Clearing houses to commingle

Author: | Published: 24 Jan 2013
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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 traders.

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 offshore clearers.

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 security-based CDS.

"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.