The International Swaps and Derivatives Association has submitted a 39 page comment on the Dodd-Frank Act. (ISDA)
Here is the extract of their key points:
Initial Margin ("IM")
- Negative consequences of IM. As proposed, the IM requirement could severely challenge the resiliency of the financial system and will severely curtail the use of uncleared swaps for hedging, which would disrupt key financial services, such as those that provide for wider availability of home loans and domestic and international corporate finance.
- Proposed alternative. In lieu of IM, systemic risk can be effectively mitigated by: imposing VM requirements with daily collection (subject to limited exceptions) and zero thresholds; implementation of appropriate capital requirements, and mandatory clearing of liquid standardized swaps.
- Timing and Consistency. The Prudential Regulators' margin rules should be coordinated and consistent with the margin requirements of the CFTC, the SEC and regulators in other major financial jurisdictions. The Prudential Regulators should re-propose their rules on margin after they have had the opportunity to review and consider the final findings of the Basel/IOSCO Working Group and the SEC's proposed margin rules.
- Phase-In/Clearing: Compliance with the margin requirements should be phased- in over time and no earlier than the clearing requirements for the same asset class. The proposed time period of 180 days for implementation of the final rules is insufficient. The effective date for margin requirements for a given asset class should follow the implementation of mandatory clearing for that asset class.
Scope: Entities – We re-emphasize the recommendation that end-users, special purpose vehicles ("SPVs") and state and municipal government entities be excluded from the margin requirements. ISDA's position is that all sovereigns and central banks should post margin in order to achieve international comity. Unilateral action by a regulator in the U.S. or any other jurisdiction would be damaging to market participants and market liquidity.
Margin Calculation - We strongly recommend that the collection of IM not be required. While the Dodd-Frank Act provides for IM requirements for bank swap dealers, the Prudential Regulators have latitude in how they address that reference to IM and should consider the severe negative consequences of the proposed IM requirements. If the Prudential Regulators find it necessary to require the collection of IM, IM should be collected on a static basis, the amounts should be low and thresholds should be allowed as determined by the CSEs. In addition, calculation and posting of IM on or before execution date should not be required.
The proposed standardized tables would result in excessive IM requirements. Based on our review of aggregated QIS data from eight leading banks (which represent 45-50% of the total notional amount of the swap market), ISDA estimates that the amount of IM required using the standardized tables as proposed in the Study and the PR Proposal would be over $10.2 (in the Study)/7.6 (in the PR Proposal) trillion, over 6 times that required if an IM model were used.7 One way to address this issue would be to allow netting. The current proposal does not allow netting when the standardized table is used to calculate IM, whereas the Study and SEC proposals allow some netting with use of the standardized table.
- Netting – In general, netting that is legally enforceable should be permitted. The Prudential Regulators should also allow portfolio-based margining across cleared and uncleared swaps, other products and across legal structures. The Study allows netting within asset class when a model is used, and across comparable contracts with the schedule is used. The Prudential Regulators should also consider the approach proposed by the SEC, which allows broad netting for margin.
- Eligible collateral. Eligible collateral and applicable haircuts should be determined by the CSEs. At a minimum, the rules should adopt a broader range of eligible collateral as proposed by the Study. Alternatively, the Prudential Regulators' final rules may avoid specifying types of products and securities as eligible, as proposed by the SEC, subject to prescribed haircuts.
- Segregation. If IM is required, segregation and third party custody for IM should be at the agreement of the parties and not be required by regulation.8 CSEs should be allowed to offer asset protection mechanisms other than third party segregation that would provide that collateral be "immediately available" as recommended by the Study; e.g. segregation on the books of the CSE. The SEC proposal provides that SBSDs hold collateral in an account under the control of the SBSD and third party segregation is at the election of the counterparty that is not an SBSD. Parties posting collateral should have the option to allow the CSE to re-hypothecate the collateral.
- Inter-Affiliate Swaps - As stated in the prior letter to the Prudential Regulators, inter- affiliate trades should be excluded from margin requirements. Swaps between affiliates do not add systemic risk. Such trades are used to internally allocate risk and encourage centralized risk management. Imposition of margin requirements on inter-affiliate trades would add cost and inefficiency to internal risk management.
- Cross-Border Trades - Affiliates of U.S. persons should not be treated as U.S. persons under the margin rules, as proposed by the CFTC in its cross-border guidance. For swaps involving multiple jurisdictions, non-U.S. regulatory regimes should be recognized.