"The biggest milestone since Prime Brokerage"

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SEC to ease margin rules in cost-cut move

By Jeremy Grant in Washington

Published: October 15 2006 22:11 | Last updated: October 15 2006 22:11

The US is set to relax margin rules in force since after the Wall Street crash of 1929 with the approval of a system that will cut securities trading costs and pave the way for “multi-asset” trading across equities, options and futures.

The move removes a key barrier to the competitiveness of the US capital markets as similar margin rules already exist in Europe, attracting increasing numbers of hedge funds to London.

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It comes as many US exchanges are trying to expand the mix of their businesses towards a combination of equities, options and futures.

This is in response to demand from hedge funds and other traders who increasingly prefer to trade such assets simultaneously.

The Securities and Exchange Commission’s staff has approved an application by the New York Stock Exchange for a new type of “portfolio margining” account that calculates margin based on the types of assets held in the account and the interplay between them.

It will provide an alternative to the “Reg T” margining system, under which the Federal Reserve and NYSE set margins for stock trading at up to 50 per cent.

Hedge funds complain that this needlessly ties up funds in margin, limiting the funds’ leverage.

They also say it arbitrarily sets margin levels regardless of the types of assets and trading strategies being used, as electronic, algorithmic trading makes such trading more complex.

Grace Vogel, executive vice-president of member firm regulation at the NYSE, said the new account would use a margining system developed by the Options Clearing Corporation, a clearing house for the six US options exchanges. It would take into account when an investor’s exposure to one asset, such as an IBM stock, was already being offset by a position in another, such as an option on IBM stock.

“The current rule does not recognise enough hedging strategies between options and stocks,” Ms Vogel said. “[Reg T] has served us well over the years but I think we’re ready to take a step in the direction of having more risk-based margining.”

She said that in some cases margin could be reduced to 15 per cent. Bob Colby, deputy director of the SEC’s division of market regulation, said the staff’s recommendation would be put to the agency’s five commissioners “in weeks”.

“It’s a big change, and that’s why we’d like the commission to consider it,” he told the Financial Times. The move is expected to be approved by a majority of commissioners.

Gary de Waal, general counsel at broker Fimat, said: “If portfolio margining is approved for the US it is as significant an event as when prime brokerage first became available. It is a major milestone.”