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11c40ad79

11c40ad79

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PIMC0
ViaElectronicSubmissionDavid
A.
StawickSecretaryCommodityFuturesTradingCommissionThreeLafayetteCentre115521stStreet,NWWashington,DC20581RIN3038-AC97JohnG.WalshActingComptrolleroftheCurrencyOfficeoftheComptrolleroftheCurrency250EStreet,SWMailStop2-3Washington,DC20219RIN1557-AD43July11,2011Jennifer1.JohnsonSecretaryBoardofGovemorsoftheFederalReserveSystem20thStreetandConstitutionAvenue,NWWashington,DC20551RIN7100AD74RobertE.FeldmanExecutiveSecretaryAttention:CommentsFederalDepositInsuranceCorporation55017thStreet,NWWashington,DC20429RIN3064-AD79Gary
K.
VanMeterActingDirectorOfficeofRegulatoryPolicyFarmCreditAdministration1501FarmCreditDriveMcLean,VA22102-5090RIN3052-AC69AlfredM.PollardGeneralCounselAttention:
Comments/RIN
2590-AA45FederalHousingFinanceAgencyFourthFloor1700GStreet,NWWashington,DC20552RIN2590-AA45Re:IssuesArisingfromMarginRequirementsforCoveredSwapEntitiesasProposedbythePrudentialRegulatorsandCommodityFuturesTradingCommission:MarginRequirementsforUnclearedSwapsforSwapDealersandMajorSwapParticipants
1
MarginandCapitalRequirementsforCoveredSwapEntities
2
DearMr.Stawick,Mr.Walsh,Ms.Johnson,Mr.Feldman,Mr.VanMeterandMr.Pollard:PacificInvestmentManagementCompanyLLC
("PIMCO")
appreciatestheopportunitytocommentontheCFTC'sproposedruleonmarginrequirementsforunclearedswaps(the
"CFTCProposedRule")
andthejointproposedrulebytheOCC,Fed,FDIC,FCAandFHFA
I
76Fed.Reg.23,732(Apr.28,2011).276Fed.Reg.27,564(May11,2011).
 
Page2of11(together,the"PrudentialRegulators,"suchproposedrule,the"PRProposedRule,"andthePRProposedRulewiththeCFTCProposedRule,the"ProposedRules").PIMCOisaglobalinvestmentmanagementfirmthatservesanarrayofclientsandmanagesretirementandotherassetsformillionsofpeopleintheU.S.andthroughouttheworld.Ourclientsincludestate,municipal,unionandprivatesectorpensionandretirementplans,educationalfoundations,endowments,philanthropicandhealthcareinstitutions,inadditiontomillionsofindividualmutualfundinvestors.PIMCOmanagesassetsinafiduciarycapacityonbehalfofitsclientsanddoesnotinvestforitsownaccount.Initscapacityasaninvestmentmanagerandfiduciarytoitsclients,PIMCObroadlysupportsimprovementsinriskmanagementpracticesforswaptransactions.Thisincludesthegoalsofmovingover-the-counterderivativestocentralcounterparties("CCP")andestablishingthemargin-postingrequirementsmandatedbytheDodd-FrankWallStreetReformandConsumerProtectionActof2010,bothofwhich,ifproperlyimplemented,willreducesystemicrisk.Inthisregard,PIMCOispreparingtotransitionasmanyofitsOTCderivativespositionstoaclearingenvironmentasisreasonablypracticable.However,despitePIMCOandothermarketparticipants'fulleffortstocomplywiththisgoal,asignificantamountofswapswillnotbeeligibleforclearing.Forthisreason,weareespeciallyconcernedaboutthepunitivenatureandassociatedunintendedconsequencesoftheProposedRulesonthoseenduserswho,foronereasonoranother,mustrelyonthenon-clearedswapsmarketforriskmanagementorotherpurposes.Tothisend,PIMCOurgesthePrudentialRegulatorsandCFTC(together,the"Agencies")toreconsiderseveralaspectsoftheProposedRules,including:First,theProposedRulesareoverlyrigidandonerousinboththeamountsandtypesofcollateralthattheywouldrequirepartiestopost,and,asaresult,arenot"appropriatefortheriskassociated,,3withnon-clearedswaps.Intheircurrentforms,theseruleswouldunfairlypunishthoselong-terminvestorswhomaynothavetheoptiontoengageintheclearedswapsmarket.Second,intheinterestofreducingsystemicrisk,theProposedRulesshouldallowforbi-lateralpostingofmargin,notsimplyunilateralpostingofmargintoswapdealers/majorswapparticipants.Third,theProposedRulesshouldconsidermoretypesofendusers-particularlypensionfundsandothertypesofregulatedfunds-as"low-risk"financialendusersorfinancialentities.Fourth,theProposedRulesshouldallowcounterpartiestoincludeswapsexecutedpriortotheeffectivenessoftheProposedRulesininitialmargincalculations,butonlybymutualagreementoftheparties.
3
Section4s(e)(3)(A)(ii)oftheCommodityExchangeAct,asaddedbySection731ofDodd-Frank;
seealso
Section15F(e)(3)(A)(ii)oftheSecuritiesandExchangeActof1934,asaddedbySection764(a)ofDodd-Frank.
 
Page3of11Fifth,theProposedRulesshouldensurethatsegregationofinitialmarginatathird-pattycustodianisavailableforallcounterparties.Finally,becausetheProposedRuleswillfundamentallyaffecttheeconomicsofawiderangeofswaps,weurgetheAgenciestodelayimplementation-oratleastfullimplementation-untilrelatedelementsofmarketinfrastructureareinplace.
Recognizingthatmanymarketparticipantswillnothavethechoicetotransactintheclearedswapsmarket,theAgenciesshouldmoderatetheexcessivecoststhattheProposedRulesimposeonnon-clearedswaptransactionsbyrequiringonlyamountsandtypesofmarginthatare"appropriatefortheriskassociated"withthetransactions.
Asstatedabove,PIMCOstronglysupportscentralcounterpartyclearing.Yet,weemphasizethateveninawell-established,post-Dodd-Frankmarket,notallswapswillbesuitableforclearing.
In
fact,endusersandevenswapdealerormajorswapparticipant("MSP")counterpartiesdonotcontrolwhichswapswillbecleared.Beforeaswapcanbecleared,itmustbeacceptedforclearingbyaCCP.
4
WhileCCPsmayofferclearingservicesforthemorestandardized,liquidcontractsforwhichtheycanmanagethe
risk.'
theymaybelesswillingtoofferclearingservicesformanyless-standardizedorless-liquidswaps.Thesecontractswillremainnon-cleared-notduetothepatties'ownchoiceorriskinessoftheswap,butbecauseoftheCCPs'unwillingnesstoclearthetrades.
6
DuringthetimeinwhichthemarketadaptstoDodd-Frank,theremaybemanysituationsinwhichcounterpartiesarewillingtocleartheirswapbutnoCCPisavailable,forcingthetransactiontoremaininnon-clearedform.EvenwhereaswapisacceptabletoaCCPforclearing,theCFTCorSECmaynotapprovesuchswapforclearing.'Asaresult,inamature,post-Dodd-Frankswapmarket,non-clearedswapswillrepresentasubstantialandnecessaryportionoftotalswapactivity.Atypicalpensionfund,forinstance,thatneedstohedgeexposurecannotdosoonlythroughswapsthatarepresentlyclearedorlikelyeventuallytomigratetothecleared
4
See
ReportoftheSenateCommitteeonBanking,Housing,andUrbanAffairsregardingtheRestoringAmericanFinancialStabilityActof2010,S.Rep.No.111-176,at35(2010)("Ifnoclearinghouse,boardoftrade,exchange,oralternativeswapexecutionfacilityacceptsthecontractforclearingortrading,thenthecontractmustbeexemptfromtheclearingandexchangetradingrequirements.").
5
UndertheCFTCandSECproposalsonthispoint,suchademonstrationthatthecontractissufficientlyliquidandthattheCCPhassufficientinfrastructuretosupporttheriskandtermsofthecontractisrequiredforthecontracttobeapprovedforclearingattheCCP.CFTCProposedProcessforSwapReview,§39.5(b)(3)(ii)(A)-(B);SECProposedProcessforSBSwapReview,
§
240.l9b-4(0)(3)(ii)(A)--(B).
Seealso
IOSCOOTCReportat22-24(discussinglegalandoperationalstandardization);AnupamChander
&
RandallCosts,
ClearingCreditDefaultSwaps:ACaseStudy
ill
GlobalLegalConvergence,
10CHI.J.INT'L
L.
639,677(2010).
6
CCPsmaychosenottoclearaswapforseveralreasons.Mostimmediately,keyelementsoftheclearinginfrastructuremaynotbereadytoclearaparticularswap.Inthelongerterm,CCPsmayelectnottoclearaswapifitsuniquecharacteristicsdonotfitwellwiththeCCP'sexistingmenuofswaps.Inparticular,aswapmaybelow-risk,butmaynotbeliquidenoughforcentralclearing.
Seealso
FSBOTCReportat19("[NJon-standardised[sicJbespokeproductswillcontinuetorepresentaportionoftheOTCderivativesmarket,"notsuitableforcentralclearing.).
7
See
ProcessforReviewofSwapsforMandatoryClearing,§39.5(a)(2),75Fed.Reg.67,277,67,281(Nov.2,2010)(tobecodifiedat17C.F.R.39);ProcessforSubmissionsforReviewofSecurity-BasedSwapsforMandatoryClearingandNoticeFilingRequirementsforClearingAgencies;TechnicalAmendmentstoRule19b-4andForm19b-4ApplicabletoAllSelf-RegulatoryOrganizations,SupplementaryInformationSectionH.A.I,
§
240.l9b-4(n)(2)(ii),75Fed.Reg.82,490,82,493,82,521(Dec.30,2010);ExchangeActSection19(b)(2)(A)(i),asamendedbySection916(a)ofDodd-Frank.

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