Published

MFA Submits Supplemental Letter to the Federal Reserve

On June 4, MFA submitted a supplemental letter to the Federal Reserve to respond Fed staff’s questions concerning the U.S. Supplementary Leverage Ratio (SLR) and initial margin (IM) requirements for uncleared swaps.

On the SLR, the letter encourages the Fed and other banking regulators to focus their recalibration efforts on three actions: 1) authorize an offset for client IM in the SLR; 2) transition from the Current Exposure Method (CEM) to an adjusted Standardized Approach for Measuring Counterparty Credit Risk Exposures (SA-CR), with offsets for client IM; and 3) withdraw the Fed’s proposal to amend FR-Y-15 reporting instructions for calculating the U.S. systemically important bank (G-SIB) surcharge, which would expand the types of derivatives clearing transaction structures that are captured.

On the new IM requirements for uncleared swaps, the letter recommends that the Fed and other regulators focus on several aspects in need of calibration by coordinated regulatory amendments: 1) a tailored IM regime for non-clearable equity total return swaps; 2) a reassessment of the requirement for IM models to use a minimum ten-day liquidation period for all uncleared swaps; 3) authorized use of enhanced portfolio margining in IM models under a cross-product master netting agreement; 4) acceleration of regulatory approvals of business-specific IM models to calculate more risk-refined IM amounts; and 5) authorized use of portfolio offsets in IM models to recognize risk-reducing hedges in a portfolio, such as between FX options (swaps) and FX forwards (exempted as swaps).