October 10, 2023

Submitted electronically via CFTC Comments Portal

Mr. Christopher Kirkpatrick
Secretary
U.S. Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street NW
Washington, DC 20581

Re: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants (RIN 3038–AF36)

Dear Mr. Kirkpatrick:

The Securities Industry and Financial Markets Association (“SIFMA”),1 including SIFMA Asset Management Group (“SIFMA AMG”),2 and the International Swap and Derivatives Association (“ISDA”),3 (collectively, the “Associations”) appreciate the opportunity to provide comments to the Commodity Futures Trading Commission (the “CFTC” or “Commission”) on the proposed amendments to the margin requirements for uncleared swaps (“Margin Rules”)4 for swap dealers and major swap participants (collectively, “Covered Swap Entities,” or “CSEs”) to:

1. Deem, for three years after they begin trading, certain collective investment funds that receive all of their start-up capital, or a portion thereof, from a sponsor entity (“Seeded Funds”) not to have any “margin affiliates” for the purposes of determining whether initial margin (“IM”) is required to be exchanged (the “Seeded Fund Proposal”);
2. Eliminate a provision disqualifying money market funds and similar funds (“MMFs”), from being eligible collateral under the Margin Rules solely because they transfer their assets through securities lending, repurchase agreements and other similar agreements (the “MMF Proposal”)5; and
3. Add a footnote to the haircut schedule describing the haircut applicable to securities of MMFs (the “MMF Haircut Footnote”).

The Associations appreciate the Commission’s recognition, both from its own experience with the implementation of the Margin Rules and from the report issued by the Global Markets Advisory Committee margin subcommittee (“GMAC Report”)6, that changes to the Margin Rules are appropriate to achieve the Commission’s regulatory objectives without creating undue burdens experienced by market participants that are Seeded Funds or that wish to post or transfer securities in MMFs as eligible collateral as anticipated by the Margin Rules. We welcome the Proposal’s thoughtful approach to address these obstacles, but, as discussed in detail below, believe additional tailoring is necessary to achieve the Commission’s stated objective; in particular certain of the currently proposed restrictions and conditions would render implementation unworkable and would need to be addressed to achieve a change in the status quo of Margin Rules implementation.

I. Executive Summary.

We respectfully provide the following recommendations and feedback for consideration by the Commission in respect of the Proposal:

• The Commission should remove from the definition of “eligible seeded fund” the requirement that none of the sponsor entity’s margin affiliates controls or has transparency into the management or trading of the fund. This requirement is not necessary to ensure that the fund is sufficiently independent and risk-remote from other entities in the sponsor group, and would preclude most Seeded Funds operated by independent asset managers from qualifying as eligible seeded funds and benefiting from the Proposal simply because the asset managers are consolidated with sponsor entities from an accounting perspective even if the sponsor entities do not have the requisite control or visibility of the management or trading of the Seeded Funds.
• The Commission should remove from the definition of “eligible seeded fund” the requirement that one or more of the fund’s margin affiliates must post and collect IM pursuant to CFTC Regulation 23.152. This requirement would limit the relief to only funds with an affiliate that is a CSE subject to the Commission’s Margin Rules, and would inappropriately exclude funds without CSE affiliates or whose CSE affiliates are subject to the prudential regulators’ margin rules. Whether or not a Seeded Fund has an affiliate that is a CSE (or indeed, an affiliate in scope for IM under the Margin Rules facing a CSE counterparty) should not impact whether such Seeded Fund may be an eligible seeded fund.
• The Commission should deem eligible seeded funds to not constitute margin affiliates of any other entity during the seeding period. Without this change, eligible seeded funds hoping to avail themselves of the relief would have to—as they do under the status quo—share information about their uncleared swap exposure with its group and require it and its CSE counterparty to calculate theoretical IM amounts that would have to be posted or collected in the absence of the proposed relief on a real-time basis. This requirement currently restricts Seeded Funds from utilizing uncleared swaps and, in some cases, has caused Seeded Funds to move their businesses overseas and trade only with non-U.S. swap providers such that their uncleared swaps would not be directly subject to the Margin Rules.
• The Commission should adopt the MMF Proposal as proposed. MMF securities are safe investments subject to extensive regulation, and the Margin Rules already include additional safeguards for MMF securities as eligible collateral by limiting the types of underlying investments an MMF may make. The Commission should not impose additional restrictions that would be inconsistent with ongoing global efforts to facilitate market participants’ use of securities in MMFs and similar funds as IM under the global uncleared derivatives margin framework.
• The Commission should not condition eligibility of MMF securities as eligible collateral under the Margin Rules on the MMF clearing its repo transactions. The Treasury clearing market is in a state of transition due to the proposal by the Securities and Exchange Commission (“SEC”) to require clearing of certain Treasury transactions. Given this state of uncertainty, the Commission should not require that MMFs clear their repos in order for securities of such MMFs to constitute eligible collateral.
• The Commission should not adopt the MMF Haircut Footnote as proposed. The prudential regulators’ approach to mandatory haircuts for MMF securities has, in practice, curtailed market participants’ ability to use MMF securities as collateral. We recommend that the Commission allow CSEs to determine the appropriate haircut for MMF securities according to their ordinary risk management process. To the extent that the Commission wishes to specify a mandatory haircut for MMF securities, we recommend a standard two percent haircut which would be consistent with market practice outside of the uncleared swaps margin rules in relation to MMF securities pledged as collateral.
• The Commission should adopt the Proposal (with recommended changes discussed herein) as soon as possible, regardless of whether the prudential regulators take a similar approach. We anticipate that the important benefit to buy-side market participants hoping to pledge MMFs securities as IM collateral would outweigh any documentation or operational costs in managing the discrepancy with other regulators’ uncleared swap margin rules.

1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (“GFMA”).

2 SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.

3 Since 1985, ISDA has worked to make the global derivatives markets safer and more efficient. Today, ISDA has over 1,000 member institutions from 77 countries. These members comprise a broad range of derivatives market participants, including corporations, investment managers, government and supranational entities, insurance companies, energy and commodities firms, and international and regional banks. In addition to market participants, members also include key components of the derivatives market infrastructure, such as exchanges, intermediaries, clearing houses and repositories, as well as law firms, accounting firms and other service providers. Information about ISDA and its activities is available on the Association’s website: www.isda.org. Follow us on Twitter, LinkedIn, Facebook, and YouTube.

4 17 C.F.R. §§ 23.150 – 23.161.

5 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 88 Fed. Reg. 53409 (Aug. 8, 2023) (“Proposal”).

6 Recommendations to Improve Scoping and Implementation of Initial Margin Requirements for Non-Cleared Swaps, Report to the CFTC’s Global Markets Advisory Committee by the Subcommittee on Margin Requirements for Non-Cleared Swaps (May 2020), https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download.