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s70812-17

s70812-17

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02/12/2013

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 January 23, 2013Elizabeth M. MurphySecretarySecurities and Exchange Commission100 F Street, NEWashington, D.C. 20549-1090
Re: File Number S7-08-12; RIN 3235-AL12Capital, Margin, and Segregation Requirements for Security-Based Swap Dealersand Major Security-Based Swap Participants and Capital Requirements forBroker-Dealers – Comments on Margin Requirements
Ladies and Gentlemen,The International Swaps and Derivatives Association
1
("
ISDA
") appreciates this opportunity toprovide comments to the Securities and Exchange Commission (the "
SEC
" or "
Commission
")regarding the recently released proposed rule concerning capital, margin and segregationrequirements for non-cleared security-based swaps and the implementation of the relatedstatutory provisions enacted by Title VII of the Dodd-Frank Wall Street Reform and ConsumerProtection Act (the "
Dodd-Frank Act
").This letter comments on the proposed margin requirements.
Executive Summary
The following is a brief summary of some of our key points:
I.
 
Initial Margin ("
IM
")
A.
 
Negative consequences of IM. Imposition of an IM requirement will severelycurtail the use of uncleared swaps for hedging, which would disrupt key financialservices, such as those that facilitate wider availability of home loans andcorporate finance. Further, the IM proposals will have detrimental pro-cyclicaleffects because they will increase collateral demands in times of market stress.
 B.
 
Proposed alternative. In lieu of IM, systemic risk can be effectively mitigated by:imposing variation margin ("
VM
") requirements with daily collection (subject to
1
ISDA, which represents participants in the privately negotiated derivatives industry, is among the world’s largestglobal financial trade associations as measured by number of member firms. ISDA was chartered in 1985 and todayhas over 800 member institutions from 54 countries on six continents. Our members include most of the world’smajor institutions that deal in privately negotiated derivatives, as well as many of the businesses, governmentalentities and other end-users that rely on over-the-counter derivatives to manage efficiently the risks inherent in theircore economic activities. For more information, please visit: www.isda.org.
 
 - 2 -limited exceptions) and zero thresholds; implementation of appropriate capitalrequirements, and mandatory clearing of liquid standardized security-based swaps("
SBS
").
C.
 
Quantitative Impact Study ("
QIS
"). Before finalizing its margin rules, if the SECdetermines that IM is necessary, it should conduct a QIS to determine the effect of imposing IM requirements.
II.
 
Process
A.
 
Consistency. Because the SEC is one of the leading global regulators, the SEC'smargin rules should be coordinated and consistent with those of other regulators,domestic and foreign. In particular, the SEC should ensure that margin rules forSBS are compatible with rules issued by the Commodity Futures TradingCommission (the "
CFTC
") for swaps. Because of the interplay between the swapand SBS markets, certain entities will be registered as both a securities-basedswap dealer ("
SBSD
") and swap dealer ("
SD
") and inconsistent margin rules willbe extremely difficult to implement and will create an unlevel playing field.
 B.
 
International coordination. The SEC and other U.S. regulators should continuetheir efforts to coordinate the development of margin rules on a global basis. U.S.regulators should not establish margin requirements in advance of positions beingtaken by regulators in other jurisdictions.
 
The SEC should re-propose its rules onmargin after it has had the opportunity to review and consider the final findings of the BCBS/IOSCO Working Group on Margining Requirements
2
("
WGMR
").
 C.
 
Phase-In/Clearing. When the rules first become effective, proprietary modelsused by SBSDs (that are eligible to use models) should be deemed provisionallyapproved for calculation of IM. SBSDs should not be required to use thestandardized approach until final approval is granted. Compliance with themargin requirements should be phased-in over time. The effective date for marginrequirements for a given asset class should follow the implementation of mandatory clearing for that asset class.
III.
 
Scope
A.
 
End-Users. We support the exclusion of commercial end-users from marginrequirements.
B.
 
SPVs and government entities. We recommend that special purpose vehicles("
SPVs
") and state and municipal government entities be excluded from themargin requirements.
2
The Basel Committee on Banking Supervision ("
BCBS
") and the International Organization of SecuritiesCommissions ("
IOSCO
") formed the Working Group on Margining Requirements ("
WGMR
") to propose rulescovering margin for uncleared swaps. WGMR also commissioned a Quantitative Impact Study ("
QIS
") on theimpact of such proposals.
 
 - 3 -
C.
 
Inter-affiliate trades. Inter-affiliate trades should be excluded from marginrequirements. SBS between affiliates do not add systemic risk. Such trades areused to internally allocate risk and encourage centralized risk management.Imposition of margin requirements on inter-affiliate trades would add cost andinefficiency to internal risk management.
D.
 
Legacy SBS. We ask that the SEC correct the rule to make it clear that SBSentered into prior to the rules' effective date ("
legacy SBS
") are exempt from VMrequirements (as well as IM requirements).
IV.
 
Margin Calculation –
A.
 
IM – Model. We strongly recommend that the collection of IM not be required.While the Dodd-Frank Act provides for IM requirements for SBSDs, the SEC haslatitude in how it addresses that reference to IM and should consider the severenegative consequences of the proposed IM requirements. If the SEC finds itnecessary to require the collection of IM, we prefer Alternative A to Alternative B,because Alternative A provides that SBSDs are not required to collect IM fromSBSD counterparties. As noted above, IM has negative consequences andsystemic risk could more effectively be addressed by other means. Further, if IMis required, it should be collected on a static basis, the amounts should be low andthe thresholds should be allowed as determined by the SBSDs.
B.
 
IM – Model – Equity. We oppose the proposed bar on using a model to calculateIM for equity SBS and urge the SEC to allow a model to be used for all SBSproduct types, subject to approval. IM models approved by other regulators,domestic and foreign, should be permitted.
C.
 
IM – Standardized approach. The proposed standardized approach would result inexcessive IM requirements. Based on our review of aggregated QIS data fromeight leading banks (which represent 45-50% of the total notional amount of theswap market), ISDA estimates that the amount of IM required using thestandardized approach as proposed by the SEC would be over $7.6 trillion underAlternative B and $2.5 trillion under Alternative A, over 5 to 6 times that requiredif an IM model were used instead.
3
Please refer to the copy of ISDA's commentsto the Prudential Regulators' proposed margin rules, dated November 26, 2012, inAppendix I which sets out the basis for these estimates in more detail. Thestandardized approach used to calculate margin should be updated and consistentwith those established by other regulators. In particular, the Theoretical
3
These estimates assume that IM requirements will be consistent and similar across jurisdictions and applicable toall swap products. The analyses contained in this presentation were derived from member QIS responses thatwere developed prior to the issuance of the exemption for foreign exchange ("
FX
") forwards and swaps by theU.S. Treasury on November 16, 2012. We estimate the Treasury exemption would reduce IM requirementsunder the U.S. Prudential Regulators' proposals by 15% to 20%. If FX forwards and swaps are excludedglobally as per the U.S. Treasury exemption, we estimate that adjustments of a similar magnitude would need tobe made to the estimated IM requirements under the proposal published by the WGMR.

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