No. 16-01, the limitation of no more than
$10 billion in consolidated assets means that the aggregate value of
all the assets of all the bank holding company’s or savings and loan
holding company’s subsidiaries on the last day of each subsidiary’s
most recent fiscal year, do not exceed $10 billion. CFTC Letter No.
16-01, at 4.
    23 CFTC Letter No. 16-01. Those requirements are that the
small bank holding company or small savings and loan holding company
is using swaps to hedge or mitigate commercial risk and notifies the
Commission how it generally meets the obligations associated with
entering into non-cleared swaps.
—————————————————————————

    DCR was persuaded by the ABA’s representation that many bank
holding companies and savings and loan holding companies enter into
interest rate swaps to hedge interest rate risk that they incur as a
result of issuing debt securities or making loans to finance their
subsidiary banks or savings associations.24 DCR accepted the ABA’s
further representation that these swaps generally have a notional
amount of $10 million or less, and that these bank holding companies
and savings and loan holding companies enter into swaps less frequently
than other swap counterparties.25 The ABA also represented that the
swaps need to be entered into by the bank holding company or savings
and loan holding company, rather than by the subsidiary bank or savings
association, in order to gain hedge accounting treatment.26 DCR
believed bank holding companies and savings and loan holding companies
having no more than $10 billion in consolidated assets should be
treated like small financial institutions, and issued a no-action
letter.27
—————————————————————————

    24 CFTC Letter No. 16-01, at 3.
    25 Id.
    26 Id.
    27 Id. (highlighting the Commission’s statements that small
financial institutions “may incur initial and annual fixed clearing
fees and other expenses that may be incrementally higher relative to
the small number of swaps they execute over a given period of time”
and that “given the relatively low notional volume [of] swap books
held by small section 2(h)(7)(C)(ii) institutions and the commercial
customer purposes these swaps satisfy, the Commission believes that
swaps executed by small section 2(h)(7)(C)(ii) institutions are what
Congress was considering when it directed the Commission to consider
an exemption from the `financial entity’ definition for small
financial institutions. . . .”). Letter No. 16-01 also noted that
the letter did not excuse the affected persons from compliance with
any other applicable requirements contained in the CEA or in the
Commission’s regulations. Id. at 4.
—————————————————————————

E. DCR No-Action Letter for Relief From the Clearing Requirement for
Community Development Financial Institutions

    Also in 2016, in response to a request from a coalition of
community development financial institutions (Coalition), DCR issued a
no-action letter stating DCR would not recommend that the Commission
take enforcement action against a community development financial
institution for failure to comply with the Clearing Requirement,
provided the entity elects not to clear a swap in accordance with the
requirements of Commission regulation 50.50 and meets the terms and
conditions of the letter.28 Some community development financial
institutions are not eligible for the End-User Exception because they
are not depository institutions.29
—————————————————————————

    28 See CFTC Letter No. 16-02.
    29 See Certification as a Community Development Financial
Institution, 12 CFR 1805.201.
—————————————————————————

    DCR accepted the Coalition’s representation that there are public
interest benefits that may be served by permitting community
development financial institutions to engage in tailored and limited
swaps to pursue their public interest goals without the expense of
posting margin to a DCO, and the cost of initial and annual fixed
clearing fees and other expenses.30 The Coalition further represented
that community development financial institutions do not provide swaps
directly to customers, but there is a public interest benefit in having
institutions that are able to serve smaller, local markets.31 DCR was
persuaded that status as a community development financial institution
pursuant to certification by the U.S. Department of the Treasury’s
(Treasury Department) Community Development Financial Institutions Fund
(CDFI Fund) 32 would ensure that community development financial
institutions operate under a specific community development
organizational mission and provide financial and community development
services to a target

[[Page 44004]]

market.33 Additionally, DCR believed the costs of clearing for
community development financial institutions are similar to those faced
by small financial institutions, and the benefits that community
development financial institutions bring to communities may be the same
or greater than those contributed by small financial institutions.34
—————————————————————————

    30 CFTC Letter No. 16-02, at 3.
    31 Id.
    32 Community development financial institutions are small in
scale and tend to serve smaller, local markets. They operate under
an organizational mission of providing financial and community
development services to underserved target markets. Community
development financial institutions are entities that must apply for,
and receive, certification from the CDFI Fund. The CDFI Fund was
created by section 104 of the Community Development Banking and
Financial Institutions Act of 1994 (CDFI Act), which is contained in
Title I of the Riegle Community Development and Regulatory
Improvement Act of 1994 (Riegle Act). See Public Law 103-325, 108
Stat. 2160 (1994).
    33 See CFTC Letter No. 16-02, at 3.
    34 Id.
—————————————————————————

    DCR limited the letter to community development financial
institutions certified as such by the Treasury Department that only
engage in swaps within specific product classes that meet certain
criteria, and required that each community development financial
institution enter into no more than 10 swaps per year, with an
aggregate notional value cap of $200 million per year.35
—————————————————————————

    35 Id. at 4. DCR also required community development financial
institutions to file a notice of election and additional information
as described in Commission regulation 50.50(b), and limited the
election of the exception to swaps entered into for the sole purpose
of hedging or mitigating commercial risk as described in Commission
regulation 50.50(c). Id. Letter No. 16-02 also noted that the letter
did not excuse the affected persons from compliance with any other
applicable requirements contained in the CEA or in the Commission’s
regulations. Id.
—————————————————————————

II. Proposed Amendments to Commission Regulation 50.5

    The Commission proposes to exempt from the Clearing Requirement
certain swap transactions entered into with bank holding companies and
savings and loan holding companies with no more than $10 billion in
consolidated assets, and community development financial institutions
certified by the CDFI Fund. Although these entities are not eligible
for the End-User Exception, the Commission believes that the same
policy reasons that the Commission considered when exempting small
financial institutions from the definition of a “financial entity”
for purposes of the End-User Exception support an exemption for swap
transactions entered into with certain bank holding companies, savings
and loan association holding companies, and community development
financial institutions.36 The Commission notes that the proposed
exemptions are intended to be consistent with the Commission’s policy
set forth in the 2012 End-User Exception final rule and would not limit
the applicability of any CEA provision or Commission regulation to any
person or transaction except as provided in the proposed rulemaking.
—————————————————————————

    36 See Section 2(h)(7)(C)(ii) of the CEA.
—————————————————————————

A. Proposed Definition of Bank Holding Company and Savings and Loan
Holding Company

    The Commission proposes to adopt the definitions for “bank holding
company” and “savings and loan holding company” referenced in the
Federal Deposit Insurance Act.37 These definitions represent the
accepted meaning for “bank holding company” and “savings and loan
holding company.” The Commission used the Federal Deposit Insurance
Act definitions for the banks and savings associations eligible for an
exemption from the definition of “financial entity” in Commission
regulation 50.50(d)(1).38
—————————————————————————

    37 12 U.S.C. 1811 et seq. Section 3(w) of the Federal Deposit
Insurance Act states that a “bank holding company” has the meaning
given to such term in section 2 of the Bank Holding Company Act of
1956. 12 U.S.C. 1813(w)(2). Section 3(w)(3) of the Federal Deposit
Insurance Act states that a “savings and loan holding company” has
the meaning given to such term in section 10 of the Home Owners’
Loan Act. 12 U.S.C. 1813(w)(3).
    38 Commission regulation 50.50(d) provides that for the
purposes of section 2(h)(7)(A) of the Act, a person that is a
“financial entity” solely because of section 2(h)(7)(C)(i)(VIII)
shall be exempt from the definition of `financial entity’ if such
person: (1) Is organized as a bank, as defined in section 3(a) of
the Federal Deposit Insurance Act, the deposits of which are insured
by the Federal Deposit Insurance Corporation; a savings association,
as defined in section 3(b) of the Federal Deposit Insurance Act, the
deposits of which are insured by the Federal Deposit Insurance
Corporation; a farm credit system institution chartered under the
Farm Credit Act of 1971; or an insured Federal credit union or
State-chartered credit union under the Federal Credit Union Act; and
(2) Has total assets of $10,000,000,000 or less on the last day of
such person’s most recent fiscal year.
—————————————————————————

    Proposed revised regulation 50.5(a) would define “bank holding
company” to mean an entity that is organized as a bank holding
company, as defined in section 2 of the Bank Holding Company Act of
1956. Section 2 of the Bank Holding Company Act generally defines a
“bank holding company,” subject to limited exceptions, as any company
which has control over any bank or over any company that is or becomes
a bank holding company.39
—————————————————————————

    39 12 U.S.C. 1841(a)(1) (subject to exceptions described in
paragraph (5) therein).
—————————————————————————

    Proposed revised regulation 50.5(a) would define “savings and loan
holding company” to mean an entity that is organized as a savings and
loan holding company, as defined in section 10 of the Home Owners’ Loan
Act of 1933. Section 10 of the Home Owners’ Loan Act generally defines
a “savings and loan holding company,” subject to limited exceptions,
as any company that directly or indirectly controls a savings
association or that controls any other company that is a savings and
loan company.40
—————————————————————————

    40 12 U.S.C. 1467(a)(1)(D)(i) (subject to exclusions described
in clause (ii)).
—————————————————————————

    Request for Comment. The Commission seeks comment on the proposed
definitions.

B. Proposed Definition of Community Development Financial Institution

    Proposed revised regulation 50.5(a) would define community
development financial institution to mean a community development
financial institution, as defined in section 103(5) of the Community
Development Banking and Financial Institutions Act of 1994, that is
certified by the U.S. Department of the Treasury’s Community
Development Financial Institution Fund under the requirements set forth
in 12 CFR 180.201(b). The proposed definition limits the entities that
are eligible for the exemption. The Commission is proposing to limit
the scope of entities that may qualify for an exemption from the
Clearing Requirement as a community development financial institution
to institutions that meet the definition of a “community development
financial institution” in section 103 of the CDFI Act.41 Under
section 103, a “community development financial institution” means a
person (other than an individual) that: (i) Has a primary mission of
promoting community development; (ii) serves an investment area or
targeted population; (iii) provides development services in conjunction
with equity investments or loans, directly or through a subsidiary or
affiliate; (iv) maintains, through representation on its governing
board or otherwise, accountability to residents of its investment area
or targeted population; and (v) is not an agency or instrumentality of
the United States, or of any State or political subdivision of a
State.42
—————————————————————————

    41 12 U.S.C. 4702(5).
    42 Id.
—————————————————————————

    The Commission believes that it is appropriate to require all
community development financial institutions included in the proposed
exemption from the Clearing Requirement to have received and maintained
certification by the CDFI Fund. Certification is a formal
acknowledgment from the CDFI Fund that a financial institution meets
certain community development finance criteria.43 In the event
certification is

[[Page 44005]]

not maintained, a community development financial institution would no
longer meet the definition and would no longer be able to rely on the
exemption from the Clearing Requirement being proposed herein.
—————————————————————————

    43 The criteria are: (1) It has a primary mission of community
development; (2) its predominant business activity is the provision
of financial products or financial services; (3) it serves one or
more target markets such as an investment area or target population;
(4) it has a track record of providing development services to
borrowers in conjunction with financing activities; (5) it maintains
accountability to the residents of its target market; and (6) it is
a non-government entity. See Certification as a Community
Development Financial Institution, 12 CFR 1805.201(b)(1)-(6).
—————————————————————————

    The Commission believes that this definition is appropriate because
community development financial institutions are certified under the
auspices of the Treasury Department’s CDFI Fund to promote economic
revitalization and community development in low-income communities.44
Community development financial institutions certified by the CDFI Fund
serve rural and urban low-income people and communities across the
nation that lack adequate access to affordable financial products and
services.45 Through financial assistance and grants from the CDFI
Fund, community development financial institutions are able to make
loans and investments, and to provide related services for the benefit
of designated investment areas, target populations, or both.46 The
Commission believes that certification by the CDFI Fund is an
appropriate definition for the entities whose transactions may be
exempt from the Clearing Requirement.
—————————————————————————

    44 As of May 31, 2018, there were 1094 certified community
development financial funds consisting of 138 banks, 16 venture
capital funds, 297 credit unions, 90 depository institution holding
companies, and 553 loan funds. See list available at: https://www.cdfifund.gov/programs-training/certification/cdfi/Pages/default.aspx.
    45 See supra n.27; see also Community Development Financial
Institutions Fund, Notice of Funds Availability, 83 FR 4750 (Feb. 1,
2018) (stating the priorities of the CDFI Fund).
    46 See 68 FR 5704 (Feb. 4, 2003). Additional information is
available at the CDFI Fund’s website: https://www.cdfifund.gov/about/Pages/default.aspx.
—————————————————————————

    Request for Comment. The Commission seeks comment on this
definition.

C. Proposed Exemptions From the Clearing Requirement for Certain Bank
Holding Companies, Certain Savings and Loan Holding Companies and
Community Development Financial Institutions

    The Commission proposes to exempt from the Clearing Requirement
swaps entered into with bank holding companies, savings and loan
holding companies, and community development financial institutions as
defined in proposed Commission regulation 50.5(a) from the Clearing
Requirement.47
—————————————————————————

    47 The proposed exemptions would not excuse the affected
persons from compliance with any other applicable requirements
contained in the CEA or the Commission’s regulations. The Commission
notes that uncleared swaps with a counterparty that is subject to
the CEA and Commission regulations with regard to that transaction
must still comply with the CEA and Commission regulations as they
pertain to uncleared swaps.
—————————————————————————

1. Certain Bank Holding Companies and Savings and Loan Holding
Companies
    The Commission proposes to add a new paragraph (e) to Commission
regulation 50.5 exempting certain swaps entered into with bank holding
companies or savings and loan holding companies from the Clearing
Requirement under regulation 50.2. The Commission believes these
entities generally enter into interest rate swaps to hedge interest
rate risk that they incur as a result of making loans or issuing debt
securities, the proceeds of which are generally used to finance their
subsidiaries, which are themselves small financial institutions.48
—————————————————————————

    48 CFTC Letter No. 16-01, at 3.
—————————————————————————

    The Commission believes that the bank holding companies and savings
and loan holding companies that meet the conditions of CFTC Letter No.
16-01, and which would meet the requirements of proposed Commission
regulation 50.5(e), enter into swaps to hedge risk from financing
transactions infrequently and have relatively low notional volume swap
books.49 Since the issuance of CFTC Letter No. 16-01, five bank
holding companies and two domestic financial holding companies 50
submitted forms to the Depository Trust & Clearing Corporation’s
(DTCC’s) swap data repository, DTCC Data Repository (DDR), indicating
they would elect the end-user exception for interest rate swaps between
June 2016 and June 2018. Between January 1, 2017 and December 31, 2017,
one bank holding company executed ten interest rate swaps with an
aggregate notional value of $43.6 million, and a second bank holding
company executed one interest rate swap with a notional value of $25
million. Nine entities submitted an end-user form to DDR between June
2016 and June 2018 indicating they would be electing the end-user
exception for credit default swaps.51 However, the data indicates
that no credit default swaps were executed between January 1, 2017 and
December 31, 2017.
—————————————————————————

    49 Id.
    50 Under the Bank Holding Company Act, a bank holding company
may elect to be a financial holding company. Although CFTC Letter
No. 16-01 does not include no-action relief for financial holding
companies, we are including these entities as they believe they are
eligible for an exception and indicated they may claim the
exception. Another entity indicated it was electing the end-user
exception as a captive finance company rather than a small bank or
other entity according to its DDR reporting form.
    51 The nine entities included the five bank holding companies,
three domestic financial holding companies, and one entity electing
the exception as a captive finance company.
—————————————————————————

    The Commission believes that bank holding companies and savings and
loan holding companies with consolidated assets of no more than $10
billion should be considered to be sufficiently similar to the type of
non-financial entity Congress was considering when it directed the
Commission to consider an exemption from the Clearing Requirement for
small banks and savings associations.52 Accordingly, the Commission
is proposing to require in new regulation (e)(1) that bank holding
companies and savings and loan holding companies be subject to the same
asset cap as small financial institutions. New paragraph (e)(1) would
require that a bank holding company or savings and loan holding company
have aggregated assets, including the assets of all its subsidiaries,
not exceeding $10 billion according to the value of assets of each
subsidiary on the last day of each subsidiary’s most recent fiscal
year.
—————————————————————————

    52 In the preamble to the 2012 End-User Exception final rule,
the Commission determined that small banks and small savings
associations were not “financial entities” for purposes of the
Clearing Requirement. 77 FR at 42578.
—————————————————————————

    The Commission preliminarily believes there is less counterparty
risk with transactions entered into with bank holding companies and
savings and loan holding companies that have no more than $10 billion
in consolidated assets because the Commission understands that these
entities generally enter into swaps with a notional amount of $10
million or less.53 The Commission believes it is appropriate to adopt
the same limitation on asset size for bank holding companies and
savings and loan holding companies as the Commission determined was
appropriate for small financial institutions in the 2012 End-User
Exception final rule.54 Congress determined that the Commission
should base its determination of whether a bank or savings association
is “small” on a $10 billion asset level.55 In adopting the cap of
$10 billion for small banks and savings associations, the Commission
made the policy decision not to exempt institutions with substantially
higher total asset amounts, such as $30 billion, $50 billion, or higher
levels because it believed that Congress has identified

[[Page 44006]]

large financial institutions as more likely to cause systemic risk and
directed prudential regulators to consider prudential standards for
“large” institutions having assets of $50 billion or more.56 The
Commission rejected the $30 billion asset level since it was three
times greater than the level Congress identified as indicative of a
“small” financial institution.57 Therefore, the proposed exemption
is would apply to bank holding companies and savings and loan holding
companies with no more than $10 billion in consolidated assets, meaning
that the aggregate value of the assets of all of the bank holding
company’s or savings and loan holding company’s subsidiaries on the
last day of each subsidiary’s most recent fiscal year, do not exceed
$10 billion.
—————————————————————————

    53 See CFTC Letter No. 16-01, at 3.
    54 77 FR at 42578.
    55 Id.
    56 Id.
    57 Id.
—————————————————————————

    As with other exemptions under Commission regulation 50.5, the
Commission is proposing in new regulation 50.5(e)(2) that the exemption
be available only if the swap is reported to an SDR pursuant to
regulations 45.3 and 45.4 of this chapter. The Commission is
additionally proposing that the bank holding companies and savings and
loan holding companies subject to this proposal be required to report
the information described in regulation 50.50(b) to an SDR. Commission
regulation 50.50(b) requires a counterparty to notify the Commission
that a swap is not subject to the Clearing Requirement and to indicate
how the electing counterparty generally meets its financial obligations
associated with its non-cleared swaps. The Commission believes that the
reporting requirements are appropriate so it can verify that the
exemption from the Clearing Requirement is being used in the way the
Commission intended and track the entities using the Clearing
Requirement exemption.
    The Commission also proposes in new 50.5(e)(3) that only swaps used
to hedge or mitigate commercial risk, as defined under regulation
50.50(c) of this part, may be exempt from the Clearing Requirement. The
Commission believes this limitation appropriately reflects how these
entities use swaps.58 Moreover, it reflects the Commission’s 2012
policy determination and Congress’s determination that transactions
with similar entities (such as those entered into by small banks,
savings associations, farm credit system institutions, and credit
unions) should be exempt from the Clearing Requirement if the
transactions are used for hedging and not speculation, as long as the
swap is reported to an SDR.59 In that regard, the Commission believes
that the extension of that policy to bank holding companies and savings
and loan holding companies subject to the proposed regulation is
appropriate and consistent with Congressional intent.
—————————————————————————

    58 See CFTC Letter No. 16-01, at 3.
    59 See Section 2(h)(7)(A) of the CEA.
—————————————————————————

    Request for Comment. The Commission requests comment on the
proposed exemption from the Clearing Requirement for swaps entered into
by certain bank holding companies and savings and loan holding
companies with total consolidated assets of no more than $10 billion.
Is such an exemption appropriate? Does such an exemption pose any risks
to the swap markets or the financial system, and if so, what are those
risks? Should the Commission clarify or modify the definitions included
in the proposed rules? If so, what specific modifications are
appropriate or necessary?
2. Community Development Financial Institutions
    Proposed regulation 50.5(f) would exempt swap transactions entered
into with a community development financial institution from the
Clearing Requirement. The Commission believes that these entities only
enter into limited interest rate swaps in the fixed-to-floating swap
class and forward rate agreement class to hedge interest rate risk
incurred as a result of issuing debt securities or making loans in
pursuit of their organizational missions.60 As such, the Commission
believes there are public interest benefits that may be served by
permitting community development financial institutions to engage in
tailored and limited swaps to pursue their public interest goals
without the expense of posting margin to a DCO, and the cost of initial
and annual fixed clearing fees and other expenses. The Commission
believes that the community development financial institutions that
meet the conditions of CFTC Letter No. 16-02, and which would meet the
requirements of proposed Commission regulation 50.5(f), enter into
swaps to hedge risk from financing transactions infrequently and have
relatively low notional volume swap books.61
—————————————————————————

    60 See CFTC Letter No. 16-02, at 2.
    61 Id.
—————————————————————————

    Since the issuance of CFTC Letter No. 16-02, five community
development financial institutions submitted forms to DTCC’s swap data
repository, DDR, indicating they would elect the end-user exception for
interest rate swaps between June 2016 and June 2018. Between January 1,
2017 and June 29, 2018, three community development financial
institutions executed interest rate swaps: One executed two swaps with
an aggregate notional value of $5.6 million; another executed three
swaps with an aggregate notional value of $116 million; and another
executed three swaps with an aggregate notional value of $130 million.
    The Commission believes that community development financial
institutions should be considered to be sufficiently similar to the
type of non-financial entities Congress was considering when it
directed the Commission to consider an exemption from the Clearing
Requirement for small banks and savings associations.62
—————————————————————————

    62 77 FR at 42578.
—————————————————————————

    As with the proposed exemptions discussed above for bank holding
companies and savings and loan holding companies, the Commission is
proposing in new regulation 50.5(f)(1) that the exemption be available
only if the swap is reported to an SDR pursuant to regulations 45.3 and
45.4 of this chapter, and if all information in regulation 50.50(b) is
reported to an SDR. Commission regulation 50.50(b) requires a
counterparty to notify the Commission that a swap is not subject to the
Clearing Requirement and to indicate how the electing counterparty
generally meets its financial obligations associated with its non-
cleared swaps. The Commission believes that the additional reporting
requirement is appropriate so it can verify that the exemption from the
Clearing Requirement is being used in the way the Commission intended
and track which entities are using the Clearing Requirement exemption.
    The Commission proposes to require in new regulation 50.5(f)(2)-(5)
four additional requirements for swaps entered into with a community
development financial institution: (1) The swap is an interest rate
swap in the fixed-to-floating swap class or the forward rate agreement
class, denominated in U.S. dollars, that would otherwise be subject to
the Clearing Requirement; (2) the total aggregate notional value of the
interest rate swaps and forward rate agreements entered into by each
community development financial institution is no more than $200
million per year; (3) a community development financial institution may
enter into no more than ten swap transactions as outlined above per
year; and (4) the swap is used to hedge or mitigate commercial risk, as
defined under Commission regulation 50.50(c). These conditions
generally track the

[[Page 44007]]

conditions in CFTC Letter No. 16-02, including that the exempted swaps
are used to hedge or mitigate commercial risk.
    The Commission believes the requirements in proposed regulation
50.5(f)(2)-(5) properly circumscribe the transactions into which these
community development financial institutions may enter while providing
these institutions with the flexibility to enter into swaps that will
contribute to their ability to carry on their mission.63 By limiting
the product scope to U.S. dollar interest rate swaps in the fixed-to-
floating swap class and forward rate agreement class, the Commission is
recognizing the need to hedge or mitigate the interest rate risk of the
loans, investments, and financial services provided by community
development financial institutions to the target populations. In
addition, the Commission preliminarily believes that limiting the total
aggregate notional value of all interest rate swaps and forward rate
agreements entered into during the twelve-month calendar year to less
than or equal to $200 million is consistent with its policy that the
swaps be used to hedge or mitigate commercial risk. In that same
regard, the Commission believes the limitation of no more than 10 swaps
per year that meet the other criteria also prevents these entities from
arbitrarily increasing the number of swap transactions into which they
enter.
—————————————————————————

    63 Between June 2016 and June 2018, five community development
financial institutions submitted a form to DTTC’s SDR indicating
they would elect the end-user exception. Three community development
financial institutions entered into eight interest rate swaps using
the exception.
—————————————————————————

    Request for Comment. The Commission requests comment on whether it
is in the public interest to exempt swap transactions entered into by
community development financial institutions from the Clearing
Requirement. The Commission is not proposing an asset cap at this time
because the Commission believes that no community development financial
institution certified by the CDFI Fund has consolidated assets greater
than $10 billion.64 Should the Commission consider an asset cap such
that transactions entered into with a community development financial
institution would not be exempt from the Clearing Requirement if the
community development financial institution had aggregated assets in
excess of the cap? Why or why not? If yes, should the cap be $10
billion, as with certain bank holding companies and savings and loan
holding companies, or another amount? The Commission also requests
comment on the proposed limitations and proposed alternatives, if any.
—————————————————————————

    64 See CDFI Program and NACA Program Awardees: A Snapshot in
2015, slide 4, “Asset Size by Institution Type in 2015,” prepared
by the CDFI Fund (August 2017), available at: https://www.cdfifund.gov/news-events/news/Pages/news-detail.aspx?NewsID=271&Category=Press%20Releases.
—————————————————————————

D. The Commission’s Section 4(c) Authority

    Section 4(c)(1) of the CEA empowers the Commission to promote
responsible economic or financial innovation and fair competition by
exempting any transaction or class of transactions, including swaps,
from any of the provisions of the CEA (subject to exceptions not
relevant here).65 In enacting CEA section 4(c)(1), Congress noted
that the goal of the provision “is to give the Commission a means of
providing certainty and stability to existing and emerging markets so
that financial innovation and market development can proceed in an
effective and competitive manner.” 66 Section 4(c)(2) of the CEA
further provides that the Commission may not grant exemptive relief
unless it determines that: (A) The exemption is consistent with the
public interest and purposes of the CEA; and (B) the transaction will
be entered into solely between “appropriate persons” and the
exemption will not have a material adverse effect on the ability of the
Commission or any contract market to discharge its regulatory or self-
regulatory responsibilities under the CEA.
—————————————————————————

    65 Section 4(c)(1) of the CEA, provides that in order to
promote responsible economic or financial innovation and fair
competition, the Commission by rule, regulation, or order, after
notice and opportunity for hearing, may (on its own initiative or on
application of any person) exempt any agreement, contract, or
transaction (or class thereof) that is otherwise subject to section
4(a) either unconditionally or on stated terms or conditions or for
stated periods and either retroactively or prospectively, or both,
from any of the requirements of section 4(a), or from any other
provision of the CEA. The Commission is proposing to promulgate the
proposed exemptive rule pursuant to sections 4(c)(1) and 8a(5) of
the CEA.
    66 H.R. Rep. No. 102-978, 102d Cong. 2d Sess. At 81 (Oct. 2,
1992), reprinted in 1992 U.S.C.C.A.N. 3179, 3213.
—————————————————————————

    The Commission believes that it would be consistent with the public
interest and the purposes of the CEA to exempt from the Clearing
Requirement swap transactions entered into with certain bank holding
companies, savings and loan holding companies, and community
development financial institutions as discussed above. In enacting the
Dodd-Frank Act, Congress recognized that it may be appropriate for the
Commission to exempt transactions entered into with certain small
financial institutions from the Clearing Requirement. The Commission
was directed to consider whether to exempt these small financial
institutions from the definition of “financial entity” for purposes
of the End-User Exception.67
—————————————————————————

    67 See Section 2(h)(7)(C)(ii) of the CEA.
—————————————————————————

    Because they are not depository institutions, bank holding
companies, savings and loan holding companies, and community
development financial institutions are not eligible for the exemption
from the financial entity definition.68 The Commission believes,
however, that the same policy reasons that Congress considered in
directing the Commission to consider exempting swaps entered into with
small financial institutions from the “financial entity” definition,
making them eligible for the End-User Exception, support an exemption
for certain swap transactions entered into with certain bank holding
companies, savings and loan association holding companies, and
community development financial institutions. The Commission
preliminarily believes these entities tend to serve smaller, local
markets and that the swaps executed by these entities likely hedge
interest rate risk associated with financing in the same way as small
financial institutions use swaps exempt from the Clearing Requirement
through the End-User Exception to hedge the interest rate risk of
commercial loans.69
—————————————————————————

    68 While some community development financial institutions may
be depository institutions, for purposes of the proposed exemption,
these entities are acting under the auspices of their CDFI Fund
certification.
    69 See 2012 End-User Exception final rule, 77 FR at 42578.
—————————————————————————

    Based on the representations of market participants, the Commission
also believes the bank holding companies, savings and loan holding
companies, and community development financial institutions subject to
the proposed regulation would tend to enter into swaps that have
smaller notional amounts.70 While the Commission believes these
entities use swaps infrequently, the Commission recognizes that these
entities may choose to enter into more swaps to hedge against rising
interest rates. The Commission believes that swaps are an important
risk management tool and that these small entities should be afforded
the means to hedge their capital costs economically in order to promote
the public interest objectives of

[[Page 44008]]

smaller financial institutions serving smaller, local markets. The
Commission believes that an exemption from the Clearing Requirement may
promote responsible economic or financial innovation and fair
competition because there appears to be substantial fixed costs
associated with clearing swaps. For these entities, the Commission
believes that the cost of clearing may be particularly costly (on a
per-swap basis) in light of the small number of trades.71 The
Commission requests updated information on the clearing related costs
for small entities.
—————————————————————————

    70 See CFTC Letter No. 16-01, at 3; CFTC Letter No. 16-02, at
2.
    71 The 2012 End-User Exception final rule’s cost estimate for
clearing related costs pursuant to the End-User Exemption
(“institutions will spend between $2,500 and $25,000 in legal fees
related to reviewing and negotiating clearing-related documentation,
and . . . a minimum of between $75,000 and $125,000 per year on fees
paid to each [futures commission merchant] with which it maintains a
relationship”). See 77 FR at 42577 n.74.
—————————————————————————

    Based on the discussion above, the Commission preliminarily
believes that an exemption from the Clearing Requirement for these
small entities should lower the cost of financing which, in turn,
should enable these entities to better manage their financing risks and
provide cost-effective loans to their subsidiaries, and small and
middle market businesses. Additionally, the Commission also believes
that the interest rate swaps may need to be entered into by the bank
holding company or savings and loan holding company, rather than the
subsidiary, in order to gain hedge accounting treatment which may
promote efficiencies to benefit their subsidiaries.72 Accordingly,
while bank holding companies and savings and loan holding companies are
not depository institutions and do not themselves issue commercial
loans, the Commission preliminarily believes that the exemption would
ultimately support the commercial lending and depository activities of
their subsidiaries.
—————————————————————————

    72 CFTC Letter No. 16-01, at 3.
—————————————————————————

    The Commission believes that the proposed amendments to the
Clearing Requirement would be available only to “appropriate
persons.” Section 4(c)(3) of the CEA includes within the term
“appropriate person” a number of specified categories of persons,
including among others, banks, savings associations and such other
persons that the Commission determines to be appropriate in light of
their financial or other qualifications, or the applicability of
appropriate regulatory protections. Sections 2(e) and 5(d)(11)(A) of
the CEA provide that only eligible contract participants (ECPs) may
enter into uncleared swaps.73 The Commission believes the bank
holding companies, savings and loan holding companies, and community
development financial institutions subject to this proposed regulation
are ECPs pursuant to section 1a(18)(A)(i) of the CEA. Because the ECP
definition is generally more restrictive than the comparable elements
of the enumerated “appropriate person” definition, the Commission
believes that the class of persons eligible to rely on the proposed
exemptions will be limited to “appropriate persons” within the scope
of section 4(c) of the CEA.
—————————————————————————

    73 Section 2(e) of the CEA limits non-ECPs to executing swaps
transactions on DCMs and section 5(d)(11)(A) of the CEA requires all
DCM transactions to be cleared. Accordingly, the two provisions read
together only permit ECPs to execute uncleared swap transactions.
—————————————————————————

    The Commission notes that certain bank holding companies, savings
and loan holding companies, and community development financial
institutions have not been clearing certain swaps covered by the
Clearing Requirement in reliance on the DCR no action letters. The
Commission is not aware of any increase in counterparty risk
attributable to the affected entities’ reliance on the no-action
letters. The proposed exemptions from the Clearing Requirement are
limited in scope and, as described further below, the Commission will
continue to have access to information regarding the swaps subject to
this exemption because they will be reported to an SDR as required by
existing Commission regulation 50.50. In addition, the Commission
retains its special call, anti-fraud, and anti-evasion authorities,
which will enable it to adequately discharge its regulatory
responsibilities under the CEA. The Commission therefore preliminarily
believes the exemption would not have a material adverse effect on the
ability of the Commission to discharge its regulatory responsibilities
under the CEA.
    For the reasons described in this proposal, the Commission believes
it would be appropriate and consistent with the public interest to
amend Commission regulation 50.5 as proposed.
    Request for Comment. The Commission requests general comments
regarding the proposal and on whether the proposed amendments to
regulation 50.5 would be an appropriate exercise of the Commission’s
authority under CEA section 4(c), including whether the proposed
exemptions promote the public interest. Are there any entities covered
by this proposed rulemaking that would not be “appropriate persons”
under section 4(c)(3) of the CEA? Additionally, the Commission requests
comment on whether the proposed exemptions provide certainty and
stability to existing and emerging markets so that financial innovation
and market development can proceed in an effective and competitive
manner.

III. Proposed Rules Do Not Effect Margin Requirements for Uncleared
Swaps

    Under Commission regulation 23.150(b)(1), the margin requirements
for uncleared swaps under Part 23 of the Commission’s regulations do
not apply to a swap if the counterparty qualifies for an exception from
clearing under section 2(h)(7)(A) and implementing regulations.74
Commission regulation 23.150(b) was added to the final margin rules
after the Terrorism Risk Insurance Program Reauthorization Act of 2015
(TRIPRA) 75 amended section 731 of the Dodd-Frank Act by adding
section 4s(e)(4) to the CEA to provide that the initial and variation
margin requirements will not apply to an uncleared swap in which a non-
financial entity (including a small financial institution and a captive
finance company) qualifies for an exception under section 2(h)(7)(A) of
the CEA, as well as two exemptions from the clearing requirement that
are not relevant in this context.76
—————————————————————————

    74 Commission regulation 23.150(b)(1).
    75 Public Law 114-1, 129 Stat. 3.
    76 Commission regulation 23.150(b)(2) provides that certain
cooperative entities that are exempt from the Commission’s clearing
requirement pursuant to section 4(c)(1) authority also are exempt
from the initial and variation margin requirements. None of the
entities included in this proposal is a cooperative that would meet
the conditions in Commission regulation 23.150(b)(2). In addition,
the regulation 23.150(b)(3), which pertains to affiliated entities,
does not apply in this context.
—————————————————————————

    The proposed rules are not implementing section 2(h)(7)(A) of the
CEA. The Commission, pursuant to its 4(c) authority (as discussed
above), is proposing to exempt swaps entered into by certain bank
holding companies, savings and loan holding companies and community
development financial institutions from the Clearing Requirement. The
Commission is not proposing to exclude these entities from the
“financial entity” definition of section 2(h)(7)(C) of the CEA.
Therefore, the bank holding companies, savings and loan holding
companies, and community development financial institutions under the
proposed rules are not eligible to elect the End-User Exception under
Commission regulation 50.50, and they remain financial entities under
the definition of section 2(h)(7)(C) of the CEA.

[[Page 44009]]

    For the reasons stated above, the proposed rules do not implicate
any of the provisions of section 4s(e)(4) of the CEA or Commission
regulation 23.150.77
—————————————————————————

    77 The Commission also preliminarily believes that the
proposed rules do not affect the margin rules for entities that are
supervised by the prudential regulators. The prudential regulators’
rules contain provisions that are identical to Commission regulation
23.150. See Margin and Capital Requirements for Covered Swap
Entities, 80 FR 74916, 74923 (Nov. 20, 2015).
—————————————————————————

IV. Cost-Benefit Considerations

A. Statutory and Regulatory Background

    Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.78 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; (3) price discovery; (4) sound
risk management practices; and (5) other public interest considerations
(collectively referred to herein as the Section 15(a) Factors).
—————————————————————————

    78 Section 15(a) of the CEA.
—————————————————————————

    The baseline for the Commission’s consideration of the costs and
benefits of this proposed rulemaking is the market as it exists under
section 2(h)(1) of the CEA and existing Commission Regulation 50.5. The
effect of the proposing release is the exemption of certain swaps with
certain bank holding companies, savings and loan holding companies, and
community development financial institutions from the Clearing
Requirement through new proposed regulations 50.5(e) and (f). The
Commission believes the entities whose transactions will be exempted by
this proposing release are similar to the entities that are already
exempt by Commission regulation 50.50(d) both in terms of their
operational and business practices and their participation in the swaps
markets.79 Consequently, the Commission preliminarily expects the
effects of the proposed amendments and the resulting costs and benefits
will parallel the considerations of the 2012 End-User Exception final
rule. The Commission recognizes that, to the extent that market
participants have relied on CFTC Letter Nos. 16-01 and 16-02, the
actual costs and benefits of the proposed rule as realized in the
market may not be as significant as compared to the baseline. The
Commission has endeavored to assess the expected costs and benefits of
the proposed rule in quantitative terms where possible. Where
estimation or quantification is not feasible, the Commission has
provided its discussion in qualitative terms.
—————————————————————————

    79 See Commission regulation 50.50(d).
—————————————————————————

    The Commission notes that the consideration of costs and benefits
below is based on the understanding that the markets function
internationally, with many transactions involving U.S. firms taking
place across international boundaries; with some Commission registrants
being organized outside of the United States; with leading industry
members typically conducting operations both within and outside the
United States; and with industry members commonly following
substantially similar business practices wherever located. Where the
Commission does not specifically refer to matters of location, the
below discussion of costs and benefits refers to the effects of the
proposed rule on all activity subject to the proposed and amended
regulations, whether by virtue of the activity’s physical location in
the United States or by virtue of the activity’s connection with or
effect on U.S. commerce under section 2(i) of the CEA.80 In
particular, the Commission notes that some entities affected by this
proposed rulemaking may be located outside of the United States.
—————————————————————————

    80 Section 2(i) of the CEA.
—————————————————————————

    In the sections that follow, the Commission considers: (1) The
costs and benefits of the proposed exemptions for certain bank holding
companies, savings and loan holding companies, and community
development financial institutions from the Clearing Requirement in
Commission Regulation 50.5, and (2) the impact of the exemptions on the
Section 15(a) Factors.

B. Consideration of the Costs and Benefits of the Commission’s Action

1. Costs
    Proposed regulations 50.5(e) and (f) would exempt certain swap
transactions entered into with certain bank holding companies, savings
and loan holding companies, and community development financial
institutions from the Clearing Requirement. By exempting transactions
with these entities from the Clearing Requirement, the Commission
recognizes that the benefits of central clearing will not accrue to
swaps entered into by these entities. The primary cost of the proposed
exemptions from the Clearing Requirement is, therefore, that
transactions with certain bank holding companies and savings and loan
holding companies, and community development financial institutions
would not be subject to the Clearing Requirement.
    In general, the principal risk to the financial system that central
clearing seeks to address is counterparty credit risk. A DCO manages
this risk by collecting initial and variation margin from its clearing
members. DCOs set margin levels and calculate and collect variation
margin daily as prices move. This allows DCOs to mitigate the
possibility of its default, and to cover the losses due to default of a
clearing member. By exempting transactions with these entities from the
Clearing Requirement, the Commission recognizes that the risk-
mitigating benefits of clearing will not attach to those transactions.
    However, the Commission believes that the entities covered by the
proposed exemptions tend to be entities that would have relatively
modest contributions to systemic risk. For instance, the Commission
believes that the bank holding companies and savings and loan holding
companies subject to the proposed regulation generally enter into swaps
with a notional amount of $10 million or less and enter into swaps less
frequently that other counterparties. Under the proposed rule, the
exemption would only extend to swaps with community development
financial institutions to the extent that they engage in swaps within
specific product classes and the total aggregate notional value of all
interest rate swaps and forward rate agreements entered into during a
calendar year is less than $200 million.
    The Commission proposes to require counterparties using the
proposed exemption to comply with Commission regulation 50.50(b).
Commission regulation 50.50(b) requires a counterparty to notify the
Commission that the swap is not subject to the Clearing Requirement and
to indicate how the electing counterparty generally meets its financial
obligations associated with its non-cleared swaps. In general, the
Commission believes the notification will be made by the swap dealer
(SD). The bank holding companies, savings and loan holding companies,
and community development financial institutions subject to this
proposed regulation would provide the notification only for those swaps
that are not entered into with a SD as the counterparty. While the
Commission anticipates that the number of such swaps would be small,
there is a lack of specific quantitative evidence regarding that
number. As a practical matter, the procedure in proposed regulation
50.5 is the same as that

[[Page 44010]]

required under the DCR no-action letter currently in effect. For this
reason, the Commission believes that the practical effect of the rule
change will not impose substantial additional compliance costs on these
entities.
    The $10 billion cap applied to certain bank holding companies and
savings and loan holding companies is a bright line. Due to the nature
of using a bright line as a threshold, it is possible that some
entities with attributes similar to those exempted entities may not be
eligible for the exemption.81 It is also possible that some bank
holding companies or savings and loan holding companies could make
operational and business decisions that would allow them to qualify for
the exemption from the Clearing Requirement. However, the Commission
does not expect that an entity will limit its potential revenue in
order to maintain a smaller size thereby permitting it to rely on this
proposed exemption.
—————————————————————————

    81 While the Commission is not proposing a size threshold for
community development financial institutions, the Commission
believes, as discussed above, that community development financial
institutions generally fall under the same $10 billion size
threshold.
—————————————————————————

    For these reasons, the costs associated with the proposed rule are
likely to be low.
    Request for Comment. The Commission requests comment on whether the
proposed exemptions for certain bank holding companies, savings and
loan holding companies, and community development financial
institutions from the Clearing Requirement would contribute to systemic
risk. The Commission requests comment, including any analysis, on the
number of bank holding companies, savings and loan holding companies,
and community development financial institutions would rely on the
proposed exemption. The Commission also requests comment, including any
analysis, on the number of bank holding companies, savings and loan
holding companies, and community development financial institutions
that have exercised an election not to clear swaps pursuant to the DCR
no-action letters. The Commission requests comment, including any
available quantitative data and analysis, of the swap trading behavior
of these entities.
2. Benefits
    Certain bank holding companies, savings and loan holding companies,
and community development financial institutions would benefit from an
exemption from the Clearing Requirement for their transactions used to
hedge interest rate risk because project financing and risk management
transactions with these entities would not be subject to the Clearing
Requirement or have the added expense of required clearing. The
Commission believes the financial system benefits from having the bank
holding companies and savings and loan holding companies subject to
this proposal enter into interest rate swaps to hedge interest rate
risk they incur as a result of issuing debt securities or making loans
to finance their subsidiary banks or savings associations. The
Commission also preliminarily believes that the interest rate swaps may
need to be entered into by the bank holding company or savings and loan
holding company, rather than the subsidiary, in order to gain hedge
accounting treatment that may promote efficiencies to benefit their
subsidiaries.82 The Commission preliminarily believes that costs of
clearing for community development financial institutions are similar
to those faced by small financial institutions and the benefits that
community development financial institutions bring to communities may
be significant.83 The Commission believes that small communities and
certain target populations will benefit from the proposed exemptions
through cost savings by not having to clear a swap.
—————————————————————————

    82 Id. at 3.
    83 Id.
—————————————————————————

    Request for Comment. The Commission requests comment on the
benefits of providing an exemption from the Clearing Requirement to
certain bank holding companies, savings and loan holding companies, and
community development financial institutions as discussed above. In
particular, the Commission is interested in quantitative data on the
magnitude of the costs savings from the exemption, and how these lower
costs might affect the entities’ behavior.

C. Section 15(a) Factors

    The discussion that follows supplements the related costs and
benefit considerations addressed in the preceding section and addresses
the overall effect of the proposed rule in terms of the factors set
forth in section 15(a) of the CEA.
1. Protection of Market Participants and the Public
    Section 15(a)(2)(A) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of
considerations of protection of market participants and the public. In
developing the proposed rule, the Commission was cognizant that in
enacting the Dodd-Frank Act, Congress directed the Commission to
consider an exemption from the definition of “financial entity,” and
therefore an exemption from the Clearing Requirement, for small banks,
savings associations, farm credit system institutions, and credit
unions.84 The extension of similar regulatory treatment to swaps
entered into by certain bank holding companies, savings and loan
holding companies, and community development financial institutions
makes the Commission’s policy consistent with the existing exemption
granted for small depository institutions by section 2(h)(7)(C)(ii) and
Commission regulation 50.50(d).
—————————————————————————

    84 See Section 2(h)(7)(C)(ii) of the CEA.
—————————————————————————

    Like the financial institutions listed in section 2(h)(7)(C)(ii),
the Commission believes these entities are likely to have limited swap
exposure, both in terms of value and number. As such, the Commission
preliminarily believes the exemption will have a minimal impact on
market participants. In addition, counterparties to a swap entered into
with a bank holding company, savings and loan holding company, or
community development financial institution subject to this proposed
regulation will have some degree of protection against default because
the electing entity is required to indicate how it generally meets the
financial obligations associated with its non-cleared swaps as required
by Commission regulation 50.50(b). This will ensure that counterparties
are aware of the potential exposure each transaction may have on the
overall risk profile of the entities.
    The Commission also preliminarily believes that the asset cap for
bank holding companies and savings and loan holding companies whose
transactions will be subject to an exemption from the Clearing
Requirement, combined with the required adherence to the requirements
of Commission regulation 50.50(b) and (c) means the proposed exemptions
are not likely to pose systemic or significant counterparty risk.
Therefore, the Commission believes the proposed exemptions are not
likely to have a negative impact on market participants or the public.
2. Efficiency, Competitiveness, and Financial Integrity of Swap Markets
    Section 15(a)(2)(B) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of efficiency,
competitiveness, and financial integrity

[[Page 44011]]

considerations. As noted above, the Commission preliminarily believes
that the proposed amendments to Commission regulation 50.5 would lower
the cost of using swaps for the bank holding companies, savings and
loan holding companies, and community development financial
institutions subject to this proposal, and in that sense, make trading
more efficient. The Commission preliminarily believes that because of
the small number of anticipated entities falling under the exemption
and the low notional value of the swaps they execute, there would be a
minimal impact on the efficiency of the swap marketplaces they operate
in and the financial integrity of the swap markets. Consequently, the
Commission believes the impact of the proposed exemptions on the
efficiency, competitiveness, and financial integrity of the swap
markets to be negligible.
3. Price Discovery
    Section 15(a)(2)(C) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of price
discovery considerations. The Commission preliminarily believes that
the proposed rule will not have a significant impact on price
discovery. Swap transactions, regardless of the counterparty, are
required by section 2(a)(13)(G) of the CEA to be reported to an SDR.
Moreover, the proposed regulation maintains this reporting requirement;
the price discovery function of the reporting requirement to an SDR is
therefore unchanged.
4. Sound Risk Management Practices
    Section 15(a)(2)(D) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of sound risk
management practices. These proposed exemptions reflect the
Commission’s determination that sound public policy supports the
finding that certain swaps entered into by certain bank holding
companies and savings and loan holding companies, and community
development financial institutions subject to this proposal should not
be subject to the Clearing Requirement. This preliminary conclusion is
based on the Commission’s determination that swaps entered into by
these entities are similar to swaps entered into by the small financial
institutions set out in section 2(h)(7)(C)(ii) of the CEA and should be
treated in a similar manner. The Commission believes that the proposed
exemptions therefore should better serve the financial markets by
enabling these entities to use swaps for hedging purposes at a
potentially lower cost. Furthermore, the Commission does not believe
that swap transactions with these entities pose risk to the U.S.
financial markets. As discussed earlier, the Commission believes that
these entities generally use swaps to mitigate the interest rate risk
exposure associate with their financing activities.
5. Other Public Interest Considerations
    Section 15(a)(2)(E) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of other
public interest considerations. The Commission has not identified any
public interest considerations relevant to this proposed rule beyond
those already noted above.

D. General Request for Comment

    The Commission requests comment on all aspects of the costs and
benefits relating to the proposed exemption of swaps entered into by
certain bank holding companies, savings and loan holding companies, and
community development financial institutions from the Clearing
Requirement. The Commission requests that commenters provide any data
or other information that would be useful in estimating the
quantifiable costs and benefits of this proposed rulemaking.

E. Antitrust Considerations

    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)), 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.85
—————————————————————————

    85 Section 15(b) of the CEA.
—————————————————————————

    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 the proposed rule implicates any other
specific public interest to be protected by the antitrust laws.
    The Commission has considered the proposed rule to determine
whether it is anticompetitive and does not anticipate that the proposed
rule will have any anticompetitive effects or result in anticompetitive
behavior. The Commission nevertheless encourages comments from the
public on any aspect of the proposal that may be inconsistent with the
antitrust laws or anticompetitive in nature. For example, the
Commission is generally interested in whether providing this exemption
to certain bank holding companies, savings and loan holding companies,
and community development financial institutions could have
anticompetitive effects. Accordingly, the Commission requests comment
on whether the proposal in total, or its individual parts, could be
deemed anticompetitive.
    Because the Commission has preliminarily determined that the
proposed rule 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 the proposed rule.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires federal agencies to
consider whether the regulations they propose will have a significant
impact on a substantial number of small entities and, if so, provide a
regulatory flexibility analysis on the impact.86 The Commission
previously has established certain definitions of small entities to be
used in evaluating the impact of its regulations on small entities in
accordance with the RFA.87 The proposed regulations will not affect
any small entities as that term is used in the RFA. The proposed rule
would affect specific counterparties to an uncleared swap: Bank holding
companies, savings and loan holding companies, and community
development financial institutions subject to the proposed regulations.
Pursuant to sections 2(e) and 5(d)(11)(A) of the CEA, only ECPs may
enter into uncleared swaps. As financial institutions, these bank
holding companies, savings and loan holding companies, and community
development financial institutions are ECPs pursuant to CEA section
1a(18)(A)(i). The Commission previously determined that ECPs are not
small entities for RFA purposes.88 Because ECPs are not small
entities, and persons not meeting the definition of ECP may not conduct
transactions in uncleared swaps, the Commission need not conduct a
regulatory flexibility

[[Page 44012]]

analysis respecting the effect of these proposed rules on ECPs.
—————————————————————————

    86 5 U.S.C. 601 et seq.
    87 47 FR 18618 (Apr. 30, 1982).
    88 See 66 FR 20740, 20743 (Apr. 25, 2001).
—————————————————————————

    Accordingly, this proposed rule will not have a significant
economic effect of any small entity. Therefore, the Chairman, on behalf
of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that
the proposed regulations will not have a significant economic impact on
a substantial number of small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) 89 imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. This proposed rulemaking would not
result in a new collection of information from these entities within
the meaning of the PRA.90
—————————————————————————

    89 44 U.S.C. 3507(d).
    90 The applicable collections of information are “Regulations
45.2. 45.3, and 45.4–Swap Data Recordkeeping and Reporting
Requirement,” OMB control number 3038-0086; “Rule 50.50 End-User
Notification of Non-Cleared Swaps,” OMB control number 3038-0085.
—————————————————————————

List of Subjects in 17 CFR Part 50

    Business and industry; Swaps.

    For the reasons set for in the preamble, the Commodity Futures
Trading Commission proposes to amend part 50 of title 17 of the Code of
Federal Regulations as follows:

PART 50–CLEARING REQUIREMENT AND RELATED RULES

0
1. The authority citation for part 50 is revised to read as follows:

    Authority: 7 U.S.C. 2(h), 6(c), and 7a-1 as amended by Pub. L.
111-203, 124 Stat. 1376.

0
2. In Sec.  50.5,
0
a. Redesignate paragraphs (a) and (b) as paragraphs (b) and (c);
0
b. Add new paragraph (a);
0
c. Add and reserve paragraph (d); and
0
d. Add paragraphs (e) and (f).
    The additions read as follows:

Sec.  50.5   Swaps exempt from a clearing requirement.

    (a) Definitions. For the purposes of Sec.  50.5:
    Bank holding company means an entity that is organized as a bank
holding company, as defined in section 2 of the Bank Holding Company
Act of 1956;
    Community development financial institution means a community
development financial institution, as defined in section 103(5) of the
Community Development Banking and Financial Institutions Act of 1994,
and is certified by the U.S. Department of the Treasury’s Community
Development Financial Institution Fund as meeting the requirements set
forth in 12 CFR 1805.201(b);
    Savings and loan holding company means an entity that is organized
as a savings and loan holding company, as defined in section 10 of the
Home Owners’ Loan Act of 1933.
* * * * *
    (d) [Reserved]
    (e) Swaps entered into by a bank holding company or savings and
loan holding company shall be exempt from the clearing requirement
under Sec.  50.2, provided that:
    (1) The bank holding company or savings and loan holding company
has aggregated assets, including the assets of all its subsidiaries,
that do not exceed $10,000,000,000 according to the value of assets of
each subsidiary on the last day of each subsidiary’s most recent fiscal
year;
    (2) The bank holding company or savings and loan holding company
reports the swap to a swap data repository pursuant to Sec. Sec.  45.3
and 45.4 of this chapter, and reports all information described under
Sec.  50.50(b) to a swap data repository; and
    (3) The swap is used to hedge or mitigate commercial risk, as
defined under Sec.  50.50(c).
    (f) Swaps entered into by a community development financial
institution shall be exempt from the clearing requirement under Sec. 
50.2 provided, that:
    (1) The community development financial institution reports the
swap to a swap data repository pursuant to Sec. Sec.  45.3 and 45.4 of
this chapter, and reports all information described under Sec. 
50.50(b) to a swap data repository; and
    (2) The swap is a U.S. dollar denominated interest rate swap in the
fixed-to-floating class or the forward rate agreement class of swaps
that would otherwise be subject to the clearing requirement under Sec. 
50.2;
    (3) The total aggregate notional value of the interest rate swaps
and forward rate agreements entered into during the twelve-month
calendar year is less than or equal to $200,000,000;
    (4) The swap is one of ten or fewer swap transactions that the
community development financial institution enters into within a
twelve-month calendar year; and
    (5) The swap is used to hedge or mitigate commercial risk, as
defined under Sec.  50.50(c).

    Issued in Washington, DC, on August 23, 2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

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

Appendices to Amendments to Clearing Exemption for Swaps Entered Into
by Certain Bank Holding Companies, Savings and Loan Holding Companies,
and Community Development Financial Institutions

Appendix 1–Commission Voting Summary

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

Appendix 2–Statement of Chairman J. Christopher Giancarlo

    Consistent with the overall goals of Project KISS, this proposal
would codify Commission policy laid out in the preamble to the 2012
End-User Exception final rule and several staff no-action letters.
It will also provide clarity and reduce unnecessary burdens on bank
holding companies and savings and loan holding companies with
consolidated assets of $10 billion or less, and certain community
development financial institutions.
    I want to thank Commission staff for their intelligent work on
this proposal. I am grateful to Commissioners Quintenz and Behnam
and for their thoughtful input and unanimous support.

[FR Doc. 2018-18618 Filed 8-28-18; 8:45 am]
 BILLING CODE 6351-01-P