Washington, DC, March 18, 2019 – SIFMA Asset Management Group (SIFMA AMG) and Managed Funds Association (MFA) today submitted comments to several prudential regulators designed to ensure accessible and affordable central clearing of derivatives for asset managers, investment funds, and institutional investors. The Associations’ comment letter responds to the proposed rule issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency to implement the standardized approach for counterparty credit risk (SA-CCR) as a replacement for the current exposure method in the U.S. capital rules. Among other comments, the Associations urged regulators to adjust the Supplementary Leverage Ratio (SLR) to recognize the exposure-reducing nature of client initial margin.

The letter outlines specific recommendations to prevent amplifying the negative effects of the current regulatory capital regime on end users, such as endowments, public and private pension funds and registered investment companies, that use derivatives to hedge their risks. The letter recommends a more risk-sensitive and less punitive approach than is set forth in the proposed rule.

“We urge the Agencies to adopt SA-CCR in a manner that will decrease, rather than increase, exposure values compared to the current exposure method for banking organizations when they offer derivatives to asset managers, investment funds, and pension funds,” the Associations wrote in the letter.

Specifically, the letter urged the Agencies to consider the following changes to the Proposal to make the final SA-CCR rule less likely to increase exposure values and more risk-sensitive:

• In the SLR context, recognize the exposure-reducing effect of initial margin and variation margin for client cleared derivatives exposures, consistent with the risk-based version of SA-CCR.
• In risk-based capital requirements, recognize more fully the effect of initial margin in reducing a banking organization’s risk-weighted assets, such as by providing for dollar-for-dollar recognition of collateral and/or by reducing the Proposal’s 5 percent potential future exposure (PFE) floor. The revised treatment of initial margin in risk-based capital requirements should also apply to client cleared derivatives exposures in the SLR.
• Reduce and make more granular the Proposal’s supervisory factors for certain credit, commodity, and equity asset classes.
• Eliminate the 1.4X alpha multiplier that the Proposal would apply to the bank’s replacement cost (RC) and PFE due to the lack of adequate policy or economic reasons for its inclusion.
• Allow all transactions subject to a qualifying master netting agreement to be part of the same netting set.
• Permit chains of FX derivatives to be part of the same exchange rate hedging set, and interest rate derivatives with different reference currencies to be part of the same interest rate hedging set.

The letter further details these points and is available here.