This year, clearing houses will look to comingle options
contracts in an attempt to use margin offsets to lower
Dodd-Frank compliance costs for themselves and swaps
The Commodity Futures Trading Commission (CFTC) has not yet
reached a decision on ICE Clear Europe's September petition to
comingle foreign and domestic futures and options contracts. If
the regulator does approve the petition, other clearing houses
are tipped to follow, with a possible migration to similar
Credit default swaps (CDS) are an instrument that has seen
the benefits of commingled contracts in one cleared account. On
January 14, the CFTC followed the SEC's lead in approving ICE
Clear Credit's request for portfolio margining of cleared and
"The only reason that is an issue is the regulatory
structure in the US: single name trades have to be cleared
through an SEC clearing house and index trades are traded
through a CFTC clearing house," says Robert Pickel, CEO of the
International Swaps and Derivatives Association (Isda).
The over-the-counter swaps industry has not been shy about
raising the issue of regulatory arbitrage and capital flight.
Portfolio margining could make that less of a concern.
"Portfolio margining, to the extent it can be expanded across
futures and cleared swaps, may help the US industry remain
competitive with emerging offshore alternatives," Morrison
& Foerster partner David Kaufman says.
Other jurisdictions may pass their own swaps rules,
lessening the impact on liquidity in the US. The European
Commission, for instance, is also considering mandatory
clearing requirements. This would also have the effect of
allowing foreign swaps traders possibly subject to Dodd-Frank
to opt for a substitute compliance programme.
"The question is how close those efforts will be to the US
model to what extent they can fall short and still be
deemed to be comparable by the CFTC," says Donald Lamson, a
partner at Shearman & Sterling.
More work is needed before traders outside the US will know
if they can register in their own jurisdictions instead of the
CFTC, according to James Scwhartz, counsel at Morrison &
Foerster. "No one quite knows what the process will be for
determining what exactly will be subject to substituted
compliance," he says.