Comment Letters to Prudential Regulators on their Proposed Rules for Margin and Capital Requirements for Covered Swap Entities

July 11, 2011

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Topics: Notice of Proposed Rulemaking on Margin and Capital Requirements for Covered Swap Entities Treasury, swap markets, central clearing, risk-based margin requirements, minimize risk, liquidity, swap dealers, SDs, major swap participants, covered swap participants, CSEs, uncleared swaps, delivery of margin, counterparties, operational costs, adverse pricing, robust netting arrangements, funding costs, customized transactions, Securities and Exchange Commission, SEC, Commodity Futures Trading Commission, unsecured counterparty credit risk, consistency, transparency, variation margin, Timothy Geithner, mandatory clearing requirements, central clearinghouse, clearing eligible, non-cash collateral, Gary Gensler, asset class, financial entity counterparties, bilateral exchange of variation margin, pension plans, university endowments, counterparty risk, systemic risk, "too big to fail, uncollaterized swap positions, indirect transmission, House Committee on Financial Services, Ben S. Bernanke, swap portfolio, risk management, cleared swap transactions, risk reduction tool, interest rate swaps, commodity swaps, FCM, credit default swap, referenced bond, interest rate swap, Eurodollar futures, security-based swaps, physically-settling forwards, repurchase agreements, security lending agreements, over-collateralization, futures commission merchant, liquidation value, cross-product netting agreements, multi-lateral netting agreements, non-cleared commodity options, paired products, trading contracts, proprietary models, equity swaps, call option, total return swap, illiquid security, ten-day liquidation time horizon, five-day time horizon, valuation formulas, swap documents, Capital Relief for Cleared Swaps, DCO, capital charge, derivatives clearing organizations, Office of the Comptroller of the Currency, Federal Housing Finance Agency, Board of Governors of the Federal Reserve System, Farm Credit Administration, Federal Deposit Insurance Corporation, FDIC, CFTC,
From: MFA, Stuart Kaswell


Office of the Comptroller of the Currency, Ms. Jennifer J. Johnson, Boards of Governors of the Federal Reserve System, Mr. Robert E. Feldman, Federal Deposit Insurance Corporation, Mr. Alfred M. Pollard, Federal Housing Finance Agency, Mr. Gary K. Van Meter, Office of Regulatory Policy , Farm Credit Administration

MFA submitted a comment letter to the Prudential Regulators in response to their notice of proposed rulemaking on Margin and Capital Requirements for Covered Swap Entities. In our letter, we explained how the proposed capital and margin affect buy-side firms. We also urged the Prudential Regulators to issue margin requirements that promote a fair and stable market for uncleared swaps and to coordinate their margin rules with the SEC and CFTC. In addition, we strongly encouraged the Prudential Regulators to require prudentially regulated swap dealers and major swap participants (CSEs) to post and collect variation margin. We expressed our belief that it is critical that the Prudential Regulators permit CSEs and financial entities to net across many different exposures and assets. We also made comments related to: (i) ensuring initial margin models used by CSEs are objective; (ii) revising the proposed Grid-Based Method for calculating initial margin to properly account for the variety of swaps; (iii) the ten-day liquidation time horizon for initial margin requirements; (iv) clarifying the proposed swap documentation requirements; and (v) capital treatment for cleared swaps.