MFA/SIFMA AMG Letter on CME VM Haircutting Rules

October 28, 2019

From: MFA, SIFMA AMG

To:

Chicago Mercantile Exchange

On October 28, MFA and SIFMA AMG submitted a letter to CME on the ammendments to interest rate derivative clearing and the CME definitions regarding the end of waterfall rules for interest rate swaps. In the letter the Associations outline that our members are a vital part of the cleared derivatives markets, and clear a large number of interest rate swaps (“IRS”) through CME. Since the CME Rule Amendments directly impact the default waterfall and the potential use of customer assets during a default event, our members could be adversely affected by CME’s contemplated “portfolio gains haircutting.”

The Associations voice concerns that CME is adding portfolio gains haircutting as a recovery tool for IRS because, as discussed further below, portfolio gains haircutting primarily affects market participants that have directional portfolios. As a result, this type of loss allocation mechanism may disproportionately affect customer portfolios as compared to clearing member proprietary portfolios, because clearing member portfolios may be less likely to be significantly directional in nature.

Due to the potential disparate impact of the CME Rule Amendments, and for other reasons explained below, the Associations believe that further careful consideration of the CME Rule Amendments, and potential alternatives, is warranted. Therefore, the Associations respectfully request that the Commission extend its review under CFTC Rule 40.10(f) (“Rule 40.10(f)”) and request further analysis from CME.

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