By Brad Rosen, J.D.
The SEC has approved a proposed amendment to its rules that would lower the margin requirement for an unhedged security futures position from 20 percent to 15 percent. Moreover, the proposal would also result in certain conforming revisions to the margin offset table consistent with the proposed reduction in margin. The proposed rule amendment passed on a 4-1 vote with Commissioner Robert Jackson dissenting.
CFTC’s approval is pending. As noted in the SEC’s release, the SEC and CFTC have joint rulemaking authority regarding margin requirements for security futures. In 2002, the Commissions adopted rules establishing margin requirements for unhedged security futures products at 20 percent. In light of lower margin requirements that have been established for comparable financial products and the resulting asymmetry, the SEC determined that it is appropriate to re-examine the minimum margin required for security futures at this time. The CFTC has not yet voted on an equivalent rule proposal. It has scheduled its vote to do so at its open meeting scheduled for July 11, 2019.
In dissent, Commissioner Jackson offers sharp criticism. While acknowledging that the SEC had not considered its security futures margin requirements in almost two decades and some update made sense, Commissioner Jackson was highly critical of the manner in which the SEC had proceeded in this matter. He noted that the majority simply proposed to lower the required margin “without seriously analyzing the consequences of doing so or assessing alternatives.” He concluded that the proposal favored regulatory intuition over market-driven analysis. Specifically, the commissioner observed:
The proposal assumes that law is more important than market dynamics in driving demand for investment products. He specifically rejected that notion that since the law sets margin at 15 percent for options and 20 percent for futures, options are favored over futures. He asserted that assembling an option portfolio replicating a single-stock future is extremely expensive, and after taking account of those costs, it’s not clear that futures are really disfavored.
The proposal’s consideration of the consequences of lowering the margin requirement amounts to vague claims about improved market efficiency and liquidity. In his view, a serious economic analysis would consider whether reducing margin would actually improve price discovery or simply make it easier for uninformed investors to migrate into the futures markets in search of leverage.
The Commission is in error when it asserts that it “does not believe that there are reasonable alternatives to the proposal to reduce the … margin levels for unhedged security futures to 15 percent.” Jackson noted there are many such alternatives.
In final analysis, Jackson believed that the SEC rushed to reduce margin requirements, rather than having engaged in a careful consideration of the alternatives. Accordingly, he explained he was not able to support the proposal.
Next steps. In the event the CFTC votes to approve the proposal release, it will be published in the Federal Register, and the public comment period will remain open for 30 days following that publication.