MFA submitted a comment letter to the Working Group on Margining Requirements (WGMR) of the Basel Committee on Banking Supervision and the International Organization of Securities Commissions in response to their Second Consultative Document on Margin Requirements for Non-Centrally Cleared Derivatives.
MFA took the following positions in response to the four open issues in the Second Consultative Document:
- Physically-settled FX forwards and swaps. MFA supports the bilateral exchange of variation margin (VM) for these derivatives. However, while MFA does not support these derivatives being exempt from initial margin (IM) requirements, MFA urges the WGMR to take a more nuanced approach to IM requirements to address their highly liquid nature.
- Re-hypothecation. MFA supports the segregation and robust physical protection of IM unless a customer has made a deliberate decision to waive such protection, in which case, such customer should be permitted to allow re-hypothecation of its IM by its counterparty without condition or restriction. MFA recommends that posting counterparties should decide whether or not to allow re-hypothecation of their IM based on their individual risk assessments and the protections afforded by local laws.
- Phase-in arrangements. MFA generally supports the WGMR’s phase-in arrangements for both the VM and IM exchange requirements.
- QIS results. MFA believes that the quantitative impact study results highlight the need for IM models to be sufficiently replicable and transparent to enhance their utility by both parties to an uncleared derivative. In addition, the results underscore the importance of ensuring that eligible collateral is employed as efficiently as possible. Toward this end, MFA requests that the WGMR clarify certain language in the final framework to reinforce the authority of market participants to use master netting agreements to account for risk offsets among different types of financial instruments within asset classes.