A statement dated Sept. 27, 2019, entitled, "Joint Trade Association Letter on Cash and Money Market Funds as Initial Margin," on the ISDA, or the International Swaps and Derivatives Association, website tell us, "On August 1, 2019, ISDA sent a letter to the CFTC and US Prudential regulators, co-signed by Managed Funds Association ('MFA'), Securities Industry and Financial Markets Association's Asset Management Group ('SIFMA AMG'), Investment Company Institute ('ICI'), Institutional Money Market Funds Association ('IMMFA'), and Securities Industry and Financial Markets Association ('SIFMA'). The letter requests that US regulators: allow the use of a broader range of MMFs meeting the conditions set out above; and allow the use of comparable EU MMFs in cases where substituted compliance is available through the issuance of a comparability determination by the US Prudential Regulators."

The full letter, addressed to the: Commodity Futures Trading Commission, Board of Governors of the Federal Reserve System, Department of Treasury/Office of the Comptroller of the Currency, Farm Credit Administration, Federal Deposit Insurance Corporation and Federal Housing Finance Agency and entitled, "Re: Posting Cash and Money Market Funds for Initial Margin," states that ISDA, MFA, SIFMA AMG, ICI, IMMFA, and SIFMA "are requesting that US regulators provide relief or amendments pertaining to posting money market funds ('MMF's) as initial margin to covered swap entities, including swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants (collectively, 'CSEs') and their counterparties which will become subject to the initial margin ('IM') requirements of the Margin and Capital Requirements for Covered Swap Entities ('USPR rule') and the Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants ('CFTC rule') (collectively, the 'US Margin Rules.')

It explains, "Specifically, we request that the US prudential regulators and the CFTC provide relief or rule amendments to expand the types of money market funds that can be used as eligible collateral, including allowing non-US MMFs. We also request that the US prudential regulators permit substituted compliance with EU margin rules."

The letter continues, "Both in the United States and European Union, MMF regulations allow for the use of repurchase and reverse repurchase agreements, and the prospectuses for a large majority of MMFs in both jurisdictions contemplate the use of these transactions to properly manage short term liquidity. The US Margin Rules restrict such activity in the conditions for use of MMFs as eligible collateral, even though these same restrictions do not apply to use of MMFs as collateral for cleared swaps. EU margin rules for uncleared derivatives transactions also do not restrict MMFs' use of repurchase or reverse repurchase transactions. Consequently, parties subject to both EU and US margin requirements have limited options for using MMFs as collateral absent US regulators granting substituted compliance with the EU margin rules. Unless remedied, the use of MMFs as eligible collateral for IM will be extremely limited and the global market will be bifurcated by regulatory regime."

ISDA writes, "Cash is widely used as collateral in the derivatives market. According to the latest ISDA Margin Survey, 75.3% of derivatives collateral posted is cash. Cash settlement processing is efficient, fungible, and a high quality and highly liquid asset. Posting cash is a necessity for entities both directly and indirectly subject to the IM requirements."

They continue, "For both voluntary and also mandatory IM, buyside market participants have steadily increased the use of third party IM segregation arrangements and margin transfer deadlines continue to contract from a regulatory perspective, and as a consequence, there has been an increased use of MMFs as a secure and efficient reinvestment option with cash margin. As a result, the expected mechanism for reinvestment of cash is a custodian 'sweep,' where the custodian reinvests the cash within the segregated account into another eligible collateral asset via standing instructions. Buyside market participants using the custodian sweep process can efficiently meet margin calls with cash in compressed timeframes without having dedicated resources and overhead costs to manage the MMF investment process directly."

The letter adds, "We appreciate that the US Margin Rules allow for the use of redeemable securities in a pooled investment fund that holds only US Treasuries (or securities unconditionally guaranteed by the US Treasury) and cash funds denominated in US dollars, however, this form of eligible collateral is subject to the undue limitation.... 'Assets of the fund may not be transferred through securities lending, securities borrowing, repurchase agreements, reverse repurchase agreements, or other means that involve the fund having rights to acquire the same or similar assets from the transferee.' This limitation severely reduces the number of eligible MMFs that could be used under the US Margin Rules, and this limitation is also inconsistent with other regulations such as CFTC Regulation 1.25 (which governs the investment of customer money by futures commission merchants ('FCMs') without similar restrictions)."

It tells us, "Providing for the use of MMFs with the ability to use securities lending, securities borrowing, repurchase agreements, and reverse repurchase agreements, including the use of comparable non-US MMF issuers and allowing substituted compliance with the EU Margin Rules will ensure global access to liquid eligible collateral offerings for cash reinvestment.... Accordingly, for the preceding reasons indicated, ISDA, MFA, SIFMA AMG, ICI, IMMFA, and SIFMA requests that US regulators: allow the use of a broader range of MMFs meeting the conditions set out above; and allow the use of comparable EU MMFs in cases where substituted compliance is available through the issuance of a comparability determination by the US Prudential Regulators."

Finally, ISDA's letter to EU regulators, including the EC, ESMA, EBA and EIOPA on the "Eligibility of non-EU Money Market Funds ('MMFs') as Initial margin of non-cleared derivatives – Request for modification of the EMIR Margin RTS," tells us, "With the upcoming revision of the European Commission Delegated Regulation (EU) 2016/2251 (EMIR Margin RTS) in the context of the EMIR Refit framework, the European Supervisory Authorities will notably adjust the timeline of implementation of IM for non-cleared derivatives.... This new environment of in scope entities makes it appropriate to consider alternative forms of collateral as compared to previous phases."

ISAD explains, "It would be appropriate to expand the scope of eligible instruments beyond EU UCITS and more specifically to non-EU Money Market Funds (MMFs). The International Swaps and Derivatives Association ('ISDA') requests that the ESAs extend the scope of MMFs for use as initial margin to additional funds beyond UCITS, and extend the applicability of the existing equivalence determination in respect of the US Commodity Futures Trading Commission's ('CFTC') Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants; Final Rule ('CFTC Rules')."

They tell us, "Both in the United States and European Union, the regulatory requirements for the margining of non-cleared derivatives allow for the use of MMFs as collateral. However, each regulatory regime imposes restrictions that, in practice, mean that there are no MMFs that are eligible under both the EMIR Margin RTS and either the CFTC Rules or the Margin and Capital Requirements for Covered Swap Entities adopted by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration and the Federal Housing Finance Agency ('USPR Rules')."

The letter adds, "As a result when an entity in scope of the CFTC Rules or USPR Rules (the 'US margin rules'), faces an entity in scope under the EU regulatory regime, neither counterparty may post cash to be reinvested into an MMF nor directly post an MMF as collateral. Where substituted compliance is available, the conditions on use of substituted compliance mean that, depending on the location of the parties, either US or EU MMFs can be posted, but not both. This restriction significantly decreases the options for viable eligible collateral considering settlement and transfer timing limitations and global fragmentation."

It states, "Based on the current EU requirements, only MMFs that are UCITS may be posted as eligible collateral -- no other structure of MMF. However, under the US margin rules, MMFs that are UCITS do not qualify as eligible collateral due to their ability to use repo. As a result, in the example above, the EU pledging counterparty would not be allowed to post cash for reinvestment into a MMF (subject to the availability of substituted compliance, discussed further below). Please note: ISDA has submitted a request to the CFTC and US Prudential Regulators to allow repo, reverse repo, and securities lending within MMFs used as initial margin. To accommodate a global market, MMFs in additional structures to UCITS must be available. We request that the requirements regarding MMFs as eligible collateral be expanded to include issuing entities that have similar MMF regulatory oversight within their applicable regime. To date, ISDA members have mostly identified the issue in the context of EU-US contractual relationships. But naturally such extension of eligible MMFs should be based on equivalence determination conditions, irrespective of the concerned jurisdiction."

Finally, the letter says, "Accordingly, for the preceding reasons indicated, ISDA requests that EU regulators: amend the EU Margin RTS to allow for the broader range of money market funds, not to be limited to UCITS; amend the Equivalence Determination in respect of the CFTC Rules to include SDs not established in the US; and issue an equivalence determination in respect of the USPR Rules for the benefit of SDs and SBSDs regardless of whether the registered entity is established in the US."

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