II SrATE SJREEr. 

November 16, 2010 

Mr. David Stawick 

Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

Via Email: SegBankruptcy@cftc.gov 

David W. Puth 

Executive Vice President 

State Street Global Markets 

State Street Financial Center 

One Lincoln Street 

Boston, MA 0211 1-2900 

Telephone: 617-664-6172 

E-mail: dwputh@statestreet.com 

Re: Pre-Proposal Comments Related to Segregation of Collateral for 

Swaps 

Dear Mr. Stawick: 

State Street Corporation ("State Street") 1 is writing in support of the Commodity 

Futures Trading Commission (the "Commission") announcement that it will seek 

additional public input, through an Advance Notice of Proposed Rulemaking 

("ANPR"), on collateral segregation rules for cleared swaps, and suggest similar 

outreach to market participants, particularly buy-side, real money managers, on 

rules related to segregation of collateral for non-cleared swaps. We believe these 

segregation rules, required under Section 724 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act ("Dodd-Frank") will be critical to the 

achieving the swaps market related goals of Dodd-Frank, and urge the 

Commission to fully consider the issues described below. 

1 With over $20 trillion of assets under custody and administration and $ 1.9 trillion of 

assets under management at September 30, 20 10, State Street is a leading specialist in meeting the 

needs of institutional investors worldwide. Our customers include mutual funds, collective 

investment funds and other investment pools, corporate and public retirement plans, insurance 

companies, foundations, endowments and investment managers. including the United States, we 

operate in 25 countries and more than I 00 geographic markets worldwide. We conduct our 

business primarily through our principal banking subsid iary, State Street Bank, which u·aces its 

beginnings to the founding of the Union Bank in 1792. State Street Bank's current charter was 

authorized by a special act or the Massachusetts Legislature in 1891, and its present name was 

adopted in 1960. 
Mr. David Stawick 

November 16,2010 

Page 2 of 6 

I. Buy-Side Concerns Regarding Segregation and Protection of 

Collateral and the Need or Public Input Prior to Issuing a Rule 

Proposal 

A. Buy-Side and Systemic Risk Concerns 

State Street acts as service provider to a broad range of institutional, buy-side 

market participants, who are likely to become counterparties to transactions in the 

new swaps environment. Based upon our discussions with these clients, we 

believe that many buy-side participants have significant concerns regarding 

anticipated Commission rulemaking with respect to segregation and protection of 

customer colJateral for cleared and non-cleared swaps. Despite considerable 

efforts by the Commission, including a public roundtable on customer collateral 

protection on October 22, 2010, it appears many market participants have not yet 

focused upon the impact of potential Commission rulemaking. While the October 

22 roundtable was highly informative, it revealed a significant need for additional 

data and other input from the public before a rule is proposed. 

The development of appropriate rulemaking initiatives for segregation and 

protection of customer collateral - for both cleared and non-cleared swaps - is 

critical to the success of Dodd-Frank in reducing systemic risk and avoiding a 

recurrence of the swaps market related issues that contributed to the recent market 

crisis. Specifically, from the perspective of our buy-side customers, segregation 

rules that do not increase protection of collateral posted by a buy-side 

counterpru1.y to a dealer and minimize operational inefficiencies would be 

particularly troubling. As a result, we suggest that, the Commission seek 

additional public input on numerous issues related to both cleared and non-cleared 

swaps. Addressing these issues to the satisfaction of all participants will be a key 

element in the ultimate success of the new swap marketplace. 

B. Specific Concerns for Cleared and Non-Cleared Swaps 

For cleared trades, there is a substantial risk that the cleared swaps market will not 

be viewed by the buy-side as viable, if the clearing system that is developed under 

Commission rules does not address the concerns of market counterparties arising 

after the Lehman Brothers bankruptcy. While strong prudential and other rules for 

clearing members and clearinghouses are essential, the new regulatory system 

cannot succeed without high levels of protection for collateral posted by 

counterparties as well. Today, the collateral posted by market counterparties on a 

bi-lateral basis, while subject to other risks, are not subject to the risk of default of 

other market participants that enter into transactions with swap dealers, and it is 

imperative to replicate the same level of protection in a cleared environment. 

Otherwise, the buy-side will be reluctant to participate in the market, and the U.S. 

2 
Mr. David Stawick 

November 16, 2010 

Page 3 of 6 

swaps market may not develop robustly, in particular compared to non-U.S. 

markets. In addition, a market in which buy-side pruticipants are not comfortable 

pruticipating would lead to reduced investment options for U.S. pension plans and 

mutual fund investors. 

For non-cleared swaps, insufficiently robust implementation of the third-party 

segregation option under Dodd-Frank could signal lack of regul atory support for 

market movement towards the countcrparty negotiation of strong collateral 

segregation treatment, and encourage use of collateral management practices that 

contributed to the recent financial crisis. 

For both cleared and non-cleared swaps, we believe the use of tri-party custody 

arrangements could, with appropriate rulemaking, provide buy-side counterparties 

higher levels of protection and greatly increase operational efficiencies compared 

to the existing swaps environment, where dealers are allowed broad use of 

comingled customer assets, or compared to a new structure modeled after current 

practices of Futures Commission Merchants ("FCM"), where customer assets are 

held separately from the FCM, but comingled with other customers.2 

Incorporating viable options for third-party custody (including protection of 

posted collateral in the event of another client default or the bankruptcy of the 

FCM) into the new regulatory environment should ameliorate growing buy-side 

concern over implementation of the Dodd-Frank swaps mandate and the resulting 

market environment for investing in swaps. 

II. Scope of Recommended Advance Notice of Proposed Rulemaking 

To determine the impact on investors that use the swaps market, the Commission 

should seek comment on a range of possible segregation and custody 

arrangements for both cleared and non-cleared swaps. Given the importance of 

segregation of collateral under the new market structure envisioned by DoddFrank, it is imperative for the Commission to seek additional buy-side input in 

relation to the following issues. 

2 We understand that the Commission has previously limited the use of tri-party custody 

arrangements. See Commodity Futures Trading Commission , Amendment of Financial and 

Segregation Interpretation No. I 0, 70 FR 24768 (May 22, 2005) (the "Interpretation 10 

Withdrawal") (withdrawing an interpre tatio n that permitted the conditional usc o f c ustodia l 

accounts for futures). However, we no te that there have been significant changes in the market 

si nce the Commission issued the Interpretatio n I 0 Withdrawal, including the financial crisis and 

the enactme nt of Dodd-Frank. Thus, for the reasons discussed in this letter, we believe the 

Commission should reconsider its prior action. 

3 
Mr. David Stawick 

November 16, 2010 

Page 4 of 6 

(i) Consistency between cleared and non-cleared swaps. 

In the aftermath of the Lehman Brothers bankruptcy, buy-side market 

participants have become increasingly focused on the counterpatty risk 

presented by their relationships with swap dealers. Many sophisticated 

participants currently negotiate tri-party custody arrangements for noncleared swaps as a means to mitigate the risk of default by their swap 

counterparties. 3 The Commission should seek the views of buy-side 

participants on the use of tri-party custody arrangements for both initial 

and variation margin to mitigate risks in the swap market and the effect on 

their participation in the cleared swaps market if they arc not permitted to 

use tri-patty custody arrangements, as is common in the over-the-counter 

("OTC") market. The Commission should ask whether there ru·e 

efficiencies in leveraging, with respect to swaps, the operationally 

efficient tri-party custody arrangements that are used today in various 

markets, such as the OTC swaps mru·ket. For example, would monitoring 

of collateral be enhanced by using tri-party custody arrangements? Could 

existing systems for communications and monitoring of tri-party 

arrangements be applied to the swaps market? If so, would permitting 

buy-side participants to leverage these efficiencies encourage robust buyside participation in the redesigned swaps market? 

(ii) Consistent treatment of cleared and non-cleared swaps may promote 

risk management techniques currently employed in the swap market 

Over the past five years, buy-side firms have come to rely on more 

dynamic portfolio margining regimes to calculate their collateral 

requirements. Under these dynamic mru-gining regimes, collateral changes 

daily based on changes in one's portfolio, independent market prices, and 

overall market conditions. Portfolio mru-gining regimes ascribe collateral 

at a portfolio level; consequently, this advance in risk management would 

be curtailed if mru-ket participants ru-e required to calculate collateral 

sepru-ately and under distinct requirements on cleared and non-cleared 

swaps with the same dealer. The Commission should seek commentary on 

whether portfolio mru-gining regimes reduce overall risk in the system by 

creating the right incentives for market participants to assemble balanced, 

nettable portfolios at their counterparties and, if desirable for risk 

3 See, e.g., ISDA, Managed Funds Association, and SIFMA, Independent Amounts White 

Paper 7-10 (Oct. 2009) (discussing the use of tri-party arrangements in the over-the-counter 

market). 

4 
Mr. David Stawick 

November 16,2010 

Page 5 of6 

management purposes, how such arrangements can be promoted as part of 

the Commission's rulemaking. 

(iii) Creating a Meaningful Third Party Custody Option for Un-Cleared 

swaps. 

The buy-side views as essential the requirement in Dodd-Frank for buyside counterparties to be able to elect third party custody of initial margin 

for non-cleared swaps. The Commission should exercise rulemaking 

authority under this provision of Dodd-Frank to make this right 

meaningful and robust. Among other questions, the Commission should 

seek buy-side commentary on the cost or efficiency benefits of permitting 

a buy-side counterparty, as opposed to the dealer, to designate the thirdparty custodian, and bow best to ensure that the third-party custody option 

is meaningful, such as through mandatory non-discriminatory pricing, or 

rules that require execution and collateral management to be separately 

priced. 

III. Conclusion 

We believe the Commission will benefit from market participants' input on 

whether tri-party custody anangements are essential for a robust swaps market. 

Specifically, the Commission should seek public input on the issues discussed 

above to determine buy-side perspectives on the relative advantages of the 

emerging regulatory environment for the swaps market in the U.S. and around the 

world. We believe that seeking additional guidance on these and other issues will 

foster market acceptance, including by buy-side participants, of margin practices 

and protection in the redesigned swaps market. Market acceptance of the 

regulatory structure for the new swaps market is essential to further the purposes 

VII of Dodd-Frank.4 

We believe the Commission's plans to issue an ANPR in connection with cleared 

swaps is a step in the right directi.on, and urge the Commission to seek similar 

additional public input in relation to segregation of collateral for non-cleared 

swaps. 

* * * 

1 See 156 Cong. Rec. S 5902, 5921 (daily ed. July 15, 20 I 0) (Statement of Senator 

Blanche Lincoln: "The mandatory clearing and trading of certain swaps and security-based swaps, 

along with real-time price reporting. is at the heart of swaps market reform.") 

5 
Mr. David Stawick 

November 16, 2010 

Page 6 of 6 

State Street appreciates the opportunity to provide our views regarding the 

Commission's consideration of segregation of collateral. We would be happy to 

discuss the foregoing at your con vcnience. 

cc: Gary Gensler, Chairman 

Michael Dunn, Commissioner 

Jill E. Sommers, Commissioner 

Bart Chilton, Commissioner 

Scott D. O'Malia, Commissioner 

Sincerely yours, 

David W. Puth 

Executive Vice President, 

State Street Corporation 

Ananda Radhakrishnan, Director, Division of Clearing and Intermediary 

Oversight 

Robert B. Wasserman, Associate Director, Division of Clearing and 

Intermediary Oversight 

6