MFA Submits Comment Letter in Response to Basel-IOSCO’s Consultative Document on Margin Requirements for Non-Cleared Derivatives

September 28, 2012

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Topics: asset classes Basel Committee on Banking Supervision, best practices, bilateral exchange, bilateral exchange of variation margin, buy-side firms, CCP, CDS, CDS spreads, central clearing, central counterparty, CFTC, cleared derivatives, clearing, clearing house, commodities, Commodity Futures Trading Commission, concentration limits, correlated financial instruments, cost mitigation, credit, credit default swap, credit risk, cross-product master netting agreements, currency, custodian accounts, delta, Denominated in G7 Currencies, derivatives, derivatives markets, diversification, Dodd-Frank Act, eligible collateral, equities, EU, Eurodollar futures, European Union, financial instruments, foreign exchange, forwards, G7, haircuts, harmonization, hedge, hedge funds, hedged portfolios, implementation timeline, initial margin, interest rates, International Organization of Securities Commissions, International Swaps and Derivatives Association, IOSCO, ISDA, liquidation, liquidity, liquidity characteristics, liquidity costs, liquidity mechanism, major swap participants, mandatory clearing, margin, margin requirements, margin threshold, margining, market advantage, market infrastructures, market liquidity, market participants, market practices, market value, minimum transfer amount, MTA, mutually offsetting transactions, netting, non-centrally cleared derivatives transactions, non-cleared derivatives, non-cleared interest rate swaps, non-compliance, notional value, novating parties, novation, novation arrangements, over-collateralization, party stepping in, party stepping out, phase-in period, portfolio margining, Portfolios, prudential regulators, prudentially regulated financial counterparties, quantitative impact study, re-hypothecation, Regulators, regulatory arbitrage, regulatory authorities, remaining party, replacement transaction, repurchase agreements, risk characteristics, risk management, risk offsets, risk profile, risk/reward profile, segregated account, segregation, SIFI, standard practice, swap dealers, swaps, systemic importance, systemic risk, systemic risk level, systemically important, systemically important non-financial firm, third-party segregation, transparency, two-way margining, U.S. Treasury futures, uniformity, United States, unlevel playing field, unsecured credit extension, variation margin, Working Group on Margining Requirements,
From: MFA, Stuart Kaswell


Basel Committee on Banking Supervision, International Organization of Securities Commissions
Michael Gibson, Bobby Bean, Sean Campbell, Nicolas Gauthier, John Lawton, Thomas McGowan, Heather Pilley, Roopa Sharma, Graham Young, Kurt Wilhelm
Gary Gensler, Jill Sommers, Bart Chilton, Scott O'Malia, Mark Wetjen, CFTC; Mary Schapiro, Elisse Walter, Luis Aguilar, Troy Paredes, Daniel Gallagher, SEC

MFA submitted a comment letter to the Working Group on Margining Requirements (WGMR) of the Basel Committee on Banking Supervision (Basel) and the Board of the International Organization of Securities Commissions (IOSCO) in response to the Basel-IOSCO Consultative Document on Margin Requirements for Non-Centrally-Cleared Derivatives.  In the letter, MFA commended the commitment of the WGMR to establish a unified framework that will provide a global standard for margining non-cleared derivatives.  MFA particularly supported the requirement to exchange variation margin on a bilateral basis, which reflects and reinforces the current market “best practice”.  However, MFA urged the WGMR in the final recommendations to take into consideration the importance and continued viability of certain non-cleared derivatives as customized risk management tools.  To address the overarching concerns, MFA set forth the following positions:

  • Initial margin.  MFA supports the bilateral exchange of initial margin, provided that the initial margin requirements appropriately reflect and address the risks to the financial system presented by the relevant non-cleared derivative transaction.
  • Portfolio margining.  MFA strongly supports the proposal to allow quantitative initial margin models to account for risk on a portfolio basis.  For portfolio margining to achieve the intended risk offset benefits, initial margin models should account for risk offsets across suitably correlated cleared and non-cleared derivative and non-derivative products.
  • Margin thresholds.  MFA does not believe that thresholds are an appropriate tool for managing the liquidity impact of the proposed initial margin requirements.  MFA is concerned that the introduction of thresholds would result in counterparties being treated unequally, with some counterparties being required to post no initial margin, or a significantly reduced amount after application of a high threshold.
  • IM schedule.  MFA welcomes the proposed option for market participants to choose between using an approved initial margin model or a standardized initial margin schedule.
  • Ongoing review of requirements.  MFA recommends that the WGMR plan for a regular review and, when appropriate, periodic adjustment, of the international standards for margin requirements in response to developments in the non-cleared derivatives markets.