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Margin Requirements for UncleaSwaps

Presentation to CFTC Staff January 8, 2015
© AMERICAN COUNCIL OF LIFE INSURERS

101 Constitution Ave., NW, Washington, DC 20001-2133 

American Council of Life Insurers (“ACL

 ACLI is a national trade association with 300 members repre

than 90 percent of the assets and premiums of the life insuraannuity industry in the U.S. 

 ACLI members offer life insurance, annuities, retirement plan

care insurance, disability income insurance, and reinsurance

 Life insurers provide the largest U.S. source of corporate bon

holding 20% of total U.S. corporate debt outstanding ($2.3 tr

of 2013). 

• In 2013, approximately 51% of life insurers’ $6.2 trillion of tota

held in bonds, divided between corporate bonds (38%) and gov(13%). 

• Over 37% of bonds purchased by life insurers for their general a

maturities in excess of twenty years at the time of purchase. 

Sources: ACLI tabulations of NAIC data (year-end 2013), used by permission; Federal Reserve Board, Z.1 Financial Acc

Second Quarter 2014.
© AMERICAN COUNCIL OF LIFE INSURERS

101 Constitution Ave., NW, Washington, DC 20001-2133 

Summary

 ACLI submitted comment letters on the Prudential Regulato

CFTC’s Proposed Margin Rules for Uncleared Swaps in 2014

 Uncleared swaps remain a key component of Life Insurers’ 

programs.

• More effective Asset/Liability matching (ALM)• Increased flexibility of customer product offerings• Increased hedge effectiveness

 Several aspects of the Proposed Rules have the potential to 

Insurers’ abilities to manage assets and liabilities in a prud

• Elimination of non-cash collateral for variation margin (VM)• Characterization of VM as settlement payments• Creation of significant operational risk through accelerated imp

• Lack of consistency and transparency in initial margin (IM) mod• Market fragmentation due to inconsistency with BCBS-IOSCO F
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101 Constitution Ave., NW, Washington, DC 20001-2133 

Eligible Collateral for Variation Margin (

Liability

Duration

(20-30+yr) Asset

Duration

Derivative

Duration

Policyholder Swa

Insurance Company

 Over 95% of Ins Co’s derivative usage is to hedge assets and liabilit Long duration high-quality assets can be difficult to source

 Large amounts of cash reduces portfolio income and inhibits effect

 Non risk-free assets enable Ins Co’s to offer affordable products to 

Policy Swap

* Source: 2014 NAIC Capital Markets Special Report on the Insurance Industry’s Derivative Exposure at Year-End 2012
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VM Treatment: Clearing Model

Insurance 

Company FCM CCP C

 CCP is a third party to trade, whose functions include:

• Serving as credit intermediary to the transaction• Transferring VM between parties• Sole arbiter for end of day pricing, IM and VM• Establishing minimum margin requirements uniformly fo

Clearing Model

FCM
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101 Constitution Ave., NW, Washington, DC 20001-2133 

VM Treatment: Current Uncleared Mode

Insurance 

Company Sw

 VM is not characterized as a settlement payment Collateral pledged as security interest against performanc Market Mid Prices are agreed to by both parties with disp Values do not reflect actual execution levels in a close-out 

Current Uncleared Model

Dispute Mechanism Dispute Mechanism

Variation Margin

Market Inputs
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101 Constitution Ave., NW, Washington, DC 20001-2133 

Eligible VM Requirements should be phased-in per the Initial Margin Schedul

ACLI Proposed VM Phase-In Schedule

December 2015 IM Phase-In Schedule

Broad Requirement that VM is exchanged between parties Any Restrictions on VM Collate

Incorporate EMNAs

Thresholds

Minimum Transfer Amou

 Currently, exchanging VM is broad based among market part However, the Proposed Rules will require:

• Legal documentation changes requiring bi-lateral negotiation• Changes to portfolio asset allocation• Changes to trading & collateral management systems

 Separate phase-in for IM will require multiple sets of changes
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101 Constitution Ave., NW, Washington, DC 20001-2133 

Initial Margin Models Require Transpare

Insurance 

Company Swap Dealer

 Ins Cos have no mandated transparency into IM Models Ins Cos have no specific dispute rights in regards to IM ca IM Model consistency and transparency is essential

Prudential Regulators’ & CFTC’s Proposed Uncleared Model with Initial Ma

VM Dispute Mechanism VM Dispute Mechanism

Initial Margin

Variation Margin

IM Model

Inputs

Model Parameters

Market Inputs
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101 Constitution Ave., NW, Washington, DC 20001-2133 

Initial Margin Models Require Transpare

Insurance 

Company Swap Dealer

 Advantages:

• One consistent model for all market participants• IM model transparency to all facilitates dispute resolution 

ACLI Proposed Uncleared Model with Initial Margin

VM Dispute Mechanism VM Dispute Mechanism

Initial Margin

Variation Margin

Industry 

Standard

IM Model

Market Inputs
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101 Constitution Ave., NW, Washington, DC 20001-2133 

Conclusions

 Eligible Collateral for Variation Margin should include non

collateral consistent with the BCBS-IOSCO Framework.

 Variation Margin for uncleared swaps should continue to b

characterized as a pledge/security interest.

 Any restrictions on collateral types should be phased-in co

with IM requirements. 

 Initial Margin Models should be consistent and transparen

market participants.