MFA Submits Comments to European Supervisory Authorities in Response to Joint Discussion Paper on Risk Mitigation Techniques

April 02, 2012

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Topics: assurance undertakings asymmetry, bankruptcy-remote, Basel Committee on Banking Supervision, Basel II, Basel III, Basel rules, best practices, bilateral arrangements, bilateral exchange, bilateral initial margin arrangements, buy-side firms, capital, CDS, central clearing, CFTC, collateralization, Commodity Futures Trading Commission, competitive advantages, counterparty credit risk, covered swap entities, credit default swap, credit exposure, credit institutions, creditworthiness, current market practice, daily valuation of collateral, de minimi exception, deep and liquid markets, derivatives markets, discriminatory distortions, dispute resolution procedures, due diligence, eligible collateral, EMIR, ESA, ESMA, EU, Eurodollar futures, European Banking Authority, European Commission, European Insurance and Occupational Pension Authority, European Securities and Markets Authority, European Supervisory Authorities, European Union, exposures, haircuts, hedging, highly correlated assets, incremental compliance costs, independent third party custodian, initial margin, insolvency estate, institutions for occupational retirement provision, insurance undertakings, interest rate swap, internal model method, internal models, international harmonization of regulations, intraday change, investment firms, Joint Committee of the European Supervisory Authorities, legally required transparency, liquidity, major swap participants, margin, margin calculations, mark-to-market, market transparency, net margin, netting, NFCs+, non financial counterparties above the clearing threshold, non-cleared derivative contracts, non-cleared derivatives, non-cleared OTC derivatives, non-financial assets, non-prudentially regulated financial counterparties, NPRFC, OTC derivatives, over-collateralization, over-the-counter derivatives, party-specific variables, perceived systemic relevance, physically-settling forwards, posting party, PRFC, prudential regulators, prudentially regulated financial counterparties, receiving party, regulatory arbitrage, reinsurance undertakings, repurchase agreements, revaluation, risk mitigation techniques, risk-based margin requirements, security lending agreements, segregated account, segregation, segregation of counterparty assets, segregation regime, standardized method, substantial counterparty exposure, substantial position in swaps, systemic importance, tri-party custodial arrangements, uncollateralized, uniformity of application, variation margin,
From: MFA Stuart Kaswell

To:

Joint Committee of the European Supervisory Authorities, European Securities and Markets Authority, ESMA

MFA submitted a comment letter to the European Supervisory Authorities in response to their Discussion Paper on Draft Regulatory Technical Standards on risk mitigation techniques for OTC derivatives not cleared by a CCP under the Regulation on OTC derivatives, CCPs and Trade Repositories. In our letter, MFA emphasized that appropriate segregation is critical, meaning the regime must ensure that, in the event of the receiving partys default or insolvency: 1) the posting partys initial margin (IM) is segregated in a manner that is bankruptcy-remote under the local insolvency laws of the relevant Member State; and 2) it allows for the efficient return of the posting partys collateral. In addition, MFA highlighted that: 1) where there is appropriate segregation, MFAs preferred approach would be to have only prudentially regulated financial counterparties collect IM coupled with a threshold below which they would not have to collect IM; 2) where there is not appropriate segregation, the posting of IM by all parties is necessary; and 3) in calculating IM, margin methodologies must be transparent and replicable.

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