CFTC and SEC Want to Expand Portfolio and Cross-Margining
Commentary by Steven Lofchie
The CFTC and the SEC solicited comment on "potential ways to further implement portfolio and cross-margining of securities and derivatives."
In a Joint Request for Comment, the agencies described evolving markets that are becoming more interconnected. They said traders increasingly hold related positions across cash securities, options, futures, and swaps. They highlighted that current rules can force these related positions into separate accounts with different margin requirements. As a result, they argued, margin math may not recognize offsetting exposures across securities and derivatives. The agencies said this result can tie up capital and raise liquidity demands without adding to market stability.
The agencies noted that earlier this year, they issued conditional exemptive orders for customer cross-margining of cleared U.S. Treasury securities and Treasury futures (see prior coverage). They also pointed to prior orders covering cleared credit default swaps.
Commentary
One significant aspect of this effort is that cross-margining of SEC-CFTC products likely means that cross-margined accounts become subject to the CFTC bankruptcy scheme rather than the SEC scheme because the CFTC does not provide insurance in the manner of SIPA. It is much easier to push products away from the insurance protection than to provide it to products that don't already have it (which would require Congressional action.)