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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
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IM requirements.89 Because maintaining a risk-based model imposes a disproportionate burden on the CSEs relative to the discrete and limited nature of their uncleared swap activities, the CSEs would generally not have a model for the calculation of IM, and thus new paragraph a5 will permit them to use the risk-based model calculation of their swap entity counterparties to determine the amount of IM to be collected from such counterparties.
Letter 1929, in addition to the foregoing conditions, requires that Cargill, prior to using the risk-based model calculation of IM of a swap entity counterparty, agree with its counterparty in writing that the IM
calculation be provided to Cargill in a manner and time frame that would allow Cargill to comply with the CFTC
Margin Rule and other applicable Commission regulations, and that the calculation be used to determine the amount of IM to be collected from the counterparty and to determine whether the IM threshold amount has been exceeded, which would require documentation addressing the posting, collection, and custody of IM. While the Commission acknowledges that the application of the alternative method of calculation of IM adopted herein could potentially result in the miscalculation or underestimation of IM, it believes that the safeguards in Part 23 of the Commissions regulations, such as the documentation requirements in Regulations 23.158 and 23.504, address this concern.
Regulation 23.158a requires CSEs to comply with the documentation requirements set forth in Regulation 23.504.90 Regulation 23.504b4i requires CSEs to have written documentation reflecting the agreement with a counterparty concerning methods, procedures, rules, and inputs for determining the value of each swap at any time from execution to the termination, maturity, or expiration of such swap for the purposes of complying with the margin requirements under section 4se of the Act and regulations under this part.91
Regulation 23.504b3i also provides that the documentation shall include credit support arrangements, including initial and variation margin requirements, if any.92
89 See generally 17 CFR 23.152 requiring CSEs to exchange IM with swap entity counterparties for their uncleared swaps.
90 17 CFR 23.158a.
91 7 U.S.C. 6se;17 CFR 23.504b4i.
92 Regulation 23.504b1 further provides that the documentation should include all terms governing the trading relationship between an SD

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Letter 1929 also sets forth two conditions that are designed to ensure that Cargill will undertake adequate risk management with respect to its uncleared swaps. The Commission notes that the availability of the alternative method of calculation of IM
may lead some CSEs to forgo the adoption of a proprietary risk-based model for the calculation of IM. Without a proprietary risk-based model, CSEs may not be able to precisely calculate IM, or the potential future exposure of uncleared swaps, which could undercut a CSEs ability to adequately manage the risk of its swaps. However, the Commission believes that CSEs risk management obligations under the CEA
and the Commissions regulations provide adequate safeguards to address this concern. In this regard, the Commission notes that section 4sj2 of the CEA requires SDs and MSPs, including CSEs, to establish robust and professional risk management systems adequate for the management of their day-to-day swaps business 93 and that Regulation 23.600, consistent with the mandate under the CEA, requires SDs and MSPs to establish and maintain a risk management program to monitor and manage risk associated with their swap activities.94
To obtain relief under Letter 1929, Cargill also must keep track of exceedances 95 and if the exceedances indicate that the Approved IM Calculation Method fails to meet the relevant regulators standards, Cargill must take appropriate steps to ensure compliance with its risk management obligations and address exceedances with its SD counterparty. 96 The purpose of this requirement is to ensure that Cargill monitors, identifies, and addresses potential shortfalls in the amount of IM generated by the counterparty. Cargill must also report to the CFTC any adjustments and enhancements . . . applied to the amount of IM calculated pursuant to the Approved IM Calculation Method to ensure Cargills collection of adequate amounts of IM.
The Commission notes that if a CSE
declines to adopt a proprietary model to calculate IM, a CSE may be unable to verify whether the amounts of IM
or MSP and its counterparty, including without limitation, terms addressing payment obligations, netting of payments, events of default or other termination events, calculation and netting of obligations upon termination, valuation, and dispute resolution. 17 CFR 23.504b1.
93 7 U.S.C. 6sj2.
94 See 17 CFR 23.600.
95 Exceedances are price movements above the amount of IM computed using a risk-based model that complies with the Commissions regulations.
96 Letter 1929 at 4.

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calculated by its counterparty are sufficient. The Commission, however, believes that Regulation 23.600
addresses this concern by requiring SDs and MSPs to account for credit risk in conducting their risk oversight and to ensure compliance with the CFTC
margin requirements. In the case of a CSE relying on new paragraph a5, as adopted, adequate risk oversight will include steps by the CSE to monitor, identify, and address potential shortfalls in the amounts of IM generated by the counterparty on whose IM model the CSE is relying. While the Commission does not prescribe the CSEs oversight process, it believes that a risk management program that is unable to identify or to address shortfalls in IM
will be insufficient to comply with Regulation 23.600.
Moreover, Regulation 23.600 requires SDs and MSPs to furnish to the Commission risk exposure reports setting forth credit risk exposures and any other applicable risk exposures relating to their swap activities. Here again, the Commission believes that an adequate risk exposure report pursuant to Regulation 23.600 will require a CSE
to identify any adjustments and enhancements to the amount of IM
calculated pursuant to the risk-based model of its swap entity counterparty to ensure the CSEs collection of adequate amounts of IM.
Commenters generally supported the proposed amendment to Regulation 23.154a to permit CSEs to rely on their swap entity counterparties risk-based model calculation of IM.97 A commenter stated that the proposed alternative method of IM calculation would greatly reduce the complexity and burden associated with the implementation of the margin requirements, in particular in the last phases of compliance, thus fostering greater liquidity and contributing to lowering the hedging costs of end-users.98 Another commenter discussed the competitive disadvantage that smaller SDs might experience absent the alternative method of IM calculation.99 This commenter noted that large SDs may be 97 Associations 10/22/2020 Letter at 4; BPEC 10/
23/2020 Letter at 2; FIA 10/22/2020 Letter at 4;
STRM 10/23/2020 Letter at 1; Working Group 10/
22/2020 Letter at 3. In addition to the comments addressing the alternative method of calculation of IM, as proposed, two commenters requested broadening the Proposal to permit CSEs to use the risk-based model of calculation of IM of financial end user counterparties. BPEC 10/23/2020 Letter at 9; Associations 10/22/2020 Letter at 4. In the Commissions view, this matter falls outside the scope of the Proposal. Accordingly, the Commission will not express a view or act on this matter.
98 BPEC 10/23/2020 Letter at 2.
99 FIA 10/22/2020 Letter at 5.

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