SIFMA, SIFMA AMG, International Swaps and Derivatives Association, Inc. (ISDA) and Association of the Luxembourg Fund Industry (ALFI) provide comments…
May 13, 2019
The Honorable Jerome Powell
Board of Governors of the Federal
20th Street and Constitution Avenue, NW
Washington, DC 20551
The Honorable Jelena McWilliams
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
The Honorable Joseph Otting
Comptroller of the Currency
Office of the Comptroller of the Currency
400 7th Street, SW
Washington, DC 20219
Barry F. Mardock
Office of Regulatory Policy
Farm Credit Administration
1501 Farm Credit Drive
McLean, VA 22102-5090
Alfred M. Pollard
Federal Housing Finance Agency
400 7th Street, SW
Washington, DC 20024
Re: Inter-Affiliate Initial Margin Requirements
Ladies and Gentlemen:
The undersigned trade associations1 are writing to respectfully request that the Board of Governors of the Federal Reserve (the “Board”), the Farm Credit Administration (the “FCA”), the Federal Deposit Insurance Corporation (the “FDIC”), the Federal Housing Finance Agency (the “FHFA”) and the Office of the Comptroller of the Currency (the “OCC” and, together with the Board, the FCA, the FDIC and the FHFA, the “Prudential Regulators”) promptly modify their margin rules for noncleared swaps and security-based swaps to make them consistent with international standards. Specifically, we request that the Prudential Regulators provide an exception from initial margin (“IM”) requirements for swaps and security-based swaps between affiliates (“inter-affiliate swaps”). The Commodity Futures Trading Commission (“CFTC”) and regulatory authorities in the European Union, Japan, and most other G20 jurisdictions each currently provides such an exception.
Below we summarize the key considerations supporting this modification to the Prudential Regulators’ margin rules for inter-affiliate swaps. We provide additional details regarding certain of these considerations in Appendix A to this letter.
The Prudential Regulators Are the Only Major G20 Authorities to Impose IA IM Requirements. Firms use inter-affiliate swaps to engage in centralized risk management, which promotes safety and soundness and reduces systemic risk by reducing overall group-wide credit exposure to third parties. Noting that “inter-affiliate swaps do not increase the overall risk profile or leverage of the group,” the CFTC determined that imposing IM requirements on inter-affiliate swaps (“IA IM requirements”) would “substantially increase the overall amount of margin being collected, and thus the cost of swap transactions generally, without a commensurate benefit to risk reduction to the overall group.”2 The CFTC also concluded that IA IM requirements would “limit the ability of U.S. companies to efficiently allocate risk among
affiliates and manage risk centrally.”3
In light of these conclusions, the CFTC excluded inter-affiliate swaps from IM requirements. Instead, the CFTC’s margin rules subject inter-affiliate swaps to variation margin (“VM”) requirements, centralized risk management requirements, and antievasion requirements.4 Authorities in Australia, Brazil, Canada, the European Union, Hong Kong, Japan, Korea, Russia, Singapore, and Switzerland have also exempted interaffiliate swaps from IM requirements, subject to varying conditions.
The Prudential Regulators, in contrast, require the swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants regulated by them (“prudentially regulated swap entities”) to collect and segregate IM from affiliates, in addition to exchanging VM. Prudentially regulated swap entities currently include not only U.S. insured state member banks and national banks, but also foreign subsidiaries of national banks, foreign banks that have branches or bank subsidiaries in the U.S., and foreign banks that do not have any U.S. banking operations.5
1 Descriptions of the associations can be found in Appendix B to this letter.
2 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants; Final Rule,
81 Fed Reg. 636, 673 (Jan. 6, 2016).
4 See 17 C.F.R. § 23.159.
5 There are currently no prudentially regulated swap entities subject to regulation by the FHFA or FCA.
Accordingly, this letter does not address such entities.