Under Section 7 c 3 B of the Exchange Act, 74 the financing of the market making or underwriting activities of a member of a national securities exchange or a registered broker-dealer is excluded from the scope of federal margin regulation.
First, the Commissions are adding a provision regarding the interpretation of the security futures margin rules. The Commissions have also decided that it is unnecessary to restate the applicability of existing net capital requirements under CFTC and SEC rules, or to impose additional net capital requirements, as a condition of the exclusion for persons acting as market makers.
It does not cover margin requirements imposed by clearing agencies on their members. Extensions of Credit The Final Rules prohibit any extension of credit with respect to security futures, if the extension of credit is designed to evade or circumvent the security futures margin requirements.
In addition, the term "customer" is defined under the Final Rules as any person or persons acting jointly on whose behalf a security futures intermediary effects a security futures transaction or carries a security futures position, or who would be considered a customer of the security futures intermediary according to the ordinary usage of the trade.
As a result, the customer will be economically neutral but will be required to hold both positions to expiration and meet daily variation settlement calls with respect to each contract.
Section 7 c 2 of the Exchange Act directs the Federal Reserve Board to prescribe rules regarding customer margin for security futures products, but it does not confer authority over margin requirements for clearing agencies and derivatives clearing organizations.
Exceptions from the Reproposed Margin Requirements. More specifically, the Final Rules define an exempted person as a member of a national securities exchange, a registered broker or dealer, or a registered futures commission merchant, a substantial portion of whose business consists of transactions in securities, commodity futures, or commodity options with persons other than brokers, dealers, futures commission merchants, floor brokers, or floor traders, including a person who: One commenter addressed this exclusion and maintained that the exclusion was confusing because the Commissions did not provide any guidance as to the factors under which a broker-dealer would qualify for the exclusion.
However, the Commissions believe that there are a number of different ways that an exchange member could satisfy this condition. After carefully considering the public comments, the Commissions have adopted Final Rules that reflect modifications to the Proposed Rules in response to the views and concerns expressed by the commenters.
First, the borrower could not directly or indirectly accept or solicit customer orders or provide advice to any customer in connection with the trading of security futures.
The exempted person provision further states that a member of a national securities exchange or a registered broker, dealer, or futures commission merchant that has been in existence for less than one year may meet the definition of exempted person based on a six-month period.
This is not intended to create a substantive difference in the provisions applicable to the securities and futures industries. Thus, under the Proposed Rules, Regulation T would have applied both to securities accounts which are already subject to Regulation T and to futures accounts which are not otherwise subject to Regulation T that carry security futures.
The daily settlement price of a security future on the preceding business day, for example, may not exist if such security future were not available for trading on the preceding business day. Identify the types of collateral acceptable as margin deposits and establish standards for the valuation of such collateral and other components of equity.
Phase-in of Requirements Compliance with the initial margin requirements is to be phased-in depending on the following level of notional exposures of the parties: This is because the exemption cannot readily be applied to floor brokers given that they do not carry the type of customer accounts contemplated by the Regulation T exempted borrower provision.
Specifically, the CFMA added a new subsection 2 to Section 7 c of the Exchange Act, 2 which directs the Board of Governors of the Federal Reserve System "Federal Reserve Board" to prescribe rules establishing initial and maintenance customer margin requirements imposed by brokers, dealers, and members of national securities exchanges for security futures products.
However, given the costs of compliance—including the system and infrastructure costs associated with bilateral margining—these requirements are still likely to have a significant impact on the market and many of its participants. The Commissions received 14 comment letters that addressed the issue of portfolio margining, all of which supported the concept of portfolio margining for security futures.
The text of the proposed exclusion has been revised to specify that the Final Rules exclude clearing agencies registered under Section 17A of the Exchange Act and derivatives clearing organizations registered under Section 5b of the CEA.
The Commissions do not believe that registration with the SEC or CFTC is, by itself, sufficient to show that a market participant is holding itself out as willing to buy and sell security futures. The Commissions believe that the inclusion of these provisions in the Final Rules satisfies the statutory requirement that the margin rules for security futures be consistent with Regulation T.
Second, the borrower had to be registered with the exchange or association as a security futures dealer, pursuant to regulatory authority rules that require the borrower: For example, a security futures intermediary may not arrange for a Regulation T creditor to extend credit to a customer against securities or other assets in a nonpurpose or nonsecurities credit account to enable the customer to meet a margin requirement with respect to a security future.
There is no requirement for a CSE to collect initial margin from a financial end user under this threshold. Accordingly, the Federal Reserve Board stated in its delegation letter that "[t]he authority delegated by the Board is limited to customer margin requirements imposed by brokers, dealers, and members of national securities exchanges.
As another alternative, the exchange member could be subject to rules that impose on it an affirmative obligation to quote on a regular or continuous basis in security futures.
Contacts If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:Commodity Futures Trading Commission risk to the U.S. financial system through the establishment of margin requirements for uncleared swaps.
CEA section 4s(e), added by section of Proposed Margin Rule’’); and (iii) an entity-level approach that would apply margin rules on a firm. Final Rule: Customer Margin Rules Relating to Security Futures COMMODITY FUTURES TRADING COMMISSION 84 The commenter maintained that market makers on a screen-based trading system either should have an enforceable obligation to provide liquidity or should meet an objective standard for supplying before the implementation of a proposed.
Proposed Amendments in NCCPL Regulations for Public Comments; Leveraged Markets and Pledging Rules ; NCCPL CKO Regulations, ; CKO Rules, ; Margin Trading System (MTS) Margin Financing System (MFS) Securities Lending & Borrowing (SLB) Capital Gain Tax (CGT) National Custodial Services (NCS).
COMMODITY FUTURES TRADING COMMISSION. 17 CFR Parts 23 and the financial system by, among other things: (1) providing for the registration and The Commission initially proposed margin requirements for SDs and MSPs in In response to the international framework, the Commission reproposed.
JSE ITAC INITIATIVE Spurred by the success of the MIT Trading system implementation for the Cash How are the proposed intraday margin calls different to what is catered for today? The JSE currently caters for ad‐hoc intraday margin calls, which can be executed at the JSE’s discretion in periods of.
system and process redesign to enable operational readiness implementation of the margin rules due to the inconsistency of requirements across jurisdictions, regarding such issues as cross- Phase II considerations for the implementation of uncleared margin.Download