21 November, 2014
Office of the Comptroller of the Currency
400 7th Street SW
Suite 3E-218
Mail Stop 9W-11
Washington, DC 20219
Email: regs.comments@occ.treas.gov

Robert deV. Frierson, Secretary
Board of Governors of theFederal Reserve System
20th Street and Constitution Avenue,
Washington, DC 20511
Email: regs.comments@federalreserve.gov

Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Email: Comments@FDIC.gov

Barry F. Mardock
Deputy Director
Office of Regulatory Policy
Farm Credit Administration
1501 Farm Credit Drive
McLean, VA 22102-5090
Email: reg-comm@fca.gov

Alfred M. Pollard
General Counsel
Attention: Comments/RIN 2590-AA45
Federal Housing Finance Agency
Constitution Center (OGC Eighth Floor)
400 7th St. SW.,
Washington, DC
Email: RegComments@fhfa.gov

Christopher Kirkpatrick
Secretary
Commodity Futures Trading Commission
1155 21st Street, N.W.
Washington, DC 20581
http://comments.cftc.gov

Dear Agencies
Margin and Capital Requirements for Covered Swap Entities
OCC: [Docket No. OCC-2011-0008] Board: [Docket No. R-1415] (RIN 7100 AD74)
FDIC: (RIN 3064-AE21) FCA: (RIN 3052-AC69) FHFA: (RIN 2590-AA45)
Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants
CFTC: (RIN 3038-AC97)
1. Introduction
The Japan Financial Markets Council (JFMC)1 is grateful for the opportunity to comment on the U.S.
Prudential Regulators’2 and the Commodity Futures Trading Commission’s (collectively, ‘theAgencies’) proposals to establish capital requirements and initial and variation margin requirements
for swap dealers and their counterparties on all non-cleared swaps and non-cleared security-basedswaps. Non-centrally cleared bilateral swaps provide an important mechanism to support a range oflegitimate financial activities including hedging risks, credit extensions to business, corporate fundraising, international note issuances by a wide variety of issuers and investment activities byinvestors throughout the world. They play a significant role in facilitating international trade and it is1

The JFMC is an association which includes representatives from five Japan-based institutions and five international firms active inJapanese capital markets. Its aim is to ensure that authorities deciding on regulatory initiatives that have a global impact are aware of andtake into account the effect of new regulations on Japanese capital markets. The current JFMC members are: Bank of Tokyo-Mitsubishi
UFJ, Daiwa Securities Group, Mizuho Securities, Nomura Holdings, SMBC Nikko Securities Inc, BNP Paribas, Citigroup Japan Holdings
Corp, Deutsche Bank Group, JPMorgan Securities Japan Co., Ltd. and Morgan Stanley Japan Holdings. The co-chairs of the JFMC are therepresentatives from Morgan Stanley and Nomura.
2U.S. Prudential Regulators: the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, Farm Credit Administration and the Federal Housing Finance Agency.

therefore important that a framework is in place that helps support the appropriate global use of
these instruments and puts in place appropriate risk safeguards.
We note that after the Basel Committee on Banking Supervision (BCBS) and the International
Organization of Securities Commissions (IOSCO) published their proposal on an internationalframework for margin requirements the Agencies re-opened their own comment period on their2011 proposal. The JFMC responded both to this consultation and the BCBS/IOSCO consultation.3The swaps market is global and the regulations that are put in place in one country can have animpact on global operations of an international financial institution. National regulators of course
need to implement rules to meet the conditions of home markets but also need to have a regard forthe impact they may have internationally, including an awareness that different circumstances andbusiness operations may exist. We note the Agencies have, in a number of important respects, set out
proposals that are consistent with the BCBS/IOSCO framework, which we welcome as we believe
consistency of a framework through harmonization is desirable to a well-functioning global market.
But we also note with concern that the Agencies’ regulations differ from the internationalframework in some significant ways (including the threshold for initial margins and definition ofaffiliates) and these variations are likely to have a detrimental impact on cross-border transactions.
To help sustain a well-functioning global derivative market we therefore strongly believe that
harmonization, using the BCBS/IOSCO framework, is the best way forward and would urge theAgencies to adopt such an approach.
This letter covers some specific issues that are particularly important to players in the Japanesemarket and, although we have an interest in other areas of the consultation, these are largely
covered by responses from other trade associations. We would like to highlight:···

The desirability of harmonization with other regimes including the treatment of inter-affiliatetrades;
Frequency and timing of the collecting and posting of margins, including the logistical impacts
on Asian markets; andWe are particularly concerned about the implementation and phase-in timetable. Changes tothis are particularly important for JFMC members.

2. Inter-affiliate trades
The Agencies propose that margin requirements should be applied to inter-affiliate trades but webelieve there would be no clear benefits for risk management purposes as they are required to
manage risks on a consolidated basis. The proposed rules are not consistent with what regulators inJapan and the EU have proposed and we believe a more consistent approach would be appropriate.
If initial margin is required for inter-affiliate trades then it must be segregated and posted with athird party custodian. This therefore creates a credit exposure which would otherwise not exist, asfirms manage credit risk on a group wide basis. Initial margin requirements for the inter-affiliate
trade would create a new and unnecessary layer of both credit and operational risk and appears to becounter intuitive.
Cross-border inter-affiliate swaps also need to take into account the business conditions in othercountries. We believe there is likely to be some operational constraints in collateralizing
inter-affiliate trades at subsidiaries in emerging countries due to the lack of an internal operating
infrastructure.

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http://www.japanfmc.org/activities/consultation-responses

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The proposal would also clearly constrain the overall liquidity available for financial institutions andhave detrimental effects on the financial system.
We note that the Agencies’ proposal is not consistent with the rationale that was employed by theCFTC when considering the treatment of inter-affiliate swaps for central clearing purposes. In that
context CFTC exempted certain inter-affiliate swaps, without conditioning it on exchanging initial orvariation margin, noting the “…risk mitigating characteristics of inter-affiliate swaps…” and that it “…wasguided by comments expressing concern that a variation margin requirement will limit the ability of U.S.
companies to efficiently allocate risk among affiliates and manage risk centrally”4. The JFMC believes thatinter-affiliate swaps should not be subject to initial margin and variation margin requirements, or atthe very most only variation margin should be required; there would be a greater adverse impact onliquidity if initial margin were imposed on inter-affiliate trades.
3. Frequency and timing of the collecting and posting of margins
The JFMC would like to clarify that the proposed T+1 timeframe is a requirement for a margin callrather than for a collateral settlement. Requirements for collateral settlement need to take into
account the usual settlement cycle that applies in the relevant jurisdiction as the settlement
infrastructures and the settlement cycles vary from jurisdiction to jurisdiction.
Initial margins should, in particular, be given more time to be calculated; for example either weekly or
less frequently. This will allow time to reconcile the entire portfolio and examine all the relevant
factors before making the margin call. The resolution of any initial margin dispute is likely also to be
more difficult and technical than that for a variation margin, and as a result requires more time.
T+1 settlement (and in some cases a T+1 margin call) for initial and variation margins, would cause
logistical problems for counterparties located in the U.S. and Asia because of the time zone
differences and potentially affect the capacity of swap dealers to service client hedgingrequirements.
The proposals should take into account business practices in other jurisdictions. In Asia,counterparties and especially corporates, are not familiar with daily operations to post and receive
collateral, as Credit Support Annexes (CSA) and daily collateral management practices are not as
widely employed with the financial end user counterparties (except by a small number of Tier 1 banks
and dealers) compared with the U.S. or EU. This is partly because other risk mitigating procedures
are in place, which require the less frequent posting and receiving of collateral. For example, in Japana comprehensive agreement between a client and a particular bank (‘ginko-torihiki yakujosho’) iscommon and covers credit contracts in a single collateral agreement.
The JFMC believes there should be more flexibility to the T+1 requirement for posting and collecting
margins and a useful model is the Japanese proposed regulations: that margins should be collected“promptly in the absence of justifiable causes for delay”. This flexibility would help to accommodate
important cross-border transactions.
4. Implementation schedule and phasing-in the new regime
The JFMC believes that both initial and variation margin requirements need sufficient preparation
time (such as two years) after the major markets (especially U.S., EU and Japan) have finalized theirregulations. The time taken to finalize national regulations has been delayed, and as a result the timeallowed for negotiating collateral agreements is much shorter than was expected when theinternational framework was published in September 2013. Depending on when local regulations arefinalized the lead-in time could be as short as six months.

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Federal Register, vol 78. No 70 (April 11, 2013) CFTC 17 CFR 50 Clearing Exemption for Swaps between Certain Affiliated Entities3

It will not be possible to negotiate a CSA within such a contracted time frame; negotiating new CSAs
with counterparties that require cross-border collateral arrangements are likely to involve complex
legal considerations and will need adequate time. This is particularly true within Asia where CSAs,
for the reasons described above, are often much less commonly used and it will be necessary formarket participants to be allowed to have sufficient time to meet documentation and operational
requirements.
We also believe the new regime should be implemented in phases. This will help alleviate the impact
on available liquidity, which as a result of a number of regulatory requirements will be in highdemand. It will also allow market participants more time to put in place appropriate systems.
5. Conclusion
We are grateful that the Agencies are consulting on the national implementation of margins foruncleared swaps. We welcome the progress that has been made but would urge the Agencies toreconsider their position on inter-affiliate trades, the frequency of collecting and posting margins,
the implementation and phase-in timetable and the issues raised in the annex to this letter.
If you have any queries about any of the comments outlined in this letter, please do not hesitate tocontact us for more information.
Yours faithfully,

Jonathan B. Kindred
Shigesuke Kashiwagi
Co-chairs of the Japan Financial Markets Council

Contact: Paul Hunter, Head of JFMC Secretariat (Secretary General of IBA Japan)
Telephone +81 (0)3-6205-7532
E-mail paul.hunter@ibajapan.org

4Annex
Below are some additional issues that the JFMC would like to bring to the attention of the Agencies
for their consideration.
1. Application of the U.S. regime to trades with a non-netting jurisdiction
There are a number of jurisdictions, especially those in emerging markets, in which close-out
netting agreements using standard derivatives documentation are not legally enforceable. If aparty in a nettable jurisdiction is dealing with counterparty from a non-nettable jurisdiction, they
may have to post or pay a larger amount of collateral than would be justified by the actual risk
profile because of this asymmetry. But the risks to the counterparty in the nettable jurisdiction
are likely to increase because they would not be able to net off their position and the possible
posting of higher initial margins would affect liquidity in the markets.
2. Treatment of Special Purpose Vehicles (SPVs)
The JFMC believes that SPVs should be exempt from both initial and variation margin
requirements because they do not a pose systemic risk to the financial system. Also, if margin
requirements are applied to SPVs, most, if not all, SPVs will be forced to exit the derivatives
hedging market because they don’t have ready access to assets that could be used as collateral.
Even if margin requirements were to be applied to SPVs, JFMC believes that the Aggregate
Average Notional Amount (AANA) calculation for SPVs should be conducted at the level of thefund sub-accounts (i.e. individually segregated as ‘bankruptcy remote’) for the purpose ofdetermining whether it exceeds the threshold for a material swap exposure.
An SPV may act as a securitization vehicle and issue bonds in a mutually independent series. Theunderlying assets are segregated and have no recourse to others in the same SPV. Derivative
documentation including the netting agreement is also executed, or deemed to be entered into,
for each series. The counterparty risk for such an SPV should therefore be recognized for eachseries rather than on the whole legal entity basis.
3. Use of government debt as eligible collateral for variation margin
The JFMC believes liquid government debt, such as U.S. Treasuries and Japanese Government
Bonds (JGBs), should be permitted to be used as eligible collateral for paying variation margins. If
an institution was unable to call on this liquid asset, perhaps during a time when there was a
short-term squeeze on cash liquidity, then potentially an institution could be in financial
difficulties and ultimately fail for short-term market liquidity issues rather than for solvency
reasons. This might therefore have a pro-cyclical and damaging effect on markets.
4. Use of trust accounts
The JFMC believes that initial margin should be allowed to be left for safe keeping not only with athird-party custodian but also with a trust account. A trust account is a segregated account with atrust company or a trust bank ring-fenced from insolvency of the trust company or trust bankwhich is overseen by an applicable law (for example the Trust Business Act of Japan).

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