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Federal Register / Vol. 86, No. 14 / Monday, January 25, 2021 / Rules and Regulations
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required by Regulation 23.158a. The amendment recognizes that CSEs can apply separate MTAs for IM and VM for determining whether Regulations 23.152b3 and 23.153c require the exchange of IM or VM. The Commission acknowledges that the application of separate IM and VM MTAs may result in the exchange of a lower amount of total margin between a CSE and its counterparty to mitigate the risk of their uncleared swaps than the amount that would be exchanged if the IM and VM
MTA were computed on an aggregate basis.53 The Commission notes that this cost may be mitigated because the application of separate IM and VM
MTAs could also result in the exchange of higher rather than lower amounts of margin.54
While the Commission recognizes that the uncollateralized exposure that may result from amending Regulations 23.151 and 23.158a, in line with Letters 1712 and 1925, could increase credit risk associated with uncleared swaps, the Commission believes that a number of safeguards exist to mitigate this risk. The Commission notes that the amendments, as adopted, set the MTA
at low levels. When the MTA is applied to a counterparty, the sum of the IM and VM MTAs must not exceed $500,000.
When the MTA is applied to an SMA of a counterparty, the sum of the IM and VM MTAs must not exceed $50,000. In particular with respect to the application of the MTA to SMAs, the low level of the MTA may dampen the incentive to create additional SMAs to benefit from the potentially higher MTA
threshold given the inability to net collateral across SMAs under the Final Rule. Several commenters confirmed the Commissions assessment and some added that the burdens and costs of creating and maintaining separate accounts would likely override the 53 Supra note 38 explaining how the application of separate MTAs for IM and VM could result in the exchange of lower amounts of margin than if IM
and VM MTA were computed on an aggregate basis.
54 The following illustration explains how the application of separate MTAs for IM and VM could result in the exchange of higher amounts of margin than if IM and VM MTA were computed on an aggregate basis: An SD and a counterparty agree to $300,000 IM MTA, and $200,000 VM MTA. If the margin calculations set forth in Commission regulations 23.154 for IM, and 23.155 for VM
require the SD to post $200,000 of IM with the counterparty and $250,000 of VM with the counterparty, the SD would not be required to post IM with the counterparty as the $200,000
requirement is less than the $300,000 MTA.
However, the SD would be required to post $250,000 in VM as the VM required exceeds the $200,000 VM MTA, even though the total amount of margin owed is below the $500,000 MTA set forth in Commission regulations 23.152b3 and 23.153c. Letter 1925 at 4.

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benefits of any marginal increase in MTA.55 Also, the Commission notes that other regulatory safeguards exist that would limit the potential increase in the credit exposure, including section 4sj2 of the CEA,56 which mandates that CSEs adopt a robust and professional risk management system adequate for the management of day-today swap activities, and Regulation 23.600,57 which requires CSEs, in establishing a risk management program for the monitoring and management of risk related to their swap activities, to account for credit risk and to set risk tolerance limits.
3. Section 15a Considerations In light of the foregoing, the CFTC has evaluated the costs and benefits of the Final Rule pursuant to the five considerations identified in section 15a of the CEA as follows:
a. Protection of Market Participants and Public As discussed above, the amendments to Regulations 23.151 and 23.158a, which address the application of the MTA to SMAs and the application of separate MTAs for IM and VM, remove practical burdens in the application of the MTA, facilitating the implementation of the CFTC Margin Rule, with minimal impact on the protection of market participants and the public in general. Although the amendments, as adopted, could result in larger amounts of MTA being applied to uncleared swaps, potentially resulting in the exchange of reduced margin to offset the risk of uncleared swaps, the impact is likely to be negligible relative to the size of the uncleared swap positions. The Commission notes that the MTA thresholds are set at low levels. In addition, CSEs are required to monitor and manage risk associated with their swaps, in particular credit risk, and to set tolerance levels as part of the risk management program mandated by Regulation 23.600. To meet the risk tolerance levels, a CSE
may contractually limit the MTA or the number of SMAs for a particular counterparty with whom the CSE enters into uncleared swap transactions.
b. Efficiency, Competitiveness, and Financial Integrity of Markets By amending Regulation 23.151 to allow CSEs to apply an MTA of up to $50,000 for each SMA of a counterparty, the Commission eliminates burdens and practical challenges associated with the 55 See
ICI at 7; MFA at 3; SIFMA AMG at 3.
U.S.C. 6sj2.
57 17 CFR 23.600.
56 7

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computation and aggregation of the MTA across multiple SMAs. In addition, the new MTA threshold for SMAs could have the effect of delaying how soon margin would be exchanged, as the aggregate MTA for SMAs is no longer limited to $500,000.
The simplification of the process for applying the MTA to SMAs and the reduced cost that may be realized from the deferral of margin obligations may encourage market participants to enter into uncleared swaps through accounts managed by asset managers and also encourage asset managers to accept more clients. The amendments to Regulation 23.151 could therefore foster competitiveness by encouraging increased participation in the uncleared swap markets.
The amendment to Regulation 23.158a states that if a CSE and its counterparty agree to have separate MTAs for IM and VM, the respective amounts of MTA must be reflected in the margin documentation required by Regulation 23.158a. The amendment recognizes that CSEs can apply separate MTAs for IM and VM, enabling CSEs to accommodate the different segregation treatments for IM and VM under the CFTCs margin requirements and to more efficiently comply with the CFTC
Margin Rule.
The amendments to Regulations 23.151 and 23.158a could have the overall effect of permitting larger amounts of MTA being applied to uncleared swaps, resulting in the collection and posting of less collateral to offset the risk of uncleared swaps, which could undermine the integrity of the markets. The Commission, however, believes that the uncollateralized swap exposure will be limited given that the MTA thresholds are set at low levels, and there are other built-in regulatory safeguards, such as the requirement that CSEs establish a risk management program under Regulation 23.600 that provides for the implementation of internal risk parameters for the monitoring and management of swap risk.
The Commission also notes that the amendments provide certainty to market participants who may have relied on Letters 1712 and 1925, and thereby facilitate their efforts to take the operation of the Commissions regulations into account in planning their uncleared swap activities.
c. Price Discovery The amendments to Regulations 23.151 and 23.158a simplify the process for applying the MTA, reducing the burden and cost of implementation.
Given these cost savings, CSEs and
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