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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
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b Efficiency, Competitiveness, and Financial Integrity of Markets The Final Rule aligns the CFTC
Margin Rules AANA calculation method for determining MSE and the timing of post-phase-in compliance with the BCBS/IOSCO Framework. The Final Rule will thus reduce the need, at least for entities not also undertaking swaps with U.S. prudentially regulated SDs, to undertake separate AANA calculations accounting for different calculation methods and to conform to separate compliance timings, varying according to the location of swap counterparties and jurisdictional requirements applicable to the counterparties.165 As such, the Final Rule may promote market efficiency and may level the playing field for CSEs, fostering competitiveness and reducing the incentive for market participants to engage in regulatory arbitrage by identifying more accommodating margin frameworks.
The amendment to Regulation 23.154a, as proposed, will allow CSEs to rely on a swap entity counterpartys IM risk-based model calculation. This will generally result in lower IM than if IM were calculated using the standardized IM table. As such, the amendment may allow CSEs to more effectively compete in providing swaps to end-users. The Final Rule may thus promote efficiency in the uncleared swaps market by increasing the pool of swap counterparties and fostering competition.
Potential costs may arise because, without its own model, a CSE may lack effective means to verify its counterpartys IM calculations. As a result, if there are shortfalls in the output, the CSE may collect less IM
collateral to offset the risk of default by the counterparty, which could increase the risk of contagion, threatening the integrity of the U.S. financial markets.
The Commission, however, believes that the Final Rule is sufficiently targeted to mitigate these risks. The Final Rule will apply only when uncleared swaps are entered into for hedging, thus limiting widespread use and the potential for uncollateralized uncleared swap risk.
c Price Discovery By aligning the CFTC Margin Rule and the BCBS/IOSCO Framework with respect to the AANA calculation method for determining MSE and the post-phase-in compliance timing, the Final Rule may reduce the burden and confusion inherent in implementing 165 As noted above, for entities that only trade in the U.S., the Final Rule may result in separate compliance timings and AANA calculations.

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separate measures and processes to address compliance in different jurisdictions for some entities. The Final Rule may thus incentivize more firms to enter into uncleared swap transactions, increasing liquidity and leading to more robust pricing that reflects market fundamentals.
The amendment to Regulation 23.154a, as proposed, may relieve certain CSEs from having to adopt a risk-based margin model to calculate IM
or use the standardized IM table, by allowing them to rely on a counterpartys risk-based model calculation of IM. Relative to the alternatives, being able to have IM
calculated in this manner may lower the costs of trading for such entities, and they may increase their trading in uncleared swaps, which in turn may increase liquidity and enhance price discovery. On the other hand, the Final Rule may encourage entities to shift their trading from swaps that can be cleared, potentially reducing liquidity and price discovery in those markets.
d Sound Risk Management The Final Rule may reduce the need for some firms to undertake separate AANA calculations using different methods and to conform to separate compliance timing, allowing firms to engage in sound risk management by focusing on more substantive requirements.
Under the current rule, after the last phase of compliance, CSEs that enter into uncleared swaps with FEUs with MSE would have been required to exchange IM with such FEUs beginning on January 1, 2023. Under the Final Rule, CSEs will not be required to exchange IM with an FEU with MSE
until September 1, 2023. As such, one effect of adopting the Final Rule is that uncleared swaps entered into between January 1, 2023, and September 1, 2023, by a CSE and FEU with MSE may now be uncollateralized. Given that less collateral may be collected during that nine-month period, positions created during that period may be riskier, increasing the risk of contagion and systemic risk. Conversely, because the existing January 1, 2023 compliance date would have required reassessment of MSE status on such date, certain FEUs that came into scope in the last phase of compliance may have come out of scope post-phase-in, resulting in the collection of less collateral for such entities than under the Final Rule. The Commission therefore believes that balancing the additional firms that will not be required to exchange IM until September 2023, against the possibility that some firms would have come out of
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scope under the existing requirements, the impact of the rule change with respect to the exchange of required collateral is likely to be relatively small.
Also, it is possible that FEUs trading certain financial products may not meet the MSE threshold because month-end positions in these financial products are not reflective of their typical position, so that their month-end AANAs may be uncharacteristically low.166 As result, CSEs and such FEUs may not exchange IM for their uncleared swaps and their swaps may be insufficiently collateralized, increasing the risk of contagion and systemic risk.
Conversely, because more than 96% of FEUs are unlikely to have MSE and come within the scope of the IM
requirements, as estimated by the OCE, the exclusion of such products will have a limited impact on the effectiveness of the Commissions IM requirements.
Having only three observations to evaluate an entitys typical position may lead to less precision in determining which entities are most likely to contribute to systemic risk. However, absent window dressing issues, the effect of having fewer observations is unlikely to be substantial. Based on 2020 trading, OCE estimates that the sets of firms that will meet MSE under either measure are largely the same, and the set of entities that meet one criterion and not the other tends to consist of the smallest entities.
In regard to window dressing, AANA calculations based on month-end AANA compared to the currently required daily AANA averaging may be more susceptible to manipulation and less conducive to sound risk management. FEUs may manage their exposures as they approach the monthend date during the three-month calculation period to avoid MSE status.
The Commission, however, believes that the anti-evasion language being incorporated into the rule text by this Final Rule, discussed in more detail above, would reduce the risk of window dressing. In addition, the Commission notes that it has authority, including anti-fraud authority under section 4b of the CEA, to take appropriate enforcement actions against any market participant that may engage in deceptive conduct with respect to the AANA
calculation, and that CSEs, under the Commissions regulations, must have written policies and procedures in place 166 As noted in footnote 60 infra, the month-end calculation may tend to undercount positions in certain physical energy swaps.

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