SIFMA AMG Submits Comments to FCA to Exclude Mortgage TBAs from the Definition of Derivative Contracts under EMIR

The Asset Management Group of SIFMA (“SIFMA AMG”) submitted comments to the Financial Conduct Authority (“FCA”) requesting that it exclude To-Be-Announced trades (“TBAs”) from the definition of derivative contracts under European Market Infrastructure Regulation (“EMIR”).

In the letter, SIFMA AMG suggested that TBA trades should not be classed as derivative contracts for the following reasons:

  • TBA trades are appropriately classified as spot trades (cash market trades) as they settle within the standard settlement cycle of the securities being purchased;
  • TBA trades should be classified similarly to other transaction types that include relatively long periods of settlement and that are not considered to be derivative contracts;
  • there is no regulatory imperative for classifying TBA trades as derivatives; and
  • the TBA market is a distinct market based in the United States, focused primarily on transactions in securities issued and guaranteed by three U.S. government-owned or -chartered agencies.

Lofchie Comment: SIFMA AMG’s comments recommending the exclusion of Mortgage TBA’s from the definition of derivative contracts serve as an illustration that the meaning of the term “derivative” is intended to describe not something that is inherent in a financial instrument, but rather something that may be accepted by market convention or determined and imposed by regulators. There is no assumption that similar regulations be imposed on all “derivatives,” as that term can be used to describe a vast array of financial instruments, some of which are exotic, some of which are risky, some of which are common (such as home mortgages with floating rates and early repayment options), and some of which are safe.

See: SIFMA Comment Letter.


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