Monday, June 20, 2011

Securities and Banking Groups Ask Banking Agencies to Coordinate with SEC on Margin and Capital Rules for Swap Entities

Securities and banking associations have asked the banking agencies to extend the comment period for their proposed rulemaking on the capital and margin requirements for covered swap entities so that the comment period coincides with the anticipated SEC rules on capital and margin. In a letter to the prudential regulators, the American Banking Association, the Investment Company Institute and the ABA Securities Association cited a recent speech to the International Monetary Conference by Treasury Secretary Tim Geithner calling for a more coordinated and integrated approach to rulemaking by U.S. agencies responsible for financial regulation and emphasizing the critical need for U.S. regulators to adopt rules that are as consistent as possible.

In his speech, the Secretary urged a global margin standard that would set minimum requirements applicable to uncleared derivatives trades. Closer coordination and consistent standards among the U.S. financial regulators on margin requirements would be key to any process for developing an international agreement on a global margin standard. Consistent with these principles, the trade associations asked that the public have the opportunity to review all of the capital and margin standards for uncleared swaps required by the Dodd-Frank Act before being required to submit comments on the Prudential Regulator proposal.

To date, both the prudential regulators and the CFTC have proposed rules that would establish minimum capital and margin requirements applicable to non-cleared swaps and security-based swaps. The deadline for comments on the prudential regulator proposal is June 24, and the deadline for the CFTC proposals is July 11. However, the SEC has not yet issued its proposed margin and capital rules.
Dodd-Frank Sections 731 and 764 require the prudential regulators, the CFTC, and the SEC to establish and maintain comparable requirements for capital as well as initial and variation margin for swaps to the maximum extent practicable. The statute also stipulates that all of the regulators consult at least annually on these requirements.

In the view of the trade associations, these provisions clearly manifest Congressional intent that the regulators work in concert to establish capital and margin requirements. Yet the public is being asked to comment on the proposed prudential regulator and CFTC rules without the benefit of a key component, namely the SEC’s proposed capital and margin rules. Given the language in the statutory mandate for promulgating these rules, the banking and securities groups believe that extension of the comment period so that it coincides with the comment period on the anticipated SEC rule proposal is not only appropriate but also essential.

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