Swap Dealers and Major Swap Participants Regulation - Capital, Margin and Segregation for SB-SD/MSPs - Comment Letters

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Dodd-Frank Timeline, Capital, Margin and Segregation for SB-SD/MSPs, SEC
Proposal Date Comment Deadline Reopened Comment Period Deadline
November 23, 2012 February 22, 2013 July 22, 2013

On October 17, 2012, the Securities and Exchange Commission issued a proposed rulemaking regarding margin, collateral and segregation requirements for security-based swap dealers and major swap participants.<ref>SEC Proposes Rules for Security-Based Swap Dealers and Major Security-Based Swap Participants. SEC. Retrieved on October 17, 2012.</ref> The proposed rules will determine how much capital dealers in security-based swaps need to hold; when and how these dealers need to collect collateral, or margin, to protect against losses from counterparties; and how these dealers segregate and protect funds and securities held for customers.

Comment letters can be found below.

SIFMA - February 22, 2013[edit]

Capital, Margin and Segregation for SB-SD/MSPs, SEC
February 22, 2013

Among the concerns from the comment letter are several regarding revising the proposed margin methodology:

  • The Commission should permit the use of margin models to the greatest extent possible, including allowing all SBS counterparties to use models and permitting the use of models for both debt and equity SBS.
  • Models used to calculate margin requirements should be required to include liquidation time horizons for non-cleared SBS at a 99% confidence interval over a horizon of less than ten days.
  • If a margin amount is posted only by the financial end-user counterparty to an SBS, that counterparty should be able to choose whether a model or standardized haircut is used to calculate the margin amount for that counterparty’s account. If both parties post margin amounts, they should jointly agree on whether a model or grid is used.
  • The Commission should require that financial end users be able to independently verify the calculation of margin amounts.
  • SBS Dealers should not be required to collect margin for legacy SBS or take a capital charge in lieu of margin collateral, but should be allowed to include legacy SBS in margin calculations if both counterparties agree.
  • If the Commission phases in SBS clearing requirements by category of SBS, an SBS in a category not yet subject to mandatory clearing should, like cleared SBS, be included in the equity calculation but not subject to margin requirements.
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Investment Company Institute - February 4, 2013[edit]

Capital, Margin and Segregation for SB-SD/MSPs, SEC
February 4, 2013

Three concerns from the comment letter:

"First, we believe that a requirement that SBSDs only collect margin would not provide adequate protection for counterparties to SBSDs and could potentially increase systemic risk. We urge the CFTC instead to impose a bilateral margin requirement. Second, imposing a capital charge on SBSDs when their counterparties elect an independent custodian to hold their collateral will likely impose significant burdens on those counterparties by increasing their costs. Third, we recommend that the Commission revise the segregation requirements to prohibit SBSDs from using funds in the customer reserve account for one customer that belong to another customer."

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Consortium of Institutional Investors - January 22, 2013[edit]

Capital, Margin and Segregation for SB-SD/MSPs, SEC
January 22, 2013

From the comment letter:

"Our comments primarily focus on the application of the Proposed Rules to security-based swaps between SBSDs and MSBSPs, on the one hand, and large institutional investors, on the other hand. As described in more detail below, we respectfully request that the Commission: (i) require bilateral (rather than unilateral) exchange of initial and variation margin; (ii) harmonize its rules with those of other regulators by applying the exception to mandatory posting of initial and variation margin to all non-financial entities, rather than only non-financial entities who are entering into transactions to hedge or mitigate risks relating to commercial activities; (iii) expressly permit netting of initial margin for non-cleared security-based swaps and netting of initial margin across cleared and noncleared security-based swaps; (iv) require that tri-party custodial accounts used to segregate margin be in the name of the counterparty for the benefit of the SBSD or MSBSP (rather than in the name of the SBSD or MSBSP) and be governed by a provision that allows a counterparty to a SBSD or MSBSP to take control of collateral in the tri-party account upon the SBSD’s or MSBSP’s bankruptcy or insolvency; and (v) reconsider the proposed requirement that entities that elect individual segregation enter into a subordination agreement with the SBSD counterparty."

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Systemic Risk Council - January 24, 2013[edit]

Capital, Margin and Segregation for SB-SD/MSPs, SEC
January 24, 2013

The Systemic Risk Council (SRC or Council) is a private sector, non-partisan body of former government officials and financial and legal experts committed to addressing regulatory and structural issues relating to systemic risk in the U.S., and is led by former FDIC chair Sheila Bair. From the comment letter:

"Not only do models routinely fail in a crisis (precisely when we need loss absorbing shareholder equity most)- their use for regulatory capital purposes can create perverse incentives for risk management and real competitive advantages for larger firms relative to smaller firms doing the same activity.

Minimum risk-based capital requirements should be just that: a minimum. If internal models identify additional risks that require higher capital, firms should be required to raise more equity. Management, boards, examiners, investors and counterparties deserve an objective and clear minimum risk-based capital baseline."

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ISDA - January 23, 2013[edit]

Capital, Margin and Segregation for SB-SD/MSPs, SEC
January 23, 2013

In the comment letter, ISDA comments on several key points, including:

  • Initial margin: the unintended consequences of IM, a proposed alternative, and request for a quality impact study to be conducted;
  • Process: including consistency, international coordination, and a phase-in of rules;
  • Scope: including end-users, special purpose vehicles and government entities, and inter-affiliate trades;
  • Margin calculation: including the use of models, the amount of margin expected under the standardized approach, cross-marginind and netting, and eligible collateral;
  • Segregation including choices and the use of IM for hedging; and
  • Cross-border trades and the recognition of sufficiency of host country regulations.
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References[edit]

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