Bloomberg News

Protecting Customer Money Could Double Clearinghouse Margins

November 03, 2010

Money managers could pay 150 percent more to guarantee swaps with clearinghouses if the system some prefer for protecting margin is adopted, said Lauren Teigland- Hunt, an attorney who represents hedge funds and institutional investors.

Asset managers are asking regulators such as the Commodity Futures Trading Commission to consider creating rules so that their margin payments aren’t used to help fund the default of another swaps user, Teigland-Hunt said today in Chicago at the Futures Industry Association conference. Clearinghouse rules mandate now that users share the risk of covering defaults.

The big concern among other asset managers is what such an approach would cost, said Teigland-Hunt, managing partner of New York-based Teigland-Hunt LLP. If margin is held in individual accounts, and not pooled among all users of a bank as is done now, and money managers are allowed to bypass funding defaults “that could cause margin payments to go up over 150 percent.”

Swaps clearing, which is now voluntary, will become mandatory for most of over-the-counter derivatives under the Dodd-Frank Act passed in July. Swaps complicated efforts to resolve the financial crisis when it couldn’t be easily determined how interconnected banks had become through trading the contracts.

CFTC Commissioner Michael Dunn, speaking on the same panel discussion as Teigland-Hunt, said the CFTC is taking the issue of segregating customer margin funds seriously.

“We as a commission hold that sacrosanct,” he said.

Lehman Default

After the 2008 default of Lehman Brothers Holdings Inc., one of the largest swaps dealers, hedge fund and asset manager customers lost billions of dollars because their margin wasn’t segregated within the bank. After that experience, the funds are very conscious of how their money is protected, Teigland-Hunt said.

Gary DeWaal, general counsel for the futures broker Newedge USA LLC, said exempting some users from funding a default violates the risk-sharing idea of clearinghouses.

“Clearing is nothing more than mutualization of risk,” he said. “If you’re saying central clearing is a good thing, you’re saying mutualization of risk is a good thing.”

To contact the reporter on this story: Matthew Leising in New York at

To contact the editor responsible for this story: Alan Goldstein at

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