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.