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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
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risk attendant to another swap undertaken between the CSE and a nonswap entity counterparty; and b whether such other swap i was executed by the non-swap entity counterparty as a substitute for transactions made or to be made, or for positions taken or to be taken at a later time, in a commercial enterprise; ii is economically appropriate to the reduction of risk in the conduct and management by the non-swap entity counterparty of a commercial enterprise;
and iii arises from the potential change in value of the non-swap entity counterpartys assets, liability or services. To determine whether the criteria in b above have been satisfied, the CSE, in accordance with Regulation 23.402d, would be able to rely on a written representation from the nonswap entity counterparty, unless the CSE has information that would cause a reasonable person to question the accuracy of the representation.130
By using this framework, the Commission believes that many of the questions raised by the commenters in connection with the application of the hedging limitation would be addressed.
For example, commenters asked whether swaps entered into by a CSE
and an end-user and the offsetting swaps undertaken by the CSE and a swap entity counterparty must match one-to-one.131 The framework provides some flexibility permitting CSEs as part of the hedging strategy to match a set of customer-facing swaps with one or more hedging swaps undertaken with a swap entity counterparty. Commenters also asked what would happen if the customer-facing swaps were terminated, and whether anticipatory hedging would be deemed hedging in the context of the alternative method of calculation.132 Consistent with the framework set forth above, swaps undertaken by a CSE and a swap entity counterparty as part of a hedging strategy to offset the risk of customer130 17 CFR 23.402d providing that an SD or MSP may rely on the written representations of a counterparty to satisfy its due diligence requirements under subpart H of Part 23 of the Commissions regulations, which sets forth business conduct standards for SDs and MSPs to be applied in their dealings with counterparties. See also Position Limits for Derivatives approved Oct. 15, 2020 defining bona fide hedging transaction or position to include pass-through swaps, as described in section 4ac2B of the CEA, undertaken to offset the risk of other swaps entered into to hedge commercial risk, and noting that a counterparty may rely on its counterpartys written representations confirming that such counterparty is executing the pass-through swap to hedge another swap undertaken to offset commercial risk.
131 FIA 10/22/2020 Letter at 7; BPEC 10/23/2020
Letter at 4.
132 Id.

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facing swapsincluding swaps that are ultimately terminated and swaps that may be entered into in the future would be deemed to be hedges for the purposes of the alternative method of IM calculation.
The Commission confirms, consistent with the statutory framework set forth in section 4ac2B, that both the underlying swap between the CSE and the end-user counterparty, and the offsetting swap between the CSE and the swap entity counterparty must be entered into for hedging purposes. More specifically, the swap between the CSE
and the end-user counterparty must be entered into to hedge risk attendant in a commercial enterprise. In connection with this position, a commenter stated that the burden of compliance with the hedging limitation would be borne not only by the CSE and the swap entity counterparty, but also by end-users that are counterparties to the CSE, as they too would need to make an assessment of whether their swaps are for hedging purposes and would need to update their documentation accordingly.133 Given that the alternative method of calculation is expected to be used in the limited circumstances described herein, the Commission believes that the chance that end-users may be burdened would be greatly reduced.
A commenter also stated that the hedging limitation may not only burden small CSEs but also their swap entity counterparties.134 Another commenter noted that a swap entity counterparty may be reluctant to trade with a CSE
fearing the CSEs misrepresentation or mischaracterization of its swaps as hedges, which could lead the swap entity counterparty to violate its obligations under the CFTC Margin Rule.135 In this regard, the Commission notes that Regulation 23.402d permits a swap entity counterparty with respect to swaps with a CSE to rely on the CSEs representations to satisfy its due diligence obligations unless the swap entity counterparty has any reason to question the CSEs representations.136
The Commission believes that Regulation 23.402d mitigates swap entity counterparties concerns regarding a CSEs potential misrepresentation or 133 FIA

10/22/2020 Letter at 8.
10/23/2020 Letter at 5.
135 FIA 10/22/2020 Letter at 8.
136 See 17 CFR 23.402d allowing SDs or MSPs to rely on the written representations of a counterparty to satisfy its due diligence requirements concerning swaps entered into with the counterparty, unless the SD or MSP has information that would cause a reasonable person to question the accuracy of the representation.
134 BPEC

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mischaracterization of its swaps as hedges.
Two commenters suggested replacing the hedging limitation with a $750
billion threshold, whereby CSEs with AANA below the threshold would be able to use the alternative method of IM
calculation without imposing conditions on the business of CSEs that could have adverse market impact.137 In the Commissions view, another threshold to determine the applicability of the CFTCs margin requirements would add further complexity to the rules. In addition, the Commission believes that the hedging limitation as adopted and further discussed above is adequately designed to advance the Commissions goals.
III. Administrative Compliance A. Regulatory Flexibility Act The Regulatory Flexibility Act RFA requires Federal agencies to consider whether the rules they propose will have a significant economic impact on a substantial number of small entities.138 As discussed in the Proposal, the amendments being adopted herein only affect SDs and MSPs that are subject to the CFTC
Margin Rule and their covered counterparties, all of which are required to be eligible contract participants ECPs.139 The Commission has previously determined that SDs, MSPs, and ECPs are not small entities for purposes of the RFA.140 Therefore, the Commission believes that the Final Rule will not have a significant economic impact on a substantial number of small entities, as defined in the RFA.
Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605b that the Final Rule will not have a significant economic impact on a substantial number of small entities.
B. Paperwork Reduction Act The Paperwork Reduction Act of 1995
PRA 141 imposes certain requirements on Federal agencies, including the Commission, in connection with their conducting or sponsoring any collection of information, as defined by the PRA. The 137 STRM 10/23/2020 Letter at 5; Working Group 10/23/2020 Letter at 5.
138 5 U.S.C. 601 et seq.
139 Each counterparty to an uncleared swap must be an ECP, as the term is defined in section 1a18
of the CEA, 7 U.S.C. 1a18 and Regulation 1.3, 17
CFR 1.3. See 7 U.S.C. 2e.
140 See Registration of Swap Dealers and Major Swap Participants, 77 FR 2613, 2620 Jan. 19, 2012
SDs and MSPs and Opting Out of Segregation, 66
FR 20740, 20743 April 25, 2001 ECPs.
141 44 U.S.C. 3501 et seq.

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