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

February 22, 2013

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Topics: Securities and Exchange Commission SEC, margin, capital, segregation, Security-Based Swap Dealer, Major Security-Based Swap Participant, capital requirements, broker-dealer, risk, security-based swaps, customer collateral, Dodd-Frank Act, CFTC, Commodity Futures Trading Commission, Private Funds Managers, Investor Protection, regulation, international regulatory standards, efficiency, capital formation, liquidity, collateral, margin requirements, market participants, variation margin, netting, margining, Financial Industry Regulatory Authority, FINRA, international harmonization of regulations, regulatory arbitrage, federal register, bilateral exchange of variation margin, best practices, counterparty risk, systemic risk, risk management, portfolio margining, securities, cross-product master netting agreements, initial margin, financial system, asset class, counterparties, prudential regulators, leverage, derivatives, tri-party custodial arrangements, customer protection, omnibus segregation, default, fellow customer risk, legal segregation with operation commingling, LSOC, swap dealers, Major Swap Participant, Individual Segregation, buy-side firms, non-commercial end-users, hedge funds, credit risk, capital inefficiency, transparency, Basel Committee on Banking Supervision, International Organization of Securities Commissions, IOSCO, Working Group on Margining Requirements, central clearing, compliance, registered clearing agencies, mandatory clearing, compliance date, two-way margining, reform, collateral management, asymmetrical initial margin exchange, pension, endowments, university endowment, financial crisis, "too big to fail, too interconnected to fail, American International Group, AIG, House Committee on Financial Services, Ben Bernanke, Federal Reserve Board, 111th Congress, financial contagion, financial institutions, asymmetry, portfolio reconciliation, portfolio compression, Swap Trading Relationship Documentation, swap dealer, collateral management stystems, trading costs, complexity, settlement risk, credit default swap, CDS, OTC derivatives, forwards, repurchase agreements, Value at Risk, VaR, financial instrument, cross-margining, Options Clearing Corporation, Chicago Mercantile Exchange Holdings Inc., New York Portfolio Clearing LLC, LCH.Clearnet Ltd., customer replicability, proprietary information, reconciliation, market risk, haircuts, Cash Flow, pro-cyclical effects, creditworthiness, multiplier, customized risk management tools, sell-side firms, liquidation time horizon, product type, market practice, ISDA, U.S. dollar, settlement, money market instruments, eligible collateral, capital charge, Lehman Brothers, bankruptcy, bankruptcy estate, third-party custody arrangement, enhanced protections, Notice of Exclusive Control, Investment Company Institute, ICI, White Paper, Securities Industry and Financial Markets Association, SIFMA, liquidation, Federal Reserve Bank of New York, tentative net capital, dealers, Eric Chern, Chicago Trading Company, \, operational risk, Security-Based Swap Transactions, Darrell Duffie, Federal Reserve Bank of New York Staff Report No. 424, ICE Clear Europe Limited, segregation model, DCO, derivatives clearing organization, portability, insolvency, out-of-the-money, operational and legal commingling, default segregation model, MF Global Inc., Peregrine Financial Group, Fraud, investment risk, Russell Wasendorf, accounting, operational costs, Broker, Dealer, ISDA Margin Survey 2012, European Commission, European Parliament, Council of the European Union, central counterparty, CCP, trade repositories, commodity broker, Bart Chilton, Division of Clearing and Intermediary Oversight, Robert Wasserman, independent third party custodian, state bank regulator, state and federal laws,
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.