Thus,
the Working Group, in its final recommendations, should take into consideration
the risk management needs of participants in the non-cleared derivatives
markets and to avoid compromising their ability to manage risk effectively. More
broadly, the MFA strongly urged
regulators across jurisdictions to coordinate with each other in order to
ensure a uniform set of margin requirements in non-cleared derivatives markets.
The MFA believes that the
derivatives markets operate most efficiently where the margin requirements are
harmonized cross-border and applied uniformly with respect to all non-cleared
derivatives. A uniform set of margin requirements will facilitate orderly
collateral management practices. Without cross-border uniformity, warned the
MFA, market participants will have to monitor and comply with multiple margin
regimes, which would be a costly and burdensome task that could increase the
likelihood for errors and instances of non-compliance. Further, margin
requirements that differ according to the jurisdiction would encourage
regulatory arbitrage and create advantages for market participants established
in certain jurisdictions over other market participants.
The
MFA looks forward to the results of the quantitative impact study to assess the
effect of the proposed margining requirements on the orderly functioning and
liquidity of the non-cleared derivatives markets, and urged the Working Group
to consider the results of the study when finalizing the proposals. The final
recommendations should take into consideration the importance and continued
viability of non-cleared derivatives as customized risk management tools.
Specifically,
the MFA supports the bilateral exchange of initial margin, provided that the
initial margin requirements appropriately reflect and address the risks to the
financial system presented by the non-cleared derivative transaction. However,
the association is concerned that buy-side market participants will bear their
sell-side counterparties’ costs associated with establishing and maintaining
segregated custodian accounts for counterparties. The MFA is also concerned
that the increased cost of trading non-cleared derivatives could reduce
liquidity and adversely impact market participants’ ability to properly hedge
their portfolios. Thus, the group said that the final recommendations should
consider the overall cost and liquidity impact of the proposed margining
requirements.
Similarly,
the MFA supports the proposal to allow portfolio margining. But for portfolio
margining to achieve the intended risk offset benefits, said the association,
initial margin models should account for risk offsets across suitably
correlated cleared and non-cleared derivative and non-derivative products. The
MFA believes that such portfolio margining within a single cross-product master
netting agreement is instrumental in mitigating the potential shortfall in
eligible collateral while ensuring sufficient reserves to preserve systemic
safety. Portfolio margining arrangements should account adequately for the
risks of a portfolio, continued the hedge fund group, while avoiding the
capital inefficiencies of over-collateralization. In addition, portfolio
margining arrangements encourage market participants to enter into mutually
offsetting transactions and maintain balanced and hedged portfolios.
The
MFA does not believe that thresholds are an appropriate tool for managing the
liquidity impact of the proposed initial margin requirements. The introduction
of thresholds would result in counterparties being treated unequally, said the
association, with some counterparties being required to post no initial margin,
or a significantly reduced amount after application of a high threshold.