SIFMA AMG Submits Comments to the BCBC and IOSCO on Margin Requirements for Non-Centrally Cleared Derivatives (with Lofchie Comment)

SIFMA AMG submitted the attached comments to the Basel Commission on Banking Supervision ("BCBS") and the International Organization of Securities Commissions ("IOSCO") with regard to their Second Consultative Document for the Margin Requirements for Non-Centrally Cleared Derivatives. SIFMA AMG offers broad support for the BCBS/IOSCO recommendations and proposed timeline. SIFMA AMG also reiterated the points made in prior comments to BCBS/IOSCO on this subject, including the following: (i) the categorization of entities for purposes of defining initial margin thresholds, (ii) bilateral margining, and (iii) the use of models.

The letter's main points include:

• "Foreign exchange swaps and foreign exchange forwards should not be subject to mandatory margin requirements . . . [because they] pose less risk than other derivatives and [] because these risks are already appropriately mitigated. . . .
• "Derivatives counterparties that post initial margin should be able to elect to have that initial margin segregated at a third-party custodian, with appropriate protections. Initial margin posted for uncleared derivatives but not held in third-party custody should be treated as customer property of an insolvent counterparty, protected against the claims of general creditors.
• "Limited re-hypothecation should be allowed to finance or hedge customer positions as long as re-hypothecated customer assets are adequately protected."

Lofchie Comment: The letter does not explain the process by which SIFMA believes that hypothecated collateral could be protected. It is not clear to me what SIFMA AMG is expecting in this regard since re-hypothecated collateral is presumably pledged to a third party who has a superior claim to it.

Click hereto view comment letter in full (links externally to SIFMA website).Related News: "BCBS and IOSCO Publish the Responses to Consultation on Margin Requirements" (April 2, 2013).