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Trade Associations Ask Prudential Regulators to Drop Inter-Affiliate IM Requirements

nihal.patel@cwt.com's picture
Commentary by Nihal Patel

Several trade associations asked U.S. prudential (bank) regulators to eliminate the requirement that swap dealers collect initial margin from their affiliates.

In a joint letter, the trade associations requested that the prudential regulators exempt transactions between affiliates ("inter-affiliate swaps") from swaps initial margin ("IM") requirements. The trade associations noted that the CFTC, as well as regulators in the EU, Japan and other G20 jurisdictions, do not require initial margin between affiliates. The trade associations stated that the affiliate IM requirements:

  • impose a competitive, growing economic burden on U.S. firms;

  • incentivize firms to engage in risky and complex activity;

  • do not effectively address risks to U.S.-insured banks; and

  • depart from other requirements under the Dodd-Frank Title VII framework.

The signers of the letter are the American Bankers Association, the ABA Securities Association, the Bank Policy Institute, the U.S. Chamber of Commerce Center for Capital Markets Competitiveness, the Financial Services Forum, the Institute of International Bankers, ISDA and SIFMA.

Commentary

The policy adopted by the bank regulators in IM between affiliates has been controversial from the start. The discussion in the adopting release (from p. 74887) highlights that commenters generally opposed the requirements, but regulators adopted them anyway, albeit in somewhat watered-down form from what was originally proposed. This controversy was amplified by the CFTC then choosing not to adopt inter-affiliate IM requirements. (To be sure, one of the reasons the CFTC said it did not adopt inter-affiliate IM requirements was because the prudential regulators' rules contained these requirements. See adopting release at p. 673.)

Beyond describing the process that led to the current state of affairs, the associations make the case that (i) the IM rules have proven to be too costly for a limited benefit, (ii) the rules impose a competitive disadvantage on firms subject to the requirements and (iii) whatever policy goals are being sought by the regulators in imposing these requirements should be addressed through authority under Sections 23A and 23B of the Bank Holding Company Act rather than derivatives margin. The associations also note that the problems with the swaps rules are so severe that the bank regulators should eliminate the IM requirements before moving on to consider any 23A/23B-related changes.

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American Bankers Assoc., Institute of International Bankers, SIFMA, ISDA