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

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SEC commissioners voted 5-0 today to seek public comment oncollateral requirements for swaps that remain in theover-the-counter market instead of being settled at third-partyclearinghouses. The proposal, part of the agency's rulemaking underthe Dodd-Frank Act, would also increase capital requirements fordealers of swaps tied to single securities or loans or a narrowindex of swaps.

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

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The SEC and Commodity Futures Trading Commission are leadingU.S. rulemaking to limit risk and boost transparency afterunregulated swaps contributed to the 2008 credit crisis. The SEChas authority to regulate credit-default swaps and equity swaps,while the CFTC oversees interest rate, broader indexes ofcredit-default swaps and commodity trades.

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Dodd-Frank, the 2010 financial-regulation law, calls for mostswaps in the $648 trillion market to be guaranteed atclearinghouses that hold collateral from buyers and sellers to cutdefault risk. The SEC is the last U.S. regulator to proposecollateral requirements for non-cleared trades.

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

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The SEC is also seeking comment on how dealers collect marginfrom each other. The agency is asking whether dealers need tocollect both variation and initial margin. Initial margin is postedat the beginning of a trade, whereas variation margin may beexchanged daily to offset risk from incremental pricemovements.

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The Basel Committee on Banking Supervision, an organizationrepresenting international securities regulators, called in Julyfor consistency in global rules governing collateral forderivatives.

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

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Bloomberg News

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