NYSE and CBOE look into mixed accounts
By Jeremy Grant in Washington
Wed Nov 1, 3:55 PM ET
The two top US financial regulators have lent support for the first time to solving one of the most thorny issues in securities and futures trading: how to allow cross-margining.
This concept would allow the inclusion of futures products in a new type of account being contemplated by both the New York Stock Exchange and the Chicago Board Options Exchange.
The new account would cut overall margins - to 15 per cent overall, in some cases - and could free significant capital for brokers and their clients.
It would also be an important step towards creating an environment in the US that would stimulate trading across the full range of securities and futures - so-called "multi-asset" trading.
A "portfolio margining" account would offer a "risk-based" margining system that took account of the way stocks and options held in the same account could offset each other's risks.
This is an alternative to the "Reg T" margining system, in place since the Wall Street crash of 1929. Reg T prescribed margin for stocks trading at up to 50 per cent.
But there are significant obstacles to the inclusion of futures in a portfolio margining account.
One is the different insurance treatments afforded securities and futures in the event of trading defaults and bankruptcy.
The second is jurisdictional. Inclusion would mix up futures, regulated by the Commodity Futures Trading Commission, and securities (stocks and options), regulated by the Securities and Exchange Commission.
However, the chairmen of the two regulators have agreed to support the creation of a "working group", backed by the Futures Industry Association and the Securities Industry Association, to resolve such issues.
The working group was proposed by Tony Leitner, a former managing director at Goldman Sachs.
Erik Sirri, head of market oversight at the SEC, said: "I think there is a commitment to look at how issues can be resolved and [the two regulators] are supportive of the group coming up with some recommendations."
The issue is delicate as joint oversight by the two regulators is so far limited to security futures - sometimes called single stock futures - and futures on debt indices.
A second problem is that some within the CFTC are unconvinced that portfolio margining has value for the futures community.
Craig Donohue, CEO of the Chicago Mercantile Exchange, believes "regulatory complications" could be reduced by examining his exchange's experience with similar margining arrangements where futures and securities accounts are kept separate. He hopes the group will find "significant efficiencies" for the two industries. |
