Statement By Commissioner Scott D. O’Malia - Approving Portfolio Margining of Swaps and Security Based Swaps in 4d(f) Accounts

January 14, 2013

Today the Commission has issued an order granting a request made by ICE Clear Credit, L.L.C. (ICE), submitted pursuant to §4d of the Commodity Exchange Act, to hold security-based-swaps in §4d(f) cleared swaps customer accounts subject to the CFTC’s jurisdiction. The SEC is in the process of approving a complementary exemptive order1 allowing security-based-swaps to be held outside securities accounts in §4d(f) cleared swaps customer accounts. Clearing Member Banks of a Designated Clearing Organization (DCO) have been allowed to margin their proprietary swaps in a single account since November of 2011.2 This order will extend the same level of capital efficiency to buy-side firms trading credit default protection.

In granting these orders the Commissions will be paving the way for customers trading both swaps and security-based-swaps to take advantage of the capital efficiencies provided by calculating margin based on the entire portfolio of positions, thereby recognizing margin reductions based on correlated positions.

Although portfolio margining brings great benefits to the market and its participants, in granting ICE’s request, the SEC has set a bad precedent by requiring final SEC approval of the margining methodology employed by a joint Broker Dealer (BD) / Futures Commission Merchant (FCM) offering §4d(f) portfolio margin accounts. Until this order, the margin methodologies employed in §4d(f) accounts was solely within the jurisdiction of the CFTC.

The CFTC currently has regulations in place that set requirements for collecting initial customer margin as well as risk management policies and procedures for clearing members of DCOs. The SEC’s insistence on having final approval of margining methodologies for cleared swaps customer accounts ignores the existence of a comprehensive regulatory framework for §4d(f) accounts.

Allowing an established margining methodology for accounts within the CFTC’s jurisdiction and oversight to remain in place would be the prudent and logical choice, in keeping with both current practice and the statute. By mandating final approval of margin requirements for 4d(f) swap accounts, the SEC has introduced duplicative regulation without providing additional risk mitigation. It is worth noting that the SEC did not insist on any joint authority over applying its bankruptcy regime and has entrusted the Commission to apply its Part 190 standards to all 4(d)(f) accounts of a BD/FCM.

1 http://www.gpo.gov/fdsys/pkg/FR-2012-12-19/pdf/2012-30553.pdf

2 http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/rul112511icecc001.pdf

Last Updated: January 14, 2013