The SEC and CFTC (collectively, the "Commissions") adopted a final rule reducing the margin requirements for security futures. The final rule harmonized the requirements regardless of whether such products are held in a futures account or in a securities portfolio margin account.
The final rule amends CFTC Rule 41.45 ("Required Margin") and SEC Rule 202.403 ("Required Margin") to lower the minimum margin requirement for security futures from 20 percent to 15 percent of the market value for each security future. The lower margin requirements would apply to security futures held in futures accounts and in securities accounts not subject to the portfolio margining rules.
The joint final rule will go into effect 30 days after its publication in the Federal Register.
CFTC Chair Heath P. Tarbert said that the lower margin requirements would make regulation of the security futures market "more efficient." Mr. Tarbert and SEC Chair Jay Clayton said that the joint final rule is a first step toward future collaborative regulatory efforts by the CFTC and SEC to help "jumpstart" the security futures market.
CFTC Commissioner Brian Quintenz noted that the only U.S. exchange with listed security futures recently discontinued its operations. Mr. Quintenz said that while the final rule will make trading security futures more cost-effective, further regulatory action may need to be taken, as trading security futures "may [still] not be sufficiently cost effective to make the product economically viable."
CFTC Commissioner Rostin Benham highlighted that there are currently no securities futures contracts listed for trading on U.S. exchanges. Mr. Benham stressed that the 15 percent margin requirements represent a floor and are "conservative" when taking into account the risk profile of security futures. Commissioner Benham noted that futures commission merchants and broker-dealers remain able to set higher margin requirements to adequately address any increased risks posted to security futures markets and customers.
CFTC Commissioner Dawn Stump expressed regret that the rule change took a decade to implement and will now be adopted without any immediate practical application. Ms. Stump criticized the Commissions for not permitting risk-based margining for security futures, noting (i) that this is permitted in Europe and (ii) the risks [are] "stifling" the security futures market.
CFTC Commissioner Dan Berkovitz agreed that the rule is "too late to be of any near-term benefit," and said it did not pose any new risks to the financial system.
Commentary Nihal Patel
The adopting release has a high ratio of release length to rule-text length (the 148-page release adopts two short sentences of changed rules) and an even higher ratio of length to practical applicability (148 pages to none, at least in the short term). Nevertheless, this release and the Commissions' ongoing consideration of cross-product margining represent an overall positive development for market participants active in trading in CFTC- and SEC-regulated products.
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