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House Democrats Urge Ending of Inter-Affiliate Initial Margin for Swaps

Steven.Lofchie@cwt.com's picture
Commentary by Steven Lofchie

Seventeen Democrats from the U.S. House of Representatives urged prudential regulators to ease initial margin ("IM") requirements for inter-affiliate swap transactions by harmonizing with the CFTC and other major G20 regulators.

Although certain of the prudential regulators have indicated that they are reviewing the requirement that IM be posted in inter-affiliate transactions, the representatives expressed concern that this would take extensive time when "quick action" is necessary. Among other things, the representatives said that the IM requirements (i) limit economic growth by locking up the large and increasing amount of collateral from inter-affiliate swap transactions, and (ii) disincentivize firms from implementing "good internal risk management."

Commentary

Notably, the SEC, in adopting margin requirements for security-based swap dealers, did not impose IM requirements on transactions with affiliates. While the SEC action has only limited impact given the SEC's limited jurisdiction (the security-based swaps market is very small relative to the swaps market, and of even less consequence to commercial companies), the SEC's action is nonetheless consistent with the content of this letter, and implicitly acknowledges that the imposition of margin requirements has costs as well as benefits. 

It is also notable to see a group of Democrats advocating for a reduction in financial regulation. The group is geographically diverse and few are members of the House Financial Service Committee.   

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