Proposed FINRA Margin Requirements for Credit Default Swaps (with Lofchie Comment)

FINRA filed with the SEC a proposed rule change to amend FINRA Rules 4210(g) ("Margin Requirements - Portfolio Margin") and 4240("Margin Requirements for Credit Default Swaps") to permit members to elect to comply with portfolio margining programs that are approved by either the CFTC or the SEC, subject to specified requirements. In addition, the proposed rule change makes other revisions to FINRA Rule 4240 to clarify and update the rule.

The key text of the proposed rule change is as follows:

".02 Portfolio Margin Accounts Holding CDS. The margin requirements set forth in this Rule shall not apply to a member that elects to collect, on an individual portfolio margin account in which CDS are held, margin pursuant to a portfolio margining program that is in compliance with CFTC or SEC rules, regulations or exemptions, provided that such member shall notify FINRA in advance in writing and shall demonstrate to the satisfaction of FINRA staff that the member has implemented an appropriate written risk analysis methodology as required by FINRA Rule 4210(g)(1)."

Lofchie Comment: The discussion of the proposed rule change contained in the proposing release is inconsistent. In some places, the discussion says that the margin requirements must be approved by the CFTC AND the SEC, while in other places, approval by either one agency OR the other is sufficient. That said, the actual rule proposal uses "or." Note that a FINRA member firm must have a risk analysis for the collection of CDS margin that has been approved by FINRA; a firm cannot simply rely on the rules as written.

See: Text of Proposed Rule Change.See also: Lofchie's Guide to Broker-Dealer Regulation, Margin Chapter (credit default swaps are discussed in Section VI of the Chapter). See also: MFA Submits Comments to SEC on Cross-Margining of Single-Name and Index CDS Swaps (with Lofchie Comment).