Swap Entities Regulation - Clearing Member Risk Management - Comment Letters

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Dodd-Frank Timeline, Clearing Member Risk Management
Final Rule Issue Effective Date Compliance Date, Rule 1.73 Compliance Extension, Bunched Orders
April 9, 2012 October 1, 2012 June 1, 2013 September 1, 2013

Comment letters related to clearing member risk management.

Futures Industry Association - September 29, 2011[edit]

Clearing Member Risk Management
September 29, 2011

From the comment letter:

As the Commission recognizes, not all FCMs are the same. The nature of their customers and the scope of their customers’ (as well as their own) trading activities may vary greatly. Their respective risk management practices and procedures should reflect their varied risk profiles. We are pleased, therefore, that, in proposing this rule, the Commission has emphasized that it“does not intend to prescribe the particular means of fulfilling these obligations.” As a consequence, however, certain provisions of the proposed rule are unacceptably vague and fail to provide FCMs the certainty necessary to assure that they have adequate notice of their obligations under Commission rules, for which they will be held responsible. As such, the rule unnecessarily exposes FCMs to regulatory risk. To resolve this conflict, we encourage the Commission to consider whether, at least in the near term, it should rely on the several derivatives clearing organizations (“DCOs”) to assure that their respective clearing members have adequate risk management policies and practices, as the Commission has already proposed in its Risk Management Requirements for Derivatives Clearing Organizations.

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Swaps and Derivatives Market Association - September 30, 2011[edit]

Clearing Member Risk Management
September 30, 2011

The SDMA supports the current proposed CFTC rules that seek to strengthen the financial integrity of the cleared swap markets by addressing the aforementioned trade latency issue by imposing certain uniform standards for prompt processing, real time trade acceptance into clearing, requiring certain clearing member risk management tools and restricting possible anti competitive behavior while promoting open access.

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CME Group - September 29, 2011[edit]

Clearing Member Risk Management
September 29, 2011

While CME Group supports the CFTC’s efforts to bolster risk management at the clearing member level, they are “concerned with the proposal to require clearing members to “use automated means to screen orders for compliance with the risk-based limits.” As stated in IOSCO’s final report on Principles for Direct Electronic Access to Markets: “In an automated trading environment, the only controls that can effectively enforce [risk] limits are automated controls.” CME Group has championed automated pre-trade controls in electronic trading environments, with a leading example being our Globex Credit Controls. We note, however, that floor-based or “open outcry” trading continues to be utilized in many of our exchange-traded markets, and automated controls are not feasible in such non-automated trading environments. We therefore urge the CFTC to revise the proposed regulations to require clearing members to “use automated or otherwise appropriate means to screen orders for compliance with the risk-based limits.”

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FHLBanks - September 29, 2011[edit]

Clearing Member Risk Management
September 29, 2011

In their comment letter, the FHLBanks express their support with the adoption of the Proposed Rules, especially because they establish “baseline risk management standards for all clearing members, irrespective of size or DCO membership.” However, the FHLBanks urge the Commission to adopt four risk management requirements in addition to those outlined in the Proposed Rules. “Three of the four additional requirements pertain to the public availability of information about clearing members and would further the Dodd-Frank Act's goal of increasing transparency in the swaps market. The fourth additional requirement would more closely align the handling of margin collected by a clearing member in excess a DCO's requirements with the CFTC's proposed rules on the treatment of customer collateral for uncleared swap transactions.”

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Freddie Mac - September 29, 2011[edit]

Clearing Member Risk Management
September 29, 2011

In their comment letter, Freddie Mac “suggests that proposed Section 1.73 be revised to focus on risk management process rather than position limits or other particular tools. Such an approach would emphasize requirements for FCMs to have comprehensive written procedures for the analysis and monitoring of customer credit exposures in connection with cleared swaps and for the application of risk controls as necessary and appropriate to mitigate risk from such exposures. These written procedures could be submitted to the Commission for review and approval prior to the commencement of customer clearing of swaps. In such manner, FCMs would be allowed the flexibility to develop practices that are responsive to the requirements of their particular relationships while the Commission would have the ability to monitor for conformity to best practices.”

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Citadel - September 29, 2011[edit]

Clearing Member Risk Management
September 29, 2011

From the comment letter:

Citadel explains that arguments that dismiss real-time acceptance and attempt to justify trilateral execution agreements are flawed and that the Proposed Rules are overwhelmingly justified from a cost-benefit analysis perspective. Among others, Citadel argues that:

  • trilateral execution agreements are not “optional”
  • the Proposed Rules are not prescriptive
  • trilateral execution agreements do not represent an “interim” arrangement
  • trilateral execution agreements do not enhance risk management practices
  • real-time acceptance for clearing is the best means to ensure access for smaller market participants, while trilateral execution agreements actually hinder smaller market participants' access to the market
  • trilateral execution agreements do not provide certainty during stressed or volatile market conditions
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Managed Funds Association - September 29, 2011[edit]

Clearing Member Risk Management
September 29, 2011

From the comment letter:

“The Proposed Documentation Rules would prevent futures commission merchants (“FCMs”), swap dealers (“SDs”) and major swap participants (“MSPs”) from requiring customers to enter into agreements that would limit the number of counterparties a customer may trade with, restrict the size of a trade a customer may enter into with any individual counterparty (aside from its overall credit limit), impair a customer’s access to execution on terms that have a reasonable relationship to the best terms available, or compromise the anonymity of a customer’s executing counterparty. MFA strongly supports the Proposed Documentation Rules because, as we requested of the Commission in the MFA April Letter, these rules will prohibit documentation that would: (1) impose anti-competitive restrictions; (2) impair access to competitive liquidity and best execution; and (3) compromise anonymity.”

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Minneapolis Grain Exchange - September 29, 2011[edit]

Clearing Member Risk Management
September 29, 2011

From the comment letter:

The proposed rule makings outline risk management requirements for Future Clearing Merchants (“FCMs”), Swap Dealers (“SDs”), and Major Swap Participants (“MSPs”).First, the Exchange believes each FCM, SD and MSP should have in place and perform proper risk management on each of their respective customers. This is logical as these entities are either directly involved with trading swaps or have customers who might be trading swaps. While DCOs certainly play a critical role in appropriate risk management, a DCO performing clearing functions is not the appropriate party to establish detailed risk programs involving swap customers since the DCO does not have the direct relationship with the customers. A DCO should not be forced to be a proxy in performing risk management for these entity’s customers. Each DCO, FCM,SD and MSP has different information and obligations and, therefore, should be responsible for their own information and obligations as part of the industry’s overall risk management regime. As such, it is best for the CFTC to act in its role of regulator and to oversee and hold accountable each entity directly to ensure they are meeting their respective requirements under an all encompassing industry program.

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International Swaps and Derivatives - September 29, 2011[edit]

Clearing Member Risk Management
September 29, 2011

In their comment letter, ISDA explains that they support the Proposed Rule’s overarching goal of “enhancing risk management safeguards at the clearing member level, whether the clearing members be SDs/MSPs who self-clear only or FCMs. We observe, however, that the Proposed Rules (a) do not take account of the multiple ways that swaps may be executed and access clearing, (b) bear differently on SDs/MSPs than on FCMs, (c) lack sufficient clarity in certain respects and (d) are based on an unrealistic cost analysis.

Finally, as the Commission recognizes in its request for comment on the Proposed Rules, DCOs would be required to adopt and enforce rules addressing each clearing member’s risk management policies and procedures. We urge the Commission to work with DCOs to ensure that DCO regulations in this area are compatible, and administered in a coordinated manner, with the Proposed Rules.”

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Intercontinental Exchange - September 29, 2011[edit]

Clearing Member Risk Management
September 29, 2011

From the comment letter:

“The Commission's proposal has two parts: (1) new rules governing customer clearing documentation and (2) new rules governing the time frame for accepting trades into clearing. In regards to the new rules governing customer clearing documentation, ICE supports the Commission’s efforts to increase the customer access to clearing. In regards to the rules governing the time frame for accepting trades into clearing, ICE supports the Commission’s efforts. As noted in our previous comment letters, ICE believes that straight through processing of trades by DCOs underpins an effective clearing system. Delays between execution and clearing can lead to uncertainty and could subject participants to counterparty risk.”

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