SEC and CFTC Bolster Cooperation by Harmonizing Minimum Margin Levels for Both Securities Future Accounts and Securities Portfolio Margin Accounts

Written by Taher Kameli & Chathan Vemuri

Over the past several years, experts have called for the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (CFTC) to harmonize their regulatory standards in order to minimize duplicative or contradictory regulatory reporting requirements.[1] Not doing so has led to market participants creating “two different reporting systems and/or processes – one for the CFTC and one for the SEC” despite both require the reporting of similar data.[2] The obstacles posed to cross-jurisdictional transparency in following the regulatory rules and the convoluted nature of following them has been financially burdensome to market participants looking to invest.[3] Not to mention challenging the ability to carry out proper regulatory oversight, “limiting the ability to consolidate and view data across regulatory bodies[.]”[4] Some have argued that doing so (especially with regards to substituted compliance with the synchronized rules for either agency) would reduce operational risks by minimizing duplicative or contradicting requirements, improve the quality of data necessary for market surveillance and create clear-cut efficiencies for market participants.[5] Already, the two organizations have started coordination, with both agencies signing a Memorandum of Understanding and the CFTC affirming its commitment to reform efforts at coordination with the SEC.[6]

On October 22, 2020, in a major breakthrough in their efforts at harmonizing its regulations and requirements, the SEC and the CFTC both approved a Joint Final Rule harmonizing the minimum margin level for security futures held in a futures account with the minimum margin level for security futures held in a securities portfolio margin account.[7] They also issued “a joint request for [public] comment on the portfolio margining of un[-]cleared swaps and non-cleared security-based swaps.”[8] Specifically, both agencies adopted a “margin requirement to set the required margin level for each long or short unhedged position in a security future at 15 percent of its current market value.”[1] Furthermore, security futures would be set at a 15 percent level by the Final Rule, “if an existing exchange were to resume operations or another exchange were to launch security futures contracts.”[2] This was in response to the asymmetry between the two agencies’ margin requirements due to the 15 percept margin level that was “established for security futures and comparable financial products held in a securities margin account.”[3]

In addition to the Joint Final Rule, both the SEC and the CFTC issued a Joint Request for Comment on how to carry out the portfolio margining of un-cleared swaps and non-cleared security-based swaps.[4] Portfolio margining is the cross-margining of related positions in a single account.[5] They seek public input into whether changing the current margin rules would help to enhance efficiency, reduce complexity, increase consistency, and strengthen the financial system.[6] Both Commissions seek the aid of public comment on the discrepancies in margin and segregation requirements for positions affiliated to various account types.[7] Once the public input goes into effect, a 30-day comment period will begin for members of the public to voice their opinions about this proposals’ strengths, weaknesses, and other aspects about it requiring the Commissions’ attention.[8]

Officials for both agencies have highlighted the importance of these joint actions for harmonizing their regulations and requirements to make them more effective and beneficial for investors and markets.[9] As CFTC Chairman Heath P. Tarbert noted, “[t]he markets [that] the CFTC and SEC regulate are highly interconnected, so coordination is vital to regulatory effectiveness.”[10] Similarly, SEC Chairman Jay Clayton stated that “[c]ollaboration and coordination between the two Commissions are critical to achieving our shared regulatory objectives.”[11] Furthermore, it is hoped by CFTC Chairman Tarbert that the action is a first step to jump-starting the security futures market, as the US has lacked a venue for trading single-stock futures since the exchange OneChicago LLC permanently folded up in September.[1] At the same time, other SEC Commissioners who had opposed the margin change expressed concerns about the lack of clarity from agencies as to how the minimum margin requirement decrease would benefit the futures market with regards to different stocks, as well as the lack of evidence justifying lowering required margins on highly leveraged products.[2]

Please contact the Law Offices of Kamelli & Associates, P.C. at info@kameli.com, or please call us at +1 (312)-233-1000 if you have any questions about how the new regulations work and how to conduct future securities investments in light of them.

[1] Andrew Ramonas, SEC, CFTC Adopt Margin Change in Bid to Revive Stock Futures, Bloomberg Law (Oct. 22, 2020, 12:50 PM) available at https://www.bloomberglaw.com/document/XFHRVMEG000000?bna_news_filter=securities-law&jcsearch=BNA%2520000001755113d874abff757fdb0d0001#jcite

 

[2] Id.

[1] Id.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id. (The Table provided at the very end of the cited article lists the different account type and its accompanying positions, for whose margin and segregation requirements, both Commissions seek public comment and input.)

[8] Andrew Ramonas, SEC, CFTC Adopt Margin Change in Bid to Revive Stock Futures, Bloomberg Law (Oct. 22, 2020, 12:50 PM) available at https://www.bloomberglaw.com/document/XFHRVMEG000000?bna_news_filter=securities-law&jcsearch=BNA%2520000001755113d874abff757fdb0d0001#jcite

[9] At Joint Open Meeting, CFTC and SEC Approve Final Rule on Security Futures Margin and Request for Comment on Portfolio Margining, CFTC.gov (Oct. 22, 2020) available at https://www.cftc.gov/PressRoom/PressReleases/8292-20

[10] Id.

[11] Id.

[1] Mark Wetjen, Harmonize SEC, CFTC Rules for a Better Trading World, The Hill (Sept. 25, 2018, 3:00 PM EDT) available at https://thehill.com/opinion/finance/408345-harmonize-sec-cftc-rules-for-a-better-trading-world

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] At Joint Open Meeting, SEC and CFTC Approve Final Rule on Security Futures Margin and Request for Comment on Portfolio Margining, SEC.gov (Oct. 22, 2020) available at https://www.sec.gov/news/press-release/2020-264

 

[8] Id.