MFA Coalition Submits Joint Letter to SEC and CFTC on CDS Customer Portfolio Margining

May 10, 2013

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Topics: ACLI AIMA, Alternative Investment Management Association, American Council of Life Insurers, arbitrage, backloading, broad-based indices, broker-dealer, buy-side participants, capital, capital formation, CDS, central clearing, CFTC, clearing, clearing agency, clearing mandate, clearinghouse, collateral, Commodity Futures Trading Commission, counterparty credit risk, counterparty risk, credit default swaps, credit risk, custody bank, DCM, DCO, dealers, derivatives, derivatives clearing organization, direct clearing members, directional portfolio, economic barriers, end-users, equity markets, excess margin, FCM, Federal Reserve Bank of New York, Financial Industry Regulatory Authority, FINRA, futures commission merchants, Gary Gensler, hedging, ICE Clear Credit LLC, ICE Trust, initial margin, initial margin requirements, insolvency, institutional custodian, interconnectedness, interest rate swaps, Investor Protection, iTraxx Europe, legal segregation with operation commingling, liquidation, liquidity, liquidity requirements, long-short strategies, LSOC, LSOC with excess, margin, margin requirements, margining, market efficiency, market participants, Mary Jo White, master netting agreements, narrow-based index credit default swap, net margin, New York State Banking Department, OCC, offsetting position, Options Clearing Corporation, portfolio margining, price competition, price distortion, proprietary strategies, registered clearing agencies, regulatory framework, risk management, S&P 500, SEC, Securities and Exchange Commission, security-based swaps, segregation, self-clearing members, sell-side firms, settlement, short straddles, single-name CDS, speculative position, straight-through processing, swaps, systemic risk, tri-party segregation arrangements, variation margin, volatility, voluntary clearing,
From: MFA, Stuart Kaswell; ACLI, Carl Wilkerson; AIMA, Jiří Krol


Mary Jo White, SEC; Gary Gensler, CFTC
Elisse Walter, Luis Aguilar, Troy Paredes, Daniel Gallagher, SEC; John Ramsay, Jim Burns, Peter Curley, Michael Macchiaroli, SEC
Jill Sommers, Bart Chilton, Scott O'Malia, Mark Wetjen, CFTC; Ananda Radhakrishnan, CFTC

MFA, the American Council of Life Insurers (ACLI), and the Alternative Investment Management Association (AIMA) (collectively, the “Associations”) submitted a joint letter to SEC Chairman White and CFTC Chairman Gensler with a request for action by the two commissions to improve coordination and to facilitate portfolio margining for customers in the cleared credit default swaps (CDS) market.  This letter follows up on recent meetings with representatives at the CFTC and the SEC.  In the letter, the Associations further expressed members’ concerns with the SEC Staff’s imposition of needlessly high initial margin requirements on customers who want to participate in ICE Clear Credit’s (ICC) cleared CDS portfolio margining program for CDS indices and single-name CDS.  SEC Staff is imposing a temporary level for customers at 1.5 or 2 times the level imposed on dealers using the same CDS portfolio margining program.  The Associations believe this disparity has undermined policy goals to encourage clearing to reduce systemic risk, to protect investors, to reduce counterparty exposure and interconnectedness of both customers and dealers, and to establish an integrated and coordinated regulatory framework by the two commissions.  The Associations requested the SEC to issue final approval of the margin methodologies of the seven broker-dealer/futures commission merchants that have applied for evaluation by SEC Staff and FINRA in a coordinated manner, at a level that matches the approved level for dealers, and as soon as possible in advance of the CFTC’s June 10 mandatory clearing deadline for Category 2 entities.  In the interim, the Associations requested the SEC to modify the temporary customer margin levels to the ICC baseline margin level to match the level approved for dealers.