MANAGED FUNDS ASSOCIATION 

The Voice or the Glob.1! Allernative Inycslmenl Industry 

WASIIiNGTON. DC I NEW YOIlK 

April 11,2011 

Via Electronic Submission: http://comments.cftc.gov 

David A. Stawick 

Secretary of the Commission 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

Re:	 RIN No. 3038-AC98: Notice of Proposed Rulemaking on Requirements for 

Processing, Clearing, and Transfer of Customer Positions 

Dear Mr. Stawick: 

Managed Funds Association ("MFA,,)l appreciates the opportunity to provide comments 

to the Commodity Futures Trading Commission (the "Commission") on its proposed rules on 

"Requirements for Processing, Clearing, and Transfer of Customer Positions" (the "Proposed 

Rules"i related to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the 

"Dodd-Frank Act,,). 3 MFA strongly supports the intent of the Proposed Rules "to expand 

access to, and to strengthen the financial integrity of, the swap markets" by establishing uniform 

standards for submission of transactions to, and prompt processing, submission and acceptance 

of swaps eligible for clearing by, a derivatives clearing organization ("DCO,,).5 Further, we 

strongly support the Commission's goal of preventing unnecessary delay and market disruption 

by requiring DCOs to promptly transfer customer positions from a carrying clearing member to 

another clearing member. 6 Accordingly, we respectfully provide the following suggestions on 

the Proposed Rules, which we believe will assist the Commission in adopting final rules that help 

to achieve these goals. 

MFA is the voice of the global alternative investment industry. Its members are professionals in hedge 

funds, funds of funds and managed futures funds, as well as industry service providers. Established in 1991, MFA is 

the primary source of information for policy makers and the media and the leading advocate for sound business 

practices and industry growth. MFA members include the vast majority of the largest hedge fund groups in the 

world who manage a substantial portion of the approximately $1.9 trillion invested in absolute return strategies. 

MFA is headquartered in Washington, D.C., with an office in New York. 

76 Fed. Reg. 13101 (Mar. 10, 20 II) (the "Proposing Release"). 

Pub. L. 111-203, 124 Stat. 1376 (20 I0). 

Proposing Release at 13103. 

The Commission has not yet promulgated final rules regarding the requirements for registration as a DCO. 

Thus, for the remainder of this letter, when we refer to DCOs, it shall mean an entity likely to be registered as such 

an entity based on the Commission's current proposed rules. 

Proposing Release at 13102. 

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Mr. Stawick 

April 11,2011 

Page 2 of 11 

I. Proposed §39.12(b)(7): Timeframe for Clearing Transactions 

Proposed §39.12(b)(7) would require DCOs to comply with specified timeframes for 

processing and clearing contracts, agreements and transactions that vary depending on the 

execution method used and whether or not the trade is subject to mandatory clearing. 7 MFA 

strongly supports the Commission's proposal for real-time clearing acceptance. First, because 

real-time acceptance gives market participants certainty of clearing immediately following 

execution, thereby allowing them to hedge more efficiently and maintain balanced risk 

management. 8 Second, it is a critical component to the implementation of broad, mandatory 

clearing. Third, because real-time acceptance is essential to electronic trading, palticularly limit 

order book trading. Lastly, because real-time acceptance promotes open, competitive markets 

and access to best execution by giving parties to a cleared trade immediate certainty that they 

will face the DCO, thus eliminating the need to negotiate individual credit agreements with each 

of their counterparties. 

Given the benefits of real-time acceptance, we respectfully request that the Commission 

impose the same real-time acceptance timeframe for all trades submitted for clearing, regardless 

of the execution method used or whether or not the trade is subject to mandatory clearing. We 

are concerned that if a customer faces any delay in a DCOs acceptance of any trade, it will lead 

the customer to trade with fewer counterpalties, typically the largest dealers that pose lower 

long-term counterparty credit risk or with which customers have a bilateral International Swaps 

and Derivatives Association, Inc. ("ISDA") master agreement in place. In contrast, as the 

Commission has acknowledged, real-time acceptance benefits the market because if a customer 

has clearing certainty and there is no risk of bilateral counterparty credit risk exposure, the 

customer will be able to transact with any competitive, eligible counterparty, without the need 

for extensive documentation and credit intermediation or other credit arrangements. 9 Therefore, 

adopting real-time acceptance timeframes that contravene this benefit would undermine the 

Proposed §39.12(b)(7) specifies that: 

•	 for transactions executed on a swap execution facility ("SEF") or designated contract market ("DCM"), the 

Dca must accept for clearing, immediately upon execution, all transactions listed for clearing by the DCa; 

•	 for swaps not executed on a SEF or DCM and subject to mandatory clearing, a Dca must accept for 

clearing, upon submission to the DCa, all swaps that are listed for clearing by the DCa; and 

•	 for swaps not executed on a SEF or DCM and not subject to mandatory clearing, a DCa must accept for 

clearing, no later than the close of business on the day of submission to the DCa, all swaps the Dca lists 

for clearing. 

Real-time acceptance for clearing is essential because when a customer executes a trade, it may be part of a 

larger strategy involving related or offsetting trades. The customer must know with certainty that its trade will clear 

since it will immediately enter into related transactions in reliance on the clearing of that trade. 

9 Proposing Release at 13111. As noted by Commission Chairman Gary Gensler, we agree that the practices 

in the futures markets should be a model, and that uniform standards for prompt processing, submission and 

acceptance for clearing of all swaps eligible for clearing (not only those for which clearing is mandatory) will allow 

the documentation framework to closely resemble the futures construct. In Section V of this letter, we address 

specific suggestions relating to documentation in the context ofthe Proposed Rules. 

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Mr. Stawick 

April 11,2011 

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fundamental policy goals of clearing by limiting optimal risk management, competitive liquidity 

and open access to best execution. 

As a result, we recommend that the Commission modify the proposed timeframes so that, 

as long as a Dca receives a matched trade submission according to its messaging requirements 

which the Commission should require to be reasonable, standardized and non-discriminatory 

the Dca would be required to process each trade for acceptance or rejection for clearing in realtime. lO We understand that from the DCa's perspective, there is no practical difference: (i) 

between processing a trade that is subject to mandatory clearing and processing a trade that the 

parties clear voluntarily; (ii) between processing a SEF-executed trade and processing a trade 

executed bilaterally using a voice-based system; or (iii) for processing of particular types of 

trades, such as block trades. II Delay in processing swaps not subject to mandatory clearing will 

generally deter parties from clearing them, and thus, slow the progressive expansion of the 

product set and volumes of cleared trades. Therefore, we believe adopting rules that create such 

unnecessary distinctions will undermine the Commission's goal of encouraging central clearing. 

In order to accept a transaction for clearing once submitted, a DCa confirms that the 

transaction is in an instrument eligible for clearing and that the transaction otherwise conforms to 

its guidelines, and then the DCa ascertains whether the transaction is within the credit limits that 

apply to the counterparties to the trade. For a trade between two direct members of the DCa, the 

Dca should at all times have the information necessary to confirm credit eligibility in real time, 

since the DCa itself establishes and monitors the credit limits of its direct participants. 

When, however, one or both of the counterparties is an indirect clearing participant, the 

DCa must also confirm that the trade is within the indirect patiicipant's credit limits as 

established and adjusted from time to time by that indirect participant's clearing member. There 

are currently two approaches for enabling the DCa to perform this customer credit verification: 

(1)	 under one approach, each clearing member maintains (and may periodically 

adjust) its credit limits for each of its customers through a confidential facility at 

the DCa. When a trade is submitted to which the customer is a party, because the 

limits are maintained with the DCa, the DCa can verify in real time that the trade 

is within that customer's limits as determined by its clearing member as well as 

confirm that the clearing member is also within its aggregate limits with respect to 

the DCa. 

10 We believe that if parties execute a swap that they want cleared (whether submission for clearing is 

voluntary or mandatory), the swap is binding at its execution subject to clearing, and if the DCa rejects it, there is 

no trade. If clearing of such swap is not mandatory, the transacting parties could contract in advance to fallback to a 

bilateral swap in the event the DCa rejects the swap for clearing, but such a fallback arrangement is at the option of 

the parties and should not be a prerequisite to submission for clearing. 

II We appreciate that certain investment managers may need to engage in a second process to manage 

allocations (e.g., for bunched trades). However, proposed §39.l2(b)(7) focuses on DCa timing requirements, and 

for a Dca there should be no difference between an investment manager allocating portions of a trade pursuant to a 

separate agreement with its clearing member and an investment manager allocating pOltions of a trade to multiple 

clearing members as part of a separate allocation process. 

­

­

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Mr. Stawick 

April 11,2011 

Page 4 ofll 

(ii)	 under an alternate approach, in order to verify that the customer's trade is within 

the limits set by its clearing member, the DCa is constrained to dispatch a 

message to the clearing member. The clearing member, upon receiving the 

message in its systems, will confirm whether the new trade is within the 

customer's limits, and send a return message to the Dca either confirming 

clearing member acceptance or rejecting it. 

This latter approach can be, and currently in certain instances is, accomplished in real time 

through automation. However, because this processing step is outside of the DCa's control, it 

creates the risk that, absent affirmative requirement, processing could be held up at the clearing 

member and introduce delay and uncertainty into the clearing acceptance process. 

Accordingly, MFA submits that to minimize the time between trade execution and 

clearing, and specifically to ensure compliance with the Proposed Rules' real-time acceptance 

requirements, the relevant clearing member should be required through real-time automation to: 

(i) immediately accept or reject a trade that its customer has submitted/affirmed for clearing, 

whether the request is routed from the customer, the SEF or the DCM; and (ii) immediately 

communicate its acceptance or rejection of the trade back to the DCa. 

II.	 Proposed §39.12(b)(4): Participant Eligibility 

Core Principle C requires each DCa to establish appropriate standards for determining 

the eligibility of agreements, contracts or transactions submitted for clearing. 12 In response, the 

Proposed Rules include new §39.12(b)(4), which would prohibit a DCa from requiring one of 

the original executing parties to a swap to be a clearing member in order for the transaction to be 

eligible for clearing. MFA strongly supports proposed §39.12(b)(4) and believes that the 

Commission should further strengthen and expand this provision. Specifically, we recommend 

that the Commission modify the proposed rule to prohibit Dcas from adopting rules or engaging 

in conduct that is prejudicial to indirect clearing members as compared to direct clearing 

members with respect to eligibility or the timing of clearing or processing of trades generally. 

We believe that when an indirect clearing member trades with another indirect clearing member, 

the clearing process should be identical and as prompt as when one of the parties is a direct 

clearing member, so long as the transaction satisfies the relevant DCa's rules, requirements and 

standards otherwise applicable to such trades. Moreover, providing such parity would allow new 

liquidity providers to efficiently and effectively enter into and compete within the market. 

III.	 Proposed §39.15(d): Transfer of Customer Positions 

Under Core Principle F,13 each DCa must: (i) establish standards and procedures that are 

designed to protect and ensure the safety of its clearing members' funds and assets; (ii) hold such 

funds and assets in a manner that minimizes the risk of loss or delay in the DCa's access to the 

12 Core Principle C, as amended by the Dodd-Frank Act, Section 5b(c)(2)(C) of the Commodity Exchange 

Act ("CEA"); 7 U.S.C. 7a-l(c)(2)(C). 

13 Core Principle F, as amended by the Dodd-Frank Act, Section 5b(c)(2)(F) of the CEA; 7 U.S.C. 7a1(c)(2)(F). 

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Mr. Stawick 

April 11,2011 

Page 5 of 11 

assets and funds; and (iii) only invest such funds and assets in instruments with minimal credit, 

market and liquidity risks. Proposed §39.15(d) seeks to implement Core Principle F by requiring 

a DCa, upon customer request, promptly to transfer customer positions and related funds from 

one clearing member to another, without requiring the close-out and re-booking of the positions 

prior to the requested transfer. 14 

MFA emphatically supports proposed §39.15(d) and strongly believes that facilitating a 

customer's ability to freely transfer all or a pOltion of its pOltfolio and associated margin 

between clearing members at the same DCa will have beneficial results, including: 

(i)	 allowing customers to use more than one clearing member to protect themselves 

against clearing member default; 

(ii)	 enhancing customers' ability to transfer positions, in whole or in part, if the 

customer perceives that its current clearing member is under stress (e.g., at risk of 

default or insolvency), thereby mitigating the disruption caused by any eventual 

default of that clearing member; 

(iii)	 allowing customers to manage their portfolios efficiently and achieve optimal 

compression; and 

(iv)	 fostering competition among clearing members for clearing services. 15 

In furtherance of the principle of efficient portability in proposed §39.15(d), we 

recommend that in the final rules the Commission expressly prohibit Dcas' rules from giving 

ceding clearing members the right to refuse the DCa's instruction to transfer all or a portion of a 

customer's portfolio in any situation, even if such clearing member is not in default. We agree 

that such transfer should be allowed only if all positions not transferred by the customer: (i) 

remain "appropriately margined" (i.e., the customer has posted margin consistent with the 

margin required by the DCa, using either the same methodology utilized previously or such 

other methodology as otherwise agreed between the customer and its clearing member); and (ii) 

there is no ongoing event of default of the customer that would give the ceding clearing member 

specific rights, in whole or in part, over the positions and margin being transferred. In addition, 

we suggest that the Commission mandate that the DCa rules must specify that upon a requested 

transfer, the DCa will simultaneously transfer margin along with the related positions, and 

prohibit ceding clearing members from imposing extraordinary charges on transfers that could 

act as deterrents or hidden consent rights. 

14 Proposing Release at 13102, in which the Commission states that "promptly" means "as soon as possible 

and within a reasonable period of time" and that the Commission's intention is to conform the Proposed Rules to 

current futures industry standards, where the timeframe is typically no more than two business days. 

t5 [d. at 13111. Commission Chairman Gary Gensler recognized some of these benefits in the Proposing 

Release, where he stated that the requirement for prompt and efficient transfer of customer positions between 

clearing members would promote efficiency and provide end users the benefit of greater competition amongst 

clearing members. 

600 14th Street, NW, Suite 900 Washington. DC 20005 Phone: 202.730.2600 r:ax: 202.730.260\ wlVlV.l1lunugedlll11ds.org 
Mr. Stawick 

April 11, 2011 

Page 6 of 11 

This framework is consistent with that of futures clearing currently,16 and transferring 

margin at the same time as the transfer of the related positions would reduce costs, limit the 

operational risk to the customer and eliminate the possibility that the customer would be called to 

re-post margin with respect to the transferred positions prior to the transfer or return of margin it 

previously posted.17 Therefore, we believe that the final rules must specifically set forth these 

additional measures to ensure facility of transfer and to reverse the current practice at certain 

clearing organizations of requiring clearing member consent, which creates delay or imposes 

added costs on such transfer requests. 

The Commission has fUl1her sought comment as to whether "promptly" provides 

adequate guidance with respect to the time period within which DCOs would be required to 

transfer customer positions or whether another descriptive term or phrase is more appropriate. 18 

Recognizing that the Commission prefers not to specify a particular timeframe,19 we would urge 

the Commission to mandate that the DCO must make such a transfer within the shortest 

commercially reasonable time period, i.e., "as soon as technologically practicable". Given that 

the Commission opted not to specify a particular timeframe in recognition of future 

technological advances that will allow DCOs to transfer positions more quickly/o it makes sense 

to connect DCOs' ability to transfer customer positions to existing technological constraints. 

Mandating that transfers must occur as soon as technologically practicable will also allow the 

market to realize more fully the benefits (discussed above) of liberalizing the transfer rules. 

IV. Proposed §23.506: Submission of Swaps for Processing and Clearing 

Proposed §23.506 would require swap dealers ("SDs") and major swap participants 

("MSPs") to route swaps that are not executed on a SEF or DCM to a DCO in a manner that is 

acceptable to the DCO for the purposes of risk management. Proposed §23.506 would further 

require SDs and MSPs to coordinate with DCOs to facilitate prompt and efficient processing in 

accordance with proposed regulations related to the timing of clearing by DCOs, and that section 

sets forth required timeframes for a SD, MSP, FCM, SEF and DCM to submit contracts, 

agreements or transactions to a DCO for clearing.21 MFA generally supports these guidelines. 

16 See e.g.. Id. at 13107. With respect to other aspects of proposed §39.l5(d), such as the time period within 

which DCOs must effect such transfers, the Commission has indicated (as discussed in footnote 9) that the futures 

industry is an appropriate model for this new transfer regime. We agree. We understand that, under normal 

circumstances, there are no operational or other reasons why a DCO could not execute a portability request on a 

same day or overnight basis, as is standard practice in futures markets. 

17 We note that ifDCOs are not required to transfer margin along with the related positions, time delays could 

result between when customers are required to post margin with the new clearing member and when the original 

clearing member returns the customer's outstanding margin amounts. Concurrent transfer of the positions and 

related margin would eliminate this need to have duplicative posting of collateral in respect of the same positions. 

18 Proposing Release at 13107. 

19 Id. 

20 Id. The Commission stated that this preference is due to the belief that, as technology evolves, "it is likely 

that the transfer of customer positions and related funds can be accomplished more quickly and with greater 

operational efficiency". 

Proposed §23.506 states that: 

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21 
Mr. Stawick 

April 11,2011 

Page 7 of 11 

However, to minimize the time between trade execution and clearing and to ensure compliance 

with the proposed real-time acceptance requirements, the Commission should promulgate 

specific rules that ensure timely submission to DCOs of all trades not executed on a SEF or 

DCM (making allowances for after-hours trade submission protocols).22 Specifically, the final 

rules should stipulate timeframes that are as shott as technologically practicable, so that as 

technology and trade flows become more established and efficient the timeframes will compress. 

In addition, we believe that real-time acceptance (as discussed in Section I) and 

streamlined documentation procedures (as discussed in Section V) are essential to the 

development of SEFs. 23 We think it is important to promote SEFs as desirable venues because 

we believe they will be essential to the continued development of organized markets for the 

execution and trading of swaps. Therefore, to encourage SEF development, we recommend that 

the Commission require DCOs to support real-time acceptance of transactions executed on SEFs 

by mandating that DCOs must have universally disciplined, real-time processes that take 

standard messages regarding block trades from SEFs, complete the clearing acceptance process 

and deliver real-time messages back to the SEFs that the DCO has accepted or rejected the trade. 

V.	 Recommended Rulemaking Relating to Cleared Swap Documentation and 

Impediments to Best Execution and Competitive Markets 

As noted above, real time acceptance for clearing eliminates the need for credit 

arrangements between transacting counterparties, since they immediately face the DCO and not 

each other. The elimination of the need for individually negotiated bilateral credit arrangements 

•	 for swaps subject to mandatory clearing, an SD or MSP must submit the swap for clearing as soon as 

technologically practicable following execution, but not later than the close of business on the day of 

execution; 

•	 for swaps not subject to mandatory clearing, if cleared, such swaps would have to be submitted for clearing 

not later than the next business day after execution of the swap or the agreement to clear, if later than 

execution; and 

•	 SEFs and DCMs would submit swaps for clearing immediately upon execution. 

22 In this regard, we believe that both patiies will enter the details of the vast majority of non-SEF executed 

trades into automated trade capture systems at essentially the same time that they execute the trade. 

Also, by way of analogy, we note that many futures exchanges require submission of the details of any off-exchange 

or block trades within minutes of execution. See e.g., Chicago Mercantile Exchange ("eME") Rule 526, which 

requires the seller in a block trade to repOli the trade to the CME "within five minutes of the time of execution; 

except that block trades in interest rate futures and options executed outside of Regular Trading Hours (7:00 a.m. 

through 4:00 p.m. Central Time, Monday through Friday on regular business days) and Housing and Weather 

futures and options must be reported within fifteen minutes of the time of execution. The report must include the 

contract, contract month, price, quantity of the transaction, the respective clearing members, the time of execution, 

and, for options, strike price, put or call and expiration month." 

23 See also MFA's comment letter to the Commission dated March 8, 2011, in response to the Commission's 

proposed rules on "Core Principles and Other Requirements for Swap Execution Facilities", 76 Fed. Reg. 1214 (Jan. 

7,2011), available at: 

http://www.munagedfllnds.org/downlouds/CFTC.Swap.Execlition.Facilities.RlIles.Final.MFA.Letter.pdf, in which 

MFA supports the Commission's proposed regulations that would permit a broad range of SEF trading platforms. 

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Mr. Stawick 

April 11, 2011 

Page 8 of 11 

is one of the significant systemic benefits of clearing, as it allows participants to seek out 

liquidity and best execution from the widest universe of transacting counterparties and eliminates 

barriers to entry for new eligible participants in a market. Further, because the clearing member 

faces only the customer and the Dca once the trade is cleared, the clearing member has no need 

to know the identity of the customer's counterparties, and therefore, should not exercise any 

restriction or influence over the customer's freedom to transact with competing price providers. 

Long-established cleared markets, including markets for cleared swaps, do not require 

credit arrangements between transacting parties, again since counterparty credit risk is managed 

through the clearing framework. In a cleared market, the only documentation necessary for a 

market participant to enter into cleared trades is: 

(i)	 a clearing arrangement, which is effectively a single credit arrangement where 

either the participant's qualification is as a direct clearing participant under the 

credit guidelines of the DCa or its qualification is as a customer of one of the 

DCa's clearing members. From a documentation perspective, these 

arrangements take the form of the direct participant's clearing membership 

agreement with the Dca on the one hand, or the indirect participant's clearing 

agreement with its clearing member on the other; and 

(ii)	 adherence to the DCa's rules that govern the terms of the specific cleared 

transactions as well as the functioning of the cleared market and responsibilities 

of its participants, including in a default scenario. 

In bilateral, non-cleared markets, counterparties can transact only with parties with whom 

they have negotiated specific credit agreements, either directly on a bilateral basis or trilaterally 

with the involvement of a guarantor or credit intermediary (e.g., as in derivatives prime 

brokerage). Negotiation and ongoing administration of such arrangements is time-intensive, 

costly and necessarily limits the number of transacting counterparties available to a participant. 

These arrangements also tend to concentrate trading activity amongst those firms that are 

deemed the most secure from an individual credit perspective. Since credit intermediation is no 

longer relevant in a cleared market because the DCa performs this function centrally, such credit 

and documentary burdens should no longer pel1ain to a cleared market. 

Therefore, we believe that, consistent with current practice in other cleared markets (e.g., 

the cleared energy swap markets), the cleared over-the-counter swaps markets should not require 

any agreement between transacting counterparties as a precondition to enter into a cleared swap. 

The Commission's proposed requirement for real-time acceptance absence of a need for such an 

agreement is underscored by the Commission's proposed requirement for real-time acceptance, 

which effectively eliminates credit exposure concerns between the counterparties. 

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Mr. Stawick 

April 11,2011 

Page 9 of 11 

In our view, two areas that might appropriately be the subject of an optional bilateral 

24 agreement between transacting counterparties are the following: (l) the allocation of breakage

and (2) the possible fallback to a bilateral agreement if a trade fails to clear, where permitted. In 

the future, with the implementation of real-time acceptance for clearing, it should not be 

necessary to address these issues in a bilateral agreement because few (if any) trades should fail 

to clear. Moreover, in the rare case where a trade does fail to clear, breakage should be minimal 

given the immediate notice of such failure (and a fallback to a bilateral trade may no longer be 

permitted). However, we believe that such bilateral arrangements could be useful during a 

transition phase, as real-time acceptance becomes standard and cleared products are 

progressively transitioned from voluntary clearing to mandatory clearing, provided such 

arrangements can be put in place without unduly restricting participants' access to best execution 

through establishment of a simple industry standard agreement template, such as the form 

currently being drawn up by an industry working group.25 

It has been proposed, however, that there should also be a form of credit arrangement that 

should apply even to cleared swaps cleared in real-time. This arrangement would require a 

customer seeking to transact with an SD (the "Executing Counterparty") to enter into a 

"trilateral" guaranteed clearing arrangement amongst the customer, the Executing Counterparty, 

and the customer's clearing member as a precondition to entering into a cleared swap. Some 

dealer firms have maintained that this arrangement is necessary to manage the risk that the 

customer: (i) may cause a trade to be rejected for clearing (e.g., by breaching a credit or position 

limit), and (ii) then default on its obligations, if any, to pay breakage. The "trilateral" agreement 

requires the customer's clearing member to establish a specific limit for the customer's 

transactions with the Executing Counterparty, and to declare that it will accept for clearing such 

transactions that fall with this specific sublimit for that party. If the clearing member breaches 

its commitment to accept a trade, the Executing Counterparty will have recourse to the clearing 

member and the customer for breakage owed. Accordingly, this "trilateral" arrangement 

represents a form of guarantee by the clearing member to pay breakage to the Executing 

Counterparty in the event the customer breaches its obligation to do SO.26 

24 "Breakage" refers to losses incurred by a party when a Dca rejects its counterparty's side of the trade for 

clearing and the counterparty cancels the trade because it engaged in hedging or related trades in the expectation that 

the trade would clear. 

25 We reemphasize that such a "bilateral" transaction document must remain optional, and no Dca should be 

permitted to require it as a precondition to submission for clearing at the Dca. In other words, if parties execute a 

swap transaction that is to be cleared (whether submission for clearing is voluntary or mandatory), the swap is 

binding at its execution subject to clearing, and if the Dca rejects it, there is no trade (absent a fallback arrangement 

agreed between the transacting parties). Again, if clearing of such swap is not mandatory, the transacting parties 

could contract in advance to fallback to a bilateral swap in the event the swap is rejected for clearing, but such a 

fallback arrangement is at the option of the parties, and the parties must not be obliged to enter into an ISDA or 

similar agreement as a prerequisite to submission for clearing. 

26 Other cleared markets do not require such arrangements. First, all participants are strongly deterred from 

exceeding their limits, since they are likely to be shunned as trading counterparties thereafter. Second, clearing 

systems have procedures typically to do all that is possible to clear the trade - for example, the customer's clearing 

member can call increased margin as a condition for clearing a trade that exceeds a limit. Third, Executing 

Counterparties are able to undertake credit diligence on their counterparties. FOUlih, consistent with the Proposed 

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Mr. Stawick 

April 11,2011 

Page 10 of 11 

The mechanics of the "trilateral" guarantee require that there no longer be anonymity 

between a clearing member and its customer's trading counterparties, since the clearing member 

is being required in effect to individually approve that each of its customer's trades with the 

Executing Counterparty are within the Executing Counterparty's sublimit. As a result, such 

arrangements require the clearing member to limit the range of its customer's counterparties 

(rather than allowing the customer to utilize its full clearing credit limit to transact with 

whomever it chooses) and could force the customer to execute with the clearing member's 

trading desk affiliate (where greater information exchange with the clearing member would 

facilitate flexibility with limits), both of which would have an anti-competitive effect that 

impairs the customer's access to best execution. 

MFA believes that real-time acceptance eliminates the need for these arrangements?7 

Indeed, such arrangements likely conflict with the real-time acceptance requirement as they 

introduce a need for clearing members to evaluate each customer transaction not only against the 

customer's overall credit limit, but also against specific limits set for each of the customer's 

permitted Executing Counterparties. When a customer seeks to enter into a transaction that is 

within its overall limit, but exceeds specific sub-limits, it will be obliged to seek the permission 

of its clearing member through a manual process that disrupts automated trade processing and 

introduces delay in its efforts of securing the best available price in the market. As observed, 

such arrangements are not required or customarily used in other cleared markets (including other 

cleared swap markets). Therefore, we believe it would be appropriate for the final rules to 

prohibit: 

(i)	 a market partIcIpant (such as an SD) from reqUIrIng, as a precondition to 

executing a cleared swap, documentation or adherence to a credit limit scheme 

that limits the number of eligible parties a market participant may transact with, or 

otherwise impairs the patticipant's access to competitive liquidity and best 

execution; 

(ii)	 a clearing member from imposing execution limits or other forms of restrictions 

that are anti-competitive, compromise anonymity between a customer's trading 

counterparties and its clearing member, limit the number of eligible parties a 

market participant may transact with or otherwise inhibit the customer's ability to 

achieve best execution in the relevant market (without limiting a clearing 

member's right to impose and adjust overall position/credit limits on a customer's 

net open position with its clearing member); and 

Rules' requirements, ensuring that all trades are executed in an environment of real-time acceptance ensures that 

breakage is minimized or eliminated. These observations illustrate that there are less intrusive ways to manage any 

risk that a participant is responsible for rejection from clearing and defaults on its obligation to pay breakage. 

27 This model is the current CME credit default swap ("CDS") model, the CME and International Derivatives 

Clearing Gro'up interest rate swap ("IRS") model, as well as the IntercontinentalExchange ("ICE") energy swaps 

model. These models are all already working, consistent with the futures trade flow model, and we understand that 

ICE and LCH.Clearnet similarly are building CDS and IRS trade flows to conform to regulatory requirements and 

provide real-time acceptance and supp0l1 anonymity. 

600 14th Street, NW, Suite 900 Washington. DC 20005 Phone: 202.730.2600 Fax: 202.7302601 IVlVw.munugedlllllds.org 
Mr. Stawick 

April 11,2011 

Page 11 of 11 

(iii)	 a DCO from requiring that the transacting counterparties to a cleared trade enter 

into a bilateral agreement (such as an ISDA agreement) or other credit 

arrangement outside the patiies' direct and indirect clearing arrangements, as a 

precondition to submission for clearing. For swaps for which clearing is 

voluntary, parties may optionally enter into fallback arrangements in case the 

DCO does not accept the trade for clearing. 

We note that these "trilateral" credit arrangements are currently proposed for cleared 

swaps that are transacted bilaterally (e.g., by voice). It may be appropriate in certain instances 

for a SEF to administer arrangements to ensure certainty of clearing in suppOli of, for example, a 

central limit order book, but unlike the credit arrangements described above, a SEF could 

administer such suppOli on an anonymous basis and exclusively according to each participant's 

total credit limit available on the SEF, without any limitation of the amount a paliicipant can 

transact with other specific participants on the SEF or a limitation on permitted counterparties. 

**************************** 

MFA thanks the Commission for the opportunity to provide comments regarding the 

Proposed Rules. Please do not hesitate to call Carlotta King or the undersigned at (202) 730­

2600 with any questions the Commission or its staff might have regarding this letter. 

Respectfully submitted, 

lsi Stuart 1. Kaswell 

Stuart 1. Kaswell 

Executive Vice President & Managing 

Director, General Counsel 

cc:	 The Hon. Gary Gensler, CFTC Chairman 

The Hon. Michael Dunn, CFTC Commissioner 

The Hon. Bart Chilton, CFTC Commissioner 

The Hon. Jill E. Sommers, CFTC Commissioner 

The Hon. Scott D. O'Malia, CFTC Commissioner 

The Hon. Mary Schapiro, SEC Chairman
 

The Hon. Kathleen L. Casey, SEC Commissioner
 

The Hon. Elisse B. Walter, SEC Commissioner
 

The Hon. Luis A. Aguilar, SEC Commissioner
 

The Hon. Troy A. Paredes, SEC Commissioner
 

600 14th Street, NW, Suite 900 Washington. DC 20005 Phone: 202.730.2600 Fax: 202.7302601 ww\V.managedfllnds.org