FICC guaranty-fund plan enters SEC proceedings as dealers dispute its burden

The SEC has opened formal proceedings on FICC’s proposed Government Securities Division guaranty fund, leaving unresolved a redesign that would separate members’ initial margin from resources shared against losses. Its November 5 order says the step does not signal a conclusion on approval or rejection.[1]

The proposed fund would accept cash and be sized against stress losses exceeding margin if the two member families creating the largest aggregate exposure defaulted. Today, members’ required deposits collectively serve as the Clearing Fund and support shared losses. The proposal would remove that mutualisation role from initial margin.[1]

Investment managers and independent dealers reach different conclusions about the redesign. Their letters show why the headline capital treatment cannot establish its benefit for every intermediary.[2][4]

The cost comparison has a consequential footnote

The Independent Dealer and Trader Association (IDTA) argues that bank-affiliated members could obtain capital relief from the margin changes while independent broker-dealers face different net-capital rules. Its September 1 letter says the extra cash requirement disproportionately burdens smaller intermediaries.[2]

IDTA puts contributions at 28.9% of required deposits for ten member firms, versus 9.2% system-wide. But the figures are not strictly comparable: its footnote says the first measure averages firms’ daily ratios; the second divides aggregates.[2]

FICC rejects the premise that the fund simply duplicates existing margin. In its October 13 response, it says the fund addresses stress losses remaining after initial margin and allocates contributions according to the stress exposures members bring. It also argues that removing initial margin from mutualised losses can reduce the amount exposed to another member’s default.[3]

Cash, regulatory capital and shared-loss exposure measure different things. More cash can coexist with less margin exposed to another member’s default; neither establishes total economic cost.[3][2]

Support rests on capacity and access

AIMA’s October 23 letter supports the proposal on the grounds that qualifying clearing members could release regulatory capital and expand Treasury trading and financing capacity. It also backs eliminating fixed minimum margin charges for certain customer accounts, arguing that these disproportionately discourage smaller participants from using segregated clearing.[4]

FICC has acknowledged the preparation burden. Its response committed to estimated member requirements in October and additional reporting in December to help firms anticipate their obligations. Those commitments provide a more useful next test for individual dealers than applying an industry-wide percentage to their own balance sheets.[3]

The SEC’s review covers safeguards, competition, credit exposure and related clearing requirements. It has invited further comments; the November 5 order does not make the proposed fund operative.[1]

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