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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
regulations unless a compelling reason exists not to do sowhich is not the case here.
Indeed, in the Dodd-Frank Act, Congress specifically directed the Commission, in order to promote effective and consistent global regulation of swaps, to consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation . . . of swaps and swap entities. . . . 6 And when the G20 leaders met in Pittsburgh in the midst of the financial crisis in 2009, they, too, recognized that a workable solution for global derivatives markets demands coordinated policies and cooperation.7
Our rule change regarding MSE is true to the direction of Congress in the Dodd-Frank Act, and honors the commitment of the G
20 leaders at the Pittsburgh summit.
Differences between countries in the detailed timing and calculation requirements with respect to uncleared margin compel participants in these global markets to run multiple compliance calculationsfor no particular regulatory reason. This not only forces market participants to bear unnecessary costs, but actually hinders compliance with margin requirements because of the entirely foreseeable prospect of calculation errors in applying the different rules.
As noted above, now is the time to address this disconnect in MSE timing and calculation requirements because the financial end-users to which the MSE
definition applies are coming into scope of the margin rules. During the unfortunate events of the financial crisis, we learned that coordination among global regulators, working towards a common objective, is essential. That lesson remains true today, and we are reminded that disregarding this reality has the potential to weaken, rather than strengthen, the effectiveness of our oversight and the resilience of global derivatives markets.
The Benefits of Codifying Staff Relief and Re-Visiting Our Rules The second rule change that we are adopting would codify existing Staff noaction relief in recognition of market realities. The Commissions Staff often has occasion to issue relief or take other action in the form of no-action letters, interpretative letters, or advisories on various issues and in various circumstances. This affords the Commission a chance to observe how the Staff action operates in real-time, and to evaluate lessons learned. With the benefit of this time and experience, the Commission
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6 See
section 752a of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111203, Title VII, 124 Stat. 1376 2010 DoddFrank Act.
7 See Leaders Statement from the 2009 G20
Summit in Pittsburgh, Pa. at 7 September 2425, 2009 We are committed to take action at the national and international level to raise standards together so that our national authorities implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism, and regulatory arbitrage, available at https www.treasury.gov/resourcecenter/international/g7-g20/Documents/pittsburgh_
summit_leaders_statement_250909.pdf.

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should then consider whether codifying such Staff action into rules is appropriate.8 As I
have said before, it is simply good government to re-visit our rules and assess whether certain rules need to be updated, evaluate whether rules are achieving their objectives, and identify rules that are falling short and should be withdrawn or improved. 9
This second rule change would codify the alternative IM calculation method set out in Staff no-action Letter No. 1929.10 It would provide that a swap dealer may use the riskbased model calculation of IM of a counterparty that is a CFTC-registered swap dealer as the amount of IM that the former must collect from the latter. The release states the Commissions expectation that this alternative method of IM collection will be used by swap dealers with a discrete and limited swap business consisting primarily of entering into uncleared customer-facing swaps with end-user counterparties, and then hedging the risk of those swaps with uncleared swaps entered into with a few other swap dealers.
Simply put, not all swap dealers are created equal. It is therefore appropriate to tailor our uncleared margin regime accordingly. Letter No. 1929 recognized this reality and smoothed the rough edges of our otherwise one-size-fits-all uncleared margin rules, and it is appropriate to codify that result.
Yet, under the rule amendments being adopted, this alternative method is subject to the condition that the uncleared swaps for which a swap dealer uses the risk-based model calculation of IM of its swap dealer counterparty are entered into for the purpose of hedging the formers own risk from entering into customer-facing swaps with non-swap dealer counterparties. This is a departure from the GMAC Margin Subcommittee, which did not recommend such a condition.
I am concerned by comments we received suggesting that this condition may cause this rule change to prove unworkable in 8 See comments of Commissioner Dawn D. Stump during Open Commission Meeting on January 30, 2020, at 183 noting that after several years of noaction relief regarding trading on swap execution facilities SEFs, we have the benefit of time and experience and it is time to think about codifying some of that relief. . . . The SEFs, the market participants, and the Commission have benefited from this time and we have an obligation to provide more legal certainty through codifying these provisions into rules., available at https
www.cftc.gov/sites/default/files/2020/08/
1597339661/openmeeting_013020_Transcript.pdf.
9 Statement of Commissioner Dawn D. Stump for CFTC Open Meeting on: 1 Final Rule on Position Limits and Position Accountability for Security Futures Products; and 2 Proposed Rule on Public Rulemaking Procedures Part 13 Amendments September 16, 2019, available at https
www.cftc.gov/PressRoom/SpeechesTestimony/
stumpstatement091619.
10 CFTC Letter No. 1929, Request for No-Action Relief Concerning Calculation of Initial Margin December 19, 2019, available at https
www.cftc.gov/LawRegulation/CFTCStaffLetters/
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practice.11 I am encouraged that the rulemaking release addresses some of these comments by, among other things, confirming: 1 The flexibility of swap dealers as part of their hedging strategy to match a set of customer-facing swaps with one or more hedging swaps undertaken with swap dealer counterparties; and 2 that customer-facing swaps entered into through anticipatory hedging or that are subsequently terminated would be deemed hedges for purposes of the alternative method of IM
calculation. Nevertheless, if over time, market participants find that the hedging condition causes this rule change to fail to fulfill its intended purpose, I urge them to alert the Commission so that it can consider appropriate adjustments.
There Remains Unfinished Business While I am pleased with the steps the Commission is taking, there remains unfinished business in the implementation of uncleared margin requirements. As an initial matter, U.S. prudential regulators with oversight authority over bank swap dealers have not adopted the same rule changes. As a result, although commenters expressed support for the Commission proceeding with these rule changes even in the absence of parallel action by the U.S. prudential regulators, the operational difficulties confronting market participants that are coming into scope of the margin rules will not be fully addressed when they enter into uncleared swaps with bank swap dealers. I
look forward to continuing the dialogue with our regulatory colleagues at other U.S.
agencies to support addressing these challenges.
In addition, the report of the GMAC Margin Subcommittee recommended several actions, beyond those that we are adopting, to address the hurdles associated with the application of uncleared margin requirements to end-users.
Having been present for the development of the Dodd-Frank Act, I recall that the concerns expressed by many lawmakers at the time focused on the application of the new requirements to end-users. The unique challenges with respect to uncleared margin that caused uneasiness back in 20092010
are now much more immediate as the margin requirements are being phased in to apply to these end-users. As the calendar turns into the new year, I look forward to continuing to work together to address the other recommendations included in the GMAC
Margin Subcommittees report regarding applying the uncleared margin rules to financial end-users. The need to do so will 11 See, e.g., Letter from BP Energy Company at 5
given the uncertainty as to what constitutes hedging, swap dealers may be reluctant to rely on the alternative method of IM calculation and 6
limiting relief to hedge transactions may diminish its utility; Letter from Futures Industry Association at 8 complexity and added risk of hedging condition will make the alternative method of IM
calculation impractical as counterparties will shy away from undertaking swaps with swap dealers that rely on the alternative method of calculating IM; also, cost, operational and documentation burdens associated with hedging condition could lead small swap dealers to cease providing risk management services to end-user counterparties, leaving end users with unhedged risks.

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