Board of Governors of the Federal Reserve System

October 11, 2019

I support the proposed changes permitting certain amendments to legacy swaps, initial phase-in dates, and documentation requirements.

I have concerns that eliminating the inter-affiliate initial margin requirement without the necessary changes to strengthen Regulation W could again expose banks and the financial system to risk from the buildup of risky derivatives. During the crisis, the buildup of uncleared swap positions exposed covered swap entities, including banks, to losses and put the broader financial system at risk. In response, pursuant to the requirements of the Dodd-Frank Act, the federal banking agencies adopted a final swap margin rule in 2015 that requires prudent margining practices between covered swap entities, including banks, and their counterparties. These margin requirements are important to protect the safety and soundness of banks that are covered swap entities in the event of a counterparty default and to guard against broader risks to financial stability. The final rule recognizes that banks' derivatives transactions with affiliated parties, such as foreign affiliates and nonbank affiliates, can pose important risks that necessitate prudent margin requirements. These inter-affiliate derivatives transactions represent a large share of uncleared swaps activity. The rule crafted special one-way provisions to recognize that swaps with affiliated counterparties pose different risks relative to those with unaffiliated counterparties.

Today's proposal eliminates these safeguards entirely without proposing compensating adjustments. It does so on the basis of "supervisory experience" since the final rule was implemented. I supported the 2015 final rule and do not see compelling reasons to reverse it by eliminating these safeguards.

The preamble to today's proposal notes that "certain affiliate transactions are subject to the requirements of sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve's Regulation W" and asserts that these "are the more effective tools to address risks arising from transactions between affiliates." While it is true that Regulation W could impose margining safeguards on certain swap transactions between a bank and certain affiliates under sections 23A and 23B, it is important to note that Regulation W does not currently include such requirements with regard to inter-affiliate swap transactions. In fact, Regulation W has not yet been updated to reflect changes associated with the Dodd-Frank Act. It is premature to remove the affiliate protections under the swap margin rule on the grounds that there are other "more effective" regulatory protections, when such protections are not in place or in process. To date, there have been no discussions with policymakers on proposed amendments to Regulation W.

If a concurrent effort had been undertaken to amend Regulation W to address this important area of potential risk, then I would be open to revisiting the swap margin rule's inter-affiliate requirements. A concurrent process to amend Regulation W would allow a considered examination of the similarities and differences between the objectives and scope of sections 23A and 23B as implemented by Regulation W and the policy objectives of the swap margin rule. While sections 23A and 23B are intended to protect an insured depository institution from losses arising from transactions with its affiliates, the swap margin rule is also intended to address the risk to the financial system more broadly arising from the buildup of leverage associated with uncleared derivatives.