CFTC and SEC Hold First Joint Meeting, Approve Joint Final Rule on Security Futures Margin, Request Comment on Portfolio Margining, and Issue Joint Letter Regarding CFTC 'Bad Actor' Orders | Practical Law

CFTC and SEC Hold First Joint Meeting, Approve Joint Final Rule on Security Futures Margin, Request Comment on Portfolio Margining, and Issue Joint Letter Regarding CFTC 'Bad Actor' Orders | Practical Law

The CFTC and SEC approved a joint final rule lowering the minimum margin requirement for security futures held in futures accounts and a joint request for public comment on the portfolio margining of uncleared swaps and non-cleared security-based swaps. The chairmen of the agencies also issued a joint letter regarding CFTC "bad actor" orders.

CFTC and SEC Hold First Joint Meeting, Approve Joint Final Rule on Security Futures Margin, Request Comment on Portfolio Margining, and Issue Joint Letter Regarding CFTC 'Bad Actor' Orders

by Practical Law Finance
Published on 03 Nov 2020 • USA (National/Federal)
The CFTC and SEC approved a joint final rule lowering the minimum margin requirement for security futures held in futures accounts and a joint request for public comment on the portfolio margining of uncleared swaps and non-cleared security-based swaps. The chairmen of the agencies also issued a joint letter regarding CFTC "bad actor" orders.
On October 22, 2020, the CFTC and the SEC (collectively, the Commissions), at their first ever joint meeting, issued:
The final rule and request for comment are the latest components of the ongoing effort between the Commissions to further harmonize their derivatives regulatory regimes.
On October 23, 2020, CFTC Chairman Heath P. Tarbert and SEC Chairman Jay Clayton (collectively, the Chairmen) also issued a joint letter that establishes a one-year pilot program to formalize their practice relating to CFTC orders that implicate the "bad actor disqualification" provisions of Regulation A and Regulation D under the Securities Act of 1933 (Securities Act) (see Joint Letter Regarding 'Bad Actor' Disqualifications).

Joint Final Rule on Security Futures Margin

The Commissions announced the proposal to lower the minimum margin requirement for security futures on July 9, 2020 (see Legal Update, SEC and CFTC Propose Joint Reduction of Margin Requirements for Security Futures to 15 Percent).
The joint final rule:
  • Lowers the minimum margin requirement for unhedged security futures held in a futures account from 20% to 15%, aligning with the minimum margin requirement for security futures held in a securities portfolio margin account or a securities account that is not approved for portfolio margining.
  • Re-publishes the margin offset table adopted in 2002 so that it is consistent with the approved reduction in margin. The table appears on pages 51-55 of the final rule.
  • Declines to revise the position taken by the CFTC's Division of Clearing and Risk in its 2012 interpretive letter stating that the specific initial margin (IM) requirements under CFTC Rule 39.13(g)(8)(ii) do not apply to security futures positions, as requested by a commenter of the proposal who sought clarification about the intersection of the security futures rules and CFTC general margin requirements.
The final rule becomes effective on December 24, 2020.

Request for Comment on Portfolio Margining of Uncleared Swaps and Non-Cleared SBS

The request for comment seeks public input on ways to implement portfolio margining of uncleared swaps and non-cleared SBS, including on the merits, benefits, and risks of portfolio margining these types of positions, and on any regulatory and operational issues associated with portfolio margining them.
Under portfolio margining, parties may post collateral to cover their exposure under multiple contracts on a net basis, rather than posting gross amounts to cover exposure under each individual contract regardless of whether there may be an offsetting position between the parties under a contract. The Commissions issued a joint statement on derivatives portfolio margining harmonization efforts in 2019 (see Legal Update, CFTC-SEC Issue Joint Statement on Derivatives Portfolio Margining Harmonization Efforts).
More specifically, the Commissions request public comment on whether:
  • Uncleared swaps, non-cleared SBS, options on futures, and security futures should be permitted to be portfolio margined in a securities account subject to:
  • Uncleared swaps, non-cleared SBS, and over-the-counter (OTC) securities options should be allowed to be portfolio margined in an SBS account.
  • Uncleared swaps and non-cleared SBS should be allowed to be portfolio margined in a swap account.
  • The Commissions should consider any other potential portfolio margining scenarios with regard to uncleared swaps, non-cleared SBS, and other related positions.
The request for comment also asks commenters to address any potential regulatory or operational issues involving a particular portfolio margining scenario, as well as any costs, benefits, and competitive impact the Commissioners should consider in their evaluation.
Comments must be received on or before December 7, 2020.

Joint Letter Regarding 'Bad Actor' Disqualifications

Under Regulations A and D of the Securities Act, persons or entities are disqualified from availing themselves of certain exemptions from registration for securities offerings if certain triggering events occur; such triggering events include certain final orders issued by the CFTC.
The letter issued by the Chairmen establishes a one-year pilot program to set out and formalize the practice and agreement between the Chairmen relating to such CFTC orders, namely, that given adequate notice and where appropriate, the CFTC may include language in its orders advising the SEC that disqualification should not arise as a result of a CFTC final order.
The letter is effective upon execution and is effective for one year.