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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
collect and post IM 9 and variation margin VM 10 for uncleared swaps.11
In administering the CFTC Margin Rule, the Commission has identified matters, further described below, that may pose challenges in the implementation of the IM requirements.
A. Calculation Method for Determining Whether Certain Entities Are Subject to the IM Requirements and the Timing for Compliance With the IM Requirements After the End of the Phased Compliance Schedule Regulation 23.161 sets forth a schedule for compliance with the CFTC
Margin Rule, spanning from September 1, 2016, to September 1, 2022.12 Under the schedule, entities are required to comply with the IM requirements in staggered phases,13 starting with entities with the largest average aggregate notional amount AANA, calculated on a daily basis, of uncleared swaps, uncleared security-based swaps, foreign exchange forwards, and foreign exchange swaps covered products and then successively with lesser AANA. The last phase of compliance, which begins on September 1, 2022, encompasses CSEs and covered
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9 IM

or initial margin is the collateral calculated as provided by Regulation 23.154 that is collected or posted in connection with one or more uncleared swaps pursuant to Regulation 23.152. IM is intended to secure potential future exposure following default of a counterparty i.e., adverse changes in the value of an uncleared swap that may arise during the period of time when it is being closed out. See CFTC Margin Rule, 81 FR at 683.
10 VM or variation margin, as defined in Regulation 23.151, is the collateral provided by a party to its counterparty to meet the performance of its obligations under one or more uncleared swaps between the parties as a result of a change in the value of such obligations since the trade was executed or the last time such collateral was provided. 17 CFR 23.151.
11 See generally Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR 636 Jan. 6, 2016. The CFTC
Margin Rule, which became effective April 1, 2016, is codified in part 23 of the Commissions regulations. 17 CFR 23.150 through 23.159, 23.161.
In May 2016, the Commission amended the CFTC
Margin Rule to add Regulation 23.160, 17 CFR
23.160, providing rules on its cross-border application. See generally Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap ParticipantsCross-Border Application of the Margin Requirements, 81 FR 34818 May 31, 2016.
12 See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 85
FR 71246 Nov. 9, 2020 extending the phased compliance schedule for the CFTCs IM
requirements for uncleared swaps to September 1, 2022.
13 The schedule also addresses the VM
requirements under the CFTC Margin Rule, providing a compliance period of September 1, 2016, through March 1, 2017. See 17 CFR 23.161a.
The compliance period including a six-month extension to September 1, 2017, through no-action relief has long expired and all eligible entities are required to comply with the VM requirements.

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counterparties 14 that did not come into the scope of the IM requirements in prior phases, including financial end users FEUs with material swaps exposure MSE 15 of more than $8
billion in AANA of covered products.16
The method for determining which entities come within the scope of the CFTCs IM requirements beginning in the last phase of compliance, as set forth in the Commissions regulations, differs from the method set out in the BCBS/
IOSCO Framework.17 More specifically, the BCBS/IOSCO Framework requires that in the last phase of implementation of the IM requirements, which begins on September 1, 2022, entities with 8
billion 18 in average month-end aggregate of notional amount monthend AANA of non-cleared derivatives, including forex forwards and swaps, during the period of March, April, and May of the current year, to exchange IM
beginning on September 1 of each year.
In contrast, under the CFTC Margin Rule, a CSE must exchange IM with an FEU that has MSE with respect to uncleared swaps entered into between the parties beginning in the last phase of compliance, which starts on September 1, 2022. The MSE for the 14 The term covered counterparty is defined in Regulation 23.151 as a financial end user with material swaps exposure or a swap entity, including an SD or MSP, that enters into swaps with a CSE.
See 17 CFR 23.151.
15 Regulation 23.151 provides that MSE for an entity means that the entity and its margin affiliates have an average daily aggregate notional amount of uncleared swaps, uncleared security-based swaps, foreign exchange forwards, and foreign exchange swaps with all counterparties for June, July, or August of the previous calendar year that exceeds $8 billion, where such amount is calculated only for business days. A company is a margin affiliate of another company if: i Either company consolidates the other on a financial statement prepared in accordance with U.S. Generally Accepted Accounting Principles, the International Financial Reporting Standards, or other similar standards; ii both companies are consolidated with a third company on a financial statement prepared in accordance with such principles or standards; or iii for a company that is not subject to such principles or standards, if consolidation as described in paragraph i or ii of this definition would have occurred if such principles or standards had applied. 17 CFR 23.151.
16 The determination of MSE requires computing AANA, calculated on a daily basis, of covered products over June, July and August of the previous calendar year. For simplicity purposes, this formulation will be referred to as daily average AANA to contrast with month-end AANA, which is used for the calculation of AANA under the BCBS/IOSCO Framework.
17 See generally BCBS/IOSCO, Margin requirements for non-centrally cleared derivatives July 2019, https www.bis.org/bcbs/publ/d475.pdf 2019 BCBS/IOSCO Framework.
18 The U.S. adopted the BCBS/IOSCO threshold, but replaced the 8 billion euro figure with a dollar amount of $8 billion. As a result, there is a small disparity in the threshold amounts given the continuing fluctuation of the dollar-euro exchange rate. The Final Rule does not address this issue.

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FEU is to be determined on September 1, 2022, based on the FEUs daily average AANA during the period of June, July, and August of the prior year.
After the last phase of compliance, the MSE for the FEU is to be determined on January 1 of each calendar year based on its daily average AANA during the June, July, and August period of the prior year, with application of the IM
requirements, if the FEU has MSE, required to begin on January 1 of each year.
The BCBS/IOSCO Framework was originally promulgated in September 2013,19 and then revised in 2015.20 The 2015 version of the BCBS/IOSCO
Framework changed the calculation period of June, July, and August, with an annual implementation date of December 1, to March, April, and May of each calendar year, with an annual implementation date of September 1.
The CFTC Margin Rule incorporated the earlier 2013 version of the BCBS/IOSCO
Framework by adopting the June, July, and August calculation period for the annual calculation of MSE. As a result, the Commissions existing regulations do not reflect the calculation period of March, April, and May set forth in the revised BCBS/IOSCO Framework published in March 2015.
The Commission also departed from BCBS/IOSCOs month-end AANA
calculation for determining whether an entity is subject to the IM requirements.
The Commission decided to adopt instead daily AANA averaging to determine whether an FEU has MSE, the finding of which requires a CSE to exchange IM with the FEU, to gather a more comprehensive assessment of the FEUs participation in the swaps market, and to address the possibility that a market participant might window dress its exposure on an asof date such as year-end, in order to avoid the Commissions margin requirements.21
As a result, the Commissions current method for the annual calculation of MSE, which was adopted in coordination with the U.S. prudential 19 See generally BCBS/IOSCO, Margin requirements for non-centrally cleared derivatives Sept. 2013, https www.bis.org/publ/
bcbs261.htm.
20 See generally BCBS/IOSCO, Margin requirements for non-centrally cleared derivatives March 2015, https www.bis.org/bcbs/publ/
d317.htm.
21 81 FR at 645. The potential for mutual funds to alter their portfolios prior to disclosure window dressing has been documented in the financial economics literature. See, e.g., Musto, D.
1999. Investment decisions depend on portfolio disclosures. Journal of Finance 54, 935952, or Agarwal, V., Gay G. and Ling, L. 2011. Window dressing in mutual funds. Review of Financial Studies, 27, 31333170.

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