SEC proposes 15% minimum margin requirement for security futures

Maria Nikolova

The regulator has proposed to align the minimum margin required on security futures with other similar financial products.

The United States Securities and Exchange Commission (SEC) on Wednesday published its proposals to change the margin requirements for security futures, in a move set to align the minimum margin required on security futures with other similar financial products.

The proposal, which the CFTC has not voted on yet, would set the minimum margin requirement for security futures at 15% of the current market value of each security future.

The SEC and the Commodity Futures Trading Commission (CFTC) have joint rulemaking authority regarding margin requirements for security futures. In 2002, both regulators adopted rules establishing margin requirements for unhedged security futures products at 20%. Given lower margin requirements that have been established for comparable financial products and the resulting asymmetry, the SEC has determined that it is appropriate to re-examine the minimum margin required for security futures.

More specifically, the proposed amendments would lower the margin requirement for an unhedged security futures position from 20% to 15%, as well as propose certain revisions to the margin offset table consistent with the proposed reduction in margin.

In summary, because unhedged exchange-traded options and security futures in SRO risk-based portfolio margining programs were permitted to be margined at a lower 15% rate as early as 2008, when the SRO risk- based portfolio margining programs became permanent, the Commission is proposing to amend their joint margin rules relating to security futures to reduce the minimum required margin for unhedged security futures from 20% to 15%, reflecting the current margin requirements available for comparable exchange-traded options.

A security future is a futures contract on a single security or on a narrow-based security index.

Because the current SRO required margin levels for unhedged exchange-traded options held in a portfolio margin account are set at a level based on shocking the portfolio at 15% price movements, the Commission preliminarily believes that the unhedged security futures margin rate should not be lower than 15%. Therefore, the Commissions’ proposal to lower the margin requirement for security futures complies with the statutory requirement that the margin level for a security future be consistent with the margin for any comparable exchange-traded option.

The regulator believes that certain types of exchange-traded options, no matter what type of an account they are in, are comparable to security futures – futures contracts on a single security or on a narrow-based security index. The margin requirements for comparable exchange-traded options and security futures must be consistent, the SEC argues.

Under this proposal, the SEC is using a stress level percentage set out for unhedged exchange-traded options based on an equity security or narrow-based index in a portfolio margin account (e.g., +/-15%) to establish a consistent margin level for security futures held outside of a securities portfolio margin account, which use a fixed-rate percentage of market value to set margin. While these two regimes reflect certain differences (in that portfolio margin calculates margin on a portfolio or net basis for securities with the same underlying position, and outside a securities portfolio margin account, margin is calculated on a position-by-position basis), the SEC believes that these two regimes are consistent when comparing unhedged security futures with comparable exchange-traded options.

The CFTC has not yet voted on the proposal and has scheduled its vote for July 11, 2019.

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