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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23
RIN ____ - ____
Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap
Participants
AGENCY: Commodity Futures Trading Commission
ACTION: Proposed rule on the cross-border application of the margin requirements
SUMMARY: On October 3, 2014, the Commission published proposed regulations to
implement section 4s(e) of the Commodity Exchange Act (CEA), as added by section
731 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act). This provision requires the Commission to adopt initial and variation margin
requirements for swap dealers (SDs) and major swap participants (MSPs) that do not
have a Prudential Regulator (collectively, CSEs or Covered Swap Entities). In the
October 3, 2014 proposing release, the Commission also issued an Advance Notice of
Proposed Rulemaking (ANPR) requesting public comment on the cross-border
application of such margin requirements. In this release, the Commission is proposing a
rule for the application of the Commissions margin requirements to cross-border
transactions (Proposed Rule).
DATES: Comments must be received on or before [INSERT DATE 60 DAYS AFTER
PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: You may submit comments, identified by RIN [____ - ____], and
Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap
Participants by any of the following methods:

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Agency Web site, via its Comments Online process at http://comments.cftc.gov.

Follow the instructions for submitting comments through the web site.

Mail: Send to Christopher Kirkpatrick, Secretary, Commodity Futures Trading

Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC
20581.

Hand Delivery/Courier: Same as mail above.

Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions

for submitting comments.
Please submit your comments using only one method.
All comments must be submitted in English, or if not, accompanied by an English

translation. Comments will be posted as received to http://www.cftc.gov. You should

submit only information that you wish to make available publicly. If you wish the
Commission to consider information that may be exempt from disclosure under the
Freedom of Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the established procedures in 145.9 of the
Commissions regulation, 17 CFR 145.9.
The Commission reserves the right, but shall have no obligation, to review, prescreen, filter, redact, refuse or remove any or all of your submission from www.cftc.gov
that it may deem to be inappropriate for publication, such as obscene language. All
submissions that have been redacted, or removed that contain comments on the merits of
the rulemaking will be retained in the public comment file and will be considered as
required under the Administrative Procedure Act and other applicable laws, and may be
accessible under the Freedom of Information Act.

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FOR FURTHER INFORMATION CONTACT: Laura B. Badian, Assistant General
Counsel, (202) 418-5969, lbadian@cftc.gov, or Paul Schlichting, Assistant General
Counsel, (202) 418-5884, pschlichting@cftc.gov, Office of the General Counsel,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,
NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I.

BACKGROUND
A. Dodd-Frank Act and the Scope of This Rulemaking
B. Key Considerations in the Cross-Border Application of the Margin Regulations
C. Advance Notice of Proposed Rulemaking

II.

1.

Guidance Approach

2.

Prudential Regulators Approach

3.

Entity-Level Approach

4.

Comments on the Alternative Approaches Discussed in the ANPR

THE PROPOSED RULE

A. Overview
1.

Use of Hybrid, Firm-Wide Approach

B. Key Definitions
1.

U.S. person

2.

Guarantees
3

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3.

Foreign Consolidated Subsidiaries

C. Applicability of Margin Requirements to Cross-Border Uncleared Swaps

1.

Uncleared swaps of U.S. CSEs or non-U.S. CSEs whose obligations under

the relevant swap are guaranteed by a U.S. Person

2.

Uncleared swaps of non-U.S. CSEs (including Foreign Consolidated

Subsidiaries) whose obligations under the relevant swap are not guaranteed
by a U.S. person

3.

Exclusion for uncleared swaps of non-U.S. CSEs where neither

counterpartys obligations under the relevant swap are guaranteed by a U.S.
person and neither counterparty is a Foreign Consolidated Subsidiary nor a
U.S. branch of a non-U.S. CSE

4.

U.S. Branches of Non-U.S. CSEs

D. Substituted Compliance
E. General Request for Comments

III. RELATED MATTERS

A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
1.

Introduction

2.

Proposed Rule

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a.

U.S. Person

b.

Availability of Substituted Compliance and Exclusion

i.

Uncleared swaps of U.S. CSEs or of non-U.S. CSEs whose obligations

under the relevant swap are guaranteed by a U.S. person

ii. Uncleared swaps of non-U.S. CSEs whose obligations under the
relevant swap are not guaranteed by a U.S. person
iii. Exclusion for uncleared swaps of non-U.S. CSEs where neither
counterpartys obligations under the relevant swap are guaranteed by a U.S.
person and neither counterparty is a Foreign Consolidated Subsidiary nor a U.S.
branch of a non-U.S. CSE
iv. Foreign Consolidated Subsidiaries
v. U.S. branch of a non-U.S. CSE

3.

c.

Alternatives

d.

Comparability Determinations

Section 15(a) Factors

a.

Protection of Market Participants and the Public

b.

Efficiency, Competitiveness, and Financial Integrity

i.

Efficiency

ii. Competitiveness
iii. Financial integrity of markets
iv. Price Discovery
v. Sound Risk Management Practices
vi. Other Public Interest Considerations

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4.

I.

General Request for Comment

Background
A.

Dodd-Frank Act and the Scope of This Rulemaking

In the fall of 2008, as massive losses spread throughout the financial system and
many major financial institutions failed or narrowly escaped failure with government
intervention, confidence in the financial system was replaced by panic, credit markets
seized up, and trading in many markets grounded to a halt. The financial crisis revealed
the vulnerability of the U.S. financial system to widespread systemic risk resulting from,
among other things, excessive leverage, poor risk management practices at financial
firms, and the lack of integrated supervisory oversight of financial institutions and
financial markets.1 The financial crisis also highlighted the contagion risks of undercollateralized counterparty exposures in a highly interconnected financial system.2
In the wake of the financial crisis, Congress enacted the provisions of the
Commodity Exchange Act (CEA) relating to swaps in Title VII of the Dodd-Frank
Act,3 which establishes a comprehensive new regulatory framework for swaps. One of

See Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report: Final Report of the
National Commission on the Causes of the Financial and Economic Crisis in the United States, Jan. 2011,
at xviii-xxv, 307-8, 363-5, 386, available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
2

Id. at xxiv-xxv, 49-51.

Public Law 111203, 124 Stat. 1376 (2010).

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the cornerstones of this regulatory framework is the reduction of systemic risk to the U.S.
financial system through the establishment of margin requirements for uncleared swaps.4
Section 731 of the Dodd-Frank Act added a new section 4s, which directs the
Commission to adopt rules establishing minimum initial and variation margin
requirements for SDs and MSPs on all swaps that are not cleared by a registered
derivatives clearing organization. Section 4s(e) further provides that the margin
requirements must: (i) help ensure the safety and soundness of the SD or MSP; and (ii) be
appropriate for the risk associated with the uncleared swaps held as a SD or MSP.5
The Dodd-Frank Act also requires that the Prudential Regulators,6 in consultation
with the Commission and the Securities and Exchange Commission (SEC), adopt a
joint margin rule. Accordingly, each SD and MSP for which there is a Prudential
Regulator must meet margin requirements established by the applicable Prudential
Regulator, and each SD and MSP for which there is no Prudential Regulator must comply
with the Commission's margin requirements. Further, the Dodd-Frank Act requires that
the Commission, the Prudential Regulators and the SEC, to the maximum extent
practicable, establish and maintain comparable minimum capital and minimum initial and

The Financial Crisis Inquiry Commission stated in its report that the failure of American International
Group, Inc. (AIG) was possible because the sweeping deregulation of over-the-counter derivatives
(including credit default swaps) effectively eliminated federal and state regulation of these products,
including capital and margin requirements that would have reduced the likelihood of AIGs failure. Id. at
352.
5

Section 4s(e)(3)(A)(i) of the CEA, 7 U.S.C. 6s(e)(3)(A)(i).

The term Prudential Regulator is defined in section 1a(39) of the CEA, as amended by section 721 of
the Dodd-Frank Act. This definition includes the Board of Governors of the Federal Reserve System
(FRB); the Office of the Comptroller of the Currency (OCC); the Federal Deposit Insurance
Corporation (FDIC); the Farm Credit Administration; and the Federal Housing Finance Agency.

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variation margin requirements, including the use of noncash collateral, for SDs and
MSPs.7
In determining whether, and the extent to which, section 4s(e) should apply to a
CSEs swap activities outside the United States, the Commission focused on the text and
objectives of that provision together with the language of section 2(i) of the CEA.8 As
discussed further below, the primary reason for the margin requirement is to protect CSEs
in the event of a counterparty default. That is, in the event of a default by a counterparty,
margin protects the CSE by allowing it to absorb the losses using collateral provided by
the defaulting entity and to continue to meet all of its obligations. In addition, margin
functions as a risk management tool by limiting the amount of leverage that a CSE can
incur. Specifically, by requiring a CSE to post margin to its counterparties, the margin
requirements ensure that a CSE has adequate eligible collateral to enter into an uncleared
swap.

See section 4s(e)(3)(D)(ii) of the CEA, 7 U.S.C. 6s(e)(3)(D)(ii), which was added by section 731 of the
Dodd-Frank Act. The Prudential Regulators, the Commission, and the SEC are also required to consult
periodically (but not less frequently than annually) on minimum capital requirements and minimum initial
and variation margin requirements. See section 4s(e)(3)(D)(i) of the CEA, 7 U.S.C. 6s(e)(3)(D)(i).
8

See 7 U.S.C. 2(i). Section 2(i) of the CEA states:

The provisions of this Act relating to swaps that were enacted by the Wall Street Transparency and
Accountability Act of 2010 (including any rule prescribed or regulation promulgated under that Act),
shall not apply to activities outside the United States unless those activities
(1) have a direct and significant connection with activities in, or effect on, commerce of the United
States; or
(2) contravene such rules or regulations as the Commission may prescribe or promulgate as are
necessary or appropriate to prevent the evasion of any provision of this Act that was enacted by
the Wall Street Transparency and Accountability Act of 2010.

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Risk arising from uncleared swaps can potentially have a substantial adverse
effect on any CSEirrespective of its domicile or the domicile of its counterpartiesand
therefore the stability of the U.S. financial system because each CSE has a sufficient
nexus to the U.S. financial system to require registration as a CSE. In light of the role of
margin in ensuring the safety and soundness of CSEs and preserving the stability of the
U.S. financial system, and consistent with section 2(i), section 4s(e)s margin
requirements extend to all CSEs on a cross-border basis.
Pursuant to its new section 4s(e) authority, on October 3, 2014, the Commission
published reproposed regulations to implement initial and variation margin requirements
on uncleared swaps (Proposed Margin Rules) for SDs and MSPs that do not have a
Prudential Regulator (collectively, CSEs or Covered Swap Entities).9 In the same
release, the Commission also published an Advance Notice of Proposed Rulemaking
(ANPR) requesting public comment on the cross-border application of such margin
requirements. In this release, the Commission is proposing a rule for the application of
the Commissions uncleared swap margin requirements to cross-border transactions
(referred to herein as the Proposed Rule).

The Commissions Proposed Margin Rules are set forth in proposed rules 150 through 159 of part 23 of
the Commissions regulations, proposed as17 CFR 23.150 through 23.159. See Margin Requirements
for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 FR 59898 (Oct. 3, 2014). In
September 2014, the Prudential Regulators published proposed regulations to implement initial and
variation margin requirements for SDs and MSPs that have a Prudential Regulator. See Margin and Capital
Requirements for Covered Swap Entities, 79 FR 53748 (Sept. 24, 2014), available at
http://www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf. The Commission originally proposed
margin rules for public comment in 2011. See Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 76 FR 23732 (April 28, 2011).

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B.

Key Considerations in the Cross-Border Application of the Margin

Regulations

The swaps market is global in nature. Swaps are routinely entered into between
counterparties located in different jurisdictions. Dealers and other market participants
conduct their swaps business through subsidiaries, affiliates, and branches dispersed
across geographical boundaries. The global and highly interconnected nature of the
swaps market heightens the potential that risks assumed by a firm overseas can be
transmitted across national borders to cause or contribute to substantial losses to U.S.
persons and threaten the stability of the entire U.S. financial system. Therefore, it is
important that margin requirements for uncleared swaps apply on a cross-border basis in
a manner that effectively addresses risks to U.S. persons and the U.S. financial system.
The Commission recognizes that non-U.S. CSEs and non-U.S. counterparties may
be subject to comparable or different rules in their home jurisdictions. Conflicting and
duplicative requirements between U.S. and foreign margin regimes could potentially lead
to market inefficiencies and regulatory arbitrage, as well as competitive disparities that
undermine the relative position of U.S. CSEs and their counterparties. Therefore, it is
essential that a cross-border margin framework takes into account the global nature of the
swaps market and the supervisory interests of foreign regulators with respect to entities
and transactions covered by the Commissions margin regime.10

10

In developing the proposed cross-border framework, the Commission is guided by principles of

international comity, which counsels due regard for the important interests of foreign sovereigns. See
Restatement (Third) of Foreign Relations Law of the United States (the Restatement). The Restatement
provides that even where a country has a basis for jurisdiction, it should not prescribe law with respect to a
person or activity in another country when the exercise of such jurisdiction is unreasonable. See
Restatement 403(1). The reasonableness of such an exercise of jurisdiction, in turn, is to be determined
by evaluating all relevant factors, including certain specifically enumerated factors where appropriate:

10

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In granting the Commission new authorities under the Dodd-Frank Act, Congress
also reaffirmed and called for coordination and cooperation among domestic and foreign
regulators. Section 752(a) of the Dodd-Frank Act requires the Commission, the
Prudential Regulators, and the SEC to consult and coordinate with foreign regulatory
authorities on the establishment of consistent international standards with respect to the
regulation of swaps.11 In this regard, the Commission recognizes that efforts are
underway by other domestic and foreign regulators to implement margin reform and that

(a) the link of the activity to the territory of the regulating state, i.e., the extent to which the
activity takes place within the territory, or has substantial, direct, and foreseeable effect upon
or in the territory;
(b) the connections, such as nationality, residence, or economic activity, between the regulating
state and the persons principally responsible for the activity to be regulated, or between that
state and those whom the regulation is designed to protect;
(c) the character of the activity to be regulated, the importance of regulation to the regulating
state, the extent to which other states regulate such activities, and the degree to which the
desirability of such regulation is generally accepted;
(d) the existence of justified expectations that might be protected or hurt by the regulation;
(e) the importance of the regulation to the international political, legal, or economic system;
(f) the extent to which the regulation is consistent with the traditions of the international system;
(g) the extent to which another state may have an interest in regulating the activity; and
(h) the likelihood of conflict with regulation by another state.
See Restatement 403(2).
Notably, the Restatement does not preclude concurrent regulation by multiple jurisdictions. However,
where concurrent jurisdiction by two or more jurisdictions creates conflict, the Restatement recommends
that each country evaluate its own interests in exercising jurisdiction and those of the other jurisdiction, and
where possible, to consult with each other.
11

15 U.S.C. 8325(a) (added by section 752 of the Dodd-Frank Act). Also, before commencing any
rulemaking or issuing an order regarding swaps, the Commission must consult and coordinate to the extent
possible with the SEC and the Prudential Regulators for the purposes of assuring regulatory consistency
and comparability, to the extent possible. See 15 U.S.C. 8302(a)(1) (added by section 712(a)(1) of the
Dodd-Frank Act).

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regulatory harmonization and coordination are indispensable to achieving a workable
cross-border framework.
In developing a cross-border framework for margin regulations, the Commission
aims to strike the proper balance among these sometimes competing considerations. To
that end, the Commission has consulted and coordinated with the Prudential Regulators
and foreign regulatory authorities. Commission staff worked closely with the staff of the
Prudential Regulators, and the Proposed Rule is closely aligned with the cross-border
proposal that was published by the Prudential Regulators in September 2014. In addition,
Commission staff has participated in numerous bilateral and multilateral discussions with
foreign regulatory authorities addressing national efforts to implement margin reform and
the possibility of conflicts and overlaps between U.S. and foreign regulatory regimes.
Recognizing that systemic risks arising from global and interconnected swaps market
must be addressed through coordinated regulatory requirements for margin across
international jurisdictions, the Commission has played an active role in encouraging
international harmonization and coordination of margin requirements for uncleared
swaps.
The Commission notes that its collaboration with the Basel Committee on
Banking Supervision (BCBS) and the Board of the International Organization of
Securities Commissions (IOSCO) as a member of the Working Group on Margining
Requirements (WGMR) resulted in the issuance of a final margin policy framework for
non-cleared, bilateral derivatives in September 2013 (referred to herein as the BCBS-

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IOSCO framework).12 Individual regulatory authorities across major jurisdictions
(including the EU, Japan, and the United States) have since started to develop their own
margin rules.13 The Proposed Rule is consistent with the standards in the final BCBSIOSCO framework, and we have been in continuous communication with regulators in
the EU and Japan as we developed our cross-border margin proposal. Although at this
time foreign jurisdictions do not yet have their margin regimes in place, the Commission
has participated in ongoing, collaborative discussions with regulatory authorities in the
EU and Japan regarding their cross-border approaches to the margin rules, including the
anticipated scope of application of margin requirements in their jurisdiction to crossborder swaps, their plans for recognizing foreign margin regimes, and their anticipated
timelines.
The Commission believes that its ongoing bilateral and multilateral discussions
with foreign regulatory authorities in major jurisdictions (including the EU and Japan) are
critical to fostering international cooperation and harmonization and in reducing
conflicting and duplicative regulatory requirements. The Commission expects that these
discussions will continue as it finalizes and then implements its framework for the

12

See Margin Requirements for Non-centrally Cleared Derivatives (Sept. 2013), available at
http://www.bis.org/publ/bcbs261.pdf.
13

See European Banking Authority, European Securities and Markets Authority, and European Insurance
and Occupational Pensions Authority, Consultation Paper on draft regulatory technical standards on riskmitigation techniques for OTC-derivative contracts not cleared by a CCP under Article 11(15) of
Regulation (EU) No 648/2012 (for the European Market Infrastructure Regulation) (April 14, 2014),
available at
https://www.eba.europa.eu/documents/10180/655149/JC+CP+2014+03+%28CP+on+risk+mitigation+for+
OTC+derivatives%29.pdf; Financial Services Agency of Japan, draft amendments to the Cabinet Office
Ordinance on Financial Instruments Business and Comprehensive Guidelines for Supervision with
regard to margin requirements for non-centrally cleared derivatives (July 3, 2014). Available in Japanese at
http://www.fsa.go.jp/news/26/syouken/20140703-3.html.

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application of margin requirements to cross-border transactions, and as other jurisdictions
develop their own respective approaches.
C.

Advance Notice of Proposed Rulemaking

The ANPR sought public comment on three potential alternative approaches to

the cross-border application of its margin requirements: (1) a transaction-level approach
that is consistent with the Commissions cross-border guidance (Guidance
Approach);14 (2) an approach that is consistent with the approach proposed by the
Prudential Regulators (the Prudential Regulators Approach);15 and (3) an entity-level
approach described in the ANPR (Entity-Level Approach). To provide context for the
discussion of the Proposed Rule, the three alternative approaches discussed in the ANPR
are summarized below.
1.

Guidance Approach

Under the first alternative discussed in the ANPR, the Commissions margin
requirements would be applied on a transaction-level basis, consistent with its crossborder Guidance.16 The Commission stated in the Guidance that it would generally treat
its margin requirements for uncleared swaps as a transaction-level requirement.
Consistent with the rationale stated in the Guidance, under this transaction-level

14

Interpretative Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78
FR 45292 (July 26, 2013) (Guidance). The Commission addressed, among other things, how the swap
provisions in the Dodd-Frank Act (including the margin requirement for uncleared swaps) generally would
apply on a cross-border basis. In this regard, the Commission stated that as a general policy matter it
expected to apply the margin requirement as a transaction-level requirement.
15

See Margin and Capital Requirements for Covered Swap Entities, 79 FR 53748 (Sept. 24, 2014),
available at http://www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf.
16

See Interpretative Guidance and Policy Statement Regarding Compliance with Certain Swap
Regulations, 78 FR 45292 (July 26, 2013).

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approach, the Commissions Proposed Margin Rules would apply to a U.S. SD/MSP
(other than a foreign branch of a U.S. bank that is a SD/MSP) for all of its uncleared
swaps, regardless of whether its counterparty is a U.S. person,17 without substituted
compliance.
However, under this approach the margin requirements would apply to a non-U.S.
SD/MSP (whether or not it is a guaranteed affiliate18 or an affiliate conduit19) only
with respect to its uncleared swaps with a U.S. person counterparty and a non-U.S.
counterparty that is a guaranteed affiliate or an affiliate conduit; the margin requirements
would not apply to uncleared swaps with a non-U.S. person counterparty that is not a
guaranteed affiliate or an affiliate conduit. Where the non-U.S. counterparty is a
guaranteed affiliate or an affiliate conduit, the Commission would allow substituted
compliance (i.e., the non-U.S. SD/MSP would be permitted to comply with the margin

17

The scope of the term U.S. person as used in the Cross-Border Guidance Approach and the EntityLevel Approach would be the same as under the Guidance. See Guidance at 45316-45317 for a summary
of the Commission's interpretation of the term U.S. person.
18

Under the Guidance, id. at 45318, the term guaranteed affiliate refers to a non-U.S. person that is an
affiliate of a U.S. person and that is guaranteed by a U.S. person. The scope of the term guarantee under
the Guidance Approach and the Entity-Level Approach would be the same as under note 267 of the
Guidance and accompanying text.
19

Under the approach discussed in the Guidance, id. at 45359, the factors that are relevant to the
consideration of whether a person is an "affiliate conduit" include whether: (i) the non-U.S. person is
majority-owned, directly or indirectly, by a U.S. person; (ii) the non-U.S. person controls, is controlled by,
or is under common control with the U.S. person; (iii) the non-U.S. person, in the regular course of
business, engages in swaps with non-U.S. third party(ies) for the purpose of hedging or mitigating risks
faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other
arrangements with such U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with thirdparty(ies) to its U.S. affiliates; and (iv) the financial results of the non-U.S. person are included in the
consolidated financial statements of the U.S. person. Other facts and circumstances also may be relevant.

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requirements of its home country's regulator if the Commission determines that such
requirements are comparable to the Commission's margin requirements).20
2.

Prudential Regulators Approach

The second alternative discussed in the ANPR was the Prudential Regulators
Approach to cross-border application of the margin requirements.21 Under the Prudential
Regulators proposal issued in September 2014 (the September proposal), the
Prudential Regulators would apply the margin requirements to all uncleared swaps of
CSEs under their supervision with a limited exception.22 Specifically, the Prudential
Regulators would not apply their margin requirements to any foreign non-cleared swap of
a foreign covered swap entity.23 This exclusion would only be available where neither
the non-U.S. SD/MSPs nor the non-U.S. counterpartys obligations under the relevant

20

Where the uncleared swap is between a non-U.S. SD/MSP (whether or not it is a guaranteed affiliate or
an affiliate conduit) and a foreign branch of a U.S. bank that is a SD/MSP, substituted compliance would be
available if certain conditions are met.
21

See section 9 of the proposed rule on Margin and Capital Requirements for Covered Swap Entities, 12
CFR part 237 (Sept. 24, 2014) for a complete description of the proposed cross-border application of
margin requirements to swaps by the Prudential Regulators, available at http://www.gpo.gov/fdsys/pkg/FR2014-09-24/pdf/2014-22001.pdf.
22

A summary of the Prudential Regulators Approach to the cross-border application of their proposed
margin requirements is included in the ANPR. See Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 79 FR at 59917(Oct. 3, 2014). For further information on the
Prudential Regulators Approach generally, see Margin and Capital Requirements for Covered Swap
Entities, 79 FR 53748 (Sept. 24, 2014), available at http://www.gpo.gov/fdsys/pkg/FR-2014-0924/pdf/2014-22001.pdf.
23

The Prudential Regulators define a foreign covered swap entity as any covered swap entity that is not
(i) an entity organized under U.S. or State law, including a U.S. branch, agency, or subsidiary of a foreign
bank; (ii) a branch or office of an entity organized under U.S. or State law; or (iii) an entity controlled by an
entity organized under U.S. or State law. Under the Prudential Regulators proposal, a foreign noncleared swap would include any non-cleared swap of a foreign covered swap entity to which neither the
counterparty nor any guarantor (on either side) is (i) an entity organized under U.S. or State law, including
a U.S. branch, agency, or subsidiary of a foreign bank; (ii) a branch or office of an entity organized under
U.S. or State law; or (iii) a covered swap entity controlled by an entity organized under U.S. or State law.

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swap are guaranteed by a U.S. person and neither party is controlled by a U.S. person.
Under the control test used in the September proposal, the term control of another
company means: (1) ownership, control, or power to vote 25 percent or more of a class of
voting securities of the company, directly or indirectly or acting through one or more
other persons; (2) ownership or control of 25 percent or more of the total equity of the
company, directly or indirectly or acting through one or more other persons; or (3)
control in any manner of the election of a majority of the directors or trustees of the
company.
3.

Entity-Level Approach

Under the third alternative discussed in the ANPR, margin requirements would be
treated as an entity-level requirement. Under this Entity-Level Approach, the
Commission would apply its proposed cross-border rules on margin on a firm-wide
levelthat is, to all uncleared swaps activities of a SD/MSP registered with the
Commission, irrespective of whether the counterparty is a U.S. person, and with no
possibility of exclusion. This approach takes into account that a non-U.S. SD/MSP
entering into uncleared swaps faces counterparty credit risk regardless of where the swap
is executed or whether the counterparty is a U.S. person.24 That risk, if it leads to a
default by the non-U.S. SD/MSP, could cause adverse consequences to its U.S.
counterparties and the U.S. financial system. At the same time, in recognition of

24

A summary of the Entity-Level Approach to the cross-border application of the Proposed Margin Rules
is included in the ANPR. See Margin Requirements for Uncleared Swaps for Swap Dealers and Major
Swap Participants, 79 FR at 59917(Oct. 3, 2014).

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COMMISSION VOTING COPY APPROVED

international comity, under this approach the Commission would consider, where
appropriate, allowing CSEs to avail themselves of substituted compliance.
4.

Comments on the Alternative Approaches Discussed in the ANPR

After publishing the ANPR, the Commission received comments that responded
to the three alternative approaches.25 There was no consensus among commenters on a
preferable approach.
Several commenters supported the Guidance Approach, with modifications, on
the basis that margin rules should not apply to swaps between a foreign swap dealer and a
foreign, non-guaranteed counterparty.26 Some of these commenters suggested
modifications to the availability of substituted compliance in the approach described in
the Guidance.27 For example, one commenter suggested that the Commission should
treat non-U.S. margin requirements that conform to the BCBS-IOSCO framework as
essentially identical to the Commissions regime and therefore accessible to all SDs as
a means of complying with the Commissions margin requirements.28 Another
commenter suggested that the Commission modify its approach to substituted compliance
outlined in the Guidance to allow substituted compliance for trades between U.S. persons
and non-U.S. persons at such parties mutual agreement.29 In addition, some commenters

25

Comment letters received in response to the ANPR may be found on the Commissions web site at
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1528.
26

See International Swaps and Derivatives Association, Inc. (Nov. 24, 2014) (ISDA), Managed Funds
Association (MFA) (Dec. 2, 2014), and INTL FCStone Inc. (Dec. 3, 2014).
27

See ISDA (Nov. 24, 2014) and MFA (Dec. 2, 2014).

28

See ISDA (Nov. 24, 2014).

29

See MFA (Dec. 2, 2014).

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COMMISSION VOTING COPY APPROVED

that supported the Guidance Approach expressed the view that it should include an
emerging markets exception.30 Still another commenter argued that the Commissions
Guidance correctly classified margin as a transaction-level rather than an entity-level
requirement because, as with the clearing requirement, it is practicable to separate out
transactions which are subject to the margin requirements and transactions which are not.
This commenter stated that it would be an odd result if the Commission were to
determine that the reach of the clearing requirement was not as great as that of the margin
requirement, given that both requirements are intended to address counterparty credit
risk.31
In contrast, some commenters argued against adopting the Guidance Approach.
One commenter argued that the Guidance Approach has become a significant driver of
conflict between U.S. and European regulatory requirements, and is undermining the goal
of a globally coordinated regulatory framework.32 Another commenter argued that this
approach provides an excessively broad exemption for non-guaranteed foreign
affiliates of U.S. banks, and that it is completely inappropriate to apply such an
exemption to a crucial prudential requirement such as derivatives margin, which could
pose major risks to the financial system by encouraging a race to the bottom among
jurisdictions concerning margin requirements.33

30

See ISDA (Nov. 24, 2014) and American Bankers Association (Nov. 25, 2014).

31

See INTL FCStone Inc. (Dec. 3, 2014).

32

See Alternative Investment Management Association (AIMA) (Dec. 2, 2014).

33

See Americans for Financial Reform (AFR) (Dec. 2, 2014).

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COMMISSION VOTING COPY APPROVED

Other commenters generally supported the Entity-Level Approach, with
modifications, on the basis that it captures all registrants uncleared trades, regardless of
the domicile of the registrant or the counterparty. These commenters generally favored
this approach because, rather than exempting foreign to foreign transactions, it makes
substituted compliance available for these transactions. One commenter stated that the
Entity-Level Approach is the most appropriate choice because it provides market
participants with more certainty in determining which jurisdictions margin requirements
apply. Further, this commenter stated that the Entity-Level Approach is consistent with
how collateral is currently handled under a single master agreement and would mitigate
legal uncertainty and operational errors that can arise if trades are subject to different
margin requirements under the same master agreement.34 Another commenter favored
the Entity-Level Approach because it imposes prudential rules on all swaps activities of
U.S.-headquartered firms, regardless of where the swap transaction is booked. This
commenter stated that both the Prudential Regulators Approach and the Guidance
Approach provide a means for U.S. firms to escape U.S. oversight.35
Another commenter supported a cross-border approach that combines the
Guidance Approach with certain enhancements found in the Entity-Level Approach.
This commenter suggested that the Entity-Level Approach correctly subjects certain nonU.S. SDs and MSPs to U.S. regulationsat least with respect to variation margin and the
collection of initial marginwhere the Guidance Approach would permit substituted

34

See Securities Industry and Financial Markets Association, Asset Management Group (Nov. 24, 2014).

35

See Public Citizen (Dec. 2, 2014).

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COMMISSION VOTING COPY APPROVED

compliance to both parties in all respects. However, this commenter stated that the
Entity-Level Approach also contains provisions that are significantly weaker than the
Guidance Approach, such as making substituted compliance available to certain non-U.S.
counterparties of U.S. SDs or MSPs. This commenter also expressed the view that the
Guidance Approach correctly requires both counterparties to fully comply with U.S. rules
in all transactions involving a U.S. SD or MSP.36
Commenters generally did not support the Prudential Regulators Approach as
their first choice, but two commenters thought it might be workable with modifications.
The first commenter stated that if the Commission elects not to adopt the Entity-Level
Approach, the Prudential Regulators Approach might be workable, although this
commenter had reservations about situations where different jurisdictions regimes apply
to the same transaction.37 The other commenter argued that if its first choice, the EntityLevel Approach, is not adopted, the Prudential Regulators Approach is greatly superior
to the Guidance Approach, as it would apply margin requirements to foreign affiliates of
U.S. banks that are classified as SDs or MSPs, regardless of whether such affiliates are
nominally guaranteed. However, this commenter argued that the Prudential Regulators
Approach is flawed in that, like the Guidance Approach, it would exempt controlled
foreign subsidiaries of U.S. banks that are not registered with the Commission as swaps
entities.38

36

See Better Markets, Inc. (Dec. 2, 2014).

37

See AIMA (Dec. 2, 2014).

38

See AFR (Dec. 2, 2014).

21

COMMISSION VOTING COPY APPROVED

Two commenters specifically argued against the Prudential Regulators
Approach. One commenter contended that the Prudential Regulators Approach provides
limited clarity on how the control test should be applied, which means that foreign
bank subsidiaries of U.S. banks cannot be certain whether they are subject to U.S. rules
or foreign rules, and provides limited guidance as to how foreign covered swaps entities
can determine whether a financial end-user counterparty is a U.S. entity or a foreign
entity, in comparison to the clear U.S. person standard in the Guidance.39 The other
commenter is concerned with the Prudential Regulators Approach as it relates to funds.
This commenter stated that the Prudential Regulators definition of foreign non-cleared
swap effectively classifies funds organized outside of the United States, but with a U.S.
principal place of business (e.g., funds with a U.S.-based manager), as foreign entities.
This commenter stated that if funds with a U.S.-based manager are not considered U.S.
persons subject to U.S. derivatives regulation, even though they have a substantial U.S.
nexus, they would likely be required to margin their covered swaps in accordance with
the foreign margin rules to which their non-U.S. CSE counterparty is subject, which
would give too much deference to the foreign regulatory regime.40
One commenter asserted that both the Prudential Regulators Approach and the
Guidance Approach would appropriately exclude swaps between foreign-headquartered
swap entities that are not controlled or guaranteed by a U.S. person and a non-U.S.
person that is not guaranteed by a U.S. person from the scope of the margin rules, noting

39

See Committee on Capital Markets Regulation (Nov. 24, 2014).

40

See MFA (Dec. 2, 2014).

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COMMISSION VOTING COPY APPROVED

that if U.S. rules require the foreign-headquartered swap entity to post margin, this would
create the potential for conflicts or inconsistencies with its home country margin
requirements.41
One commenter did not explicitly support any of the three approaches, noting that
all of the proposals diverge in potentially significant ways from the final framework
developed by BCBS and IOSCO and the OTC margin framework proposed in April 2014
by European supervisory agencies, and that none of the proposals embrace substituted
compliance in a comprehensive manner that would address cross-border conflicts or
inconsistencies that could arise. This commenter suggested that the Commission should
use an outcomes-based approach that looks to whether giving full recognition to an
equivalent foreign OTC margin framework as a whole would ensure an acceptable
reduction of aggregate unmargined risk.42
II.

The Proposed Rule

A.

Overview

Based on, among other things, consideration of the comments to the ANPR and
after close consultation with the Prudential Regulators, the Commission is proposing a
rule for the application of the Commissions Proposed Margin Rules to cross-border
transactions (as noted above, the proposed cross-border margin rule is referred to herein
as the Proposed Rule). As discussed above, a cross-border framework for margin

41

See Institute of International Bankers (Nov. 24, 2014). This commenter also stated that these foreign
swaps would have little effect on the U.S. financial system in the event of a default; further, under the
Dodd-Frank Act, the risk to the United States of a default by the foreign-headquartered swap entity on its
swaps with U.S. counterparties would already be mitigated by capital and margin collection requirements.
42

See Securities Industry and Financial Markets Association (SIFMA) (Nov. 24, 2014).

23

COMMISSION VOTING COPY APPROVED

necessarily involves consideration of significant, and sometimes competing, legal and
policy considerations, including the impact on market efficiency and competition.43 The
Commission, in developing the Proposed Rule, aims to balance these considerations to
effectively address the risk posed to the safety and soundness of CSEs, while creating a
workable framework that reduces the potential for undue market disruptions and
promotes global harmonization. The Commission also recognizes that there are other
possible approaches to applying the margin rules in the cross-border context.
Accordingly, the Commission invites public comment regarding all aspects of the
Proposed Rule.
1.

Use of Hybrid, Firm-Wide Approach

The Proposed Rule is a combination of the entity- and transaction-level

approaches and is closely aligned with the Prudential Regulators Approach. In general,
under the Proposed Rule, margin requirements are designed to address the risks to a CSE,
as an entity, associated with its uncleared swaps (entity-level); nevertheless, certain
uncleared swaps would be eligible for substituted compliance or excluded from the
Commissions margin rules based on the counterparties nexus to the United States
relative to other jurisdictions (transaction-level).
Although margin is calculated for individual transactions or positions, and
therefore, could be applied on a transaction-level basis, the Commission believes that as a
general matter margin requirements should apply on a firm-wide basis, irrespective of the
domicile of the counterparties or where the trade is executed. The primary reason for

43

The Commissions consideration of the costs and benefits associated with the Proposed Rule is discussed
in section III.C. below.

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COMMISSION VOTING COPY APPROVED

collecting margin from counterparties is to protect an entity in the event of a counterparty
default. That is, in the event of a default by a counterparty, margin protects the nondefaulting counterparty by allowing it to absorb the losses using collateral provided by
the defaulting entity and to continue to meet all of its obligations. In addition, margin
functions as a risk management tool by limiting the amount of leverage that a CSE can
incur. Specifically, by requiring a CSE to post margin to its counterparties, the margin
requirements ensure that a CSE has adequate eligible collateral to enter into an uncleared
swap. In this way, margin serves as a first line of defense to protect a CSE as a whole
from risk arising from uncleared swaps.
The source of counterparty credit risk to a CSE, however, is not confined to its
uncleared swaps with U.S. counterparties. Risk arising from uncleared swaps involving
non-U.S. counterparties can potentially have a substantial adverse effect on a CSE
including a non-U.S. CSEand therefore the stability of the U.S. financial system
because CSEs have a sufficient nexus to the U.S. financial system to require registration
as a CSE. Given the function of margin, the Commission believes that margin should be
treated as an entity-level requirement in the cross-border context, and thus not take into
account the domicile of CSE counterparties or where the trade is executed.
The Commission also believes that treating margin as an entity-level requirement
is consistent with the role of margin in a CSEs overall risk management program.
Margin, by design, is complementary to capital.44 That is, margin and capital
requirements serve different but equally important risk mitigation functions that are best

44

See BCBS and IOSCO, Margin requirements for non-centrally cleared derivatives (Sept. 2013) at 3,
available at http://www.bis.org/publ/bcbs261.pdf.

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COMMISSION VOTING COPY APPROVED

implemented at the entity-level. Unlike margin, capital is difficult to rapidly adjust in
response to changing risk exposures; thus, capital can be viewed as a backstop, in the
event that the margin is not enough to cover all of the losses that resulted from the
counterparty default. Standing alone, either capital or margin may not be enough to
prevent a CSE from failing, but together, they are designed to reduce the probability of
default by the CSE and limit the amount of leverage that can be undertaken by CSEs (and
other market participants), which ultimately mitigates the possibility of a systemic
event.45
At the same time, the Commission recognizes that a CSEs uncleared swaps with
a particular counterparty may implicate the supervisory interests of foreign regulators and
it is important to calibrate the cross-border application of the margin requirements to
mitigate, to the extent possible and consistent with the Commissions regulatory interests,
the potential for conflicts or duplication with other jurisdictions. Therefore, the Proposed
Rule, while applying margin requirements to a CSE as a whole, also permits a U.S. CSE
or non-U.S. CSE to avail itself of substituted compliance (to the extent applicable under
the Proposed Rule) by complying with the margin requirements of the relevant foreign
jurisdiction in lieu of compliance with the Commissions margin requirements, provided
that the Commission finds that such jurisdictions margin requirements are comparable to
the Commissions margin requirements, as further discussed in section II.D. below.

45

Section 4s(e) of the CEA, 7 U.S.C. 6s(e), directs the Commission to adopt capital requirements for SDs
and MSPs. The Commission proposed capital rules in 2011. See Capital Requirements for Swap Dealers
and Major Swap Participants, Notice of proposed rulemaking, 76 FR 27802 (May 12, 2011).

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COMMISSION VOTING COPY APPROVED

In addition, the Proposed Rule provides for a limited exclusion of uncleared
swaps between non-U.S. CSEs and non-U.S. counterparties (the Exclusion) in certain
circumstances. The Commission recognizes that the supervisory interest of foreign
regulators in certain uncleared swaps between non-U.S. CSEs and their non-U.S.
counterparties may equal or exceed the supervisory interest of the United States. The
Proposed Rule takes into account the interests of other jurisdictions and balances those
interests with the supervisory interests of the United States in order to calibrate the
application of margin rules to non-U.S. CSEs swaps with non-U.S. counterparties.
Accordingly, the Commission believes that it would be appropriate to not apply the
Commissions margin rules to uncleared swaps meeting the criteria for the Exclusion,
which is described in section II.C.3. below.
B.

Key Definitions

The Proposed Rule uses certain key definitions to establish a proposed framework
for the application of margin requirements in a cross-border context. Specifically, the
Proposed Rule defines the terms U.S. person, guarantee, and Foreign Consolidated
Subsidiary in order to identify those persons or transactions that, because of their
substantial connection or impact on the U.S. market, raise or implicate greater
supervisory interest relative to other CSEs, counterparties, and uncleared swaps that are
subject to the Commissions margin rules. These definitions are discussed below.
1.

U.S. person

Generally speaking, the term U.S. person would be defined to include those
individuals or entities whose activities have a significant nexus to the U.S. market by
virtue of their organization or domicile in the United States or the depth of their

27

COMMISSION VOTING COPY APPROVED

connection to the U.S. market, even if domiciled or organized outside the United States.
The proposed definition generally follows the traditional, territorial approach to defining
a U.S. person, and the Commission believes that this definition provides an objective and
clear basis for determining those individuals or entities that should be identified as a U.S.
person.46

46

In addition, the Commission notes that the proposed definition of U.S. person is similar to the definition
of U.S. person used by the SEC in the context of cross-border security-based swaps. In the SECs
August 2014 release adopting rules and providing guidance regarding the application of Title VII of the
Dodd-Frank Act to cross-border security-based swap activities and persons engaged in those activities, the
SEC defined the term U.S. person in Rule 240.3a71-3(a)(4) under the Securities Exchange Act of 1934 as
follows:
(i) Except as provided in paragraph (a)(4)(iii) of this section, U.S. person means any person that
is:
(A) A natural person resident in the United States;
(B) A partnership, corporation, trust, investment vehicle, or other legal person organized,
incorporated, or established under the laws of the United States or having its principal place
of business in the United States;
(C) An account (whether discretionary or non-discretionary) of a U.S. person; or
(D) An estate of a decedent who was a resident of the United States at the time of death.
(ii) For purposes of this section, principal place of business means the location from which the
officers, partners, or managers of the legal person primarily direct, control, and coordinate the
activities of the legal person. With respect to an externally managed investment vehicle, this
location is the office from which the manager of the vehicle primarily directs, controls, and
coordinates the investment activities of the vehicle.
(iii) The term U.S. person does not include the International Monetary Fund, the International
Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian
Development Bank, the African Development Bank, the United Nations, and their agencies
and pension plans, and any other similar international organizations, their agencies and
pension plans.
(iv) A person shall not be required to consider its counterparty to a security-based swap to be a
U.S. person if such person receives a representation from the counterparty that the
counterparty does not satisfy the criteria set forth in paragraph (a)(4)(i) of this section, unless
such person knows or has reason to know that the representation is not accurate; for the
purposes of this final rule a person would have reason to know the representation is not
accurate if a reasonable person should know, under all of the facts of which the person is
aware, that it is not accurate.

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COMMISSION VOTING COPY APPROVED

The Proposed Rule would define a U.S. person for purposes of the cross-border
application of the margin rules to mean:
(i)

Any natural person who is a resident of the United States;

(ii)

Any estate of a decedent who was a resident of the United States at the

time of death;
(iii) Any corporation, partnership, limited liability company, business or
other trust, association, joint-stock company, fund or any form of entity similar to any of
the foregoing (other than an entity described in subparagraph (iv) or (v) of this paragraph)
(a legal entity), in each case that is organized or incorporated under the laws of the
United States or having its principal place of business in the United States, including any
branch of the legal entity;
(iv) Any pension plan for the employees, officers or principals of a legal
entity described in subparagraph (iii) of this paragraph, unless the pension plan is
primarily for foreign employees of such entity;
(v)

Any trust governed by the laws of a state or other jurisdiction in the

United States, if a court within the United States is able to exercise primary supervision
over the administration of the trust;
(vi) Any legal entity (other than a limited liability company, limited
liability partnership or similar entity where all of the owners of the entity have limited
liability) owned by one or more persons described in subparagraph (i), (ii), (iii), (iv) or

See Application of Security-Based Swap Dealer and Major Security-Based Swap Participant
Definitions to Cross-Border Security-Based Swap Activities; Final rule; interpretation (Republication), 79
FR at 47371 (Aug. 12, 2014).

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(v) of this paragraph who bear(s) unlimited responsibility for the obligations and
liabilities of the legal entity, including any branch of the legal entity; and
(vii) Any individual account or joint account (discretionary or not) where
the beneficial owner (or one of the beneficial owners in the case of a joint account) is a
person described in subparagraph (i), (ii), (iii), (iv), (v) or (vi).47
A non-U.S. person is defined to be any person that is not a U.S. person.48
The proposed definition is generally consistent with the definition of this term set
forth in the Guidance, with certain exceptions discussed below.
Prongs (i), (ii), (iii), (iv), (v), and (vii) identify certain persons as a U.S. person
by virtue of their domicile or organization within the United States. The Commission has
traditionally looked to where a legal entity is organized or incorporated (or in the case of
a natural person, where he or she resides) to determine whether it is a U.S. person.49 In
the Commissions view, these personsby virtue of their decision to organize or locate
in the United States and because they are likely to have significant financial and legal
relationships in the United Statesare appropriately included within the definition of
U.S. person for purposes of the proposed cross-border margin framework.
Under prong (iii), consistent with its traditional approach, the Commission
proposes to define U.S. person also to include persons that are organized or
incorporated outside the United States, but have their principal place of business in the

47

See 23.160(a)(10) of the Proposed Rule.

48

See 23.160(a)(5) of the Proposed Rule.

49

See, e.g., 17 C.F.R. 4.7(a)(1)(iv) (defining Non-United States person for purposes of part 4 of the
Commission regulations relating to commodity pool operators).

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COMMISSION VOTING COPY APPROVED

United States. For purposes of this prong, the Commission proposes to interpret
principal place of business to mean the location from which the officers, partners, or
managers of the legal person primarily direct, control, and coordinate the activities of the
legal person. This interpretation is consistent with the Supreme Courts decision in Hertz
Corp. v. Friend, which described a corporations principal place of business, for purposes
of diversity jurisdiction, as the place where the corporations high level officers direct,
control, and coordinate the corporations activities.50
The Commission is of the view that the application of the principal place of
business concept to a fund may require consideration of additional factors beyond those
applicable to operating companies. In the case of a fund, the Commission notes that the
senior personnel that direct, control, and coordinate a funds activities are generally not
the persons who are named as directors or officers of the fund, but rather are persons who
work for the funds investment adviser or the funds promoter. Therefore, consistent
with the Guidance, the Commission generally would consider the principal place of
business of a fund to be in the United States if the senior personnel responsible for either
(1) the formation and promotion of the fund or (2) the implementation of the funds
investment strategy are located in the United States, depending on the facts and
circumstances that are relevant to determining the center of direction, control and
coordination of the fund.51

50

See Hertz Corp. v. Friend, 559 U.S. 77, 80 (2010).

51

See the Guidance, 78 FR at 45309-45312, for guidance on application of the principal place of business
test to funds and other collective investment vehicles in the context of cross-border swaps, including
examples of how the Commissions approach could apply to a consideration of whether the principal place
of business of a fund is in the United States in particular hypothetical situations. However, because of
variations in the structure of collective investment vehicles as well as the factors that are relevant to the

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COMMISSION VOTING COPY APPROVED

Prong (vi) of the proposed definition of U.S. person would include certain legal
entities owned by one or more U.S. person(s) and for which such person(s) bear
unlimited responsibility for the obligations and liabilities of the legal entity. As noted
above, the Guidance included a similar concept in the definition of the term U.S.
person; however the definition contained in the Guidance would generally characterize a
legal entity as a U.S. person if the entity were directly or indirectly majority-owned by
one or more persons falling within the term U.S. person and such U.S. person(s) bears
unlimited responsibility for the obligations and liabilities of the legal entity. Where a
U.S. person serves as a financial backstop for all of a legal entitys obligations and
liabilities, creditors and counterparties look to the U.S. person when assessing the risk in
dealing with the entity, regardless of the amount of equity owned by the U.S. person.
Under such circumstances, because the U.S. person has unlimited responsibility for all of
the legal entitys obligations, the Commission believes that the legal entity should be
deemed to be a U.S. person.
The Proposed Rule would not include the U.S. majority-ownership prong that was
included in the Guidance (50% U.S. person ownership of a fund or other collective
investment vehicle).52 Some commenters have argued that a majority ownership test for
funds should not be included on the basis that ownership alone is not indicative of
whether the activities of a non-U.S. fund with a non-U.S.-based manager has a direct and

consideration of whether a collective investment vehicle has its principal place of business in the United
States under the Guidance, these examples were included in the Guidance for illustrative purposes only.
52

The Commissions definition of the term U.S. person as used in the Guidance included a prong (iv)
which covered any commodity pool, pooled account, or collective investment vehicle (whether or not it is
organized or incorporated in the United States) of which a majority ownership is held, directly or indirectly,
by a U.S. person(s).

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COMMISSION VOTING COPY APPROVED

significant effect on the U.S. financial system, and that it is difficult to determine the
identity of the beneficial owner of a fund in certain fund structures (e.g., fund-of-funds or
master-feeder). Alternatively, an argument for retaining the majority-ownership test
would be that many of these funds have large U.S. investors, who can be adversely
impacted in the event of a counterparty default. On balance, the Commission believes the
majority-ownership test should not be included in the definition of U.S. person for
purposes of the margin rules. Non-U.S. funds with U.S. majority-ownership, even if
treated as a non-U.S. person, would be excluded from the Commissions margin rules
only in limited circumstances (namely, when these funds trade with a non-U.S. CSE that
is not a consolidated subsidiary of a U.S. entity or a U.S. branch of a non-U.S. CSE).
This, coupled with the implementation issues raised by commenters, persuades the
Commission not to propose to define those funds that are majority-owned by U.S.
persons (and that would otherwise not fall within the definition of a U.S. person), as
U.S. persons.
The proposed definition of U.S. person determines a legal persons status at the
entity level and thus includes any foreign operations that are part of the U.S. legal person,
regardless of their location. Consistent with this approach, the definition of U.S.
person under the Proposed Rule would include a foreign branch of a U.S. person.
Under the proposed definition, the status of a legal person as a U.S. person would
not affect whether a separately incorporated or organized legal person in the affiliated
corporate group is a U.S. person. Therefore, an affiliate or a subsidiary of a U.S. person
that is organized or incorporated in a non-U.S. jurisdiction would not be deemed a U.S.
person solely by virtue of its relationship with a U.S. person.

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COMMISSION VOTING COPY APPROVED

The proposed U.S. person definition does not include the prefatory phrase
includes, but is not limited to that was included in the Guidance. The Commission
believes that this prefatory phrase should not be included in order to provide legal
certainty regarding the application of U.S. margin requirements to cross-border swaps.
The Commission understands that the information necessary for a swap
counterparty to accurately assess the status of its counterparties as U.S. persons may not
be available, or may be available only through overly burdensome due diligence. For this
reason, the Commission believes that a swap counterparty generally should be permitted
to reasonably rely on its counterpartys written representation in determining whether the
counterparty is within the definition of the term U.S. person. In this context, the
Commissions policy is to interpret the reasonable standard to be satisfied when a party
to a swap conducts reasonable due diligence on its counterparties, with what is reasonable
in a particular situation to depend on the relevant facts and circumstances.53
Under the Proposed Rule, a non-U.S. person is any person that is not a U.S.
person (as defined in the Proposed Rule).54 References in this preamble to a U.S.
counterparty are to a swap counterparty that is a U.S. person under the Proposed Rule,

53

The Commission notes that under the External Business Conduct Rules, a SD or MSP generally meets its
due diligence obligations if it reasonably relies on counterparty representations, absent indications to the
contrary. As in the case of the External Business Rules, the Commission believes that allowing for
reasonable reliance on counterparty representations encourages objectivity and avoids subjective
evaluations, which in turn facilitates a more consistent and foreseeable determination of whether a person is
within the Commissions interpretation of the term U.S. person.
54

See 23.160(a)(5) of the Proposed Rule.

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COMMISSION VOTING COPY APPROVED

and references to a non-U.S. counterparty are to a swap counterparty that is a nonU.S. person under the Proposed Rule.55
Request for Comment. The Commission requests comment on all aspects of the
proposed definition of U.S. person, including the following:
1.

Does the proposed definition of U.S. person appropriately identify all

individuals or entities that should be designated as U.S. persons? Is the proposed

definition too narrow or broad? Why?
2.

Should the definition of U.S. person include the U.S. majority-

ownership prong for funds and other collective investment vehicles, as set forth in the
Guidance? Please explain.
3.

Should the definition of U.S. person include certain legal entities owned

by one or more persons described in prongs (i), (ii), (iii), (iv), or (v) of the proposed U.S.
person definition who bear(s) unlimited responsibility for the obligations and liabilities of
the legal entity? Please explain.
4.

Should the definition of U.S. person be identical to the definition of

U.S. person that the SEC adopted in its August 2014 rulemaking? For example:
a. Should the definition of U.S. person exclude certain designated (and
any similar) international organizations, their agencies and pension
plans, with headquarters in the United States?
b. Should the Commission define the term principal place of business
as the location from which the officers, partners, or managers of a

55

Under the Proposed Rule, a U.S. CSE is a CSE that is a U.S. person. The term U.S. CSE includes a
foreign branch of a U.S. CSE. A non-U.S. CSE is any CSE that is not a U.S. person.

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legal person primarily direct, control, and coordinate the activities of
the legal person, and specify that in the case of an externally managed
investment vehicle, this location is the office from which the manager
of the vehicle primarily directs, controls, and coordinates the
investment activities of the vehicle?
c. Should the Commission delete prong (vi) of the proposed definition of
U.S. person which includes certain legal entities owned by one or
more U.S. person(s) and for which such person(s) bear unlimited
responsibility for the obligations and liabilities of the legal entity and
instead treat such arrangements as recourse guarantees?
d. Should any other changes be made to the proposed definition of U.S.
person to conform it to the definition adopted by the SEC?
2.

Guarantees

Under the Proposed Rule, uncleared swaps of non-U.S. CSEs, where the non-U.S.
CSEs obligations under the uncleared swap are guaranteed by a U.S. person, would be
treated the same as uncleared swaps of a U.S. CSE. The Commission believes that this
treatment is appropriate because the swap of a non-U.S. CSE whose obligations under the
swap are guaranteed by a U.S. person is identical, in relevant respects, to a swap entered
directly by a U.S. person. That is, by virtue of the guarantee, the U.S. guarantor is
responsible for the swap it guarantees in a manner similar to a direct counterparty to the
swap. The U.S. person guarantor effectively acts jointly with the non-U.S. person whose
swap it guarantees to engage in swaps transactions. The counterparty, pursuant to the

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recourse guarantee, looks to both the direct non-U.S. counterparty and its U.S. guarantor
in entering into the swap.
The Proposed Rule would define the term guarantee as an arrangement pursuant
to which one party to a swap transaction with a non-U.S. counterparty has rights of
recourse against a U.S. person guarantor (whether such guarantor is affiliated with the
non-U.S. counterparty or is an unaffiliated third party) with respect to the non-U.S.
counterpartys obligations under the relevant swap transaction. Under the Commissions
proposal, a party to a swap transaction has rights of recourse against the U.S. person
guarantor if the party has a conditional or unconditional legally enforceable right, in
whole or in part, to receive payments from, or otherwise collect from, the U.S. person in
connection with the non-U.S. persons obligations under the swap.56 Accordingly, the
term guarantee would apply whenever a party to the swap has a legally enforceable
right of recourse against the U.S. guarantor of a non-U.S. counterpartys obligations
under the relevant swap, regardless of whether such right of recourse is conditioned upon
the non-U.S. counterpartys insolvency or failure to meet its obligations under the
relevant swap, and regardless of whether the counterparty seeking to enforce the
guarantee is required to make a demand for payment or performance from the non-U.S.
counterparty before proceeding against the U.S. guarantor.
Under the Proposed Rule, the terms of the guarantee need not necessarily be
included within the swap documentation or even otherwise reduced to writing (so long as
legally enforceable rights are created under the laws of the relevant jurisdiction),

56

See 23.160(a)(2) of the Proposed Rule.

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provided that a swap counterparty has a conditional or unconditional legally enforceable
right, in whole or in part, to receive payments from, or otherwise collect from, the U.S.
person in connection with the non-U.S. persons obligations under the swap.57
Further, the Commissions proposed definition of guarantee would not be affected
by whether the U.S. guarantor is an affiliate of the non-U.S. CSE because, in each case,
the swap counterparty has a conditional or unconditional legally enforceable right, in
whole or in part, to receive payments from, or otherwise collect from, the U.S. person in
connection with the non-U.S. persons obligations under the swap.
The Commission notes that the definition of guarantee in the Proposed Rule is
narrower in scope than the one used in the Guidance.58 In proposing this definition, the
Commission is cognizant that many other types of financial arrangements or support,
other than a guarantee as defined in the Proposed Rule, may be provided by a U.S. person
to a non-U.S. CSE (e.g., keepwells and liquidity puts, certain types of indemnity
agreements, master trust agreements, liability or loss transfer or sharing agreements).
The Commission understands that these other financial arrangements or support transfer
risk directly back to the U.S. financial system, with possible significant adverse effects,
in a manner similar to a guarantee with a direct recourse to a U.S. person. The
Commission, however, believes that application of a narrower definition of guarantee for

57

Further, the definition of guarantee is intended to encompass any swap of a non-U.S. person where the
counterparty to the swap has rights of recourse, regardless of the form of the arrangement, against at least
one U.S. person (either individually or jointly or severally with others) for the non-U.S. persons
obligations under the swap.
58

In the Guidance, the Commission interpreted the term guarantee generally to include not only
traditional guarantees of payment or performance of the related swaps, but also other formal arrangements
that, in view of all the facts and circumstances, support the non-U.S. persons ability to pay or perform its
swap obligations with respect to its swaps.

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purposes of identifying those uncleared swaps that should be treated like uncleared swaps
of a U.S. CSEs would reduce the potential for conflict with the non-U.S. CSEs home
regulator. Moreover, the Commission believes that a non-U.S. CSE that has been
provided with financial arrangements or support from a U.S. person that do not fall
within the term guarantee as defined in the Proposed Rule in many cases is likely to
meet the definition of a Foreign Consolidated Subsidiary and therefore, as discussed in
the next section, would be subject to the Commissions margin requirements, with
substituted compliance (but not the Exclusion) available. Therefore, the Commission
believes that a narrow definition of guarantee would achieve a more workable framework
for non-U.S. CSEs, without undermining protection of U.S. persons and U.S. financial
system.
The Commission is aware that some non-U.S. CSEs removed guarantees in order
to fall outside the scope of certain Dodd-Frank requirements. The proposed coverage of
foreign subsidiaries of a U.S. person as a Foreign Consolidated Subsidiary, which is
discussed in the next section, and whose swaps would not be eligible for the Exclusion
under any circumstances (as discussed in section II.C.3. below), would address the
concern that even without a guarantee, as defined under the Guidance or in the Proposed
Rule, foreign subsidiaries of a U.S. person with a substantial nexus to the U.S. financial
system are adequately covered by the margin requirements.
Request for Comment. The Commission seeks comment on all aspects of the
proposed definition of guarantee, including the following:

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1.

Should the broader use of the term guarantee in the Guidance be used

instead of the proposed definition, and if so, why? Would an alternative definition be
more effective in light of the purpose of the margin requirements, and if so, why?
2.

Is the Commissions assumption that a non-U.S. CSE is likely to meet the

definition of a Foreign Consolidated Subsidiary when it has been provided with

financial arrangements or support from a U.S. person that do not fall within the term
guarantee (as defined in the Proposed Rule) correct? If not, why not?
3.

Is it appropriate to distinguish, for purposes of the Proposed Rule, between

those arrangements under which a party to the swap has a legally enforceable right of
recourse against the U.S. guarantor and those arrangements where there is not direct
recourse against a U.S. guarantor?
3.

Foreign Consolidated Subsidiaries

The Proposed Rule uses the term Foreign Consolidated Subsidiary in order to
identify swaps of those non-U.S. CSEs whose obligations under the relevant uncleared
swap are not guaranteed by a U.S. person but that raise substantial supervisory concern in
the United States, as a result of the possible negative impact on their U.S. parent entities
and the U.S. financial system. Consolidated financial statements report the financial
position, results of operations and statement of cash flows of a parent entity together with
subsidiaries in which the parent entity has a controlling financial interest (which are
required to be consolidated under U.S. GAAP).

In the Commissions view, the fact that

an entity is included in the consolidated financial statements of another is an indication of

potential risk to the other entity that offers a clear and objective standard for the
application of margin requirements.

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Specifically, the Proposed Rule defines the term Foreign Consolidated
Subsidiary as a non-U.S. CSE in which an ultimate parent entity59 that is a U.S. person
has a controlling interest, in accordance with U.S. GAAP, such that the U.S. ultimate
parent entity includes the non-U.S. CSEs operating results, financial position and
statement of cash flows in the U.S. ultimate parent entitys consolidated financial
statements, in accordance with U.S. GAAP.
In the case of Foreign Consolidated Subsidiaries whose obligations under the
relevant swap are not guaranteed by a U.S. person, substituted compliance would be
broadly available under the Proposed Rule to the same extent as other non-U.S. CSEs
whose obligations under the relevant swap are not guaranteed by a U.S. person, even
though the financial position, operating results, and statement of cash flows of the
Foreign Consolidated Subsidiary have a direct impact on the financial position, risk
profile and market value of the consolidated group (which includes a U.S. parent entity);
however, the Exclusion would not be available for swaps with a Foreign Consolidated
Subsidiary because their swap activities have a direct impact on the financial position,
risk profile, and market value of a U.S. parent entity that consolidates the Foreign
Consolidated Subsidiarys financial statements and a potential spill-over effect on the
U.S. financial system.60

59

Under the Proposed Rule, the term ultimate parent entity means the parent entity in a consolidated
group in which none of the other entities in the consolidated group has a controlling interest, in accordance
with U.S. generally accepted accounting principles (GAAP).
60

The Exclusion under the Proposed Rule is discussed in section II.C.3. below.

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The Commission believes that not extending the Exclusion to Foreign
Consolidated Subsidiaries under the Proposed Rule would be appropriate because the
U.S. parent entity that consolidates the Foreign Consolidated Subsidiarys financial
statements may have an incentive to provide support to a Foreign Consolidated
Subsidiary, or the Foreign Consolidated Subsidiary may pose financial risk to the U.S.
parent entity. In addition, market participants (including counterparties) may have the
expectation that the parent entity will provide support to the Foreign Consolidated
Subsidiary although, whether the U.S. parent entity actually steps in to fulfill the
obligations of the Foreign Consolidated Subsidiary would depend on a business judgment
rather than a legal obligation.61 Notably, although consolidation has a direct impact on
the U.S. parent entity, the U.S. parent entity stands in a different legal position than a
U.S. guarantor because, in the absence of a direct recourse guarantee, the U.S. parent
entity has no legal obligation to pay or perform under the relevant swap if the Foreign
Consolidated Subsidiary defaults on its swap obligations. Therefore, the Commission
believes that, in the absence of a direct recourse guarantee from a U.S. person, uncleared
swaps with a Foreign Consolidated Subsidiary should not be treated the same as swaps

61

For example, when General Electric announced on April 10, 2015 that it would guarantee repayment of
approximately $210 billion of debt from GE Capital, the prices of some GE Capital bonds reportedly went
up as much as 1.5% even though previously the parent company had provided other support but not an
unconditional guarantee. According to an article in the Wall Street Journal, Russell Solomon, an analyst at
Moodys Investors Service, stated: Weve always assumed that GE would support GE Capital almost no
matter whatBut now this says theyll support it no matter what. Similarly, the article reports that
Standard & Poors Rating Services stated that General Electrics decision to back GE Capital debt
strengthens our view of GEs support, by buttressing the parents proven willingness and ability to support
its subsidiary with a contractual obligation to do so. See Mike Cherney and Katy Burne, WSJ, Apr. 10,
2015, available at http://www.wsj.com/articles/ges-move-alters-the-bond-market-1428707800.

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with a U.S. CSE or a non-U.S. CSE whose obligations under the relevant swap are
guaranteed by a U.S. person.
The Commission considered proposing a control test similar to that proposed by
the Prudential Regulators. The control test in the Prudential Regulators proposal is
based solely on an entitys ownership level and control of the election of the board, 62
which may or may not clearly identify, depending on the facts and circumstances, those
non-U.S. CSEs that are likely to raise greater supervisory concerns than other non-U.S.
CSEs (in each case whose obligations under the relevant swap are not guaranteed by a
U.S. person). Therefore, the Commission is using a consolidation test rather than a
control test in the proposed definition of a Foreign Consolidated Subsidiary in order
to provide a clear, bright-line test for identifying those non-U.S. CSEs whose uncleared
swaps are likely to raise greater supervisory concerns.
Request for Comment. The Commission seeks comment on all aspects of the
Proposed Rules definition of Foreign Consolidated Subsidiary, including:
1.

Does the proposed definition of a Foreign Consolidated Subsidiary

appropriately capture those non-U.S. CSEs that should not be eligible for the Exclusion?
If not, please explain and provide an alternative(s).
2.

The consolidation test in the definition of a Foreign Consolidated

Subsidiary is intended to provide a clear, bright-line test for identifying those non-U.S.

62

Under the Prudential Regulators proposal, the term control of another company means: (1) ownership,
control, or power to vote 25 percent or more of a class of voting securities of the company, directly or
indirectly or acting through one or more other persons; (2) ownership or control of 25 percent or more of
the total equity of the company, directly or indirectly or acting through one or more other persons; or (3)
control in any manner of the election of a majority of the directors or trustees of the company.

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CSEs whose uncleared swaps are likely to raise greater supervisory concerns relative to
other non-guaranteed non-U.S. CSEs. Should the proposed consolidation test be used in
lieu of the control test proposed by the Prudential Regulators? Why or why not? Should
the Commission use both a consolidation test and a control test? If so, please explain.
Would any other tests or criteria be more appropriate? If so, please explain what tests or
criteria should be used and why they are more appropriate.
3.

Under the definition of Foreign Consolidated Subsidiary, the Commission

is using U.S. GAAP as the standard for purposes of determining whether an entity
consolidates another entity. In reviewing registration data of CSEs, the Commission
believes that this definition balances the goals of the statute and the burdens placed on the
industry; however, should the Commission also consider including in the definition of
Foreign Consolidated Subsidiary, non-U.S. CSEs whose U.S. ultimate parent entity uses
a different standard than U.S. GAAP in determining whether a parent entity must
consolidate an entity for financial reporting purposes? If so, please explain why.
4.

Should the Commission also include in the definition of Foreign

Consolidated Subsidiary those non-U.S. CSEs whose U.S. ultimate parent entity is not
required to prepare consolidated financial statements under any accounting standard or
for any other reason (e.g., the U.S. ultimate parent entity is not a public company under
federal securities laws and is not required to prepare consolidated financial statements by
private investors or debtholders as a condition to investing or financing), but which
would consolidate the non-U.S. CSE if it were required to prepare consolidated financial
statements in accordance with U.S. GAAP? If so, please explain why?

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5.

Under the definition of Foreign Consolidated Subsidiary, the Commission

is only including non-U.S. CSEs whose financial statements are consolidated by an

ultimate parent entity that is a U.S. person. Should the Commission also include
immediate and intermediate parent entities of the non-U.S. CSE in the definition? If so,
please explain why?
C.

Applicability of Margin Requirements to Cross-Border Uncleared

Swaps
The following section describes the application of the Commissions margin rules
to cross-border swaps between CSEs and various types of counterparties, as well as when
the Exclusion from the Commissions margin requirements would be applicable.
Appendix A includes a table illustrating how the Proposed Rule would apply to specific
transactions between various types of counterparties, which should be read in conjunction
with the rest of the preamble and the text of the Proposed Rule.
1.

Uncleared swaps of U.S. CSEs or non-U.S. CSEs whose

obligations under the relevant swap are guaranteed by a U.S.
Person

Under the Proposed Rule, the Commissions margin rules63 would apply to all
uncleared swaps of U.S. CSEs,64 with no exclusions. By their nature, U.S. CSEs have a
significant impact on the U.S. swaps market, and the Commission therefore has a strong
interest in ensuring their viability. However, substituted compliance would be available
with respect to initial margin posted to (but not collected from) any non-U.S.
63

The Commissions Proposed Margin Rules are set forth in proposed rules 150 through 159 of part 23 of
the Commissions regulations, proposed as17 CFR 23.150 through 23.159.
64

Foreign branches of a U.S. CSE are treated as part of the related principal entity and hence an uncleared
swap executed by or through a foreign branch would be treated as an uncleared swap of a U.S. CSE.

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counterparty (including a non-U.S. CSE) whose obligations under the uncleared swap are
not guaranteed by a U.S. person. The Commission proposes to provide substituted
compliance in this situation (assuming that the non-U.S. counterparty is subject to
comparable margin requirements in a foreign jurisdiction) because the swap counterparty
is a non-U.S. person and where its swap obligations are not guaranteed by a U.S. person,
the foreign regulator may have equal or greater interest in the collection of margin by the
non-U.S. counterparty. However, substituted compliance would not apply to the
collection of margin by the U.S. CSE from the non-U.S. counterparty, as the Commission
has a significant regulatory interest in the collection of margin by the U.S. CSE, which
protects the U.S. CSE and the U.S. financial system from counterparty credit risk.
The same treatment that applies to U.S. CSEs would also apply to a non-U.S. CSE
whose obligations under the relevant swap are guaranteed by a U.S. person. The
Commission believes that this result is appropriate because the economics of the
transaction are no different from a trade entered directly by the U.S. guarantor, as
discussed in section II.B.2. above. In addition, the Commission believes that treating
uncleared swaps of these entities differently from those of U.S. CSEs would lead to
unwarranted competitive distortions. That is, the non-U.S. CSE that enters into a swap
with a direct recourse guarantee from a U.S. person would be positioned to benefit from
more competitive pricing when dealing with non-U.S. counterparties (as compared to
U.S. CSEs) to the extent that either substituted compliance or the Exclusion would be
available.
The Commission believes that requiring U.S. CSEs and non-U.S. CSEs whose
obligations under the relevant swap are guaranteed by a U.S. person to comply with its

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margin requirements, with only limited substituted compliance for margin posted to (but
not collected from) any non-U.S. counterparty (including a non-U.S. CSE) whose
obligations under the uncleared swap are not guaranteed by a U.S. person, would help
ensure their safety and soundness and support the stability of the U.S. financial markets,
reducing the likelihood of another financial crisis affecting the U.S. economy.
Request for Comment. The Commission requests comments on all aspects of
the proposed treatment of uncleared swaps of U.S. CSEs and/or non-U.S. CSEs whose
obligations under the relevant swap are guaranteed by a U.S. person, including:
1.

Is the Proposed Rules treatment of U.S. CSEs and non-U.S. CSEs whose

obligations under the swap are guaranteed by a U.S. person appropriate? If not, please
explain. If a different treatment should apply to U.S. CSEs or non-U.S. CSEs whose
obligations under the swap are guaranteed by a U.S. person, please describe the
alternative treatment that should apply and explain why.
2.

What are the competitive implications of the proposed treatment of

uncleared swaps of non-U.S. CSEs whose obligations under the swap are guaranteed by a
U.S. person?
3.

Does the proposed treatment of non-U.S. CSEs whose obligations under

the swap are guaranteed by a U.S. person appropriately take into account the supervisory
interest of a non-U.S. CSEs home jurisdiction?
2.

Uncleared swaps of non-U.S. CSEs (including Foreign

Consolidated Subsidiaries) whose obligations under the relevant
swap are not guaranteed by a U.S. person

Under the Proposed Rule, non-U.S. CSEs (including Foreign Consolidated

Subsidiaries) whose obligations under the relevant uncleared swap are not guaranteed by
a U.S. person may avail themselves of substituted compliance to a greater extent than if
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their obligations under the swap were guaranteed by a U.S. person. The Commission
believes that this approach is appropriate since a non-U.S. CSE whose swap obligations
are not guaranteed by a U.S. person (including a Foreign Consolidated Subsidiary), on
balance, may implicate equal or greater supervisory concerns on the part of a foreign
regulator relative to the supervisory interest of the Commission (in comparison to U.S.
CSEs or non-U.S. CSEs whose obligations under the relevant swap are guaranteed by a
U.S. person, because the Commission has a significant regulatory interest in uncleared
swaps of these CSEs). Under the Proposed Rule, where the obligations of a non-U.S.
CSE (including a Foreign Consolidated Subsidiary) under the relevant swap are not
guaranteed by a U.S. person, substituted compliance would be available with respect to
its uncleared swaps with any counterparty, except where the counterparty is a U.S. CSE
or a non-U.S. CSE whose obligations under the relevant swap are guaranteed by a U.S.
person.65
Further, uncleared swaps entered into by Foreign Consolidated Subsidiaries
would not be eligible for the Exclusion under the Proposed Rule. As described above,
the financial position, operating results, and statement of cash flows of a Foreign
Consolidated Subsidiary are incorporated into the financial statements of the U.S.
ultimate parent entity and therefore, likely have a direct impact on the consolidated
entitys financial position, risk profile, and market value. Under these circumstances, and
given the importance of margin in mitigating counterparty credit risk, the Commission

65

With respect to uncleared swaps with a U.S. CSE or a non-U.S. CSE whose obligations under the
relevant swap are guaranteed by a U.S. person, substituted compliance would only be available for initial
margin collected by the non-U.S. CSE whose obligations under the relevant swap are not guaranteed by a
U.S. person, as discussed in section II.C.1.

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has greater supervisory concerns with respect to the uncleared swaps of a Foreign
Consolidated Subsidiary than other non-U.S. CSEs. Therefore, the Commission believes
that extending the Exclusion to a Foreign Consolidated Subsidiary would not further the
goal of ensuring the safety and soundness of a CSE and the stability of U.S. financial
markets. The Commission is also concerned that extending the Exclusion to Foreign
Consolidated Subsidiaries would encourage a U.S. entity to use their non-U.S.
subsidiaries to conduct their swap activities with non-U.S. counterparties, possibly
bifurcating the U.S. entitys U.S. and non-U.S.-facing businesses, and potentially
resulting in separate pools of liquidity.
Request for Comment. The Commission requests comments on all aspects of
the proposed treatment of uncleared swaps of non-U.S. CSEs (including Foreign
Consolidated Subsidiaries) whose obligations under the relevant swap are not guaranteed
by a U.S. person, including:
1.

The Proposed Rule makes substituted compliance more broadly available

to a Foreign Consolidated Subsidiary whose obligations under the relevant swap are not
guaranteed by a U.S. person than a non-U.S. CSE (including a Foreign Consolidated
Subsidiary) whose obligations under the relevant swap are guaranteed by a U.S. person.
Should Foreign Consolidated Subsidiaries be treated the same as non-U.S. CSEs that are
guaranteed by a U.S. person and if not, what treatment is appropriate?
2.

What are the competitive implications of the proposed treatment of

Foreign Consolidated Subsidiaries (relative to other non-U.S. CSEs)? Does the proposed
treatment appropriately take into account the supervisory interest of a non-U.S. CSEs
home jurisdiction?

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3.

Exclusion for uncleared swaps of non-U.S. CSEs where neither

counterpartys obligations under the relevant swap are guaranteed
by a U.S. person and neither counterparty is a Foreign
Consolidated Subsidiary nor a U.S. branch of a non-U.S. CSE

Under the Proposed Rule, an uncleared swap entered into by a non-U.S. CSE with
a non-U.S. person counterparty (including a non-U.S. CSE) would be excluded from the
Commissions margin rules, provided that neither counterpartys obligations under the
relevant swap are guaranteed by a U.S. person and neither counterparty is a Foreign
Consolidated Subsidiary nor a U.S. branch of a non-U.S. CSE.66
As discussed above, the Commission believes that, given the importance of
margin to the safety and soundness of a CSE, as a general matter, margin requirements
should apply to the uncleared swaps of a CSE, without regard to the domicile of the
counterparty or where the trade is executed. At the same time, the Commission believes
that it is appropriate to make a limited exception to this principle of firm-wide
application of margin requirements in the cross-border context, consistent with section
4s(e) of the CEA67 and comity principles, so as to exclude a narrow class of uncleared
swaps involving a non-U.S. CSE and a non-U.S. counterparty.
The Commission notes that a non-U.S. CSE that can avail itself of the Exclusion
would still be subject to the Commissions margin rules with respect to all uncleared
swaps not meeting the criteria for the Exclusion, albeit with the possibility of substituted
compliance. The non-US CSE would also be subject to the Commissions capital

66

See 23.160(b)(2)(ii) of the Proposed Rule.

67

Section 4s(e)(3)(A) of the CEA, 7 U.S.C. 6s(e)(3)(A). The section calls for, among other things, that
margin requirements be appropriate for the risks associated with the non-cleared swaps held as a swap
dealer or major market participant.

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requirements, which, as proposed, would impose a capital charge for uncollateralized
exposures.68 Additionally, any excluded swaps would most likely be covered by the
margin requirements of another jurisdiction that adheres to the BCBS-IOSCO
framework.69
The Commission also recognizes that the supervisory interest of foreign
regulators in the uncleared swaps of non-U.S. CSEs (and their non-U.S. counterparties)
that are eligible for the Exclusion may equal or exceed the supervisory interest of the
United States in such uncleared swaps. Both counterparties are domiciled outside the
United States and likely would be subject to the supervision of a foreign regulator. As
discussed above, the Commission believes that a workable cross-border framework must
take into account the interests of other jurisdictions and balance those interests with the
supervisory interests of the United States in order to calibrate the application of margin
rules to non-U.S. CSEs swaps with non-U.S. counterparties. Such an approach would
help mitigate the potential for conflicts with other jurisdictions and ultimately promote
global harmonization. For all of the foregoing reasons, the Commission believes that it
would be appropriate to not apply the Commissions margin rules to uncleared swaps
meeting the criteria for the Exclusion.
The Commission acknowledges that similar mitigating factors and comity
considerations may apply to Foreign Consolidated Subsidiaries, but as discussed above, a

68

See Capital Requirements of Swap Dealers and Major Swap Participants, Notice of proposed rulemaking,
76 FR 27802 (May 12, 2011).
69

The non-U.S. CSE that qualifies for the exclusion would be eligible for substituted compliance, with
respect to all margin requirements, if its counterparty to the uncleared swap is a U.S. person that is not a
CSE. If the uncleared swap is with a U.S. CSE, substituted compliance would only be available with
respect to initial margin posed by the U.S. CSE counterparty.

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Foreign Consolidated Subsidiarys financial position, operating results, and statement of
cash flows are directly reflected in its U.S. Ultimate Parent entitys financial statements,
which implicates greater supervisory concerns. Therefore, the Commission believes that
it has a greater regulatory interest in Foreign Consolidated Subsidiaries than other nonU.S. CSEs (that are not guaranteed by a U.S. person), and that the uncleared swaps of
Foreign Consolidated subsidiaries should not be excluded from the margin requirements.
Further, the Commission believes that the uncleared swaps of a U.S. branch of a
non-U.S. CSE should not be excluded from the margin requirements for the reasons
discussed in the next section.
Request for Comment. The Commission is requesting comments on all aspects
of the proposed Exclusion, including:
1.

In light of the mitigating factors cited above and the Commissions

supervisory interest in the safety and soundness of all CSEs and the critical role that
margin plays in helping ensure the safety and soundness of CSEs, is the proposed
Exclusion appropriate, and if not, please explain why not? Is the scope of the Exclusion
appropriate, or should it be broader or narrower, and if so, why?
2.

Under the Proposed Rule, uncleared swaps with a Foreign Consolidated

Subsidiary would not be eligible for the Exclusion from the Commissions margin
requirements. Should Foreign Consolidated Subsidiaries be eligible for the Exclusion
and if so, why?

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4.

U.S. Branches of Non-U.S. CSEs

The Proposed Rule treats uncleared swaps executed through or by a U.S. branch
of a non-U.S. CSE the same as those swaps of a non-U.S. CSE, except that the Exclusion
from the margin rules would not be available to a U.S. branch of a non-U.S. CSE.
Generally speaking, because the risks posed by uncleared swaps are borne by a
CSE as a whole, it should not matter if the transaction is entered by or through a U.S.
branch or office within the United States. Nevertheless, the Commission believes that
extending the Exclusion (to the extent than the Exclusion might otherwise apply to the
non-U.S. CSE, as discussed above) would not be appropriate in the case of uncleared
swaps executed by or through a U.S. branch of a non-U.S. CSE.
The Commission notes that non-U.S. CSEs can conduct their swap dealing
business within the United States utilizing a number of different legal structures,
including a U.S. subsidiary or a U.S. branch or office. Excluding uncleared swaps
conducted by or through U.S. branches of non-U.S. CSEs would give these non-U.S.
CSEs an unfair advantage when dealing with non-U.S. clients relative to U.S. CSEs
(including those CSEs that are subsidiaries of foreign entities). That is, a U.S. branch of
a non-U.S. CSE that is permitted to operate outside of the Commissions margin
requirements would be able to offer a more competitive price to non-U.S. clients than a
U.S. CSE. The Commission believes that when a non-U.S. CSE is conducting its swap
activities within the United States through a branch or office located in the United States,
it should be subject to U.S. margin laws. However, the Commission also believes that,
consistent with comity principles, substituted compliance should be available for
uncleared swaps executed by or through a U.S. branch of a non-U.S. CSE whose

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obligations under the relevant swap are not guaranteed by a U.S. person with any
counterparty (except where the counterparty is a U.S. CSE or a non-U.S. CSE whose
obligations under the relevant swap are guaranteed by a U.S. person).70
Request for Comment. The Commission seeks comment on the Proposed Rules
treatment of uncleared swaps conducted by or through a U.S. branch of a non-U.S.
CSE. In particular, the Commission requests comment on the following questions:
1.

How should the Commission determine whether a swap is executed

through or by a U.S. branch of a non-U.S. CSE for purposes of applying the

Commissions margin rules on a cross-border basis? Should the Commission base the
determination of whether the swap activity is conducted at a U.S. branch of a non-U.S.
CSE for purposes of applying the Commissions margin rules on a cross-border basis on
the same analysis as is used in the Volcker rule?71
2.

The Commission seeks comment on the proposed treatment of U.S.

branches of non-U.S. CSEs, including whether these branches should be eligible for the
Exclusion in light of the policy objectives outlined above. If the Exclusion should be
available, please explain why. The Commission also seeks comment regarding whether

70

With respect to uncleared swaps with a U.S. CSE or a non-U.S. CSE whose obligations under the
relevant swap are guaranteed by a U.S. person, substituted compliance would only be available for initial
margin collected by the U.S. branch of a non-U.S. CSE whose obligations under the relevant swap are not
guaranteed by a U.S. person. See section II.C.1.
71

Under the Volcker rule, personnel that arrange, negotiate, or execute a purchase or sale conducted under
the exemption for trading activity of a foreign banking entity must be located outside of the United States.
See Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With,
Hedge Funds and Private Equity Funds; Final Rule, 79 FR 5808 (Jan. 31, 2014). Thus, for example,
personnel in the United States cannot solicit or sell to or arrange for trades conducted under this exemption.
Personnel in the United States also cannot serve as decision makers in transactions conducted under this
exemption. Personnel that engage in back-office functions, such as clearing and settlement of trades,
would not be considered to arrange, negotiate, or execute a purchase or sale for purposes of this provision.
Id. at 5927, n. 1526.

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the scope of substituted compliance for U.S. branches of non-U.S. CSEs under the
Proposed Rule is appropriate. If not, please explain why.
D.

Substituted Compliance

As noted above, consistent with CEA section 2(i) and comity principles, the
Commission would allow CSEs to comply with comparable margin requirements in a
foreign jurisdiction under certain circumstances. In this release, we are proposing to
establish a standard of review that will apply to Commission determinations regarding
whether some or all of the relevant foreign jurisdictions margin requirements are
comparable to the Commissions corresponding margin requirements, as well as
procedures for requests for comparability determinations, including eligibility
requirements and submission requirements.
Specifically, the Commission would permit a U.S. CSE or a non-U.S. CSE, as
applicable, to avail itself of substituted compliance (to the extent applicable under the
Proposed Rule) by complying with the margin requirements of the relevant foreign
jurisdiction in lieu of compliance with the Commissions margin requirements, provided
that the Commission finds that such jurisdictions margin requirements are comparable to
the Commissions margin requirements. Failure to comply with the applicable foreign
margin requirements could result in a violation of the Commissions margin
requirements. Further, all CSEs, regardless of whether they rely on a comparability
determination, would remain subject to the Commissions examination and enforcement
authority.72

72

Under Commission regulations 23.203 and 23.606, all records required by the CEA and the
Commissions regulations to be maintained by a registered swap dealer or MSP shall be maintained in

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The Commission is proposing a comparability standard that is outcome-based
with a focus on whether the margin requirements in the foreign jurisdiction achieve the
same regulatory objectives as the CEAs margin requirements. Under this outcomebased approach, the Commission would not look to whether a foreign jurisdiction has
implemented specific rules and regulations that are identical to rules and regulations
adopted by the Commission. Rather, the Commission would evaluate whether a foreign
jurisdiction has rules and regulations that achieve comparable outcomes. If it does, the
Commission believes that a comparability determination may be appropriate, even if
there may be differences in the specific elements of a particular regulatory provision.73
In evaluating whether a foreign jurisdictions margin requirements are
comparable to the Commissions margin requirements, the Commission would consider
whether the foreign jurisdictions margin rules are consistent with international
standards.74 That is, the Commission would determine, considering all relevant facts and

accordance with Commission regulation 1.31 and shall be open for inspection by representatives of the
Commission, the United States Department of Justice, or any applicable prudential regulator. The
Commission believes that, before a non-U.S. CSE should be permitted to rely on substituted compliance, it
should assure the Commission that it can provide the Commission with prompt access to books and records
and submit to onsite inspection and examination. The Commission further expects that access to books and
records and the ability to inspect and examine a non-U.S. CSE will be a condition to any comparability
determination.
73

As noted below, because the Commission would make comparability determinations on an element-byelement basis, it is possible that a foreign jurisdictions margin requirements would be comparable with
respect to some, but not all, elements of the margin requirements.
74

Under the Proposed Rule, the term international standards means the margin policy framework for
non-cleared, bilateral derivatives issued by the Basel Committee on Banking Supervision and the
International Organization of Securities Commissions in September 2013, as subsequently updated,
revised, or otherwise amended, or any other international standards, principles or guidance relating to
margin requirements for non-cleared, bilateral derivatives that the Commission may in the future recognize,
to the extent that they are consistent with United States law (including the margin requirements in the
Commodity Exchange Act). See 23.160(a)(3) of the Proposed Rule. For further information regarding
the margin policy framework for non-cleared, bilateral derivatives issued by the Basel Committee on

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circumstances, whether a foreign jurisdiction has adopted margin rules that adequately
address the BCBS-IOSCO framework. The Commission believes that considering this
factor is appropriate because BCBS and IOSCO established this framework to ensure
globally harmonized margin rules for uncleared derivative transactions. Individual
regulatory authorities across major jurisdictions (including the EU, Japan, and the United
States) have started to develop their own margin rules consistent with the final BCBSIOSCO framework for non-centrally cleared, bilateral derivatives.75 If the foreign
jurisdictions margin rules are not consistent with international standards, then the
Commission may not find the rules comparable. In providing information to the
Commission for a determination, applicants should include, among other things,
information describing any difference between the foreign jurisdictions margin
requirements and international standards.76
Under the proposal, once the Commission has determined that a foreign
jurisdictions margin requirements adhere to the BCBS-IOSCO framework, the
Commission would evaluate the various elements of the foreign jurisdictions margin
requirements.77 Because the Commission is not proposing to make a binary
determination of comparability (i.e., all or nothing), but instead would make
comparability determinations on an element-by-element basis, it is possible that a foreign

Banking Supervision and the International Organization of Securities in September 2013, see note 12,
supra.
75

See note 13, supra.

76

See 23.160(c)(2)(iii) of the Proposed Rule.

77

See 23.160(c)(2) of the Proposed Rule.

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margin system would be comparable with respect to some, but not all, elements of the
margin requirements. For instance, a foreign jurisdiction may impose variation margin
requirements on a non-U.S. CSEs uncleared swaps with financial end-users that achieve
outcomes comparable to the Commissions margin requirements, but the same foreign
jurisdiction may not achieve comparable regulatory outcomes with respect to segregation
and rehypothecation requirements. By assessing each of the relevant elements separately,
the Commission would have the flexibility to determine, with respect to one element of
the requirements, that the outcomes are comparable, but not another. The elements that
the Commission would be analyzing, among others, would include, but not be limited to:
(i) the transactions subject to the foreign jurisdictions margin requirements; (ii) the
entities subject to the foreign jurisdictions margin requirements; (iii) the methodologies
for calculating the amounts of initial and variation margin; (iv) the process and standards
for approving models for calculating initial and variation margin models; (v) the timing
and manner in which initial and variation margin must be collected and/or paid; (vi) any
threshold levels or amounts; (vii) risk management controls for the calculation of initial
and variation margin; (viii) eligible collateral for initial and variation margin; (ix) the
requirements of custodial arrangements, including rehypothecation and the segregation
of margin; (x) documentation requirements relating to margin; and (xi) the cross-border
application of the foreign jurisdictions margin regime.
Moreover, the Commission would expect that the applicant, at a minimum,
describe how the foreign jurisdictions margin requirements addresses each of the abovereferenced elements, and identify the specific legal and regulatory provisions that
correspond to each element (and, if necessary, whether the foreign jurisdictions margin

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requirements do not address a particular element), and describe the objectives of the
foreign jurisdictions margin requirements. Further, the applicant would be required to
furnish copies of the foreign jurisdictions margin requirements (including an English
translation of any foreign language document) and any other information or
documentation that the Commission deems appropriate.
In addition, in section (c)(3) of the Proposed Rule,78 the Commission sets out its
standard of review that would take into consideration all other relevant factors, including
but not limited to, the scope and objectives of the foreign jurisdictions margin
requirement(s) for uncleared swaps; how the foreign jurisdictions margin requirements
compare to international standards; whether the foreign jurisdictions margin
requirements achieve comparable outcomes to the Commissions corresponding margin
requirements; the ability of the relevant regulatory authority or authorities to supervise
and enforce compliance with the foreign jurisdictions margin requirements; and any
other facts and circumstances the Commission deems relevant.79
The Proposed Rule provides that any CSE that is eligible for substituted
compliance may apply, either individually or collectively. In addition, the Proposed Rule
provides that a foreign regulatory authority that has direct supervisory authority over one
or more covered swap entities and that is responsible for administering the relevant

78

See 23.160(c)(3) of the Proposed Rule.

79

The submission should include a description of the ability of the relevant foreign regulatory authority or
authorities to supervise and enforce compliance with the foreign jurisdictions margin requirements,
including the powers of the foreign regulatory authority or authorities to supervise, investigate, and
discipline entities for compliance with the margin requirements and the ongoing efforts of the regulatory
authority or authorities to detect, deter, and ensure compliance with the margin requirements. See
23.160(c)(2)(iv) of the Proposed Rule.

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foreign jurisdictions margin requirements may submit a request for a comparability
determination with respect to some or all of the Commissions margin requirements.
Persons requesting a comparability determination may want to coordinate their
application with other market participants and their home regulators to simplify and
streamline the process. Once a comparability determination is made for a jurisdiction, it
will apply for all entities or transactions in that jurisdiction to the extent provided in the
Proposed Rule and the determination, subject to any conditions specified by the
Commission.
The Commission expects that the comparability determination process would
require close consultation, cooperation, and coordination with other appropriate U.S.
regulators and relevant foreign regulators. Further, the Commission expects that, in
connection with a comparability determination, the foreign regulator(s) would enter into,
or would have entered into, an appropriate memorandum of understanding (MOU) or
similar arrangement with the Commission.
In issuing a Comparability Determination, the Commission may impose any terms
and conditions it deems appropriate.80 Further, the Proposed Rule would provide that the
Commission may, on its own initiative, further condition, modify, suspend, terminate, or
otherwise restrict a comparability determination in the Commissions discretion. This
could result, for example, from a situation where, after the Commission issues a
comparability determination, the basis of that determination ceases to be true. In this
regard, the Commission would require an applicant to notify the Commission of any

80

The violation of such terms and conditions may constitute a violation of the Commissions margin
requirements and/or result in the modification or revocation of the comparability determination.

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material changes to information submitted in support of a comparability determination
(including, but not limited to, changes in the relevant foreign jurisdictions supervisory or
regulatory regime) as the Commissions comparability determination may no longer be
valid.81
Request for Comment. The Commission is seeking comments on all aspects of
the proposed standard of review that will apply to Commission determinations regarding
whether some or all of the relevant foreign jurisdictions margin requirements are
comparable to the Commissions corresponding margin requirements, as well as
proposed procedures for requests for comparability determinations, including eligibility
requirements and submission requirements. Among other things, commenters may wish
to submit comments on the following questions:
1.

Please provide comments on the appropriate standard of review for

comparability determinations and the degree of comparability and comprehensiveness

that should be applied to comparability determinations.
2.

Are the proposed procedures, including eligibility requirements and

submission requirements, for comparability determinations appropriate?

3.

Many foreign jurisdictions are in the process of implementing margin

reform. Should the Commission develop an interim process that takes into account a
different implementation timeline? Please provide details and address competitive
implications for U.S. CSEs and non-U.S. CSEs that are required to comply with the
Commissions margin regulations.

81

The Commission expects to impose this obligation as one of the conditions to the issuance of a
comparability determination.

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4.

In the Guidance, the Commission discussed a de minimis exemption

with respect to transaction-level requirements for foreign branches of U.S. swap dealers
located in emerging markets that, in the aggregate, constitute less than 5 percent of the
firms notional swaps.82 The Proposed Rule does not contain an exemption for CSEs
operating in emerging markets. Should the Commission develop an exemption for
emerging markets? If so, what should be the eligibility criteria or conditions? For
example, should the Commission provide an exemption where a non-U.S. CSE is
operating in a jurisdiction that does not permit the related collateral to be held outside
that jurisdiction and/or that lacks legal or operational infrastructure relating to proper
segregation of initial margin? Should the Commission require the CSE to collect initial
and variation margin from its counterparty in eligible emerging market jurisdictions, but
only require the CSE to post variation margin? Should the Commission limit the type of
eligible collateral that could be used in eligible emerging market jurisdictions? Which
jurisdictions, if any, should qualify as emerging markets for purposes of the
exemption? What should be the process for determining that the qualifying criteria are
met? Please provide quantitative data, to the extent practical.
5.

As some emerging market jurisdictions laws may not support legally

enforceable netting arrangements, which would then, under the Proposed Margin Rules
and under certain circumstances, require that a CSE and its counterparty post and collect
gross margin, should the Commission, if it does not provide for an emerging markets
exception, permit the CSE and its counterparty to collect/post variation margin on a net

82

See the Guidance, 78 FR at 45351.

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basis? If so, what conditions, if any, should the Commission place on this requirement to
ensure that CSEs and the U.S. financial system are adequately protected?
6.

Is the scope of substituted compliance under the Proposed Rule

appropriate? Should additional or fewer transactions be eligible for substituted

compliance, and if so, how should the Proposed Rule be modified?
E.

General Request for Comments

In addition to the specific requests for comments included above, the Commission
seeks comment on all aspects of the Proposed Rule. Commenters are encouraged to
address, among other things, the scope and application of the Proposed Rule, costs and
benefits of the Proposed Rule, alternatives to the Proposed Rule, practical implications
for CSEs and other market participants and the market generally related to the Proposed
Rule, whether the Proposed Rule sufficiently supports the statutory goals of ensuring the
safety and soundness of the CSE and protecting the financial system against the risks
associated with uncleared swaps, and whether the Proposed Rule sufficiently takes into
account principles of international comity. In particular, the Commission requests
comment on the following:
1.

Does the Proposed Rules approach to the cross-border application of

margin requirements satisfy the Commissions statutory requirements, including the

requirement to help ensure the safety and soundness of CSEs, and the requirement that
the Commission, the Prudential Regulators, and the SEC, to the maximum extent
practicable, establish and maintain comparable minimum initial and variation margin
requirements?

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2.

Would it be more appropriate to apply the margin requirements at the

entity-level, without any exclusion? If yes, please explain.

3.

Would it be more appropriate to apply the margin requirements at a

transaction-level? If yes, please explain.

4.

Is the scope of the Proposed Rule appropriate, or should it be changed, and

if so, how?
5.

Would an alternative approach to the Proposed Rule better achieve the

Commissions statutory requirements or otherwise be preferable or more appropriate? If

yes, please explain.
6.

Does the Commissions Proposed Rule strike the right balance between

the Commissions supervisory interest in offsetting the risk to CSEs and the financial
system arising from the use of uncleared swaps and international comity principles? If
not, please explain.

III.

RELATED MATTERS
A.

Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) requires that agencies consider whether
the regulations they propose will have a significant economic impact on a substantial
number of small entities.83 The Commission previously has established certain
definitions of small entities to be used in evaluating the impact of its regulations on

83

5 U.S.C. 601 et seq.

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small entities in accordance with the RFA.84 The proposed regulation establishes a
mechanism for CSEs85 to satisfy margin requirements by complying with comparable
margin requirements in the relevant foreign jurisdiction as described in paragraph (c) of
the Proposed Rule,86 but only to the extent that the Commission makes a determination
that complying with the laws of such foreign jurisdiction is comparable to complying
with the corresponding margin requirement(s) for which the determination is sought.
The Commission previously has determined that SDs and MSPs are not small
entities for purposes of the RFA.87 Thus, the Commission is of the view that there will
not be any small entities directly impacted by this rule.
The Commission notes that under the Proposed Margin Rules, SDs and MSPs
would only be required to collect and post margin on uncleared swaps when the
counterparties to the uncleared swaps are either other SDs and MSPs or financial end
users. As noted above, SDs and MSPs are not small entities for RFA purposes.
Furthermore, any financial end users that may be indirectly88 impacted by the Proposed
Rule would be similar to ECPs, and, as such, they would not be small entities.89 Further,

84

47 FR 18618 (Apr. 30, 1982).

85

Section 23.151 of the Proposed Margin Rules defines CSEs as a SD or MSP for which there is no
prudential regulator.
86

See 23.160(c) of the Proposed Rule.

87

See 77 FR 30596, 30701 (May 23, 2012).

88

The RFA focuses on direct impact to small entities and not on indirect impacts on these businesses,
which may be tenuous and difficult to discern. See Mid-Tex Elec. Coop., Inc. v. FERC, 773 F.2d 327, 340
(D.C. Cir. 1985); Am. Trucking Assns. v. EPA, 175 F.3d 1027, 1043 (D.C. Cir. 1985).
89

As noted in paragraph (1)(xii) of the definition of financial end user in section 23.151 of the Proposed
Margin Rules, a financial end-user includes a person that would be a financial entity described in
paragraphs (1)(i)(xi) of that definition, if it were organized under the laws of the United States or any

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to the extent that there are any foreign financial entities that would not be considered
ECPs, the Commission expects that there would not be a substantial number of these
entities significantly impacted by the Proposed Rule. As noted above, most foreign
financial entities would likely be ECPs to the extent they would trade in uncleared swaps.
The Commission expects that only a small number of foreign financial entities that are
not ECPs, if any, would trade in uncleared swaps.
Accordingly, the Commission finds that there will not be a substantial number of
small entities impacted by the Proposed Rule. Therefore, the Chairman, on behalf of the
Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations
will not have a significant economic impact on a substantial number of small entities.
B.

Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA) imposes certain requirements on

Federal agencies, including the Commission, in connection with their conducting or
sponsoring any collection of information, as defined by the PRA. This proposed
rulemaking would result in the collection of information requirements within the meaning
of the PRA, as discussed below. The proposed rulemaking contains collections of
information for which the Commission has not previously received control numbers from
the Office of Management and Budget (OMB). If adopted, responses to this collection
of information would be required to obtain or retain benefits. An agency may not
conduct or sponsor, and a person is not required to respond to, a collection of information

State thereof. The Commission believes that this prong of the definition of financial end-user would
capture the same type of U.S. financial end-users that are ECPs, but for them being foreign financial
entities. Therefore, for purposes of the Commissions RFA analysis, these foreign financial end-users will
be considered ECPs and therefore, like ECPs in the U.S., not small entities.

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unless it displays a currently valid control number. The Commission has submitted to
OMB an information collection request to obtain an OMB control number for the
collections contained in this proposal.
Section 731 of the Dodd-Frank Act, amended the CEA,90 to add, as section 4s(e)
thereof, provisions concerning the setting of initial and variation margin requirements for
SDs and MSPs. Each SD and MSP for which there is a Prudential Regulator, as defined
in section 1a(39) of the CEA, must meet margin requirements established by the
applicable Prudential Regulator, and each CSE must comply with the Commission's
regulations governing margin. With regard to the cross-border application of the swap
provisions enacted by Title VII of the Dodd-Frank Act, section 2(i) of the CEA provides
the Commission with express authority over activities outside the United States relating
to swaps when certain conditions are met. Section 2(i) of the CEA provides that the
provisions of the CEA relating to swaps enacted by Title VII of the Dodd-Frank Act
(including Commission rules and regulations promulgated thereunder) shall not apply to
activities outside the United States unless those activities (1) have a direct and significant
connection with activities in, or effect on, commerce of the United States or (2)
contravene such rules or regulations as the Commission may prescribe or promulgate as
are necessary or appropriate to prevent the evasion of any provision of Title VII.91
Because margin requirements are critical to ensuring the safety and soundness of a CSE
and supporting the stability of the U.S. financial markets, the Commission believes that

90

7 U.S.C. 1 et seq.

91

7 U.S.C. 2(i).

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its margin rules should apply on a cross-border basis in a manner that effectively
addresses risks to the registered CSE and the U.S. financial system.
As noted above, the Proposed Rule would establish margin requirements for
uncleared swaps of CSEs on a firm-wide, entity-level basis (with substituted compliance
available in certain circumstances), except as to a narrow class of uncleared swaps
between a non-U.S. CSE and a non-U.S. counterparty that fall within the Exclusion. The
Proposed Rule would establish a procedural framework in which the Commission would
consider permitting compliance with comparable margin requirements in a foreign
jurisdiction to substitute for compliance with the Commissions margin requirements in
certain circumstances. The Commission would consider whether the requirements of
such foreign jurisdiction with respect to margin of uncleared swaps are comparable to the
Commissions margin requirements.
Specifically, the Proposed Rule would provide that a CSE who is eligible for
substituted compliance may submit a request, individually or collectively, for a
comparability determination.92 Persons requesting a comparability determination may
coordinate their application with other market participants and their home regulators to
simplify and streamline the process. Once a comparability determination is made for a
jurisdiction, it would apply for all entities or transactions in that jurisdiction to the extent
provided in the determination, as approved by the Commission. In providing information

92

A CSE may apply for a comparability determination only if the uncleared swap activities of the CSE are
directly supervised by the authorities administering the foreign regulatory framework for uncleared swaps.
Also, a foreign regulatory agency may make a request for a comparability determination only if that agency
has direct supervisory authority to administer the foreign regulatory framework for uncleared swaps in the
requested foreign jurisdiction.

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to the Commission for a comparability determination, applicants must include, at a
minimum, information describing any differences between the relevant foreign
jurisdictions margin requirements and international standards, 93 and the specific
provisions of the foreign jurisdiction that govern: (i) the transactions subject to the
foreign jurisdictions margin requirements; (ii) the entities subject to the foreign
jurisdictions margin requirements; (iii) the methodologies for calculating the amounts of
initial and variation margin; (iv) the process and standards for approving models for
calculating initial and variation margin models; (v) the timing and manner in which initial
and variation margin must be collected and/or paid; (vi) any threshold levels or amounts;
(vii) risk management controls for the calculation of initial and variation margin; (viii)
eligible collateral for initial and variation margin; (ix) the requirements of custodial
arrangements, including rehypothecation and the segregation of margin; (x)
documentation requirements relating to margin; and (xi) the cross-border application of
the foreign jurisdictions margin regime.94
In addition, the Commission would expect the applicant, at a minimum, to
describe how the foreign jurisdictions margin requirements addresses each of the abovereferenced elements, and identify the specific legal and regulatory provisions that
correspond to each element (and, if necessary, whether the relevant foreign jurisdictions
margin requirements do not address a particular element). Further, the applicant must
describe the objectives of the foreign jurisdictions margin requirements, the ability of the

93

See note 74, supra, for a discussion of the definition of international standards under the Proposed
Rule. See also 23.160(a)(3) of the Proposed Rule.
94

See 23.160(c)(2) of the Proposed Rule for submission requirements.

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relevant regulatory authority or authorities to supervise and enforce compliance with the
foreign jurisdictions margin requirements, including the powers of the foreign regulatory
authority or authorities to supervise, investigate, and discipline entities for compliance
with the margin requirements and the ongoing efforts of the regulatory authority or
authorities to detect, deter, and ensure compliance with the margin requirements. Finally,
the applicant must furnish copies of the foreign jurisdictions margin requirements
(including an English translation of any foreign language document) and any other
information and documentation that the Commission deems appropriate.95
In issuing a Comparability Determination, the Commission may impose any terms
and conditions it deems appropriate.96 In addition, the Proposed Rule would provide that
the Commission may, on its own initiative, further condition, modify, suspend, terminate,
or otherwise restrict a comparability determination in the Commissions discretion. This
could result, for example, from a situation where, after the Commission issues a
comparability determination, the basis of that determination ceases to be true. In this
regard, the Commission would require an applicant to notify the Commission of any
material changes to information submitted in support of a comparability determination
(including, but not limited to, changes in the foreign jurisdictions supervisory or
regulatory regime) as the Commissions comparability determination may no longer be
valid.97

95

See 23.160(c)(2)(v) and (vi) of the Proposed Rule.

96

The violation of such terms and conditions may constitute a violation of the Commissions margin
requirements and/or result in the modification or revocation of the comparability determination.
97

The Commission expects to impose this obligation as one of the conditions to the issuance of a
comparability determination.

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The collection of information that is proposed by this rulemaking is necessary to
implement sections 4s(e) of the CEA, which mandates that the Commission adopt rules
establishing minimum initial and variation margin requirements for CSEs on all swaps
that are not cleared by a registered derivatives clearing organization, and section 2(i) of
the CEA, which provides that the provisions of the CEA relating to swaps that were
enacted by Title VII of the Dodd-Frank Act (including any rule prescribed or regulation
promulgated thereunder ) apply to activities outside the United States that have a direct
and significant connection with activities in, or effect on, commerce of the United
States.98 The information collection would be necessary for the Commission to consider
whether the requirements of the foreign rules are comparable to the applicable
requirements of the Commissions rules.
As noted above, any CSE who is eligible for substituted compliance may make a
request for a comparability determination. Currently, there are approximately 102 CSEs
provisionally registered with the Commission. The Commission further estimates that of
the approximately 102 CSEs, approximately 61 CSEs would be subject to the
Commissions margin rules as they are not subject to a Prudential Regulator. However,
the Commission notes that any foreign regulatory agency that has direct supervisory
authority over one or more CSEs and that is responsible to administer the relevant foreign
jurisdictions margin requirements may apply for a comparability determination. Further,

98

Section 2(i) of the CEA provides that the provisions of the CEA relating to swaps that were enacted by
Title VII of the Dodd-Frank Act (including any rule prescribed or regulation promulgated thereunder ),
shall not apply to activities outside the United States unless those activities (1) have a direct and significant
connection with activities in, or effect on, commerce of the United States or (2) contravene such rules or
regulations as the Commission may prescribe or promulgate as are necessary or appropriate to prevent the
evasion of any provision of Title VII of the CEA.

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once a comparability determination is made for a jurisdiction, it would apply for all
entities or transactions in that jurisdiction to the extent provided in the determination, as
approved by the Commission. The Commission estimates that it will receive requests for
a comparability determination from 17 jurisdictions, consisting of the 16 jurisdictions
within the G20, plus Switzerland, 99 and that each request would impose an average of 10
burden hours.
Based upon the above, the estimated hour burden for collection is calculated as
follows:
Number of respondents: 17
Frequency of collection: Once.
Estimated annual responses per registrant: 1.
Estimated aggregate number of annual responses: 17.
Estimated annual hour burden per registrant: 10 hours.
Estimated aggregate annual hour burden: 170 hours (17 registrants x 10 hours
per registrant).
3. Information Collection Comments
The Commission invites the public and other Federal agencies to comment on any
aspect of the reporting burdens discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B),
the Commission solicits comments in order to: (1) evaluate whether the proposed

99

Because the Commissions proposed margin requirements are based on the BCBS-IOSCO framework
and one of the factors that the Commission will consider in making its determination is the comparability to
these international standards, the Commission estimates that in all likelihood, it will receive applications
from all 16 jurisdictions within the G20, plus Switzerland.

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collection of information is necessary for the proper performance of the functions of the
Commission, including whether the information will have practical utility; (2) evaluate
the accuracy of the Commissions estimate of the burden of the proposed collection of
information; (3) determine whether there are ways to enhance the quality, utility, and
clarity of the information to be collected; and (4) minimize the burden of the collection of
information on those who are to respond, including through the use of automated
collection techniques or other forms of information technology.
Comments may be submitted directly to the Office of Information and Regulatory
Affairs, by fax at (202) 395-6566 or by e-mail at OIRAsubmissions@omb.eop.gov.
Please provide the Commission with a copy of submitted comments so that all comments
can be summarized and addressed in the final rule preamble. Refer to the ADDRESSES
section of this notice of proposed rulemaking for comment submission instructions to the
Commission. A copy of the supporting statements for the collections of information
discussed above may be obtained by visiting RegInfo.gov. OMB is required to make a
decision concerning the collection of information between 30 and 60 days after
publication of this document in the Federal Register. Therefore, a comment is best
assured of having its full effect if OMB receives it within 30 days of publication.
C.

Cost-Benefit Considerations
1.

Introduction

Section 15(a) of the CEA requires the Commission to consider the costs and
benefits of its actions before promulgating a regulation under the CEA or issuing certain

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orders.100 Section 15(a) further specifies that the costs and benefits shall be evaluated in
light of five broad areas of market and public concern: (1) protection of market
participants and the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management practices; and (5) other
public interest considerations. The Commission considers the costs and benefits resulting
from its discretionary determinations with respect to the section 15(a) factors.
In promulgating the Proposed Margin Rules,101 the Commission considered the
costs and benefits associated with its choices regarding the scope and extent to which it
would apply its proposed margin requirements to uncleared swaps of a CSE, including
those related to the setting of the material swap exposure for financial entities, and related
substantive requirements, such as the determination of eligible collateral and acceptable
custodial arrangements. In addition, in light of the fact that section 4s(e), by its terms,
applies to uncleared swaps of all CSEs, regardless of the domicile of the CSE (or its
counterparties), the costs and benefits discussed in the Proposed Margin Rules Federal
Register release relate both to the domestic and cross-border application of the margin
rule. 102 The cost and benefit considerations (CBC) set out in this proposal are intended
to augment the CBC set forth in the Proposed Margin Rules Federal Register release and
address cost and benefit considerations related to the Commissions choices regarding the

100

7 U.S.C. 19(a).

101

The Commissions Proposed Margin Rules are set forth in proposed rules 150 through 159 of part 23 of
the Commissions regulations, proposed as17 CFR 23.150 through 23.159. See Margin Requirements
for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 FR 59898 (Oct. 3, 2014).
102

See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 FR
at 59920-59926 (Oct. 3, 2014).

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extent to which it would recognize compliance with comparable foreign requirements as
an alternative means of compliance with the Commissions margin rules (substituted
compliance) and the extent to which it would exclude uncleared swaps from the
Commissions margin rules. Further, in considering the relevant costs and benefits of the
Proposed Margin Rules, the Commission used as its baseline the swaps market as it
existed at the time of the Proposed Margin Rules Federal Register release; because this
Proposed Rule addresses the cross-border application of the Proposed Margin Rules, the
Commission is using as its baseline the swaps market as it would operate once the
Proposed Margin Rules were fully implemented.
As discussed in section I.B. above, in developing the proposed cross-border
framework in the Proposed Rule, the Commission is mindful of the global and highly
interconnected nature of the swaps marketand that risk exposures overseas can quickly
manifest in the United States and pose substantial threat to the U.S. financial system. At
the same time, the Commission also recognizes that competitive distortions and market
inefficiencies can resultand the benefits of the BCBS-IOSCO framework lostif due
consideration is not given to comity principles. The Commission has also carefully
considered the impact of its choices in determining whether (and, if so, under what
circumstances) substituted compliance would be available or whether (and, if so, under
what circumstances) swaps would be deemed excluded, including the effect of its choices
on efficiency, competition, market integrity and transparency.
The Commission is aware of the potentially significant trade-offs inherent in its
policy decisions. For instance, the Commissions choice not to exclude from its margin
requirements certain foreign-facing swaps involving U.S. CSEs and non-U.S. CSEs

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whose obligations under the relevant swap are guaranteed by a U.S. person may make it
more costly for such firms to conduct their swaps business, particularly in foreign
jurisdictions, and put them at a competitive disadvantage relative to non-U.S. CSEs
whose obligations under the relevant swap are not guaranteed by a U.S. person. It could
also make foreign counterparties less willing to deal with U.S. CSEs and non-U.S. CSEs
whose obligations under the relevant swap are guaranteed by a U.S. person. On the other
hand, full application of the margin requirements to these CSEs may enhance the safety
and soundness of these CSEs and consequently, the U.S. financial system. In addition,
the extent, if any, to which either of the aforementioned disadvantages would arise
depends on whether competitors of such CSEs must comply with comparable margin
requirements. In developing the proposed cross-border framework in the Proposed Rule,
the Commission has attempted to appropriately consider competing concerns in seeking
to effectively address the risk posed to the safety and soundness of CSEs, while creating a
workable framework that mitigates the potential for undue market distortions and that
promotes global harmonization.
The Commissions consideration of the costs and benefits associated with the
proposed framework is complicated by the fact that other jurisdictions may adopt
requirements with different scope or on different timelines. Currently, no foreign
jurisdiction has finalized rules for margin of uncleared swaps. However, the EU103 and

103

See European Banking Authority, European Securities and Markets Authority, and European Insurance
and Occupational Pensions Authority, Consultation Paper on draft regulatory technical standards on riskmitigation techniques for OTC-derivative contracts not cleared by a CCP under Article 11(15) of
Regulation (EU) No 648/2012 (for the European Market Infrastructure Regulation) (April 14, 2014),
available at
https://www.eba.europa.eu/documents/10180/655149/JC+CP+2014+03+%28CP+on+risk+mitigation+for+
OTC+derivatives%29.pdf.

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Japan104 have proposed such rules, each of which are based on the BCBS-IOSCO
framework.105 The extent to which, if at all, foreign jurisdictions will follow the BCBSIOSCO framework and the differences between the requirements implemented overseas
and the Commissions margin requirements will affect the costs and benefits related to
the Proposed Rule. Thus, for example, if a margin rule in a particular foreign jurisdiction
is less rigorous than the Commissions margin rule, those CSEs (U.S. and non-U.S.
CSEs) that are subject to the Commissions margin rule may be competitively
disadvantaged relative to those dealers that are eligible for Exclusion from the
Commissions margin rule for certain swaps or are outside the Commissions
jurisdiction.106

104

See Financial Services Agency of Japan, draft amendments to the Cabinet Office Ordinance on
Financial Instruments Business and Comprehensive Guidelines for Supervision with regard to margin
requirements for non-centrally cleared derivatives (July 3, 2014). Available in Japanese at
http://www.fsa.go.jp/news/26/syouken/20140703-3.html.
105

See Margin Requirements for Non-centrally Cleared Derivatives, Sept. 2013, available at
http://www.bis.org/publ/bcbs261.pdf. The Commission is not incorporating the details of the EU and
Japanese proposals in this CBC, because they have not been adopted and would be subject to change upon
adoption.
106

As discussed in section I.B. above, in the interest of promoting global harmonization, the Commission
has consulted and coordinated with the Prudential Regulators and foreign regulatory authorities. In
addition, the Commission staff has participated in numerous bilateral and multilateral discussions with
foreign regulatory authorities discussing national efforts to implement margin reform and the possibility of
conflicts and overlaps between U.S. and foreign regulatory regimes. Although at this time foreign
jurisdictions do not yet have their margin regimes in place, the Commission has participated in ongoing,
collaborative discussions with regulatory authorities in the EU and Japan regarding their cross-border
approaches to the margin rules, including the anticipated scope of application of margin requirements in
their jurisdiction to cross-border swaps, their plans for recognizing foreign margin regimes, and their
anticipated timelines. The Commission expects that these discussions will continue as it finalizes and then
implements its margin rules, and as other jurisdictions develop their own margin rules and approaches to
cross-border applications.

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In sum, given that foreign jurisdictions do not yet have in place their margin rules,
it is not possible to fully evaluate the costs and benefits associated with the Proposed
Rule, and in particular, the implications for the safety and soundness of CSEs and
competition. However, to the extent that a foreign regimes margin requirements are
comparable, any differences between the Commissions margin requirements and foreign
margin requirements would be insignificant and, therefore, mitigate the potential for
undue risk to the CSE and competitive distortions. However, if a foreign regimes
margin requirements are not deemed comparable, this may put a CSE at a competitive
disadvantage when competing with non-U.S. firms that are not registered with the
Commission because these non-CFTC registered dealers would have a cost advantage
that could affect their pricing terms to clients.
In the sections that follow, the Commission considers: (i) costs and benefits
associated with the proposed definition of U.S. person; (ii) the proposed framework for
substituted compliance; (iii) the proposed exclusion from the margin rule; (iv) the
submission of requests for a comparability determination; and (v) alternatives considered
and the cost and benefit of such alternatives. Wherever reasonably feasible, the
Commission has endeavored to quantify the costs and benefits of this proposed
rulemaking. In a number of instances, the Commission currently lacks the data and
information required to precisely estimate costs and benefits. Where it was not feasible
to quantify (e.g., because of the lack of accurate data or appropriate metrics), the
Commission has endeavored to consider the costs and benefits of these rules in
qualitative terms.

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2.

Proposed Rule

The Proposed Rule sets forth a definition of U.S. person, describing the
circumstances under which substituted compliance or the exclusion would be available,
and would establish a process for the submission of requests for a comparability
determination. In addition to issues related to financial integrity of markets, competition
and market distortions noted above, the U.S. person definition and comparability
determination process entail monetary costs for CSEs and market participants because a
market participant may have to expend resources to determine whether it (or its
counterparty) is a U.S. person. A CSE seeking to rely on substituted compliance could
incur costs in connection with the submission of a request for a comparability
determination, although this would not be the case in circumstances where the relevant
jurisdiction has itself attained a comparability finding from the Commission. In this
section, we describe the most significant considerations that we have taken into account
in formulating the Proposed Rule.
a.

U.S. Person

Under the Proposed Rule, the term U.S. person would be defined so as to
identify activities having a substantial nexus to the U.S. market because they are
undertaken by individuals or entities organized or domiciled in the United States or
because of other connections to the U.S. market. The definition is intended to identify
those individuals and entities whose swap activities have a substantial nexus to U.S.
markets even when they transact in swaps with a non-U.S. CSE. As noted in section
II.B.1. above, this proposed definition generally follows the traditional, territorial
approach to defining a U.S. person. The chief benefit of this territorial approach is that it

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is objective and clearand the Commission believes that the industry has largely
followed a similar definition of U.S. person included in the Guidance.
The Commission considered including the U.S. majority-ownership prong that
was included in the Guidance (50% U.S. person ownership of a fund or other collective
investment vehicle), but has determined not to propose it.107 The Commission
understands that unlike other corporate structures, certain types of funds, specifically
fund-of-funds and master-feeder structures, would require an adviser or administrator to
look through to other fund entities in the fund structure, in ascertaining whether a
beneficial owner of the fund is a U.S. person. The Commission further understands that
this may be difficult to determine in some cases. In addition, the Commission believes
that other elements of the U.S. person definition would in many circumstances cover
these funds as a U.S. person.
Even if a non-U.S. fund with U.S. majority-ownership is treated as a non-U.S.
person, such fund would be excluded from the Commissions margin rules only in limited
circumstances (namely, when the fund trades with a non-U.S. CSE that is not a
consolidated subsidiary of a U.S. entity or a U.S. branch of a non-U.S. CSE).
Additionally, any excluded swaps would most likely be covered by another jurisdiction
that adheres to the BCBS-IOSCO standards. The Commission anticipates that non-U.S.
CSEs will generally be required, in their home jurisdiction, to collect margin from these

107

The Commissions definition of the term U.S. person as used in the Guidance included a prong (iv)
which covered any commodity pool, pooled account, or collective investment vehicle (whether or not it is
organized or incorporated in the United States) of which a majority ownership is held, directly or indirectly,
by a U.S.person(s).

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non-U.S. funds.108 Therefore, non-U.S. CSEs would generally be protected in the event
of a default by a non-U.S. fund even if the uncleared swap with the non-U.S. fund falls
within the Exclusion.109 Accordingly, the Commission believes that treatment of nonU.S. funds with U.S. majority-ownership as non-U.S. persons will not have a substantial
impact on the safety and soundness of CSEs or the stability of the U.S. financial system;
at the same time, the Commission believes that excluding the majority-ownership prong
would alleviate any burden associated with determining whether a fund qualifies as a
U.S. person under this criterion.
As noted in section II.B.1. above, prong (vi) of the proposed U.S. person
definition would capture certain legal entities owned by one or more U.S. person(s) and
for which such person(s) bear unlimited responsibility for the obligations and liabilities of
the legal entity. In the case of the Guidance, the U.S. person definition would
generally characterize a legal entity as a U.S. person if the entity were directly or
indirectly majority-owned by one or more persons falling within the term U.S. person
and such U.S. person(s) bears unlimited responsibility for the obligations and liabilities of
the legal entity. Because this prong of the proposed definition of U.S. person is
broader in scope, the Commission believes that this may result in more legal entities

108

At this time, we do not have information as to what portion of the funds that would have been covered
by the U.S. majority-ownership prong are hedge funds.
109

Further, as noted earlier, a non-U.S. CSE that can avail itself of the Exclusion would still be subject to
the Commissions margin rules with respect to all uncleared swaps not meeting the criteria for the
Exclusion, albeit with the possibility of substituted compliance. The Commission further believes that the
possibility of a cascading event affecting U.S. counterparties and the U.S. market more broadly as a result
of a default by the non-U.S. CSE would also be mitigated because the non-U.S. CSE would be subject to
U.S. margin requirements (with the possibility of substituted compliance to the extent applicable) when
entering into a swap with U.S. counterparties.

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meeting the U.S. person definition. In addition, to the extent that this prong of the
proposed definition of U.S. person expands the number of market participants that
would be deemed to be a U.S. person, the Commission believes that the benefits that
would have been provided to otherwise non-U.S. CSEs from being able to avail
themselves of substituted compliance and the Exclusion would not be realized.
The proposed U.S. person definition does not include the prefatory phrase
includes, but is not limited to that was included in the Guidance. The Commission
believes that this prefatory phrase should not be included in the Proposed Rule in order to
provide legal certainty regarding the application of U.S. margin requirements to crossborder swaps.
Finally, the Commission believes that the definition of U.S. person provides a
clear and objective basis upon which to identify a U.S. person, and that identifying
whether a counterparty is a U.S. person should be relatively straightforward because, as
noted above, the Commission believes that a swap counterparty generally should be
permitted to reasonably rely on its counterpartys written representation in determining
whether the counterparty is within the definition of the term U.S. person.
b.

Availability of Substituted Compliance and Exclusion

i.

Uncleared swaps of U.S. CSEs or of non-U.S. CSEs whose

obligations under the relevant swap are guaranteed by a
U.S. person

As set out in Appendix A, under the Proposed Rule, the Commissions margin
rules would generally apply to all uncleared swaps of U.S. CSEs. For U.S. CSEs,
substituted compliance would only be available with respect to the requirement to post

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initial margin and only if the counterparty is a non-U.S. person (including a non-U.S.
CSE) whose obligations under the uncleared swap are not guaranteed by a U.S. person.
Uncleared swaps with U.S. CSEs would never qualify for the Exclusion. Under the
Proposed Rule, non-U.S. CSEs whose obligations under the relevant swap are guaranteed
by a U.S. person would receive the same treatment as U.S. CSEs.110 The Commission
believes that this result is appropriate because a swap of an entity guaranteed by that U.S.
person will have economic and financial implications that are likely to be very similar to
the economic and financial implications of a swap entered into directly by the U.S.
guarantor, as discussed in section II.B.2. above.
The Commission understands that the Proposed Rule may place U.S. CSEs and
non-U.S. CSEs whose obligations under the relevant swap are guaranteed by a U.S.
person at a disadvantage when competing with either non-U.S. CSEs that are able to rely
on the Exclusion or with non-CFTC registered dealers for foreign clients, though whether
such a disadvantage exists would depend on whether these competitors are subject to
comparable margin rules in other jurisdictions. For example, the ability of a non-U.S.
CSE that is not guaranteed by a U.S. person (and that is not a Foreign Consolidated
Subsidiary or a U.S. branch of a non-U.S. CSE) to rely on the Exclusion could allow it to
110

As discussed in section II.B.2, under the Proposed Rule the Commission is defining a guarantee
narrower than in the Guidance, and in doing so, the Commission has broadened the availability of
substituted compliance and the Exclusion to certain non-U.S. CSEs that would not have the ability to avail
themselves of these if the broader definition of guarantee used in the Guidance were used in the Proposed
Rule instead of the narrower definition. However, the Commission believes that as a result of its decision
to define certain non-U.S. CSEs as Foreign Consolidated Subsidiaries, some of these same non-U.S. CSEs
that would have been able to avail themselves of substituted compliance and the Exclusion, as a result of
the narrow definition of a guarantee, would not be eligible for the Exclusion (but would benefit from the
full application of substituted compliance instead of a limited application). The costs and benefits related
to substituted compliance and the Exclusion are set out in this section and below.

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gain a cost advantage over a U.S. CSE or a non-U.S. CSE that is guaranteed by a U.S.
person and thus offer better pricing terms to foreign clients, unless it is subject to another
jurisdictions margin rules that are comparable. U.S. CSEs and non-U.S. CSEs whose
obligations under the relevant swap are guaranteed by a U.S. person may also be at a
disadvantage when competing for clients with non-U.S. CSEs that are able to rely on
substituted compliance more broadly if the clients believe complying with the foreign
jurisdictions margin requirements would be less burdensome or costly than when
transacting with a U.S. CSE under the Proposed Rule, as the amount posted by the nonU.S. counterparty would need to comply with U.S. margin requirements. However, the
Commission believes that the requirement that the relevant foreign jurisdictions margin
requirements have comparable outcomes should operate to narrow any competitive
disadvantage, thereby diminishing opportunities for regulatory arbitrage.111
In addition, because the Proposed Rule provides for limited substituted
compliance for U.S. CSEs and non-U.S. CSEs whose obligations under the relevant swap
are guaranteed by a U.S. person (relative to other CSEs), those CSEs may be subject to
conflicting or duplicative regulations, and consequently, would incur costs associated
with developing multiple sets of policies and procedures and operational infrastructures.
The Commission recognizes that such costs would vary for firms depending on the nature
and scope of the individual firms business, and costs relative to other competitors would

111

The Commission notes that of the approximately 61 CSEs that would be subject to the Commissions
margin rules, 21 are non-U.S. CSEs. Of those 21 non-U.S. CSEs, 20 are domiciled in jurisdictions that
participated in the development of the BCBS-IOSCO framework. Although harmonization among these
jurisdictions may mitigate some competitive disadvantages, the associated costs and benefits cannot be
reasonably determined as no jurisdictions have finalized their margin rules.

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depend on whether the competitors are subject to other jurisdictions margin rules. The
Commission requests data from commenters to assist the Commission in considering the
quantitative effect of the limited substituted compliance for U.S. CSEs and non-U.S.
CSEs whose obligations under the relevant swap are guaranteed by a U.S. person.
On the other hand, the Commission believes that requiring U.S. CSEs and nonU.S. CSEs whose obligations under the relevant swap are guaranteed by a U.S. person to
comply with its margin requirements would foster the stability of the U.S. financial
markets. By their nature, U.S. CSEs and non-U.S. CSEs whose swap obligations are
guaranteed by a U.S. person have a significant impact on the U.S. financial markets, and
the Commission therefore has a strong interest in ensuring their viability. As discussed in
section II.C.1. above, the Commission believes that requiring U.S. CSEs and non-U.S.
CSEs whose swap obligations are guaranteed by a U.S. person to comply with the
Commissions margin requirements, with only limited substituted compliance, is
important to maintaining well-functioning U.S. financial markets and ensuring the sound
risk management practices of key market participants in the U.S. swaps market.
ii.

Uncleared swaps of non-U.S. CSEs whose obligations

under the relevant swap are not guaranteed by a U.S.
person

As set out in Appendix A, under the Proposed Rule, non-U.S. CSEs whose
obligations under the relevant uncleared swap are not guaranteed by a U.S. person,
including Foreign Consolidated Subsidiaries, are eligible for substituted compliance to a
greater extent relative to U.S. CSEs or non-U.S. CSEs whose obligations under the
relevant uncleared swap are guaranteed by a U.S. person. A subset of these non-U.S.

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CSEs may qualify for the Exclusion, as described in section II.C.3. above. As noted in
section II.C.2., the Commission believes that the proposed approach is appropriate since a
non-U.S. CSE whose swap obligations are not guaranteed by a U.S. person (including a
Foreign Consolidated Subsidiary), may implicate equal or greater supervisory concerns
on the part of a foreign regulator relative to the Commissions supervisory interests (in
comparison to U.S. CSEs or non-U.S. CSEs whose obligations under the relevant swap
are guaranteed by a U.S. person, because the Commission has a significant regulatory
interest in uncleared swaps of these CSEs).
Substituted compliance would benefit such non-U.S. CSEs by allowing them to
avoid conflicting or duplicative regulations and choose the most appropriate set of rules
when transacting with each other. Furthermore, eligible non-U.S. CSEs could further
benefit from developing one enterprise-wide set of compliance and operational
infrastructures.112 And because substituted compliance is contingent on the
Commissions determination that the relevant jurisdictions margin rules are comparable,
the potential for undue risk to the CSE and competitive distortions between those

112

The Commission notes that the costs of developing the margin infrastructure needed to comply with
Commission margin requirements in the context of cross-border transactions, as well as the costs of
complying with the Commissions margin requirements more generally in the context of cross-border
transactions, could vary significantly for different CSEs based on factors specific to each firm (e.g.,
organizational structure, status as a U.S. CSE or non-U.S. CSE (including whether the firm is a Foreign
Consolidated Subsidiary or a U.S. branch of a non-U.S. CSE), jurisdictions in which uncleared swaps
activities are conducted, applicable margin requirements in the U.S. and other jurisdictions, the location
and status of counterparties, existence of an appropriate MOU or similar arrangement with the relevant
jurisdictions, existence of Comparability Determinations in the relevant jurisdictions and any conditions in
such determinations, and firm policies and procedures for the posting and collection of margin). The
Commission further notes that currently no foreign jurisdiction has finalized rules for margin of uncleared
swaps. However, the EU and Japan have proposed such rules, each of which are based on the BCBSIOSCO framework. Accordingly, the Commission lacks the data and information required to reasonably
estimate costs related to developing the appropriate margin infrastructure or the costs of complying with the
Commissions margin requirements generally in the context of cross-border transactions.

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registrants that are eligible for substituted compliance and those that are not would be
mitigated. However, if the foreign jurisdictions margin requirements are not deemed
comparable, these CSEs will be at a disadvantage to non-CFTC registered dealers when
competing for client business.
iii.

Exclusion for uncleared swaps of non-U.S. CSEs where

neither counterpartys obligations under the relevant swap
are guaranteed by a U.S. person and neither counterparty is
a Foreign Consolidated Subsidiary nor a U.S. branch of a
non-U.S. CSE

As discussed in section II.C.3., under the Proposed Rule, the Commission would
exclude from its margin rules uncleared swaps entered into by a non-U.S. CSE with a
non-U.S. person counterparty (including a non-U.S. CSE), provided that neither
counterpartys obligations under the relevant swap are guaranteed by a U.S. person and
neither counterparty is a Foreign Consolidated Subsidiary nor a U.S. branch of a nonU.S. CSE. As discussed in section II.C.3. above, the Commission believes that it would
be appropriate to tailor the application of margin requirements in the cross-border
context, consistent with section 4s(e) of the CEA113 and comity principles, so as to
exclude this narrow class of uncleared swaps involving a non-U.S. CSE and a non-U.S.
counterparty.

113

Section 4s(e)(3)(A) of the CEA, 7 U.S.C. 6s(e)(3)(A). The section provides, among other things, that
margin requirements be appropriate for the risks associated with the non-cleared swaps held as a swap
dealer or major market participant.

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The Commission believes that such non-U.S. CSEs may benefit from the
Exclusion because it allows them to avoid conflicting or duplicative regulations where a
transaction would be subject to more than one uncleared swap margin regime. On the
other hand, to the extent a non-U.S. CSE would be able to rely on the margin
requirements of a foreign jurisdiction, as opposed to the Commissions margin
requirements, and such other margin requirements are not comparable, the Exclusion
could result in a less rigorous margin regime for such CSE. This, in turn, could create
competitive disparities between non-U.S. CSEs relying on the Exclusion and other CSEs
that are not eligible for the Exclusion. That is, the Exclusion could allow these non-U.S.
CSEs to offer better pricing to their non-U.S. clients, which would give them a
competitive advantage relative to those CSEs that are not eligible for the Exclusion (e.g.,
U.S. CSEs, non-U.S. CSEs whose obligations under the relevant swap are not guaranteed
by a U.S. person, or Foreign Consolidated Subsidiaries). However, whether these
competitive effects occur will also depend on whether the relevant foreign jurisdiction
has comparable margin rules. In addition, non-U.S. CSEs that are eligible for the
Exclusion could be in a better position to compete with non-CFTC registered dealers in
the relevant foreign jurisdiction for foreign clients.
As noted above, at this time, given that foreign jurisdictions do not yet have in
place their margin regimes, it is not possible to fully evaluate the Proposed Rules
eventual implications for the safety and soundness of CSEs and competition. Assuming,
however, for the sake of analysis that the relevant foreign jurisdiction does not have
comparable margin requirements, the Commission preliminarily believes that the
Exclusion would not result in a significant diminution in the safety and soundness of the

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non-U.S. CSE, as discussed in section II.C.3. above. This is based on several
considerations. First, the potential adverse effect on a non-U.S. CSE would be
substantially mitigated by the Commissions capital requirements.114 Additionally, any
excluded swaps would most likely be covered by another jurisdiction that adheres to the
BCBS-IOSCO standards because the Commission believes that most swaps are currently
undertaken in jurisdictions that already have agreed to adhere to the BCBS-IOSCO
margin standards.
Further, a non-U.S. CSE that can avail itself of the Exclusion would still be
subject to the Commissions margin rules with respect to all uncleared swaps not meeting
the criteria for the Exclusion, albeit with the possibility of substituted compliance. The
Commission further believes that the possibility of a cascading event affecting U.S.
counterparties and the U.S. financial markets more broadly as a result of a default by the
non-U.S. CSE would also be mitigated because the non-U.S. CSE would be subject to
U.S. margin requirements (with the possibility of substituted compliance to the extent
applicable) when entering into a swap with U.S. counterparties.
iv.

Foreign Consolidated Subsidiaries

Under the Proposed Rule, substituted compliance is more broadly available to a

Foreign Consolidated Subsidiary whose obligations under the relevant swap are not
guaranteed by a U.S. person than a U.S. CSE or a non-U.S. CSE whose obligations under
the relevant swap are guaranteed by a U.S. person. Further, a Foreign Consolidated
Subsidiary would be able to avail itself of substituted compliance to the same extent as

114

See section II.A.1.

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other non-U.S. CSEs, but would not be eligible for the Exclusion. A Foreign
Consolidated Subsidiarys financial position, operating results, and statement of cash
flows are directly reflected in its ultimate U.S. parent entitys financial statements. Given
the nature of a Foreign Consolidated Subsidiarys direct relationship to a U.S. person, the
Commission believes that the uncleared swaps of Foreign Consolidated Subsidiaries
should not be excluded from the margin requirements, as discussed in section II.C.3.
above.
The unavailability of the Exclusion could disadvantage Foreign Consolidated
Subsidiaries relative to other non-U.S. CSEs that would be eligible for the Exclusion (i.e.,
non-U.S. CSEs where neither counterpartys obligations under the relevant swap are
guaranteed by a U.S. person and neither counterparty is a Foreign Consolidated
Subsidiary nor a U.S. branch of a non-U.S. CSE) or non-CFTC registered dealers within
a foreign jurisdiction. Non-U.S. CSEs that rely on the Exclusion or non-CFTC registered
dealers could realize a cost advantage over Foreign Consolidated Subsidiaries and thus
have the potential to offer better pricing terms to foreign clients. The competitive
disparity between non-U.S. CSEs that rely on the Exclusion and Foreign Consolidated
Subsidiaries, however, may be somewhat mitigated to the extent that the relevant foreign
jurisdiction implements the BCBS-IOSCO framework.
v.

U.S. branch of a non-U.S. CSE

Under the Proposed Rule, the Exclusion from the margin rules would not be
available to a U.S. branch of a non-U.S. CSE. The Commission believes that when a
non-U.S. CSE conducts its swap activities within the United States through a branch or
office located in the United States, it should be subject to U.S. margin requirements, but

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with the possibility of substituted compliance, consistent with comity principles. The
Commission believes that the Proposed Rules Exclusion should not be available in this
case, because U.S. branches of non-U.S. CSEs are operating within the U.S. market and
competing with U.S. CSEs for business, including from non-U.S. counterparties.
If a U.S. branch of a non-U.S. CSE were permitted to use the Exclusion it could
be able to offer more competitive terms to non-U.S. clients than U.S. CSEs, and thereby
gain an unwarranted advantage when dealing with non-U.S. clients relative to other CSEs
operating within the United States (i.e., U.S. CSEs). On the other hand, for the same
reason, the Proposed Rule could put non-U.S. CSEs that conduct swaps business through
their U.S. branches at a disadvantage relative to either non-U.S. CSEs that are eligible for
the Exclusion or non-CFTC registered dealers that conduct swaps business overseas.
However, to the extent that the U.S. branch of a non-U.S. CSE is able to rely on
substituted compliance, the competitive disparities relative to those non-U.S. CSEs that
are eligible for the Exclusion should be reduced to the extent that the relevant foreign
jurisdiction implements BCBS-IOSCO framework standards.115
The unavailability of the Exclusion could also result in the U.S. branch of a nonU.S. CSE being subject to conflicting or duplicative margin requirements. However, the
Commission believes that overall any resulting costs may not be significant to the extent
that the U.S. branch is able to avail itself of substituted compliance in that jurisdiction.

115

Non-U.S. CSEs are also likely to conduct swaps business with U.S. clients from locations outside the
United States; nevertheless, U.S. branches are likely to have greater U.S. client-orientation relative to such
foreign operations.

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c.

Alternatives

The Commission believes that the Proposed Rule effectively addresses the risk
posed to the safety and soundness of CSEs, while creating a workable framework that
reduces the potential for undue market disruptions and promotes global harmonization by
taking into account the interests of other jurisdictions and balancing those interests with
the supervisory interests of the United States.
The Commission has determined not to propose the Guidance Approach because
it believes that if the Guidance Approach were adopted, too many swaps would be
excluded from the margin rules to ensure the safety and soundness of CSEs and the U.S.
financial system. In particular, under the Guidance Approach, uncleared swaps between
a non-U.S. CSE and a non-U.S. person whose uncleared swap obligations are not
guaranteed by a U.S. person would be excluded from the Commissions margin rules
without regard to whether the non-U.S CSE is guaranteed or its financial statements are
consolidated with a U.S. parent entity under U.S. generally accepted accounting
principles.
The Commission has also determined not to propose the Entity-Level Approach.
On the one hand, the Entity-Level Approach (where the margin requirements would
apply to all uncleared swaps of a CSE, with no possibility of any exclusion) is arguably
appropriate because margin requirements are critical in ensuring the safety and soundness
of a CSE and in supporting the stability of the U.S. financial markets. As a result of
CSEs engaging in a level of uncleared swap activity that is significant enough to warrant
U.S. registration, their uncleared swaps have a direct and significant nexus to the U.S.
financial system, irrespective of whether their counterparty is a U.S. or non-U.S. entity.

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However, the Commission believes that the Entity-Level Approach does not adequately
consider the relative supervisory interests of U.S. and foreign regulators.
d.

Comparability Determinations

As noted in section II.D. above, any CSE who is eligible for substituted
compliance may make a request for a comparability determination. Currently, there are
approximately 102 CSEs provisionally registered with the Commission. The
Commission further estimates that of the 102 CSEs that are registered, approximately 61
CSEs would be subject to the Commissions margin rules, as they are not supervised by a
Prudential Regulator. However, the Commission notes that any foreign regulatory
agency that has direct supervisory authority to administer the foreign regulatory
framework for margin of uncleared swaps in the requested foreign jurisdiction may apply
for a comparability determination. Further, once a comparability determination is made
for a jurisdiction, it would apply for all entities or transactions in that jurisdiction to the
extent provided in the determination, as approved by the Commission.
The Commission assumes that a CSE or foreign regulatory agency will apply for
a comparability determination only if the anticipated benefits warrant the costs attendant
to submission of a request for a comparability determination. Although there is
uncertainty regarding the number of requests that would be made under the Proposed
Rule, the Commission estimates that it would receive applications for comparability
determinations from 17 jurisdictions representing 61 separate registrants, and that each
request would impose an average of 10 burden hours per registrant. 116

116

See note 99, supra.

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Based upon the above, the Commission estimates that the preparation and filing
of submission requests for comparability determinations should take no more than 170
hours annually in the aggregate (17 registrants x 10 hours). The Commission further
estimates that the total aggregate cost of preparing such submission requests would be
$64,600, based on an estimated cost of $380 per hour for an in-house attorney.117
3.

Section 15(a) Factors

As discussed above, the Proposed Rule is intended to apply the Proposed Margin
Rules on a cross-border basis in a manner that effectively addresses risks to U.S. persons
and the U.S. financial system, while mitigating the potential for conflicts and duplications
that could lead to market distortions and undue competitive disparities. The discussion
that follows supplements the related cost and benefit considerations addressed in the
preceding section and addresses the overall effect of the Proposed Rule in terms of the
factors set forth in section 15(a) of the CEA.
a.

Protection of Market Participants and the Public

CEA section 15(a)(2)(A) requires the Commission to evaluate the costs and
benefits of a proposed regulation in light of considerations of protection of market
participants and the public. CEA section 4s(e)(2)(A) requires the Commission to develop
rules designed to ensure the safety and soundness of CSEs and the U.S. financial system.

117

Although different registrants may choose to staff preparation of the comparability determination
request with different personnel, Commission staff estimates that, on average, an initial request could be
prepared and submitted with 10 hours of an in-house attorneys time. To estimate the hourly cost of an inhouse attorneys attorney time, Commission staff reviewed data in SIFMAs Report on Management and
Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an
1800-hour work-year and multiplied by a factor of 5.35 to account for firm size, employee benefits and
overhead. Commission staff believes that use of a 5.35 multiplier here is appropriate because some persons
may retain outside advisors to assist in making the determinations under the rules.

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In developing the Proposed Rule, the Commissions primary focus was on the
relationship or trade-offs between the benefits associated with applying the
Commissions margin requirement and the costs associated with extending substituted
compliance or the Exclusion. On the one hand, full application of the Commissions
margin requirements would help to ensure the safety and soundness of CSEs and the U.S.
financial system by reducing counterparty credit risk and the threat of contagion; on the
other hand, extending substituted compliance or the Exclusion to CSEs would reduce the
potential for conflicting or duplicative requirements, which would, in turn, reduce market
distortions and promote global harmonization. Substituted compliance in particular
should not reduce the safety and soundness benefit of the Proposed Rule because
substituted compliance will not be available unless the Commission determines that
foreign margin regulations are comparable to the Commissions margin regulations.
Granting the Exclusion to certain CSEs should not significantly undermine these
purposes, because other requirements and circumstances discussed above should mitigate
the risk those CSEs pose to the U.S. financial system.
b.

Efficiency, Competitiveness, and Financial Integrity

CEA section 15(a)(2)(B) requires the Commission to evaluate the costs and
benefits of a proposed regulation in light of efficiency, competitiveness and financial
integrity considerations.
i.

Efficiency

The availability of substituted compliance to CSEs following comparable margin

requirements in a foreign jurisdiction may incentivize global implementation of the
BCBS-IOSCO framework. Greater harmonization across markets lessens the potential

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for conflicting or duplicative requirements, which, in turn, would promote greater
operational efficiencies as a CSE would be able to avoid creating individualized
compliance and operational infrastructures to account for the unique requirements of each
jurisdiction in which it conducts swaps business. Also, to the extent that margin regimes
across jurisdictions are comparable, substituted compliance should help to mitigate
regulatory arbitrage.
ii.

Competitiveness

Under the Proposed Rule, the availability of substituted compliance would turn
primarily on the nature of the non-U.S. CSEs relationship to a U.S. person and the
national status of the non-U.S. CSEs counterparty. For example, in the case of a nonU.S. CSE whose swap obligations are not guaranteed by a U.S. person, substituted
compliance would be available for any swap with a counterparty that is not a U.S. CSE or
a non-U.S. CSE whose swap obligations are guaranteed by a U.S. person. Further, under
the Proposed Rule, an uncleared swap entered into by a non-U.S. CSE with a non-U.S.
person counterparty (including a non-U.S. CSE) would be excluded from the
Commissions margin rules, provided that neither counterpartys obligations under the
relevant swap are guaranteed by a U.S. person and neither counterparty is a Foreign
Consolidated Subsidiary nor a U.S. branch of a non-U.S. CSE.
The availability of substituted compliance and/or the Exclusion could create
competitive disparities between those CSEs that are eligible for substituted compliance
and/or the Exclusion relative to those that are not eligible. In addition, as the Exclusion is
not provided to all CSEs, those that are not permitted to use the Exclusion may be at a
competitive disadvantage when competing in foreign jurisdictions that do not have

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comparable margin rules to that of the Commission relative to non-CFTC registered
dealers for foreign clients.118 Because the Proposed Rule offers to U.S. CSEs (and nonU.S. CSEs with respect to swaps whose obligations are guaranteed by a U.S. person) only
a minimal degree of substituted compliance and no Exclusion, these CSEs may be
particularly impacted. As discussed in section II.C.1., however, the Commission believes
that the Proposed Margin Rules should apply to the maximum degree to such CSEs in
order to ensure the safety and soundness of U.S. CSEs (and U.S. guarantor) and the U.S.
financial system. Furthermore, to the extent that that a relevant foreign jurisdictions
margin rules are comparable to that of the Commissions margin rules, such competitive
disparities could be reduced.
iii.

Financial integrity of markets

The safety and soundness of CSEs are critical to the financial integrity of markets.
Further, as discussed in section II.A. above, margin serves as a first line of defense to
protect a CSE as a whole in the event of a default by a counterparty. Together with
capital, margin represents a key element in a CSEs overall risk management program,
which ultimately mitigates the possibility of a systemic event.
At the same time, the Commission recognizes that a CSEs uncleared swaps with
a particular counterparty may implicate the supervisory interests of foreign regulators,
and it is important to calibrate the cross-border application of the margin requirements to
mitigate, to the extent possible, consistent with the Commissions regulatory interests, the

118

The Commission notes, however, that of the approximately 61 CSEs that would be subject to the
Commissions margin rules, 21 are non-U.S. CSEs. Of those 21 non-U.S. CSEs, 20 are domiciled in
jurisdictions that participated in the development of the BCBS-IOSCO framework, which may mitigate
possible regulatory arbitrage between these dealers.

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potential for conflict or duplication with other jurisdictions. Therefore, the Proposed
Rule also allows for substituted compliance and an Exclusion in certain circumstances.
The Commission believes that the Proposed Rule strikes the right balance
between the two competing considerations to ensure that substituted compliance and the
Exclusion are not extended in a way that could pose substantial risk to the integrity of the
U.S. financial system. Substituted compliance is predicated on the Commissions
determination that the relevant foreign jurisdiction has comparable margin rules; if the
Commission does not find a foreign jurisdictions rules comparable, the CSE would then
need to comply with the Commissions rules. Even in instances where the Exclusion
would be available, the Commission has taken into account that the risk to the integrity of
the financial markets would be mitigated by the Commissions expectation that: (1) the
Proposed Margin Rules would cover many of the swaps of the non-U.S. CSEs (eligible
for the Exclusion) with other counterparties, namely, all U.S. counterparties; (2) the
Exclusion would be limited to a narrow set of swaps by non-U.S. CSEs; (3) the capital
requirements would apply on an entity-level basis to all CSEs; and (4) the excluded
swaps will most likely be covered by another foreign regulators margin rules that are
based on the BCBS-IOSCO framework.
iv.

Price Discovery

CEA section 15(a)(2)(C) requires the Commission to evaluate the costs and
benefits of a proposed regulation in light of price discovery considerations. The
Commission generally believes that substituted compliance, by reducing the potential for
conflicting or duplicative regulations, could reduce impediments to transact uncleared
swaps on a cross-border basis. This, in turn, may enhance liquidity as more market

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participants would be willing to enter into uncleared swaps, thereby possibly improving
price discovery and ultimately reducing market fragmentation. Alternatively, if
substituted compliance or the Exclusion were not made available, it would incentivize
CSEs to consider setting up their swap operations outside the Commissions jurisdiction,
and as a result, increase the potential for market fragmentation.
v.

Sound Risk Management Practices

CEA section 15(a)(2)(D) requires the Commission to evaluate the costs and
benefits of a proposed regulation in light of sound risk management practices. Margin is
a critical element of a firms sound risk management program that, among other things,
can prevent the accumulation of counterparty credit risk. As international regulators and
the Commission harmonize their margin regulations for uncleared swaps, market
participants may be able to manage their risk more effectively on an enterprise-wide
basis. On the other hand, to the extent that a CSE relies on the Exclusion for eligible
swaps and the relevant foreign jurisdiction does not have comparable margin
requirements, the Proposed Rule could lead to weaker risk management practices.
vi.

Other Public Interest Considerations

CEA section 15(a)(2)(E) requires the Commission to evaluate the costs and
benefits of a proposed regulation in light of other public interest considerations. The
Commission has not identified any additional public interest considerations related to the
costs and benefits of the Proposed Rule.
4.

General Request for Comment

The Commission requests comment on all aspects of the costs and benefits
relating to the cross-border application of the Proposed Rule, including the nature and

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extent of the costs and benefits discussed above and any other costs and benefits that
could result from adoption of the Proposed Rule. Commenters are encouraged to discuss
the costs and benefits to U.S. CSEs and non-U.S. CSEs covered by the Proposed Rule, as
well as any costs and benefits to other market participants, the swap markets, or the
general public, and to the extent such costs and benefits can be quantified, monetary and
other estimates thereof. The Commission requests that commenters provide any data or
other information that would be useful in estimating the quantifiable costs and benefits of
this rulemaking. Among other things, commenters may wish to submit comments on the
following questions:
1.

Are the Commissions assumptions about the costs and benefits of the

Proposed Rule accurate? If not, please explain and provide any data or other information
that you have quantifying or qualifying the costs and benefits of the Proposed Rule.
2.

Did the Commission consider all of the appropriate costs and benefits

related to the Proposed Rule? If not, what additional costs and benefits should the
Commission consider? Please explain why these additional costs and benefits should be
considered and provide any data or other information that you have quantifying or
qualifying the costs and benefits of these additional costs of the Proposed Rule.
3.

Please provide any data or other information relating to costs associated

with the definition of U.S. person in the Proposed Rule, and in particular, as the
proposed definition relates to the definition of U.S. person that was included in the
Guidance.
4.

Will allowing substituted compliance or the Exclusion for swaps between

certain categories of non-U.S. persons lead to fragmentation (e.g., creating separate or

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multiple swap markets) of the liquidity in swaps markets for uncleared swaps to the
detriment of price discovery? Is swap market fragmentation detrimental to various
market participants when there is post-trade price transparency of swaps? Commenters
are encouraged to quantify when practicable. Does the Proposed Rule have any
significant effects on price discovery? Indeed, to what extent are the impacts on price
discovery the result of other requirements, such as the margin for uncleared swaps or the
trade execution mandate, and not the Proposed Rule per se?
List of Subjects
17 CFR Part 23
Swaps, Swap dealers, Major swap participants, Capital and margin requirements.
In consideration of the foregoing and pursuant to the authority contained in the Act, as
indicated herein, the Commission hereby amends chapter I of title 17 of the Code of
Federal Regulations as follows:
Part 23 SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
1. The general authority citation for part 23 continues to read, and a sectional authority
is added in numerical order, to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b-1, 6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 16a,
18, 19, 21.
* * * * *
Section 23.160 is also issued under Pub. L. 111-203, section 721(b), 124 Stat. 1641
(2010), and 7 U.S.C. 2(i).

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2. Section 23.160 is added to Subpart E Capital and Margin Requirements for Swap
Dealers and Major Swap Participants and shall read as follows:
23.160.
(a)

Cross-border application

Definitions. For purposes of this section only:

(1)

Foreign Consolidated Subsidiary means a non-U.S. CSE in which an

ultimate parent entity that is a U.S. person has a controlling financial
interest, in accordance with U.S. GAAP, such that the U.S. ultimate parent
entity includes the non-U.S. CSEs operating results, financial position and
statement of cash flows in the U.S. ultimate parent entitys consolidated
financial statements, in accordance with U.S. GAAP.

(2)

Guarantee means an arrangement pursuant to which one party to a swap

transaction with a non-U.S. person counterparty has rights of recourse
against a U.S. person, with respect to the non-U.S. person counterpartys
obligations under the swap transaction. For these purposes, a party to a
swap transaction has rights of recourse against a U.S. person if the party has
a conditional or unconditional legally enforceable right to receive or
otherwise collect, in whole or in part, payments from the U.S. person in
connection with the non-U.S. person counterpartys obligations under the
swap.

(3)

International standards means the margin policy framework for noncleared, bilateral derivatives issued by the Basel Committee on Banking
Supervision and the International Organization of Securities in September
2013, as subsequently updated, revised, or otherwise amended, or any other

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international standards, principles or guidance relating to margin
requirements for non-cleared, bilateral derivatives that the Commission may
in the future recognize, to the extent that they are consistent with United
States law (including the margin requirements in the Commodity Exchange
Act).
(4)

Non-U.S. CSE means a covered swap entity that is not a U.S. person. The
term non-U.S. CSE includes a Foreign Consolidated Subsidiary or a
U.S. branch of a non-U.S. CSE.

(5)

Non-U.S. person means any person that is not a U.S. person.

(6)

Ultimate parent entity means the parent entity in a consolidated group in

which none of the other entities in the consolidated group has a controlling
interest, in accordance with U.S. GAAP.

(7)

United States means the United States of America, its territories and
possessions, any State of the United States, and the District of Columbia.

(8)

U.S. CSE means a covered swap entity that is a U.S. person.

(9)

U.S. GAAP means U.S. generally accepted accounting principles.

(10) U.S. person means:

(i)

A natural person who is a resident of the United States;

(ii)

An estate of a decedent who was a resident of the United States at

the time of death;

(iii)

A corporation, partnership, limited liability company, business or

other trust, association, joint-stock company, fund or any form of
entity similar to any of the foregoing (other than an entity described

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in subparagraph (iv) or (v) of this paragraph) (a legal entity), in
each case that is organized or incorporated under the laws of the
United States or having its principal place of business in the United
States, including any branch of such legal entity;
(iv)

A pension plan for the employees, officers or principals of a legal

entity described in subparagraph (iii) of this paragraph, unless the
pension plan is primarily for foreign employees of such entity;

(v)

A trust governed by the laws of a state or other jurisdiction in the

United States, if a court within the United States is able to exercise
primary supervision over the administration of the trust;

(vi)

A legal entity (other than a limited liability company, limited

liability partnership or similar entity where all of the owners of the
entity have limited liability) that is owned by one or more persons
described in subparagraph (i), (ii), (iii), (iv) or (v) of this paragraph
and for which such person(s) bears unlimited responsibility for the
obligations and liabilities of the legal entity, including any branch of
the legal entity; or

(vii)

An individual account or joint account (discretionary or not) where

the beneficial owner (or one of the beneficial owners in the case of a
joint account) is a person described in subparagraph (i), (ii), (iii),
(iv), (v) or (vi).

(b)

Applicability of margin requirements.

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(1)

Uncleared Swaps of U.S. CSEs or Non-U.S. CSEs whose obligations

under the relevant swap are guaranteed by a U.S. person.
(i)

Applicability of U.S. margin requirements; availability of

substituted compliance for requirement to post initial margin.
With respect to each uncleared swap entered into by a U.S. CSE or a
non-U.S. CSE whose obligations under the swap are guaranteed by a
U.S. person, the U.S. CSE or non-U.S. CSE whose obligations under
the swap are guaranteed by a U.S. person shall comply with the
requirements of 23.150 through 23.159 of this part, provided that
the U.S. CSE or non-U.S. CSE whose obligations under the swap are
guaranteed by a U.S. person may satisfy its requirement to post initial
margin to certain counterparties to the extent provided in paragraph (ii)
of this section.

(ii)

Compliance with foreign initial margin collection requirement.

A covered swap entity that is covered by paragraph (b)(1)(i) of this
section may satisfy its requirement to post initial margin under this
part by posting initial margin in the form and amount, and at such
times, that its counterparty is required to collect initial margin pursuant
to a foreign jurisdictions margin requirements, but only to the extent
that:
(A)

The counterparty is neither a U.S. person nor a non-U.S.

person whose obligations under the relevant swap are
guaranteed by a U.S. person;

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(B)

The counterparty is subject to such foreign jurisdictions

margin requirements; and

(C)

The Commission has issued a comparability determination

under paragraph (c) of this section (Comparability
Determination) with respect to such foreign jurisdictions
requirements regarding the posting of initial margin by the
covered swap entity (that is covered in paragraph (b)(1) of
this section).

(2)

Uncleared Swaps of Non-U.S. CSEs whose obligations under the

relevant swap are not guaranteed by a U.S. person.
(i)

Applicability of U.S. Margin Requirements except where an

Exclusion Applies; Availability of Substituted Compliance. With
respect to each uncleared swap entered into by a non-U.S. CSE
whose obligations under the relevant swap are not guaranteed by a
U.S. person, the non-U.S. CSE shall comply with the requirements
of 23.150 through 23.159 of this part except to the extent that an
exclusion is available under subparagraph (b)(2)(ii) of this section,
provided that a non-U.S. CSE whose obligations under the relevant
swap are not guaranteed by a U.S. person may satisfy its margin
requirements under this part to the extent provided in subparagraphs
(b)(2)(iii) and (b)(2)(iv) of this section.

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(ii)

Exclusion. A non-U.S. CSE shall not be required to comply with

the requirements of 23.150 through 23.159 of this part with
respect to each uncleared swap it enters into to the extent:
(A)

The non-U.S. CSEs obligations under the relevant swap are

not guaranteed by a U.S. person

(B)

The non-U.S. CSE is not a U.S. branch of a non-U.S. CSE;

and

(C)

The non-U.S. CSE is not a Foreign Consolidated Subsidiary

with a non-U.S. person counterparty (excluding a Foreign
Consolidated Subsidiary or the U.S. branch of a non-U.S.
CSE), whose obligations under the relevant swap are not
guaranteed by a U.S. person.

(iii)

Availability of substituted compliance where the counterparty is

not a U.S. CSE or a non-U.S. CSE whose obligations under the
relevant swap are guaranteed by a U.S. person. Except to the
extent that an exclusion is available under subparagraph (b)(2)(ii) of
this section, with respect to each uncleared swap entered into by a
non-U.S. CSE whose obligations under the relevant swap are not
guaranteed by a U.S. person with a counterparty (except where the
counterparty is either a U.S. CSE or a non-U.S. CSE whose
obligations under the relevant swap are guaranteed by a U.S.
person), the non-U.S. CSE whose obligations under the relevant
swap are not guaranteed by a U.S. person may satisfy margin

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COMMISSION VOTING COPY APPROVED

requirements under this part by complying with the margin
requirements of a foreign jurisdiction to which such non-U.S. CSE
(whose obligations under the relevant swap are not guaranteed by a
U.S. person) is subject, but only to the extent that the Commission
has issued a Comparability Determination under paragraph (c) of this
section for such foreign jurisdiction.
(iv)

Availability of substituted compliance where the counterparty is

a U.S. CSE or a non-U.S. CSE whose obligations under the
relevant swap are guaranteed by a U.S. person. With respect to
each uncleared swap entered into by a non-U.S. CSE whose
obligations under the relevant swap are not guaranteed by a U.S.
person with a counterparty that is a U.S. CSE or a non-U.S. CSE
whose obligations under the relevant swap are guaranteed by a U.S.
person, the non-U.S. CSE (whose obligations under the relevant
swap are not guaranteed by a U.S. person) may satisfy its
requirement to collect initial margin under this part by collecting
initial margin in the form and amount, and at such times and under
such arrangements, that the non-U.S. CSE (whose obligations under
the relevant swap are not guaranteed by a U.S. Person) is required to
collect initial margin pursuant to a foreign jurisdictions margin
requirements, provided that:

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COMMISSION VOTING COPY APPROVED

(A)

The non-U.S. CSE (whose obligations under the relevant

swap are not guaranteed by a U.S. person) is subject to the
foreign jurisdictions regulatory requirements; and

(B)

The Commission has issued a Comparability Determination

with respect to such foreign jurisdictions margin
requirements.

(c)

Comparability Determinations.
(1)

Eligibility Requirements. The following persons may, either individually

or collectively, request a Comparability Determination with respect to some
or all of the Commissions margin requirements:
(i)

A covered swap entity that is eligible for substituted compliance

under this section; or

(ii)

A foreign regulatory authority that has direct supervisory authority

over one or more covered swap entities and that is responsible for
administering the relevant foreign jurisdictions margin
requirements.

(2)

Submission Requirements. Persons requesting a Comparability

Determination should provide the Commission (either by hard copy or
electronically):
(i)

A description of the objectives of the relevant foreign jurisdictions

margin requirements;

(ii)

A description of how the relevant foreign jurisdictions margin

requirements address, at minimum, each of the following elements of

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COMMISSION VOTING COPY APPROVED

the Commissions margin requirements. Such description should
identify the specific legal and regulatory provisions that correspond
to each element and, if necessary, whether the relevant foreign
jurisdictions margin requirements do not address a particular
element:
(A)

The transactions subject to the foreign jurisdictions margin

requirements;

(B)

The entities subject to the foreign jurisdictions margin

requirements;

(C)

The methodologies for calculating the amounts of initial and

variation margin;

(D)

The process and standards for approving models for

calculating initial and variation margin models;

(E)

The timing and manner in which initial and variation margin

must be collected and/or paid;

(F)

Any threshold levels or amounts;

(G)

Risk management controls for the calculation of initial and

variation margin;

(H)

Eligible collateral for initial and variation margin;

(I)

The requirements of custodial arrangements, including

rehypothecation and the segregation of margin;

(J)

Documentation requirements relating to margin; and

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(K)

The cross-border application of the foreign jurisdictions

margin regime.

(iii)

A description of the differences between the relevant foreign

jurisdictions margin requirements and the International Standards;

(iv)

A description of the ability of the relevant foreign regulatory

authority or authorities to supervise and enforce compliance with the
relevant foreign jurisdictions margin requirements. Such
description should discuss the powers of the foreign regulatory
authority or authorities to supervise, investigate, and discipline
entities for compliance with the margin requirements and the
ongoing efforts of the regulatory authority or authorities to detect,
deter, and ensure compliance with the margin requirements; and

(v)

copies of the foreign jurisdictions margin requirements (including

an English translation of any foreign language document);

(vi)

Any other information and documentation that the Commission

deems appropriate.

(3)

Standard of Review. The Commission will issue a Comparability

Determination to the extent that it determines that some or all of the relevant
foreign jurisdictions margin requirements are comparable to the
Commissions corresponding margin requirements. In determining whether
the requirements are comparable, the Commission will consider all relevant
factors, including:

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COMMISSION VOTING COPY APPROVED

(i)

The scope and objectives of the relevant foreign jurisdictions

margin requirements;

(ii)

How the relevant foreign jurisdictions margin requirements

compare to the International Standards;

(iii)

Whether the relevant foreign jurisdictions margin requirements

achieve comparable outcomes to the Commissions corresponding
margin requirements;

(iv)

The ability of the relevant regulatory authority or authorities to

supervise and enforce compliance with the relevant foreign
jurisdictions margin requirements; and

(v)
(4)

Any other facts and circumstances the Commission deems relevant.

Reliance. Any covered swap entity that, in accordance with a

Comparability Determination, complies with a foreign jurisdictions margin
requirements would be deemed to be in compliance with the Commissions
corresponding margin requirements. Accordingly, the failure of such a
covered swap entity to comply with the foreign jurisdictions margin
requirements may constitute a violation of the Commissions margin
requirements. All covered swap entities, regardless of whether they rely on
a Comparability Determination, remain subject to the Commissions
examination and enforcement authority.

(5)

Conditions. In issuing a Comparability Determination, the Commission

may impose any terms and conditions it deems appropriate. The violation of
such terms and conditions may constitute a violation of the Commissions

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COMMISSION VOTING COPY APPROVED

margin requirements and/or result in the modification or revocation of the
Comparability Determination.
(6)

Modifications. The Commission reserves the right to further condition,

modify, suspend, terminate or otherwise restrict a Comparability
Determination in the Commissions discretion.

(7)

Delegation of Authority. The Commission hereby delegates to the Director

of the Division of Swap Dealers and Intermediary Oversight, or such other
employee or employees as the Director may designate from time to time, the
authority to request information and/or documentation in connection with
the Commissions issuance of a Comparability Determination.

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

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COMMISSION VOTING COPY APPROVED

Appendix A
APPLICATION OF THE PROPOSED RULE 1 2 3
CSE

Counterparty

U.S. CSE

U.S. person (including U.S.

CSE)

Non-U.S. person (including nonU.S. CSE, FCS, and U.S. branch

of a non-U.S. CSE) whose
obligations under the relevant
swap are guaranteed by a U.S.
person

or

Non-U.S. CSE (including

U.S. branch of a non-U.S.
CSE and a Foreign
Consolidated Subsidiary
(FCS)) whose obligations
under the relevant swap

are guaranteed by a U.S.

person

FCS whose obligations

under the relevant swap
are not guaranteed by a
U.S. person
or
U.S. branch of a non-U.S.
CSE whose obligations
under the relevant swap

Non-U.S. person (including nonU.S. CSE, FCS and U.S. branch

of a non-U.S. CSE) whose
obligations under the relevant
swap are not guaranteed by a
U.S. person

Proposed
Approach
U.S. (All)

U.S. (Initial
Margin collected
by CSE in column
1)
Substituted
Compliance
(Initial Margin
posted by CSE in
column 1)
U.S. (Variation
Margin)

U.S. (Initial
Margin posted by
Non-U.S. CSE (including U.S.
CSE in column 1)
branch of a non-U.S. CSE and
Substituted
FCS) whose obligations under
Compliance
the relevant swap are guaranteed (Initial Margin
by a U.S. person
collected by CSE
in column 1)
U.S. (Variation
Margin)
U.S. CSE

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COMMISSION VOTING COPY APPROVED

are not guaranteed by a
U.S. person

U.S. person (except as noted

above for a CSE)

Non-U.S. person whose

obligations under the swap are
guaranteed by a U.S. person
(except a non-U.S. CSE, U.S.
branch of a non-U.S. CSE, and
FCS whose obligations are
guaranteed, as noted above)

Non-U.S. person (including nonU.S. CSE, U.S. branch of a nonU.S. CSE, and a FCS) whose
obligations under the relevant
swap are not guaranteed by a
U.S. person

Non-U.S. CSE (that is not a

FCS or a U.S. branch of a

non-U.S. CSE) whose

obligations under the
relevant swap are not
guaranteed by a U.S.
person

U.S. CSE
Non-U.S. CSE (including U.S.
branch of a non-U.S. CSE and
FCS) whose obligations under
the swap are guaranteed by a
U.S. person

U.S. person (except as noted

above for a CSE)

Non-U.S. person whose

obligations under the swap are
guaranteed by a U.S. person
(except a non-U.S. CSE whose
obligations are guaranteed, as
noted above)

U.S. branch of a Non-U.S. CSE

or FCS, in each case whose
obligations under the relevant

115

Substituted
Compliance (All)

U.S. (Initial
Margin posted by
CSE in column 1)
Substituted
Compliance
(Initial Margin
collected by CSE
in column 1)
U.S. (Variation
Margin)
Substituted
Compliance (All)

COMMISSION VOTING COPY APPROVED

swap are not guaranteed by a
U.S. person

Non-U.S. person (including a

non-U.S. CSE, but not a FCS or
a U.S. branch of a non-U.S.
CSE) whose obligations under
the relevant swap are not
guaranteed by a U.S. person

Excluded

This table should be read in conjunction with the rest of the preamble and the text
of the Proposed Rule.

The term U.S. person is defined in section 23.160(a)(10) of the Proposed Rule.
A non-U.S. person is any person that is not a U.S. person. The term swap
means an uncleared swap and is defined in section 151 of the Proposed Margin
Rules. See Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants, 79 FR 59898 (Oct. 3, 2014).
3

As used in this table, the term Foreign Consolidated Subsidiary or FCS refers
to a non-U.S. CSE in which an ultimate parent entity that is a U.S. person has a
controlling financial interest, in accordance with U.S. GAAP, such that the U.S.
ultimate parent entity includes the non-U.S. CSEs operating results, financial
position and statement of cash flows in the U.S. ultimate parent entitys
consolidated financial statements, in accordance with U.S. GAAP. The term
ultimate parent entity means the parent entity in a consolidated group in which
none of the other entities in the consolidated group has a controlling interest, in
accordance with U.S. GAAP.

Issued in Washington, DC, on June __, 2015, by the Commission.

Christopher J. Kirkpatrick,
Secretary of the Commission.

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

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Appendices to Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants Commission Voting Summary, Chairmans Statement,
and Commissioners Statements
Appendix 1 Commission Voting Summary
On this matter, Chairman Massad and Commissioners Wetjen, Bowen, and
Giancarlo voted in the affirmative. No Commissioner voted in the negative.
Appendix 2 Statement of Chairman Timothy G. Massad
Today the Commission voted unanimously to issue a proposal on the cross-border
application of our previously proposed rules on margin for uncleared swaps. I thank my
fellow commissioners for their work and input on this proposal, and I also want to thank
our staff for their hard work.
The proposed rule on margin for uncleared swaps, which we issued last fall, is
one of the most important rules for the regulation of the over-the-counter swaps market.
That is because there will always be a large part of the swaps market that is not
cleared through central counterparties. Although we are mandating clearing for certain
swaps, we should not mandate clearing for all swaps. Some products are not appropriate
for such a mandate because of their risk or liquidity characteristics.
Margin can be an effective tool for addressing counterparty credit risk arising
from uncleared swaps. Our rule will make sure that registered swap dealers post and
collect margin in their transactions with other registered swap dealers and financial
institutions that are above certain thresholds. That helps lower the risk to the financial
system and the overall economy. I also note that the requirements do not apply to
commercial end users.

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We saw what happened in 2008 when there was a build-up of excessive risk in
bilateral swaps. That risk intensified and accelerated the financial crisis like gasoline
poured on a fire. And that crisis cost our economy eight million jobs and untold suffering
for American families.
Moreover, we saw how that risk could be created offshore, outside our borders,
but still jeopardize our financial stability and our economy.
The excessive swap risk taken on by AIG was initiated from its overseas
operation. In order to prevent the failure of AIG, our government had to commit over
$180 billion.
We got all that money back, but that is a painful example of why the cross-border
application of the margin rule is important.
The proposal we are issuing today addresses the possibility that risk created
offshore can flow back into the U.S. And so it applies to activities of non-U.S. swap
dealers that are registered with us. At the same time, our proposal recognizes the
importance of harmonizing rules with other jurisdictions.
If a transaction by an offshore swap dealer is guaranteed by a U.S. person, such as
the parent of the dealer, the risk of that transaction can flow back into the U.S. But the
same can occur even if the transaction is not guaranteed by the U.S. parent. Our proposal
addresses that. By doing so, I believe our proposal is a good way to address the risk that
can arise from uncleared swaps in that situation.
The proposal draws a line as to when we should take this offshore risk into
account that is both reasonable and clear. The line we are proposing is this: if the
financial results and position of the non-U.S. swap dealer are consolidated in the financial

118

statements of the U.S. parent, then we should take that into account, whether or not there
is an explicit guarantee.
This is how the proposal works: U.S. swap dealers would be required to comply
with the rule in all their transactions, but in their transactions with certain non-U.S.
counterparties, they would be entitled to substituted compliance with respect to margin
they post, but not the margin they collect. Non-U.S. swap dealers whose swap
obligations are guaranteed by a U.S. person would be treated the same way. Substituted
compliance would be available in the case of the laws of those jurisdictions which we
have deemed comparable.
For non-U.S. swap dealers registered with us, whose obligations are not
guaranteed by a U.S. person, they must still comply, but they would be entitled to
substituted compliance to a greater extent. Generally, they could avail themselves of full
substituted compliance unless the counterparty was a U.S. swap dealer or a swap dealer
guaranteed by a U.S. person. And, transactions between a non-U.S. swap dealer (but not
conducted through its U.S. branch) and a non-U.S. counterparty would be excluded from
the margin rules, if neither partys obligations under the relevant swap are guaranteed by
a U.S. person nor consolidated in the financial statements of its U.S. parent.
Limiting the exclusion from our rule to only those transactions where neither
party is guaranteed or consolidated with a U.S. person helps address the concern that
there is risk to the U.S. even if there is no explicit guarantee.
Lastly, when foreign banks conduct their swaps business within the U.S. through
their branches located in the U.S., in direct competition with U.S. swap dealers, the

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exclusion would not apply. However, U.S. branches would be eligible for substituted
compliance, which would reduce the potential for conflicts with foreign jurisdictions.
The broad scope of substituted compliance recognizes that we must work together
with other jurisdictions to regulate this market, and we should design our rules to avoid
conflict and duplication as much as possible. And the proposal may reduce competitive
disparities that would otherwise result from different sets of rules applying to swap
dealers engaged in essentially the same activity.
The proposal we are making today is very similar to the approach proposed last
fall by the prudential regulators. That is appropriate, because the law requires us and the
prudential regulators to harmonize our margin rules as much as possible. It also makes
sense when you look at the composition of the registered swap dealers. There are
approximately 100 swap dealers registered with us. Approximately 40 of those will be
subject to the margin rules of the prudential regulators, while approximately 60 will be
subject to our rules. About two thirds of those 60 swap dealers that will be subject to our
margin rule have affiliates who will be subject to the margin rules of the prudential
regulators. For example, of the approximately 60 swap dealers subject to our margin
rules, over half are subsidiaries of just five major U.S. bank holding companies. Each of
those large bank holding companies has other subsidiaries that are, subject to the margin
rules of the prudential regulators. Therefore, if our margin rules are substantially
different from the margin rules of the prudential regulators, then we have created
incentives for firms to move activity from one entity to another solely to take advantage
of potential differences in the rules. That is an outcome we should try very hard to avoid.

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We also wish to coordinate our rules with the margin rules of other jurisdictions.
That is why our proposal today provides for substituted compliance. In addition, at my
direction, our staff is actively engaged with their counterparts in other jurisdictions to try
to harmonize the rules as much as possible. Although much work remains to be done,
and the Commission must take final action, I am hopeful that our final rules will be
similar on many critical issues to those currently being developed in other major
jurisdictions.
I would also like to say a word about our Cross-Border Guidance, which
discussed how the Commission would generally apply Dodd-Frank requirements to
cross-border swap activities. In doing so, the Commission recognized that the market is
complex and dynamic and that a flexible approach is necessary. As stated in the
Guidance, the Commission will continue to follow developments as foreign regulatory
regimes and the global swaps market continue to evolve. In this regard, the Commission
will periodically review this Guidance in light of future developments. That is
essentially what we are doing here. With each area of our rules, the implications of
cross-border transactions for our policy objectives may vary. Margin for uncleared
swaps is intended to protect the safety and soundness of swap dealers and ultimately, to
ensure the stability of the U.S. financial system. Therefore, it is appropriate to take into
account whether that risk flows back into the United States by virtue of a guarantee by a
U.S. person, or financial consolidation with a U.S. person. But the approach we are
proposing today for margin may not be appropriate with respect to other areas of
regulation such as swaps reporting or trading.

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In conclusion, I believe the approach we are proposing today combines the best
elements of the various approaches proposed last fall. It strikes the right balance between
the Commissions supervisory interest in ensuring the safety and soundness of registered
swap dealers and the need to recognize principles of international comity and reduce the
potential for conflict with foreign regulatory requirements.
Appendix 3 Statement of Commissioner Mark P. Wetjen
Todays release lays out a proposed framework for the application of the
commissions margin rules to un-cleared swaps (the Margin Rule) in cross-border
transactions. Interestingly, the release states that there was no consensus among those
who filed comments in response to the commissions Advance Notice of Proposed
Rulemaking (ANPR) last fall, which laid out three alternative, cross-border
approaches: the Guidance Approach, the Prudential Regulators Approach, and the
Entity Approach. To the extent, therefore, that the release was designed to identify a
consensus view concerning which of these three approaches was best, it failed.
The comment letters, however, provided a great deal of useful discussion that has
aided the commissions thinking about the extra-territorial application of its rules.
Ultimately, the agency was guided by those comments to propose today an approach that
is essentially an entity approach, but because of more availability of substituted
compliance, appears most similar to the Prudential Regulators Approach in terms of its
practical implementation.
I am comfortable supporting todays release, but for the reasons discussed below,
continue to harbor some doubts as to whether we have selected the approach that best
balances the commissions interests in protecting the financial system and U.S. taxpayers,

122

meeting its statutory mandate to preserve an appropriate competitive landscape for

participants in the global swaps market, and adopting policies whose costs to those
affected do not exceed their benefits.1
The Commissions Responsibilities Regarding the Margin Rule
To begin, it is important to understand the scope of the commissions
responsibilities with respect to implementing and enforcing the Margin Rule. As was
made plain by the proposal seeking comment on the Margin Rule released last fall, the
rulemaking is one of the most important component parts of the risk-focused
requirements under Title VII of Dodd-Frank. The statute divides up responsibilities for
implementing and enforcing the Margin Rule among this commission, the U.S. prudential
regulators, and the Securities and Exchange Commission. Those responsibilities are
weighty, requiring, among others, the review and approval of margin methodologies
submitted by the covered swap entities under each authoritys jurisdiction.
As of today, five U.S. bank holding companies regulated by the Board of
Governors of the Federal Reserve System (the Board) have 17 U.S. registered swap
dealers that would fall exclusively within the CFTCs jurisdiction for margin purposes.
These same five U.S. bank holding companies have 15 non-U.S. registered swap dealers
that would fall exclusively within the CFTCs jurisdiction for margin purposes (the U.S.
Foreign-Affiliate Dealers). That is a total of 32 registered swap dealers that the
commission would have to oversee, supervise, and enforce compliance with respect to the
Margin Rule.

See 7 U.S.C. 19(a).

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There are another three non-U.S. parent entities regulated by the Board, which
altogether have four entities registered with the commission as swap dealers, due to the
level of swap-dealing activity they engage in with U.S. counterparties (Non-U.S.
Dealers). There are only three non-U.S. registered swap dealers that do not have a
parent entity regulated by the Board and that would fall exclusively within the CFTCs
jurisdiction for margin purposes (the Truly Foreign Dealers), or just a fraction of the
number of firms that are either based in the U.S. or controlled by a U.S. regulated parent.
This brings to 39 the total number of swap dealers whose un-cleared swap activities
would be subjected to the commissions Margin Rule.
The commissions regulatory interests in each of these categories of registered
swap dealers is different, notwithstanding the fact the commission has responsibility over
all of them. In most respects, the commission (and other U.S. policymakers and swapmarket stakeholders) should be primarily concerned about the U.S. Foreign-Affiliate
Dealers when thinking through and developing a cross-border framework to determine
when these entities should follow U.S. law. This statement is based on the fact that
concerns about risk importation into the U.S. are much lower, relatively speaking, when
it comes to the activities of the Non-U.S. Dealers and Truly Foreign Dealers (none of the
Non-U.S. Dealers or Truly Foreign Dealers would appear to meet the control test under
the prudential regulators September 2014 margin rule proposal). Instead, these latter
categories of swap dealers raise different issues related to the commissions mandates to
enhance market integrity and promote fair competition.2

See section 3(b) of the Commodity Exchange Act (CEA), 7 U.S.C. 5(b).

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Appropriately, when Non-U.S. Dealers and Truly Foreign Dealers face other nonU.S. counterparties, they are excluded from having to comply with the Margin Rule
under the proposal, so long as neither the registered swap dealers nor its counterpartys
obligations benefit from a guarantee by a U.S. person. Under the Guidance Approach,
these Non-U.S. Dealers and Truly Foreign Dealers would be excluded from the Margin
Rule as well, so long as neither the swap dealers nor its counterpartys obligations
benefit from a guarantee by a U.S. person.
I review the scope and weight of these responsibilities here because the context to
deciding how much supervisory responsibilities to assert over the cross-border swap
activities of entities located outside of the U.S. is important, both in understanding the
practical implications of claiming those responsibilities as well as the potential effect on
international comity. The review of the different categories of swap-dealer registrants
also makes it clear to me that to pursue the Entity Approach without allowing substituted
compliance, as some commenters suggested, is neither necessary for the commission to
meet its statutory responsibilities nor advisable, not to mention impractical.
When the commission voted on the ANPR, I noted the potential benefits of the
proposal set forth by the Prudential Regulators Approach, which would effectively apply
the margin rule as an entity-level rule with certain exclusions for foreign swap activities.
At that time, however, I expressed my view that applying the margin rule as a
transaction-level requirement under the Guidance Approach was the better option. In
part, that view was shaped by the practical reality that it would be difficult for the
commission to meet its challenge to supervise U.S. swap dealers compliance with the

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margin rule, let alone the activities of the U.S. Foreign-Affiliate Dealers and Truly
Foreign Dealers.
Policy Advantages of Todays Proposal
As it relates to the Truly Foreign Dealers, compliance obligations under todays
proposal would be effectively the same as under the cross-border guidance, so
presumably no new burdens or competitive considerations would be created here for
those firms (as discussed above). Additionally, as it relates to the U.S. Foreign-Affiliate
Dealers (some of which have affiliates not supervised by the commission and engaged in
swap activities), todays proposal could dis-incentivize firms from moving swap activity
transacted by an affiliated entity regulated by a U.S. prudential regulator, into the U.S.
Foreign-Affiliate Dealer. Such a market response is conceivable given the fact there
could be different compliance obligations under the proposal as compared to the
Guidance Approach depending on whether the U.S. Foreign-Affiliate Dealer is a Foreign
Consolidated Subsidiary, and whether the dealers un-cleared swap is supported by a
guarantee. Presumably, there is swap activity of some of these U.S. Foreign-Affiliate
Dealers that would be required to comply with the Margin Rule under todays proposal,
that would not have been subjected to the Margin Rule under the Guidance Approach.
U.S. domestic regulators should not knowingly create an opportunity for affiliates
within a U.S. bank holding company to move swap activity from one affiliate to another
for no other reason than to avoid application of U.S. law (even if there are legitimate
policy reasons that U.S. law would not apply). Indeed, this is why the Dodd-Frank Act
requires the relevant agencies implementing the Margin Rule to coordinate their efforts as

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closely as possible. Knowingly allowing such a result also would be inconsistent with
the commissions statutory duty to promote fair competition.3
Similarly, the commission should be careful to avoid adopting a significantly
different cross-border approach from the U.S. prudential regulators if it would incentivize
affiliates of U.S. Foreign-Affiliate Dealers to move their swap activity to the U.S.
Foreign-Affiliate Dealer in order to exploit the relative dearth of resources available to
the commission for supervising and enforcing compliance. The CFTC currently is understaffed. Meeting the challenge to monitor compliance with the complex and technical
requirements of the Margin Rule as it applies to the swap activity conducted by U.S.
Foreign-Affiliate Dealers today would be difficult. A cross-border approach that is
substantively similar to the Prudential Regulators Approach may facilitate the
commission in meeting its supervisory challenge.
Relatedly, I am also cognizant of market efforts to develop a standard initialmargin methodology for un-cleared swaps, which I believe would be supported by the
hybrid approach set forth in todays proposal. I am in favor of these efforts because the
use of a standard initial margin methodology has the potential to reduce dispute burdens
by using a common approach for reconciliation, promote the efficient use of limited
market resources, and enhance fairness and transparency in the global OTC derivatives
markets. As such, the commission should, if possible, avoid adopting a cross-border
approach that would discourage the development of a standard initial-margin
methodology, or would otherwise encourage the development of different margin
methodologies across affiliated entities and/or the broader marketplace. This outcome
3

See section 3(b) of the Commodity Exchange Act (CEA), 7 U.S.C. 5(b).

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would complicate the jobs of all supervisory authorities involved, perhaps especially the
U.S. prudential regulators.
Policy Advantages of the Guidance Approach
Generally speaking, the commission in adopting its cross-border guidance
intended to strike a reasonable balance in assuring that the swaps markets were brought
under the new regulatory regime as directed by Congress and consistent with section 2(i)
of the CEA.4 We should not depart from those important policy judgments without a
compelling reason to do so.
One advantage of the Guidance Approach, therefore, is that it would harmonize
the commissions own cross-border policies as they related to both cleared and un-cleared
swap activity. Because many firms under the commissions jurisdiction have incurred
significant costs by building systems and practices designed to follow the commissions
cross-border guidance, overall costs to registered swap dealers might be lower if the
Guidance Approach were adopted, which obviously is relevant to the commissions
mandate to consider the benefits and costs of its policies. But of course, with harmony of
the commissions cross-border policies comes disharmony with the U.S. prudential
regulators.
Another advantage to the Guidance Approach is that it provides a more elegant
way for U.S. Foreign-Affiliate Dealers, Non-U.S. Dealers and Truly Foreign Dealers to
comply with their regulatory obligations when the commission has made a substitutedcompliance determination regarding another jurisdictions margin requirements. Under
the Guidance Approach, an affected swap dealers obligations to post margin and collect
4

See section 2(i) of the CEA, 7 U.S.C. 2(i).

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margin would follow the same law or regulation of another jurisdiction if the commission
had made such a substituted-compliance determination; which is to say, margin payments
going in both directions would follow the same set of rules. This outcome has the added
benefit of being consistent with the Basel Committee on Banking Supervisions
(BCBS) and the Board of the International Organization of Securities Commissions
(IOSCO) final margin policy framework for margin requirements for non-centrally
cleared derivatives (the BCBS-IOSCO Framework), which states that when a
transaction is subject to two sets of rules, the regulators should endeavor to harmonize
their rules to the extent possible.5
Given the relatively broad agreement among key jurisdictions about how the
global framework for margin requirements ought to be structured, such a result should be
an acceptable way to address any remaining concerns about risk from overseas activity
transferring back to the U.S. Again, those concerns primarily would arise from the uncleared swap activities of the U.S. Foreign-Affiliate Dealers. The proposal, on the other
hand, would require a non-U.S. covered swap entity guaranteed by a U.S. person to
follow U.S. initial margin rules, but only permit substituted compliance for the posting of
initial margin when such non-U.S. covered swap entity trades with a non-U.S.
counterparty.
In this scenario, it would be possible for two separate laws to apply to the same
transaction. Under this framework, I question whether market participants engaging in

See BCBS and IOSCO, Margin requirements for non-centrally cleared derivatives (Sept. 2013) at 22,
available at http://www.bis.org/publ/bcbs261.pdf. The BCBS-IOSCO Framework also provides that
regulators should recognize the equivalence and comparability of their respective rules and apply only one
set of rules to the transaction.

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un-cleared swaps would have the necessary legal certainty as to which margin
requirements they would face. While this framework is proposed ostensibly to help
ensure the safety and soundness of covered swap entities and to support the stability of
the U.S. financial markets, these goals arguably will be accomplished only if the
framework is workable. The Guidance Approach would arguably provide greater
certainty as to the law applicable to a particular transaction, and render the commissions
policy more consistent with the BCBS-IOSCO Framework.6
To that end, I look forward to hearing additional comments on whether a swap
between a non-U.S. covered swap entity and a non-U.S. counterparty should receive
substituted compliance for the entire swap, rather than subject the swap to both U.S. and
foreign margin requirements. Ideally, such comments would give the commission a
better understanding of the feasibility of designing systems to assist the covered swap
entity comply with two separate margin requirements for the same transaction.
To the degree that the commission should be concerned about deferring to other
regulators to supervise the posting and collecting of margin for un-cleared swaps as it
would in the wake of a substituted-compliance determination context again is important
to remember here. As mentioned, there is relatively broad agreement among key
jurisdictions about how the global framework for margin requirements should be
structured, as a result of the issuance of the BCBS-IOSCO Framework. Its equally
important to remember that the commissions capital rule is treated as an entity-level rule

See id.

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under the commissions cross-border guidance.7 As I stated when the commission

released its proposal for the Margin Rule, credit risks not addressed through the Margin
Rule could be addressed, at least in part, through indirect capital requirements at the
holding company level, and direct capital requirements at the registrant level for those
swap dealers relying on substituted compliance (or otherwise).
Yet another advantage to the Guidance Approach is that it might better avoid
further diminishments to liquidity that the marketplace has experienced recently, as well
as better avoid regulatory market fragmentation that materialized after the commissions
new swap-execution framework went into effect. Several commenters expressed strong
concerns that the Entity Approach could further fragment the swaps markets and impair
liquidity, promote regulatory arbitrage, and place the foreign affiliates of U.S. entities at a
competitive disadvantage beyond the circumstances they face in the cleared swap
environment under the commission cross-border guidance. I have recognized and spoken
about market fragmentation for years, and so do not take lightly such concerns being
raised again in this context.
Clarifications of the Commissions Definition of Guarantee and U.S. Person
The proposal includes two important clarifications for market participants that I
would like to acknowledge. First, I am supportive of the proposed removal of the U.S.
majority-ownership prong from the U.S. person definition. For certain types of funds, it
is extremely difficult for advisors or administrators to accurately determine whether, and
how many of, the beneficial owners of fund entities within the fund structure are U.S.

See Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations,
78 FR 45292 (July 26, 2013).

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persons. Given this complexity and the other elements of the U.S. person definition that
would capture those funds that have a substantial nexus to the U.S. markets, I believe this
exclusion is necessary and appropriate. I also support the releases proposed definition of
guarantee. This clearer definition will help market participants better identify those
transactions that raise or implicate greater supervisory interest by the commission.
Conclusion
The questions asked in this proposal are intended to solicit comment in hopes of
further clarifying the most appropriate way for the commission to meet its regulatory
objectives as well as finding more consensus on the important issues raised in the release.
As discussed above, I am open to the approach taken in this proposal and recognize its
merits. I look forward to seeing whether comments filed in response to todays release
can further build the case for the commission adopting the proposal, rather than the
Guidance Approach.
Appendix 4 Concurring Statement of Commissioner Sharon Y. Bowen
I'm pleased to support this new proposed rule on cross-border application of
uncleared margin requirements for swap dealers and major swap participants. Margin
requirements for uncleared swaps, needless to say, are a core piece of the new regulatory
regime we are establishing as required by the Dodd-Frank Wall Street Reform and
Consumer Protection Act.
It is imperative that we get all aspects of our margin requirements right, and that
includes getting the cross-border element of the requirements right. The swaps market is
a global one - the market has organically evolved to rely on the ability of U.S. entities to
trade with European entities as a matter of course. It is incumbent on us that our rules not

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severely restrict this flow of commerce, just as it is incumbent on us that our rules
provide rigorous regulations on this market for the protection of investors, consumers,
and the broader financial system.
To that end, I look forward to receiving comments on this proposal from a wide
swath of stakeholders, from market participants to financial reform advocates. I hope we
will receive comments on whether this rule is workable, whether it is sufficiently robust,
and what changes would make the rule more effective on both of those metrics.
Appendix 5 Statement of Commissioner J. Christopher Giancarlo
The Commissions proposal for the cross-border application of margin
requirements for uncleared swaps is a highly complicated labyrinth. I look forward to the
jolt to U.S. economic growth that will occur in the 3rd quarter of 2015 as a result of the
thousands of billable hours that will be expended by lawyers and other professionals, who
will have to read, interpret and respond to this tangled regulatory construct.
I have many concerns and questions regarding the proposal, including:
1. the shift from the transaction-level approach set forth in the July 2013
Cross-Border Interpretive Guidance and Policy Statement1 (Guidance)
to a hybrid approach and what this means for the status of the Guidance
moving forward;
2. the revised definitions of U.S. person (defined for the first time in an
actual Commission rule) and guarantee and how these new terms will be

Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78
FR 45292 (Jul. 26, 2013).

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interpreted and applied by market participants across their entire global

operations;
3. the scope of when substituted compliance is allowed; and
4. the practical implications of permitting substituted compliance, but
disallowing the exclusion from CFTC margin requirements (Exclusion)
for non-U.S. covered swap entities (CSEs) who qualify as Foreign
Consolidated Subsidiaries.
My concerns extend to the standards set forth for determining comparability. An
appropriate framework for the cross-border application of margin requirements for
uncleared swaps is essential if we are to preserve the global nature of the swaps market.
Congress recognized this when it instructed the CFTC, the SEC and the prudential
regulators to coordinate with foreign regulatory authorities on the establishment of
consistent international standards with respect to the regulation of swaps.2 Towards
that end, representatives of more than 20 regulatory authorities, including the CFTC,
participated in consultations with the Basel Committee on Banking Supervision
(BCBS) and the Board of the International Organization of Securities Commissions
(IOSCO), which resulted in the issuance of a final BCBS-IOSCO framework in
September 2013 that establishes minimum margin standards for uncleared swaps
(BCBS-IOSCO framework).3

15 U.S.C. 8325(a) (added by section 752 of the Dodd-Frank Act).

See Margin Requirements for Non-centrally Cleared Derivatives (Sep. 2013), available at
http://www.bis.org/publ/bcbs261.pdf, revised Mar. 2015, available at
http://www.bis.org/bcbs/publ/d317.pdf.
3

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Element seven of the BCBS-IOSCO framework discusses the cross-border

application of margin requirements and stresses the importance of developing consistent
requirements across jurisdictions to ensure that implementation at a national jurisdictional
level is appropriately interactive:
that is, that each national jurisdictions rule is territorially
complementary such that (i) regulatory arbitrage opportunities are limited,
(ii) a level playing field is maintained, (iii) there is no application of
duplicative or conflicting margin requirements to the same transaction or
activity, and (iv) there is substantial certainty as to which national
jurisdictions rules apply. When a transaction is subject to two sets of
rules (duplicative requirements), the home and the host regulators should
endeavor to (1) harmonize the rules to the extent possible or (2) apply only
one set of rules, by recognizing the equivalence and comparability of their
respective rules.4
Regulatory authorities in major financial centers continue to collaborate in
the development of their rules and I commend CFTC staff for their continued
dialogue with fellow domestic and foreign regulators. Nevertheless, there are
bound to be differences across jurisdictions in the final rule sets that are
ultimately adopted. Comparability determinations allowing for substituted
compliance with the margin requirements of foreign jurisdictions will be essential
to achieving a workable cross-border framework. I am concerned that the

Id. at 23.

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standards for making comparability determinations outlined in the Commissions

proposal may be too restrictive.
The Commission states that it will employ an outcome-based
comparability standard focusing on whether the margin requirements in a foreign
jurisdiction achieve the same regulatory objectives as the CFTCs margin
requirements and will not require specific rules identical to the Commissions
rules. The Commission states further, however, that it will make its outcomebased determinations on an element-by-element basis that will include, but not be
limited to, analyzing: (i) the transactions subject to the foreign jurisdictions
margin requirements; (ii) the entities subject to the foreign jurisdictions margin
requirements; (iii) the methodologies for calculating the amounts of initial and
variation margin; (iv) the process and standards for approving models for
calculating initial and variation margin models; (v) the timing and manner in
which initial and variation margin must be collected and/or paid; (vi) any
threshold levels or amount; (vii) risk management controls for the calculation of
initial and variation margin; (viii) eligible collateral for initial and variation
margin; (ix) the requirements of custodial arrangements, including
rehypothecation and segregation of margin; (x) documentation requirements
relating to margin; and (xi) the cross-border application of the foreign
jurisdictions margin regime.
As proposed, the Commission will not be assessing whether the foreign
authoritys margin regime as a whole meets the broad regulatory objectives of

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requiring margin for uncleared swaps.5 Rather, in looking at each element (and
any other factor not included in the foregoing list) the Commission may determine
that a foreign regime is comparable as to some elements, but not others, in which
case substituted compliance might be allowed, for example, with respect to the
methodologies for calculating initial and variation margin, but not for the eligible
collateral.
Depending on how it is put into practice, this element-by-element
approach may be difficult to distinguish from the rule-by-rule analysis the
Commission claims to eschew. We have seen this before when the Commission
made its comparability determinations for certain foreign countries regarding
certain transaction-level requirements for swap dealers and major swap
participants.6 There, the Commission made its determinations on a requirementby-requirement basis, rather than on the basis of the foreign regime as a whole.7
Former Commissioner Scott OMalia observed in that instance that this was a
rule-by-rule analysis, which was contrary to the recommendations of the OTC
Derivatives Regulators Group and afforded only limited substituted compliance
relief.8 Will our element-by-element analysis be any different than the
requirement-by-requirement method the Commission employed then?

The regulatory objectives of requiring margin for uncleared swaps, as stated in the Dodd-Frank Act, are to
help insure the safety and soundness of the swap dealer or major swap participant, the financial integrity of
the markets and the stability of the U.S. financial system. Section 4s(e)(3)(A), (C), 7 U.S.C. 6s(e)(3)(A),
(C).
6
See, e.g., Comparablility Determination for the European Union: Certain Transaction-Level
Requirements, 78 FR 78878 (Dec. 27, 2013).
7
Id. at 78881.
8
Id. at 78889.

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I fear that the proposed element-by-element approach will be outcomebased in name only. In a perfect world all G-20 countries will adopt comparable
margin requirements, but we cannot let the perfect be the enemy of the good. For
substituted compliance to work, we must focus on broad objectives, not specific
requirements.
I am also troubled by the provision of the proposed rule that would not permit
swaps executed through or by a U.S. branch of a non-U.S. CSE to qualify for the
Exclusion for non-U.S. CSEs who qualify as Foreign Consolidated Subsidiaries. Under
the proposal, uncleared swaps entered into by a non-U.S. CSE with a non-U.S. person
counterparty (purely foreign-to-foreign swaps), where neither counterparty is a Foreign
Consolidated Subsidiary or guaranteed by a U.S. person, would be excluded from the
Commissions margin rules. The Exclusion is not available, however, if the swap is
executed through or by the U.S. branch of a non-U.S. CSE.9 The request for comment
following this discussion asks how the Commission should determine whether a swap is
executed through or by a U.S. branch and suggests using the same analysis used in the
Commissions Volcker Rule, which required that personnel that arrange, negotiate, or
execute a purchase or sale conducted under the exemption for trading activity of a
foreign banking entity must be located outside the U.S.10
Prior to its appearance in the Commissions final Volcker Rule this concept
appeared in a hastily issued, November 2013 Staff Advisory 13-69 (sometimes referred
to in the industry as the elevator rule) that imposed swaps transaction rules on trades

I note that the through or by language appears in the preamble to the rule, not the rule text.
See Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships
With, Hedge Funds and Private Equity Funds, 79 FR 5808, 5927 & n.1526 (Jan. 31, 2014).
10

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between non-U.S. persons whenever anyone on U.S. soil arranged, negotiated, or

executed the trade.11 The effective date of this Staff Advisory has been delayed four
times.12 As I have stated before, the elevator rule is causing many overseas trading firms
to consider cutting off all activity with U.S.-based trade support personnel to avoid
subjecting themselves to the CFTCs flawed swaps trading rules. The Staff Advisory, if
it goes into effect, will jeopardize the role of bank sales personnel in U.S. financial
centers like Boston, Charlotte, Chicago, New Jersey and New York. It will likely have a
ripple effect on technology staff supporting U.S. electronic trading systems, along with
the thousands of jobs tied to the vendors who provide food services, office support,
custodial services and transportation for the U.S. financial series industry. With this
proposal, rather than recognizing the myriad of problematic issues arising from the Staff
Advisory, the Commission is proposing to expand its scope from trading rules to margin
rules.
Despite my many questions and concerns, I support issuing the proposed rule only
so that the public may provide thorough analysis and thoughtful comment. My vote to
issue the proposal for public comment should not signal, however, my agreement with it.
I look forward to reviewing public comment.

11

CFTC Staff Advisory No. 13-69 (Nov. 14, 2013), available at

http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-69.pdf.
12
CFTC Letter No. 14-140, Extension of No-Action Relief: Transaction-Level Requirements for Non-U.S.
Swap Dealers (Nov. 14, 2014), available at
http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-140.pdf.

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