ICE Gets Green Light on Portfolio Margining

Terry Flanagan

ICE Clear Credit, the derivatives clearing arm of exchange operator IntercontinentalExchange, has received the go-ahead from regulators to offer portfolio margining to buy-side customers of its clearing members.

The U.S. Securities and Exchange Commission and Commodity Futures Trading Commission have approved ICE Clear Credit’s request to allow clearing members that are dually registered as futures commission merchants and broker-dealers to commingle and portfolio margin credit default swaps (CDSs) and security-based CDSs in a cleared swaps customer account.

Portfolio margining, which is a general term that includes such methods as single or one-pot margining, enables clearing members to offset positions in multiple asset classes for the purpose of calculating risk, and is very much in the spirit of the Dodd-Frank Act, which seeks to promote greater transparency into the commodities markets.

“Margin efficiency is a focus topic for the buy side, given the amount of margin that is required to be posted under the Dodd-Frank Act,” said Supurna VedBrat, managing director and co-head of electronic trading and market structure at asset manager BlackRock, in a statement. “This is a step in the right direction, improving the capital efficiency of clearing and providing a proven and well understood regulatory regime for clearing index and single name credit default swaps.”

The move is yet another step in the ongoing ‘futurization’ of OTC markets.

“We have seen huge advances across the infrastructure of our industry driven by the continued evolution of electronic trading and improved centralization and automation of our clearing systems,” said Chip Register, managing director at Sapient Global Markets, a provider of services to financial and commodity markets.

“Bringing all of these together is an industry move to a model where more and more tasks are performed by newly created and shared utilities as opposed to the old model of every firm having a proprietary infrastructure to manage similar functions between institutions.”

Many OTC swaps market participants, having already utilized existing listed derivatives exchanges to trade and hedge part of their economic exposures, thereby posting margin and collateral at the respective exchanges’ clearing houses, “find it prohibitively expensive to post separate, additional margins/collaterals at the newly formed central counterparties (CCPs) as required by the Dodd-Frank Act, especially since they are not allowed to post just one set of collateral across asset classes and net out their margin requirements between the futures/options exchange clearing house and the CCP,” according to a report by research firm Aite Group.

ICE Clear Credit filed petitions with the CFTC and the SEC to provide portfolio margining for proprietary and buy-side accounts in October 2011. ICE Clear Credit received regulatory approval in late 2011 for proprietary positions and began portfolio margining for clearing members in January 2012.

Approvals for buy-side portfolio margining were granted in December 2012 by the SEC and on January 14, 2013 by the CFTC.

ICE Clear Credit will launch clearing of North American corporate single names and Latin American sovereigns and portfolio margining for buy-side accounts this quarter.

Portfolio margining allows clients to achieve capital efficiencies by clearing index and single name CDSs in a single segregated CFTC customer account.

Previously, a client would have been required to post full margin on a single-name position held in an SEC account as well as full margin on an index position held in a CFTC account even if the two positions offset each other from a risk perspective.

By combining the positions in one CFTC account and applying a portfolio margining methodology to reduce the amount of margin needed, the clearing house provides capital efficiencies while maintaining strong risk management practices.

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