Proposed US investment adviser rules may harm derivatives market

This article was first published in Global Investor Group.

The International Swaps and Derivatives Association (ISDA) has warned proposed US rules covering custody and asset segregation by investment advisers may harm the derivatives markets.

In a response to a US Securities and Exchange Commission (SEC) consultation on proposed rules to strengthen oversight of custody and securities lending by investment managers, the New York-based trade body said the rules are too widely drafted, potentially hampering the use of derivatives on behalf of clients which could affect liquidity in the wider market.

“This comment letter emphasises the destabilising impact that the Proposed Rule would have on the use of cleared and uncleared derivatives by Investment Advisers and the broader impacts on the derivatives markets,” ISDA said on Friday. “Additionally, this comment letter addresses the impacts of the Proposed Rule on certain other products that fall within the broad definition of ‘assets’ such as commodities, repurchase agreements and stock loan agreements.”

The SEC’s so-called “custody rule” is designed to safeguard client funds and securities from the registered investment adviser that executes trades or holds assets on the client's behalf . The new “safeguarding rule” significantly widens the definition of assets to include derivatives and the collateral held against derivatives positions, increasing the burden on market participants, ISDA says.

“ISDA respectfully urges the Commission more generally to reconsider the ‘kitchen sink’ approach it has taken with the definition of ‘assets’ – effectively forcing the industry to go through every product to identify and analyse the impacts on various markets to justify products that should not be ‘assets’ – in favour of a clear and well-considered proposal describing how any specific products and transactions beyond ‘funds and securities’ would benefit from the additional stringent requirements contemplated in the Proposed Rule,” it said.

ISDA earlier this month published its annual margin survey which suggested initial and variation margin calls on uncleared derivatives increased $100bn (£79bn) last year to $1.4 trillion.

The chief executive of LCH and group head of post-trade at parent company LSE Group Daniel Maguire on May 12 was elected to the ISDA board of directors.

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