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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
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Commenters expressed strong support for the amendments to the MSE
definition in Regulation 23.151 to align the method for calculating AANA and the timing of compliance with the IM
requirements after the end of the last phase of compliance with the BCBS/
IOSCO Framework.62 Commenters stated that the amendments would help smaller market participants overcome unnecessary operational challenges. 63
The commenters also stated that the amendments would help entities that conduct swaps business across jurisdictions.64 A commenter stated that the differences in the AANA calculation methods and the timing of compliance burden market participants, such as asset managers, in determining whether clients are in scope in the later phases of the compliance schedule and create a complex and confusing ongoing monitoring process.65
Another commenter noted that the U.S. is the only jurisdiction that requires using the three-month period of June, July and August of the preceding year for the calculation of AANA, and the only jurisdiction besides Brazil that requires AANA to be calculated using daily averaging rather than month-end averaging over the three-month period.66 The commenter stated that a jurisdiction-specific approach creates additional effort for smaller counterparties coming into scope in the later phases of the compliance schedule, which need to run separate AANA
calculations using different time periods and methods and need to provide separate notifications to their counterparties concerning the application of the IM requirements.67
The commenter stated that according to its estimates, 775 counterparties with a total of 5,443 relationships could come into the scope of global IM requirements in the last phase of compliance beginning September 1, 2022, and that Framework and the amendments to the definition of MSE discussed herein. Also of note, the U.S.
Securities and Exchange Commission SEC has adopted a different approach that does not use MSE
for identifying entities that come within the scope of the SEC margin requirements. See Capital, Margin, and Segregation Requirements for SecurityBased Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, 84 FR 43872 Aug.
22, 2019.
62 See ACLI 10/23/2020 Letter at 1; Associations 10/22/2020 Letter at 2; FIA 10/22/2020 Letter at 4;
MFA 10/22/2020 Letter at 1; SIFMA AMG 10/22/
2020 Letter at 2; Working Group 10/22/2020 Letter at 3.
63 SIFMA AMG 10/22/2020 Letter at 1; ACLI 10/
23/2020 Letter at 2.
64 Id.
65 Id.
66 Associations 10/22/2020 Letter at 2.
67 Id.

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over 74% of those counterparties will qualify for the IM requirements with less than EUR 25 billion AANA and therefore may be in a position to recalculate their AANA each year to affirm the continued application of the IM requirements.68 In addition, hundreds of other counterparties that do not initially breach the $8 billion threshold will need to conduct annual AANA calculations to confirm whether they have come into scope of the IM
requirements in one or more jurisdictions.69 The commenter concluded by stating that jurisdictional differences are difficult to track and manage, leading to inadvertent errors or omissions in the calculations and the application of IM requirements, and that the differences could interfere with the ability to apply substituted compliance, since a party may become subject to the IM requirements under the CFTC
Margin Rule on a different date in the U.S. as they will in other global jurisdictions.70
Addressing concerns that the monthend AANA methodology for determining MSE may result in window dressing, a commenter stated that it was not a realistic risk, as it would take considerable effort for parties to unwind their positions and then reestablish the position on a recurring basis over the three-month period, which would interrupt their hedging strategies and require the counterparties to absorb the cost of realized profit and loss changes.71 Another commenter echoed these arguments, noting that tearing up positions may interfere with hedging and cause portfolios to incur realized profit and loss changes.72 A commenter, speaking on behalf of the managed fund industry, stated that adjustments to swaps positions to benefit from the month-end AANA methodology would be contraindicated in the case of an investment adviser to a regulated fund because the investment adviser is a fiduciary to the fund that is legally obligated to manage the funds assets in accordance with that funds investment strategy, policies, and limitations.73
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 advisers duty to act in the best interest of its clients.74
68 Id.
69 Id.

235

Another commenter representing the life insurance industry stated that the proposed changes to the calculation of AANA would be unlikely to change the life insurers market behavior given that life insurers are subject to significant state regulation of their derivatives activities.75
While recognizing that practical considerations, as discussed by the commenters, may reduce the risk of window dressing, the Commission believes that it should seek to remove any potential incentives that may lead to the manipulation of swaps exposures to avoid meeting the definition of MSE
and thus coming within the scope of the margin requirements. Accordingly, as discussed further above, the Commission is revising the proposed rule text to incorporate an anti-evasion provision prohibiting activities willfully designed to avoid the month-end AANA
calculation.
With respect to the divergence between the CFTC and the U.S.
prudential regulators regarding the method for calculating AANA for determining whether an entity has MSE
and the timing of compliance after the last phase of the compliance schedule, commenters stated that the CFTC
should proceed with the amendments even if the prudential regulators do not make corresponding changes to their margin rules while also encouraging the prudential regulators to align with the global standards.76 A commenter further noted that given that most affected FEUs belong to a corporate group that has to calculate AANA for multiple jurisdictions, a deviation between the CFTC and prudential regulators would not increase the regulatory burden for most FEUs as they would already be calculating AANA under the CFTC/
prudential regulator approach and the BCBS/IOSCO approach.77
After reviewing the comments, the Commission has confirmed the rationale articulated for proposing the amendments to the definition of MSE in Regulation 23.151 and is therefore adopting the amendments as proposed, subject to the change to the proposed rule text to add the anti-evasion provision discussed in more detail above. The Commission believes, as discussed in the preamble to the Proposal, that the amendments will eliminate the need to maintain separate schedules and processes for the computation of AANA and reduce the burden and cost of compliance with the
70 Id.
71 Id.

75 ACLI

72 SIFMA

AMG 10/22/2020 Letter at 3.
73 ICI 10/22/2020 Letter at 5.
74 Id.

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10/23/2020 Letter at 2.
AMG 10/22/2020 Letter at 3; Working Group 10/22/2020 Letter at 2.
77 Working Group 10/22/2020 Letter at 3.
76 SIFMA

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