CFTC-SEC Joint Meeting
Oct. 22, 2020
It is such a pleasure to be participating in a joint meeting with our colleagues at the CFTC this morning. Thank you, Commissioner Quintenz, for your kind comments. One of the highlights of my time at the SEC has been working with you and the staffs of both Commissions on issues related to Title VII. It is not the scintillating subject matter that has made that experience so fulfilling, but the shared commitment to preserving and strengthening our capital markets. The cooperative efforts are an important milestone in a relationship that has not been without tensions over the years. From our first interaction, Commissioner Quintenz has exhibited a practical, collaborative approach and a cheerful persistence in tackling difficult questions. I credit Chairmen Clayton, Giancarlo, and Tarbert for giving us the room to work together and setting a cooperative tone from the top. Continued commitment will be important as our agencies work through differences and toward our common objectives in the many areas in which we have shared interests. We always will be stronger working together than going our separate ways. That is exactly what we are doing today with this joint meeting.
Security Futures Margin
The single stock future has a long and tortured history in our markets. In the early 1980s, the CFTC and the SEC were unable to reach an agreement over whether these products should be treated as a future or a security, and in 1981, the chairmen of the two Commissions reached an agreement that prohibited single stock futures from trading in U.S. markets. This agreement was subsequently codified by Congress and remained in place until the Commodity Futures Modernization Act lifted the prohibition in 2000. The rule we are considering today would amend the margin requirements for these products that were put into place in 2002, shortly after the CFMA was enacted.
Following the enactment of the CFMA, there was some speculation that these products would attract significant investor interest. As one scholar put it back in 2001, single stock futures would “introduce opportunities for substantial leveraging of individual stock transactions in ways that previously were not available,” and they could be used to reduce the regulatory costs of pursuing certain strategies, including short selling. Single stock futures also provided a theoretically less costly way to pursue certain strategies that investors had used in the options market.
Single stock futures never really lived up to their potential. In the years after they started trading, volumes remained far below the levels that commentators had initially expected. And last month, OneChicago, the only U.S. exchange that listed single stock futures, closed its doors. Advocates of this product have argued—persuasively to me—that our margin requirements have played a role in suppressing interest in this market.
The rule that the Commissions are considering today takes a small step toward remedying this problem. The recommendation from the staffs, consistent with the proposal, is to reduce the margin level for an unhedged security future held outside a portfolio margin account to 15 percent, which will harmonize the margin level with the margin level that applies to an unhedged security future in a portfolio margin account. This change will also ensure that the margin level for an unhedged single stock future is the same across account types.
I support this change, but I am concerned that it may not be enough to make the single stock future a viable product. One commenter argued that the proposed rule was “[a]t best . . . a first step” and argued that the Commissions would need to permit risk-based margining for this product to thrive.
The Commissions are working under a less-than-crystal-clear statutory constraint. The Exchange Act specifies that margin requirements for security futures “be consistent with the margin requirements for comparable” listed options and further specifies that “initial and maintenance margin levels for a security future product not be lower than the lowest level of margin . . . required for any comparable” listed option. In 2002, the Commissions set the margin level for unhedged single stock futures at 20 percent of the current market value of the position, consistent with the margin requirements that were then in effect for an unhedged listed option on a security held in a customer account. Although I believe that the Commissions may have the authority to take a more flexible approach in determining whether the margin requirement for security futures is consistent with, and the margin levels are not lower than, those for comparable listed equity options, a shift to a risk-based approach would be a significant departure from the approach we have taken to date. Before making that change, the Commissions would need to establish that the margin requirements calculated under that approach satisfied these statutory constraints. I am not persuaded that the record before us allows us to establish that a risk-based approach would do so.
However, to the extent that my concerns are confirmed, and this market fails to develop, the Commissions should seek to identify the reasons for the lack of uptake and to determine whether different margin requirements would be appropriate and consistent with the statutory requirements. The SEC, together with the CFTC where appropriate, may need to engage in a more comprehensive exercise to determine whether a broader reconsideration of its margin framework across the products it regulates is appropriate.
Request for Comment regarding Portfolio Margining for Uncleared Swaps and Non-Cleared Security-Based Swaps
Title VII of the Dodd-Frank Act mandated a massive overhaul of the regulatory framework governing swaps and security-based swaps, and one of the most significant of these changes is the requirement that swap and security-based swap dealers be subject to “minimum initial and variation margin requirements” for uncleared swaps and non-cleared security-based swaps. These requirements are intended to reduce various risks associated with these transactions. At the same time, they impose significant costs on counterparties to these trades, as funds that could be put to other productive uses are set aside to mitigate these risks.
Portfolio margining, or the cross-margining of related positions, can reduce these costs in a manner consistent with prudent risk management by allowing the netting of offsetting exposures. Different types of products can provide exposure to similar risks, but one of the unique features of the U.S. financial markets is that jurisdiction over these products and the dealers who intermediate transactions in these products is divided between the SEC and the CFTC. Each agency has its own margin requirements. These jurisdictional and legal differences make it difficult or impossible for market participants to achieve the efficiencies that would be possible if they could prudently offset these exposures, carried in different products that are currently held in different accounts, through portfolio margining. Regulatory margin requirements sometimes stand in the way of effective, safe, and efficient portfolio margining.
Finding a solution to these issues that will work for participants in our markets is going to require a lot of hard work on the part of our two agencies. Both agencies have made policy choices over the years that reflect the idiosyncrasies of our respective markets, the risk characteristics of the products we regulate, and the decades-long legacies of our respective approaches to the regulation of margin and capital requirements that apply to our regulated entities. As the Commissions examine how to make portfolio margining a possibility for the firms we regulate and across the product types that we regulate, we need to be sensitive to the ways that our different approaches create unnecessary complexity for market participants and determine how we might enable market participants to benefit from prudent risk management practices while still achieving the regulatory objectives of our respective regimes. Doing this is going to require frank, open dialogue between the two Commissions and our staffs, as well as intensive engagement with the public, including those who are active across these markets.
The Request for Comment that we are considering today is the first step in this process. The document invites engagement on a wide range of issues relating to the portfolio margining of uncleared swaps and non-cleared security-based swaps, both with each other and with other products, in both SEC- and CFTC-regulated entities. I hope that market participants and other interested members of the public will respond in detail, and, where possible, with analyses of the efficiencies that portfolio margining can generate and suggestions for how the Commissions can continue to advance what we each have identified as important policy objectives while permitting firms to benefit from these efficiencies.
Speaking of public input, I also have received repeated requests for the Commission to revisit the exemptive relief it granted in 2012 for portfolio margining of cleared swaps and security-based swaps. I agree that we should revisit this issue and hope we will do so in short order.
Thank you to the staff of both agencies who have worked on this request for comment. I look forward to working with you as we receive input from interested members of the public. I support the request for comment and do not have any questions.
 See GAO, Report: CFTC and SEC: Issues Related to the Shad-Johnson Jurisdictional Accord 1 (2000).
 See id. at 6. See also An Act to Clarify the Jurisdiction of the Securities and Exchange Commission and the Definition of Security, and for Other Purposes, Pub. L. No. 97–303, 96 Stat. 1409 (1982); Futures Trading Act of 1982, Pub. L. No. 97–444, 96 Stat. 2294 (1983).
 See Customer Margin Rules Relating to Security Futures, Exchange Act Release No. 46292 (Aug. 1, 2002), 67 FR 53146 (Aug. 14, 2002).
 Frank Partnoy, “Some Policy Implications of Single-Stock Futures,” Law and Economics Research Paper No. 10 at 2 (2001), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=261896.
 See, e.g., Travis Jones and Robert Brooks, “An analysis of single-stock trading in the U.S.,” 14 Fin. Svcs. Rev. 85, 88 (2005) (stating that “[single-stock futures] still have a long way to go before reaching the potential that many foresaw at their launch”).
 Letter from Thomas G. McCabe, Chief Regulatory Officer, OneChicago (Aug. 26, 2019) at 1.
 Securities Exchange Act of 1934 (“Exchange Act”) section 7(c)(2)(B)(3).
 See SEC and CFTC, Customer Margin Rules Relating To Security Futures, Exchange Act Release No. 34-90244 (Oct. 22, 2020) at 11.
 Exchange Act section 15F(e)(1)(B) (requiring the Commission to establish margin requirements for security-based swap dealers and major security-based swap participants that are not banks); Commodity Exchange Act section 4s(e)(1)(B) (requiring the Commodity Futures Trading Commission to do the same for swap dealers and major swap participants that are not banks).