On December 7, 2020, Better Markets was one of six commenters to file letters in response to a Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) request for comment on portfolio margining of uncleared swaps and security-based swaps.  We commended the agencies for responsibly seeking public comment through a request-for-comment release and not issuing a premature portfolio margining proposal.

There are substantial legal complexities associated with portfolio margining of uncleared derivatives (and related instruments) across multiple account types at SEC and CFTC registrants.  Inconsistent elements of margin, segregation, capital, and bankruptcy frameworks across broker-dealers, OTC derivatives dealers, security-based swap dealers, and swap dealers would raise a number of intractable conflict-of-laws issues.  Furthermore, these frameworks likely would not be harmonized for portfolio margining purposes without the agencies deferring on (effectively waiving) otherwise irreconcilable elements of statutory and regulatory requirements.

Thus, although a portfolio margining framework conceptually could be risk-reducing, it also could incentivize market participants to migrate derivatives activities into the most permissive account and registrant categories and open avenues for regulatory arbitrage of margin and capital requirements.  That could be especially problematic in this context.  Portfolio margining, by its nature, would broadly reduce derivatives-related margin and capital levels.  If a finalized framework facilitates the introduction of new derivatives-related risks into account and registrant categories without otherwise applicable requirements, benignly described efforts to merely “harmonize” SEC and CFTC requirements and recognize legitimate risk offsets in practice could—and likely would—increase certain types of risks to intermediaries and/or the U.S. financial system. 

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