CFTC Grants Order to ICE Clear Credit Permitting Portfolio Margining of Swaps and Security-Based Swaps in a Cleared Swaps Customer Account (with Lofchie Comment)

The CFTC has issued an order granting a request made by Ice Clear Credit LLC ("ICC"), a CFTC-registered derivatives clearing organization ("DCO"), pursuant to Section 4d(f) of the Commodity Exchange Act that is also registered with the SEC. The order sets forth terms and conditions under which ICC and its clearing members which are dually registered as futures commission merchants with the CFTC, and as broker-dealers with the SEC, may (1) hold credit default swaps ("CDS") and security-based CDS in a cleared swaps customer account subject to Section 4d(f) of the CEA; and (2) portfolio margin such CDS and security-based CDS held in the cleared swaps customer account. In the event of the insolvency of the FCM (broker-dealer) holding the account, the customer's assets would be distributed pursuant to the rules of the CFTC, not those of the SEC.

The SEC previously had issued a complementary exemptive order permitting security-based CDS, which are subject to SEC jurisdiction, to be held outside a securities account and commingled and portfolio margined with CDS in a cleared swaps customer account regulated by the CFTC. ICC clearing members have been allowed to hold and portfolio margin their proprietary CDS and security-based CDS in a single account since November 2011. This order will extend the same treatment to the customers of ICC’s clearing members.

Lofchie Comment: Regulatory actions like this one are a great example of the tremendous irrationality of the current dividing line between the SEC and the CFTC. We have essentially identical products (various types of CDS), some of which are regulated by the SEC and some of which are regulated by the CFTC, with the result that ICC and ICC's member firms must be subject to regulation by both agencies, and exemptive relief must be obtained to record the related CDS transactions in the same account. There could hardly be a more blunt illustration of the waste of regulatory resources that our current system creates, as well as the cost to the private sector that this regulatory division creates. In a global economy in which the efficiency of our regulatory system has an impact on t he competitiveness of firms and markts doing business in the United States (and ultimately the ability to create jobs), this is not the way to compete.

View Order in full here (Cabinet link).See also: Statement of Support by Chairman Gary Gensler - Client Portfolio Margining; Statement By Commissioner Scott D. O'Malia - Approving Portfolio Margining of Swaps and Security Based Swaps in 4d(f) Accounts.