Letters

G-SIB Surcharge Calculation

Summary

SIFMA AMG provides comments to the Federal Reserve System regarding Proposed Changes to G-SIB Surcharge Calculation. The Proposal would penalize the clearing of client positions through a GSIB’s futures commission merchant by disproportionately increasing the G-SIB Surcharge scores for this activity. The Associations urge the Board to withdraw the Proposal due to its inconsistency with regulatory directives to clear derivatives – directives that the Associations have supported as beneficial to market stability and management of counterparty risks – and the negative and unwarranted effects the Proposal would have on clients that use cleared derivatives.

PDF

Submitted To

Federal Reserve System

Submitted By

SIFMA AMG

Date

20

October

2017

Excerpt

October 20, 2017

By Email ([email protected])

Ann E. Misback
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC 20551

Re: Proposed Changes to G-SIB Surcharge Calculation (FR Y-15; OMB Control
Number: 7100–0352)

Dear Ms. Misback:

The Securities Industry and Financial Markets Association’s Asset Management Group (“AMG”) and Managed Funds Association (“MFA” and together with AMG, the “Associations”)1 appreciate the opportunity to comment on the proposal by the Board of Governors of the Federal Reserve System (the “Board”) to amend the FR Y-15 reporting instructions for U.S. global systemically important banks (“G-SIBs”). 2 The Proposal would penalize the clearing of client positions through a GSIB’s futures commission merchant (“FCM”) by disproportionately increasing the G-SIB Surcharge scores for this activity. The Associations urge the Board to withdraw the Proposal due to its inconsistency with regulatory directives to clear derivatives – directives that the Associations have supported as beneficial to market stability and management of counterparty risks – and the negative and unwarranted effects the Proposal would have on clients that use cleared derivatives.

The volume of cleared derivatives transactions executed by asset managers on behalf of their clients has dramatically increased due to regulatory directives to clear, making FCMs’ willingness to clear an important linchpin to achieving the goals of regulatory reform.3 Pension funds, retail investor funds (e.g., U.S. mutual funds and UCITS), private funds and other investors for which asset managers serve as fiduciaries (“clients”) have shifted a significant percentage of bilateral derivatives to central counterparties (“CCPs”) after the financial crisis. Post-crisis regulations advanced this migration directly through mandating the clearing of additional derivatives pursuant to requirements put in place by Congress under Title VII of the Dodd-Frank Act, and indirectly through, for example, higher margin requirements for uncleared transactions. Asset managers’ clients typically must transact through FCMs who, as members of the CCPs in the U.S., act as the clients’ agents in handling the transactions. Under current processes in the U.S., FCMs typically guarantee the client’s performance to the CCP because FCMs assess and manage clients’ risk profiles while CCPs typically do not.4 U.S. G-SIBs handle a substantial amount of the total clearing volume in the United States.

The migration of derivatives to central clearing decreases clients’ counterparty risks to G-SIBs and reduces systemic risk overall. Clearing via CCPs with robust resiliency, recovery and resolution standards allows clients to reduce counterparty risks and transact in a more liquid and stable derivatives market. Clearing provides many benefits to the swaps market, including improved market liquidity and market integrity. For these and other reasons, the Associations have supported regulatory initiatives to require and foster clearing.

However, prudential requirements that inflate the economic risk of derivatives, particularly the Supplementary Leverage Ratio (“SLR”), impose artificial barriers for asset managers’ clients to access cleared derivatives and work at cross-purposes with mandates to clear. Recognizing these effects, Board Governor Jerome H. Powell recently stated that “[g]lobal authorities . . . have a responsibility to ensure that bank capital standards and other policies do not unnecessarily discourage central clearing.”5 The Associations share Governor Powell’s sentiments and believe the Proposal would directly contradict his clear mandate by newly imposing disproportionately high capital requirements for G-SIBs that, in acting as agents on behalf of clients, guarantee their clients’ obligations to CCPs.

For the reasons discussed below, the G-SIB surcharge, as amended by the Proposal, would overstate the risk arising from an FCM’s clearing of client positions and, as a direct consequence, discourage derivatives clearing. Accordingly, we request that the Board withdraw the Proposal. If the Board does not withdraw the Proposal, the Associations urge that, at a minimum, the Board provide an analysis of the Proposal’s calibration of risk and the likely impacts of increasing the G-SIB Surcharge scores for derivatives clearing so that asset managers and their clients can understand and comment on the Board’s reasoning for the change.

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1 Descriptions of the Associations are set forth in the Appendix to this letter.

2 82 Fed. Reg. 40,154 (Aug. 24, 2017), referred to herein as the “Proposal.”

3 See, e.g., U.S. Department of the Treasury, A Financial System That Creates Economic Opportunities, p. 9 (Oct. 2017), available at https://www.treasury.gov/press-center/press releases/Documents/A-FinancialSystem-Capital-Markets-FINAL-FINAL.pdf (“Reforms in the derivatives market, such as mandatory central clearing of certain swaps and increased data disclosure requirements, have been effective in promoting greater market liquidity and transparency.”).

4 In the U.S., FCMs typically do not guarantee the CCP’s performance to the client.

5 Remarks by Governor Jerome H. Powell at the Federal Reserve Bank of Chicago Symposium on Central Clearing, Central Clearing and Liquidity, at p. 4 (June 23, 2017), available at https://www.federalreserve.gov/newsevents/speech/files/powell20170623a.pdf.