SEC Updates CDS Portfolio Margining Exemptions and Issues Order Permitting CDS Portfolio Margining at LCH | Practical Law

SEC Updates CDS Portfolio Margining Exemptions and Issues Order Permitting CDS Portfolio Margining at LCH | Practical Law

The SEC adopted modifications to certain conditions under the Exchange Act, permitting portfolio margining of cleared credit default swaps (CDS) that are security-based swaps (SBS) with non-SBS CDS by registered clearing agencies and broker-dealers that are also registered with the CFTC.

SEC Updates CDS Portfolio Margining Exemptions and Issues Order Permitting CDS Portfolio Margining at LCH

by Practical Law Finance
Published on 17 Nov 2021 • USA (National/Federal)
The SEC adopted modifications to certain conditions under the Exchange Act, permitting portfolio margining of cleared credit default swaps (CDS) that are security-based swaps (SBS) with non-SBS CDS by registered clearing agencies and broker-dealers that are also registered with the CFTC.
On November 5, 2021, the SEC adopted changes to the exemptions (2021 exemptions) under Section 3E of the Securities Exchange Act of 1934 (Exchange Act), permitting portfolio margining of cleared credit default swaps (CDS) that are security-based swaps (SBS). These changes in effect replace the December 2012 order (December 2012 order) on CDS portfolio margining (see Legal Update, Regulators Permit Cleared CDS Portfolio Margining).
The exemption applies to:
  • SEC-registered clearing agencies that are dually registered with the CFTC as derivatives clearing organizations (DCOs).
  • SEC-registered broker-dealers that are dually registered with the CFTC as broker-dealers futures commission merchants (FCMs).
Clearing agencies dealing in CDS for cleared-swaps consumers in segregated accounts (defined in Section 4d(f) of the Commodities Exchange Act (CEA)), and any affiliates in cleared swaps propriety accounts, are exempt from Section 3E requirements. The exemptions also permit portfolio margining for these clearing agencies.
The 2021 exemptions adopted by the SEC:
  • Remove conditions (a)(1) and (a)(2) regarding exemptions for clearing agencies/DCOs, which provided an option for SBS customers to portfolio margin cleared SBS and swaps that are CDS in an SBS account.
  • Modify conditions (b)(1)(ii) and (2)(ii) in the December 2012 order, which required subordination agreements and instead require the scope of subordination to extend only to money, securities, or other property held in the subordinating person's CFTC-cleared customer or proprietary account.
  • Eliminate condition (b)(3), which required approval of a broker-dealer or FCM margin methodology and instead allow an internal risk management program approved by the SEC.
On November 10, 2021, the CFTC granted an order permitting the London Clearing House (LCH SA), a CFTC-registered DCO, and its dually registered FCM-and-broker-dealer clearing members to:
  • Hold CDS and security-based CDS in a cleared swaps customer account subject to Section 4d(f) of the CEA; and
  • Provide portfolio margining for CDS and security-based CDS held in this customer account.