At a House committee hearing on legislative proposals regarding derivatives, SIFMA President and CEO Kenneth Bentsen outlined ways to make regulations more risk-sensitive and less complex.
While SIFMA supports many of the transparency requirements implemented through Dodd-Frank, Bentsen said that the organization is concerned that some of the reforms go beyond what is necessary to achieve risk mitigation and transparency objectives.
“SIFMA and its members are pleased to see that policymakers are now evaluating these issues as they take stock of recent derivatives reforms,” Bentsen told the House Committee on Financial Services Subcommittee on Capital Markets, Securities, and Investment.
Specifically, SIFMA supports fixing the application of Title VII requirements to inter-affiliate transactions.
“We believe that an appropriate and targeted solution would be to exempt inter-affiliate swaps from initial margin, mandatory clearing, and mandatory trading requirements, so long as they are part of a centralized risk management program and remain subject to variation margin and trade reporting requirements. This approach would bring the banking regulators’ margin rules in line with the CFTC’s and help streamline existing CFTC exemptions,” Bentsen said.
Also, SIFMA encourages the Commodity Futures Trading Commission and the Securities and Exchange Commission to find ways to harmonize and streamline their respective Title VII requirements, where appropriate.
Further, Bentsen said regulatory capital requirements should be based on the principle that taking greater risk requires greater capital. Risk-insensitive leverage capital measures, such as the supplemental leverage ratio (SLR), are becoming the capital measures for many banks.
Meanwhile, the standardized risk-based capital requirements do not allow sufficient use of more risk sensitive methodologies.
“Because the SLR’s approach to client clearing requires clearing firms to hold capital against these exposures far in excess of the risks they face, it discourages client clearing activity,” Bentsen said. “SIFMA accordingly supports H.R. 4659, as it would deduct any client-provided initial margin on centrally cleared derivatives from the amount of leverage exposure for the firm clearing the swap and requires the banking regulators to amend their leverage-based capital rules to reflect this change.”
H.R. 4659, introduced by Rep. Blaine Luetkemeyer (R-MO), would the appropriate Federal banking agencies to recognize the exposure-reducing nature of client margin for cleared derivatives.
Also, SIFMA believes that any modification of the de minimis threshold exempting a market participant from being deemed a swap dealer must be supported by data.