Portfolio Margining: SEC Order Grants Exemptions to Permit Portfolio Margining of CDS

Sullivan& Cromwell LLP - January 8, 2013

The SEC has adopted an exemptive order that provides relief from certain Exchange Act requirements otherwise applicable to customer accounts carrying credit default swap positions consisting of swaps and security-based swaps. The relief is available to (i) clearing organizations dually registered as clearing agencies with the SEC and derivatives clearing organizations with the CFTC, and (ii) entities dually registered as broker-dealers with the SEC and futures commission merchants with the CFTC. The relief is available only with respect to accounts of customers that qualify as eligible contract participants. The relief available to a dually registered clearing organization is conditioned on, among other things, adoption of rules by the CFTC permitting portfolio margining of CDS and the clearing organization permitting its clearing members to elect between offering customers accounts that conform to requirements related to segregation and portfolio margining under either the Exchange Act or the CEA. The relief available to a dually registered broker-dealer / futures commission merchant is conditioned on, among other things:

  • the customer entering into a non-conforming subordination agreement;
  • maintenance of margin levels no lower than those determined using a margin methodology that has been approved by the SEC (or its staff); and
  • provision of certain disclosures to customers with accounts participating in a CDS margining program undertaken pursuant to the Exemptive Order.

The SEC seeks comment on all aspects of the Exemptive Order. The Exemptive Order became effective on December 19, 2012 and comments on it are due by February 19, 2013.