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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
relating to risk-based modeling,161
which may undercut the effectiveness of the CSEs risk oversight.162
In addition, the safeguard of private market discipline that is inherent in having each counterparty develop its own IM model, and therefore the ability for the parties to scrutinize each others IM model and output, will not be present given that under the Final Rule, a CSE will be permitted to rely on the risk-based model calculation of a swap entity counterparty. As such, there is the potential that insufficient amounts of IM will be generated by the swap entity counterparty, which may be attributable to a deficiency in the model or the fact that the swap entity may be inherently conflicted and interested in generating lower IM collectable by the CSE.163 Without a model, the CSE will lack adequate means to verify the amount of IM produced by the swap entity counterparty and will not be capable to contest it. As a result, insufficient amounts of IM may be collected by the CSE to protect itself against the risk of default by the swap entity counterparty, increasing the risk of contagion and the potential for systemic risk.
The Commission, however, believes that these costs are mitigated by the Final Rule, because it reflects the narrow terms of Letter 1929, which extends no-action relief only with respect to uncleared swaps entered into for the purpose of hedging. In addition, the Commission notes that there are other requirements in the Commissions regulations that address the monitoring of exposures and swap risk.
3. Section 15a Considerations In light of the foregoing, the CFTC has evaluated the costs and benefits of the Final Rule pursuant to the five considerations identified in section 15a of the CEA as follows:
a Protection of Market Participants and the Public The Final Rule aligns the CFTCs method for calculating AANA for determining MSE and the timing of post-phase-in compliance with the BCBS/IOSCO Framework. By aligning these aspects of the CFTC Margin Rule with the international standard, the Final Rule will reduce the potential for 161 See
generally 17 CFR 23.154b.
cf. 17 CFR 23.600 requiring SDs and MSPs to establish a robust risk management program for the monitoring and management of their swap activities.
163 But cf. 17 CFR 23.600 requiring swap entities to have a risk management program for the management and monitoring of risk associated with their swaps, which may reduce the risk that such entities may act in a conflicted manner.

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complexity and confusion that can result from using different AANA
calculation methods and different compliance schedules for some market participants that may be subject to margin requirements in multiple jurisdictions, which could result in errors in determining whether a particular entity comes within the scope of the CFTC Margin Rule, and, in turn, the failure to exchange requisite margin if the entity is mistakenly determined to be out of scope.
The Final Rule may result in FEUs having less time between the calculation of AANA to determine whether they reach the MSE level, and the date on which CSEs would be required to exchange IM with the FEUs should the FEUs reach the MSE level. This may make it more difficult for such FEUs to prepare for the exchange of IM for their uncleared swaps with CSEs and to timely post IM, increasing the risk of their swap positions.
More specifically, under the existing CFTC Margin Rule, beginning on September 1, 2022, FEUs would have been required to look back to the JuneAugust 2021 period to determine whether they have MSE and come within the scope of the IM
requirements. The firms would have had at least twelve months to engage in preparations for the exchange of regulatory IM, by, among other things, procuring rule-compliant documentation, establishing processes and systems for the calculation, collection and posting of IM collateral, and setting up custodial arrangements.
Under the Final Rule, which changes the AANA calculation period for determining MSE to March-May of the current year, such firms will have only a three-month window to engage in preparations to exchange IM.
Nevertheless, the Commission notes that, under the current rule being amended, after the end of the phased compliance schedule, firms would have had only four months in subsequent years between calculation and required compliance since the calculation period for determining MSE status would have been June through August of the prior year, with compliance starting January 1
of the following year. In addition, because the Final Rule requires the averaging of three month-end dates rather than all business days during the three-month calculation period, the potential burdens of a shorter preparatory period may be offset by the adoption of the BCBS/IOSCO
Frameworks less onerous calculation method for some entities.
Moreover, the Final Rule shifts the timing of post-phase-in compliance to
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September 1 of each year. As such, some entities that otherwise would have been required to exchange IM beginning January 1, 2023, will be able to defer compliance to September 1, 2023.164 As a result, less collateral for uncleared swaps may be collected between January 1, 2023, and September 1, 2023, rendering the parties positions riskier during that nine-month period, which could raise the risk of contagion and increase the potential for systemic risk.
Firms that would have fallen out of scope by January 1, 2023, will also be subject to compliance for an additional nine months.
The amendment to Regulation 23.154a, as proposed, will allow a CSE
to use the risk-based model calculation of IM of a counterparty that is a swap entity. As a result, the CSE may forgo the adoption of a risk-based model, avoiding the cost and burden associated with the development and maintenance of a model. Without a model, the CSE
may not be able to challenge the amounts generated by the swap entity counterparty, which may be insufficient because of model error or malfunction or because the swap entity, given the inherent conflict of interest, may be biased in favor of calculating and posting lower amounts of IM to the CSE.
Hence, the CSE may collect insufficient amounts of IM to offset the risk of counterparty default, increasing the risk of contagion and the potential for systemic risk.
The Commission believes that these risks may be mitigated by the Final Rule, which is narrowly tailored to permit reliance on a swap entity counterpartys risk-based model calculation only with respect to uncleared swaps entered into for the purpose of hedging. In addition, Regulation 23.600, which requires SDs and MSPs to adopt a robust risk management program for the monitoring and management of risk related to their swap activities, imposes an additional safeguard by requiring the monitoring of exposures and swap risk.
164 This would apply to entities that meet the MSE level based on their AANA during the June, July, and August 2022 period, and continue to have MSE in the March, April, and May 2023 period. Of course, changing the calculation period to the March, April, and May 2023 period may lead to the inclusion of entities whose AANA is below MSE in the June, July, and August 2022 period, but rises to the MSE level or above by the March, April, and May 2023 period. The OCE estimated that approximately 75100 entities typically move from one side of the MSE threshold to the other between measurement periods.

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