August 17, 2012

Clearing Exemption for Swaps Between Certain Affiliated Entities

Gary Gensler has made clear the CFTC will not require firms who centralise their risk management in a central entity to clear their inter-entity business.

He does set out some rules (see link below) the main one is that these inter-group swaps are subject to Variation Margin, in other words must have a CSA in place.

There is also a dissenting statement from Scott O’Malia and Jill Sommers saying that the VM requirement is generally a bad thing, and brings unwanted cost.

Scenario 1: Client <-a-> CCP <-b-> Local Entity <-c-> Central Group Entity

For a clearable product, and let’s assume the Client is in-the-money:

  • Swap ‘a’ and ‘b’ will be in clearing and be subject to VM/IM
  • The cost of VM is adjusted using PAI via the CCP, so more or less flat
  • Requiring VM to be posted from the Central Entity to the Local Entity would transfer the cost of the OTM position into the Central Entity, which might be desirable from a netting and monitoring point of view

Scenario 2: Client <-a-> Local Entity <-c-> Central Group Entity

For a non-clearable product, and assume the Client is in-the-money:

  • Swap ‘a’ will be subject to a CSA and meet regulatory requirements for VM & IM
  • The CSA should pay Interest on the VM posted by the Local Client, equivalent to PAI
  • Swap ‘c’ would still be subject to a CSA, same as above

In both scenarios:

  • If VM were not required between Central and Local, then the net VM of the Local Entity would be funded within Local, and this funding cost will show in the P&L of that entity, without any netting across other group entities
  • If VM is required, as the CFTC wants, all the net VM across the group will be transferred into the Central Group Entity, and may result in a better net funding position by virtue of keeping all the funding in one place – scale usual brings down cost, or of course a worse position ;-)

I don’t know how this would affect capital calculations, so without a full numerical analysis it’s hard to know whether this inter-affiliate requirement has a net negative effect, or not. It certainly means CSAs being in place within a group. Scott O’Malia (here) makes a point that inter-affiliate trades don’t bring systemic risk, but isn’t that like saying you can remove some of the spokes in a bicycle wheel and not see any weakening of the wheel as a whole. By having VM between affiliates the loss in a default would be lower, even if the default of an affiliate doesn’t bring down the whole group.

Anyone else got views?

Statement of Support: Clearing Exemption for Swaps Between Certain Affiliated Entities.

Most Viewed


Related Articles

September 15, 2022

Tradefeedr Hires Alexis Fauth as Head of Data Science and Client Analytics



September 6, 2022

Siege FX announces the launch of NetFix



August 2, 2022

OSTTRA and LCH collaborate to reconcile bilateral OTC trade data


Post Trade Processing