Tuesday, October 27. 2020
During this meeting, the two agencies announced that they approved a joint final rule to:
- synchronize the minimum margin level for security futures held in a futures account with the minimum margin level for security futures held in a securities portfolio margin account or a securities account that is not approved for portfolio margining
- approve the issuance of a joint request for comment on the portfolio margining of uncleared swaps and non-cleared security-based swaps
The landmark joint open meeting reflects the organizations’ long history of cooperation regarding the joint regulation of margin requirements for security futures and the agencies’ strong commitment to harmonizing efforts where appropriate.
Joint Final Rule: Customer Margin Rules Relating to Security Futures
The SEC and the CFTC adopted rules in 2002 that established margin levels for unhedged security futures at 20 percent. The partnering agencies are adopting the proposed margin requirement to set the required margin level for each long or short unhedged position in a security future at 15 percent of its current market value in keeping with the asymmetry in margin requirements resulting from the 15 percent margin level that has been established for security futures and comparable financial products held in a securities portfolio margin account.
Currently, there are no security futures contracts listed for trading on US exchanges. The final rule amendments, however, would set a 15 percent level for security futures if another exchange were to launch security futures contracts or an existing exchange were to continue operations.
The final rule will be effective 30 days following publication in the Federal Register.
Joint Request for Comment: Portfolio Margining of Uncleared Swaps and Non-Cleared Security-based Swaps
The joint request for comment welcomes public remarks regarding:
- potential ways to implement portfolio margining of uncleared swaps and non-cleared security-based swaps
- opportunities to enhance efficiencies and reducing complexity
- increasing consistency and adding resiliency to the financial system through adjustments to current margin rules
Portfolio margining generally describes the cross margining of related positions in a single account. Portfolio margining of uncleared swaps, non-cleared security-based swaps, and related positions can offer benefits to customers and the markets, such as fostering greater efficiency in margin calculations regarding offsetting positions. Facilitating portfolio margining for uncleared swaps, non-cleared security-based swaps, and related positions call for careful consideration to guarantee that any customer protection and relevant regulatory matters and potential effects are appropriately considered and addressed.
Regulation of Non-Cleared Security-based Swaps and Uncleared Swaps
Under the Dodd-Frank Act, the SEC has jurisdiction over non-cleared security-based swaps and the CFTC has jurisdiction over uncleared swaps. The SEC has adopted margin and segregation rules applicable to nonbank security-based swap dealers and the CFTC has adopted margin rules (including minimum requirements for the protection of collateral) for uncleared swaps applicable to nonbank swap dealers. The requirements of these rules vary in some ways that would be relevant to portfolio margining, as discussed in the request for comment.
The table below summarizes some of the similarities and differences between the agencies’ margin rules:
|Requirement||SEC Margin Rule for Non-Cleared Security-based Swaps||CFTC Margin Rule for Uncleared Swaps|
|Dealer Must Collect/Post Variation Margin||Required, unless exception||Required, unless exception|
|Dealer Must Collect Initial Margin||Must collect from all counterparties, unless a counterparty, threshold or legacy exception applies||Required collection from other swap dealers and financial end users with material swaps exposure, unless a counterparty threshold or legacy exception applies|
|Dealer Must Post Initial Margin||Permitted, but not required||Required posting to other swap dealers and financial end users with material swaps exposure, unless a counterparty threshold or legacy exception applies|
|Dealer Can Use An Approved Initial Margin Model (including an industry standard model)||Permitted; provided Broker-dealer/SBSDs must use a standardized method for equity security-based swaps||Permitted|
|Initial Margin Posted to/by Dealer Must Be Held by Third-Party Custodian||Permitted, but not required||Required|
|Waiver of Segregation Requirements for Initial Margin Collateral||Permitted; provided that, if the SBSD is a broker-dealer, non-affiliated customers cannot waive segregation||Prohibited|
|Re-hypothecation of Initial Margin Collateral||Permitted under limited circumstances||Prohibited|
Specific Requests for Comment; Different Account Types
The agencies’ request for comment seeks feedback regarding:
- specific aspects of the margining of non-cleared security-based swaps and uncleared swaps
- related positions, including the merits, benefits, and risks of portfolio margining these kinds of positions and on any regulatory, legal, and operational issues related to portfolio margining these various positions in different account types
The table below is organized by account type and position type. It summarizes the current applicable margin and segregation requirements and the types of positions subject to the agencies’ requests for comment:
|Account Type||Types of Positions Subject to Request for Comment||Current Margin Requirements for Account Type||Current Segregation Requirements for Account Type|
|Broker-Dealer/SBSD Securities Account: Portfolio Margin||
||Securities self-regulatory organization (“SRO”) portfolio margin rules|
|Broker-Dealer/SBSD Securities Account: Non-Portfolio Margin||
|Broker-Dealer/SBSD Security-Based Swap Account||
|SBSD (including SBSD/OTC derivatives dealer) Security-Based Swap Account||
|Swap Dealer Swap Account||
||CFTC Rules 23.150 - 23.161 (Margin requirements for swap dealers)||Initial margin must be held at an independent third-party custodian (CFTC Rule 23.157)|
The public comment period will remain open for 30 days following publication in the Federal Register. All comments will be posted on both the CFTC’s website and the SEC’s website. You can submit comments to the CFTC by any of the following methods:
- the CFTC website: https://comments.cftc.gov
- mailing Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581
- delivering them in person at address above
Identify your comments with RIN 3038-AF07.
Submit comments to the SEC by:
- using the SEC’s internet comment form (http://www.sec.gov/rules/other.shtml)
- emailing email@example.com
- mailing Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090
All comments should refer to File Number S7-15-20. If emailing, please include this number in the subject line.