The Managed Funds Association ("MFA") asked U.S. prudential regulators to address the regulatory burden and "trading disruptions" caused by "Phase Five" of the implementation of swaps initial margin ("IM") requirements.

As previously covered, CFTC Chair J. Christopher Giancarlo and others have expressed concerns regarding Phase Five. Specifically, Mr. Giancarlo worried that smaller entities will be required to incur time and expense in making operations and documentation preparations, even where they may not be required to exchange margin due to the $50 million threshold specified in the rules, or because their trading activities (e.g., foreign exchange ("FX") swaps and FX forwards) are not in scope for any margin requirement.

In a comment letter, the MFA requested that prudential regulators:

  • affirm BCBS-IOSCO's March 5th guidance, which states that the BCBS-IOSCO margin framework does not specify documentation, custodial or operational requirements where the $50 million threshold is not crossed and it expects that firms will "act diligently" as exposures approach the threhsold; and
  • enact a six-month forbearance period for Phase Five counterparty relationships that do not initially exceed the $50 million regulatory IM exchange threshold.

In addition to the points regarding the threshold, the MFA also reiterated additional recommendations previously made in a letter to BCBS-IOSCO, including:

  • excluding physically settled FX products from notional calculations for determining whether counterparties are in scope for IM requirements;
  • adopting an additional phase in year between the $750 billion trigger for 2019 and the $8 billion trigger for 2020 (e.g., $100 billion for 2020, $8 billion for 2021);
  • enhancements to the use and risk-sensitivity of IM models; and
  • requiring robust data security protections by vendors providing functionality for regulatory IM.

Commentary / Nihal Patel

One interesting wrinkle for the CFTC, prudential regulators, and non-U.S. regulators that follow the BCBS-IOSCO derivatives margin framework is the approach recently adopted by the SEC. (A Cadwalader memorandum on those rules is available here.) The SEC adopted the same group-group $50 million threshold adopted under the BCBS-IOSCO framework. However, the SEC did not also impose a trigger that a counterparty have "material swaps exposure" (i.e., the MFA points on extending the phase-in period or excluding the FX products would be moot under the SEC rules). In addition, the SEC adopted a "forbearance" period of the kind argued for by MFA, albeit for two months rather than six.

While the SEC policy determinations are relevant, their rules are not, as they will not go into effect for at least another 18 months. The other regulators, however, should make decisions soon because firms potentially subject to IM later this year and in 2020 are already in the midst of making plans and entering into contractual relationships; the longer regulators wait to take action (or not), the more time and resources are wasted.

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