SEC Grants Seven Broker-Dealers Approval of Margin Methodology Applied to Cleared CDS Transactions, Subject to Substantial Conditions (with Lofchie Comment)

The SEC has granted seven major broker-dealers temporary approval of a margin methodology to be applied to cleared CDS transactions. This approval, in combination with an exemptive order entered by the SEC last year, will enable the broker-dealers to commingle customers' CDS transactions consisting of swaps and security-based swaps in a segregated account maintained in accordance with section 4d(f) of the Commodity Exchange Act. This, in turn, will enable the broker-dealers to margin the positions on a portfolio basis. The margin methodology approved by the SEC imposes margin requirements based on a model developed by ICE Clear Credit LLC, but with substantially higher requirements. The broker-dealers will be permitted to take a capital charge in lieu of collecting a portion of the margin requirement. The SEC continues to review the broker-dealers’ proposed margin methodologies and may approve different margin methodologies in the future.

Lofchie Comment: Buy-side and sell-side will both complain that the margin requirements are too high. It may be academic at this point, but to me, the fundamental issue is that CDS is not a business that should be forced into either FCMs or broker-dealers: it is a credit business that is much better suited to be done by banks.

See Exemptive Orders: UBS Securities LLC; Morgan Stanley Co. LLC; J.P. Morgan Securities LLC; Goldman, Sachs Co.; Credit Suisse Securities (USA) LLC; Citigroup Global Markets Inc.; Barclays Capital Inc.Related News Items: Numerous Assorted Securities SRO Rule Changes Including FINRA Proposed Rule Change Relating to CDS Margin Requirements; MFA Submits Comments to SEC on Cross-Margining of Single-Name and Index CDS Swaps (with Lofchie Comment); ESMA Publishes Q&A on Short Selling and CDS Regulation (Including Cross-Border Application).