Swap Dealers and Major Swap Participants Regulation - Capital Requirements - Comment Letters

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Dodd-Frank Timeline, Capital Requirements for Swap Dealers and Major Swap Participants
Proposal Date Comment Deadline Final Rule Issue
May 12, 2011 July 11, 2011 TBA

This page contains comment letters addressing CFTC's proposed rule on capital requirements for swap dealers and major swap participants. The CFTC also issued a rule proposal regarding margin requirements for swap dealers and major swap participants. Such comment letters can be found here.

Other regulatory agencies "Prudential Regulators" have proposed capital and margin requirements for entities under such jurisdiction. Many of the comment letters below address the rules proposed by these regulators.

Additionally, certain commenters submitted letters addressing margin and capital requirements to the Prudential Regulators. Such letters can be found here. Finally, the Securities and Exchange Commission released its proposed rule on capital, margin and segregation requirements for swaps under its jurisdiction in November 2012. These comment letters can be found HERE.

Managed Funds Association - July 11, 2011

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants
Capital Requirements for Swap Dealers and Major Swap Participants
July 11, 2011 From the comment letter:
"...we believe that sound regulation of margin delivered in connection with uncleared swaps includes at a minimum, the following attributes:

  • consistency of margin requirements among regulators;
  • parity among market participants in their obligations to deliver variation margin;
  • extensive use of netting to both abate counterparty credit risk and lower costs associated with the delivery of margin;
  • transparent methods for determining margin amounts that both CSEs and their counterparties can use independently; and
  • determination of variation margin in a negotiated manner that need not be formula-based."
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Institute of International Bankers - July 1, 2011

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants
Capital Requirements of Swap Dealers and Major Swap Participants
Margin and Capital Requirements for Covered Swap Entities
July 1, 2011

In the comment letter, the Institute of International Bankers (IIB) offers several recommendations regarding capital and margin requirements, including:

  • CFTC rules should be consistent with those of other prudential regulators.
  • Commission should permit Foreign-supervised SD/MSPs to comply with regulations, initial margin models, recordkeeping and reporting requirements of the home country in lieu of U.S. requirements.
  • The Commission and the Prudential Regulators should take a more flexible approach toward the risk of a custodian’s insolvency, consistent with the Commission’s earlier proposal for addressing legal risk more generally.
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Working Group of Commercial Energy Firms - July 11, 2011

Capital Requirements for Swap Dealers and Major Swap Participants
July 11, 2011 Summary of key points from the comment letter:

  • "The Proposed Rules and Prudential Regulator’s Proposed Rules will impose significant direct costs on Covered Swap Entities and their counterparties. The Office of the Comptroller of the Currency (the “OCC”) estimates that the Prudential Regulators’ Proposed

Rules will result in swap market participants posting over $2 trillion in the form of initial margin, with an associated annual cost of $20 billion per 1% of forgone potential return on such margin.

  • The Proposed Rules and Prudential Regulators Proposed Rules will likely lead to higher per transaction costs for swap market participants. These costs reflect higher margin requirements, but also additional operational expenses and associated fees.
  • The Proposed Rules will materially affect the use of cash and short-term lending facilities by commercial firms. The imposition of capital and margin requirements may reduce counterparty credit risk, but it will not eliminate risk altogether.
  • The Proposed Rules set capital and margin requirements that could drive smaller swap dealers out of swap markets and serve as substantial barriers to entry for new swap dealers.
  • The Proposed Rules will impose substantial indirect and opportunity costs upon commercial firms.
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National Council of Farmer Cooperatives - July 11, 2011

Capital Requirements for Swap Dealers and Major Swap Participants
Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants July 11, 2011 From the comment letter:

"Given that the proposed regulations are specific to Swap Dealers and Major Swap Participants, it is implied that there will not be capital requirements for commercial end-users. NCFC supports end-users’ exemption from mandatory capital requirements. Similar to what was outlined above, if such requirements were placed on farmer owned cooperatives, their ability to provide risk management services and products to their affiliates and their farmer owners would be significantly reduced."

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Principal Traders Group - July 11, 2011

Capital Requirements for Swap Dealers and Major Swap Participants
July 11, 2011

This comment letter was submitted by 27 firms which are all members of the FIA Principal Traders Group.

Summary of key points from the comment letter:

  • There is no policy reason to apply minimum regulatory capital to participants that do not have customers and trade only cleared swaps.
  • Costs from imposing a minimum regulatory capital requirement on entities that do not have customers and that trade only cleared swaps contracts are not balanced by any corresponding regulatory benefit.
  • Financial condition information for swap dealers that do not have customers should remain confidential.
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Cargill - July 7, 2011

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants
July 7, 2011

Key points from the comment letter:

  • Transactions with affiliates should not result in capital charges.
  • NFA should be permitted to approve internal risk models.
  • Swap dealer financial information available to the public should be limited to the same type of information that is published for FCMs.
  • Provisions regarding reporting of valuation disputes should be revised.
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References

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