Finra proposes pilot program for margining CDS

By Jennifer Chiou

New York, March 18 - The Financial Industry Regulatory Authority announced that is has proposed a pilot program for the margining of credit-default swaps by Finra-registered firms that clear CDS transactions on the Chicago Mercantile Exchange, other central counterparty platforms or outside of those platforms.

According to a news release, Finra requested that the Securities and Exchange Commission accelerate approval of the pilot program.

The program would expire on Sept. 25, 2009, the same day that the SEC's temporary rules providing for the establishment of central counterparties for CDS transactions expire, Finra said.

Historically, CDS trades by U.S. investment banks have not been transacted by broker-dealers themselves, but rather in affiliated entities, the release noted. It is expected that with the creation of CDS central counterparties, an increasing volume of CDS transactions may be handled through broker-dealers.

Finra said its 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 start of any such activity.

Finra is an independent regulator for securities firms doing business in the United States and is based in Washington, D.C.

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