MFA modifies CFTC swaps comments post MF Global

December 13, 2011 06:00 PM

December 2, 2011

Via Electronic Submission:

David A. Stawick
Secretary of the Commission
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, DC 20581

Re: Notice of Proposed Rulemaking on Protection of Cleared Swap Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions: RIN 3038-AC99

Dear Mr. Stawick:

Managed Funds Association is submitting this letter to supplement comments we previously submitted to the Commodity Futures Trading Commission (the “Commission”) on its proposed rules on “Protection of Cleared Swap Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions” (the “Proposed Rules”). MFA is a strong supporter of efforts to reduce systemic risk, including by transitioning the over-the counter (“OTC”) derivatives markets to greater central clearing. In addition, MFA strongly supports the goals of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act to enhance transparency and reduce risk in the swap markets, including the
segregation of collateral for cleared swaps. Accordingly, like others in the industry, we are very troubled by the recent bankruptcy of, and other events related to, MF Global, Inc. (“MF Global”), which have resulted in a delay in the return of segregated customer assets, material concerns that customers have incurred associated losses, and allegations of misuse or misplacement of customer funds. Thus, in the context of the Commission’s overall reform efforts, we offer some additional thoughts on customer protection in the swaps and futures markets to assist the Commission in its consideration of the lessons learned from the MF Global situation.

I. General

MFA applauds the Commission’s prompt response to the MF Global matter and decision to open an investigation into whether the Commodity Exchange Act or Commission regulations were violated. These events have caused many market participants, including MFA’s members, to question what framework is best suited to prevent similar events from occurring in the future. In the absence of greater knowledge about what events precipitated the delayed return of, and potential losses associated with, MF Global’s segregated customer assets, our views are still evolving with respect to certain provisions within the Proposed Rules and other Commission regulations that may have a bearing on the MF Global matter. However, MFA members, whichare significant participants in the OTC derivatives markets, are actively reviewing and evaluatingthese issues. We hope to be helpful to the Commission as it considers the Proposed Rules and other relevant rulemakings in light of the MF Global developments.

II. Reevaluating Segregation Models for Cleared Swaps

MFA previously submitted a comment letter in response to the Proposed Rules, in which we supported the proposed Complete Legal Segregation Model. In that letter, we agreed with the Commission that the Complete Legal Segregation Model provided superior protections when compared to the Legal Segregation with Recourse Model and the Futures Model. Although MFA still believes that the Complete Legal Segregation Model has more robust segregation protections and may facilitate portability better than the other two models, in light of the emerging facts surrounding MF Global, we intend to reexamine this model as well as other alternatives, including the full physical segregation model, for the protection of customer assets for cleared swaps.

In addition, MFA strongly urges the Commission to retain the flexibility to consider each of the following options: (1) adopting the full physical segregation model for cleared swaps; (2) adopting the Complete Legal Segregation Model; or (3) conducting an impartial study of the additional costs and the benefits provided to customers associated with the Complete Legal Segregation Model as compared to the full physical segregation model to determine which model is more suitable. MFA will continue to monitor the MF Global developments, and we hope to maintain an open dialogue with the Commission about these issues. As appropriate, MFA will provide updated views on the Proposed Rules, once more information is known.

MFA recognizes that the fact-finding related to MF Global has just begun and that it may be many months before the Commission can make a final determination as to whether violations occurred. We urge the Commission to wait until the facts are clearer and there has been sufficient policy debate before proceeding with rules related to segregation of collateral for cleared swaps. However, we also are not suggesting that the Commission wait for definitive answers on every aspect of the MF Global failure before proceeding with rulemakings related to the protection of customer collateral. Rather, we are suggesting that given the unprecedented nature of the events surrounding MF Global and the renewed significance of the segregation rules, it is critical that the Commission evaluate the swap collateral rules in light of the new information. Once the Commission knows more facts, it can determine more conclusively the relative merits of adopting the Complete Legal Segregation Model, the full physical segregation model or protections in other areas.

In addition, MFA is not suggesting that the Commission delay other rulemakings. In particular, we wholeheartedly encourage the Commission to continue adopting and implementing other important final rules that are unrelated to the segregation of customer collateral for cleared swaps.

III. Examine Customer Protections for Futures

In light of the MF Global situation, we feel it is also appropriate to re-examine the protections available to participants in the futures market, and to assess the appropriate balance between the costs of enhanced protections versus the costs to investors and the market as a whole of a segregation failure. Once the Commission has more information about the events that led to the MF Global failure, we would recommend that as the Commission did when considering segregation rules for swaps, they hold one or more roundtables to ensure full consideration of the lessons learned, and to assess whether further protections of the collateral of futures customers are appropriate.


MFA members believe that the events of MF Global warrant careful analysis and should inform future regulatory decisions. MFA appreciates the Commission’s consideration of these supplemental comments on the Proposed Rules. We would be pleased to meet with the Commission members or staff to discuss our comments. If the Commission members or staff have any questions, please do not hesitate to call Carlotta King or the undersigned at (202) 730-2600.

Respectfully submitted,
/s/ Stuart J. Kaswell
Stuart J. Kaswell
Executive Vice President, Managing Director & General Counsel

cc: The Hon. Gary Gensler, Chairman
The Hon. Jill E. Sommers, Commissioner
The Hon. Bart Chilton, Commissioner
The Hon. Scott D. O’Malia, Commissioner
The Hon. Mark P. Wetjen, Commissioner

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