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

To:

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.

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