On December 7, in response to U.S. prudential regulators proposal on “Margin and Capital Requirements for Covered Swap Entities,” MFA submitted comments urging regulators to address implementation challenges to avoid creating market disruption. In the letter, MFA supported the clarification in the timing of required trading documentation and the change to the implementation schedule for the final phases of initial margin requirements for uncleared derivatives. Nevertheless, MFA urged prudential regulators to coordinate with other regulators to adopt the following additional changes to prevent confusion and market disruption:
- Expand the use of money market funds by removing the unduly restrictive conditions to their use as eligible initial margin collateral;
- Provide a deferral or grace period of six months after a given counterparty relationship involving a financial end user, including any separately managed account (SMA), first exceeds the initial margin threshold to put the necessary Uncleared Margin Rules-compliant documentation and systems in place;
- Authorize annual calculation, testing and monitoring of the $50 million regulatory initial margin exchange threshold (IM Threshold) for in-scope counterparty relationships involving SMAs. Doing so will facilitate a controlled and orderly implementation process for SMAs that will reduce the costs and operational burdens of daily monitoring and minimize unexpected breaches of IM Thresholds by SMAs that would cause trading disruptions;
- Work with market participants to develop a feasible, standardized approach for allocating IM Thresholds across multiple asset managers for a given SMA client; and
- Exclude physically settled foreign exchange swaps and forwards in calculations of aggregate average notional amounts for determining whether counterparties are subject to regulatory IM requirements.
