Derivatives Market Practices

MFA has played an important role in improving market practices in the derivatives markets through collaboration with the major derivatives dealers and other industry participants. Over-the-counter (OTC) derivatives are of great importance to MFA Members as many of the funds they manage are active investors in these products. Over the last ten years, OTC derivatives have become a critical means by which funds manage the risk and returns of the assets in their portfolios in order to meet the objectives of their investors. MFA and its members have consistently supported and participated in industry efforts to improve the operational infrastructure and efficiency of the OTC derivatives markets.. These efforts can be broken down into three categories of initiatives:

• Industry Policy
• Standard Documentation Advocacy
• Education and Outreach

Recent initiatives include the following:

7.9.2010		MFA submitted a comment letter in response to the European Commission’s (EC) Consultation Paper on Derivatives and Market Infrastructures. In our letter, MFA applauded the EC’s interest in considering differing market perspectives as it finalizes its draft legislative proposals and policies regarding central clearing, improved transparency and other aspects of the OTC derivatives market.  In addition, we expressed our general support of: (i) the bottom-up approach to the EC’s mandatory clearing obligation; (ii) the general approach specified in the consultation paper on organizational requirements and governance processes for European central counterparties (CCPs); (iii) the EC’s rule requiring each clearing member to distinguish and segregate in accounts with the CCP the assets and positions of that clearing member from those of its clients; and (iv) the EC’s principle regarding non-cleared OTC derivatives contracts being reported to a trade repository, but expressed concern regarding the options presented in the consultation paper.
4.21.2010		MFA submitted a letter to the leadership of the Senate Committee on Agriculture, Forestry and Nutrition regarding the Wall Street Transparency and Accountability Act of 2010, which seeks to regulate the over-the-counter derivatives market. In the letter, MFA expressed its support of the objectives of the bill, but highlighted several key concerns, including:  (i) the definitions of “swap dealer” and “major swap participant” (“MSP”); (ii) the potential imposition of capital requirements on MSPs; (iii) the requirement that the recipient of any non-dealer swap margin payment be required to register as a futures commission merchant; and (iv) the authority of the SEC to establish position limits with respect to securities and security-based swaps.
3.1.2010		MFA, several buy-side firms, the major swap dealers and other industry trade associations jointly submitted a letter to global regulators, setting out new commitments and targets across asset classes with respect to central clearing, transparency, standardization, operational efficiency and collateral management.  There were two central themes in the letter: (i) increased transparency by the creation and usage of trade repositories; and (ii) expanded usage of central clearing (including the identification of impediments of buy-side clearing and steps to eliminate those impediments).
3.1.2010		MFA, the International Swaps and Derivatives Association and the Securities Industry Financial Markets Association-Asset Managers Group jointly co-published an Independent Amount White Paper, which examines the risk associated with under- and over-collateralization from posting independent amounts and the potential alternatives that may be developed by the derivatives market to protect participants against these risks. This paper is the second edition; the original edition was published on October 20, 2009. The current edition is one of the deliverables described in the derivatives industry letter to the Federal Reserve Bank of New York and other banking supervisors dated June 2, 2009.
2.1.2010		MFA submitted a letter to the UK House of Lords in response to a Call for Evidence from the Subcommittee regarding the European Commission’s Communications on ensuring safe and sound derivatives markets. In our letter, we: (i) discussed the benefits of the derivatives markets; (ii) noted that derivatives helped market participants to hedge their risk exposures during the worst months of the financial crisis; (iii) agreed that the European Commission’s approach to monitor and, when appropriate, to impose minimum collateral levels with respect to non-cleared derivatives transactions is the correct level of oversight; and (iv) encouraged the European Commission to coordinate its regulation and oversight of the derivatives markets with other regulators around the world to prevent market segmentation.
11.9.2009		MFA submitted a letter to the Department of the Treasury regarding the Obama administration's legislative proposal titled the "Over-the-Counter Derivatives Markets Act of 2009" ("DMA"). A copy of the proposal can be found here. In our letter, MFA provided a number of comments, which we believe are consistent with the proposal's public policy goals and will further enhance the benefits of OTC derivatives regulation.
9.14.2009		MFA submitted a letter to the CFTC in response to its notice of proposed rulemaking, which was published on August 13, 2009, to create a separate account class for customer positions in cleared OTC derivatives. In our letter, MFA provides its support for the proposal because, in MFA’s view, the proposal: (i) would significantly mitigate counterparty risk and systemic risk; (ii) is necessary to ensure broad market support of customer clearing initiatives in light of alleged uncertainty; and (iii) is consistent with current policy objectives and some legislative proposals that include measures to protect customer positions and collateral in the context of central clearing.
9.8.2009		MFA submitted a letter to the International Swaps and Dealers Association (ISDA) to provide comments to the penultimate draft of the Independent Amount White Paper. In our letter, MFA raises a number of concerns regarding, among others, the neutrality of the first part of the paper, which is supposed to provide a factual explanation of the risks association with over-collateralization of independent amounts under ISDA Credit Support Annexes. MFA also submitted its markup to the draft.
8.7.2009		MFA submitted a comment letter to ISDA on the proposed 2009 Protocol for Resolution of Disputed Collateral Calls. In our letter, MFA expressed its support of industry efforts to improve collateral dispute resolution processes and urged ISDA to consider objective, unbiased resolution methods as a means to address intractable collateral disputes between counterparties.
6.15.2009		MFA submitted a letter to the International Organization of Securities Commissions (IOSCO) in response to its Consultation Report on Unregulated Financial Markets and Products. In our letter, we assert that any regulatory measures that seek to affect the functioning of the CDS market and other OTC derivatives markets must be balanced against the significant benefits that these products bring to global capital markets and to the market participants who trade them. We agreed with IOSCO that the optimal framework to strike this balance is through industry initiatives, which are organized in coordination and cooperation with global regulators.
6.11.2009		MFA submitted a letter following a call on June 9, 2009 among MFA staff, MFA members, the SEC, CFTC, New York Fed, Federal Reserve Board, FDIC and OCC, as well as SIFMA regarding the standardization and clearing eligibility of OTC derivatives. This interagency regulatory group provided good feedback about the information and views that MFA and its members presented during the call.
6.2.2009		MFA, through its participation in the Operations Management Group (OMG), joined the Major Dealers in presenting a letter to global regulators establishing new commitments to address key concerns in the OTC derivatives markets. In particular, the letter commits that its signatories will maintain support of commercially viable centralized clearing platforms, universally report all OTC derivatives trades and promote sound business practices. MFA issued a press release announcing the new commitments identified in the letter. A plain-language summary and chart of the letter’s commitments were issued by its signatories.
2.6.2009		MFA submitted a letter to the Government Accountability Office (GAO) following its telephone interview on January 15, which was held in connection with the GAO’s examination of the risks and challenges presented by the credit default swap market. In the letter, MFA reiterated certain points discussed during the interview and provided answers to certain questions that were not asked due to time constraints.
12.23.2008		MFA submitted a letter to the Federal Reserve Bank of New York, SEC and CFTC raising concerns regarding the protection and safeguarding of customers’ initial margin that they deposit with dealer financial institutions in connection with OTC derivatives trading. MFA’s submission followed meetings MFA held with financial regulators on the infrastructure issues related to the CDS market and proposals to establish one or more central counterparties for such market.
10.31.2008		MFA, through its participation in the Operations Management Group (OMG), joined the 16 Major Dealers in presenting a letter to industry regulators that establishes a series of strategic roadmaps and seven high level goals to further improve front-to-back office processing of OTC derivatives and to mitigate risk across the OTC derivatives market. The letter reaffirmed the continued cooperation between the buy-side institutions of the OMG and the Major Dealers in confronting challenges posed by recent market events. The letter also addressed counterparty credit risk concerns by setting forth commitments regarding central counterparty clearing, electronic novation processing and collateral management. MFA issued a press release announcing the new commitments identified in the letter.
7.31.2008		MFA announced that it is joining the 17 major derivatives dealers as a signatory to a letter to global regulators that develops new commitments to improve operational efficiency across OTC derivatives, as well as commodities and foreign exchange markets and collateral management. Click here for a copy of the letter and click here for a copy of the supplement to the letter.
6.9.2008		MFA, ISDA and SIFMA delivered an implementation plan that they developed jointly to help enable buy-side market participants to operate consistently with the relevant goals outlined in the March 27th letter to the New York Fed. The implementation plan consists of three fundamental strategies: (1) communication and education, (2) facilitation and use of electronic confirmation and novation platforms, and (3) electronic confirmation matching improvement. Click here for a copy of the implementation plan. Click here for the Summary of the 2008 Industry Commitments. Click here for the final agenda for the MFA, ISDA and SIFMA live session.