FINRA Wades Into CDS Regulation with Margin and Risk Assessment Rule

FINRA has adopted a new rule implementing margin and risk control procedures for credit default swaps (CDS). New Rule 4240 requires a member firm to maintain the minimum margin required by a central counterparty or similar margin to the extent transacted OTC. Moreover, firms must assess whether such minimum margin is sufficient (or should be increased) after applying risk monitoring procedures. Such procedures should include a “comprehensive written risk analysis methodology for assessing the potential risk to a member’s capital over a specified range of possible market movements over a specified period of time.” Additionally, firms must notify FINRA (and provide extensive information) before using a central counterparty.

OUR TAKE: The various regulators need to determine who will regulate CDS. Thus far, the SEC, the state securities regulators, the state insurance regulators, and now FINRA have volunteered. Perhaps, they can speak to each other to determine who will lead the oversight.

http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p118837.pdf