November 8, 2018
Requiring an initial margin payment on security-based swap deals adds another very dense layer of complexity to a very regulated industry. Additionally, the initial margin provides little benefit considering the requirement of a variation margin. For these reasons, the SEC should adopt Alternative A.
When making security-based swaps, the firms conducting these transactions are risk-averse and well-trained on protecting their own interest. An initial margin is a very cumbersome, and expensive route to regulating this industry. For instance, for the firms that are able to make the switch to be able to effectively adjust their business model of swapping securities with an initial margin, will need new areas of compliance such as: calculating the amount of the initial margin due based on risk (which takes complex IT analysis), finding solutions to each participant for setting up custody arrangements for these funds, and the implications of that. These added complexities and costs to the business model will undoubtedly make its way to the end user.
It is important to keep business, especially relatively new and thriving areas of transactions, such as security-based swaps, open to new and creative techniques for making the industry profitable and efficient. Early regulation can make the product half of what it could be if allowed to run free. Adding the initial margin takes funds and resources out of the process of fulfilling the goal of profitability for corporations and stagnates more funds. Third-party financial institutions would love the initial margin and would increase these departments exponentially for little benefit to the industry.
For these reasons the SEC should adopt Alternative A. Initial margins are slightly helpful but largely extraneous in an already complex and intricate new regulation. Alternative A will complete the job needed to be done, without over-regulation. Thank you.