(a) Authority. This subpart (Regulation KK) is issued by the Board
of Governors of the Federal Reserve System (Board) under section 4s(e)
of the Commodity Exchange Act of 1936, as amended (7 U.S.C. 6s(e)),
and section 15F(e) of the Securities Exchange Act of 1934, as amended
(15 U.S.C. 78o-10(e)), as well as under the Federal Reserve Act, as
amended (12 U.S.C. 221 et seq.); section 8 of the Federal Deposit
Insurance Act, as amended (12 U.S.C. 1818); the Bank Holding Company
Act of 1956, as amended (12 U.S.C. 1841et seq.); the International
Banking Act of 1978, as amended (12 U.S.C. 3101 et seq.), and
the Home Owners’ Loan Act, as amended (1461 et seq.).
(b) Purpose. Section 4s
of the Commodity Exchange Act of 1936 (7 U.S.C. 6s) and section 15F
of the Securities Exchange Act of 1934 (15 U.S.C. 78o-10) require
the Board to establish capital and margin requirements for any state
member bank (as defined in 12 CFR 208.2(g)), bank holding company
(as defined in 12 U.S.C. 1841), savings and loan holding company (as
defined in 12 U.S.C. 1467a (on or after the transfer established under
section 311 of the Dodd-Frank Act) (12 U.S.C. 5411)), foreign banking
organization (as defined in 12 CFR 211.21(o)), foreign bank that does
not operate an insured branch, state branch or state agency of a foreign
bank (as defined in 12 U.S.C. 3101(b)(11) and (12)), or Edge or agreement
corporation (as defined in 12 CFR 211.1(c)(2) and (3)) that is registered
as a swap dealer, major swap participant, security-based swap dealer,
or major security-based swap participant with respect to all non-cleared
swaps and non-cleared security-based swaps. This subpart implements
section 4s of the Commodity Exchange Act of 1936 and section 15F of the
Securities Exchange Act of 1934 by defining terms used in the statute
and related terms, establishing capital and margin requirements, and
explaining the statutes’ requirements.
(c) Scope. This subpart
establishes minimum capital and margin requirements for each covered
swap entity subject to this subpart with respect to all non-cleared
swaps and non-cleared security-based swaps. This subpart applies to
any non-cleared swap or non-cleared security-based swap entered into
by a covered swap entity on or after the relevant compliance date
set forth in paragraph (e) of this section. Nothing in this subpart
is intended to prevent a covered swap entity from collecting margin
in amounts greater than are required under this subpart.
(d) Exemptions.
(1) Swaps. The requirements of this subpart (except for section 237.12) shall
not apply to a non-cleared swap if the counterparty:
(i) Qualifies
for an exception from clearing under section 2(h)(7)(A) of the Commodity
Exchange Act of 1936 (7 U.S.C. 2(h)(7)(A)) and implementing regulations;
(ii) Qualifies for
an exemption from clearing under a rule, regulation, or order that
the Commodity Futures Trading Commission issued pursuant to its authority
under section 4(c)(1) of the Commodity Exchange Act of 1936 (7 U.S.C.
6(c)(1)) concerning cooperative entities that would otherwise be subject
to the requirements of section 2(h)(1)(A) of the Commodity Exchange
Act of 1936 (7 U.S.C. 2(h)(1)(A)); or
(iii) Satisfies the criteria in section
2(h)(7)(D) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(7)(D))
and implementing regulations.
(2) Security-based
swaps. The requirements of this subpart (except for section 237.12)
shall not apply to a non-cleared security-based swap if the counterparty:
(i) Qualifies for an exception from clearing under section 3C(g)(1)
of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(1)) and
implementing regulations; or
(ii) Satisfies the criteria in section
3C(g)(4) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(4))
and implementing regulations.
(e) Compliance dates. Covered swap
entities shall comply with the minimum margin requirements of this
subpart on or before the following dates for non-cleared swaps and
non-cleared security-based swaps entered into on or after the following
dates:
(1) September 1, 2016
with respect to the requirements in section 237.3 for initial margin
and section 237.4 for variation margin for any non-cleared swaps and
non-cleared security-based swaps, where both:
(i) The covered
swap entity combined with all its affiliates; and
(ii) Its counterparty combined with
all its affiliates, have an average daily aggregate notional amount
of non-cleared swaps, non-cleared security-based swaps, foreign exchange
forwards and foreign exchange swaps for March, April and May 2016
that exceeds $3 trillion, where such amounts are calculated only for
business days; and
(iii) In calculating the amounts in paragraphs (e)(1)(i) and (ii)
of this section, an entity shall count the average daily aggregate
notional amount of a non-cleared swap, a non-cleared security-based
swap, a foreign exchange forward or a foreign exchange swap between
the entity and an affiliate only one time, and shall not count a swap
or security-based swap that is exempt pursuant to paragraph (d) of
this section.
(2) March 1, 2017 with respect to the requirements in section 237.4
for variation margin for any other covered swap entity with respect
to non-cleared swaps and non-cleared security-based swaps entered
into with any other counterparty.
(3) September 1, 2017 with respect to the
requirements in section 237.3 for initial margin for any non-cleared
swaps and non-cleared security-based swaps, where both:
(i) The
covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined
with all its affiliates, have an average daily aggregate notional
amount of non-cleared swaps, non-cleared security-based swaps, foreign
exchange forwards and foreign exchange swaps for March, April and
May 2017 that exceeds $2.25 trillion, where such amounts are calculated
only for business days; and
(iii) In calculating the amounts in
paragraphs (e)(3)(i) and (ii) of this section, an entity shall count
the average daily aggregate notional amount of a non-cleared swap,
a non-cleared security-based swap, a foreign exchange forward or a
foreign exchange swap between the entity and an affiliate only one
time, and shall not count a swap or security-based swap that is exempt
pursuant to paragraph (d) of this section.
(4) September 1, 2018 with
respect to the requirements in section 237.3 for initial margin for
any non-cleared swaps and non-cleared security-based swaps, where
both:
(i) The covered swap entity combined
with all its affiliates; and
(ii) Its counterparty combined with
all its affiliates, have an average daily aggregate notional amount
of non-cleared swaps, non-cleared security-based swaps, foreign exchange
forwards and foreign exchange swaps for March, April and May 2018
that exceeds $1.5 trillion, where such amounts are calculated only
for business days; and
(iii) In calculating the amounts in paragraphs (e)(4)(i) and (ii)
of this section, an entity shall count the average daily aggregate
notional amount of a non-cleared swap, a non-cleared security-based
swap, a foreign exchange forward or a foreign exchange swap between
the entity and an affiliate only one time, and shall not count a swap
or security-based swap that is exempt pursuant to paragraph (d) of
this section.
(5) September 1, 2019 with respect to the
requirements in section 237.3 for initial margin for any non-cleared
swaps and non-cleared security-based swaps, where both:
(i) The
covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined
with all its affiliates, have an average daily aggregate notional
amount of non-cleared swaps, non-cleared security-based swaps, foreign
exchange forwards and foreign exchange swaps for March, April and
May 2019 that exceeds $0.75 trillion, where such amounts are calculated
only for business days; and
(iii) In calculating the amounts in
paragraphs (e)(5)(i) and (ii) of this section, an entity shall count
the average daily aggregate notional amount of a non-cleared swap,
a non-cleared security-based swap, a foreign exchange forward or a
foreign exchange swap between the entity and an affiliate only one
time, and shall not count a swap or security-based swap that is exempt
pursuant to paragraph (d) of this section.
(6) September 1, 2021 with
respect to requirements in section 237.3 for initial margin for any
non-cleared swaps and non-cleared security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty
combined with all its affiliates, have an average daily aggregate
notional amount of non-cleared swaps, foreign exchange forwards and
foreign exchange swaps for March, April and May 2021 that exceeds
$50 billion, where such amounts are calculated only for business days;
and
(iii) In calculating
the amounts in paragraphs (e)(6)(i) and (ii) of this section, an entity
shall count the average daily aggregate notional amount of a non-cleared
swap, a non-cleared security-based swap, a foreign exchange forward
or a foreign exchange swap between the entity and an affiliate only
one time, and shall not count a swap or security-based swap that is
exempt pursuant to paragraph (d) of this section.
(7) September 1, 2022
with respect to requirements in section 237.3 for initial margin for
any other covered swap entity with respect to non-cleared swaps and
non-cleared security-based swaps entered into with any other counterparty.
(f) Once a covered swap entity must comply
with the margin requirements for non-cleared swaps and non-cleared
security-based swaps with respect to a particular counterparty based
on the compliance dates in paragraph (e) of this section, the covered
swap entity shall remain subject to the requirements of this subpart
with respect to that counterparty.
(g) (1) If a covered swap entity’s
counterparty changes its status such that a non-cleared swap or non-cleared
security-based swap with that counterparty becomes subject to stricter
margin requirements under this subpart (such as if the counterparty’s
status changes from a financial end user without material swaps exposure
to a financial end user with material swaps exposure), then the covered
swap entity shall comply with the stricter margin requirements for
any non-cleared swap or non-cleared security-based swap entered into
with that counterparty after the counterparty changes its status.
(2) If a covered swap
entity’s counterparty changes its status such that a non-cleared swap
or non-cleared security-based swap with that counterparty becomes
subject to less strict margin requirements under this subpart (such
as if the counterparty’s status changes from a financial end user
with material swaps exposure to a financial end user without material
swaps exposure), then the covered swap entity may comply with the
less strict margin requirements for any non-cleared swap or non-cleared
security-based swap entered into with that counterparty after the
counterparty changes its status as well as for any outstanding non-cleared
swap or non-cleared security-based swap entered into after the applicable
compliance date in paragraph (e) of this section and before the counterparty
changed its status.
(h) Legacy swaps. Covered swaps entities are
required to comply with the requirements of this subpart for non-cleared
swaps and non-cleared security-based swaps entered into on or after
the relevant compliance dates for variation margin and for initial
margin established in paragraph (e) of this section. Any non-cleared
swap or non-cleared security-based swap entered into before such relevant
date shall remain outside the scope of this subpart if amendments
are made to the non-cleared swap or non-cleared security-based swap
by method of adherence to a protocol, other amendment of a contract
or confirmation, or execution of a new contract or confirmation in
replacement of and immediately upon termination of an existing contract
or confirmation, as follows:
(1) Amendments to the non-cleared swap
or non-cleared security-based swap solely to comply with the requirements
of 12 CFR part 47, 12 CFR part 252 subpart I, or 12 CFR part 382,
as applicable;
(2) The
non-cleared swap or non-cleared security based swap was amended under
the following conditions:
(i) The swap was originally entered
into before the relevant compliance date established in paragraph
(e) of this section and one party to the swap booked it at, or otherwise
held it at, an entity (including a branch or other authorized form
of establishment) located in the United Kingdom;
(ii) The entity in the United Kingdom
subsequently arranged to amend the swap, solely for the purpose of
transferring it to an affiliate, or a branch or other authorized form
of establishment, located in any European Union member state or the
United States, in connection with the entity’s planning for or response
to the event described in paragraph (h)(2)(iii) of this section, and
the transferee is:
(A) A covered swap entity, or
(B) A covered swap entity’s counterparty
to the swap, and the counterparty represents to the covered swap entity
that the counterparty performed the transfer in compliance with the
requirements of paragraphs (h)(2)(i) and (ii) of this section;
(iii)
The law of the European Union ceases to apply to the United Kingdom
pursuant to Article 50(3) of the Treaty on European Union, without
conclusion of a Withdrawal Agreement between the United Kingdom and
the European Union pursuant to Article 50(2);
(iv) The amendments do
not modify any of the following: The payment amount calculation methods,
the maturity date, or the notional amount of the swap;
(v) The amendments cause
the transfer to take effect on or after the date of the event described
in paragraph (h)(2)(iii) of this section transpires; and
(vi) The amendments cause
the transfer to take effect by the later of:
(A) The date
that is one year after the date of the event described in paragraph
(h)(2)(iii) of this section; or
(B) Such other date permitted by transitional
provisions under Article 35 of Commission Delegated Regulation (E.U.)
No. 2016/2251, as amended.
(3) (i)
Amendments to the non-cleared swap or non-cleared security-based swap
that are made solely to accommodate the replacement of:
(A) An interbank
offered rate (IBOR) including, but not limited to, the London Interbank
Offered Rate (LIBOR), the Tokyo Interbank Offered Rate (TIBOR), the
Bank Bill Swap Rate (BBSW), the Singapore Interbank Offered Rate (SIBOR),
the Canadian Dollar Offered Rate (CDOR), Euro Interbank Offered Rate
(EURIBOR), and the Hong Kong Interbank Offered Rate (HIBOR);
(B) Any other interest rate that
a covered swap entity reasonably expects to be replaced or discontinued
or reasonably determines has lost its relevance as a reliable benchmark
due to a significant impairment; or
(C) Any other interest rate that succeeds
a rate referenced in paragraph (h)(3)(i)(A) or (B) of this section.
An amendment made under this paragraph (h)(3)(i)(C) could be one of
multiple amendments made under this paragraph (h)(3)(i)(C). For example,
an amendment could replace an IBOR with a temporary interest rate
and later replace the temporary interest rate with a permanent interest
rate.
(ii) Amendments to accommodate replacement of an interest rate described
in paragraph (h)(3)(i) of this section may also incorporate spreads
or other adjustments to the replacement interest rate and make other
necessary technical changes to operationalize the determination of
payments or other exchanges of economic value using the replacement
interest rate, including changes to determination dates, calculation
agents, and payment dates. The changes may not extend the maturity
or increase the total effective notional amount of the non-cleared
swap or non-cleared security-based swap beyond what is necessary to
accommodate the differences between market conventions for an outgoing
interest rate and its replacement.
(iii) Amendments to accommodate replacement
of an interest rate described in paragraph (h)(3)(i) of this section
may also be effectuated through portfolio compression between or among
covered swap entities and their counterparties. Portfolio compression
under this paragraph is not subject to the limitations in paragraph
(h)(4) of this section, but any non-cleared swaps or non-cleared security-based
swaps resulting from the portfolio compression may not have a longer
maturity or increase the total effective notional amount more than
what is necessary to accommodate the differences between market conventions
for an outgoing interest rate and its replacement.
(4) Amendments solely
to reduce risk or remain risk-neutral through portfolio compression
between or among covered swap entities and their counterparties, as
long as any non-cleared swaps or non-cleared security-based swaps
resulting from the portfolio compression do not:
(i) Exceed
the sum of the total effective notional amounts of all of the swaps
that were submitted to the compression exercise that had the same
or longer remaining maturity as the resulting swap; or
(ii) Exceed the longest
remaining maturity of all the swaps submitted to the compression exercise.
(5) The non-cleared
swap or non-cleared security-based swap was amended solely for one
of the following reasons:
(i) To reflect technical changes, such
as addresses, identities of parties for delivery of formal notices,
and other administrative or operational provisions as long as they
do not alter the non-cleared swap’s or non-cleared security-based
swap’s underlying asset or reference, the remaining maturity, or the
total effective notional amount; or
(ii) To reduce the notional amount,
so long as:
(A) All payment obligations attached to the
total effective notional amount being eliminated as a result of the
amendment are fully terminated; or
(B) All payment obligations attached to the
total effective notional amount being eliminated as a result of the
amendment are fully novated to a third party, who complies with applicable
margin rules for the novated portion upon the transfer.
