SPEECHES & TESTIMONY

Statement of Commissioner Dan M. Berkovitz on Less is More – Segregation of Assets Held as Collateral in Uncleared Swap Transactions; Amendments

March 28, 2019

The final rule amends CFTC regulations giving certain swap counterparties the right to require initial margin segregation.  I support the amendments.

In this instance, real world experience in implementing new regulations demonstrates that modifying certain of the regulatory requirements may help better achieve the intended customer protection goals.  An added benefit of fine-tuning the regulations is a reduction in costs for registrants without a reduction in customer protections.

CFTC regulations 23.701 through 704 (“Margin Segregation Rules”) set forth certain requirements concerning the right of counterparties of swap dealers to elect segregation of initial margin posted to secure uncleared swaps.  These regulations support an important safety measure for mostly non-financial swap counterparties by providing them the right to have collateral posted as initial margin for swaps to be held in segregated accounts at third-party custodians.  Segregation protects the counterparty by keeping the counterparty’s collateral, and the collateral posted by the swap dealer to cover obligations to the counterparty, separate from the swap dealer’s other assets and liabilities in the event of a bankruptcy.  The regulations currently in effect provide detailed requirements regarding the delivery of notices by swap dealers to their counterparties of the right to segregate as well as specific, limited investment choices for the collateral.

The Margin Segregation Rules were adopted in 2013.  Since that time, two things have happened to warrant changes to the regulations.  First, in 2016, the Commission adopted its uncleared swaps margin regulations.  The margin rules effectively superseded regulations 23.702 and 23.703 regarding investment of margin funds for a large majority of affected swap counterparties.  Second, as detailed in the final release, experience from implementing the Margin Segregation Rules demonstrated that certain aspects of these rules have provided little or no benefit.  Almost no counterparties are electing to segregate initial margin in the manner provided by the Margin Segregation Rules with fewer than five counterparties making the election at each of the swap dealers examined for this issue.  In addition, some of the specific requirements of the rule added unnecessary costs and the rule’s purpose could be achieved through more efficient means.

The amendments in the final rule will reduce the burdens of the rule’s notice requirements while assuring that each counterparty is properly notified of the important right to segregate initial margin at the most effective time in the swap documentation process.  The final rule also provides the parties with greater flexibility to negotiate mutually beneficial terms for the segregation arrangements based on the specific needs of the counterparties.  This flexibility may encourage more counterparties to elect segregation.  In addition, the final rule will increase regulatory efficiency by reducing unnecessary notices and procedural requirements that must be documented and examined by the National Futures Association in their oversight of swap dealers.

The reduced costs and greater flexibility that will result from the final rule should benefit both swap dealers and end users in uncleared swap transactions.  The comment letters that the Commission received on the notice of proposed rulemaking all provided reasoned support for the proposal.  I therefore support today’s final rule.