Regulators Review FICC-CME Cross-Margining Expansion
Commentary by Steven Lofchie
The Fixed Income Clearing Corporation ("FICC") proposed rule changes to expand the availability of its "Cross-Margining Arrangement" with the Chicago Mercantile Exchange Inc. ("CME Group") "to positions cleared and carried for customers by a dually registered broker-dealer and futures commission merchant."
In its filing with the SEC, FICC said the expanded arrangement would allow participants to offset margin requirements by recognizing offsetting risks between FICC-cleared U.S. Treasury securities and CME-cleared interest rate futures. FICC said it intends to calculate margin on a gross customer-by-customer basis, establishing specific "Liquidation Portfolios" to ensure customer assets are not used to satisfy proprietary obligations in the event of a default. FICC said that in the event of the bankruptcy of a dually registered broker-dealer and FCM, a customer's assets would be liquidated under bankruptcy provisions applicable to FCMs, not under the regime applicable to broker-dealers. The SEC published notice of FICC's filing with a 60-day extended review period noting the "novel and complex issues" raised by extending cross-margining to customers. The Commission has until April 11, 2026, to issue an objection or non-objection to the proposal.
Following CME Group's filing in late September, the CFTC proposed an Order granting the necessary exemptions to facilitate this structure, allowing firms to deposit futures customer funds at FICC. Under the proposal, securities positions and funds could be commingled with futures accounts, provided they remain protected as customer property under bankruptcy laws. The relief is conditioned on safeguards, including requirements that FICC hold customer margin in segregated accounts at a Federal Reserve Bank or insured commercial bank. Comments on the CFTC proposal are due by January 16, 2026.
Commentary
The significance of these rule changes, assuming that they are all eventually approved, is that it brings back the "basis trade," netting securities risk against offsetting futures risk to reduce margin requirements. Of course, the ultimate level of margin is not yet known. In addition, the clearing houses may require customers to hold a minimum level of margin with them at all times, regardless of the level of risk. That will cause customers to narrow the number of firms through which they hold accounts in which they may effect basis trades.
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