59970

Proposed Rules Federal Register Vol. 84, No. 216

Thursday, November 7, 2019

This section of the FEDERAL REGISTER dealers under the agencies’ Regulations.gov Classic: Go to https:// contains notices to the public of the proposed respective jurisdictions to exchange www.regulations.gov/. Enter ‘‘Docket ID issuance of rules and regulations. The with their counterparties for OCC–2019–0023’’ in the Search Box and purpose of these notices is to give interested swaps that are not centrally cleared click ‘‘Search.’’ Click on ‘‘Comment persons an opportunity to participate in the (Swap Margin Rule). The Swap Margin Now’’ to submit public comments. For rule making prior to the adoption of the final rules. Rule as adopted in 2015 takes effect help with submitting effective under a phased compliance schedule comments please click on ‘‘View spanning from 2016 through 2020, and Commenter’s Checklist.’’ Click on the DEPARTMENT OF THE TREASURY the dealers covered by the rule continue ‘‘Help’’ tab on the Regulations.gov home to hold swaps in their portfolios that page to get information on using Office of the Comptroller of the were entered into before the effective Regulations.gov, including instructions dates of the rule. Such swaps are for submitting public comments. grandfathered from the Swap Margin Regulations.gov Beta: Go to https:// 12 CFR Part 45 Rule’s requirements until they expire beta.regulations.gov/ or click ‘‘Visit according to their terms. The proposed New Regulations.gov Site’’ from the [Docket No. OCC–2019–0023] rule would permit swaps entered into Regulations.gov classic homepage. Enter RIN 1557–AE69 prior to an applicable compliance date ‘‘Docket ID OCC–2019–0023’’ in the (legacy swaps) to retain their legacy Search Box and click ‘‘Search.’’ Public FEDERAL RESERVE SYSTEM status in the event that they are comments can be submitted via the amended to replace an interbank offered ‘‘Comment’’ box below the displayed 12 CFR Part 237 rate (IBOR) or other discontinued rate, document information or click on the document title and click the [Docket No. R–1682] repeal the inter-affiliate initial margin provisions, introduce an additional ‘‘Comment’’ box on the top-left side of RIN 7100–AF62 compliance date for initial margin the screen. For help with submitting requirements, clarify the point in time at effective comments please click on FEDERAL DEPOSIT INSURANCE which trading documentation must be ‘‘Commenter’s Checklist.’’ For CORPORATION in place, permit legacy swaps to retain assistance with the Regulations.gov Beta their legacy status in the event that they site please call (877) 378–5457 (toll free) 12 CFR Part 349 are amended due to technical or (703) 454–9859 Monday–Friday, 9 RIN 3064–AF08 amendments, notional reductions, or a.m.–5 p.m. ET or email to regulations@ erulemakinghelpdesk.com. portfolio compression exercises, and • FARM CREDIT ADMINISTRATION make technical changes to relocate the Email: regs.comments@ occ.treas.gov. provision addressing amendments to • Mail: Chief Counsel’s Office, 12 CFR Part 624 legacy swaps that are made to comply Attention: Comment Processing, Office RIN 3052–AD38 with the Qualified Financial Contract of the Comptroller of the Currency, 400 Rules, as defined in the Supplementary 7th Street SW, Suite 3E–218, FEDERAL HOUSING FINANCE Information section. Washington, DC 20219. AGENCY DATES: Comments should be received on • Hand Delivery/Courier: 400 7th or before December 9, 2019. Street SW, Suite 3E–218, Washington, 12 CFR Part 1221 ADDRESSES: Interested parties are DC 20219. • Fax: (571) 465–4326. RIN 2590–AB03 encouraged to submit written comments Instructions: You must include jointly to all of the agencies. ‘‘OCC’’ as the agency name and ‘‘Docket Margin and Capital Requirements for Commenters are encouraged to use the Covered Swap Entities ID OCC–2019–0023’’ in your comment. title ‘‘Margin and Capital Requirements In general, the OCC will enter all AGENCY: Office of the Comptroller of the for Covered Swap Entities’’ to facilitate comments received into the docket and Currency, Treasury (OCC); Board of the organization and distribution of publish the comments on the Governors of the Federal Reserve comments among the agencies. Regulations.gov website without System (Board); Federal Deposit OCC: You may submit comments to change, including any business or Insurance Corporation (FDIC); Farm the OCC by any of the methods set forth personal information that you provide Credit Administration (FCA); and the below. Commenters are encouraged to such as name and address information, Federal Housing Finance Agency submit comments through the Federal email addresses, or phone numbers. (FHFA). eRulemaking Portal or email, if possible. Comments received, including Please use the title ‘‘Margin and Capital ACTION: Proposed rule and request for attachments and other supporting comment. Requirements for Covered Swap materials, are part of the public record Entities’’ to facilitate the organization and subject to public disclosure. Do not SUMMARY: The OCC, Board, FDIC, FCA, and distribution of the comments. You include any information in your and FHFA (each, an agency, and may submit comments by any of the comment or supporting materials that collectively, the agencies) request following methods: you consider confidential or comment on a proposed rule that would • Federal eRulemaking Portal— inappropriate for public disclosure. amend the agencies’ regulations that Regulations.gov Classic or You may review comments and other require swap dealers and security-based Regulations.gov Beta related materials that pertain to this

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules 59971

rulemaking action by any of the • Email: regs.comments@ near the top of the page; select following methods: federalreserve.gov. Include the docket ‘‘comment on a pending regulation’’ • Viewing Comments Electronically— number and RIN number in the subject from the dropdown menu; and click Regulations.gov Classic or line of the message. ‘‘Go.’’ This takes you to an electronic Regulations.gov Beta • Fax: (202) 452–3819. public comment form. • Regulations.gov Classic: Go to https:// Mail: Address to Ann E. Misback, • Federal eRulemaking Portal: http:// www.regulations.gov/. Enter ‘‘Docket ID Secretary, Board of Governors of the www.regulations.gov. Follow the OCC–2019–0023’’ in the Search box and Federal Reserve System, 20th Street and instructions for submitting comments. • click ‘‘Search.’’ Click on ‘‘Open Docket Constitution Avenue NW, Washington, Mail: Barry F. Mardock, Deputy Folder’’ on the right side of the screen. DC 20551. Director, Office of Regulatory Policy, Comments and supporting materials can All public comments are available Farm Credit Administration, 1501 Farm be viewed and filtered by clicking on from the Board’s website at http:// Credit Drive, McLean, VA 22102–5090. ‘‘View all documents and comments in www.federalreserve.gov/generalinfo/ You may review copies of all this docket’’ and then using the filtering foia/ProposedRegs.cfm as submitted, comments we receive at our office in tools on the left side of the screen. Click unless modified for technical reasons or McLean, Virginia or on our website at on the ‘‘Help’’ tab on the to remove personally identifiable http://www.fca.gov. Once you are on the Regulations.gov home page to get information at the commenter’s request. website, click inside the ‘‘I want to . information on using Regulations.gov. Accordingly, comments will not be . .’’ field near the top of the page; The docket may be viewed after the edited to remove any identifying or select ‘‘find comments on a pending regulation’’ from the dropdown menu; close of the comment period in the same contact information. Public comments and click ‘‘Go.’’ This will take you to the manner as during the comment period. may also be viewed electronically or in Comment Letters page where you can Regulations.gov Beta: Go to https:// paper in Room 146, 1709 New York select the regulation for which you beta.regulations.gov/ or click ‘‘Visit Avenue NW, Washington, DC 20006 would like to read the public comments. New Regulations.gov Site’’ from the between 9:00 a.m. and 5:00 p.m. on We will show your comments as Regulations.gov classic homepage. Enter weekdays. submitted, including any supporting ‘‘Docket ID OCC–2019–0023’’ in the FDIC: You may submit comments, data provided, but for technical reasons Search Box and click ‘‘Search.’’ Click on identified by RIN 3064–AF08, by any of we may omit items such as logos and the ‘‘Comments’’ tab. Comments can be the following methods: • Agency Website: https:// special characters. Identifying viewed and filtered by clicking on the www.FDIC.gov/regulations/laws/federal. information that you provide, such as ‘‘Sort By’’ drop-down on the right side • Mail: Robert E. Feldman, Executive phone numbers and addresses, will be of the screen or the ‘‘Refine Results’’ Secretary, Attention: Comments/Legal publicly available. However, we will options on the left side of the screen. ESS, Federal Deposit Insurance attempt to remove email addresses to Supporting Materials can be viewed by Corporation, 550 17th Street NW, help reduce internet spam. clicking on the ‘‘Documents’’ tab and Washington, DC 20429. FHFA: You may submit your written filtered by clicking on the ‘‘Sort By’’ • Hand Delivered/Courier: The guard comments on the proposed rulemaking, drop-down on the right side of the station at the rear of the 550 17th Street identified by regulatory information screen or the ‘‘Refine Results’’ options Building (located on F Street) on number: (RIN) 2590–AB03, by any one on the left side of the screen. For business days between 7:00 a.m. and of the following methods: assistance with the Regulations.gov Beta 5:00 p.m. • Agency Website: www.fhfa.gov/ site please call (877)-378–5457 (toll free) • Email: [email protected]. open-for-comment-or-input. or (703) 454–9859 Monday–Friday, 9 Comments submitted must include • Federal eRulemaking Portal: http:// a.m.–5 p.m. ET or email to regulations@ ‘‘FDIC’’ and ‘‘RIN 3064–AF08—Margin www.regulations.gov. Follow the erulemakinghelpdesk.com. Amendments’’: Margin and Capital instructions for submitting comments. If The docket may be viewed after the Requirements for Covered Swap you submit your comment to the close of the comment period in the same Entities.’’ Comments received will be Federal eRulemaking Portal, please also manner as during the comment period. posted without change to https:// send it by email to FHFA at • Viewing Comments Personally: You www.fdic.gov/regulations/laws/federal, [email protected] to ensure may personally inspect comments at the including any personal information timely receipt by the agency. Please OCC, 400 7th Street SW, Washington, provided. include ‘‘RIN 2590–AB03’’ in the DC 20219. For security reasons, the OCC FCA: We offer a variety of methods for subject line of the message. requires that visitors make an you to submit your comments. For • Hand Delivery/Courier: The hand appointment to inspect comments. You accuracy and efficiency reasons, delivery address is: Alfred M. Pollard, may do so by calling (202) 649–6700 or, commenters are encouraged to submit General Counsel, Attention: Comments/ for persons who are deaf or hearing comments by email or through the RIN 2590–AB03, Federal Housing impaired, TTY, (202) 649–5597. Upon FCA’s website. As facsimiles (fax) are Finance Agency, Constitution Center arrival, visitors will be required to difficult for us to process and achieve (OGC Eighth Floor), 400 7th St. SW, present valid government-issued photo compliance with section 508 of the Washington, DC 20219. Deliver the identification and submit to security Rehabilitation Act, we are no longer package to the Seventh Street entrance screening in order to inspect comments. accepting comments submitted by fax. Guard Desk, First Floor, on business Board: You may submit comments, Regardless of the method you use, days between 9:00 a.m. and 5:00 p.m. identified by Docket No. R–1682 and please do not submit your comments • U.S. Mail, United Parcel Service, RIN No. 7100–AF62, by any of the multiple times via different methods. Federal Express, or Other Mail Service: following methods: You may submit comments by any of The mailing address for comments is: • Agency Website: http:// the following methods: Alfred M. Pollard, General Counsel, www.federalreserve.gov. Follow the • Email: Send us an email at reg- Attention: Comments/RIN 2590–AB03, instructions for submitting comments at [email protected]. Federal Housing Finance Agency, http://www.federalreserve.gov/ • FCA Website: http://www.fca.gov. Constitution Center (OGC Eighth Floor), generalinfo/foia/ProposedRegs.cfm. Click inside the ‘‘I want to . . .’’ field 400 7th St. SW, Washington, DC 20219.

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 59972 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules

Please note that all mail sent to FHFA 649–3685, Christopher.Vincent@ framework, on November 30, 2015, the via U.S. Mail is routed through a fhfa.gov, or James P. Jordan, Associate agencies published regulations that national irradiation facility, a process General Counsel, Office of General require swap dealers and security-based that may delay delivery by Counsel, (202) 649–3075, swap dealers under the agencies’ approximately two weeks. [email protected], Federal Housing respective jurisdictions to exchange All comments received by the Finance Agency, Constitution Center, margin with their counterparties for deadline will be posted for public 400 7th St. SW, Washington, DC 20219. swaps that are not centrally cleared inspection without change, including The telephone number for the (Swap Margin Rule or Rule), which any personal information you provide, Telecommunications Device for the includes many of the principles and such as your name, address, email Hearing Impaired is (800) 877–8339. other aspects of the BCBS/IOSCO address and telephone number on the SUPPLEMENTARY INFORMATION: framework.4 In particular, the Swap FHFA website at http://www.fhfa.gov. In Margin Rule adopted the I. Background on the Swap Margin addition, copies of all comments implementation schedule set forth in Rule received will be available for the BCBS/IOSCO framework, including examination by the public through the The Dodd-Frank Wall Street Reform the revised implementation schedule electronic rulemaking docket for this and Consumer Protection Act (Dodd- adopted on March 18, 2015.5 proposed rule also located on the FHFA Frank Act) required the OCC, Board, The Swap Margin Rule established an website. FDIC, FCA, and FHFA (each, an agency, effective date of April 1, 2016, with a phased-in compliance schedule for the FOR FURTHER INFORMATION CONTACT: and collectively, the agencies) to jointly initial and variation margin OCC: Chris McBride, Director for adopt rules that establish capital and requirements.6 On or after March 1, Market Risk, Treasury and Market Risk margin requirements for swap entities 2017, all covered swap entities were Policy, (202) 649–6402, or Allison that are prudentially regulated by one of the agencies (covered swap entities).1 required to comply with the variation Hester-Haddad, Counsel, Chief These capital and margin requirements margin requirements for transactions Counsel’s Office, (202) 649–5490, for apply to swaps that are not cleared by with other swap entities and financial persons who are deaf or hearing a registered derivatives clearing end user counterparties. The Swap impaired, TTY (202) 649–5597, Office of organization or a registered clearing Margin Rule presently requires all the Comptroller of the Currency, 400 7th agency (non-cleared swaps).2 For the covered swap entities to comply with Street SW, Washington, DC 20219. remainder of this preamble, the term the initial margin requirements for non- Board: Constance Horsley, Deputy ‘‘non-cleared swaps’’ refers to non- cleared swaps with all financial end Associate Director, (202) 452–5239, cleared swaps and non-cleared security- users with a material swaps exposure Lesley Chao, Lead Financial Institution based swaps unless the context requires and with all swap entities by September Policy Analyst, (202) 974–7063, or John otherwise. 1, 2020. Feid, Principal Economist, (202) 452– The Basel Committee on Banking The Swap Margin Rule’s requirements 2385, Division of Supervision and Supervision (BCBS) and the Board of generally apply only to a non-cleared Regulation; Patricia Yeh, Senior the International Organization of swap entered into on or after the Counsel, (202) 452–3089, Jason Shafer, Securities Commissions (IOSCO) applicable compliance date.7 A non- Senior Counsel, (202) 728–5811, or established an international framework cleared swap entered into prior to an Justyna Bolter, Senior Attorney, (202) for margin requirements on non-cleared entity’s applicable compliance date is 452–2686, Legal Division; for users of derivatives in September 2013 (BCBS/ essentially ‘‘grandfathered’’ by this Telecommunication Devices for the Deaf IOSCO framework).3 Following the regulatory provision, in that the non- (TDD) only, contact 202–263–4869; establishment of the BCBS/IOSCO cleared swap is generally not subject to Board of Governors of the Federal the margin requirements in the Swap Reserve System, 20th and C Streets NW, 1 Dodd-Frank Wall Street Reform and Consumer Margin Rule (legacy swap). However, Washington, DC 20551. Protection Act, Pub. L. 111–203, 124 Stat. 1376 the agencies explained in the preamble FDIC: Irina Leonova, Senior Policy (2010). See 7 U.S.C. 6s; 15 U.S.C. 78o–10. Sections 731 and 764 of the Dodd-Frank Act added a new of the Swap Margin Rule that a legacy Analyst, [email protected], Capital section 4s to the Commodity Exchange Act of 1936, swap that is later amended or novated Markets Branch, Division of Risk as amended, and a new section, section 15F, to the on or after the applicable compliance Management Supervision, (202) 898– Securities Exchange Act of 1934, as amended, respectively, which require registration with the 3843; Thomas F. Hearn, Counsel, 4 Commodity Futures Trading Commission (CFTC) of 80 FR 74840 (November 30, 2015). [email protected], Legal Division, swap dealers and major swap participants and the 5 See BCBS and IOSCO ‘‘Margin requirements for Federal Deposit Insurance Corporation, U.S. Securities and Exchange Commission (SEC) of non-centrally cleared derivatives,’’ (March 2015), 550 17th Street NW, Washington, DC security-based swap dealers and major security- available at https://www.bis.org/bcbs/publ/ 20429. based swap participants (each a swap entity and, d317.pdf. collectively, swap entities). Section 1a(39) of the 6 The applicable compliance date for a covered FCA: Jeremy R. Edelstein, Associate Commodity Exchange Act of 1936, as amended, swap entity is based on the average daily aggregate Director, Finance & Capital Market defines the term ‘‘prudential regulator’’ for notional amount of non-cleared swaps, foreign Team, Timothy T. Nerdahl, Senior purposes of the margin requirements applicable to exchange forwards and foreign exchange swaps of Policy Analyst, Clayton D. Milburn, swap dealers, major swap participants, security- the covered swap entity and its counterparty based swap dealers and major security-based swap (accounting for their respective affiliates) for each Senior Financial Analyst, Office of participants. See 7 U.S.C. 1a(39). business day in March, April, and May of that year. Regulatory Policy, (703) 883–4414, TTY 2 A ‘‘swap’’ is defined in section 721 of the Dodd- The applicable compliance dates for initial margin (703) 883–4056, or Richard A. Katz, Frank Act to include, among other things, an requirements that are currently in place, and the Senior Counsel, Office of General rate swap, , , corresponding average daily aggregate notional and , and a security-based swap amount thresholds, are: September 1, 2016, $3 Counsel, (703) 883–4020, TTY (703) is defined in section 761 of the Dodd-Frank Act to trillion; September 1, 2017, $2.25 trillion; 883–4056, Farm Credit Administration, include a swap based on a single security or loan September 1, 2018, $1.5 trillion; September 1, 2019, 1501 Farm Credit Drive, McLean, VA or on a narrow-based security index. See 7 U.S.C. $0.75 trillion; and September 1, 2020, all swap 22102–5090. 1a(47); 15 U.S.C. 78c(a)(68). entities and counterparties. See § __.1(e) of the 3 See BCBS and IOSCO ‘‘Margin requirements for Swap Margin Rule. In this proposed rule, the FHFA: Christopher Vincent, Senior non-centrally cleared derivatives,’’ (September agencies are also proposing to add one additional Financial Analyst, Office of Financial 2013), available at https://www.bis.org/publ/ year to this schedule for certain counterparties. Analysis, Modeling & Simulations, (202) bcbs261.pdf. 7 See § l.1(e) of the Swap Margin Rule.

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules 59973

date should be subject to the compression exercises, without The Federal Reserve Board and requirements of the Swap Margin Rule, triggering margin requirements. Federal Reserve Bank of New York in the of preventing evasion of These aspects of the proposal are each convened the Alternative Reference the Rule’s margin requirements.8 discussed in greater detail below. Rates Committee (ARRC) 14 in 2014 to The Swap Margin Rule has recently II. Interbank Offered Rates identify an alternative reference rate for been amended to (1) provide relief to USD LIBOR and create an legacy swaps that are amended to A. Background on IBORs implementation plan to promote the use achieve compliance with final rules that The proposed rule would amend the of the selected alternative on a established restrictions on and Swap Margin Rule to permit a covered voluntary basis. In 2017, the ARRC requirements for certain non-cleared swap entity to amend a legacy swap in selected the Secured Overnight Funding swaps and certain other qualified order to replace an IBOR with an Rate (SOFR), which is designed to be financial contracts of U.S. global alternative reference rate or rates, representative of general funding systemically important banking without triggering margin requirements. conditions in the overnight Treasury organizations and their subsidiaries and An IBOR is a benchmark interest rate repo market. The ARRC has noted that the U.S. operations of foreign global that is intended to represent banks’ cost use of SOFR is voluntary and that other systemically important banking of unsecured wholesale borrowing. benchmarks can also be considered as organizations (QFC Rules) 9 and (2) IBORs 11 have been used as the potential alternatives for USD LIBOR. subject to certain conditions, provide benchmark interest rate for a large For example, the American Financial relief for entities located in the United volume and broad range of existing Exchange is offering Ameribor as a Kingdom to transfer their existing swap financial products and contracts, potential USD LIBOR replacement portfolios that face counterparties including for an estimated $190 trillion 15 located in the European Union to an US Dollar LIBOR (USD LIBOR) rate. In addition, benchmarks such as affiliate or other related establishment exposure, of which $145 trillion an Overnight Bank Funding Rate were located within the European Union or represents over-the-counter derivatives suggested by some market participants the United States while maintaining exposure (as of year-end 2016).12 as a potential alternative. legacy status for such portfolios.10 This However, the discovery of, and In July 2017, the U.K. Financial notice of proposed rulemaking would numerous regulatory actions to seek Conduct Authority (UKFCA), which make the following changes to the Swap redress of, market manipulation and regulates ICE Benchmark Margin Rule: false reporting of the many IBORs, Administration, the administrator of First, the proposal would provide together with the post-crisis decline in LIBOR, announced that it has sought relief by allowing legacy swaps to be liquidity in interbank unsecured commitments from LIBOR panel banks amended to replace existing interest rate funding markets, have undermined to continue to contribute to LIBOR provisions based on certain interbank confidence in the reliability and through the end of 2021, but that the offered rates (IBORs) and other interest robustness of IBORs. UKFCA will not use its powers to rates that are reasonably expected to be As a result, the Financial Stability compel or persuade contributions discontinued or are reasonably Board (FSB) and the U.S. Financial beyond that date. The UKFCA has also determined to have lost their relevance Stability Oversight Council (FSOC) warned that it may judge LIBOR to no as a reliable benchmark due to a requested that government and industry longer be representative of its stakeholders undertake implementation significant impairment, without such underlying market should it persist past of new designs and methodologies for swaps losing their legacy status. this date. Thus, it is possible that LIBOR IBORs, and the identification of viable Second, the proposal would amend will cease to be published at the end of the Swap Margin Rule’s requirements alternative near risk-free rates in their respective (U.S. dollar in the 2021. Consequently, it is likely that for inter-affiliate swaps. The proposal derivatives contracts that reference would repeal the requirement for a case of the United States) with a focus on the feasibility of new rate LIBOR will need to be amended to covered swap entity to collect initial replace LIBOR. margin from its affiliates, but would methodologies, including identification retain the requirement that variation of suitable administrators and any In consideration of this uncertainty, margin be exchanged for affiliate necessary infrastructure to support these the International Swaps and Derivatives 13 transactions. rates. Association, Inc. (ISDA), which Third, the proposal would add an produces standard documentation used 11 additional initial margin compliance IBORs include the London Interbank Offered by parties to derivatives contracts, Rate (LIBOR), the Tokyo Interbank Offered Rate indicated that it plans to amend its period for certain smaller (TIBOR), the Bank Bill Swap Rate (BBSW), the counterparties, and clarify the existing Singapore Interbank Offered Rate (SIBOR), the documentation to ‘‘include fallbacks trading documentation requirements in Canadian Dollar Offered Rate (CDOR), the Euro that would apply upon the permanent Interbank Offered Rate (EURIBOR), and the Hong discontinuation of certain key § l.10 of the Rule. Kong Interbank Offered Rate (HIBOR). Fourth, the proposal would amend 12 ‘‘Second Report of the Alternative Reference the Swap Margin Rule to permit Rates Committee’’ published in March 2018, 14 The voting members of the 2014 ARRC were amendments caused by conducting available at https://www.newyorkfed.org/ Bank of America, Barclays, BNP Paribas, Citigroup, medialibrary/Microsites/arrc/files/2018/ARRC- Credit Suisse, Deutsche Bank, Goldman Sachs, certain routine life-cycle activities that Second-report. HSBC, JP Morgan Chase & Co., Morgan Stanley, covered swap entities may conduct for 13 ‘‘Reforming Major Interest Rate Benchmarks’’ Nomura, RBS, Socie´te´ Ge´ne´rale, UBS, and Wells legacy swaps, such as reduction of published by the Financial Stability Board on July Fargo; the non-voting members were Bank of New notional amounts and portfolio 22, 2014, available at http://www.fsb.org/wp- York Mellon, CME, DTCC, ISDA and LCH.Clearnet; content/uploads/r_140722.pdf. Several central the ex officio members were Board of Governors of banks responded to this request and convened the Federal Reserve System, Federal Reserve Bank 8 80 FR 74850–51. working groups of market participants and official of New York, U.S. Commodity Futures Trading 9 83 FR 50805 (October 10, 2018). The QFC Rules sector representatives, including the United Commission, U.S. Treasury Department and Office are codified as follows: 12 CFR part 47 (OCC’s QFC Kingdom, Japan, Switzerland, and the Eurozone. of Financial Research. The ARRC’s membership has Rule); 12 CFR part 252, subpart I (Board’s QFC The work has also been coordinated at the changed over time. For a list of the latest members, Rule); 12 CFR part 382 (FDIC’s QFC Rule). international level by the FSB’s Official Sector see https://www.newyorkfed.org/arrc. 10 84 FR 9940 (March 19, 2019). Steering Group (OSSG). 15 See https://ameribor.net/.

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 59974 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules

IBORs.’’ 16 For new non-cleared swaps, cleared swaps. Specifically, the agencies more qualitative standard that would be market participants will have an propose to amend § l.1(h) to preserve applicable to other categories of to amend their documentation via an the legacy status of a non-cleared swap reference rates, should the need arise in ISDA benchmark supplement. For non- after a covered swap entity replaces the future. This forward-looking cleared swaps that are already in place, certain reference rates. Proposed standard is designed to encourage market participants will have the option § l.1(h) recognizes that these covered swap entities to resolve critical to utilize an ISDA protocol that will replacements could be carried out using uncertainties before an interest rate specify amended definitions, triggers, a variety of legal mechanisms by benchmark is discontinued, or loses its and other adjustments.17 permitting amendments accomplished market relevance, in order to minimize Due to the potential discontinuation by the parties’: Adherence to a protocol; disturbance to the markets. of LIBOR at the end of 2021, covered contractual amendment of an agreement The agencies also anticipate that a swap entities face uncertainty about the or confirmation; or execution of a new reference rate may need to be replaced way their swap contracts based on contract in replacement of and LIBOR and other IBORs will operate immediately upon termination of an more than one time. For example, an after the permanent discontinuation existing contract (i.e., tear-up), subject IBOR may first be replaced with fallback date without a reliable benchmark rate. to the limitations discussed below. provisions at a time when a permanent A benchmark rate is a critical term for The proposed rule is intended to be alternative rate is not yet available or calculating payments under a swap flexible with respect to the method of amendment documentation has not yet contract. In many instances, these firms amendment. The proposal would permit been developed. Subsequently, fallback may decide to amend existing swap amendments to be executed with provisions may be replaced with contracts to replace an IBOR before the respect to an individual non-cleared permanent alternative rates. If the IBOR becomes discontinued. Such swap or on a netting set level, as long original rate that is being replaced is an amendments may also trigger follow-on as the other proposed criteria are met. IBOR or any other non-IBOR interest amendments 18 that the counterparties The proposed rule describes the type rate benchmark that otherwise meets the determine are necessary to maintain the of rate that can be replaced and the requirements of the proposed rule that economics of the contract. Absent the accompanying changes that would be a covered swap entity reasonably proposed revisions to the Swap Margin permitted. Proposed section § l expects it to be discontinued or Rule, one or more of these amendments .1(h)(3)(i) would permit amendments reasonably determines that it has lost its could affect the legacy status of a non- that are made solely to accommodate relevance as a reliable benchmark due to cleared swap and make it subject to the the replacement of an IBOR or a a significant impairment, the non- requirements of the Rule. In order to replacement of any other non-IBOR cleared swap may be amended more enable covered swap entities and their interest rate that a covered swap entity than once to accommodate ongoing counterparties to avoid the risk of future reasonably expects to be discontinued developments toward a permanent financial instability, the agencies or reasonably determines has lost its replacement rate. There is no limit to believe it is appropriate to permit relevance as a reliable benchmark due to the number of amendments that can covered swap entities to amend the a significant impairment with an take place, as long as the rate that was reference rates in a legacy swap contract alternate reference rate.19 For example, originally present in the non-cleared and to adopt necessary follow-on if a benchmark administrator materially swap met the criteria in either § l amendments without converting the changes the inputs in the benchmark .1(h)(3)(i)(A) or § l.1(h)(3)(i)(B). The legacy swap into a swap subject to the calculation because an input is no proposed approach of permitting Swap Margin Rule. The conditions of longer available, a covered swap entity subsequent amendments takes into eligibility for the amendments are may determine that the benchmark has account that any subsequent changes to described in the next section of this lost its relevance as a reliable the reference rate will be the subject of SUPPLEMENTARY INFORMATION. benchmark due to a significant negotiations among counterparties that impairment. B. Proposed Rule on IBORs are incentivized to agree to a reasonable The proposed rule lists the IBORs that rate. The proposed rule would not In recognition of the ongoing efforts to could be replaced, including LIBOR, permit subsequent amendments that transition away from key IBORs due to TIBOR, BBSW, SIBOR, CDOR, change rates or other terms of the non- their potential discontinuation, the EURIBOR, and HIBOR. Although the cleared swap for any purpose other than agencies are proposing to amend the current uncertainty surrounding for those purposes explicitly set out in Swap Margin Rule to remove reference rates is tied to IBORs, the § l.1(h), without triggering application impediments that would limit the agencies are also proposing a second, of the margin requirements. ability of covered swap entities to replace certain rates in their legacy non- 19 Under the EU Benchmark Regulation To benefit from the treatment of this (Regulation (EU) 2016/1011 (June 8, 2016)), a new legacy swap provision, a covered benchmark administrator is expected to regularly 16 ISDA Consultation on Pre-Cessation Issues for swap entity must make the amendments assess whether a critical benchmark measures the LIBOR and Certain Other Interbank Offered Rates underlying market or economic reality. In certain to the non-cleared swap solely to (IBORs), May 16, 2019, available at https:// circumstances, a regulatory authority of a accommodate the replacement of a rate www.isda.org/a/md6ME/FINAL-Pre-cessation- benchmark administrator may complete its own issues-Consultation.pdf. described in the proposed rule. The assessment of a benchmark’s representativeness as proposed rule is flexible as to the 17 ISDA Supplemental Consultation on Spread well. Covered swap entities may refer to such and Term Adjustments for Fallbacks in Derivatives assessments or other public statements by incoming replacement rate by leaving it Referencing USD LIBOR, CDOR and HIBOR and benchmark administrators or regulatory authorities up to the counterparties to select a Certain Aspects of Fallbacks for Derivatives in order to inform their expectations about whether mutually agreeable replacement rate. Referencing SOR, May 16, 2019, available at https:// a benchmark will be discontinued or continues to The agencies expect that any www.isda.org/a/n6tME/Supplemental-Consultation- be reliable. In addition, covered swap entities may on-USD-LIBOR-CDOR-HIBOR-and-SOR.pdf. consult the IOSCO Principles for Financial replacement rate, including any 18 Follow-on amendments may include a variety Benchmarks (July 2013), to assist in determining subsequent replacement rate, would be of spread adjustments resulting from the move from whether a benchmark has lost its relevance as a agreed upon by the parties after a term rate to an overnight rate, from unsecured to reliable benchmark, available at http:// assessing its complexity, safety and secured, or could result from a change in tenor, www.iosco.org/library/pubdocs/pdf/ among others. IOSCOPD415.pdf. soundness, and taking into

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules 59975

consideration associated risk period. To offer flexibility in the would, however, retain the requirement management practices.20 transition to a new reference rate, the that affiliates exchange variation The agencies also acknowledge that proposed rule would permit the margin. replacing a reference rate could require replacement of an IBOR or other Currently, § l.11 of the Swap Margin other contractual changes to maintain discontinued reference rate in the Rule establishes special rules for the economics of the non-cleared swap floating leg of a fixed-floating rate swap, transactions between a covered swap and to preserve the relative values to the and would also permit the interest rate parties after incorporating changes in in the fixed leg to be modified in order entity and an ‘‘affiliate,’’ generally the reference rate. The proposed rule to maintain the economics of the non- defined in the Swap Margin Rule as an would permit changes that incorporate cleared swap. entity that is consolidated with the spreads and other adjustments that However, the agencies do not believe dealer on an accounting basis, or accompany and implement the that the relief being provided for rate consolidated on a common basis by replacement rate amendment. The rule replacement purposes should be another entity.22 The rules applicable to would also permit other, more expansively applied to encompass all transactions with affiliates differ from administrative and technical changes changes to a legacy swap. Accordingly, the rules applicable to transactions with necessary to operationalize the the proposed rule text clarifies that the non-affiliates. For example, a covered determination of payments or other proposed safe harbor for legacy swaps swap entity is not required to post exchanges of economic value using the would be unavailable if the initial margin to an affiliate or use an replacement rate, including changes to amendments extend the maturity or independent custodian for most forms determination dates, calculation agents, increase the total effective notional of initial margin collected from an and payment dates. These types of amount of the non-cleared swap. For affiliate. In addition, the covered swap administrative changes may be example, a one time, lump-sum entity does not need to apply a $50 necessary to adjust computations and compensatory payment in lieu of a million initial margin threshold amount operational provisions to reflect the spread adjustment would not increase to the covered swap entity’s affiliates on differences between an IBOR and the the total effective notional amount and an aggregate basis, and the covered replacement rate or rates. would be permitted. On the other hand, swap entity is not required to use the The agencies envision that a number extending the maturity date to allow for ten-day holding period for calculating of contractual changes could be additional payments to be made under initial margin using an initial margin necessary to maintain the economics of the non-cleared swap would be a change l 23 the non-cleared swap, and for this outside the scope of the proposed rule. model under § .8(d)(1). Consistent reason, have drafted the proposed rule The agencies envision that covered with the requirements for non-cleared so it permits these changes. For swap entities may carry out certain swaps between non-affiliated example, legacy swaps that contain USD amendments, including those executed counterparties, current § l.11 requires LIBOR may be referencing 1-day LIBOR, by method of termination and the exchange of variation margin for 1-week LIBOR, 1-month LIBOR, 2- replacement, for the purpose of affiliate transactions. As discussed in month LIBOR, 3-month LIBOR, 6-month implementing changes that might the preamble to the final Swap Margin LIBOR or 12-month LIBOR. In these qualify for more than one exemption Rule, the initial and variation margin cases, a replacement rate that could be provided under § l.1(h). When a legacy requirements applicable to affiliate overnight and could be based, for swap is replaced with a new contract transactions were intended to advance example, on a fully secured funding rate that reflects more than one exemption, the mandate under the Dodd-Frank Act (e.g., SOFR) may need to incorporate a each of the provisions in the to ‘‘offset the greater risk to swap market risk (term structure) spread to replacement contract that differs from entities from the use of swaps that are substitute for the market risk component the terminated contract must be not cleared and help ensure the safety of LIBOR that is of a longer maturity permitted under the respective and soundness of the covered swap than overnight. Similarly, because subsection of § l.1(h). For example, a entity and are appropriate for the risk LIBOR is unsecured and therefore covered swap entity and its includes an element of bank credit risk, associated with the non-cleared swap counterparty may decide to replace an entity.’’ 24 The agencies noted that the it is likely that a replacement rate that IBOR with a different reference rate and, could be overnight and could be based, requirement to collect initial margin at the same time, make changes to from, but not post initial margin to, for example, on a fully secured funding comply with the QFC Rules. The IBOR- affiliates ‘‘should help to protect the rate (e.g., SOFR) would need a credit related changes must comply with § l safety and soundness of covered swap spread to adjust the new reference rate .1(h)(3) and the QFC Rules changes entities in the event of an affiliated to a comparable legacy LIBOR rate. This must comply with § l.1(h)(1) for the counterparty default.’’ 25 Furthermore, may also be the case for non-USD IBORs replacement contract to meet the ‘‘solely that could be replaced by overnight to comply’’ standard and, in the case of by requiring that inter-affiliate swaps be funding rates. § l.1(h)(3), the ‘‘solely to margined, the requirement was intended The proposed rule would also permit accommodate’’ standard. administrative and technical changes transactions, in recognition of the existing and necessary for operational purposes. For III. Non-Cleared Swaps Between CSEs varied approaches to the topic across jurisdictions. example, for an overnight rate, interest and an Affiliate 22 Section l.2 provides that two companies are on financial instruments that pay ‘‘affiliates’’ if either company consolidates the other The proposal would amend the on financial statements prepared in accordance periodically (e.g., quarterly) may be set treatment of affiliate transactions in the with U.S. Generally Accepted Accounting in arrears by compounding or averaging Swap Margin Rule by creating an Principles, the International Financial Reporting the daily observations over the relevant Standards, or other similar standards, or if both exemption from the initial margin companies are consolidated with a third company. requirements for non-cleared swaps 23 20 For a description of the application of this set The replacement rate is also expected to be 21 consistent with international standards, such as the between affiliates. The proposal of exemptions, see the preamble to the final rule, IOSCO Principles for Financial Benchmarks. See 80 FR at 74887. https://www.iosco.org/library/pubdocs/pdf/ 21 Under the BCBS/IOSCO framework, no 24 80 FR at 74889. IOSCOPD415.pdf. common standard was set for inter-affiliate 25 Id.

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 59976 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules

to prevent unmargined swaps from banking organization’s home country, depository institution.28 Currently, posing a risk to systemic stability.26 presence in the United States, corporate almost all U.S. covered swap entities are Since the Swap Margin Rule was organization, or business strategy. For insured depository institutions that implemented, supervisory experience example, internationally active banking would be subject to Sections 23A, 23B, has shown that inter-affiliate swaps are organizations that have a cross-border and Regulation W. These provisions are used by covered swap entities for organizational structure that relies on specifically tailored to address risks internal risk management purposes separate legal entities must currently arising from transactions, including whereby a banking organization use inter-affiliate swaps to centralize non-cleared swaps, between affiliates. transfers risk to a centralized risk risk management of the overall banking As such, the agencies believe that they management function, which is organization’s outward-facing are the more effective tools to address considered to be a prudent risk derivatives exposures, whereas other risks arising from transactions between management practice. As more covered internationally active banks that operate affiliates. The Board continues to swap entities have come into scope, the cross-border through branching consider how inter-affiliate non-cleared amount of inter-affiliate initial margin structures do not have a comparable risk swaps can be addressed under collected by covered swap entities has management need for such inter-affiliate Regulation W. swaps. The agencies do not believe this increased. This has led the affected IV. Additional Compliance Date for difference in corporate organization banking organizations to borrow Initial Margin Requirements increasing amounts of cash in the debt justifies different initial margin markets to fund eligible collateral, requirements under the Swap Margin The agencies are proposing to give placing additional demands on their Rule. covered swap entities an additional year asset-liability management structure and The agencies are not proposing to to implement initial margin increasing their liability exposure to alter the Rule’s uniform requirements requirements for certain smaller depositors and other creditors in the for covered swap entities to exchange counterparties. The implementation of market. The removal of the inter-affiliate variation margin with their affiliates. both initial and variation margin initial margin requirement would The agencies note it has become routine requirements started on September 1, provide these banking organizations in recent years for covered swap entities 2016. With respect to initial margin with additional flexibility for internal to exchange variation margin on non- requirements, the requirements in the allocation of collateral. The agencies cleared swaps with their affiliates. As a Swap Margin Rule are implemented in believe that such risk management best practice for risk management, the five phases from September 1, 2016, through September 1, 2020, depending practices often improve the safety and exchange of variation margin serves to on the size of the covered swap entity’s soundness of a covered swap entity, and reflect ongoing economic transfers of portfolio of non-cleared swaps and the therefore, to encourage such prudent current exposure for assets and counterparty’s portfolio of non-cleared risk management, propose to exempt liabilities between the various parts of swaps. Variation margin requirements inter-affiliate swaps from the Rule’s the banking organization over the life of for all covered swap entities and initial margin requirements. The each non-cleared swap. This in turn counterparties were completely phased proposal does not remove the contributes to the safety and soundness in by March 1, 2017. This schedule was requirement that covered swap entities of the covered swap entity, and the consistent with BCBS/IOSCO must collect and post initial margin larger banking organization as a whole. framework when the Swap Margin Rule with other non-affiliate covered swap The exchange of variation margin will remain a requirement under the general was adopted in 2015. entities. rules of § l.4 and will continue to be The phase-in schedule for initial The agencies also note that because applicable to inter-affiliate swaps. margin is based on the average daily other jurisdictions (as well as the U.S. The proposal would also supplement aggregate notional amount (AANA) of market regulators) do not consistently the definition of ‘‘affiliate’’ for purposes non-cleared swaps held in each party’s apply swap margin rules to inter- of § l.11 to include not only the market-wide portfolio, measured affiliate swaps, the Rule’s imposition of definition of ‘‘affiliate’’ found in § l.2 separately from the standpoint of the initial margin requirements for inter- of the Swap Margin Rule, focusing on covered swap entity and the standpoint affiliate swaps may have provided consolidation under applicable of the counterparty.29 With the recent limited systemic risk benefits and put accounting rules, but also the U.S. banking firms at a competitive established ‘‘catch-all’’ legal standard 28 12 U.S.C. 371c and 371c–1; 12 CFR part 223. disadvantage. For example, many for affiliation in banking focusing on the In adopting the Swap Margin Rule, the agencies covered swap entities subject to the noted that transactions between banks and their direct or indirect of controlling affiliates have long been subject to their own special Swap Margin Rule are banking influence over the management or set of regulatory restrictions, particularly in the case organizations that are typically policies of the controlled company. of U.S. banks pursuant to sections 23A and 23B of internationally active with operations in Absent this change, the Swap Margin the Federal Reserve Act. See 80 FR at 74889 (noting many jurisdictions that may exempt or the obligation of banks that are covered swap Rule would, by its general provisions, entities to comply with additional regulatory not impose initial margin requirements require covered swap entities to post restrictions on inter-affiliate swap transactions, on inter-affiliate transactions.27 In initial margin to, and collect initial such as those required by sections 23A and 23B). addition, the imposition of initial margin from, unconsolidated entities 29 As noted above, the AANA is determined based margin requirements may depend on the on the non-cleared swaps, foreign exchange that are treated as affiliates of the forwards and foreign exchange swaps of each of the covered swap entity for other legal or covered swap entity and its counterparty 26 80 FR at 74889. (accounting for their respective affiliates) for each 27 regulatory purposes. Under the BCBS/IOSCO framework, no Finally, the agencies note that certain business day in March, April and May of that year. common standard was set for inter-affiliate swap The corresponding average daily notional transactions, in recognition of these existing and affiliate transactions are subject to the thresholds for each compliance date currently are: varied approaches to the topic of inter-affiliate requirements of sections 23A and 23B of September 1, 2016, $3 trillion; September 1, 2017, transactions generally. 79 FR at 57353; Article 6 of the Federal Reserve Act as implemented $2.25 trillion; September 1, 2018, $1.5 trillion; the BCBS and IOSCO ‘‘Margin Requirements for by the Federal Reserve’s Regulation W, September 1, 2019, $0.75 trillion; and September 1, Non-Centrally Cleared Derivatives’’ (September 2020, all covered swap entities and their 2013), available at https://www.bis.org/publ/ as these requirements continue to apply counterparties. See § l.1(e) of the Swap Margin bcbs261.pdf. to affiliate transactions with an insured Rule.

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules 59977

occurrence of the fourth phase of initial must calculate initial margin to be collected or posted as initial margin or margin compliance obligations on collected and posted to determine if and variation margin may be resolved. September 1, 2019—for covered swap when collection or posting of initial Finally, the documentation must also entities and counterparties with an margin is required. Under § l.3, a describe the methods, procedures, rules, AANA of $750 billion to $1.5 trillion— covered swap entity must collect or post and inputs used to calculate initial the group currently scheduled for the initial margin when it calculates an margin for non-cleared swaps entered fifth phase of compliance in the initial margin amount that, after into between the covered swap entity upcoming year includes all remaining subtracting the initial margin threshold and the counterparty.35 entities within the scope of the initial amount (not including any portion of The custody agreement requirements margin requirements, spanning AANAs the initial margin threshold amount in § l.7 of the Swap Margin Rule from $8 billion up to $750 billion.30 already applied by the covered swap require such agreements to be in place The industry’s implementation work entity or its affiliates to other non- only after initial margin is required to be to execute new trading documentation cleared swaps or non-cleared security- collected or posted pursuant to § l.3, or to meet variation margin compliance based swaps with the counterparty or its when initial margin is posted by a obligations by 2017 largely excluded affiliates), exceeds zero. It is only at the covered swap entity beyond an amount any rule-compliant documentation for time at which the covered swap entity required by the Rule. The agencies initial margin, due to the greater is required to collect or post initial expect that covered swap entities will operational complexity associated with margin pursuant to § l.3 that it is closely monitor their exposures and take ‘‘T+1’’ portfolio reconciliation of required to have completed the initial appropriate steps to ensure that trading internally-modeled initial margin margin trading documentation required documentation is in place at such time amounts and third-party segregation of by § l.10. For the avoidance of doubt, as initial margin is required to be initial margin collateral. The industry the agencies are proposing to amend exchanged pursuant to § l.3. The has raised significant concerns about the § l.10 to expressly state that a covered agencies note that this view is operational and other difficulties swap entity is not required to execute consistent with statements of the BCBS associated with beginning to exchange initial margin trading documentation and IOSCO with respect to initial margin with the large number of with a counterparty prior to the time internationally agreed standards for relatively small counterparties that it is required to collect or post margin requirements for non-centrally encompassed in the Swap Margin Rule’s initial margin pursuant to § l.3.33 cleared derivatives.36 fifth phase. In recognition of these As discussed in the Swap Margin difficulties, the BCBS/IOSCO framework Rule, a covered swap entity must VI. Portfolio Compression Exercises was recently revised to permit an execute trading documentation with and Other Amendments additional phase for smaller each counterparty that falls within the The Swap Margin Rule applies to counterparties, and the agencies believe scope of the Rule’s definition of a swap non-cleared swaps entered into on or it is appropriate to amend the Swap entity or a financial end user regarding after the applicable compliance date. As Margin Rule in a similar manner. 31 credit support arrangements unless the discussed above, the agencies have also Accordingly, the agencies are proposing swap entity or financial end user is expressed concerns about amendments to amend the compliance schedule to explicitly exempt from the Rule to a swap that was entered into before add a sixth phase of compliance for pursuant to § l.1(d).34 The the applicable compliance date if the certain smaller entities that are documentation must provide the amendments would have the effect of currently subject to the ‘‘phase five’’ covered swap entity the contractual allowing covered swap entities and their compliance deadline. The proposed rights and obligations to collect and post counterparties to evade or otherwise amendments would require compliance initial and variation margin in such artificially delay implementation of by September 1, 2020, for counterparties amounts, in such form, and under such margin requirements. In particular, the with an AANA ranging from $50 billion circumstances as are required by the agencies have been concerned whether up to $750 billion, while the Rule. The documentation must also market participants would amend compliance date for all other specify the methods, procedures, rules, legacy swaps, rather than entering into counterparties (with an AANA ranging and inputs for determining the value of new ones and exchanging margin from a ‘‘material swaps exposure’’ of $8 each non-cleared swap for purposes of pursuant to the Rule once the legacy billion up to $50 billion) would be calculating variation margin and the swaps expire according to their original extended to September 1, 2021. procedures by which any disputes terms. The industry has raised concerns concerning the valuation of non-cleared V. Documentation Requirements whether certain amendments, swaps or the valuation of assets particularly non-material amendments Complying with initial margin to non-economic terms, as well as requirements creates regulatory particular counterparty, the covered swap entity amendments that are made to reduce obligations for covered swap entities remains subject to the requirements of the Swap operational or counterparty risk, such as and implications for their Margin Rule with respect to that counterparty). 33 notional reductions and portfolio 32 Section l.10 has parallel requirements for counterparties. Covered swap entities covered swap entities to execute trading documentation providing the covered swap entity 35 Id. 30 The Swap Margin Rule does not require initial with the contractual right to collect and post 36 BCBS/IOSCO statement on the final margin to be exchanged with any counterparty variation margin in such amounts, in such form, implementation phases of the Margin requirements whose AANA is less than $8 billion as of the and under such circumstances as are required by for non-centrally cleared derivatives, March 5, 2019, previous June, July, and August. See § l.3 and the the Swap Margin Rule. There is no threshold available at https://www.iosco.org/library/pubdocs/ definition of ‘‘material swaps exposure’’ in § l.1. margin amount for variation margin pursuant to § l pdf/IOSCOPD624.pdf, stating that ‘‘the framework 31 See BCBS and IOSCO ‘‘Margin requirements for .4, and § l.10 requires covered swap entities to does not specify documentation, custodial or non-centrally cleared derivatives,’’ (July 2019), execute variation margin trading documentation no operational requirements if the bilateral initial available at https://www.bis.org/bcbs/publ/ later than the time the covered swap entity margin amount does not exceed the framework’s d475.pdf. commences trading non-cleared swaps with any Ö50 million initial margin threshold. It is expected, 32 See § l.1(f) (providing that once a covered swap entity or financial end user covered by the however, that covered entities will act diligently swap entity must comply with the margin Swap Margin Rule. when their exposures approach the threshold to requirements for non-cleared swaps and non- 34 80 FR 74886–74887 (describing the trading ensure that the relevant arrangements needed are in cleared security-based swaps with respect to a documentation requirements of § l.10). place if the threshold is exceeded.’’

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 59978 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules

compressions, could be executed while between two or more parties are among covered swap entities and their still allowing those amended legacy amended or torn up and replaced, counterparties, without converting the swaps to remain exempt from the Swap which reduces the size of gross legacy swap into a swap subject to the Margin Rule. derivatives exposures and generally Swap Margin Rule. The agencies are proposing reduces the number or frequency of Under the proposed rule, amended amendments to clarify the agencies’ payments between parties, thus swaps that reflect the outcome of a implementation of the legacy swaps maintaining or reducing the overall risk compression exercise are treated slightly provisions of the Swap Margin Rule profile of the portfolio. In general, these differently than replacement swaps that since its adoption in 2015. These compression exercises make use of third are issued as a result of the compression amendments are intended to permit party service providers to assist in the exercise. If a non-cleared swap is amendments to legacy swaps arising choice of trades to be modified and the amended solely as a result of a from certain routine industry practices risk composition of the resulting compression exercise, the amendments over the life-cycle of a non-cleared swap portfolios. cannot extend the remaining maturity of that are carried out for logistical reasons In a simple bilateral form of the amended non-cleared swap or or risk-management purposes. The compression between two increase the total effective notional proposed amendments are those that do counterparties, the dealer agrees with amount of the non-cleared swap. not raise concerns that the covered swap another dealer to compress trades so Example 1: The limitations on remaining entity is seeking to evade or otherwise that offsetting positions are cancelled maturity and total effective notional amount delay the application of margin and only the net amount remains, in a compression exercise resulting in a requirements for non-cleared swaps. without any change to the overall replacement swap are different. For example, One of these proposed amendments market exposures. The resulting net if swap 1 entered into by a covered swap recognizes the legacy status of a non- position is documented by amending entity and counterparty A has a total effective cleared swap that has been amended to one of the original swaps. This notional amount of $10 (long position) and reflect technical changes, such as ‘‘amended swap’’ method is the a remaining maturity of 5 years, and swap 2 addresses, the identities of parties for predominant method used in entered into by the same covered swap entity and the same counterparty A has a total delivery of formal notices, and other compressions of non-cleared interest effective notional amount of $5 (short administrative or operational provisions rate swaps. Compression can also be position) and a remaining maturity of 4 years, of the non-cleared swap that do not alter done on a multilateral basis among more the compression exercise might result in a the non-cleared swap’s underlying asset than two counterparties, and is often cancellation of swap 2 and an amendment to or indicator, such as a security, even more efficient, as trades across swap 1 such that the total effective notional currency, interest rate, commodity, or multiple dealers involved in a amount would become $5 (long position) and price index, the remaining maturity, or compression exercise can be offset, the remaining maturity would remain at 5 the total effective notional amount. The reducing the risk in each relationship years. This amendment would be permitted types of technical changes described are under the proposed rule since the maturity across the various counterparties of the amended swap is not longer than the necessary to reflect changes in a involved in the compression. The maturity of swap 1 (5 years) and the total counterparty’s circumstances, but are resulting net position is documented by effective notional amount of the amended not associated with a desire by either creating a replacement swap reflecting swap is not greater than the total effective party to increase or decrease its the net position. This ‘‘replacement notional amount of swap 1 ($10 long exposure to market risk factors. While swap’’ method is predominantly used in position). However, an amendment to swap the technical changes listed above compression exercises for non-cleared 1 that extends the remaining maturity of the would be permitted, a change in the credit default swaps, but it can also be amended swap beyond the original 5 years or non-cleared swap’s underlying index used for compression. increases the total effective notional amount would not be a technical change. higher than the original $10 would not be Compression often results in the able to take advantage of the proposed safe The second proposed amendment cancellation of offsetting positions, but harbor. recognizes the legacy status of a non- it could also result in new trades being A replacement swap cannot extend the cleared swap that has been amended booked into an existing non-cleared longest remaining maturity of all of the solely to reduce the notional amount of portfolio to reflect the netted-down risk swaps in the compression exercise and the non-cleared swap, without altering of the original portfolio. cannot have a total effective notional amount other terms of the original non-cleared One reason that the agencies are that exceeds the total effective notional swap. For these purposes, a reduction in permitting amendments resulting from amount of that longest remaining maturity notional amount may be achieved compression exercises is to reduce the swap. through a partial termination of the operational burden associated with Example 2: Using the terms of swap 1 in original non-cleared swap, with the IBOR replacements. While protocols to the example above, assume that swap 2 has remaining non-terminated non-cleared amend non-cleared swaps that reference a total effective notional amount of $5 (short swap being able to retain its legacy an IBOR or another discontinued rate position) and a remaining maturity of 3 years. status. A reduction in notional amount The two swaps could be in a compression are in development, there is a exercise in which both swaps are terminated could also be achieved by novating a possibility that counterparties may and replaced with a new swap. The portion of the original non-cleared choose to replace portfolios of IBOR- replacement swap must have a remaining swap’s notional amount to a third party. based non-cleared swaps with maturity that does not extend the longest The original non-cleared swap, with a replacement swaps generated through remaining maturity of swaps 1 and 2 (swap lower notional amount, would retain compression exercises. 1 has the longer remaining maturity of 5 legacy status, but the novated portion In recognition of the value of risk- years). The replacement swap must also have would not retain legacy status. reducing compression exercises, the a total effective notional amount that does The third proposed amendment agencies are proposing to amend the not exceed the total effective notional recognizes the legacy status of non- Swap Margin Rule to expressly amount of the swap with the longest remaining maturity (swap 1 has the longer cleared swaps that have been modified recognize the benefits of amending or remaining maturity of 5 years, so the as part of certain portfolio compression replacing non-cleared swaps solely to replacement swap cannot exceed swap 1’s exercises used as a risk management accomplish risk-reducing or risk-neutral total effective notional amount of $10 long tool. In compression, offsetting trades portfolio compression between or position).

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules 59979

Example 3: Assume that the following swaps are part of a compression exercise:

Remaining Swap contract No. Total effective notional amount maturity

1 ...... 10 (long) ...... 5 2 ...... 4 (short) ...... 4 3 ...... 7 (long) ...... 3 4 ...... 3 (short) ...... 2 5 ...... 17 (short) ...... 1

If a compression exercise terminates all the legacy status. The exercise of the option replacement of an IBOR. The agencies swaps listed above and replaces them with a under the is not an are also proposing to allow replacement new replacement swap, the total effective amendment of the contract, but rather a of other non-IBOR reference rates if the notional amount of the replacement swap covered swap entity reasonably expects cannot exceed the sum of the total effective second phase that operationalizes the notional amounts for all swaps with the same original contract. that the rate will be discontinued or reasonably determines has lost its or longer remaining maturity than the VII. Technical Changes replacement swap. Therefore, if one assumes relevance as a reliable benchmark due to the compression exercise results in a The proposed rule would delete § l a significant impairment. Is there a need remaining maturity of 3 years for the .1(e)(7), which includes an amendment to provide relief for replacement of rates replacement swap, the replacement swap relating to the QFC Rules. The text of under other circumstances? What with a remaining maturity of 3 years could § l.1(e)(7), with slight modifications, potential criteria could the agencies have a maximum total effective notional would be moved to § l.1(h)(1), so that amount of the sum of the total effective impose on non-IBOR interest rate notional amounts of the 5 year swap, the 4 it would reside in the section of the benchmarks in order for such a year swap, and the 3 year swap, or 10 + 4 Swap Margin Rule dedicated to legacy benchmark to be considered to have lost + 7 = $21.37 Alternatively, if one assumes the swap amendments. The methods of its relevance as a reliable benchmark compression exercise results in a remaining amendment listed in § l.1(h) would due to a significant impairment? If so, maturity of 2 years for the replacement swap, apply not only to IBOR replacements, please provide a description of the the replacement swap with a remaining but also to any other contractual circumstances creating this need and a maturity of 2 years could have a maximum modifications permitted under § l.1(h), total effective notional amount of the sum of description of the rates that may need to the total effective notional amounts of the 5 including amendments relating to the be replaced, either now or in the future. year swap, the 4 year swap, the 3 year swap, QFC Rules. (5) The proposed rule anticipates that and the 2 year swap or 10 + 4 + 7 + 3 = $24. VIII. Request for Comments a reference rate may need to be The agencies are also concerned about amended more than once. What types of A. IBORs clarifying the legacy status of criteria should the regulation establish that are entered into before the The agencies request comment on all for subsequent amendments to reference applicable compliance date but aspects of the proposed rule as well as rates? Please explain how those criteria exercised after that compliance date. As on the following specific questions. maintain the robustness of the new a general matter, a is created (1) The proposed rule permits reference rate and avoid the problems when a covered swap entity and its amendments to non-cleared swaps by that plagued LIBOR, such as market counterparty enter into a derivative method of adherence to a protocol, manipulation, etc. Should the agencies transaction granting one party an option contractual amendment of an agreement impose a cap on the number of times a to, at a later time, call for the transaction or confirmation, or execution of a new reference rate may be amended and, if to be converted into a non-cleared swap contract in replacement of and so, how should that cap be structured? between the two parties, the terms of immediately upon termination of an (6) The proposed rule does not specify which are set out in the derivative existing contract (i.e., tear-up). Should any criteria for a replacement rate, but contract itself. The agencies believe it is the agencies provide additional rather leaves this open to the parties. not necessary to propose rule text to clarification in the rule as to types of What types of rates might parties settle address the legacy status of swaptions permissible amendments to better on? Should the agencies limit the scope that become non-cleared swaps once reflect established or emerging industry of the replacement rate to specific exercised. Although the exchange of practices? What specifically should be criteria, such as that the rate must be payments under the non-cleared swap added or clarified, and why? based on observable, risk-free does not commence until after the (2) Does the proposed rule provide characteristics? If so, what other criteria applicable compliance date, the terms of sufficient flexibility regarding contract- might be appropriate, or what specific that non-cleared swap were established by-contract, netting set, and rates might be appropriate? and entered into during the original compression amendments to the (7) The proposed rule intends to be creation of the swaption contract, which reference rate? What, if any, additional accommodating to accompanying was entered into before the applicable flexibility is needed, and why? amendments that may be necessary to compliance date and therefore the (3) The agencies have listed a number maintain the relative economics of the resulting non-cleared swap retains of IBORs as examples of rates that non-cleared swap following the would be permitted to be replaced. To replacement of a reference rate. Do the 37 Note, however, that a replacement swap with what extent should this list be revised accompanying amendments provide a total effective notional amount of $21 would only to remove or to include any additional sufficient flexibility to permit the be acceptable if the result is also risk-neutral or rates, such as the Swap Offer Rate of additional modifications that parties risk-reducing based on the long or short positions plan to make? If not, please explain of each swap’s total effective notional amount. The Singapore? overall effect of the compression exercise must be (4) The relief provided by the what changes the agencies should either risk-neutral or risk-reducing. proposed rule would apply to the contemplate and why, and explain how

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 59980 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules

they should be permitted under the rule. reasonably anticipate the point in time and how to make this proposal easier to Alternatively, would the accompanying at which they will cross the $50 million understand. For example: amendments change the non-cleared initial margin threshold amount such • Have we organized the material to swap such that it does not resemble the that they can prepare the required suit your needs? If not, how could this original legacy contract? If this is a documentation in time? Please explain. material be better organized? concern, how should the rule address it? • Are the requirements in the E. Portfolio Compression Exercises and For example, should the agencies proposed rule clearly stated? If not, how Other Amendments prohibit an amendment to the currency could the proposed rule be more clearly from being eligible for the safe harbor? stated? (1) What are the methods used by • (8) The proposed rule does not specify covered swap entities to determine Does the proposed rule contain an end date by which these IBOR- whether portfolio compression exercises language or jargon that is not clear? If related amendments must be completed. would meet the requirements set out in so, which language requires Should the agencies include an end the proposal, including not extending clarification? • Would a different format (grouping date? Should it be one year, two years, the remaining maturity or increasing the and order of sections, use of headings, five years, ten years? Are there legacy total effective notional amounts? contracts that would still be in place in paragraphing) make the proposed rule (2) Should the Rule limit compression easier to understand? If so, what ten years such that a ten-year timeframe exercises to mitigating only certain would be realistic? changes to the format would make the types of risk and if so, which types of proposed rule easier to understand? (9) As noted above, the agencies risk? • propose to permit the replacement of an What else could we do to make the IBOR in the floating-rate leg of the swap (3) For a replacement swap that proposed rule easier to understand? results from a compression exercise, with a new reference rate, and would B. Paperwork Reduction Act Analysis also permit the fixed-rate leg in a fixed- should the agencies consider a different method of restricting either the total Certain provisions of the proposed floating interest rate swap to be rulemaking contain ‘‘collection of modified to maintain the economics of effective notional amount or the remaining maturity? Would commenters information’’ requirements within the the non-cleared swap. Is this approach meaning of the Paperwork Reduction appropriate in order for the fixed- be supportive of an approach that limits the remaining maturity to an ‘‘effective Act (PRA) of 1995 (44 U.S.C. 3501– floating swap to retain its legacy status, 3521). In accordance with the and if not, how should it be modified? maturity’’ calculation based on the total effective notional amounts in the requirements of the PRA, the agencies B. Non-Cleared Swaps Between CSEs exercise? For example, swap 1 has a may not conduct or sponsor, and a and an Affiliate notional amount of 10 and 3 years respondent is not required to respond (1) What, if any, additional conditions remaining maturity and swap 2 has a to, an information collection unless it or limitations should the agencies notional amount of 8 and 5 years displays a currently valid Office of impose before allowing a covered swap remaining maturity. Under the Management and Budget (OMB) control entity to take advantage of the ‘‘effective maturity’’ calculation, the number. The agencies reviewed the proposed exemption from initial margin replacement swap could not exceed an rulemaking and determined that it requirements for inter-affiliate swaps? effective maturity of 3 years and 10 revises certain recordkeeping For example, the CFTC imposes certain months, calculated as (3*10 + 5*8)/ requirements that have been previously limitations and conditions on its initial (10+8). The replacement swap with a 3 cleared under various OMB control margin exemption for inter-affiliate year and 10 month maturity would also numbers. In order to be consistent swaps. Discuss why any additional not be able to exceed a total effective across the agencies, the agencies are also conditions may be appropriate to ensure notional amount of 18 (10+8). applying a conforming methodology for the safety and soundness of the covered (4) How should the Rule be more calculating the burden estimates. The swap entity. specific about technical amendments agencies are proposing to extend for (2) Should the definitions of that are permitted? How can the Rule three years, with revision, these ‘‘affiliate’’ and ‘‘control’’ in § _.11 be better explain that amending a swap’s information collections. The OCC and revised to match with the definitions of underlying asset or indicator, such as a FDIC have submitted to OMB for review the Board’s Regulation W, Regulation Y, security, currency, interest rate, under section 3507(d) of the PRA (44 Regulation Q, or any other regulations? commodity, or price index, is not a U.S.C. 3507(d)) and section 1320.11 of Why or why not? technical amendment? the OMB’s implementing regulations (5 C. Additional Compliance Date for IX. Administrative Law Matters CFR 1320). The Board has reviewed the Initial Margin Requirements information collection under its A. Solicitation of Comments on Use of delegated authority. The OMB control (1) Does the proposed one-year Plain Language extension of the final implementation numbers are 1557–0251 (OCC), 3064– timeline to September 1, 2021 Section 722 of the Gramm-Leach- 0204 (FDIC), and 7100–0364 (Board). substantially address all Bliley Act 38 requires the OCC, Board, The FCA has determined the notice of implementation challenges? Please and FDIC to use plain language in all proposed rulemaking has no PRA explain. proposed and final rules published after implications because Farm Credit January 1, 2000. The OCC, Board, and System institutions are Federally D. Documentation Requirements FDIC have sought to present the chartered instrumentalities of the (1) What issues are there, if any, proposed rule in a simple and United States and instrumentalities of related to how parties document straightforward manner and invite the United States are specifically transactions in compliance with the comments on whether the proposal is excepted from the definition of Swap Margin Rule that should be clearly stated and effectively organized, ‘‘collection of information’’ contained in considered by the agencies? 44 U.S.C. 3502(3). The FHFA has (2) Are there any reasons why covered 38 Public Law 106–102, 113 Stat. 1338, 1471 determined that the notice of proposed swap entities would not be able to (codified at 12 U.S.C. 4809). rulemaking does not contain any

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules 59981

collection of information for which the Section _.8(f)(3)—50 hours. Estimated number of respondents: agency must obtain clearance under the Section _.9(e)—10 hours (on average 1.39 PRA. of 3 times per year). Proposed revisions only estimated Comments are invited on: Sections 237.22(a)(1) and 237.22(e) annual burden: –249 hours. a. Whether the collections of (Board only)—7 hours. Total estimated annual burden: 1,490 information are necessary for the proper hours. performance of the agencies’ functions, Recordkeeping C. Regulatory Flexibility Act Analysis including whether the information has Sections _.2 (definition of ‘‘eligible practical utility; master netting agreement,’’ item 4), OCC: In general, the Regulatory b. The accuracy or the estimate of the 237.8(g), and 237.10—5 hours. Flexibility Act (RFA) (5 U.S.C. 601 et burden of the information collections, Section _.5(c)(2)(i)—4 hours. seq.) requires that in connection with a including the validity of the Section _.7(c)—100 hours. rulemaking, an agency prepare and methodology and assumptions used; make available for public comment a Sections _.8(e) and 237.8(f)—40 c. Ways to enhance the quality, regulatory flexibility analysis that utility, and clarity of the information to hours. _ describes the impact of the rule on small be collected; Section .8(h)—20 hours. entities. Under section 605(b) of the d. Ways to minimize the burden of the Disclosure RFA, this analysis is not required if an information collections on respondents, _ agency certifies that the rule will not including through the use of automated Section .1(h)—1 hour. have a significant economic impact on collection techniques or other forms of OCC a substantial number of small entities information technology; and and publishes its certification and a e. Estimates of capital or startup costs Respondents: Any national bank or a brief explanatory statement in the and costs of operation, maintenance, subsidiary thereof, Federal savings Federal Register along with its rule. and purchase of services to provide association or a subsidiary thereof, or As part of our analysis, we consider information. Federal branch or agency of a foreign whether, pursuant to the RFA, the All comments will become a matter of bank that is registered as a swap dealer, proposed rule would have a significant public record. Comments on aspects of major swap participant, security-based economic impact on a substantial this notice that may affect reporting, swap dealer, or major security-based number of small entities. The OCC recordkeeping, or disclosure swap participant. currently supervises approximately 782 requirements and burden estimates Estimated number of respondents: 10. small entities.40 Among these 782 small should be sent to the addresses listed in Proposed revisions only estimated entities, 44 could be affected by the the ADDRESSES section of this document. annual burden: –2,500 hours. proposed rule if one or more of these A copy of the comments may also be Total estimated annual burden: small entities are a party to a financial submitted to the OMB desk officer by 14,900 hours. contract with a covered swap entity. mail to U.S. Office of Management and Board Because we believe banks will incur de Budget, 725 17th Street NW, #10235, minimis costs, if any, to comply with Washington, DC 20503; facsimile to Respondents: Any state member bank the proposed rule, we conclude that the (202) 395–6974; or email to oira_ (as defined in 12 CFR 208.2(g)), bank proposed rule, if implemented, would [email protected], Attention, holding company (as defined in 12 not have a significant economic impact Federal Banking Agency Desk Officer. U.S.C. 1841), savings and loan holding on a substantial number of small company (as defined in 12 U.S.C. 41 Current Actions entities. 1467a), foreign banking organization (as Board: The Regulatory Flexibility Act, The proposed rulemaking removes the defined in 12 CFR 211.21(o)), foreign 5 U.S.C. 601 et seq. (RFA), generally recordkeeping requirement in section bank that does not operate an insured requires that an agency prepare and l.11(b) that a covered swap entity shall branch, state branch or state agency of make available for public comment an calculate the amount of initial margin a foreign bank (as defined in 12 U.S.C. initial regulatory flexibility analysis in that would be required to be posted to 3101(b)(11) and (12)), or Edge or connection with a notice of proposed an affiliate that is a financial end user agreement corporation (as defined in 12 with material swaps exposure pursuant CFR 211.1(c)(2) and (3)) that is 39 The FDIC estimates zero entities, but is to section _.3(b) and provide registered as a swap dealer, major swap estimating one here as a placeholder. documentation of such amount to each participant, security-based swap dealer, 40 We base our estimate of the number of small affiliate on a daily basis. entities on the Small Business Administration’s or major security-based swap (SBA’s) size thresholds for commercial banks and Proposed Revision, With Extension, of participant. savings institutions, and trust companies, which are the Following Information Collections Estimated number of respondents: 41. $600 million and $41.5 million, respectively. Proposed revisions only estimated Consistent with the General Principles of Title of Information Collection: Affiliation, 13 CFR 121.103(a), we count the assets annual burden: –10,209 hours. Reporting and Recordkeeping of affiliated financial institutions when determining if we should classify an OCC-supervised institution Requirements Associated with Swaps Total estimated annual burden: 61,104 hours. as a small entity. We use December 31, 2018, to Margin and Swaps Push-Out. determine size because a ‘‘financial institution’s Frequency: Annual and event FDIC assets are determined by averaging the assets generated. reported on its four quarterly financial statements Affected Public: Businesses or other FDIC: Any FDIC-insured state- for the preceding year.’’ See footnote 8 of the SBA’s chartered bank that is not a member of Table of Size Standards. for-profit. 41 the Federal Reserve System or FDIC- As one way of determining whether any of the Estimated average hours per response: small entities is a covered swap entity, the OCC insured state-chartered savings reviewed the CFTC’s listing of registered swap Reporting association that is registered as a swap dealers at http://www.cftc.gov/LawRegulation/ _ dealer, major swap participant, security- DoddFrankAct/registerswapdealer. The SEC has not Section .1(d)—1 hour (on average of yet imposed a registration requirement on entities 1,000 times per year). based swap dealer, or major security- that meet the definition of security-based swap Sections _.8(c) and _.8(d)—240 hours. based swap participant. dealer or major security-based swap participant.

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00012 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 59982 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules

rulemaking or certify that the proposed Exchange Commission (SEC).44 None of Condition (Call Report),46 the FDIC rule will not have a significant the current Board-regulated covered supervised 3,465 institutions. Of those, economic impact on a substantial swap entities are small entities. 2,705 are considered ‘‘small,’’ according number of small entities.42 The Board The Board does not believe the to the terms of the RFA. As discussed welcomes comment on all aspects of the proposed rule will result in any new previously, the proposed rule directly initial regulatory flexibility analysis. A reporting, recordkeeping or other applies to covered swap entities (which final regulatory flexibility analysis will compliance requirements. In light of the includes persons registered with the be conducted after consideration of foregoing, the Board does not believe CFTC as swap dealers or major swap comments received during the public that this proposed rule would have a participants pursuant to the Commodity comment period. significant economic impact on a Exchange Act of 1936 and persons substantial number of small entities and registered with the SEC as security- As described above, the proposed rule therefore there are no significant based swap dealers and major security- would (i) permit legacy swaps to retain alternatives to the proposed rule that based swap participants under the their legacy status in the event that they would reduce the impact on small Securities Exchange Act of 1934) that are amended to replace an IBOR or other entities. are subject to the requirements of the discontinued rate, (ii) repeal the inter- FDIC: The RFA generally requires Swap Margin Rule. The FDIC has affiliate initial margin provisions, that, in connection with a proposed identified 105 swap dealers and major introduce an additional compliance date rulemaking, an agency prepare and swap participants that, as of May 22, for initial margin requirements, (iii) make available for public comment an 2019, have registered as swap entities.47 introduce an additional compliance date initial regulatory flexibility analysis None of these institutions are for initial margin requirements, (iv) describing the impact of the proposed supervised by the FDIC. clarify the point in time at which rule on small entities. However, a As an amendment to the Swap Margin trading documentation must be in place, regulatory flexibility analysis is not Rule, the proposed rule also affects (v) permit legacy swaps to retain their required if the agency certifies that the counterparties to swaps entered into by legacy status in the event that they are proposed rule will not have a significant covered swap entities. However, the amended due to technical amendments, economic impact on a substantial Terrorism Risk Insurance Program notional reductions, or portfolio number of small entities. The SBA has Reauthorization Act of 2015 excludes compression exercises, and (vi) make defined ‘‘small entities’’ to include non-cleared swaps entered into for technical changes to relocate the banking organizations with total assets hedging purposes by a financial provision addressing amendments to of less than or equal to $600 million that institution with total assets of $10 legacy swaps that are made to comply are independently owned and operated billion or less from the requirements of with the QFC Rules. or owned by a holding company with the Swap Margin Rule. Given this less than or equal to $600 million in This proposed rule applies to exclusion, a non-cleared swap between total assets.45 Generally, the FDIC financial institutions that are covered a covered swap entity and a small FDIC- considers a significant effect to be a swap entities that are subject to the supervised entity that is used to hedge quantified effect in excess of 5 percent requirements of the Swap Margin Rule. a commercial risk of the small entity of total annual salaries and benefits per Under SBA regulations, the finance and will not be subject to the Swap Margin institution, or 2.5 percent of total non- insurance sector includes commercial Rule. The FDIC believes that it is interest expenses. The FDIC believes banking, savings institutions, credit unlikely that any small entity it that effects in excess of these thresholds supervises will engage in non-cleared unions, other depository credit typically represent significant effects for intermediation and credit card issuing swaps for purposes other than hedging. FDIC-supervised institutions. For the Given that no FDIC-supervised small entities (financial institutions). With reasons described below, the FDIC entities are covered swap entities and respect to financial institutions that are certifies pursuant to section 605(b) of that it is unlikely that FDIC-supervised covered swap entities under the Swap the RFA that the proposed rule will not small entities enter into non-cleared Margin Rule, a financial institution have a significant economic impact on swaps for purposes other than hedging, generally is considered small if it has a substantial number of small entities. this proposed rule is not expected to assets of $600 million or less.43 Covered According to data from recent have a significant economic impact on swap entities would be considered Consolidated Reports of Income and financial institutions for purposes of the 46 FDIC Call Report, March 31, 2019. RFA in accordance with SBA 44 The CFTC has published a list of provisionally 47 While the SEC had adopted a regulation that regulations. The Board does not expect registered swap dealers as of October 17, 2017 that would require registration of security-based swap that any covered swap entity is likely to does not include any small financial institutions. dealers and major security-based swap participants, be a small financial institution, because See http://www.cftc.gov/LawRegulation/ as of June 28, 2019, there was no date established DoddFrankAct/registerswapdealer. The SEC has not as the compliance date and no SEC-published list a small financial institution is unlikely yet imposed a registration requirement on entities of any such entities that so registered (see 84 FR to engage in the level of swap activity that meet the definition of security-based swap 4906 at 4925). Accordingly, no security-based swap that would require it to register as a dealer or major security-based swap participant. dealers and no major security-based swap swap dealer or a major swap participant 45 The SBA defines a small banking organization participants have been identified as swap entities as having $600 million or less in assets, where an by the FDIC. In identifying the 105 institutions with the CFTC or a security-based swap organization’s ‘‘assets are determined by averaging referred to in the text, the FDIC used the list of swap dealer or security-based major swap the assets reported on its four quarterly financial dealers set forth, on June 28, 2019 (providing data participant with the U.S. Securities and statements for the preceding year.’’ See 13 CFR as of May 22, 2019) at https://www.cftc.gov/ 121.201 (as amended by 84 FR 34261, effective LawRegulation/DoddFrankAct/ August 19, 2019). In its determination, the ‘‘SBA registerswapdealer.html. Major swap participants, 42 See 5 U.S.C. 603(a). counts the receipts, employees, or other measure of among others, are required to apply for registration 43 See 13 CFR 121.201 (effective December 2, size of the concern whose size is at issue and all through a filing with the National Futures 2014, as amended by 84 FR 34261, effective August of its domestic and foreign affiliates.’’ See 13 CFR Association. Accordingly, the FDIC reviewed the 19, 2019); see also 13 CFR 121.103(a)(6) (noting 121.103. Following these regulations, the FDIC uses National Futures Association https:// factors that the SBA considers in determining a covered entity’s affiliated and acquired assets, www.nfa.futures.org/members/sd/index.html to whether an entity qualifies as a small business, averaged over the preceding four quarters, to determine whether there were registered major including receipts, employees, and other measures determine whether the covered entity is ‘‘small’’ for swap participants. As of June 21, 2019, there were of its domestic and foreign affiliates). the purposes of RFA. no major swap participants listed on this link.

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00013 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules 59983

a substantial number of small entities (adjusted annually for inflation, List of Subjects supervised by the FDIC. For these currently $154 million) in any one year. 12 CFR Part 45 reasons, the FDIC certifies that the If a budgetary impact statement is proposed rule will not have a significant required, section 205 of the Unfunded Administrative practice and economic impact on a substantial Mandates Act also requires the OCC to procedure, Capital, Margin number of small entities, within the identify and consider a reasonable requirements, National Banks, Federal meaning of those terms as used in the number of regulatory alternatives before Savings Associations, Reporting and RFA. Accordingly, a regulatory promulgating a rule. recordkeeping requirements, Risk. flexibility analysis is not required. The OCC analyzed the amendments The FDIC invites comments on all 12 CFR Part 237 aspects of the supporting information proposed in this notice of proposed Administrative practice and provided in this section, and in rulemaking, and has determined that procedure, Banks, banking, Foreign particular, whether the proposed rule they would not result in expenditures banking, Holding companies, Reporting would have any significant effects on by State, local, and Tribal governments, and recordkeeping requirements, small entities that the FDIC has not in the aggregate, or by the private sector, Swaps. identified. of $154 million in any one year. FCA: Pursuant to section 605(b) of the Accordingly, the OCC has not prepared 12 CFR Part 349 Regulatory Flexibility Act (5 U.S.C. 601 a written statement under sections 202 Administrative practice and et seq.), FCA hereby certifies that the and 205. procedure, Banks, banking, Holding proposed rule will not have a significant E. Riegle Community Development and companies, Capital, Margin economic impact on a substantial Regulatory Improvement Act of 1994 Requirements, Reporting and number of small entities. Each of the recordkeeping requirements, Savings banks in the Farm Credit System, Pursuant to section 302(a) of the associations, Risk, Swaps. considered together with its affiliated Riegle Community Development and 12 CFR Part 624 associations, has assets and annual Regulatory Improvement Act of 1994 income in excess of the amounts that (RCDRIA), in determining the effective Accounting, Agriculture, Banks, would qualify them as small entities; date and administrative compliance Banking, Capital, Cooperatives, Credit, nor does the Federal Agricultural requirements for new regulations that Margin requirements, Reporting and Mortgage Corporation meet the impose additional reporting, disclosure, recordkeeping requirements, Risk, Rural definition of ‘‘small entity.’’ Therefore, or other requirements on insured areas, Swaps. Farm Credit System institutions are not depository institutions, each Federal 12 CFR Part 1221 ‘‘small entities’’ as defined in the banking agency must consider, Regulatory Flexibility Act. consistent with principles of safety and Government-sponsored enterprises, FHFA: The Regulatory Flexibility Act soundness and the public interest, any Mortgages, Securities. (5 U.S.C. 601 et seq.) requires that a administrative burdens that such regulation that has a significant DEPARTMENT OF THE TREASURY regulations would place on depository economic impact on a substantial Office of the Comptroller of the institutions, including small depository number of small entities, small Currency institutions, and customers of businesses, or small organizations must depository institutions, as well as the 12 CFR Chapter I include an initial regulatory flexibility 48 analysis describing the regulation’s benefits of such regulations. In Authority and Issuance addition, section 302(b) of RCDRIA impact on small entities. FHFA need not For the reasons set forth in the undertake such an analysis if the agency requires new regulations and amendments to regulations that impose common preamble and under the has certified the regulation will not have authority of 12 U.S.C. 93a and a significant economic impact on a additional reporting, disclosures, or other new requirements on insured 5412(b)(2)(B), the Office of the substantial number of small entities. 5 Comptroller of the Currency proposes to U.S.C. 605(b). FHFA has considered the depository institutions generally to take effect on the first day of a calendar amend part 45 of Title 12, Code of impact of the proposed rule under the Federal Regulations, as follows: Regulatory Flexibility Act, and certifies quarter that begins on or after the date that the proposed rule does not have a on which the regulations are published PART 45—MARGIN AND CAPITAL 49 significant economic impact on a in final form. Each Federal banking REQUIREMENTS FOR COVERED substantial number of small entities agency has determined that the SWAP ENTITIES because the proposed rule is applicable proposed rule would not impose only to FHFA’s regulated entities, which additional reporting, disclosure, or other ■ 1. The authority citation for part 45 are not small entities for purposes of the requirements; therefore the continues to read as follows: Regulatory Flexibility Act. requirements of the RCDRIA do not Authority: 7 U.S.C. 6s(e), 12 U.S.C. 1 et apply. However, the agencies note that seq., 12 U.S.C. 93a, 161, 481, 1818, 3907, D. Unfunded Mandates Reform Act of comments on these matters have been 3909, 5412(b)(2)(B), and 15 U.S.C. 78o–10(e). 1995 solicited in other sections of this ■ 2. Section 45.1 is amended by: Section 202 of the Unfunded Supplementary Information section, and ■ a. Revising paragraphs (e)(6), (e)(7), Mandates Reform Act of 1995 that the requirements of RCDRIA will be (h) introductory text, and (h)(1); and (Unfunded Mandates Act) (2 U.S.C. considered as part of the overall ■ b. Adding paragraphs (h)(3) through 1532) requires that the OCC prepare a rulemaking process. In addition, the (h)(5). budgetary impact statement before agencies also invite any other comments The revisions and additions read as promulgating a rule that includes any that will further inform the agencies’ follows: Federal mandate that may result in the consideration of RCDRIA. expenditure by State, local, and Tribal § 45.1 Authority, purpose, scope, governments, in the aggregate, or by the 48 12 U.S.C. 4802(a). exemptions and compliance dates. private sector, of $100 million or more 49 12 U.S.C. 4802. * * * * *

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00014 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 59984 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules

(e) Compliance dates. *** (A) An interbank offered rate (IBOR) (B) Exceed the longest remaining * * * * * including, but not limited to, the maturity of all the swaps submitted to (6) September 1, 2020 with respect to London Interbank Offered Rate (LIBOR), the compression exercise. requirements in § 45.3 for initial margin the Tokyo Interbank Offered Rate (5) The non-cleared swap or non- for any non-cleared swaps and non- (TIBOR), the Bank Bill Swap Rate cleared security-based swap was cleared security-based swaps, where (BBSW), the Singapore Interbank amended solely for one of the following both: Offered Rate (SIBOR), the Canadian reasons: (i) The covered swap entity combined Dollar Offered Rate (CDOR), Euro (i) To reflect technical changes, such with all its affiliates; and Interbank Offered Rate (EURIBOR), and as addresses, identities of parties for the Hong Kong Interbank Offered Rate (ii) Its counterparty combined with all delivery of formal notices, and other (HIBOR); its affiliates, have an average daily administrative or operational provisions (B) Any other interest rate that a as long as they do not alter the non- aggregate notional amount of non- covered swap entity reasonably expects cleared swaps, foreign exchange cleared swap’s or non-cleared security- to be discontinued or reasonably based swap’s underlying asset or forwards and foreign exchange swaps determines has lost its relevance as a for March, April and May 2020 that indicator, the remaining maturity, or the reliable benchmark due to a significant total effective notional amount; or exceeds $50 billion, where such impairment; or amounts are calculated only for (C) Any other interest rate that (ii) To reduce the notional amount, so business days; and succeeds a rate referenced in paragraph long as: (iii) In calculating the amounts in (h)(3)(i)(A) or (h)(3)(i)(B) of this section. (A) All payment obligations attached paragraphs (e)(6)(i) and (ii) of this An amendment made under this to the total effective notional amount section, an entity shall count the paragraph (h)(3)(i)(C) could be one of being eliminated as a result of the average daily aggregate notional amount multiple amendments made under this amendment are fully terminated; or of a non-cleared swap, a non-cleared paragraph (h)(3)(i)(C). For example, an (B) All payment obligations attached security-based swap, a foreign exchange amendment could replace an IBOR with to the total effective notional amount forward or a foreign exchange swap a temporary interest rate and later being eliminated as a result of the between the entity and an affiliate only replace the temporary interest rate with amendment are fully novated to a third one time, and shall not count a swap or a permanent interest rate. party, who complies with applicable security-based swap that is exempt (ii) Amendments to accommodate margin rules for the novated portion pursuant to paragraph (d) of this replacement of a rate described in upon the transfer. section. paragraph (h)(3)(i) may also incorporate ■ 3. Amend § 45.10 by revising (7) September 1, 2021 with respect to spreads or other adjustments to the paragraph (a) to read as follows: requirements in § 45.3 for initial margin replacement rate and make other for any other covered swap entity with necessary technical changes to § 45.10 Documentation of margin matters. respect to non-cleared swaps and non- operationalize the determination of * * * * * cleared security-based swaps entered payments or other exchanges of (a) Provides the covered swap entity into with any other counterparty. economic value using the replacement and its counterparty with the * * * * * rate, including changes to determination contractual right to collect and post (h) Legacy swaps. Covered swaps dates, calculation agents, and payment initial margin and variation margin in entities are required to comply with the dates, so long as the changes do not such amounts, in such form, and under requirements of this part for non-cleared extend the maturity or increase the total such circumstances as are required by swaps and non-cleared security-based effective notional amount of the non- this subpart, and at such time as initial swaps entered into on or after the cleared swap or non-cleared security- margin or variation margin is required relevant compliance dates for variation based swap. to be collected or posted under § 45.3 or margin and for initial margin (4) The non-cleared swap or non- § 45.4, as applicable; and established in paragraph (e) of this cleared security-based swap was * * * * * section. Any non-cleared swap or non- amended or replaced solely to reduce ■ 4. Section 45.11 is revised to read as cleared security-based swap entered risk or remain risk-neutral through follows: into before such relevant date shall portfolio compression between or remain outside the scope of this part if among covered swap entities and their § 45.11 Initial margin exemption for amendments are made to the non- counterparties as long as: affiliates. cleared swap or non-cleared security- (i) A non-cleared swap or non-cleared (a) The requirement for a covered based swap by method of adherence to security-based swap that is amended to swap entity to collect or post initial a protocol, contractual amendment of an reflect the outcome of the compression margin under § 45.3 does not apply with agreement or confirmation, or execution exercise does not: respect to any non-cleared swap or non- of a new contract in replacement of and (A) Extend the remaining maturity; or cleared security-based swap with a (B) Increase the total effective immediately upon termination of an counterparty that is an affiliate. notional amount of that swap; or existing contract, as follows: (ii) A non-cleared swap or non- (b) For purposes of this section, an (1) Amendments to the non-cleared cleared security-based swap that is affiliate means: swap or non-cleared security-based entered into as a replacement to reflect (1) An affiliate as defined in § 45.2; swap solely to comply with the the outcome of the compression exercise and requirements of part 47, subpart I of part does not: (2) Any company that controls, is 252 or part 382 of title 12, as applicable; (A) Exceed the sum of the total controlled by, or is under common * * * * * effective notional amounts of all of the control with the covered swap entity (3)(i) Amendments to the non-cleared swaps that were submitted to the through the direct or indirect exercise of swap or non-cleared security-based compression exercise that had the same controlling influence over the swap that are made solely to or longer remaining maturity as the management or policies of the accommodate the replacement of: replacement swap; or controlled company.

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00015 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules 59985

Board of Governors of the Federal and non-cleared security-based swaps operationalize the determination of Reserve System entered into with any other payments or other exchanges of 12 CFR Chapter II counterparty. economic value using the replacement * * * * * rate, including changes to determination Authority and Issuance (h) Legacy swaps. Covered swaps dates, calculation agents, and payment For the reasons set forth in the entities are required to comply with the dates, so long as the changes do not common preamble, the Board of requirements of this subpart for non- extend the maturity or increase the total Governors of the Federal Reserve cleared swaps and non-cleared security- effective notional amount of the non- System proposes to amend 12 CFR part based swaps entered into on or after the cleared swap or non-cleared security- 237 to read as follows: relevant compliance dates for variation based swap. margin and for initial margin (4) The non-cleared swap or non- PART 237—SWAPS MARGIN AND established in paragraph (e) of this cleared security-based swap was SWAPS PUSH–OUT section. Any non-cleared swap or non- amended or replaced solely to reduce cleared security-based swap entered risk or remain risk-neutral through ■ 5. The authority citation for part 237 portfolio compression between or continues to read as follows: into before such relevant date shall remain outside the scope of this subpart among covered swap entities and their Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o– if amendments are made to the non- counterparties as long as: (i) A non-cleared swap or non-cleared 10(e), 15 U.S.C. 8305, 12 U.S.C. 221 et seq., cleared swap or non-cleared security- 12 U.S.C. 343–350, 12 U.S.C. 1818, 12 U.S.C. security-based swap that is amended to based swap by method of adherence to 1841 et seq., 12 U.S.C. 3101 et seq., and 12 reflect the outcome of the compression a protocol, contractual amendment of an U.S.C. 1461 et seq. exercise does not: agreement or confirmation, or execution (A) Extend the remaining maturity; or Subpart A— Margin and Capital of a new contract in replacement of and (B) Increase the total effective Requirements for Covered Swap immediately upon termination of an notional amount of that swap; or Entities (Regulation KK) existing contract, as follows: (ii) A non-cleared swap or non- (1) Amendments to the non-cleared ■ cleared security-based swap that is 6. Section 237.1 is amended by: swap or non-cleared security-based ■ entered into as a replacement to reflect a. Revising paragraphs (e)(6), (e)(7), swap solely to comply with the (h) introductory text, and (h)(1); and the outcome of the compression exercise ■ requirements of part 47, subpart I of part does not: b. Adding paragraphs (h)(3) through 252 or part 382 of title 12, as applicable; (h)(5). (A) Exceed the sum of the total The revisions and additions read as * * * * * effective notional amounts of all of the follows: (3)(i) Amendments to the non-cleared swaps that were submitted to the swap or non-cleared security-based compression exercise that had the same § 237.1 Authority, purpose, scope, swap that are made solely to or longer remaining maturity as the exemptions and compliance dates. accommodate the replacement of: replacement swap; or * * * * * (A) An interbank offered rate (IBOR) (B) Exceed the longest remaining (e) * * * including, but not limited to, the maturity of all the swaps submitted to (6) September 1, 2020 with respect to London Interbank Offered Rate (LIBOR), the compression exercise. requirements in § 237.3 for initial the Tokyo Interbank Offered Rate (5) The non-cleared swap or non- margin for any non-cleared swaps and (TIBOR), the Bank Bill Swap Rate cleared security-based swap was non-cleared security-based swaps, (BBSW), the Singapore Interbank amended solely for one of the following where both: Offered Rate (SIBOR), the Canadian reasons: (i) The covered swap entity combined Dollar Offered Rate (CDOR), Euro (i) To reflect technical changes, such with all its affiliates; and Interbank Offered Rate (EURIBOR), and as addresses, identities of parties for (ii) Its counterparty combined with all the Hong Kong Interbank Offered Rate delivery of formal notices, and other its affiliates, have an average daily (HIBOR); administrative or operational provisions aggregate notional amount of non- (B) Any other interest rate that a as long as they do not alter the non- cleared swaps, foreign exchange covered swap entity reasonably expects cleared swap’s or non-cleared security- forwards and foreign exchange swaps to be discontinued or reasonably based swap’s underlying asset or for March, April and May 2020 that determines has lost its relevance as a indicator, the remaining maturity, or the exceeds $50 billion, where such reliable benchmark due to a significant total effective notional amount; or (ii) To reduce the notional amount, so amounts are calculated only for impairment; or (C) Any other interest rate that long as: business days; and (A) All payment obligations attached (iii) In calculating the amounts in succeeds a rate referenced in paragraph to the total effective notional amount paragraphs (e)(6)(i) and (ii) of this (h)(3)(i)(A) or (h)(3)(i)(B) of this section. being eliminated as a result of the section, an entity shall count the An amendment made under this amendment are fully terminated; or average daily aggregate notional amount paragraph (h)(3)(i)(C) could be one of (B) All payment obligations attached of a non-cleared swap, a non-cleared multiple amendments made under this to the total effective notional amount security-based swap, a foreign exchange paragraph (h)(3)(i)(C). For example, an being eliminated as a result of the forward or a foreign exchange swap amendment could replace an IBOR with amendment are fully novated to a third between the entity and an affiliate only a temporary interest rate and later party, who complies with applicable one time, and shall not count a swap or replace the temporary interest rate with margin rules for the novated portion security-based swap that is exempt a permanent interest rate. upon the transfer. pursuant to paragraph (d) of this (ii) Amendments to accommodate ■ 7. Amend § 237.10 by revising section. replacement of a rate described in paragraph (a) to read as follows: (7) September 1, 2021 with respect to paragraph (h)(3)(i) may also incorporate requirements in § 237.3 for initial spreads or other adjustments to the § 237.10 Documentation of margin margin for any other covered swap replacement rate and make other matters. entity with respect to non-cleared swaps necessary technical changes to * * * * *

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00016 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 59986 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules

(a) Provides the covered swap entity (i) The covered swap entity combined Dollar Offered Rate (CDOR), Euro and its counterparty with the with all its affiliates; and Interbank Offered Rate (EURIBOR), and contractual right to collect and post (ii) Its counterparty combined with all the Hong Kong Interbank Offered Rate initial margin and variation margin in its affiliates, have an average daily (HIBOR); such amounts, in such form, and under aggregate notional amount of non- (B) Any other interest rate that a such circumstances as are required by cleared swaps, foreign exchange covered swap entity reasonably expects this subpart, and at such time as initial forwards and foreign exchange swaps to be discontinued or reasonably margin or variation margin is required for March, April and May 2020 that determines has lost its relevance as a to be collected or posted under § 237.3 exceeds $50 billion, where such reliable benchmark due to a significant or § 237.4, as applicable; and amounts are calculated only for impairment; or * * * * * business days; and (C) Any other interest rate that ■ 8. Section 237.11 is revised to read as (iii) In calculating the amounts in succeeds a rate referenced in paragraph follows: paragraphs (e)(6)(i) and (ii) of this (h)(3)(i)(A) or (h)(3)(i)(B) of this section. section, an entity shall count the An amendment made under this § 237.11 Initial margin exemption for average daily aggregate notional amount paragraph (h)(3)(i)(C) could be one of affiliates. of a non-cleared swap, a non-cleared multiple amendments made under this (a) The requirement for a covered security-based swap, a foreign exchange paragraph (h)(3)(i)(C). For example, an swap entity to collect or post initial forward or a foreign exchange swap amendment could replace an IBOR with margin under § 237.3 does not apply between the entity and an affiliate only a temporary interest rate and later with respect to any non-cleared swap or one time, and shall not count a swap or replace the temporary interest rate with non-cleared security-based swap with a security-based swap that is exempt a permanent interest rate. counterparty that is an affiliate. pursuant to paragraph (d) of this (ii) Amendments to accommodate (b) For purposes of this section, an section. replacement of a rate described in affiliate means: (7) September 1, 2021 with respect to paragraph (h)(3)(i) may also incorporate (1) An affiliate as defined in § 237.2; requirements in § 349.3 for initial spreads or other adjustments to the and margin for any other covered swap replacement rate and make other (2) Any company that controls, is entity with respect to non-cleared swaps necessary technical changes to controlled by, or is under common and non-cleared security-based swaps operationalize the determination of control with the covered swap entity entered into with any other payments or other exchanges of through the direct or indirect exercise of counterparty. economic value using the replacement controlling influence over the * * * * * rate, including changes to determination management or policies of the dates, calculation agents, and payment controlled company. (h) Legacy swaps. Covered swaps entities are required to comply with the dates, so long as the changes do not Federal Deposit Insurance Corporation requirements of this part for non-cleared extend the maturity or increase the total effective notional amount of the non- 12 CFR Chapter III swaps and non-cleared security-based swaps entered into on or after the cleared swap or non-cleared security- Authority and Issuance relevant compliance dates for variation based swap. For the reasons set forth in the margin and for initial margin (4) The non-cleared swap or non- Supplementary Information section, the established in paragraph (e) of this cleared security-based swap was Federal Deposit Insurance Corporation section. Any non-cleared swap or non- amended or replaced solely to reduce proposes to amend 12 CFR Chapter III cleared security-based swap entered risk or remain risk-neutral through as follows: into before such relevant date shall portfolio compression between or remain outside the scope of this part if among covered swap entities and their PART 349—DERIVATIVES amendments are made to the non- counterparties as long as: (i) A non-cleared swap or non-cleared cleared swap or non-cleared security- ■ 9. The authority citation for subpart A security-based swap that is amended to based swap by method of adherence to of part 349 continues to read as follows: reflect the outcome of the compression a protocol, contractual amendment of an exercise does not: Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o– agreement or confirmation, or execution 10(e), and 12 U.S.C. 1818 and 12 U.S.C. (A) Extend the remaining maturity; or 1819(a)(Tenth), 12 U.S.C. 1813(q), 1818, of a new contract in replacement of and (B) Increase the total effective 1819, and 3108. immediately upon termination of an notional amount of that swap; or existing contract, as follows: ■ (ii) A non-cleared swap or non- 10. Section 349.1 is amended by: (1) Amendments to the non-cleared ■ a. Revising paragraphs (e)(6), (e)(7), cleared security-based swap that is swap or non-cleared security-based entered into as a replacement to reflect (h) introductory text, and (h)(1); and swap solely to comply with the ■ b. Adding paragraphs (h)(3) through the outcome of the compression exercise requirements of part 47, subpart I of part (h)(5). does not: The revisions and additions read as 252 or part 382 of title 12, as applicable; (A) Exceed the sum of the total follows: * * * * * effective notional amounts of all of the (3)(i) Amendments to the non-cleared swaps that were submitted to the § 349.1 Authority, purpose, scope, swap or non-cleared security-based compression exercise that had the same exemptions and compliance dates. swap that are made solely to or longer remaining maturity as the * * * * * accommodate the replacement of: replacement swap; or (e) * * * (A) An interbank offered rate (IBOR) (B) Exceed the longest remaining * * * * * including, but not limited to, the maturity of all the swaps submitted to (6) September 1, 2020 with respect to London Interbank Offered Rate (LIBOR), the compression exercise. requirements in § 349.3 for initial the Tokyo Interbank Offered Rate (5) The non-cleared swap or non- margin for any non-cleared swaps and (TIBOR), the Bank Bill Swap Rate cleared security-based swap was non-cleared security-based swaps, (BBSW), the Singapore Interbank amended solely for one of the following where both: Offered Rate (SIBOR), the Canadian reasons:

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00017 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules 59987

(i) To reflect technical changes, such PART 624—MARGIN AND CAPITAL remain outside the scope of this part if as addresses, identities of parties for REQUIREMENTS FOR COVERED amendments are made to the non- delivery of formal notices, and other SWAP ENTITIES cleared swap or non-cleared security- administrative or operational provisions based swap by method of adherence to ■ as long as they do not alter the non- 13. The authority citation for part 624 a protocol, contractual amendment of an cleared swap’s or non-cleared security- continues to read as follows: agreement or confirmation, or execution based swap’s underlying asset or Authority: 7 U.S.C 6s(e), 15 U.S.C. 78o– of a new contract in replacement of and indicator, the remaining maturity, or the 10(e), 12 U.S.C. 2154, 12 U.S.C. 2243, 12 immediately upon termination of an total effective notional amount; or U.S.C. 2252, 12 U.S.C. 2279bb–1. existing contract, as follows: (ii) To reduce the notional amount, so ■ 14. Section 624.1 is amended by (1) Amendments to the non-cleared long as: ■ a. Revising paragraphs (e)(6), (e)(7), swap or non-cleared security-based (A) All payment obligations attached (h) introductory text, and (h)(1); and swap solely to comply with the to the total effective notional amount ■ b. Adding paragraphs (h)(3) through requirements of part 47, subpart I of part being eliminated as a result of the (h)(5). 252 or part 382 of title 12, as applicable; amendment are fully terminated; or The revisions and additions read as follows: * * * * * (B) All payment obligations attached (3)(i) Amendments to the non-cleared to the total effective notional amount § 624.1 Authority, purpose, scope, swap or non-cleared security-based being eliminated as a result of the exemptions and compliance dates. swap that are made solely to amendment are fully novated to a third * * * * * accommodate the replacement of: party, who complies with applicable (e) * * * (A) An interbank offered rate (IBOR) margin rules for the novated portion * * * * * including, but not limited to, the upon the transfer. London Interbank Offered Rate (LIBOR), ■ 11. Amend § 349.10 by revising (6) September 1, 2020 with respect to the Tokyo Interbank Offered Rate paragraph (a) to read as follows: requirements in § 624.3 for initial margin for any non-cleared swaps and (TIBOR), the Bank Bill Swap Rate § 349.10 Documentation of margin non-cleared security-based swaps, (BBSW), the Singapore Interbank matters. where both: Offered Rate (SIBOR), the Canadian * * * * * (i) The covered swap entity combined Dollar Offered Rate (CDOR), Euro (a) Provides the covered swap entity with all its affiliates; and Interbank Offered Rate (EURIBOR), and and its counterparty with the (ii) Its counterparty combined with all the Hong Kong Interbank Offered Rate contractual right to collect and post its affiliates, have an average daily (HIBOR); initial margin and variation margin in aggregate notional amount of non- (B) Any other interest rate that a such amounts, in such form, and under cleared swaps, foreign exchange covered swap entity reasonably expects such circumstances as are required by forwards and foreign exchange swaps to be discontinued or reasonably this subpart, and at such time as initial for March, April and May 2020 that determines has lost its relevance as a margin or variation margin is required exceeds $50 billion, where such reliable benchmark due to a significant to be collected or posted under § 349.3 amounts are calculated only for impairment; or or § 349.4, as applicable; and business days; and (C) Any other interest rate that * * * * * (iii) In calculating the amounts in succeeds a rate referenced in paragraph ■ 12. Section 349.11 is revised to read paragraphs (e)(6)(i) and (ii) of this (h)(3)(i)(A) or (h)(3)(i)(B) of this section. as follows: section, an entity shall count the An amendment made under this average daily aggregate notional amount paragraph (h)(3)(i)(C) could be one of § 349.11 Initial margin exemption for of a non-cleared swap, a non-cleared multiple amendments made under this affiliates. security-based swap, a foreign exchange paragraph (h)(3)(i)(C). For example, an (a) The requirement for a covered forward or a foreign exchange swap amendment could replace an IBOR with swap entity to collect or post initial between the entity and an affiliate only a temporary interest rate and later margin under § 349.3 does not apply one time, and shall not count a swap or replace the temporary interest rate with with respect to any non-cleared swap or security-based swap that is exempt a permanent interest rate. non-cleared security-based swap with a pursuant to paragraph (d) of this (ii) Amendments to accommodate counterparty that is an affiliate. section. replacement of a rate described in (b) For purposes of this section, an (7) September 1, 2021 with respect to paragraph (h)(3)(i) may also incorporate affiliate means: requirements in § 624.3 for initial spreads or other adjustments to the (1) An affiliate as defined in § 349.2; margin for any other covered swap replacement rate and make other and entity with respect to non-cleared swaps necessary technical changes to (2) Any company that controls, is and non-cleared security-based swaps operationalize the determination of controlled by, or is under common entered into with any other payments or other exchanges of control with the covered swap entity counterparty. economic value using the replacement through the direct or indirect exercise of * * * * * rate, including changes to determination controlling influence over the (h) Legacy swaps. Covered swaps dates, calculation agents, and payment management or policies of the entities are required to comply with the dates, so long as the changes do not controlled company. requirements of this part for non-cleared extend the maturity or increase the total Farm Credit Administration swaps and non-cleared security-based effective notional amount of the non- swaps entered into on or after the cleared swap or non-cleared security- Authority and Issuance relevant compliance dates for variation based swap. For the reasons set forth in the margin and for initial margin (4) The non-cleared swap or non- preamble, the Farm Credit established in paragraph (e) of this cleared security-based swap was Administration proposes to amend section. Any non-cleared swap or non- amended or replaced solely to reduce chapter VI of title 12, Code of Federal cleared security-based swap entered risk or remain risk-neutral through Regulations, as follows: into before such relevant date shall portfolio compression between or

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00018 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 59988 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules

among covered swap entities and their § 624.11 Initial margin exemption for of a non-cleared swap, a non-cleared counterparties as long as: affiliates. security-based swap, a foreign exchange (i) A non-cleared swap or non-cleared (a) The requirement for a covered forward or a foreign exchange swap security-based swap that is amended to swap entity to collect or post initial between the entity and an affiliate only reflect the outcome of the compression margin under § 624.3 does not apply one time, and shall not count a swap or exercise does not: with respect to any non-cleared swap or security-based swap that is exempt (A) Extend the remaining maturity; or non-cleared security-based swap with a pursuant to paragraph (d) of this (B) Increase the total effective counterparty that is an affiliate. section. notional amount of that swap; or (b) For purposes of this section, an (7) September 1, 2021 with respect to (ii) A non-cleared swap or non- affiliate means: requirements in § 1221.3 for initial cleared security-based swap that is (1) An affiliate as defined in § 624.2, margin for any other covered swap entered into as a replacement to reflect and entity with respect to non-cleared swaps the outcome of the compression exercise (2) Any company that controls, is and non-cleared security-based swaps does not: controlled by, or is under common entered into with any other (A) Exceed the sum of the total control with the covered swap entity counterparty. effective notional amounts of all of the through the direct or indirect exercise of (h) Legacy swaps. Covered swaps swaps that were submitted to the controlling influence over the entities are required to comply with the compression exercise that had the same management or policies of the requirements of this part for non-cleared or longer remaining maturity as the controlled company. swaps and non-cleared security-based replacement swap; or Federal Housing Finance Agency swaps entered into on or after the (B) Exceed the longest remaining relevant compliance dates for variation Authority and Issuance maturity of all the swaps submitted to margin and for initial margin the compression exercise. For the reasons set forth in the established in paragraph (e) of this (5) The non-cleared swap or non- preamble, the Federal Housing Finance section. Any non-cleared swap or non- cleared security-based swap was Agency proposes to amend chapter XII cleared security-based swap entered amended solely for one of the following of title 12, Code of Federal Regulations, into before such relevant date shall reasons: as follows: remain outside the scope of this part if (i) To reflect technical changes, such amendments are made to the non- as addresses, identities of parties for PART 1221—MARGIN AND CAPITAL cleared swap or non-cleared security- delivery of formal notices, and other REQUIREMENTS FOR COVERED based swap by method of adherence to administrative or operational provisions SWAP ENTITIES a protocol, contractual amendment of an as long as they do not alter the non- ■ 17. The authority citation for part agreement or confirmation, or execution cleared swap’s or non-cleared security- 1221 continues to read as follows: of a new contract in replacement of and based swap’s underlying asset or immediately upon termination of an Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o– existing contract, as follows: indicator, the remaining maturity, or the 10(e), 12 U.S.C. 4513, and 12 U.S.C. 4526(a). total effective notional amount; or (1) Amendments to the non-cleared ■ 18. Section 1221.1 is amended by: swap or non-cleared security-based (ii) To reduce the notional amount, so ■ a. Revising paragraphs (e)(6), (e)(7), long as: swap solely to comply with the (h) introductory text, and (h)(1); and requirements of part 47, subpart I of part (A) All payment obligations attached ■ b. Adding paragraphs (h)(3) through 252 or part 382 of title 12, as applicable; to the total effective notional amount (h)(5). being eliminated as a result of the The revisions and additions read as * * * * * amendment are fully terminated; or (B) follows: (3)(i) Amendments to the non-cleared All payment obligations attached to the swap or non-cleared security-based total effective notional amount being § 1221.1 Authority, purpose, scope, swap that are made solely to eliminated as a result of the amendment exemptions and compliance dates. accommodate the replacement of: are fully novated to a third party, who * * * * * (A) An interbank offered rate (IBOR) complies with applicable margin rules (e) * * * including, but not limited to, the for the novated portion upon the * * * * * London Interbank Offered Rate (LIBOR), transfer. (6) September 1, 2020 with respect to the Tokyo Interbank Offered Rate ■ 15. Amend § 624.10 by revising requirements in § 1221.3 for initial (TIBOR), the Bank Bill Swap Rate paragraph (a) to read as follows: margin for any non-cleared swaps and (BBSW), the Singapore Interbank non-cleared security-based swaps, Offered Rate (SIBOR), the Canadian § 624.10 Documentation of margin Dollar Offered Rate (CDOR), the Euro matters. where both: (i) The covered swap entity combined Interbank Offered Rate (EURIBOR), and * * * * * with all its affiliates; and the Hong Kong Interbank Offered Rate (a) Provides the covered swap entity (ii) Its counterparty combined with all (HIBOR); and its counterparty with the its affiliates, have an average daily (B) Any other interest rate that a contractual right to collect and post aggregate notional amount of non- covered swap entity reasonably expects initial margin and variation margin in cleared swaps, foreign exchange to be discontinued or reasonably such amounts, in such form, and under forwards and foreign exchange swaps determines has lost its relevance as a such circumstances as are required by for March, April and May 2020 that reliable benchmark due to a significant this subpart, and at such time as initial exceeds $50 billion, where such impairment; or margin or variation margin is required amounts are calculated only for (C) Any other interest rate that to be collected or posted under § 624.3 business days; and succeeds a rate referenced in paragraph or § 624.4, as applicable; and (iii) In calculating the amounts in (h)(3)(i)(A) or (h)(3)(i)(B) of this section. * * * * * paragraphs (e)(6)(i) and (ii) of this An amendment made under this ■ 16. Section 624.11 is revised to read section, an entity shall count the paragraph (h)(3)(i)(C) could be one of as follows: average daily aggregate notional amount multiple amendments made under this

VerDate Sep<11>2014 17:23 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00019 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1 Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 / Proposed Rules 59989

paragraph (h)(3)(i)(C). For example, an (B) All payment obligations attached Dated at McLean, VA, this 17th day of amendment could replace an IBOR with to the total effective notional amount September, 2019. a temporary interest rate and later being eliminated as a result of the Dale L. Aultman, replace the temporary interest rate with amendment are fully novated to a third Secretary. a permanent interest rate. party, who complies with applicable Dated: August 27, 2019. (ii) Amendments to accommodate margin rules for the novated portion Mark A. Calabria, replacement of a rate described in upon the transfer. Director, Federal Housing Finance Agency. paragraph (h)(3)(i) may also incorporate ■ 19. Amend § 1221.10 by revising [FR Doc. 2019–23541 Filed 11–6–19; 8:45 am] spreads or other adjustments to the paragraph (a) to read as follows: BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P; replacement rate and make other 8070–01–P; 6705–01–P necessary technical changes to § 1221.10 Documentation of margin operationalize the determination of matters. payments or other exchanges of * * * * * NATIONAL CREDIT UNION economic value using the replacement ADMINISTRATION rate, including changes to determination (a) Provides the covered swap entity dates, calculation agents, and payment and its counterparty with the 12 CFR Part 701 dates, so long as the changes do not contractual right to collect and post RIN 3133–AF06 extend the maturity or increase the total initial margin and variation margin in effective notional amount of the non- such amounts, in such form, and under Chartering and Field of Membership cleared swap or non-cleared security- such circumstances as are required by based swap. this part, and at such time as initial AGENCY: National Credit Union (4) The non-cleared swap or non- margin or variation margin is required Administration (NCUA). cleared security-based swap was to be collected or posted under § 1221.3 ACTION: Proposed rule and supplemental amended or replaced solely to reduce or § 1221.4, as applicable; and statement. risk or remain risk-neutral through * * * * * portfolio compression between or SUMMARY: The NCUA Board (Board) is among covered swap entities and their ■ 20. Section 1221.11 is revised to read proposing to amend its chartering and counterparties as long as: as follows: field of membership (FOM) rules with (i) A non-cleared swap or non-cleared respect to applicants for a community § 1221.11 Initial margin exemption for charter approval, expansion, or security-based swap that is amended to affiliates. reflect the outcome of the compression conversion. Specifically, the Board is exercise does not: (a) The requirement for a covered proposing to re-adopt a provision to (A) Extend the remaining maturity; or swap entity to collect or post initial allow an applicant to designate a (B) Increase the total effective margin under § 1221.3 does not apply Combined Statistical Area (CSA), or an notional amount of that swap; or with respect to any non-cleared swap or individual, contiguous portion thereof, (ii) A non-cleared swap or non- non-cleared security-based swap with a as a well-defined local community cleared security-based swap that is counterparty that is an affiliate. (WDLC), provided that the chosen area entered into as a replacement to reflect has a population of 2.5 million or less. (b) For purposes of this section, an Separately, in accordance with an the outcome of the compression exercise affiliate means: does not: August 2019 opinion and order issued (A) Exceed the sum of the total (1) An affiliate as defined in § 1221.2; by the D.C. Circuit Court of Appeals effective notional amounts of all of the and (court) with respect to communities based on a Core-Based Statistical Area swaps that were submitted to the (2) Any company that controls, is (CBSA) or a portion thereof, the Board compression exercise that had the same controlled by, or is under common is providing further explanation and or longer remaining maturity as the control with the covered swap entity replacement swap; or support for its elimination of the through the direct or indirect exercise of requirement to serve the CBSA’s core (B) Exceed the longest remaining controlling influence over the maturity of all the swaps submitted to area as provided for in a 2016 management or policies of the rulemaking. In addition, the Board is the compression exercise. controlled company. (5) The non-cleared swap or non- proposing to clarify existing cleared security-based swap was Dated: September 17th, 2019. requirements and add an explicit amended solely for one of the following Joseph M. Otting, provision to its rules to address concerns about potential discrimination reasons: Comptroller of the Currency. (i) To reflect technical changes, such in the FOM selection for CSAs and By order of the Board of Governors of the CBSAs. as addresses, identities of parties for Federal Reserve System, October 21, 2019. DATES: delivery of formal notices, and other Ann E. Misback, Comments must be received by administrative or operational provisions December 9, 2019. as long as they do not alter the non- Secretary of the Board. Federal Deposit Insurance Corporation. By order of the Board ADDRESSES: You may submit comments cleared swap’s or non-cleared security- of Directors. by any of the following methods (Please based swap’s underlying asset or send comments by one method only): indicator, the remaining maturity, or the Dated at Washington, DC, on September • Federal eRulemaking Portal: http:// 17, 2019. total effective notional amount; or www.regulations.gov. Follow the (ii) To reduce the notional amount, so Robert E. Feldman, instructions for submitting comments. long as: Executive Secretary. • NCUA Website: http:// (A) All payment obligations attached By order of the Board of the Farm Credit www.ncua.gov/RegulationsOpinions _ _ to the total effective notional amount Administration. Laws/proposed regs/proposed being eliminated as a result of the regs.html. Follow the instructions for amendment are fully terminated; or submitting comments.

VerDate Sep<11>2014 18:10 Nov 06, 2019 Jkt 250001 PO 00000 Frm 00020 Fmt 4702 Sfmt 4702 E:\FR\FM\07NOP1.SGM 07NOP1