Several major trade associations called on U.S. prudential regulators and the CFTC to expand the types of money market funds ("MMFs") eligible for derivatives initial margin.

In a joint comment letter, ISDA, MFA, ICI, SIFMA, SIFMA's Asset Management Group and the Institutional Money Market Funds Association (collectively, the "Associations") said that relief (or a rule change) is needed to expand the types of MMFs that are eligible to be posted as regulatory initial margin. In particular, the Associations asked regulators to (i) expand the types of MMFs available for collateral usage and (ii) permit substituted compliance with EU margin rules.

The Associations noted that MMFs are commonly used as eligible collateral in circumstances where a counterparty initially posts cash, but that the cash is then "swept" into other eligible collateral, most often MMFs. In particular, the letter criticizes the "undue limitation" in the rules that the assets of an eligible MMF cannot be transferred through securities lending, repo or similar means.

The Associations also requested that U.S. regulators permit the use of comparable EU MMFs in instances where substituted compliance is accessible only through the issuance of a comparability determination by the U.S. prudential regulators.

Commentary

Nihal Patel

The policy for the limitation on MMF use of assets never made a great deal of sense nor was it explained with much detail or reason. At the time the swaps margin requirements were adopted, the prudential regulators said (at 74871) that the limitation on the use of assets by an MMF were intended to "ensure consistency with the prohibition . . . against custodian rehypothecation of initial margin collateral." This would make sense if the question was only about cash, Treasuries, or funds holding only Treasuries. However, reality is not that vacuum. The rules also permit a variety of other types of assets - including equities - that present significantly greater risk than a regulated U.S. Treasury-only MMF engaging in repurchase agreements.

As to the substituted compliance point made in the letter - its argument seems almost too narrow in focusing solely on MMF eligibility rather than initial margin requirements more broadly. The prudential regulators have not made a single substituted compliance determination since their margin rules were adopted. What was the point of the substituted compliance mechanism in the first place if the regulators were not going to use it, even for other jurisdictions whose rules are based on the same global framework as the prudential regulators' rules?

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