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LCH.Clearnet Requests to Commingle Futures and Cleared Swaps Collateral to Offer Portfolio Margining
Practical Law Legal Update w-001-4848 (Approx. 3 pages)
LCH.Clearnet Requests to Commingle Futures and Cleared Swaps Collateral to Offer Portfolio Margining
by Practical Law Finance
| Published on 02 Mar 2016 • USA (National/Federal) |
The CFTC has requested public comment on a petition by clearinghouse LCH.Clearnet Ltd. (LCH) to commingle in a common account funds used to collateralize positions in futures, foreign futures, and cleared swaps. LCH also proposes to offer portfolio margining services for these products.
On February 25, 2016, the CFTC requested public comment on a November 15, 2015 petition by LCH.Clearnet Ltd. (LCH), which asked for an order permitting LCH and its clearing members that are registered futures commission merchants (FCMs) to:
- Commingle in a cleared swaps customer account (as defined by and subject to 7 U.S.C. § 6d(f)):
- funds used to collateralize positions in futures contracts and foreign futures contracts (including those made subject to the rules of any foreign board of trade (FBOT)); and
- funds used to collateralize positions in cleared swaps.
- Certain funds related to the above.
- Subject such positions to voluntary portfolio margining services (for information on portfolio margining, see Practice Note, The Dodd-Frank Act: Derivatives Margin Collection Rules: Portfolio Margining under Dodd-Frank).
Generally, the Commodity Exchange Act (CEA) and related CFTC regulations prevent any commingling of these assets (see Practice Note, The Dodd-Frank Act: Derivatives Margin Collateral Rules: Rules on Segregation and Rehypothecation of Derivatives Margin Collateral). Specifically, LCH has asserted that it is unable to offer portfolio margining services across these contracts because:
- Section 4d(f)(2) of the CEA prohibits commingling of cleared swap positions with cleared swap funds, property or other assets used to secure such positions (7 U.S.C. § 6d(f)(2)).
- CFTC regulations state that:
- an FCM or derivative clearing organization (DCO) cannot commingle cleared swap costumer funds with money covering costumer obligations in respect of futures and foreign futures (17 CFR § 22.2); and
- funds used to secure futures and foreign futures must be held separately from cleared swaps costumers' funds (17 CFR § 1.20(e)(3) and 17 CFR § 30.7(e)(3)).
The petition asks that the CFTC issue exemptive relief to LCH from the above commingling restrictions (7 U.S.C. § 6d(f)(3)(B)).
Public comment on the petition is due by March 11, 2016. Comments can be made using the CFTC's online comment function here.