Traders, ICE Concerned Over New SEC Margin Rules for CDS -Source

By Katy Burne

BOCA RATON, FL.--IntercontinentalExchange Inc. ( ICE ) and traders in the credit-default swap market are questioning proposed new U.S. rules that would inflate the costs of clearing the trades.

A Securities and Exchange Commission proposal issued Friday could double the amount of margin on customers clearing CDS contracts, according to people familiar with the situation.

CDS function like insurance for bonds and loans. A post-crisis regulatory overhaul mandated that many CDS be openly traded for the first time and routed to central clearinghouses that guarantee the trades.

The SEC wants to limit traders' ability to offset their exposure between CDS positions with opposing risks, a process known as portfolio margining, in trades tied to indexes and individual borrowers.

A copy of the proposal reviewed by the Wall Street Journal showed the agency wants to require clearing brokers to collect margin from CDS customers that was "at least equal to 200%" of ICE's calculated portfolio margining amount, or " at least equal to 150%" if the firm determined the customer "has virtually no credit risk."

"The viability of this margin regime is questionable," said Richie Prager, global head of trading at BlackRock Inc. ( BLK ), a big user of CDS.

The SEC proposal was sent to banks who act as clearing brokers for CDS late Friday. An SEC spokeswoman had no immediate comment.

Scott O'Malia, one of five commissioners at the Commodity Futures Trading Commission, said he was surprised at the SEC's actions.

"Their own [SEC] order required them to cooperate with the CFTC, which I don't believe they've done," he said, adding the goal is to "set an appropriate margin methodology that facilitates single-pot margining for CDS that works for both clearing members and their customers."

Write to Katy Burne at katy.burne@dowjones.com

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  03-13-132011ET
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