ASSET MANAGEMENT
UPDATE
DECEMBER 2016
SIFMA AMG Steering Committee Update
The quarterly meeting took place in Washington DC at the
SIFMA Annual Meeting, on Sept. 26. The agenda included
two guest speakers, Jonah Crane, Senior Adviser to Under
Secretary for Domestic Finance, of the U.S. Treasury, gave an
update on FSOC, and Diane Blizzard, Associate Director of the
Division of Investment Management, of the SEC, discussed
recent SEC rule proposals. The committee also discussed
AMG committee developments, including Systemic Risk, Fixed
Income Market Structure, Tax, Derivatives, ERISA Fiduciary,
Operations, Treasury Market, and Municipal Market; discussed
a potential new AMG initiative on sensitive industries, and got
an update on unclaimed property issues from the SIFMA state
team. The Committee’s next meeting in December will discuss
2017 priorities.
SEC Final Rules on Liquidity Risk Management, Reporting
Modernization and Swing Pricing
On October 13, 2016, the SEC adopted three sets of final rules
relating to liquidity risk management, reporting modernization
and swing pricing for funds. The new liquidity risk management
rule 22e-4 requires each registered open-end management
investment company, including ETFs, but not including
money market funds, to establish a liquidity risk management
program. According to the SEC, the rule is “designed to
promote effective liquidity risk management for mutual funds
and ETFs, reducing the risk that funds will not be able to meet
shareholder redemptions and mitigating potential dilution
of the interests of fund shareholders.” The key requirements
include assessment, management and review of a fund’s
liquidity risk. Liquidity Risk is defined as the risk that the fund
could not meet requests to redeem shares issued by the fund
without significant dilution of remaining investors’ interests
in the fund, and the rule puts forward factors that must be
considered, such as the fund’s investment strategy and liquidity
of portfolio investments during both normal and reasonably
foreseeable stressed conditions; short-term and long-term
cash flow projections during both normal and reasonably
foreseeable stressed conditions; and holdings of cash and
cash equivalents, borrowing arrangements, and other funding
sources. ETFs also must consider the relationship between
the ETF’s portfolio liquidity and its trading activity as well as
the effect of the composition of baskets on the overall liquidity
of the ETF’s portfolio.
Funds will also be required to classify the liquidity of portfolio
investments based on the number of days in which the fund
reasonably expects the investment would be convertible to
cash in the current market conditions without changing the
market value of the investment. This determination would have
to take into account the market depth of the investment. The
four classifications are highly liquid (cash and investments
convertible to cash in three business days or less), moderately
liquid (investments convertible to cash in seven calendar
days or less), less liquid (investments that can be sold or
disposed of in seven calendar days or less, but where the sale
or disposition is reasonably expected to settle in more than
seven calendar days), and illiquid (investments that cannot be
sold or disposed of in seven calendar days or less). A fund may
classify its portfolio investments by asset class unless market,
trading or other investment-specific factors may significantly
affect the liquidity characteristics of an investment compared
to other investments in the same asset class.
The rule requires a fund to determine a highly liquid investment
minimum (the percentage of the fund’s assets held in highly
liquid investments), and adopt procedures for responding to a
shortfall. If the highly liquid investments fall below the minimum
for more than 7 days, the fund must notify the SEC. There
is a limitation on illiquid investments to no more than 15% of
a fund’s net assets. If the illiquid investment exceeds 15%,
the fund must notify the SEC within 1 business day (Form
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ASSET MANAGEMENT UPDATE
N-LIQUID), and it must report this to its board along with a
plan of action to reduce the illiquid investments to 15% or
lower within a reasonable amount of time.
The liquidity risk management programs must be adopted by
December 1,2018 for fund complexes with net assets of $1
billion or more, and by June 1,2019 for fund complexes with
net assets below $1 billion.
AMG has a Liquidity Risk Management working group
discussing asset mapping, or bucketing securities to liquidity
categories, and sharing thoughts on issues relating to asset
class determinations, and market depth, among others.
REPORTING MODERNIZATION
The SEC’s new and amended rules and forms significantly
broaden the scope of information reported by registered
investment companies. According to the SEC, the changes
are intended to “modernize reporting and disclosure of
information” and will assist the Commission “to better fulfill
its mission of protecting investors, maintaining fair, orderly,
and efficient markets, and facilitating capital formation.” All
open-end funds (except for money market funds) and ETFs
structured as unit investment trusts must provide additional
information on portfolio holdings and other data monthly on
new form N-PORT. Funds must report portfolio-wide and
position-level holdings data, portfolio-level risk metrics, as well
as information about a fund’s use of derivatives. N-PORT must
be filed with the SEC no later than 30 days after the end of the
month. In addition, funds must file census type information
annually on new form N-CEN, which must be filed no later
than 75 days after the fund’s fiscal year end. N-CEN will be
publicly available upon filing. The forms N-PORT and N-CEN
replaced current forms N-Q and N-SAR.
The SEC also adopted amendments to Regulation S-X,
requiring standardized disclosure about derivatives in fund
financial statements. Information required includes derivative
type, the counterparty to the derivative, the notional amount
of the derivative contract and any unrealized appreciation or
depreciation. This reporting requirement is consistent with the
form N-PORT. Other changes require disclosures regarding
securities lending activities via forms N-1A, N-3, and N-CSR.
Most funds will be required to begin filing reports on new forms
N-PORT and N-CEN after June 1, 2108. Fund complexes with
less than $1 billion in net assets will need to begin filing after
June 1, 2019.
AMG’s Data Modernization Working Group will look into
potentially asking the SEC to provide clarity to some of the
reporting requirements via a FAQ document with questions
collected from AMG members on the rule implications.
SWING PRICING
The SEC adopted amendments to Rule 22c-1 to permit an
open-end fund (except a money market fund or ETF) to use
swing pricing, to adjust the fund’s NAV to pass on the costs
stemming from shareholder purchase or redemption activity
to the shareholders associated with the activity. The pricing
adjustments are intended to protect other shareholders from
dilution arising from these costs. Under the swing pricing
rule funds are permitted, but not required, to establish and
implement swing pricing policies and procedures that adjust
the fund’s NAV under certain circumstances.
AMG Operations Committee Updates:
AMG OPERATIONS EXECUTIVE COMMITTEE
The AMG Operations Executive Committee evaluates current
priorities and develops the agenda for AMG operations
initiatives, committees, and events. The committee develops
the AMG Operations Member Survey that is circulated for
membership to determine member needs and priorities.
The committee has recently discussed the regulatory
implementation projects including the DOL Fiduciary rule, on
which there is not much implementation work to be done for
asset management operations. The SEC final rules on liquidity
risk management and reporting modernization will require
more work to prepare for compliance (reporting requirement
2
begins for most funds on June 1, 2018). The data collection
and reporting work will move along from legal regulatory
perspective to operational implementation within the next few
months, however, for now there are still questions that need
to be answered before operational implementation can take
place. AMG working group will look into asking the SEC to
provide FAQ guidance.
Leadership Change: AMG thanks the previous AMG
Operations Executive Committee Chair Michael Herskovitz
of AB Global for his dedicated service. Michael led AMG
Operations in a very complex environment with relentless
regulatory compliance and cost pressures. His forwardlooking vision for the future of operations ensures that AMG
operations is positioned well to remain relevant and will
continue to add value to membership. New Chair Louis Rosato
of Blackrock was elected at the AMG Operations Member
Meeting on November 10th. We welcome Lou’s leadership
and will diligently work together to continuously evolve AMG
Operations to meet and surpass member expectations.
AMG OPERATIONAL RISK COMMITTEE
The AMG Operational Risk Committee continues to meet once
a month to discuss operational risk topics and relevant recent
operational risk incidents. A recurring topic is cyber security,
with connection to SIFMA’s cyber security initiatives through
SIFMA’s Tom Wagner who spoke to the Committee at their
last meeting about the DDOS attack. The committee also
had a conversation around the indicative NAV, which gives a
real time view to the investment net asset value, and what the
member firms are doing to manage operational risk around
this practice. The Committee also did some housekeeping
to determine core risk topics for committee discussion, and
agreed that it would be good to survey committee members
for discussion topics to ensure committee focus on relevant
topics. The committee is co-chaired by Amy Gilfenbaum
of Neuberger Berman, Joe Haddock of Annaly, and Ekko
Jennings of Morgan Stanley Investment Management.
AMG DERIVATIVES OPERATIONS COMMITTEE
The AMG Derivatives Operations Committee has focused
on derivatives reporting, specifically, ensuring that members
can implement the CFTC’s Ownership and Control Reporting
requirements. The Committee has discussed the OCR reporting
in its monthly meetings, first analyzing what is required, and
then discussing methods and platforms for reporting. The
education on this topic continues as the reporting platforms
evolve. The Committee has received updates on derivatives
clearing from the central counterparties (CCPs) including CME,
ICE and LCH. The Committee’s November meeting included a
discussion on the 871(m) tax rules and implications to buy side
firms, as well as an FCM update on whether customers are
moving to clear NDFs in order to avoid the uncleared margin
rules.
The Committee continues to meet monthly, and is co-chaired
by Amy Caruso of DTCC, Lisa Cavallari of Russell Investments,
Kimberley Dall of StateStreet, and Ila Eckhoff of BlackRock.
AMG COLLATERAL OPERATIONS COMMITTEE
TThe AMG Collateral Operations Committee has met quarterly
to discuss developments relating to collateral management in
the asset management space. The recent focus has been on
the uncleared swaps margin with the AMG Uncleared Margin
Operational Implementation Working Group discussing
operational issues asset managers need to consider when
putting Uncleared margin process in place. Another topic is
the final FINRA 4210 rule for TBA margining. Although much of
the buy side already has a process in place for TBA margining
based on the previous TMPG recommendation, there are
some member firms who don’t yet margin TBAs and will
need to implement margining by the compliance deadline of
December 2017. The Collateral Committee will focus on this
topic in the upcoming year to help all members get up to
speed. The committee will also continue to educate members
on the automated collateral services, enhanced industry
infrastructure and services available to enable automated
messaging. The AMG Collateral Operations Committee is
co-chaired by Ted Leveroni of DTCC and Dessire Paradis of
Blackrock.
Interested in joining committees?
Contact Elisa Nuottajarvi of the AMG staff at [email protected]
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ASSET MANAGEMENT UPDATE
AMG UNCLEARED MARGIN OPERATIONAL IMPLEMENTATION WORKING
GROUP
The working group was created to help the asset management
community navigate issues relating to operationalizing the
uncleared swaps margin rules, with main focus on the
implementation of the variation margin requirement by March
1, 2017. The working group has met bi-weekly to discuss and
document issues and questions asset managers encounter
from both compliance and process perspective. The working
group put together an operational issues checklist that covers
topics such as legal agreements, bifurcation of processes,
same day settlement of margin calls, cross border issues,
minimum transfer amount, industry readiness, onboarding,
and any open items in regulation. The group’s work culminated
in the November 9th Collateral Management and Uncleared
Margin Implementation Workshop with many working group
members sharing insights on the various panel discussions.
The group will continue to discuss any remaining questions,
and share information about industry platforms and templates.
The working group is co-chaired by Ted Leveroni of DTCC,
Dessire Paradis of Blackrock, and Aamer Quadri of Northern
Trust.
AMG CUSTODIAN OPERATIONS COMMITTEE
The recent focus of the AMG Custodian Operations Committee
has been on the interoperability between confirmation
matching services. The committee hosted meetings in
September and November, and featured a panel discussion
on interoperability at the AMG Operations Member Meeting
on November 10th. The group first agreed on the definition
of interoperability, and then discussed the possible scenarios
with updates from each the matching services firm as to where
they are in the process of supporting interoperability. The end
goal is to work through any issues, and develop an industry
playbook that could be applied to the multiple scenarios as
well as leveraged for future interoperability discussions if more
service providers enter the field. The current focus is to ensure
that each party in the operational work stream knows which
parties are involved, and trades match and settle without
disruptions. The Committee is co-chaired by Effie Lee of
StateStreet and Robert Stewart of Brown Brothers Harriman.
AMG STP / TRADE PROCESSING COMMITTEE
WORKING GROUP ON T+2 SETTLEMENT
CYCLE
The implementation date for the T+2 settlement cycle is Sept
5, 2017. There are many industry groups organized to help
the industry prepare for shorter settlement cycle, but AMG
members feel that it is worthwhile having an AMG group for
buy side operations community status check and information
sharing. The AMG STP/Trade Processing Committee
held its first meeting in preparation for shorter settlement
cycle in September. The committee chairs shared what
their firms are doing in In preparation for the T+2 migration
noting that asset managers should now look through key
functions such as order generation and trade order entry,
particularly on the mechanism to default settlement cycle
and how the trading system is coded around these things.
Automating the confirmations to real time instead of batch is
key. Asset managers should push counter parties to deliver
confirmation message timely on the trade date. Real time
processing is important to identifying exceptions timely in
4
the shorter settlement cycle. The industry should also be
more clear as to what time is considered the end of day, 4
pm or 6 pm. This is an important discussion point with both
counter parties and custodians. Some large custodians are
developing messages for pre-matching which will be helpful
in the new environment. The settlement status messages are
also helpful. Asset managers should use their own metrics to
determine what percentage of trades is being confirmed on
T. There is still a large number of trades that is not instructed
on trade date. Some pain points on trade date processing
involve municipals and smaller regional brokers who are not
on electronic platforms but confirm trades on paper (email or
phone). To resolve these pain points operations may need to
have a conversation with front office to consider other sources
of liquidity. Asset managers should also look through their
cash management process to see if any issues moving to T2
settlement, looking for funding gaps across assets and funds,
and client accounts. In the Committee’s November meeting
John Sjosten of Deloitte discussed the feedback from the
industry’s documentation workshop. Asset managers should
inventory documentation that may need to be changed as it
references T+3 cycle, such as transfer agency agreements,
distribution agreements, and shareholder schedules.
Updating these docs may require fund board agreement. The
next meeting of the committee will take place in January 2017.
The committee is co-chaired by Chris Fiorelli of JP Morgan
Asset Management and Louis Rosato of Blackrock.
SINGLE SECURITY OPERATIONAL WORKING GROUP
SIFMA AMG has held several investor meetings with Fannie
and Freddie to discuss implications and to gather investor
feedback on the Fannie/Freddie plan to move to the single
security platform in 2018. The single security is a mortgagebacked security with common features and disclosures to
be issued and guaranteed by Fannie Mae and Freddie Mac.
Products in scope are fixed rate 30-year, 20-year, 15-year,
and 10-year securities. The single security will be called
Uniform MBS (UMBS). In addition to the investor focus group
meetings, Fannie and Freddie presented the plans at the
AMG Operations Member Meeting in June 2016, and held
an operational meeting at the AMG Operations Member
Meeting in November 2016 to discuss questions related to the
transition to the UMBS. Topics discussed included the timing
of the transition, funds’ investment guidelines, issuer limits and
allocations, and potential impact to TBA trading, reporting,
exchange timing, etc. The Single Security Operational Working
Group will meet again in early 2017.
AMG OPERATIONS MEMBER SURVEY
The annual AMG Operations Member Survey is put out to help
identify issues that are most important to AMG member firms,
and to give members the ability to provide feedback on industry
trends and the changing demands of buy side operations. The
survey is used by the AMG Operations Executive Committee
to guide the focus and use of resources for the upcoming year.
Over 60 AMG members responded to the survey this year;
here is a quick summary of the results.
Top 10 most highly rated topics (in the order of highest
importance ranking):
• Cyber Security
• Uncleared Margin Rules
• Operational Risk
• Information Security / Protecting Valuable Data
• SEC’s Liquidity Risk Management Rules
What asset management industry trends do you see currently
evolving? (A sampling of representative responses)
• Increased need for efficiency in rapidly changing
regulatory environment. Legacy operations around trade
confirmation and settlement have to be highly automated
in order to redeploy resources to engage in new workflow
to comply with new regulatory and reporting requirements.
• Block chain technology / robotics
• Growth in Alts
• Costs matter a lot / Cost reduction review in all areas
• Fee pressures
• Active managers are dying breed
A full summary of the AMG Operations Survey responses will
be available on the www.sifma.org/amg web site.
• SEC’s Derivatives Leverage Rules
• SEC’s Reporting Modernization Rules
• Collateral Management Practices and Technology
• MiFID II
• Derivatives Reporting
Please visit www.sifma.org/amg for more information on AMG committees, initiative and events.
5
ASSET MANAGEMENT UPDATE
Highlights of Asset Management events:
SIFMA AMG OPERATIONS WORKSHOP
The SIFMA AMG Operations Workshop on Collateral
Management & Uncleared Margin Implementation took
place in New York City on November 9, 2016. The purpose
of the event was to help members by sharing information
and member insights regarding the practical operational
implementation process in connection with variation margin
for asset managers getting their systems and process ready
to margin uncleared swaps by the deadline of March 1,2017.
documentation takes much time, and firms may be better off
trying to simplify things as much as possible. Sharif Ismail of
Goldman Sachs Asset Management (one of the few asset
management firms caught up in the first implementation wave)
discussed the importance of understanding rules for entity-set
up, and counterparty discussions. Darren Thomas of IHS
Markit discussed the ISDA Amend service designed to make
the re-papering process more streamlined.
Regulatory Landscape Panel
Lifecycle Panel
The first presentation on Regulatory Landscape was a primer
on the un-cleared swap margin rules. Janina Polo and John
Boyle of EY discussed final rules and known timing and
implementation deadlines in the U.S., Europe and Asia. Laura
Martin of SIFMA spoke about the AMG’s advocacy efforts,
specifically regarding the minimum transfer amount issue.
The third panel was populated by members of the AMG
Uncleared Margin Operational Implementation Working
Group, and discussed the operational issues in the margin
lifecycle and emerging operational best practices. The panel,
moderated by Amy Caruso of DTCC, began by discussing the
expected increase in margin volumes, and Dessire Paradis of
Blackrock spoke about the importance of training staff and
to automate as much as possible to reduce disputes. Abhijit
Choudhary of Goldman Sachs Asset Management shared
insights on the workflow bi-furcation and complexity that is
introduced by firms having multiple sets of CSAs per client/
counterparty. Mark Solomon of Brandywine discussed the
hurdles involved in the T+1 margin call, particularly for smaller
firms. Jason Brasile of StateStreet brought up the steps for
custodian onboarding for 40-Act funds that need a segregated
margin account set-up and Aamer Quadri of Northern Trust
discussed changes to workflows and allocation processing.
The panel touched also on cross-border issues, and how
operations should handle the differences in requirements in
various jurisdictions.
The second panel, moderated by Mayur Java of PWC,
shared lessons learned from the Sept 1, 2016 initial margin
implementation deadline. Ed Corral of Morgan Stanley
shared the sell side view stressing that re-papering legal
Lessons Learned Panel
6
The event’s next session discussed opportunities arising
from having to set up a system to cost effectively support
regulatory compliance and how the next generation collateral
management system and process will look like in the postcompliance world. Tom Ciulla of PWC moderated the panel,
with Ted Leveroni of DTCC, Tory Clements of Lombard Risk,
Ky Dong of Franklin Templeton, Patricia Fiechter of AB, and
Stephen Bruel of BBH discussed integration of collateral
management to trading decisions and true optimization of
funding and resources. The panel discussed the building
blocks to this new state dubbed Collateral Management 2.0
in a PWC white paper that lays a road map on how it can be
achieved.
The final panel, moderated by Uday Kiran Bolusani of Fidelity
Investments, gave service providers an opportunity to discuss
their service offerings and opportunities to automate the margin
management workflow. Mark Demo of Acadiasoft, and Robin
Moody of SmartDX, discussed enhancements that assist the
legal negotiation process surrounding CSAs and why firms
should look at technology beyond paper based negotiations
and ISDA Amend as a tool. Christina Landry of trueEX shared
insights on tools for trade execution and margin requirements.
Mary Harris of TriOptima spoke about reconciliation, and
together with Mark Demo discussed margin calculations,
dispute resolution, and integrated margin messaging.
Post Compliance Panel
AMG OPERATIONS MEMBER MEETING
The AMG Operations Member Meeting took place in New York
City on November 10th. The first meeting session focused
on derivatives reporting, covering the SEC’s Security Based
Swaps reporting, CFTC Ownership and Control reporting
(form 40), and new reporting requirements from the bank of
Israel. Laura Martin of SIFMA AMG moderated a panel of Neal
Kumar, Cadwalader, Wickersham & Taft LLP; Tom Wieczorek,
Unavista; and Stan Preston, DTCC.
The next session was on TBA Margining, with Chris Killian
of SIFMA giving a brief overview of the new FINRA 4210 rule
and what’s different from the TMPG requirements. He also
discussed the work SIFMA is doing to update the MSFTA.
Aaron Kim of PIMCO discussed implications to buy side.
For those that already margin TBAs the biggest work will
be updating and negotiating the MSFTAs, and registered
investment companies need to establish tri-party control
arrangements with custodians. The implementation date for
the amended FINRA rule 4210 is in December 2017.
The second panel featured a discussion of interoperability of
confirmation matching services, featuring the new entrants,
Bloomberg and SS&C, along with DTCC’s Omgeo. Bob
Stewart of BBH moderated the panel, which discussed the
definition of interoperability, gave some background to the
work taking place to ensure ensure that there is interoperability
between matching services should trade counterparties
utilize different platforms for confirmation matching. Matthew
Nelson represented Omgeo/DTCC, Jose Manso represented
Bloomberg, and Cody Callihan & Frank Battaglini represented
SS&C.
CONTINUED ON PAGE 8
7
ASSET MANAGEMENT UPDATE
AMG Operations Workshop: Automation Panel
The Member Meeting also featured a presentation on the
Election Results and the Resulting Political Landscape by
Andy Blocker and Jennifer Flitton of SIFMA’s Washington DC
office. Lindsey Keljo of SIFMA AMG gave a briefing on the SEC
Final Rules on Liquidity Risk Management and Modernizing
Reporting.
The afternoon panel discussion on Block Chain Case Studies,
moderated by Joshua Satten of Sapient shared results and
lessons learned from actual Block Chain proof of concept
projects. John Burnett, StateStreet and Jeffrey Billingham
discussed their firms’ approach to block chain and how they
identify potential areas for development, explore workflows
and roadblocks, and prototype technical implementations.
The speakers noted that the POCs were picked based on
biggest pain points, lack of automation, manual touchpoints,
lack of data transparency, lack of automated communications
methods. POCs brought up included syndicated loan
processing, sec lending, collateral management, credit events,
corporate actions and reference data. Charles DeSimone of
SIFMA discussed SIFMA’s POC with R3 on reference data,
and Suresh Sandula of Sapient shared views on which
technology platform firms should choose and what the various
block chain vendor capabilities are.
The Member Meeting also featured AMG Operations
Committee Meetings, including Operational Risk Committee,
Derivatives Operations Committee, STP / Trade Processing
Committee (T+2 Settlement Cycle), Collateral Operations
Committee, Custodian Operations Committee, and a meeting
on Single Security..
SIFMA AMG Recent Comment Letters
FEDERAL RESERVE REGARDING
MANDATORY STAY RESTRICTIONS ON QFCS
On August 5, 2016, AMG provided comments on the notice
of proposed rulemaking promulgated by the Board regarding
a proposed rule that would restrict the contractual provisions
of qualified financial contracts entered into by systemically
important U.S. banking organizations and the U.S. operations
of systemically important foreign banking organizations. For the
reasons described in our letter, AMG recommends that the Board
should make the following changes to improve the proposed
rule: Narrow the Proposed Rule’s Requirements for CrossBorder Recognition of U.S. SRRs; Not Impose Contractual
Restrictions on Cross-Default Rights or, Alternatively, Permit
Appropriate Creditor Protections, Not Impose Any Burden of
8
Proof on Contracting Parties, and Limit Restrictions to QFCs
with Cross-Default Rights; Provide for Compliance Alternatives
that Include a JMP Module Suitable for Use by Fiduciaries
and a Less Burdensome and More Flexible General Approval
Process; and The Board Should Make Additional Changes to
Narrow and Clarify the Proposed Rule.
US PRUDENTIAL REGULATORS REGARDING
NSFR
On August 5, 2016, AMG and Managed Funds Association
(“MFA”) commented on the proposed rule issued by the
Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, and the Office of the
Comptroller of the Currency to establish a Net Stable Funding
Ratio requirement for large banking organizations. For the
reasons described in our comment letter, the AMG and MFA
recommend that the Agencies make the following changes
to improve the Proposal: Tailor the Criteria for Recognition of
Variation Margin to the NSFR Context; Provide a Downward
Adjustment to the RSF Factors of Derivatives With a Short
Remaining Maturity; Release More Information Relating to
the Add-On for Potential Portfolio Valuation Changes and
Re-propose the Add-On; Treat Repo and Reverse Repo
Symmetrically; Recognize Assets and Liabilities Associated
With Client Shorts as Interdependent Assets and Liabilities
Requiring 0 Percent RSF or ASF; and Assign a 0 Percent RSF
Factor to Segregated Client Assets.
SEC REGARDING SBSDRS
On August 5, 2016, AMG provided comments to the Securities
and Exchange Commission (SEC) on the Application for
Registration of DTCC Data Repository (U.S.) LLC (“DTCC”)
as a Security-Based Swap Data Repository (“SBS DR”) with
the Commission. While AMG supports SBS reporting and
believes that DTCC is well-equipped to serve the role of SBS
DR, AMG believes that DTCC should revise its on-boarding
requirements to provide a mechanism for asset managers on
behalf of non-reporting clients to fulfill the limited obligations
imposed by Regulation SBSR without having to fully on-board.
Further, AMG asks that the Commission impose a cap on the
reporting of notional amounts for block trades. As the market
moves closer to the implementation of SBS reporting, this
crucial protection should be addressed to avoid disruptions.
US PRUDENTIAL REGULATORS AND CFTC
REGARDING FINAL RULES FOR UNCLEARED
SWAP TRANSACTIONS
On August 19, 2016, AMG submitted a letter supporting the
30-day postponement of Phase I implementation of the U.S.
Final Margin Rules requested by the International Swaps and
Derivatives Association and the Securities Industry and Financial
Markets Association. The problems documented by both the
ISDA-SIFMA Request and the request for postponement
by the Global Foreign Exchange Division (“GFXD”) of the
Global Financial Markets Association combined with AMG
members’ own recent experiences raise significant concerns
for all investors and investment vehicles that utilize uncleared
derivatives as well as seeded investment funds that are part
of Phase I. As detailed in the letter, asset managers’ clients
are facing significant restrictions on uncleared derivatives
trading in their prime brokerage accounts and some seeded
investment funds may be restricted from uncleared swap
markets entirely until Phase I readiness has been addressed.
ESAS AND EUROPEAN COMMISSION
REGARDING UNCLEARED SWAP MARGIN
RULES
On August 23, 2016, AMG submitted a letter to express its
concern regarding a change in the treatment of investment
funds in the most recent draft Uncleared Swap Margin RTS.
While the prior draft published by the European Supervisory
Authorities (ESAs) on 8 March 2016 relieved investment
funds from performing margin threshold calculations on a
consolidated group basis (where there is sufficient insolvency
remoteness), the recent European Commission draft published
28 July 2016 narrowed that relief to apply only to UCITS and
AIFs managed by Authorized AIFMs. AMG believes that relief
from consolidated margin threshold calculations should apply
to all investment funds, whether organized and managed in
the EU or in a third country, given that the same underlying
rationale for such relief applies equally across jurisdictions.
SEC REGARDING BUSINESS CONTINUITY
PLANNING AND TRANSITION PLANNING
PROPOSAL
On September 2, 2016, AMG submitted a comment letter to
the SEC regarding the SEC’s proposal to require registered
investment advisers to engage in and maintain records regarding
business continuity and transition planning. In the letter, SIFMA
AMG suggested that the SEC build upon its successful
approach to business continuity planning under Rule 206(4)-7
of the Investment Advisers Act of 1940 by issuing additional
guidance rather than a new rule. Should the SEC determine that
a new rule is necessary, SIFMA AMG urged the SEC to avoid
imposing “fraudulent” liability for business continuity practices
and establishing a new, unprecedented level of accountability
for functions carried out by third-party service providers.
Additionally, SIFMA AMG argued that separate transition
planning requirements for advisers are unnecessary since
current operational management practices and the existing
regulatory framework already address any transition-related
concerns cited by the SEC that may impact investors.
CFTC REGARDING EXEMPTION FROM
REGISTRATION FOR CERTAIN FOREIGN
PERSONS
On September 6, 2016, AMG, IAA, and ICI Global comment
letter on the CFTC’s Proposed Amendment to Regulation
3.10(c): Exemption from Registration for Certain Foreign
Persons, strongly supporting the proposed amendments,
which would simplify the CFTC registration exemption for
foreign CPOs and foreign CTAs.
CONTINUED ON PAGE 10
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ASSET MANAGEMENT UPDATE
FSB CONSULTATION ON PROPOSED
POLICY RECOMMENDATIONS TO ADDRESS
STRUCTURAL VULNERABILITIES FROM
ASSET MANAGEMENT ACTIVITIES
On September 21, 2016, AMG submitted comments to the
Financial Stability Board (“FSB”) regarding FSB’s proposed policy
recommendations to address structural vulnerabilities from asset
management activities. SIFMA AMG members were generally
supportive of many of the recommendations in the Consultation,
but they also highlighted for the FSB how the deep and intricate
regulatory framework that governs everyday operations of asset
managers and investment funds already address many of the
concerns presented in the Consultative Document.
CPMI AND IOSCO REGARDING UNIQUE
PRODUCT IDENTIFIERS
On September 30, 2016, AMG provided comments to
the Committee on Payments and Market Infrastructure
(CPMI) and the International Organization of Securities
Commissions(IOSCO) on the second consultative report
regarding Harmonisation of the Unique Product Identifier. AMG
strongly agrees with the regulatory goal of utilizing a globallyharmonised product identifier for derivatives and appreciates
CPMI IOSCO’s efforts to work across jurisdictions to ensure
a consistent approach resulting in one solution to address
regulators’ need to have certain data aggregated into a single
field. AMG asks that CPMI-IOSCO take into consideration the
product identification work that has been undertaken by other
industry parties, and to consider a single framework to cover
multiple product identifiers and usages in all jurisdictions.
We further believe that governance considerations should
be considered at the same time that CPMI-IOSCO assesses
technical issues relating to the UPI code. Granularity,
adaptability and viability of a UPI code for the ever-evolving
OTC derivatives markets are necessarily intertwined with who
will control and maintain the UPI framework and who will hold
intellectual property rights.
OCC REGARDING MANDATORY
CONTRACTUAL STAY REQUIREMENTS FOR
QFCS
On October 17, 2016, AMG comments on the notice of
proposed rulemaking promulgated by the Office of the
Comptroller of the Currency regarding a proposed rule that
would restrict the contractual provisions of qualified financial
contracts entered into by certain banks supervised by the
OCC that are part of systemically important U.S. banking
organizations or systemically important foreign banking
organizations. These restrictions extend to QFCs entered into
by Covered Banks with counterparties that are not Covered
10
Banks or other members of large banking organizations, which
would include counterparties that are, among others, asset
managers’ clients. AMG believes that the Proposed Rule’s
objective of securing cross-border recognition of U.S. special
resolution regimes should be achieved through Congressional
action, not OCC rulemaking. Notwithstanding this view, AMG
understands the OCC and other U.S. prudential regulators’
intention to move forward with its cross-border recognition
objective, but recommends that the scope of the resulting
requirements be narrowed to those strictly necessary to
achieve that objective. AMG also strongly believes that the
Proposed Rule’s separate objective of restricting cross-default
rights upon an ordinary bankruptcy filing of an affiliate of a
Covered Bank should not be pursued at all. However, if the
OCC nonetheless moves forward with restricting cross-default
rights, AMG believes that the OCC should provide greater
balance between the contractual restrictions required and
the credit protections provided. The OCC should also make
other improvements to tailor the final rule’s requirements. AMG
makes further recommendations below to clarify the scope of
the Proposed Rule and to request phased-in implementation.
Given the importance of the contractual rights at issue for
pension funds, mutual funds and other investment vehicles
held by retail investors, among others, AMG urges the OCC
to give full consideration to counterparties’ interests and thus
to promulgate a final rule whose requirements are limited to
those strictly necessary to achieve the OCC’s goals while
carefully protecting important counterparty interests.
EBA CONSULTATION PAPER REGARDING
LARGE EXPOSURE LIMITS
On October 17, 2016, AMG submitted comments on the
proposed guidelines of the European Banking Authority (“EBA”)
on the scope of the term “group of connected clients” for
purposes of the large exposure limits of Regulation (EU) No
575/2013 (the “Regulation”). AMG understands and shares the
goal of the Regulation’s large exposure limits: reducing the risks
to a bank arising from the failure of one or more significant clients.
We further understand that, in this context, it is critical to identify
accurately the types of bank clients that are so economically
related to each other that they should be considered a “group
of connected clients” under the Regulation. As discussed in
further detail in AMG’s letter, we believe that certain aspects
of the Proposed Guidelines are overbroad in explaining the
circumstances in which multiple clients are connected to each
other such that they form a “single risk.” In their conservatism,
the Proposed Guidelines would have unintended negative
consequences for banks’ asset management clients,
particularly clients based outside of Europe.
CPMI, IOSCO AND FSB REGARDING CCP
RESILIENCY RECOVERY AND RESOLUTION
On October 17, 2016, AMG submitted comments on the CPMIIOSCO Consultative Report and FSB Discussion Note, which,
in combination, propose further guidance on the Principles of
Financial Market Infrastructures for Central Counterparties.
AMG urged the FSB, CPMI and IOSCO, in their review of CCP
resilience, recovery and resolution standards, to consider
the interests of clearing members’ customers, many of
whom have increased their centrally cleared positions due to
regulatory directives. Regarding CCP resiliency, AMG believes
that dynamic margin calculations, risk-based CCP skin-inthe-game, clearing member assessments and standby credit
should comprise the available pre-resolution, dedicated
resources to satisfy the credit and liquidity risks measured by
stress tests. We believe that procyclicality concerns should
be taken into account holistically across all types of financial
resource categories. We further believe CCPs should be
expressly excluded from risk managing on the basis of a
presumption that the CCP will be able to use the margin of
non-defaulting customers to cover credit or liquidity shortfalls.
Customer collateral should never be used as a backstop in
CCP risk management practices. While we understand and
agree with the regulatory imperative of avoiding a future tax
payer bailout of a CCP, we believe that the most appropriate
way to do so is to incentivize CCPs, who generate revenue
by clearing trades with margin and risk management
requirements, to risk manage appropriately and put their own
assets at stake rather than jeopardize the assets of pension
funds, U.S. mutual funds, UCITS and other investors who
have no control over how CCPs calculate margin and accept
new products for clearing. AMG further believes that public
disclosures and CCP recovery tools should be improved,
as detailed in our comment letter. Regarding CCP recovery,
AMG believes that a CCP’s return to a matched book would
be aided by an open auction and mechanisms to continue
the payment of variation margin to and from the customers
of a defunct clearing member. AMG does not believe that
extraordinary measures, including mutualisation of losses to
non-defaulting customers, tear-up of contracts and forced
allocations, should be available for the CCP’s use in recovery.
Rather, these extraordinary measures should be expressly
prohibited until resolution. Only after full write-down of equity
positions, which may incentivize equity holders or other parties
to recapitalize, and after change of control to the resolution
authority should such measures be deployed and, even then,
they should be used only if no better means are available to
return to a matched book or to wind up the CCP. Regarding
CCP resolution, a pre-designated regulatory authority should
have constrained flexibility to initiate resolution. In considering
whether to move to resolution, the designated authority should
include in its consideration whether extraordinary measures,
including loss mutualisation and tear up, are required to return
the CCP to a matched book or to wind up the CCP’s business.
AMG agrees that CCP resolution strategies should have
the objectives of financial stability and continuity of critical
functions without exposing taxpayers to risk of loss, and that
resolution aims should still include returning the CCP to a
matched book. AMG believes, however, that these objectives
can be achieved while providing greater protections for
customers, including achieving fairness in any mutualisation
of loss with non-defaulting customer assets and certainty in
priority of payments during a wind-up.
U.S. PRUDENTIAL REGULATORS
REGARDING LEVERAGE RATIO
On November 3, 2016, AMG and several other associations
sent a letter to the Financial Stability Board (FSB), Governors
and Heads of Supervision (GHOS) and the Basel Committee on
Banking Supervision (BCBS) regarding the potential negative
impact of the leverage ratio on the strength and stability of the
global derivatives markets.
U.S. PRUDENTIAL REGULATORS AND CFTC
REGARDING UNCLEARED SWAP MARGIN
REQUIREMENT
On November 7, 2016, AMG submitted a letter to the
Department of the Treasury’s Office of the Comptroller of
the Currency, Board of Governors of the Federal Reserve
System, Federal Deposit Insurance Corporation, Farm
Credit Administration, Federal Housing Finance Agency and
Commodity Futures Trading Commission requesting relief
relating minimum transfer amount (“MTA”) set by the uncleared
swap margin rules promulgated by the Prudential Regulators
and CFTC. AMG believes that separately managed accounts
should be provided an account-level MTA of $100,000 or
$50,000 to reduce de minimis transfers of collateral that will
burden the financial system, clients, dealers and custodians
without any corresponding furtherance of the goals intended
by the uncleared swap margin rules. The absence of relief will
mean that pension plans, endowments and other institutional
clients and the financial institutions that face them will incur
higher costs to use uncleared derivatives than was intended
under the rules and without any added benefit to the rules’
regulatory aims.
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ASSET MANAGEMENT UPDATE
AMG Members (as of December 2016)
Aflac Incorporated
Capital Research
Management
AB Global
Charles Schwab
Aberdeen Asset
Management
Citadel
Allianz Global Investors US
LLC
Credit Suisse Asset
Management
AGNC Mortgage
Management, LLC
DoubleLine Capital LP
Elliott Management
Corporation
Ameriprise Financial, Inc.
•Columbia Threadneedle
Federated Investors Inc.
Annaly Capital
Management, Inc.
Fidelity Investments
Franklin Templeton
Investments
APG Asset Management
US Inc.
AQR Capital Management,
LLC
Ares Management LLC
General Motors Asset
Management
Global Atlantic Financial
Group Limited
Legg Mason, Inc.
•Brandywine Global
Investment
Manulife Asset
Management
MassMutual Financial
Group
•OppenheimerFunds Inc
Schroders
MFS Investment
Management
State Street Global
Advisors
Morgan Stanley Investment
Management
T. Rowe Price Associates,
Inc.
Natixis Global Asset
Management
TCW
•Loomis, Sayles &
Company
Guggenheim Partners
Investment Management
New York Life Investment
Management
•Dreyfus
•Mellon Capital
Management
Legal & General Investment
Management
Protective Life Insurance
Russell Investments
Neuberger Berman LLC
J.P. Morgan Asset
Management
Principal Global Investors,
LLC
•Baring Asset
Management Limited
BlackRock
•Standish
PIMCO
Putnam Investment
Management
Goldman Sachs Asset
Management
Invesco Ltd.
PGIM
•Babson Capital
Management LLC
Bank of America Merrill
Lynch
BNY Mellon Investment
Management
Nuveen Investments, Inc.
•Cornerstone Capital
Management
•MacKay Shields LLC
NISA Investment Advisors
Northern Trust Asset
Management
The D.E. Shaw Group
Vanguard
Voya Investment
Management
Waddell & Reed Investment
Management
Wellington Management
Company
Western Asset
Management Company
A warm welcome to new AMG member Aberdeen Asset Management.
12
Upcoming Events
FEBRUARY 6–8, 2017
FIA-AMG Derivatives Forum
Montage Laguna Beach, Laguna Beach, CA
FIA and SIFMA Asset Management Group come together once again in 2017 to host a
comprehensive review of the most critical derivatives issues facing the buy-side. Join us
for expert-led sessions focusing on global regulation, operations, markets and trading, and
legal and compliance and more.
JOIN THE AMG
The AMG is now accepting
applications for membership
from asset management
firms.
SIFMA
120 Broadway
New York, NY 10271
Asset Management
Derivatives Forum 2017
Following the tremendous success of the Asset Management
Derivatives Forum earlier this year, join FIA and SIFMA AMG at
the Montage Laguna Beach in February 6–8, 2017!
Register to join us for a comprehensive review of the most critical
derivatives issues facing the buy side.
Program topics include:
•
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•
•
•
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AMG
PROFESSIONAL STAFF
Tim Cameron
202-962-7447
Laura Martin
212-313-1176
Lindsey Keljo
202-962-7312
Elisa Nuottajarvi
212-313-1166
www.sifma.org/amg
​ rivers of Change in Derivatives Markets;
D
Clearinghouse Leaders;
Managing Global Regulation;
Fostering FCM-Customer Relationships;
Derivatives Challenges for the Buy Side;
Evolution of Central Execution;
Market Resiliency;
Exchange Roundup;
Operational Efficiencies for Clearing;
Uncleared Margin Operational Implementation.
MAY 8–11, 2017
SIFMA Operations Conference and Exhibition
Boca Raton, FL
Whether your focus in Operations is Leadership Management, Information Technology, Risk
Management, Legal and Compliance, or Clearance and Settlement, SIFMA’s 44th annual
Operations Conference and Exhibition delivers a comprehensive program tailored to the
critical role you perform.
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