Key Takeaways
- • The Managed Funds Association (MFA) submitted a formal comment letter supporting the SEC and CFTC's proposal to expand cross-margining across securities and derivatives markets, signaling institutional investor backing for regulatory modernization.
- • Current fragmented margining rules force firms to hold positions in separate accounts under different regulatory regimes, creating excess collateral demands that exceed the actual combined risk of economically offsetting positions.
- • A comprehensive cross-margining framework would reduce unnecessary collateral requirements for institutional investors including pension funds, foundations, and endowments, thereby improving capital efficiency without compromising market resilience or investor protection.
- • MFA urged regulators to establish contingency mechanisms that preserve appropriate margin offsets during temporary operational disruptions, preventing forced additional collateral posting when underlying portfolio risk remains unchanged.
- • Replacing the current ad hoc, product-by-product approach with a unified framework would extend cross-margining eligibility to additional asset classes and streamline risk-aligned margin calculations across the U.S. financial system.
Summary
The Managed Funds Association has formally endorsed regulatory efforts by the SEC and CFTC to expand cross-margining arrangements across U.S. securities and derivatives markets. In a comment letter submitted to the Commissions, MFA advocated for replacing the existing fragmented, product-specific margining approach with a comprehensive, unified framework that better aligns collateral requirements with actual portfolio risk.
Cross-margining permits market participants to offset economically related positions when calculating margin obligations, allowing firms to post collateral based on net exposure rather than individual position silos. Under current rules, securities and derivatives that naturally hedge one another must frequently be held in separate accounts governed by different regulatory regimes, forcing institutions to maintain excess collateral reserves substantially above what their combined risk warrants. This structural inefficiency drives unnecessary capital costs across the institutional investment landscape.
Jennifer Han, MFA Chief Legal Officer, emphasized the economic and operational case for reform: "Effective risk management looks at a portfolio's net exposure, not just its individual positions. A more comprehensive cross-margining framework would align margin requirements more closely with actual risk, lower unnecessary costs for pensions, foundations, and endowments, and promote more efficient use of capital without compromising market resilience or investor protection."
Beyond streamlining the framework itself, MFA specifically recommended that regulators establish contingency protocols to preserve margin offsets during temporary operational disruptions. The Association warned that existing frameworks risk forcing investors to post additional collateral during service interruptions even when the underlying risk profile of their portfolios remains stable. Implementing safeguards would prevent artificial liquidity demands during transient system disruptions while maintaining the integrity of cross-margining arrangements.
The MFA's endorsement reflects broad institutional investor support for regulatory modernization designed to reduce capital inefficiencies without weakening systemic safeguards or investor protections.
Cross-margining permits market participants to offset economically related positions when calculating margin obligations, allowing firms to post collateral based on net exposure rather than individual position silos. Under current rules, securities and derivatives that naturally hedge one another must frequently be held in separate accounts governed by different regulatory regimes, forcing institutions to maintain excess collateral reserves substantially above what their combined risk warrants. This structural inefficiency drives unnecessary capital costs across the institutional investment landscape.
Jennifer Han, MFA Chief Legal Officer, emphasized the economic and operational case for reform: "Effective risk management looks at a portfolio's net exposure, not just its individual positions. A more comprehensive cross-margining framework would align margin requirements more closely with actual risk, lower unnecessary costs for pensions, foundations, and endowments, and promote more efficient use of capital without compromising market resilience or investor protection."
Beyond streamlining the framework itself, MFA specifically recommended that regulators establish contingency protocols to preserve margin offsets during temporary operational disruptions. The Association warned that existing frameworks risk forcing investors to post additional collateral during service interruptions even when the underlying risk profile of their portfolios remains stable. Implementing safeguards would prevent artificial liquidity demands during transient system disruptions while maintaining the integrity of cross-margining arrangements.
The MFA's endorsement reflects broad institutional investor support for regulatory modernization designed to reduce capital inefficiencies without weakening systemic safeguards or investor protections.
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