TCH Comments on Margin and Capital Requirements for Covered Swap Entities
The Clearing House Association submitted a joint comment letter with the American Bankers Association and the ABA Securities Association on the reproposed rulemaking by the U.S. Banking Agencies, the Federal Housing Finance Agency, and the Farm Credit Administration, in consultation with the Commodity Futures Trading Commission and the Securities and Exchange Commission, implementing sections 731 and 764 of the Dodd-Frank Act that would establish initial and variation margin requirements and capital requirements for all non-cleared swaps and non-cleared security-based swaps for registered swap dealers, major swap participants, security-based swap dealers and major security-based swap participants, including banks that fall into any of these categories. The proposal does not exempt inter-affiliate swaps from these requirements. The Associations strongly believe that inter-affiliate swap transactions are a prudent and critical way by which banking organizations manage their business and maintain a centralized risk management function and that the proposed rule would create incentives for banks to change their inter-affiliate swaps practices, including by reducing inter-affiliate trades conducted for risk management purposes or increasing the volume of inter-affiliate trades that are cleared, both of which may increase risks to the banking organization or the markets more broadly without any countervailing benefit to the organization or financial stability. Further, a substantial portion of inter-affiliate transactions that will be subject to the margin requirements involve banks and are thereby separately subject to quantitative limits and collateral requirements under Sections 23A and 23B of the Federal Reserve Act. Imposing a new and separate regulatory scheme on these transactions would produce redundancy and inconsistency in the manner in which such transactions are regulated and restricted. Thus, the Associations urge the regulators to use their statutory discretion to exclude inter-affiliate swap transactions from margin requirements, consistent with the risk-based approach to implementation contemplated by the relevant statute.