While the hedge fund industry supports the CFTC’s establishment of a phased implementation approach to facilitate an orderly transition by all relevant market participants to mandatory clearing of their swaps, the industry urged that the trade execution and uncleared swap margin requirements should apply to all market participants at the same time. In a letter to the SEC, the Managed Funds Association said that a phase-in of the trade execution requirement would both fragment liquidity and subject different groups of market participants to dramatically different access to execution. Similarly, in the case of the uncleared swap margin requirements, a phase-in would subject market participants in the earlier phase-in categories to materially disparate economic burdens. But the MFA supports the Commission’s phase-in of mandatory clearing by category of market participant.
In addition, the MFA recommends that private funds be grouped together as Category 2 Entities because the Commission’s phasing objectives will best be met by having swap dealers and major swap participants clear first as Category 1 Entities, along with those private funds that voluntarily choose to clear alongside Category 1 Entities. Moreover, some private funds may need more time to evaluate the final rules and to make appropriate changes to their operations, infrastructure and business models to comply with the initial mandate.
Further, the MFA urges the CFTC to eliminate the proposed term “active fund” because it is over-inclusive, would impose undue burdens to administer and interpret, and would unnecessarily divide an existing single category of buy-side market participants, namely private funds, in a way that is unsupported and difficult to administer. The hedge fund association is very concerned that keeping the term in the final regulations would impose unjustifiably disparate burdens on a very large number of private funds and their investors, including disadvantageous treatment with respect to margining and execution requirements.
On another point, the MFA believes that the made available for trading construct should be a distinct and separate legal standard from the listing of a swap by a swap execution facility or a designated contract market. The CFTC should have a process whereby it either certifies or reviews applications by swap execution facilities or designated contract markets that wish to make a swap available for trading, similar to the Commission’s process for review of swaps for mandatory clearing.
In the MFA’s view, an active oversight role for the CFTC in the made available for trading determination process is in line with its statutory obligation to promote the trading of swaps on swap execution facilities. In this regard, while the Commission should take into account the factors raised by a swap execution facility or designated contract market in support of its application to make swap products available to trade, the CFTC should also establish objective, transparent criteria and clearly enunciated factors for consideration during the process for reviewing such swaps. These measures would lend objectivity and uniformity to such assessments.