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Credit Traders Said to Win SEC Relief in Portfolio Margin Rules

June 03, 2013

Hedge funds and asset managers will win partial relief from Dodd-Frank Act collateral requirements for credit-default swaps under a policy shift to be announced this week, according to two people briefed on the matter.

The U.S. Securities and Exchange Commission is revising a policy released in March that required some clients to put up double the collateral dealers post at Atlanta-based IntercontinentalExchange Inc. (ICE:US), according to the people, who requested anonymity because the decision isn’t public. The relief applies to portfolio accounts that hold credit swaps tied to single securities as well as indexes.

ICE, owner of the world’s largest clearinghouse for credit swaps, Citadel LLC and other firms have spent more than a year pushing regulators to support the portfolio-margining system for client trades. The SEC may require banks temporarily to collect from clients collateral equivalent to what’s required under clearinghouse rules plus the level required by their own models, according to an e-mail note the Managed Funds Association sent members on May 31.

The change from the March policy may help encourage clearing of trades under Dodd-Frank, the 2010 regulatory law that called for most swaps to be guaranteed at clearinghouses as a way to reduce risk in the financial system.

The Commodity Futures Trading Commission and SEC, which share oversight of the credit-swaps market, have taken steps to reduce the amount of collateral traders must have when they hold swaps in portfolio accounts. Investors have called for the rules to reduce the margin necessary when swaps tied to single securities are offset by trades tied to indexes.

‘Capital Efficiencies’

“There are very few cost-saving measures in Dodd-Frank; this is one of them,” Scott O’Malia, a Republican CFTC member, said yesterday. “Portfolio margining provides the buy-side the same capital efficiencies clearing members have enjoyed.”

Clients could save as much as 80 percent of the amount of margin, also known as collateral, necessary to offset index and single-name trades once they’re held in the same account, according to ICE.

The SEC’s move follows a March 8 letter the agency sent to Goldman Sachs Group Inc. (GS:US), Morgan Stanley (MS:US), Barclays Plc (BARC) and four other dealers governing how much collateral their clients must post. In the letter, the commission told dealers they were required to collect at least double the amount of margin from most of their clients.

To contact the reporters on this story: Silla Brush in Washington at; Dave Michaels in Washington at

To contact the editor responsible for this story: Maura Reynolds at

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