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SEC Approval of New Margin Rules Good for Options Trading:

SEC Approves New Margin Rules for Stocks, Derivatives (Update1)

By Edgar Ortega

Dec. 13 (Bloomberg) -- The U.S. Securities and Exchange Commission approved rules that may allow institutional investors to put up less collateral when buying stocks on margin and trading derivative contracts.

Regulators expanded a year-old test program that sets collateral requirements based on the potential loss for an entire portfolio of securities, instead of by individual trades. So- called portfolio margining is already in effect in Europe and Asia, as well as for futures contacts traded on U.S. exchanges.

The Chicago Board Options Exchange and the New York Stock Exchange, the largest options and equity markets in the U.S., proposed the new rules. The exchanges acted in part on suggestions from securities firms including Goldman Sachs Group Inc. and Morgan Stanley, two of Wall Street's biggest margin lenders to hedge funds.

``This is the biggest change in margin rules in 40 years and the biggest change for hedge funds and prime brokerages since you had them develop in the early 1990s,'' said Douglas Engmann, a managing director at Fimat USA, a unit of Paris-based Societe Generale. ``If you look at typical hedge strategies used in options and equities, you will see margin requirements going down 70 or 80 percent, and in some cases 90 percent.''

Margin requirements now would be equal to the maximum potential loss on a portfolio based on an increase or decline of as much as 15 percent in the value of each investment held. Federal Reserve rules previously required that investors put up at least 50 percent of the market value of each security.

Previous Limits

The SEC formerly limited the use of portfolio margining to a small set of securities, including equity-index options and exchange-traded funds. The new rules, which will take effect April 2, expand the program to stocks, equity options, futures contracts tied to a stock and some derivatives traded between brokerages, the CBOE said.

Equity investors often buy or sell option contracts to hedge against stock declines or as speculative investments that can boost returns.

The new rules make ``the U.S. equity markets much more competitive in a world where the lines continue to blur between product classes, where cross-border trading is common, and where capital moves quickly to the most efficient markets,'' CBOE (Chicago Board Options Exchange) Chairman William Brodsky said in a statement today. ``The benefits to customers from these changes are profound and will revolutionize our marketplace.''

Fimat's Experience

Fimat was the only broker approved to offer clients a full range of portfolio-margining services under the SEC's test program. One customer's margin requirement fell to $80 million from $600 million because so many of its investments were hedged, limiting the overall risk, Engmann said.

``While the previous rules served us well over many years, this important modernization incorporates recent advances in hedging strategies between futures, options and stocks,'' Grace Vogel, head of member-firm regulation at the NYSE said in an e- mailed statement.

Derivatives are contracts whose value is derived from a security or another asset. The derivatives approved for inclusion in portfolio margining include forward and swap contracts, as well as equity-index options with different expiration dates than what's available on exchange-traded contracts, according to a Sept. 13 NYSE filing with the SEC.
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- 12/13/06 - Dow Jones News Service - OPTIONS REPORT: New Margin Rules Affect Options Traders

OPTIONS REPORT: New Margin Rules Affect Options Traders
(Mohammed Hadi)

NEW YORK (Dow Jones)--In a move that is sure to create a splash in the options industry, the Securities and Exchange Commission has approved long-awaited changes to the way brokers can assess margin requirements.

"The new rules better reflect the risk in a portfolio," explained Steve Sanders, managing director of business development and marketing for Interactive Brokers Group.

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