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Federal Register / Vol. 86, No. 14 / Monday, January 25, 2021 / Rules and Regulations
that is required pursuant to 23.150
through 23.161 to be collected or posted and that has not been collected or posted with respect to the counterparty is greater than the minimum transfer amount, as the term is defined in 23.151.

5. Amend 23.158 by revising paragraph a to read as follows:

23.158

Margin documentation.

a General requirement. Each covered swap entity shall execute documentation with each counterparty that complies with the requirements of 23.504 and that complies with this section, as applicable. For uncleared swaps between a covered swap entity and a counterparty that is a swap entity or a financial end user, the documentation shall provide the covered swap entity with the contractual right and obligation to exchange initial margin and variation margin in such amounts, in such form, and under such circumstances as are required by 23.150 through 23.161.
With respect to the minimum transfer amount, if a covered swap entity and a counterparty that is a swap entity or a financial end user agree to have separate minimum transfer amounts for initial and variation margin, the documentation shall specify the amounts to be allocated for initial margin and variation margin. Such amounts, on a combined basis, must not exceed the minimum transfer amount, as the term is defined in 23.151.

Issued in Washington, DC, on December 9, 2020, by the Commission.
Robert Sidman, Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of Federal Regulations.

Appendices to Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap ParticipantsVoting Summary and Chairmans and Commissioners Statements Appendix 1Voting Summary
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On this matter, Chairman Tarbert and Commissioners Quintenz, Behnam, Stump, and Berkovitz voted in the affirmative. No Commissioner voted in the negative.
Appendix 2Supporting Statement of Commissioner Dawn D. Stump Overview I am pleased to support the final rulemaking that the Commission is adopting with respect to the minimum transfer amount provisions of its margin requirements for uncleared swaps.

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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.59 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, which 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 need to tailor our rules to assure that they are workable for those required to comply with them; and the benefits of codifying relief that has been issued by our Staff and re-visiting our rules, where appropriate.
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 60 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 59 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, available at https www.cftc.gov/
media/3886/GMAC_
051920MarginSubcommitteeReport/download.
60 See generally BCBS/IOSCO, Margin requirements for non-centrally cleared derivatives July 2019, available at https www.bis.org/bcbs/
publ/d475.pdf.

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a pension plan, endowment, insurance provider, mortgage service provider, or other financial end-user.
This rulemaking regarding the minimum transfer amount MTA does exactly that.
The Commissions uncleared margin rules provide that a swap dealer is not required to collect or post initial margin IM or variation margin VM with a counterparty until the combined amount of such IM and VM exceeds the MTA of $500,000. Yet, the application of the MTA presents a significant operational challenge for institutional investors that typically hire asset managers to exercise investment discretion over portions of their assets in separately managed accounts SMAs for purposes of diversification. As a practical matter, neither the owner of the SMA, the manager of the assets in the SMA, nor the swap dealer that is a counterparty to the SMA is in a position to readily determine when the MTA has been exceeded on an aggregate basis or to assure that it is not.
To address this challenge, the Commission is amending the definition of MTA in its margin rules to allow a swap dealer to apply an MTA of up to $50,000 to each SMA
owned by a counterparty with which the swap dealer enters into uncleared swaps. As noted in the release, any potential increase in uncollateralized credit risk as a result would be mitigated both by the conditions set out in the rules we are adopting, as well as existing safeguards in the Commodity Exchange Act CEA and the Commissions regulations.61
This is a sensible approach and an appropriate refinement to make the Commissions uncleared margin rules workable for SMAs given the realities of the modern investment management environment. As I have stated before, no matter how well-intentioned a rule may be, if it is not workable, it cannot deliver on its intended purpose.62
The Benefits of Codifying Staff Relief and Re-Visiting Our Rules Application of MTA to SMAs: The rule change that I have discussed above regarding the application of the MTA to SMAs would codify no-action relief in Letter No. 1712
that our Staff issued in 2017.63 The Commissions Staff often has occasion to issue relief or take other action in the form 61 Specifically, CEA Section 4sj2, 7 U.S.C.
6sj2, requires swap dealers to adopt a robust risk management system adequate for the management of their swap activities, and CFTC Rule 23.600, 17
CFR 23.600, requires swap dealers to establish a risk management program to monitor and manage risks associated with their swap activities.
62 Statement of Commissioner Dawn D. Stump Regarding Final Rule: Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants July 23, 2020, available at https www.cftc.gov/PressRoom/
SpeechesTestimony/stumpstatement072320.
63 CFTC Letter No. 1712, Commission Regulations 23.152b3 and 23.153c: No-Action Position for Minimum Transfer Amount with respect to Separately Managed Accounts February 13, 2017, available at https www.cftc.gov/idc/
groups/public/@lrlettergeneral/documents/letter/
17-12.pdf.

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