Proposed SEC Rule May Boost Swaps Collateral Costs

SEC seeks public comment on collateral requirements for swaps not settled at clearinghouses.

Goldman Sachs Group Inc., Morgan Stanley and other trading firms would face higher collateral costs under swaps-market rules proposed by the U.S. Securities and Exchange Commission.

SEC commissioners voted 5-0 today to seek public comment on collateral requirements for swaps that remain in the over-the-counter market instead of being settled at third-party clearinghouses. The proposal, part of the agency’s rulemaking under the Dodd-Frank Act, would also increase capital requirements for dealers of swaps tied to single securities or loans or a narrow index of swaps.

“These rules are intended to make the financial system safer, and the derivative markets fairer, more efficient and more transparent,” SEC Chairman Mary Schapiro said at the meeting in Washington.

The SEC and Commodity Futures Trading Commission are leading U.S. rulemaking to limit risk and boost transparency after unregulated swaps contributed to the 2008 credit crisis. The SEC has authority to regulate credit-default swaps and equity swaps, while the CFTC oversees interest rate, broader indexes of credit-default swaps and commodity trades.

Dodd-Frank, the 2010 financial-regulation law, calls for most swaps in the $648 trillion market to be guaranteed at clearinghouses that hold collateral from buyers and sellers to cut default risk. The SEC is the last U.S. regulator to propose collateral requirements for non-cleared trades.

Under the proposal, dealers in swaps tied to securities would need to set aside a fixed amount of capital and a percentage of the collateral they collect to back trades. The measure calls for dealers to have capital equal to an additional 8 percent of their collateral for cleared and non-cleared trades. The largest brokerages that use internal computer models to comply with capital rules would need to double their minimum capital to $1 billion.

The SEC is also seeking comment on how dealers collect margin from each other. The agency is asking whether dealers need to collect both variation and initial margin. Initial margin is posted at the beginning of a trade, whereas variation margin may be exchanged daily to offset risk from incremental price movements.

The Basel Committee on Banking Supervision, an organization representing international securities regulators, called in July for consistency in global rules governing collateral for derivatives.

The $648 trillion figure is the total notional amount outstanding of over-the-counter derivatives through December 2011, according to the Bank of International Settlements, a Basel, Switzerland-based organization that promotes global financial collaboration and serves as a bank for central banks.



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