CFTC aims for middle ground in segregating funds

* Money managers want clients’ swap margins segregated

* CFTC seeks to protect funds while allowing commingling

* Clearinghouses worry about increased costs

* CFTC has not yet formally proposed rule

By Roberta Rampton and Christopher Doering

WASHINGTON, Oct 22 (BestGrowthStock) – The U.S. futures regulator
is aiming to find middle ground between money managers who want
their swaps’ collateral protected in times of financial crisis,
and the clearinghouses and their members who worry new rules
will ratchet up costs.

The new Wall Street reform law requires most swaps to pass
through clearinghouses but mandates some separation for margin
posted by individual companies.

The Commodity Futures Trading Commission is in the process
of writing detailed rules to implement the law, and on Friday
brought together major funds, pension managers, dealers,
futures commission merchants and clearinghouses to discuss a
possible approach.

“We’re trying to be, I think, faithful to the statute …
in terms of protecting customers,” said Robert Wasserman, a
CFTC lawyer who is drafting the regulation on segregation of
client funds for cleared swaps.

The CFTC is considering a plan that would allow clearing
members to commingle their clients’ margins for operational
efficiency — but would prevent them from dipping into those
funds to cover losses caused by defaulting members.

The clearinghouse would be responsible for diffusing the
loss among its members.

Currently, if a futures commission merchant goes bankrupt,
a clearinghouse can tap that FCM’s pool of customer funds to
meet its obligations.

Representatives of money managers BlackRock Inc (BLK.N: ),
Vanguard and General Motors’ pension funds, as well as the
Managed Funds Association, said they would prefer a strict
segregation system to protect the collateral of their clients.

But Richard Prager, a managing director at BlackRock, said
the CFTC’s compromise approach has merit.

“We think that that’s potentially an elegant solution,”
Prager said at the meeting.

WORRIES ABOUT MARGIN COSTS

The Dodd-Frank financial reforms gave the CFTC the lion’s
share of oversight of the $615 trillion over-the-counter
derivatives market.

The regulator is working on what some estimate could be a
total of 80 regulations to implement the law. [ID:nN22187033]

Major clearinghouses owned by CME Group (CME.O: ) and
IntercontinentalExchange (ICE.N: ) said the CFTC’s tentative plan
— which has not yet been officially proposed — could
dramatically increase margin costs, or the size of default
cushions that clearing members are required to fund.

That could push some clearing members out of the market,
said Kim Taylor, managing director of CME’s clearinghouse
division.

“That increases the concentration among the remaining
players,” said Taylor, noting the customers would be left with
fewer service providers.

“It decreases the customer’s ability to diversify their own
exposure across a larger number of clearing members, and it
increases the amount by which everyone else must contribute
because there are fewer people to contribute to the losses
covered by one defaulter,” said Taylor, who asked the CFTC to
consider a more flexible approach.

(Editing by Cynthia Osterman)

CFTC aims for middle ground in segregating funds