The SEC voted to propose a reduction in the margin requirement for an unhedged security futures position and to align the margin offset table for security futures with the reduced margin requirements. The proposal is a joint proposal with the CFTC and will be published in the Federal Register only if the CFTC votes in favor of the proposal. (A vote is scheduled for July 11.)
The proposal would amend CFTC Rule 41.45 ("Required margin") and SEC Rule 403 ("Requirements as to paper, printing, language and pagination") on customer margin requirements for security futures to align the minimum margin required for security futures to other exchange-traded products (e.g., options). Specifically, the proposal would lower the minimum margin requirement from 20 percent to 15 percent of the market value for each security future.
Commissioner Robert J. Jackson Jr. dissented, saying that the proposal "favors deregulatory intuition over market-driven analysis." Among other things, Mr. Jackson said that (i) lower margin requirements do not fully explain why security futures are unpopular, (ii) the proposal does not provide a "serious economic analysis" as to why margin requirements should be lowered, and (iii) reasonable alternatives were not considered, such as reducing the contract size for single-stock futures.
Comments must be submitted within 30 days of publication of the proposal in the Federal Register, which will not take place unless the CFTC also votes to publish the proposal.
Commentary / Nihal Patel
The SEC proposal states that "security futures are 'delta one derivatives' that are more similar to total return equity swaps [than exchange-traded options]." Despite this similarity, the proposal largely seeks to compare security futures to exchange listed options. This is a somewhat odd choice from a policy perspective, but a 15% requirement is also consistent with the initial margin requirement for equity security-based swaps in the SEC's recently adopted rules. Of course, in the security-based swaps ("SBS") context, that requirement may be somewhat rarely applied, given that (i) many security-based swap dealers ("SBSDs") are banks not subject to the SEC rules; (ii) non-broker-dealer SBSDs subject to the rules can use models rather than the schedule requirement; and (iii) all SBSDs are allowed to apply a threshold to SBS IM.
There are statutory and other reasons that lead to the differing treatment, many of which are outside of the SEC's control. Still, it seems right on policy that the SEC should seek, where possible, to have margin requirements be consistent across products of similar type.
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