MFA Submits Supplemental Letter to SEC on Tri-Party Segregation Terms

The Managed Funds Association (“MFA”) submitted additional comments to the SEC to supplement two previous MFA letters regarding the proposed imposition of a capital charge on security-based swap dealers (“SBSDs”) when their financial end user counterparties elect to segregate initial margin for uncleared security-based swaps. 

The letter specified that the MFA is writing “to highlight the protections and safeguards afforded both the SBSDs and the pledgors by tri-party segregation arrangements.”  The letter included a list of suggested contractual provisions that would be protective of the SBSD and the pledgor, so as to render unnecessary the imposition of a capital charge on SBSDs when their financial end user counterparties elect to segregate initial margin for uncleared security-based swaps.

Lofchie Comment:  This discussion highlights a fundamental issue:  there is an inevitable tension between protecting customers from dealer risk and protecting dealers (and the market as a whole) from individual customer risk.  That tension cannot be eliminated wholly; the question is whether customers, dealers and the regulators can agree on a middle course that is satisfactory.

Historically, broker-dealer regulation emphasized protecting broker-dealers from individual customer risk by requiring broker-dealers to hold customer collateral under the full control of the broker-dealer.  Permitting tri-party arrangements as to swaps without requiring broker-dealers to take capital charges, even though they are not in full control of the customers’ collateral, would be a policy change, albeit, one that customers will be pushing for in light of increased awareness – post-Lehman that dealer failure creates risk.

See:  MFA Letter to SEC.

 

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