The Financial Industry Regulatory Authority (FINRA) has proposed a pilot program for the margining of credit default swaps (CDS) by FINRA-registered firms that clear CDS transactions on the Chicago Mercantile Exchange, other central counterparty platforms or outside of such platforms.
The pilot program is detailed in a proposal FINRA has filed with the Securities and Exchange Commission (SEC), with a request for accelerated approval. The program would expire on 25 September 2009 the same day that the SEC’s temporary rules providing for the establishment of central counterparties for CDS transactions expire.
Historically, CDS trades by U.S. investment banks have not been transacted by broker-dealers themselves, but, rather, in affiliated entities. It is expected that with the creation of CDS central counterparties, an increasing volume of CDS transactions may be handled through broker-dealers.
The FINRA proposal recognizes this possible development and seeks comment on whether the potential risk to the broker-dealer channel makes sense as part of an endeavor to create greater systemic stability.
The rule proposal also requires that a firm notify FINRA of participation in the CDS central counterparty trading prior to the commencement of any such activity.
L.D.