MFA Submits Letter to SEC on Proposed Capital, Margin, and Segregation Rules

February 22, 2013

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From: MFA, Stuart Kaswell


Elizabeth Murphy, SEC
Elisse Walter, Luis Aguilar, Troy Paredes, Daniel Gallagher, SEC

MFA submitted a comment letter to the Securities and Exchange Commission (SEC) on its proposed rules on “Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers.”  In the letter, MFA expressed support for measures aimed at reducing risk in the security-based swaps (SBS) market, including the imposition of appropriate risk-based margin and capital requirements, and the implementation of segregation requirements that increase protection of customer collateral.  To assist the SEC with balancing those goals with the need to protect customers, liquidity and the overall functioning of the SBS market, MFA made a number of important comments in the letter.  In particular, MFA strongly recommended that the SEC:

(1)   with respect to its proposed margin requirements:

  1. mandate the bilateral exchange of variation margin between security-based swap dealers (SBSDs) and their counterparties;
  2. permit SBSDs’ internal models to account for risk on a portfolio basis under cross-product master netting agreements; and
  3. condition its approval of SBSD internal models to determine initial margin amounts by requiring SBSDs to make the basic functionality of their initial margin models available to and replicable by their counterparties;

(2)   with respect to its proposed capital requirements, eliminate the capital charge on nonbank SBSDs in the event that their non-commercial end-user counterparties elect to have their initial margin segregated in an account at an independent third-party custodian;

(3)   with respect to its proposed rules for segregation of collateral for cleared SBS,

  1. adopt the Commodity Futures Trading Commission’s legal segregation with operational commingling (LSOC) model as the default segregation model;
  2. permit a customer to waive LSOC protections and elect omnibus segregation for its cleared SBS; and
  3. preserve the possibility of implementing an optional individual segregation model for cleared SBS customers in the future;

(4)   with respect to its proposed rules for segregation of collateral for non-cleared SBS, mandate that the customer have the right to elect that such segregation be pursuant to a tri-party agreement.