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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations Appendix 2Statement of Support of Commissioner Brian D. Quintenz I vote in favor of todays final rule that first, amends a key definition used to determine whether a financial end-user must comply with the Commissions uncleared swap margin regulations when trading with a swap dealer,1 and second, codifies noaction relief providing additional flexibility for swap dealers to use the risk-based calculation of initial margin.2 With regard to the adjustment to the definition of material swap exposure, I support the fact that the rulemaking further aligns the Commissions rules to the framework agreed upon by the international framework established by BCBSIOSCO. However, I continue to take issue with the reliance on notional value as the defining metric for determining whether a firm should be subject to the uncleared margin regulations. The philosophy behind such a framework is that firms with small levels of swaps can have outsized impacts on the financial system. Further, the fact that we, as an agency and as international regulators, continue to embrace a metric as useless, biased, and arbitrary as notional value is something I have long opposed, and I have never, not once, heard an acceptable or even rationale defense for doing so.

Appendix 3Statement of Support of Commissioner Dawn D. Stump Overview
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I am pleased to support the final rulemaking that the Commission is adopting with respect to the definition of material swaps exposure and an alternative margin calculation method in connection with the Commissions margin requirements for uncleared swaps.
This rulemaking addresses recommendations that the Commission has received from its Global Markets Advisory Committee GMAC, which I am proud to sponsor, and is based on a comprehensive report prepared by GMACs Subcommittee on Margin Requirements for Non-Cleared Swaps GMAC Margin Subcommittee.1 It demonstrates the value added to the Commissions policymaking by its Advisory Committees, in which market participants and other interested parties come together to provide us with their perspectives and potential solutions to practical problems.
The rulemaking we are adopting makes two changes to the Commissions uncleared margin rules. These changes have much to commend themindeed, we did not receive any comment letters opposing them. These rule changes further objectives that I have commented on before:
The imperative of harmonizing our margin requirements with those of our 1 Definition of material swap exposure under reg.
23.151a.
2 CFTC Letter 1929.
1 Recommendations to Improve Scoping and Implementation of Initial Margin Requirements for Non-Cleared Swaps, Report to the CFTCs Global Markets Advisory Committee by the Subcommittee on Margin Requirements for Non-Cleared Swaps April 2020 Margin Subcommittee Report, available at https www.cftc.gov/media/3886/
GMAC_051920MarginSubcommitteeReport/
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international colleagues in order to facilitate compliance and coordinated regulatory oversight; and the benefits of codifying relief that has been issued by our Staff and re-visiting our rules, where appropriate.
Background: A Different Universe Is Coming Into Scope of the Uncleared Margin Rules The Commissions uncleared margin rules for swap dealers, like the Framework of the Basel Committee on Banking Supervision and the Board of the International Organization of Securities Commissions BCBS/IOSCO 2 on which they are based, were designed primarily to ensure the exchange of margin between the largest, most systemic, and interconnected financial institutions for their uncleared swap transactions with one another. Today, these institutions and transactions are subject to uncleared margin requirements that have taken effect since the rules were adopted.
Pursuant to the phased implementation schedule of the Commissions rules and the BCBS/IOSCO Framework, though, a different universe of market participantspresenting unique considerationswill soon be coming into scope of the margin rules. It is only now, as we enter the final phases of the implementation schedule, that the Commissions uncleared margin rules will apply to a significant number of financial end-users, and we have a responsibility to make sure they are fit for that purpose.
Accordingly, now is the time we must thoughtfully consider whether the regulatory parameters that we have designed for the largest financial institutions in the earlier phases of margin implementation need to be tailored to account for the practical and operational challenges posed by the exchange of margin when one of the counterparties is a pension plan, endowment, insurance provider, mortgage service provider, or other financial end-user.
International Harmonization To Enhance Compliance and Coordinated Regulation The first rule change we are adopting would revise the calculation method for determining whether financial end-users come within the scope of the initial margin IM requirements, and the timing for compliance with the IM requirements after the end of the phased compliance schedule.
These changes would align certain timing and calculation issues under the Commissions margin rules with both the BCBS/IOSCO Framework and the manner in which these issues are handled by our regulatory colleagues in all other major market jurisdictions.
Swap dealers must exchange IM with respect to uncleared swaps that they enter into with a financial end-user counterparty that has material swaps exposure MSE.
The Commissions margin rules currently provide that after the last phase of compliance, MSE is to be determined on January 1, and that an entity has MSE if it has more than $8 billion in average aggregate 2 See generally BCBS/IOSCO, Margin requirements for non-centrally cleared derivatives July 2019, available at https www.bis.org/bcbs/
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notional amount AANA during June, July, and August of the prior year. By contrast, under the BCBS/IOSCO Framework and in virtually every other country in the world, an entity is determined to come into scope of the IM requirement on September 1, and an entity has MSE if it has the equivalent of $8 billion in AANA 3 during March, April, and May of that year.
The reason the United States is out-of-step with the rest of the world on these timing and calculation issues is not because of any reasoned policy determination. Rather, it is the result of a quirk that the U.S. margin rules were adopted based on the BCBS/
IOSCO Framework that was in effect at the timebut the BCBS/IOSCO Framework was revised two years later.
In a further disconnect, the Commissions margin rules look to the daily average AANA
during the three-month calculation period for determining MSE, whereas the BCBS/IOSCO
Framework and other major market jurisdictions base the AANA calculation on an average of month-end dates during that period. Yet, as noted in the rulemaking release, the Commissions Office of the Chief Economist has estimated that calculations based on end-of-month AANA generally would yield similar results as calculations based on the Commissions current daily AANA approach. It has been suggested that this rule change theoretically might incentivize a firm to window dress its swap exposures as the month-end approaches in order to avoid margin requirements. But the GMAC Margin Subcommittee observed that it would be neither practicable nor financially desirable for parties to tear-up their positions on a recurring basis prior to the month-end calculation,4 because doing so would interfere with hedging strategies and cause the firm to incur realized profit and loss.5
Accordingly, the Commission is amending these timing and calculation provisions of its uncleared margin rules to harmonize them with the BCBS/IOSCO Framework and the approach followed by our international colleagues. Given the global nature of the derivatives markets, we should always seek international harmonization of our 3 The MSE threshold under the BCBS/IOSCO
Framework is stated in euros rather than dollars.
4 Margin Subcommittee Report at 52.
5 Commenters made this same point. See, e.g., Joint Letter from ISDA, SIFMA, and GFXD at 3
month-end window dressing is not a realistic risk since unwinding and then reestablishing positions on a recurring basis over the three-month period would take considerable effort, interrupt hedging strategies, and require counterparties to absorb the costs of realized profit and loss changes; Letter from SIFMA Asset Management Group at 3 it would be neither practicable nor financially desirable for parties to tear-up positions on a recurring basis prior to each month end; Letter from Investment Company Institute at 56 for regulated funds, adjusting swap exposures over the course of three periodic dates solely to avoid IM
could impose transaction costs and inhibit a funds ability to manage its portfolio risk, which may be inconsistent with the investment advisers fiduciary duty to act in the best interest of its client.
Comment letters available at https
comments.cftc.gov/PublicComments/
CommentList.aspx?id=4157.

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