OTC Derivatives

As investors, customers, and longstanding market participants, MFA members support the strengthening of our nation’s financial regulatory system, including implementing changes in the derivatives markets.

The following issues are MFA’s priorities regarding OTC derivatives as congressional oversight and regulatory implementation of the Dodd-Frank Act continues:

 

Timeline for Implementation of Title VII Rulemakings

The Dodd-Frank Act mandated that regulators promulgate a record number of new regulations to reform the financial services industry. The implementation process is currently underway and regulators are in various stages of rulemakings.

 

MFA View:

MFA believes that it is important to ensure that the adoption of Title VII (OTC derivatives) rulemakings proceeds in a manner that strengthens the derivatives markets and does not impair market participants’ ability to mitigate risk through swaps. MFA members uniformly agree that Title VII rule adoption and implementation should move forward as soon as possible and in a logical, thoughtful manner.

Central Clearing and Access to Clearing Significant Entities

The Dodd-Frank Act requires clearing for all swaps that are able to be cleared and also requires the Commodities Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC), on an ongoing basis, to review swaps to determine if they should be required to be cleared – allowing for public comment on those determinations.

 

MFA View:

MFA supports policymakers’ efforts to reduce systemic risk through proliferating central clearing and enhancing transparency.  MFA believes that central clearing will play an essential role in reducing systemic, operational and counterparty risk, and thus, believe that mandatory clearing and gathering of data by swap data repositories are key first steps that will offer increased regulatory and market efficiencies, greater market transparency and competition.

Capital and Margin Requirements

The Dodd-Frank Act requires the Prudential Regulators to impose capital and margin requirements on market participants that are subject to their regulation as “Swap Dealers” or “Major Swap Participants.”

 

MFA View:

MFA strongly supports measures to reduce systemic risk in the swap markets, including the imposition of balanced, risk-based margin requirements, but we want to ensure that the Prudential Regulators’ proposed capital and margin requirements for Covered Swap Entities’ uncleared swaps promote a balanced approach between decreasing unnecessary risk and maintaining necessary liquidity in swap markets, and are harmonized at an international level.

Segregation of Customer Collateral

The Dodd-Frank Act prohibits futures commission merchants from treating a customer’s margin as its own and from commingling their proprietary assets with those of their customers. The Act also requires a clearing member to fully segregate its customer assets relating to a swap from its own assets under applicable bankruptcy rules.

The Dodd Frank Act provides critical support for clearing by expressly confirming that a clearing member must fully segregate its customer assets relating to a swap from its own assets under applicable bankruptcy rules.

 

MFA View:

MFA supports measures aimed at increasing protections for customer assets posted as collateral for swaps. Segregation of assets is a critical component to the effective functioning of the mandatory clearing regime and necessary to ensure that customer assets are protected in the event of futures commission merchants’ (FCMs) insolvency.

Position Limits

The Dodd-Frank Act grants the CFTC the authority to set position limits, as the Commission finds necessary to deter and prevent excessive speculation that causes sudden or unreasonable fluctuations or unwarranted changes in the price of a commodity.

MFA’s members rely on fair, competitive, and transparent markets that respond to fundamental factors to conduct their businesses. Hedge funds play a vital role in commodity futures markets by assuming the price risk from commercial participants (hedgers) on both the long and short sides of the market, and by providing liquidity that facilitates risk transfer and price discovery for businesses around the world.

Research and experience demonstrate that position limits have not reduced price volatility or prevented market manipulation, and it is not clear how the proposed federal limits would achieve their intended purpose with respect to energy markets.

Proposed federal limits likely will result in decreased market liquidity, which in turn would impair the ability of commercial market participants to hedge against rising prices.

 

MFA View:

MFA believes that position limits have not proven to be effective.  The CFTC should base regulation under Dodd-Frank on appropriate findings and should have data on the size of the markets before considering imposing position limits.

Swap Execution Facilities

The Dodd-Frank Act requires that all swaps subject to the clearing requirement must be executed on a regulated exchange or a “Swap Execution Facility.”

 

MFA View:

MFA strongly supports regulations that permit a broad range of SEF trading platforms because we believe that the proliferation of SEFs will benefit investors and the markets by increasing regulatory and market efficiencies, promoting market-based competition among providers and enabling greater transparency over time and across a variety of products. 

Data Repositories/Transparency

The Dodd-Frank Act requires that all swaps, cleared or uncleared, must be reported to a swap data repository, a registered entity that collects and maintains records with respect to transactions or positions in, or terms and conditions of, swaps.

 

MFA View:

MFA emphasizes that the role of swap data repositories as data collectors is critical to providing transparency and greater information about the financial markets.  MFA believes that data received by swap data repositories and shared with regulators will form an essential component of the regulatory process by providing regulators with the information necessary to refine their regulations and to oversee the markets and market participants effectively.