The SEC issued an order granting conditional exemptive relief from compliance with certain provisions of the Exchange Act in connection with a program to commingle and portfolio margin customer positions in cleared credit default swaps, which include both “swaps” and “security-based swaps,” in a segregated account. The order is necessary due to the two-track regime in the United States for the treatment of derivatives based on securities. “Security-based swaps,” which are also “securities,” are subject to the segregation and other customer protection requirements of the SEC under Sections 3E and 15(c)(3) of the Exchange Act and the rules thereunder. “Swaps,” meanwhile, including index CDS, are subject to the requirements of the CEA and the CFTC.
The order grants an exemption to dually-registered BD/FCMs from the relevant provisions of the Exchange Act, and from any requirement to treat an “affiliate” as a “customer” under Exchange Act Rules 8c-1 and 15c2-1, when offering a program to commingle and portfolio margin positions in CDS in customer accounts maintained in accordance with Section 4d(f) of the CEA.
The relief is subject to five conditions, including that clearing agency/DCOs must seek necessary relief from the CFTC (which the SEC “anticipates” that the CFTC will “consider” to facilitate portfolio margining) following the adoption of SEC final margin and segregation requirements for security-based swaps in order to permit BD/FCM clearing members to maintain customer funds in an account maintained pursuant to Section 3E of the Exchange Act as well as under 4d(f) of the CEA. The driving force behind this requirement is to provide customers with a choice as to the type of account (i.e., subject to the SEC or the CFTC rules) that they prefer. Of course, it remains to be seen what exactly will be the differences between the two types of regimes, as the SEC margin and segregation rules remain in proposed form.
Click here to view Order (links externally to SEC website).