By Lene Powell, J.D.
SIFMA Asset Management Group (AMG) submitted a comment letter requesting relief relating to uncleared swaps margin requirements established by the CFTC and prudential regulators. The group asked that separately managed accounts be provided a “minimum transfer amount” (MTA) of $50,000 or $100,000 at the account level. The group said this would help avoid costly and unnecessary transfers of small amounts of collateral. The letter was sent to the CFTC and the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Farm Credit Administration, and the Federal Housing Finance Agency.
Minimum transfer amount (MTA). Under uncleared swaps margin rules, a covered swap entity does not need to collect or post margin until the amount of required margin exceeds an MTA of $500,000. According to SIFMA, U.S. regulators are interpreting the MTA as applying at the entity level rather than the account level. This results in practical challenges because assets for each separately managed account managed by a particular asset manager are held, transferred and returned separately at the account level. Each account must calculate and post or collect collateral separately, per its applicable eligible master agreement. Thus, asset managers cannot collectively calculate MTA across the accounts, and cannot move collateral in aggregate across the accounts.
Effectively, applying MTA at the entity level requires asset managers to set MTA to zero at the account level, said SIFMA. The group estimated that this arrangement could increase daily collateral movements by up to 700 percent, resulting in the need to hire more staff and pay wire transfer costs. Moreover, an increase in small collateral movements could cause operational problems including more failed transactions and disputes over small discrepancies in valuation. This will all result in increased costs for derivatives users as well as higher error rates, SIFMA said.
Relief requested. SIFMA proposed that each eligible master netting agreement be given an independent MTA of $100,000 or, alternatively, $50,000 without an entity-level limit. The client would only be able to use this relief as an alternative to, not in addition to, the standard MTA of $500,000. The group also proposed operative language for the relief and a definition of “separately managed account.”
SIFMA acknowledged regulatory concerns about evasion, but does not believe that applying the MTA at the account level would cause evasion risks. Asset managers don’t know the positions of other asset managers trading for the same client, and do not act in coordination. In addition, once the calculation exceeds the MTA by even a small amount, the entire margin amount must be posted. To somehow reduce or evade margin requirements using an account-level MTA, asset managers would have to split netting sets into unworkably small sets of transactions and accept counterparty risk by having a counterparty not post margin. These would be unacceptable activities for registered intermediaries or advisers, SIFMA said.