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 “swap entities”. 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 entity’s
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
agencies’ 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 Rule’s 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