On December 14, 2012 and January 14, 2013, the SEC and CFTC, respectively, issued exemptive orders regarding portfolio margining of credit default swaps (CDS), subject to terms and conditions described in the orders. While the CFTC release was issued specifically in response to ICE Clear Credit LLC, which submitted a request to both regulators, the SEC order includes general conditions that, if satisfied by a clearing member that is both a futures commission merchant (FCM) registered with the CFTC and a broker-dealer registered with the SEC, permit the clearing member to provide customers with CDS portfolio margining across CDS portfolios that include both CDS and security-based CDS.

Under true portfolio margining, a customer counterparty such as a fund or commercial end user is able to post margin collateral based on the risk composition of its entire portfolio of positions with the dealer, rather than on the aggregate of the individual positions contained within the portfolio. This is known as net margining, or portfolio margining, as opposed to gross margining.

For information on portfolio margining, see Practice Note, Practical Guide to Counterparty Collateral Negotiation: Considerations for End Users: Net (Portfolio) Margining v. Gross Margining. For information on portfolio margining under Dodd-Frank, see Practice Note, The Dodd-Frank Act: Derivatives Margin Collateral Rules: Portfolio Margining under Dodd-Frank.

Under Title VII of the Dodd-Frank Act, single-name CDS and CDS on narrow-based indices are security-based swaps (SBS) that are regulated by the SEC, while CDS on broad-based indices are non-security-based swaps regulated by the CFTC. Because certain segments of the CDS market are therefore regulated differently by different regulators, CDS portfolio margining, like portfolio margining of swaps generally, has been rendered impracticable under Dodd-Frank. These orders provide for portfolio margining of swaps portfolios comprised of both security-based and non-security-based CDS.

This has many useful implications for the commercial end-user market because end users and funds are now able to take advantage of synergistic efficiencies in their credit risk mitigation activities. However, while these orders address the CDS market, derivatives portfolio margining remains a challenge under Dodd-Frank to the extent a portfolio includes swaps other than CDS. The orders also do not cover uncleared CDS.

On January 14, 2013, the CFTC issued an exemptive order permitting ICE Clear Credit (ICC) and its clearing members that are dually registered as broker-dealers (BDs) and FCMs (collectively, ICE Participants) to:

The customer property must be accounted for and treated and dealt with as belonging to the cleared swaps customers of the ICE Participant. The order sets out the terms and conditions that ICC and the ICE Participants must follow for the exemptive order to apply. The CFTC's exemptive order became effective on January 14, 2013.

On December 14, 2012, the SEC issued an exemptive order providing exemptive relief from certain requirements of the Exchange Act and permitting:

The SEC exemption is applicable to entities other than ICC and the ICE Participants that fulfill the requirements specified in the SEC order.

The SEC's exemptive order became effective on December 19, 2012, but the SEC is accepting comments until February 19, 2013.