Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) established a comprehensive regulatory framework for derivatives, which are generally characterized as swaps and security-based swaps. Sections 731 and 764 of the DFA require the registration and regulation of certain âswap entitiesâ. For certain types of swap entities that are prudentially regulated by one of the Agencies ("covered swap entities"), sections 731 and 764 of the DFA require the Agencies to jointly adopt rules for swap entities under their respective jurisdictions imposing capital requirements and initial and variation margin requirements on all non-cleared swaps.
The swaps-related provisions are intended to reduce risk, increase transparency, promote market integrity within the financial system, and, in particular, address a number of weaknesses in the regulation and structure of the swaps markets that were revealed during the financial crisis. During the financial crisis, the opacity of swap transactions among dealers and between dealers and their counterparties created uncertainty about whether market participants were significantly exposed to the risk of a default by a swap counterparty. A regulatory margin requirement for non-cleared swaps reduces the uncertainty around the possible exposures arising from non-cleared swaps. In addition, the financial crisis revealed that a number of significant participants in the swaps markets had taken on excessive risk through the use of swaps without sufficient financial resources to make good on their contracts. By imposing an initial and variation margin requirement on non-cleared swaps, the ability of firms to take on excessive risks through swaps without sufficient financial resources will be reduced. The minimum margin requirement will reduce the amount by which firms can leverage the underlying risk associated with the swap contract.
The Agencies issued an interim final rule required by the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) which amended the statutory provisions added by the DFA relating to margin requirements for certain swaps. Section 302 of TRIPRA amends sections 731 and 764 of the DFA to provide that the initial and variation margin requirements do not apply to certain transactions with specified counterparties that qualify for an exemption or exception from clearing. The agencies issued another interim final rule (Brexit Interim Final Rule) that addresses a potential impact of the scenario in which the United Kingdom (U.K.) exits from the European Union (E.U.) without a negotiated withdrawal agreement allowing financial services firms located in the U.K. to continue providing full-scope financial services in the E.U. In that event, numerous U.K. financial services firms may begin to transfer their existing swap portfolios that face counterparties located in the E.U. over to a related establishment of the U.K. financial services firm located within the E.U. or the U.S. The Brexit Interim Final Rule authorizes a financial entity with non-cleared swaps located in the U.K. to relocate existing swap portfolios to affiliates or other related entities located within the E.U. or U.S., without the legacy swaps in the portfolios becoming subject to the requirements of the Swap Margin Rule. The Brexit Interim Final Rule includes a new information collection requirement for transfers initiated by a covered swap entityâs counterparty. For those transfers, the counterparty must make a representation to the covered swap entity that the counterparty performed the transfer in compliance with the requirements of the rule.
The OCC, FRB, FDIC, FCA and FHFA are proposing a rule that would amend existing regulations that require swap dealers and security-based swap dealers under the agenciesâ respective jurisdictions to exchange margin with their counterparties for swaps that are not centrally cleared (Swap Margin Rule). The Swap Margin Rule has recently been amended to (1) provide relief to legacy swaps that are amended to achieve compliance with final rules that established restrictions on and requirements for certain non-cleared swaps and certain other qualified financial contracts of U.S. global systemically important banking organizations and their subsidiaries and the U.S. operations of foreign global systemically important banking organizations (QFC Rules) and (2) subject to certain conditions, provide relief for entities located in the United Kingdom to transfer their existing swap portfolios that face counterparties located in the European Union to an affiliate or other related establishment located within the European Union or the United States while maintaining legacy status for such portfolios. This notice of proposed rulemaking would make the following changes to the Swap Margin Rule:
(1) The proposal would provide relief by allowing legacy swaps to be amended to replace existing interest rate provisions based on certain interbank offered rates (IBORs) and other interest rates that are reasonably expected to be discontinued or are reasonably determined to have lost their relevance as a reliable benchmark due to a significant impairment, without such swaps losing their legacy status.
(2) The proposal would amend the Swap Margin Ruleâs requirements for inter-affiliate swaps. The proposal would repeal the requirement for a covered swap entity to collect initial margin from its affiliates, but would retain the requirement that variation margin be exchanged for affiliate transactions.
(3) The proposal would add an additional initial margin compliance period for certain smaller counterparties, and clarify the existing trading documentation requirements in § __.10 of the Rule.
(4) The proposal would amend the Swap Margin Rule to permit amendments caused by conducting certain routine life-cycle activities that covered swap entities may conduct for legacy swaps, such as reduction of notional amounts and portfolio compression exercises, without triggering margin requirements.
On behalf of this Federal agency, I certify that the collection of information encompassed by this request complies with 5 CFR 1320.9 and the related provisions of 5 CFR 1320.8(b)(3).
The following is a summary of the topics, regarding the proposed collection of information, that the certification covers:
(i) Why the information is being collected;
(ii) Use of information;
(iii) Burden estimate;
(iv) Nature of response (voluntary, required for a benefit, or mandatory);
(v) Nature and extent of confidentiality; and
(vi) Need to display currently valid OMB control number;
If you are unable to certify compliance with any of these provisions, identify the item by leaving the box unchecked and explain the reason in the Supporting Statement.
SPST-0204 NPR AF08 Margin and Capital Requirements for Covered Swap Entities 2019 NPR (Ver 2.0).doc
349,9(e) Requests for Determinations