MFA Submits Comments to European Supervisory Authorities in Response to Joint Discussion Paper on Risk Mitigation Techniques

April 02, 2012

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Topics: Joint Committee of the European Supervisory Authorities European Securities and Markets Authority, ESMA, European Supervisory Authorities, ESA, European Union, EU, over-the-counter derivatives, OTC derivatives, central clearing, risk-based margin requirements, risk mitigation techniques, European Banking Authority, European Insurance and Occupational Pension Authority, European Commission, liquidity, segregation regime, initial margin, posting party, receiving party, bankruptcy-remote, prudentially regulated financial counterparties, PRFC, segregation, netting, margin, investment firms, credit institutions, insurance undertakings, assurance undertakings, reinsurance undertakings, institutions for occupational retirement provision, non-cleared derivative contracts, hedging, prudential regulators, Commodity Futures Trading Commission, CFTC, counterparty credit risk, bilateral initial margin arrangements, variation margin, capital, derivatives markets, net margin, best practices, collateralization, non-cleared OTC derivatives, over-collateralization, highly correlated assets, credit default swap, CDS, interest rate swap, Eurodollar futures, physically-settling forwards, repurchase agreements, security lending agreements, intraday change, segregation of counterparty assets, NPRFC, non-prudentially regulated financial counterparties, NFCs+, non financial counterparties above the clearing threshold, non-cleared derivatives, buy-side firms, asymmetry, current market practice, perceived systemic relevance, systemic importance, uncollateralized, exposures, credit exposure, Basel rules, uniformity of application, due diligence, Basel Committee on Banking Supervision, Basel II, Basel III, creditworthiness, regulatory arbitrage, major swap participants, deep and liquid markets, substantial position in swaps, substantial counterparty exposure, international harmonization of regulations, bilateral exchange, market transparency, covered swap entities, de minimi exception, mark-to-market, standardized method, internal models, competitive advantages, discriminatory distortions, internal model method, legally required transparency, incremental compliance costs, segregated account, independent third party custodian, insolvency estate, tri-party custodial arrangements, bilateral arrangements, non-financial assets, eligible collateral, revaluation, haircuts, EMIR, margin calculations, daily valuation of collateral, dispute resolution procedures, party-specific variables,
From: MFA Stuart Kaswell

To:

Joint Committee of the European Supervisory Authorities, European Securities and Markets Authority, ESMA

MFA submitted a comment letter to the European Supervisory Authorities in response to their Discussion Paper on Draft Regulatory Technical Standards on risk mitigation techniques for OTC derivatives not cleared by a CCP under the Regulation on OTC derivatives, CCPs and Trade Repositories. In our letter, MFA emphasized that appropriate segregation is critical, meaning the regime must ensure that, in the event of the receiving partys default or insolvency: 1) the posting partys initial margin (IM) is segregated in a manner that is bankruptcy-remote under the local insolvency laws of the relevant Member State; and 2) it allows for the efficient return of the posting partys collateral. In addition, MFA highlighted that: 1) where there is appropriate segregation, MFAs preferred approach would be to have only prudentially regulated financial counterparties collect IM coupled with a threshold below which they would not have to collect IM; 2) where there is not appropriate segregation, the posting of IM by all parties is necessary; and 3) in calculating IM, margin methodologies must be transparent and replicable.

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