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Vol. 80 Tuesday,

No. 134 July 14, 2015

Part VI

Commodity Futures Trading Commission

17 CFR Part 23Margin Requirements for Uncleared Swaps for Swap Dealers and Major

Swap Participants—Cross-Border Application of the Margin Requirements;Proposed Rule

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41376 Federal Register / Vol. 80, No. 134 / Tuesday, July 14, 2015/ Proposed Rules

COMMODITY FUTURES TRADINGCOMMISSION

17 CFR Part 23

RIN 3038–AC97

Margin Requirements for UnclearedSwaps for Swap Dealers and MajorSwap Participants—Cross-Border

Application of the MarginRequirements

AGENCY: Commodity Futures TradingCommission.

ACTION: Proposed rule.

SUMMARY: On October 3, 2014, theCommission published proposedregulations to implement section 4s(e)of the Commodity Exchange Act, asadded by section 731 of the Dodd-FrankWall Street Reform and ConsumerProtection Act (‘‘Dodd-Frank Act’’). Thisprovision requires the Commission to

adopt initial and variation marginrequirements for swap dealers (‘‘SDs’’)and major swap participants (‘‘MSPs’’)that do not have a Prudential Regulator(collectively, ‘‘CSEs’’ or ‘‘Covered SwapEntities’’). In the October 3, 2014proposing release, the Commission alsoissued an Advance Notice of ProposedRulemaking (‘‘ANPR’’) requesting publiccomment on the cross-borderapplication of such marginrequirements. In this release, theCommission is proposing a rule for theapplication of the Commission’s marginrequirements to cross-bordertransactions.

DATES: Comments must be received onor before September 14, 2015.

ADDRESSES: You may submit comments,identified by RIN 3038–AC97 and‘‘Margin Requirements for UnclearedSwaps for Swap Dealers and MajorSwap Participants—Cross-BorderApplication of the MarginRequirements’’ by any of the followingmethods:• CFTC Web site: http://

comments.cftc.gov . Follow theinstructions for submitting commentsthrough the Comments Online process

on the Web site.• Mail: Send to ChristopherKirkpatrick, Secretary of theCommission, Commodity FuturesTrading Commission, Three LafayetteCentre, 1155 21st Street NW.,Washington, DC 20581.• Hand Delivery/Courier: Same as

Mail, above.• Federal eRulemaking Portal: http://

www.regulations.gov . Follow theinstructions for submitting comments.

Please submit your comments usingonly one of these methods.

All comments must be submitted inEnglish, or if not, accompanied by anEnglish translation. Comments will beposted as received to http:// www.cftc.gov . You should submit onlyinformation that you wish to makeavailable publicly. If you wish theCommission to consider informationthat may be exempt from disclosure

under the Freedom of Information Act,a petition for confidential treatment ofthe exempt information may besubmitted according to the establishedprocedures in §145.9 of theCommission’s regulations, 17 CFR145.9.

The Commission reserves the right, but shall have no obligation, to review,pre-screen, filter, redact, refuse orremove any or all of your submissionfrom www.cftc.gov that it may deem to

be inappropriate for publication, such asobscene language. All submissions thathave been redacted, or removed that

contain comments on the merits of therulemaking will be retained in thepublic comment file and will beconsidered as required under theAdministrative Procedure Act and otherapplicable laws, and may be accessibleunder the Freedom of Information Act.FOR FURTHER INFORMATION CONTACT:Laura B. Badian, Assistant GeneralCounsel, 202–418–5969, [email protected] , or Paul Schlichting, AssistantGeneral Counsel, 202–418–5884,

[email protected] , Office of theGeneral Counsel, Commodity FuturesTrading Commission, Three Lafayette

Centre, 1155 21st Street NW.,Washington, DC 20581.SUPPLEMENTARY INFORMATION:

Table of Contents

I. BackgroundA. Dodd-Frank Act and the Scope of This

RulemakingB. Key Considerations in the Cross-Border

Application of the Margin RegulationsC. Advance Notice of Proposed

Rulemaking1. Guidance Approach2. Prudential Regulators’ Approach3. Entity-Level Approach4. Comments on the Alternative

Approaches Discussed in the ANPR

II. The Proposed RuleA. Overview1. Use of Hybrid, Firm-Wide ApproachB. Key Definitions1. U.S. Person2. Guarantees3. Foreign Consolidated SubsidiariesC. Applicability of Margin Requirements to

Cross-Border Uncleared Swaps1. Uncleared Swaps of U.S. CSEs or Non-

U.S. CSEs Whose Obligations Under theRelevant Swap Are Guaranteed by a U.S.Person

2. Uncleared Swaps of Non-U.S. CSEs(Including Foreign Consolidated

Subsidiaries) Whose Obligations Underthe Relevant Swap Are Not Guaranteed

by a U.S. Person3. Exclusion for Uncleared Swaps of Non-

U.S. CSEs Where Neither Counterparty’sObligations Under the Relevant SwapAre Guaranteed by a U.S. Person andNeither Counterparty Is a ForeignConsolidated Subsidiary Nor a U.S.Branch of a Non-U.S. CSE

4. U.S. Branches of Non-U.S. CSEsD. Substituted ComplianceE. General Request for Comments

III. Related MattersA. Regulatory Flexibility ActB. Paperwork Reduction ActC. Cost-Benefit Considerations1. Introduction2. Proposed Rulea. U.S. Person

b. Availability of Substituted Complianceand Exclusion

i. Uncleared Swaps of U.S. CSEs or of Non-U.S. CSEs Whose Obligations Under theRelevant Swap Are Guaranteed by a U.S.Person

ii. Uncleared Swaps of Non-U.S. CSEs

Whose Obligations Under the RelevantSwap Are Not Guaranteed by a U.S.Person

iii. Exclusion for Uncleared Swaps of Non-U.S. CSEs Where Neither Counterparty’sObligations Under the Relevant SwapAre Guaranteed by a U.S. Person andNeither Counterparty Is a ForeignConsolidated Subsidiary Nor a U.S.Branch of a Non-U.S. CSE

iv. Foreign Consolidated Subsidiariesv. U.S. Branch of a Non-U.S. CSEc. Alternativesd. Comparability Determinations3. Section 15(a) Factorsa. Protection of Market Participants and the

Public

b. Efficiency, Competitiveness, andFinancial Integrity

i. Efficiencyii. Competitivenessiii. Financial Integrity of Marketsc. Price Discoveryd. Sound Risk Management Practicese. Other Public Interest Considerations4. General Request for Comment

I. Background

A. Dodd-Frank Act and the Scope ofThis Rulemaking

In the fall of 2008, as massive lossesspread throughout the financial systemand many major financial institutionsfailed or narrowly escaped failure withgovernment intervention, confidence inthe financial system was replaced bypanic, credit markets seized up, andtrading in many markets grounded to ahalt. The financial crisis revealed thevulnerability of the U.S. financialsystem to widespread systemic riskresulting from, among other things,excessive leverage, poor riskmanagement practices at financial firms,and the lack of integrated supervisoryoversight of financial institutions and


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1See Financial Crisis Inquiry Commission, ‘‘TheFinancial Crisis Inquiry Report: Final Report of theNational Commission on the Causes of theFinancial and Economic Crisis in the UnitedStates,’’ Jan. 2011, at xviii–xxv, 307–8, 363–5, 386,available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf .

2 Id. at xxiv–xxv, 49–51.3Pub. L. 111–203, 124 Stat. 1376 (2010).4The Financial Crisis Inquiry Commission stated

in its report that the failure of AmericanInternational Group, Inc. (‘‘AIG’’) was possible because the sweeping deregulation of over-the-counter derivatives (including credit default swaps)effectively eliminated federal and state regulation ofthese products, including capital and marginrequirements that would have reduced thelikelihood of AIG’s failure. Id. at 352.

5Section 4s(e)(3)(A)(i) of the CEA, 7 U.S.C.6s(e)(3)(A)(i).

6The term ‘‘Prudential Regulator’’ is defined insection 1a(39) of the CEA, as amended by section721 of the Dodd-Frank Act. This definition includesthe Board of Governors of the Federal ReserveSystem (‘‘FRB’’); the Office of the Comptroller of theCurrency (‘‘OCC’’); the Federal Deposit InsuranceCorporation (‘‘FDIC’’); the Farm CreditAdministration; and the Federal Housing FinanceAgency.

7See section 4s(e)(3)(D)(ii) of the CEA, 7 U.S.C.6s(e)(3)(D)(ii), which was added by section 731 ofthe Dodd-Frank Act. The Prudential Regulators, theCommission, and the SEC are also required toconsult periodically (but not less frequently thanannually) on minimum capital requirements andminimum initial and variation margin

requirements. See section 4s(e)(3)(D)(i) of the CEA,7 U.S.C. 6s(e)(3)(D)(i).8See 7 U.S.C. 2(i). Section 2(i) of the CEA states

that the provisions of the Act relating to swaps thatwere enacted by the Wall Street Transparency andAccountability Act of 2010 (including any ruleprescribed or regulation promulgated under thatAct), shall not apply to activities outside the UnitedStates unless those activities—(1) have a direct andsignificant connection with activities in, or effecton, commerce of the United States; or (2)contravene such rules or regulations as theCommission may prescribe or promulgate as arenecessary or appropriate to prevent the evasion ofany provision of the Act [CEA] that was enacted bythe Wall Street Transparency and AccountabilityAct of 2010.

9The Commission’s Proposed Margin Rules areset forth in proposed rules §§23.150 through 23.159

of part 23 of the Commission’s regulations,proposed as 17 CFR 23.150 through 23.159. SeeMargin Requirements for Uncleared Swaps forSwap Dealers and Major Swap Participants, 79 FR59898 (Oct. 3, 2014). In September 2014, thePrudential Regulators published proposedregulations to implement initial and variationmargin requirements for SDs and MSPs that havea Prudential Regulator. See Margin and CapitalRequirements for Covered Swap Entities, 79 FR53748 (Sept. 24, 2014), available at http://www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf . The Commission originally proposed margin rulesfor public comment in 2011. See MarginRequirements for Uncleared Swaps for SwapDealers and Major Swap Participants, 76 FR 23732(April 28, 2011).

financial markets.1 The financial crisisalso highlighted the contagion risks ofunder-collateralized counterpartyexposures in a highly interconnectedfinancial system.2

In the wake of the financial crisis,Congress enacted the provisions of theCommodity Exchange Act (‘‘CEA’’)relating to swaps in Title VII of the

Dodd-Frank Act,3 which establishes acomprehensive new regulatoryframework for swaps. One of thecornerstones of this regulatoryframework is the reduction of systemicrisk to the U.S. financial system throughthe establishment of marginrequirements for uncleared swaps.4

Section 731 of the Dodd-Frank Actadded a new section 4s, which directsthe Commission to adopt rulesestablishing minimum initial andvariation margin requirements for SDsand MSPs on all swaps that are notcleared by a registered derivativesclearing organization. Section 4s(e)further provides that the marginrequirements must: (i) Help ensure thesafety and soundness of the SD or MSP;and (ii) be appropriate for the riskassociated with the uncleared swapsheld as a SD or MSP.5

The Dodd-Frank Act also requires thatthe Prudential Regulators,6 inconsultation with the Commission andthe Securities and ExchangeCommission (‘‘SEC’’), adopt a jointmargin rule. Accordingly, each SD andMSP for which there is a PrudentialRegulator must meet marginrequirements established by the

applicable Prudential Regulator, andeach SD and MSP for which there is noPrudential Regulator must comply withthe Commission’s margin requirements.

Further, the Dodd-Frank Act requiresthat the Commission, the PrudentialRegulators and the SEC, to themaximum extent practicable, establishand maintain comparable minimumcapital and minimum initial andvariation margin requirements,including the use of noncash collateral,for SDs and MSPs.7

In determining whether, and theextent to which, section 4s(e) shouldapply to a CSE’s swap activities outsidethe United States, the Commissionfocused on the text and objectives ofthat provision together with thelanguage of section 2(i) of the CEA.8 Asdiscussed further below, the primaryreason for the margin requirement is toprotect CSEs in the event of acounterparty default. That is, in theevent of a default by a counterparty,margin protects the CSE by allowing itto absorb the losses using collateralprovided by the defaulting entity and to

continue to meet all of its obligations. Inaddition, margin functions as a riskmanagement tool by limiting theamount of leverage that a CSE can incur.Specifically, by requiring a CSE to postmargin to its counterparties, the marginrequirements ensure that a CSE hasadequate eligible collateral to enter intoan uncleared swap.

Risk arising from uncleared swaps canpotentially have a substantial adverseeffect on any CSE—irrespective of itsdomicile or the domicile of itscounterparties—and therefore thestability of the U.S. financial system

because each CSE has a sufficient nexusto the U.S. financial system to requireregistration as a CSE. In light of the roleof margin in ensuring the safety andsoundness of CSEs and preserving thestability of the U.S. financial system,and consistent with section 2(i), section4s(e)’s margin requirements extend toall CSEs on a cross-border basis.

Pursuant to its new section 4s(e)authority, on October 3, 2014, theCommission published reproposedregulations to implement initial andvariation margin requirements onuncleared swaps (‘‘Proposed MarginRules’’) for SDs and MSPs that do nothave a Prudential Regulator(collectively, ‘‘CSEs’’ or ‘‘Covered Swap

Entities’’).9 In the same release, theCommission also published an ANPRrequesting public comment on the cross-

border application of such marginrequirements. In this release, theCommission is proposing a rule for theapplication of the Commission’suncleared swap margin requirements tocross-border transactions (referred toherein as the ‘‘Proposed Rule’’).

B. Key Considerations in the Cross-Border Application of the MarginRegulations

The swaps market is global in nature.

Swaps are routinely entered into between counterparties located indifferent jurisdictions. Dealers and othermarket participants conduct their swaps

business through subsidiaries, affiliates,and branches dispersed acrossgeographical boundaries. The global andhighly interconnected nature of theswaps market heightens the potentialthat risks assumed by a firm overseascan be transmitted across national

borders to cause or contribute tosubstantial losses to U.S. persons andthreaten the stability of the entire U.S.financial system. Therefore, it isimportant that margin requirements foruncleared swaps apply on a cross-

border basis in a manner that effectivelyaddresses risks to U.S. persons and theU.S. financial system.

The Commission recognizes that non-U.S. CSEs and non-U.S. counterpartiesmay be subject to comparable ordifferent rules in their homejurisdictions. Conflicting andduplicative requirements between U.S.and foreign margin regimes couldpotentially lead to market inefficiencies


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10 In developing the proposed cross-borderframework, the Commission is guided by principlesof international comity, which counsels due regardfor the important interests of foreign sovereigns. SeeRestatement (Third) of Foreign Relations Law of theUnited States (the ‘‘Restatement’’). The Restatementprovides that even where a country has a basis forjurisdiction, it should not prescribe law withrespect to a person or activity in another countrywhen the exercise of such jurisdiction isunreasonable. See Restatement section 403(1). Thereasonableness of such an exercise of jurisdiction,in turn, is to be determined by evaluating allrelevant factors, including certain specificallyenumerated factors where appropriate: (a) The linkof the activity to the territory of the regulating state,i.e., the extent to which the activity takes placewithin the territory, or has substantial, direct, andforeseeable effect upon or in the territory; (b) theconnections, such as nationality, residence, or

economic activity, between the regulating state andthe persons principally responsible for the activityto be regulated, or between that state and thosewhom the regulation is designed to protect; (c) thecharacter of the activity to be regulated, theimportance of regulation to the regulating state, theextent to which other states regulate such activities,and the degree to which the desirability of suchregulation is generally accepted; (d) the existence ofjustified expectations that might be protected orhurt by the regulation; (e) the importance of theregulation to the international political, legal, oreconomic system; (f) the extent to which theregulation is consistent with the traditions of theinternational system; (g) the extent to whichanother state may have an interest in regulating theactivity; and (h) the likelihood of conflict withregulation by another state. See Restatement section403(2).

Notably, the Restatement does not precludeconcurrent regulation by multiple jurisdictions.However, where concurrent jurisdiction by two ormore jurisdictions creates conflict, the Restatementrecommends that each country evaluate its owninterests in exercising jurisdiction and those of theother jurisdiction, and where possible, to consultwith each other.

1115 U.S.C. 8325(a) (added by section 752 of theDodd-Frank Act). Also, before commencing anyrulemaking or issuing an order regarding swaps, theCommission must consult and coordinate to theextent possible with the SEC and the PrudentialRegulators for the purposes of assuring regulatoryconsistency and comparability, to the extentpossible. See 15 U.S.C. 8302(a)(1) (added by section712(a)(1) of the Dodd-Frank Act).

12See Margin Requirements for Non-centrallyCleared Derivatives (Sept. 2013), available athttp://www.bis.org/publ/bcbs261.pdf .

13See European Banking Authority, EuropeanSecurities and Markets Authority, and EuropeanInsurance and Occupational Pensions Authority,Consultation Paper on draft regulatory technicalstandards on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP underArticle 11(15) of Regulation (EU) No 648/2012 (forthe European Market Infrastructure Regulation)(April 14, 2014), available at https://www.eba.europa.eu/documents/10180/655149/JC+CP+2014+

03+%28CP+on+risk+mitigation+for+OTC+derivatives%29.pdf , and Second Consultation Paperon draft regulatory technical standards on risk-mitigation techniques for OTC-derivative contractsnot cleared by a CCP under Article 11(15) ofRegulation (EU) No 648/2012 (for the EuropeanMarket Infrastructure Regulation) (Jun. 10, 2015),available at https://www.eba.europa.eu/documents/ 10180/1106136/JC-CP-2015-002+JC+CP+on+Risk+Management+Techniques+for+OTC+derivatives+. pdf ; Financial Services Agency of Japan, draftamendments to the ‘‘Cabinet Office Ordinance on

Financial Instruments Business’’ and‘‘Comprehensive Guidelines for Supervision’’ withregard to margin requirements for non-centrallycleared derivatives (July 3, 2014). Available in Japanese at http://www.fsa.go.jp/news/26/syouken/ 20140703-3.html .

14 Interpretative Guidance and Policy StatementRegarding Compliance with Certain SwapRegulations, 78 FR 45292 (July 26, 2013)(‘‘Guidance’’). The Commission addressed, amongother things, how the swap provisions in the Dodd-Frank Act (including the margin requirement foruncleared swaps) generally would apply on a cross- border basis. In this regard, the Commission statedthat as a general policy matter it expected to applythe margin requirement as a transaction-levelrequirement.

and regulatory arbitrage, as well ascompetitive disparities that underminethe relative position of U.S. CSEs andtheir counterparties. Therefore, it isessential that a cross-border marginframework takes into account the globalnature of the swaps market and thesupervisory interests of foreignregulators with respect to entities and

transactions covered by theCommission’s margin regime.10

In granting the Commission newauthorities under the Dodd-Frank Act,Congress also reaffirmed and called forcoordination and cooperation amongdomestic and foreign regulators. Section752(a) of the Dodd-Frank Act requiresthe Commission, the PrudentialRegulators, and the SEC to consult andcoordinate with foreign regulatoryauthorities on the ‘‘establishment ofconsistent international standards’’ withrespect to the regulation of swaps.11 In

this regard, the Commission recognizesthat efforts are underway by otherdomestic and foreign regulators toimplement margin reform and thatregulatory harmonization andcoordination are indispensable toachieving a workable cross-borderframework.

In developing a cross-border

framework for margin regulations, theCommission aims to strike the proper

balance among these sometimescompeting considerations. To that end,the Commission has consulted andcoordinated with the PrudentialRegulators and foreign regulatoryauthorities. Commission staff workedclosely with the staff of the PrudentialRegulators, and the Proposed Rule isclosely aligned with the cross-borderproposal that was published by thePrudential Regulators in September2014. In addition, Commission staff hasparticipated in numerous bilateral and

multilateral discussions with foreignregulatory authorities addressingnational efforts to implement marginreform and the possibility of conflictsand overlaps between U.S. and foreignregulatory regimes. Recognizing thatsystemic risks arising from global andinterconnected swaps market must beaddressed through coordinatedregulatory requirements for marginacross international jurisdictions, theCommission has played an active role inencouraging internationalharmonization and coordination ofmargin requirements for unclearedswaps.

The Commission notes that itscollaboration with the Basel Committeeon Banking Supervision (‘‘BCBS’’) andthe Board of the InternationalOrganization of Securities Commissions(‘‘IOSCO’’) as a member of the WorkingGroup on Margining Requirements(‘‘WGMR’’) resulted in the issuance of afinal margin policy framework for non-cleared, bilateral derivatives inSeptember 2013 (referred to herein asthe ‘‘BCBS–IOSCO framework’’).12 Individual regulatory authorities acrossmajor jurisdictions (including the EU,

Japan, and the United States) have since

started to develop their own marginrules.13 The Proposed Rule is consistent

with the standards in the final BCBS–IOSCO framework, and we have been incontinuous communication withregulators in the EU and Japan as wedeveloped our cross-border marginproposal. Although at this time foreignjurisdictions do not yet have theirmargin regimes in place, theCommission has participated in

ongoing, collaborative discussions withregulatory authorities in the EU and

Japan regarding their cross-borderapproaches to the margin rules,including the anticipated scope ofapplication of margin requirements intheir jurisdiction to cross-border swaps,their plans for recognizing foreignmargin regimes, and their anticipatedtimelines.

The Commission believes that itsongoing bilateral and multilateraldiscussions with foreign regulatoryauthorities in major jurisdictions(including the EU and Japan) are critical

to fostering international cooperationand harmonization and in reducingconflicting and duplicative regulatoryrequirements. The Commission expectsthat these discussions will continue asit finalizes and then implements itsframework for the application of marginrequirements to cross-bordertransactions, and as other jurisdictionsdevelop their own respectiveapproaches.

C. Advance Notice of ProposedRulemaking

The ANPR sought public comment onthree potential alternative approaches to

the cross-border application of itsmargin requirements: (1) A transaction-level approach that is consistent withthe Commission’s cross-border guidance(‘‘Guidance Approach’’); 14 (2) an


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15See Margin and Capital Requirements forCovered Swap Entities, 79 FR 53748 (Sept. 24,2014), available at http://www.gpo.gov/fdsys/pkg/ FR-2014-09-24/pdf/2014-22001.pdf .

16See Interpretative Guidance and PolicyStatement Regarding Compliance with CertainSwap Regulations, 78 FR 45292 (July 26, 2013).

17The scope of the term ‘‘U.S. person’’ as usedin the Cross-Border Guidance Approach and theEntity-Level Approach would be the same as underthe Guidance. See Guidance at 45316–45317 for asummary of the Commission’s interpretation of theterm ‘‘U.S. person.’’

18Under the Guidance, id. at 45318, the term‘‘guaranteed affiliate’’ refers to a non-U.S. personthat is an affiliate of a U.S. person and that isguaranteed by a U.S. person. The scope of the term‘‘guarantee’’ under the Guidance Approach and theEntity-Level Approach would be the same as undernote 267 of the Guidance and accompanying text.

19Under the approach discussed in the Guidance,id. at 45359, the factors that are relevant to the

consideration of whether a person is an ‘‘affiliateconduit’’ include whether: (i) The non-U.S. personis majority-owned, directly or indirectly, by a U.S.person; (ii) the non-U.S. person controls, iscontrolled by, or is under common control with theU.S. person; (iii) the non-U.S. person, in the regularcourse of business, engages in swaps with non-U.S.third party(ies) for the purpose of hedging ormitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters intooffsetting swaps or other arrangements with suchU.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to itsU.S. affiliates; and (iv) the financial results of thenon-U.S. person are included in the consolidatedfinancial statements of the U.S. person. Other factsand circumstances also may be relevant.

20Where the uncleared swap is between a non-U.S. SD/MSP (whether or not it is a guaranteedaffiliate or an affiliate conduit) and a foreign branchof a U.S. bank that is a SD/MSP, substitutedcompliance would be available if certain conditionsare met.

21See section 9 of the proposed rule on Marginand Capital Requirements for Covered SwapEntities, 12 CFR part 237 (Sept. 24, 2014) for acomplete description of the proposed cross-borderapplication of margin requirements to swaps by thePrudential Regulators, available at http://www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf .

22A summary of the Prudential Regulators’Approach to the cross-border application of theirproposed margin requirements is included in theANPR. See Margin Requirements for UnclearedSwaps for Swap Dealers and Major SwapParticipants, 79 FR 59917(Oct. 3, 2014). For furtherinformation on the Prudential Regulators’ Approachgenerally, see Margin and Capital Requirements forCovered Swap Entities, 79 FR 53748 (Sept. 24,2014), available at http://www.gpo.gov/fdsys/pkg/

FR-2014-09-24/pdf/2014-22001.pdf . 23The Prudential Regulators define a ‘‘foreigncovered swap entity’’ as any covered swap entitythat is not (i) an entity organized under U.S. or Statelaw, including a U.S. branch, agency, or subsidiaryof a foreign bank; (ii) a branch or office of an entityorganized under U.S. or State law; or (ii i) an entitycontrolled by an entity organized under U.S. orState law. Under the Prudential Regulators’proposal, a ‘‘foreign non-cleared swap’’ wouldinclude any non-cleared swap of a foreign coveredswap entity to which neither the counterparty norany guarantor (on either side) is (i) an entityorganized under U.S. or State law, including a U.S. branch, agency, or subsidiary of a foreign bank; (ii)a branch or office of an entity organized under U.S.or State law; or (iii) a covered swap entity

controlled by an entity organized under U.S. orState law.

24A summary of the Entity-Level Approach to thecross-border application of the Proposed MarginRules is included in the ANPR. See MarginRequirements for Uncleared Swaps for SwapDealers and Major Swap Participants, 79 FR 59917(Oct. 3, 2014).

25Comment letters received in response to theANPR may be found on the Commission’s Web siteat http://comments.cftc.gov/PublicComments/ CommentList.aspx?id=1528.

approach that is consistent with theapproach proposed by the PrudentialRegulators (the ‘‘Prudential Regulators’Approach’’);15 and (3) an entity-levelapproach described in the ANPR(‘‘Entity-Level Approach’’). To providecontext for the discussion of theProposed Rule, the three alternativeapproaches discussed in the ANPR are

summarized below.1. Guidance Approach

Under the first alternative discussedin the ANPR, the Commission’s marginrequirements would be applied on atransaction-level basis, consistent withits cross-border Guidance.16 TheCommission stated in the Guidance thatit would generally treat its marginrequirements for uncleared swaps as atransaction-level requirement.Consistent with the rationale stated inthe Guidance, under this transaction-level approach, the Commission’sProposed Margin Rules would apply toa U.S. SD/MSP (other than a foreign

branch of a U.S. bank that is a SD/MSP)for all of its uncleared swaps, regardlessof whether its counterparty is a U.S.person,17 without substitutedcompliance.

However, under this approach themargin requirements would apply to anon-U.S. SD/MSP (whether or not it isa ‘‘guaranteed affiliate’’ 18 or an ‘‘affiliateconduit’’ 19) only with respect to its

uncleared swaps with a U.S. personcounterparty and a non-U.S.counterparty that is a guaranteedaffiliate or an affiliate conduit; themargin requirements would not apply touncleared swaps with a non-U.S. personcounterparty that is not a guaranteedaffiliate or an affiliate conduit. Wherethe non-U.S. counterparty is a

guaranteed affiliate or an affiliateconduit, the Commission would allowsubstituted compliance (i.e., the non-U.S. SD/MSP would be permitted tocomply with the margin requirements ofits home country’s regulator if theCommission determines that suchrequirements are comparable to theCommission’s margin requirements).20

2. Prudential Regulators’ Approach

The second alternative discussed inthe ANPR was the PrudentialRegulators’ Approach to cross-borderapplication of the margin

requirements.21

Under the PrudentialRegulators’ proposal issued inSeptember 2014 (the ‘‘Septemberproposal’’), the Prudential Regulatorswould apply the margin requirements toall uncleared swaps of CSEs under theirsupervision with a limited exception.22 Specifically, the Prudential Regulatorswould not apply their marginrequirements to any foreign non-clearedswap of a foreign covered swap entity.23

This exclusion would only be availablewhere neither the non-U.S. SD/MSP’snor the non-U.S. counterparty’sobligations under the relevant swap areguaranteed by a U.S. person and neitherparty is ‘‘controlled’’ by a U.S. person.Under the ‘‘control’’ test used in theSeptember proposal, the term ‘‘control’’of another company means: (1)

Ownership, control, or power to vote 25percent or more of a class of votingsecurities of the company, directly orindirectly or acting through one or moreother persons; (2) ownership or controlof 25 percent or more of the total equityof the company, directly or indirectly oracting through one or more otherpersons; or (3) control in any manner ofthe election of a majority of the directorsor trustees of the company.

3. Entity-Level Approach

Under the third alternative discussedin the ANPR, margin requirementswould be treated as an entity-levelrequirement. Under this Entity-LevelApproach, the Commission would applyits proposed cross-border rules onmargin on a firm-wide level—that is, toall uncleared swaps activities of a SD/MSP registered with the Commission,irrespective of whether the counterpartyis a U.S. person, and with no possibilityof exclusion. This approach takes intoaccount that a non-U.S. SD/MSPentering into uncleared swaps facescounterparty credit risk regardless ofwhere the swap is executed or whetherthe counterparty is a U.S. person.24 That

risk, if it leads to a default by the non-U.S. SD/MSP, could cause adverseconsequences to its U.S. counterpartiesand the U.S. financial system. At thesame time, in recognition ofinternational comity, under thisapproach the Commission wouldconsider, where appropriate, allowingCSEs to avail themselves of substitutedcompliance.

4. Comments on the AlternativeApproaches Discussed in the ANPR

After publishing the ANPR, theCommission received comments thatresponded to the three alternativeapproaches.25 There was no consensus


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26See International Swaps and DerivativesAssociation, Inc. (‘‘ISDA’’) (Nov. 24, 2014),Managed Funds Association (‘‘MFA’’) (Dec. 2,2014), and INTL FCStone Inc. (Dec. 3, 2014).

27See ISDA (Nov. 24, 2014) and MFA (Dec. 2,2014).

28See ISDA (Nov. 24, 2014).29See MFA (Dec. 2, 2014).30See ISDA (Nov. 24, 2014) and American

Bankers Association (Nov. 25, 2014).31See INTL FCStone Inc. (Dec. 3, 2014).32See Alternative Investment Management

Association (‘‘AIMA’’) (Dec. 2, 2014).

33See Americans for Financial Reform (‘‘AFR’’)(Dec. 2, 2014).

34See Securities Industry and Financial MarketsAssociation, Asset Management Group (Nov. 24,2014).

35See Public Citizen (Dec. 2, 2014).

36See Better Markets, Inc. (Dec. 2, 2014).37See AIMA (Dec. 2, 2014).38See AFR (Dec. 2, 2014).39See Committee on Capital Markets Regulation

(Nov. 24, 2014).

among commenters on a preferableapproach.

Several commenters supported theGuidance Approach, withmodifications, on the basis that marginrules should not apply to swaps

between a foreign swap dealer and aforeign, non-guaranteed counterparty.26 Some of these commenters suggested

modifications to the availability ofsubstituted compliance in the approachdescribed in the Guidance.27 Forexample, one commenter suggested thatthe Commission should treat non-U.S.margin requirements that conform to theBCBS–IOSCO framework as ‘‘essentiallyidentical’’ to the Commission’s regimeand therefore accessible to all SDs as ameans of complying with theCommission’s margin requirements.28 Another commenter suggested that theCommission modify its approach tosubstituted compliance outlined in theGuidance to allow substituted

compliance for trades between U.S.persons and non-U.S. persons at suchparties’ mutual agreement.29 Inaddition, some commenters thatsupported the Guidance Approachexpressed the view that it shouldinclude an emerging marketsexception.30 Still another commenterargued that the Commission’s Guidancecorrectly classified margin as atransaction-level rather than an entity-level requirement because, as with theclearing requirement, it is practicable toseparate out transactions which aresubject to the margin requirements andtransactions which are not. This

commenter stated that it would be anodd result if the Commission were todetermine that the reach of the clearingrequirement was not as great as that ofthe margin requirement, given that bothrequirements are intended to addresscounterparty credit risk.31

In contrast, some commenters arguedagainst adopting the GuidanceApproach. One commenter argued thatthe Guidance Approach has become asignificant driver of conflict betweenU.S. and European regulatoryrequirements, and is undermining thegoal of a globally coordinated regulatory

framework.32

Another commenterargued that this approach provides an

excessively broad exemption for ‘‘non-guaranteed’’ foreign affiliates of U.S.

banks, and that it is completelyinappropriate to apply such anexemption to a crucial prudentialrequirement such as derivatives margin,which could pose major risks to thefinancial system by encouraging a raceto the bottom among jurisdictions

concerning margin requirements.33 Other commenters generally

supported the Entity-Level Approach,with modifications, on the basis that itcaptures all registrants’ unclearedtrades, regardless of the domicile of theregistrant or the counterparty. Thesecommenters generally favored thisapproach because, rather thanexempting foreign to foreigntransactions, it makes substitutedcompliance available for thesetransactions. One commenter stated thatthe Entity-Level Approach is the mostappropriate choice because it provides

market participants with more certaintyin determining which jurisdiction’smargin requirements apply. Further,this commenter stated that the Entity-Level Approach is consistent with howcollateral is currently handled under asingle master agreement and wouldmitigate legal uncertainty andoperational errors that can arise if tradesare subject to different marginrequirements under the same masteragreement.34 Another commenterfavored the Entity-Level Approach

because it imposes prudential rules onall swaps activities of U.S.-headquartered firms, regardless of

where the swap transaction is booked.This commenter stated that both thePrudential Regulators’ Approach andthe Guidance Approach provide ameans for U.S. firms to escape U.S.oversight.35

Another commenter supported across-border approach that combines theGuidance Approach with certainenhancements found in the Entity-LevelApproach. This commenter suggestedthat the Entity-Level Approach correctlysubjects certain non-U.S. SDs and MSPsto U.S. regulations—at least with respectto variation margin and the collection of

initial margin—where the GuidanceApproach would permit substitutedcompliance to both parties in allrespects. However, this commenterstated that the Entity-Level Approachalso contains provisions that aresignificantly weaker than the GuidanceApproach, such as making substituted

compliance available to certain non-U.S.counterparties of U.S. SDs or MSPs.This commenter also expressed the viewthat the Guidance Approach correctlyrequires both counterparties to fullycomply with U.S. rules in alltransactions involving a U.S. SD orMSP.36

Commenters generally did not

support the Prudential Regulators’Approach as their first choice, but twocommenters thought it might beworkable with modifications. The firstcommenter stated that if theCommission elects not to adopt the‘‘Entity-Level’’ Approach, the PrudentialRegulators’ Approach might beworkable, although this commenter hadreservations about situations wheredifferent jurisdictions’ regimes apply tothe same transaction.37 The othercommenter argued that if its first choice,the Entity-Level Approach, is notadopted, the Prudential Regulators’

Approach is greatly superior to theGuidance Approach, as it would applymargin requirements to foreign affiliatesof U.S. banks that are classified as SDsor MSPs, regardless of whether suchaffiliates are nominally guaranteed.However, this commenter argued thatthe Prudential Regulators’ Approach isflawed in that, like the GuidanceApproach, it would exempt controlledforeign subsidiaries of U.S. banks thatare not registered with the Commissionas swaps entities.38

Two commenters specifically arguedagainst the Prudential Regulators’Approach. One commenter contendedthat the Prudential Regulators’Approach provides limited clarity onhow the ‘‘control’’ test should beapplied, which means that foreign banksubsidiaries of U.S. banks cannot becertain whether they are subject to U.S.rules or foreign rules, and provideslimited guidance as to how foreigncovered swaps entities can determinewhether a financial end-usercounterparty is a U.S. entity or a foreignentity, in comparison to the clear ‘‘U.S.person’’ standard in the Guidance.39 The other commenter is concerned withthe Prudential Regulators’ Approach as

it relates to funds. This commenterstated that the Prudential Regulators’definition of ‘‘foreign non-clearedswap’’ effectively classifies fundsorganized outside of the United States,

but with a U.S. principal place of business (e.g., funds with a U.S.-basedmanager), as foreign entities. This



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40See MFA (Dec. 2, 2014).41See Institute of International Bankers (Nov. 24,

2014). This commenter also stated that these foreignswaps would have little effect on the U.S. financialsystem in the event of a default; further, under theDodd-Frank Act, the risk to the United States of adefault by the foreign-headquartered swap entity onits swaps with U.S. counterparties would already bemitigated by capital and margin collectionrequirements.

42See Securities Industry and Financial MarketsAssociation (‘‘SIFMA’’) (Nov. 24, 2014).

43The Commission’s consideration of the costsand benefits associated with the Proposed Rule isdiscussed in section III.C. below.

44See BCBS and IOSCO, Margin requirements fornon-centrally cleared derivatives (Sept. 2013) at 3,available at http://www.bis.org/publ/bcbs261.pdf .

45Section 4s(e) of the CEA, 7 U.S.C. 6s(e), directsthe Commission to adopt capital requirements forSDs and MSPs. The Commission proposed capitalrules in 2011. See Capital Requirements for SwapDealers and Major Swap Participants, Notice ofproposed rulemaking, 76 FR 27802 (May 12, 2011).

commenter stated that if funds with aU.S.-based manager are not considered‘‘U.S. persons’’ subject to U.S.derivatives regulation, even though theyhave a substantial U.S. nexus, theywould likely be required to margin theircovered swaps in accordance with theforeign margin rules to which their non-U.S. CSE counterparty is subject, which

would give too much deference to theforeign regulatory regime.40

One commenter asserted that both thePrudential Regulators’ Approach andthe Guidance Approach wouldappropriately exclude swaps betweenforeign-headquartered swap entities thatare not controlled or guaranteed by aU.S. person and a non-U.S. person thatis not guaranteed by a U.S. person fromthe scope of the margin rules, notingthat if U.S. rules require the foreign-headquartered swap entity to postmargin, this would create the potentialfor conflicts or inconsistencies with its

home country margin requirements.41

One commenter did not explicitlysupport any of the three approaches,noting that all of the proposals divergein potentially significant ways from thefinal framework developed by BCBS andIOSCO and the OTC margin frameworkproposed in April 2014 by Europeansupervisory agencies, and that none ofthe proposals embrace substitutedcompliance in a comprehensive mannerthat would address cross-borderconflicts or inconsistencies that couldarise. This commenter suggested thatthe Commission should use anoutcomes-based approach that looks towhether giving full recognition to anequivalent foreign OTC marginframework as a whole would ensure anacceptable reduction of aggregateunmargined risk.42

II. The Proposed Rule

A. Overview

Based on, among other things,consideration of the comments to theANPR and after close consultation withthe Prudential Regulators, theCommission is proposing a rule for theapplication of the Commission’s

Proposed Margin Rules to cross-bordertransactions (as noted above, theproposed cross-border margin rule is

referred to herein as the ‘‘ProposedRule’’). As discussed above, a cross-

border framework for margin necessarilyinvolves consideration of significant,and sometimes competing, legal andpolicy considerations, including theimpact on market efficiency andcompetition.43 The Commission, indeveloping the Proposed Rule, aims to

balance these considerations toeffectively address the risk posed to thesafety and soundness of CSEs, whilecreating a workable framework thatreduces the potential for undue marketdisruptions and promotes globalharmonization. The Commission alsorecognizes that there are other possibleapproaches to applying the margin rulesin the cross-border context.Accordingly, the Commission invitespublic comment regarding all aspects ofthe Proposed Rule.

1. Use of Hybrid, Firm-Wide Approach

The Proposed Rule is a combinationof the entity- and transaction-levelapproaches and is closely aligned withthe Prudential Regulators’ Approach. Ingeneral, under the Proposed Rule,margin requirements are designed toaddress the risks to a CSE, as an entity,associated with its uncleared swaps(entity-level); nevertheless, certainuncleared swaps would be eligible forsubstituted compliance or excludedfrom the Commission’s margin rules

based on the counterparties’ nexus tothe United States relative to otherjurisdictions (transaction-level).

Although margin is calculated for

individual transactions or positions, andtherefore, could be applied on atransaction-level basis, the Commission

believes that as a general matter marginrequirements should apply on a firm-wide basis, irrespective of the domicileof the counterparties or where the tradeis executed. The primary reason forcollecting margin from counterparties isto protect an entity in the event of acounterparty default. That is, in theevent of a default by a counterparty,margin protects the non-defaultingcounterparty by allowing it to absorb thelosses using collateral provided by the

defaulting entity and to continue tomeet all of its obligations. In addition,margin functions as a risk managementtool by limiting the amount of leveragethat a CSE can incur. Specifically, byrequiring a CSE to post margin to itscounterparties, the margin requirementsensure that a CSE has adequate eligiblecollateral to enter into an unclearedswap. In this way, margin serves as a

first line of defense to protect a CSE asa whole from risk arising fromuncleared swaps.

The source of counterparty credit riskto a CSE, however, is not confined to itsuncleared swaps with U.S.counterparties. Risk arising fromuncleared swaps involving non-U.S.counterparties can potentially have a

substantial adverse effect on a CSE—including a non-U.S. CSE—andtherefore the stability of the U.S.financial system because CSEs have asufficient nexus to the U.S. financialsystem to require registration as a CSE.Given the function of margin, theCommission believes that marginshould be treated as an entity-levelrequirement in the cross-border context,and thus not take into account thedomicile of CSE counterparties or wherethe trade is executed.

The Commission also believes thattreating margin as an entity-level

requirement is consistent with the roleof margin in a CSE’s overall riskmanagement program. Margin, bydesign, is complementary to capital.44 That is, margin and capital requirementsserve different but equally importantrisk mitigation functions that are bestimplemented at the entity-level. Unlikemargin, capital is difficult to rapidlyadjust in response to changing riskexposures; thus, capital can be viewedas a backstop, in the event that themargin is not enough to cover all of thelosses that resulted from thecounterparty default. Standing alone,either capital or margin may not beenough to prevent a CSE from failing,

but together, they are designed to reducethe probability of default by the CSEand limit the amount of leverage thatcan be undertaken by CSEs (and othermarket participants), which ultimatelymitigates the possibility of a systemicevent.45

At the same time, the Commissionrecognizes that a CSE’s uncleared swapswith a particular counterparty mayimplicate the supervisory interests offoreign regulators and it is important tocalibrate the cross-border application ofthe margin requirements to mitigate, to

the extent possible and consistent withthe Commission’s regulatory interests,the potential for conflicts or duplicationwith other jurisdictions. Therefore, theProposed Rule, while applying margin


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46 In addition, the Commission notes that theproposed definition of ‘‘U.S. person’’ is similar tothe definition of ‘‘U.S. person’’ used by the SEC inthe context of cross-border security-based swaps. Inthe SEC’s August 2014 release adopting rules andproviding guidance regarding the application ofTitle VII of the Dodd-Frank Act to cross-bordersecurity-based swap activities and persons engagedin those activities, the SEC defined the term ‘‘U.S.person’’ in Rule 240.3a71–3(a)(4)(i) under theSecurities Exchange Act of 1934 to mean, except asprovided in paragraph (a)(4)(iii) of the rule, anyperson that is (1) A natural person resident in theUnited States (Rule 240.3a71–3(a)(4)(i)(A)); (2) Apartnership, corporation, trust, investment vehicle,or other legal person organized, incorporated, orestablished under the laws of the United States orhaving its principal place of business in the UnitedStates (Rule 240.3a71–3(a)(4)(i)(B)); (3) An account(whether discretionary or non-discretionary) of aU.S. person (Rule 240.3a71–3(a)(4)(i)(C)); or (4) Anestate of a decedent who was a resident of theUnited States at the time of death(Rule 240.3a71–3(a)(4)(i)(D)).

Paragraph (a)(4)(ii) of SEC Rule 240.3a71–3 alsodefines, for purposes of that section, ‘‘principalplace of business’’ to mean the location from whichthe officers, partners, or managers of the legalperson primarily direct, control, and coordinate theactivities of the legal person. With respect to anexternally managed investment vehicle, thislocation is the office from which the manager of thevehicle primarily directs, controls, and coordinatesthe investment activities of the vehicle.

Paragraph (a)(4)(iii) of SEC Rule 240.3a71–3 statesthat the term ‘‘U.S. person’’ does not include theInternational Monetary Fund, the InternationalBank for Reconstruction and Development, theInter-American Development Bank, the AsianDevelopment Bank, the African Development Bank,the United Nations, and their agencies and pensionplans, and any other similar internationalorganizations, their agencies and pension plans.

Paragraph (a)(4)(iv) of SEC Rule 240.3a71–3 states

that a person shall not be required to consider itscounterparty to a security-based swap to be a U.S.person if such person receives a representation fromthe counterparty that the counterparty does notsatisfy the criteria set forth in paragraph (a)(4)(i) ofthat section, unless such person knows or hasreason to know that the representation is notaccurate; for the purposes of this final rule a personwould have reason to know the representation isnot accurate if a reasonable person should know,under all of the facts of which the person is aware,that it is not accurate.

See Application of ‘‘Security-Based Swap Dealer’’and ‘‘Major Security-Based Swap Participant’’Definitions to Cross-Border Security-Based SwapActivities; Final rule; interpretation(Republication), 79 FR 47371 (Aug. 12, 2014).

47See § 23.160(a)(10) of the Proposed Rule.48See § 23.160(a)(5) of the Proposed Rule.

requirements to a CSE as a whole, alsopermits a U.S. CSE or non-U.S. CSE toavail itself of substituted compliance (tothe extent applicable under theProposed Rule) by complying with themargin requirements of the relevantforeign jurisdiction in lieu ofcompliance with the Commission’smargin requirements, provided that the

Commission finds that suchjurisdiction’s margin requirements arecomparable to the Commission’s marginrequirements, as further discussed insection II.D. below.

In addition, the Proposed Ruleprovides for a limited exclusion ofuncleared swaps between non-U.S.CSEs and non-U.S. counterparties (the‘‘Exclusion’’) in certain circumstances.The Commission recognizes that thesupervisory interest of foreign regulatorsin certain uncleared swaps betweennon-U.S. CSEs and their non-U.S.counterparties may equal or exceed the

supervisory interest of the UnitedStates. The Proposed Rule takes intoaccount the interests of otherjurisdictions and balances thoseinterests with the supervisory interestsof the United States in order to calibratethe application of margin rules to non-U.S. CSEs’ swaps with non-U.S.counterparties. Accordingly, theCommission believes that it would beappropriate to not apply theCommission’s margin rules to unclearedswaps meeting the criteria for theExclusion, which is described in sectionII.C.3. below.

B. Key DefinitionsThe Proposed Rule uses certain key

definitions to establish a proposedframework for the application of marginrequirements in a cross-border context.Specifically, the Proposed Rule definesthe terms ‘‘U.S. person,’’ ‘‘guarantee,’’and ‘‘Foreign Consolidated Subsidiary’’in order to identify those persons ortransactions that, because of theirsubstantial connection or impact on theU.S. market, raise or implicate greatersupervisory interest relative to otherCSEs, counterparties, and unclearedswaps that are subject to the

Commission’s margin rules. Thesedefinitions are discussed below.

1. U.S. Person

Generally speaking, the term ‘‘U.S.person’’ would be defined to includethose individuals or entities whoseactivities have a significant nexus to theU.S. market by virtue of theirorganization or domicile in the UnitedStates or the depth of their connectionto the U.S. market, even if domiciled ororganized outside the United States. Theproposed definition generally follows

the traditional, territorial approach todefining a U.S. person, and theCommission believes that this definitionprovides an objective and clear basis fordetermining those individuals orentities that should be identified as aU.S. person.46

The Proposed Rule would define a‘‘U.S. person’’ for purposes of the cross-

border application of the margin rules tomean:

(1) Any natural person who is aresident of the United States (ProposedRule § 23.160(a)(10)(i));

(2) Any estate of a decedent who wasa resident of the United States at thetime of death (Proposed Rule§ 23.160(a)(10)(ii));

(3) Any corporation, partnership,limited liability company, business orother trust, association, joint-stockcompany, fund or any form of entitysimilar to any of the foregoing (otherthan an entity described in paragraph(a)(10)(iv) or (v) of proposed § 23.160) (alegal entity), in each case that isorganized or incorporated under the

laws of the United States or having itsprincipal place of business in theUnited States, including any branch ofthe legal entity (Proposed Rule§ 23.160(a)(10)(iii));

(4) Any pension plan for theemployees, officers or principals of alegal entity described in paragraph(a)(10)(iii) of proposed §23.160, unlessthe pension plan is primarily for foreignemployees of such entity (ProposedRule § 23.160(a)(10)(iv));

(5) Any trust governed by the laws ofa state or other jurisdiction in theUnited States, if a court within the

United States is able to exercise primarysupervision over the administration ofthe trust (Proposed Rule§ 23.160(a)(10)(v));

(6) Any legal entity (other than alimited liability company, limitedliability partnership or similar entitywhere all of the owners of the entityhave limited liability) owned by one ormore persons described in paragraphs(a)(10)(i) through (a)(10)(v) of proposed§ 23.160 who bear(s) unlimitedresponsibility for the obligations andliabilities of the legal entity, includingany branch of the legal entity (Proposed

Rule §23.160(a)(10)(vi)); and(7) Any individual account or joint

account (discretionary or not) where the beneficial owner (or one of the beneficial owners in the case of a jointaccount) is a person described inparagraphs (a)(10)(i) through (a)(10)(vi)of proposed §23.160 (Proposed Rule§ 23.160(a)(10)(vii)).47

A non-U.S. person is defined to beany person that is not a U.S. person.48

The proposed definition is generallyconsistent with the definition of thisterm set forth in the Guidance, withcertain exceptions discussed below.

Prongs (1), (2), (3), (4), (5), and (7)(Proposed Rule § 23.160(a)(10)(i), (ii),(iii), (iv), (v), and (vii)) identify certainpersons as a ‘‘U.S. person’’ by virtue oftheir domicile or organization withinthe United States. The Commission hastraditionally looked to where a legalentity is organized or incorporated (or inthe case of a natural person, where heor she resides) to determine whether it



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49See, e.g., 17 CFR 4.7(a)(1)(iv) (defining ‘‘Non-United States person’’ for purposes of part 4 of theCommission regulations relating to commodity pooloperators).

50See Hertz Corp. v. Friend, 559 U.S. 77, 80(2010).

51See the Guidance, 78 FR 45309–45312, forguidance on application of the principal place of business test to funds and other collective

investment vehicles in the context of cross-borderswaps, including examples of how theCommission’s approach could apply to a

consideration of whether the ‘‘principal place of business’’ of a fund is in the United States inparticular hypothetical situations. However, because of variations in the structure of collectiveinvestment vehicles as well as the factors that arerelevant to the consideration of whether a collectiveinvestment vehicle has its principal place of business in the United States under the Guidance,these examples were included in the Guidance forillustrative purposes only.

52The Commission’s definition of the term ‘‘U.S.person’’ as used in the Guidance included a prong(iv) which covered ‘‘any commodity pool, pooledaccount, or collective investment vehicle (whetheror not it is organized or incorporated in the UnitedStates) of which a majority ownership is held,directly or indirectly, by a U.S. person(s).’’

is a U.S. person.49 In the Commission’sview, these persons—by virtue of theirdecision to organize or locate in theUnited States and because they arelikely to have significant financial andlegal relationships in the UnitedStates—are appropriately includedwithin the definition of ‘‘U.S. person’’for purposes of the proposed cross-

border margin framework.Under prong (3) (Proposed Rule

§ 23.160(a)(10)(iii)), consistent with itstraditional approach, the Commissionproposes to define ‘‘U.S. person’’ also toinclude persons that are organized orincorporated outside the United States,

but have their principal place of business in the United States. Forpurposes of this prong, the Commissionproposes to interpret ‘‘principal place of

business’’ to mean the location fromwhich the officers, partners, ormanagers of the legal person primarilydirect, control, and coordinate the

activities of the legal person. Thisinterpretation is consistent with theSupreme Court’s decision in Hertz Corp.v. Friend, which described acorporation’s principal place of

business, for purposes of diversityjurisdiction, as the ‘‘place where thecorporation’s high level officers direct,control, and coordinate thecorporation’s activities.’’ 50

The Commission is of the view thatthe application of the principal place of

business concept to a fund may requireconsideration of additional factors

beyond those applicable to operatingcompanies. In the case of a fund, theCommission notes that the seniorpersonnel that direct, control, andcoordinate a fund’s activities aregenerally not the persons who arenamed as directors or officers of thefund, but rather are persons who workfor the fund’s investment adviser or thefund’s promoter. Therefore, consistentwith the Guidance, the Commissiongenerally would consider the principalplace of business of a fund to be in theUnited States if the senior personnelresponsible for either (1) the formationand promotion of the fund or (2) theimplementation of the fund’s

investment strategy are located in theUnited States, depending on the factsand circumstances that are relevant todetermining the center of direction,control and coordination of the fund.51

Prong (6) (Proposed Rule§ 23.160(a)(10)(vi)) of the proposeddefinition of ‘‘U.S. person’’ wouldinclude certain legal entities owned byone or more U.S. person(s) and forwhich such person(s) bear unlimitedresponsibility for the obligations andliabilities of the legal entity. As notedabove, the Guidance included a similar

concept in the definition of the term‘‘U.S. person;’’ however the definitioncontained in the Guidance wouldgenerally characterize a legal entity as aU.S. person if the entity were ‘‘directlyor indirectly majority-owned’’ by one ormore persons falling within the term‘‘U.S. person’’ and such U.S. person(s)

bears unlimited responsibility for theobligations and liabilities of the legalentity. Where a U.S. person serves as afinancial backstop for all of a legalentity’s obligations and liabilities,creditors and counterparties look to theU.S. person when assessing the risk in

dealing with the entity, regardless of theamount of equity owned by the U.S.person. Under such circumstances,

because the U.S. person has unlimitedresponsibility for all of the legal entity’sobligations, the Commission believesthat the legal entity should be deemedto be a U.S. person.

The Proposed Rule would not includethe U.S. majority-ownership prong thatwas included in the Guidance (50%U.S. person ownership of a fund orother collective investment vehicle).52 Some commenters have argued that amajority ownership test for funds

should not be included on the basis thatownership alone is not indicative ofwhether the activities of a non-U.S. fundwith a non-U.S.-based manager has adirect and significant effect on the U.S.financial system, and that it is difficultto determine the identity of the

beneficial owner of a fund in certainfund structures (e.g., fund-of-funds ormaster-feeder). Alternatively, anargument for retaining the majority-ownership test would be that many of

these funds have large U.S. investors,who can be adversely impacted in theevent of a counterparty default. On

balance, the Commission believes themajority-ownership test should not beincluded in the definition of U.S. personfor purposes of the margin rules. Non-U.S. funds with U.S. majority-ownership, even if treated as a non-U.S.

person, would be excluded from theCommission’s margin rules only inlimited circumstances (namely, whenthese funds trade with a non-U.S. CSEthat is not a consolidated subsidiary ofa U.S. entity or a U.S. branch of a non-U.S. CSE). This, coupled with theimplementation issues raised bycommenters, persuades the Commissionnot to propose to define those funds thatare majority-owned by U.S. persons(and that would otherwise not fallwithin the definition of a ‘‘U.S.person’’), as U.S. persons.

The proposed definition of ‘‘U.S.

person’’ determines a legal person’sstatus at the entity level and thusincludes any foreign operations that arepart of the U.S. legal person, regardlessof their location. Consistent with thisapproach, the definition of ‘‘U.S.person’’ under the Proposed Rule wouldinclude a foreign branch of a U.S.person.

Under the proposed definition, thestatus of a legal person as a U.S. personwould not affect whether a separatelyincorporated or organized legal personin the affiliated corporate group is a U.S.person. Therefore, an affiliate or asubsidiary of a U.S. person that is

organized or incorporated in a non-U.S.jurisdiction would not be deemed a‘‘U.S. person’’ solely by virtue of itsrelationship with a U.S. person.

The proposed ‘‘U.S. person’’definition does not include the prefatoryphrase ‘‘includes, but is not limited to’’that was included in the Guidance. TheCommission believes that this prefatoryphrase should not be included in orderto provide legal certainty regarding theapplication of U.S. margin requirementsto cross-border swaps.

The Commission understands that theinformation necessary for a swap

counterparty to accurately assess thestatus of its counterparties as U.S.persons may not be available, or may beavailable only through overly

burdensome due diligence. For thisreason, the Commission believes that aswap counterparty generally should bepermitted to reasonably rely on itscounterparty’s written representation indetermining whether the counterparty iswithin the definition of the term ‘‘U.S.person.’’ In this context, theCommission’s policy is to interpret the‘‘reasonable’’ standard to be satisfied



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53The Commission notes that under the ExternalBusiness Conduct Rules, a SD or MSP generallymeets its due diligence obligations if it reasonablyrelies on counterparty representations, absentindications to the contrary. As in the case of theExternal Business Rules, the Commission believesthat allowing for reasonable reliance oncounterparty representations encourages objectivityand avoids subjective evaluations, which in turnfacilitates a more consistent and foreseeabledetermination of whether a person is within theCommission’s interpretation of the term ‘‘U.S.person.’’

54See § 23.160(a)(5) of the Proposed Rule.55Under the Proposed Rule, a ‘‘U.S. CSE’’ is a

CSE that is a U.S. person. The term ‘ ‘U.S. CSE’’includes a foreign branch of a U.S. CSE. A ‘‘non-U.S. CSE’’ is any CSE that is not a U.S. person.

56See § 23.160(a)(2) of the Proposed Rule.57Further, the definition of ‘‘guarantee’’ is

intended to encompass any swap of a non-U.S.person where the counterparty to the swap hasrights of recourse, regardless of the form of thearrangement, against at least one U.S. person (eitherindividually or jointly or severally with others) forthe non-U.S. person’s obligations under the swap.

58 In the Guidance, the Commission interpretedthe term ‘‘guarantee’’ generally to include not onlytraditional guarantees of payment or performance ofthe related swaps, but also other formalarrangements that, in view of all the facts andcircumstances, support the non-U.S. person’sability to pay or perform its swap obligations withrespect to its swaps.

when a party to a swap conductsreasonable due diligence on itscounterparties, with what is reasonablein a particular situation to depend onthe relevant facts and circumstances.53

Under the Proposed Rule, a ‘‘non-U.S.person’’ is any person that is not a ‘‘U.S.person’’ (as defined in the ProposedRule).54 References in this preamble to

a ‘‘U.S. counterparty’’ are to a swapcounterparty that is a ‘‘U.S. person’’under the Proposed Rule, and referencesto a ‘‘non-U.S. counterparty’’ are to aswap counterparty that is a ‘‘non-U.S.person’’ under the Proposed Rule.55

Request for Comment. TheCommission requests comment on allaspects of the proposed definition of‘‘U.S. person,’’ including the following:

1. Does the proposed definition of‘‘U.S. person’’ appropriately identify allindividuals or entities that should bedesignated as U.S. persons? Is theproposed definition too narrow or

broad? Why?2. Should the definition of ‘‘U.S.person’’ include the U.S. majority-ownership prong for funds and othercollective investment vehicles, as setforth in the Guidance? Please explain.

3. Should the definition of ‘‘U.S.person’’ include certain legal entitiesowned by one or more personsdescribed in prongs (1), (2), (3), (4), or(5) (Proposed Rule §23.160(a)(10)(i), (ii),(iii), (iv) or (v)) of the proposed U.S.person definition who bear(s) unlimitedresponsibility for the obligations andliabilities of the legal entity? Pleaseexplain.

4. Should the definition of ‘‘U.S.person’’ be identical to the definition of‘‘U.S. person’’ that the SEC adopted inits August 2014 rulemaking? Forexample:

a. Should the definition of ‘‘U.S.person’’ exclude certain designated (andany similar) international organizations,their agencies and pension plans, withheadquarters in the United States?

b. Should the Commission define theterm ‘‘principal place of business’’ asthe location from which the officers,

partners, or managers of a legal personprimarily direct, control, and coordinatethe activities of the legal person, andspecify that in the case of an externallymanaged investment vehicle, thislocation is the office from which themanager of the vehicle primarily directs,controls, and coordinates theinvestment activities of the vehicle?

c. Should the Commission deleteprong (6) (Proposed Rule§ 23.160(a)(10)(vi)) of the proposeddefinition of ‘‘U.S. person’’ whichincludes certain legal entities owned byone or more U.S. person(s) and forwhich such person(s) bear unlimitedresponsibility for the obligations andliabilities of the legal entity and insteadtreat such arrangements as recourseguarantees?

d. Should any other changes be madeto the proposed definition of ‘‘U.S.person’’ to conform it to the definitionadopted by the SEC?

2. GuaranteesUnder the Proposed Rule, uncleared

swaps of non-U.S. CSEs, where the non-U.S. CSE’s obligations under theuncleared swap are guaranteed by a U.S.person, would be treated the same asuncleared swaps of a U.S. CSE. TheCommission believes that this treatmentis appropriate because the swap of anon-U.S. CSE whose obligations underthe swap are guaranteed by a U.S.person is identical, in relevant respects,to a swap entered directly by a U.S.person. That is, by virtue of theguarantee, the U.S. guarantor is

responsible for the swap it guarantees ina manner similar to a directcounterparty to the swap. The U.S.person guarantor effectively acts jointlywith the non-U.S. person whose swap itguarantees to engage in swapstransactions. The counterparty,pursuant to the recourse guarantee,looks to both the direct non-U.S.counterparty and its U.S. guarantor inentering into the swap.

The Proposed Rule would define theterm ‘‘guarantee’’ as an arrangementpursuant to which one party to a swaptransaction with a non-U.S.counterparty has rights of recourseagainst a U.S. person guarantor (whethersuch guarantor is affiliated with thenon-U.S. counterparty or is anunaffiliated third party) with respect tothe non-U.S. counterparty’s obligationsunder the relevant swap transaction.Under the Commission’s proposal, aparty to a swap transaction has rights ofrecourse against the U.S. personguarantor if the party has a conditionalor unconditional legally enforceableright, in whole or in part, to receivepayments from, or otherwise collect

from, the U.S. person in connectionwith the non-U.S. person’s obligationsunder the swap.56 Accordingly, the term‘‘guarantee’’ would apply whenever aparty to the swap has a legallyenforceable right of recourse against theU.S. guarantor of a non-U.S.counterparty’s obligations under therelevant swap, regardless of whether

such right of recourse is conditionedupon the non-U.S. counterparty’sinsolvency or failure to meet itsobligations under the relevant swap,and regardless of whether thecounterparty seeking to enforce theguarantee is required to make a demandfor payment or performance from thenon-U.S. counterparty beforeproceeding against the U.S. guarantor.

Under the Proposed Rule, the terms ofthe guarantee need not necessarily beincluded within the swapdocumentation or even otherwisereduced to writing (so long as legally

enforceable rights are created under thelaws of the relevant jurisdiction),provided that a swap counterparty hasa conditional or unconditional legallyenforceable right, in whole or in part, toreceive payments from, or otherwisecollect from, the U.S. person inconnection with the non-U.S. person’sobligations under the swap.57

Further, the Commission’s proposeddefinition of guarantee would not beaffected by whether the U.S. guarantoris an affiliate of the non-U.S. CSE

because, in each case, the swapcounterparty has a conditional orunconditional legally enforceable right,

in whole or in part, to receive paymentsfrom, or otherwise collect from, the U.S.person in connection with the non-U.S.person’s obligations under the swap.

The Commission notes that thedefinition of ‘‘guarantee’’ in theProposed Rule is narrower in scope thanthe one used in the Guidance.58 Inproposing this definition, theCommission is cognizant that manyother types of financial arrangements orsupport, other than a guarantee asdefined in the Proposed Rule, may beprovided by a U.S. person to a non-U.S.CSE (e.g., keepwells and liquidity puts,



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59Under the Proposed Rule, the term ‘‘ultimateparent entity’’ means the parent entity in aconsolidated group in which none of the otherentities in the consolidated group has a controllinginterest, in accordance with U.S. GAAP.

60The Exclusion under the Proposed Rule isdiscussed in section II.C.3. below.

61For example, when General Electric announcedon April 10, 2015 that it would guaranteerepayment of approximately $210 billion of debtfrom GE Capital, the prices of some GE Capital bonds reportedly went up as much as 1.5% even

though previously the parent company hadprovided other support but not an unconditionalguarantee. According to an article in the Wall Street Journal, Russell Solomon, an analyst at Moody’sInvestors Service, stated: ‘‘We’ve always assumedthat GE would support GE Capital almost no matterwhat . . . But now this says they’ll support it nomatter what.’’ Similarly, the article reports thatStandard & Poor’s Rating Services stated thatGeneral Electric’s decision to back GE Capital debt‘‘strengthens our view of GE’s support, by buttressing the parent’s proven willingness andability to support its subsidiary with a contractualobligation to do so.’’ See Mike Cherney and KatyBurne, WSJ, Apr. 10, 2015, available at http://www.wsj.com/articles/ges-move-alters-the-bond-market-1428707800.

certain types of indemnity agreements,master trust agreements, liability or losstransfer or sharing agreements). TheCommission understands that theseother financial arrangements or supporttransfer risk directly back to the U.S.financial system, with possiblesignificant adverse effects, in a mannersimilar to a guarantee with a direct

recourse to a U.S. person. TheCommission, however, believes thatapplication of a narrower definition ofguarantee for purposes of identifyingthose uncleared swaps that should betreated like uncleared swaps of a U.S.CSEs would reduce the potential forconflict with the non-U.S. CSE’s homeregulator. Moreover, the Commission

believes that a non-U.S. CSE that has been provided with financialarrangements or support from a U.S.person that do not fall within the term‘‘guarantee’’ as defined in the ProposedRule in many cases is likely to meet the

definition of a ‘‘Foreign ConsolidatedSubsidiary’’ and therefore, as discussedin the next section, would be subject tothe Commission’s margin requirements,with substituted compliance (but notthe Exclusion) available. Therefore, theCommission believes that a narrowdefinition of guarantee would achieve amore workable framework for non-U.S.CSEs, without undermining protectionof U.S. persons and U.S. financialsystem.

The Commission is aware that somenon-U.S. CSEs removed guarantees inorder to fall outside the scope of certainDodd-Frank requirements. The

proposed coverage of foreignsubsidiaries of a U.S. person as a‘‘Foreign Consolidated Subsidiary,’’which is discussed in the next section,and whose swaps would not be eligiblefor the Exclusion under anycircumstances (as discussed in sectionII.C.3. below), would address theconcern that even without a guarantee,as defined under the Guidance or in theProposed Rule, foreign subsidiaries of aU.S. person with a substantial nexus tothe U.S. financial system are adequatelycovered by the margin requirements.

Request for Comment. The

Commission seeks comment on allaspects of the proposed definition of‘‘guarantee,’’ including the following:

1. Should the broader use of the term‘‘guarantee’’ in the Guidance be usedinstead of the proposed definition, andif so, why? Would an alternativedefinition be more effective in light ofthe purpose of the margin requirements,and if so, why?

2. Is the Commission’s assumptionthat a non-U.S. CSE is likely to meet thedefinition of a ‘‘Foreign ConsolidatedSubsidiary’’ when it has been provided

with financial arrangements or supportfrom a U.S. person that do not fallwithin the term ‘‘guarantee’’ (as definedin the Proposed Rule) correct? If not,why not?

3. Is it appropriate to distinguish, forpurposes of the Proposed Rule, betweenthose arrangements under which a partyto the swap has a legally enforceable

right of recourse against the U.S.guarantor and those arrangements wherethere is not direct recourse against aU.S. guarantor?

3. Foreign Consolidated Subsidiaries

The Proposed Rule uses the term‘‘Foreign Consolidated Subsidiary’’ inorder to identify swaps of those non-U.S. CSEs whose obligations under therelevant uncleared swap are notguaranteed by a U.S. person but thatraise substantial supervisory concern inthe United States, as a result of thepossible negative impact on their U.S.parent entities and the U.S. financialsystem. Consolidated financialstatements report the financial position,results of operations and statement ofcash flows of a parent entity togetherwith subsidiaries in which the parententity has a controlling financial interest(which are required to be consolidatedunder U.S. generally acceptedaccounting principles (‘‘GAAP’’)). In theCommission’s view, the fact that anentity is included in the consolidatedfinancial statements of another is anindication of potential risk to the otherentity that offers a clear and objectivestandard for the application of margin

requirements.Specifically, the Proposed Ruledefines the term ‘‘Foreign ConsolidatedSubsidiary’’ as a non-U.S. CSE in whichan ultimate parent entity 59 that is a U.S.person has a controlling interest, inaccordance with U.S. GAAP, such thatthe U.S. ultimate parent entity includesthe non-U.S. CSE’s operating results,financial position and statement of cashflows in the U.S. ultimate parent entity’sconsolidated financial statements, inaccordance with U.S. GAAP.

In the case of Foreign ConsolidatedSubsidiaries whose obligations underthe relevant swap are not guaranteed bya U.S. person, substituted compliancewould be broadly available under theProposed Rule to the same extent asother non-U.S. CSEs whose obligationsunder the relevant swap are notguaranteed by a U.S. person, eventhough the financial position, operatingresults, and statement of cash flows of

the Foreign Consolidated Subsidiaryhave a direct impact on the financialposition, risk profile and market valueof the consolidated group (whichincludes a U.S. parent entity); however,the Exclusion would not be available forswaps with a Foreign ConsolidatedSubsidiary because their swap activitieshave a direct impact on the financial

position, risk profile, and market valueof a U.S. parent entity that consolidatesthe Foreign Consolidated Subsidiary’sfinancial statements and a potentialspill-over effect on the U.S. financialsystem.60

The Commission believes that notextending the Exclusion to ForeignConsolidated Subsidiaries under theProposed Rule would be appropriate

because the U.S. parent entity thatconsolidates the Foreign ConsolidatedSubsidiary’s financial statements mayhave an incentive to provide support toa Foreign Consolidated Subsidiary, or

the Foreign Consolidated Subsidiarymay pose financial risk to the U.S.parent entity. In addition, marketparticipants (including counterparties)may have the expectation that theparent entity will provide support to theForeign Consolidated Subsidiaryalthough, whether the U.S. parent entityactually steps in to fulfill the obligationsof the Foreign Consolidated Subsidiarywould depend on a business judgmentrather than a legal obligation.61 Notably,although consolidation has a directimpact on the U.S. parent entity, theU.S. parent entity stands in a differentlegal position than a U.S. guarantor

because, in the absence of a directrecourse guarantee, the U.S. parententity has no legal obligation to pay orperform under the relevant swap if theForeign Consolidated Subsidiarydefaults on its swap obligations.Therefore, the Commission believesthat, in the absence of a direct recourse


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