Cross-margining programs play a critical role in financial markets. By ensuring margin requirements more closely reflect the actual risk of a portfolio of products, they reduce liquidity strain and improve market efficiency, both of which will become even more important as US Treasury clearing mandates are introduced in the coming year. Cross-margining programs already exist, but their expansion in the US has been hampered by needless complexity and regulatory red tape. Fortunately, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are looking at how this can be improved, and we’ve proposed several changes that could make a genuine difference.

It’s important to recognize that the CFTC and SEC have already made progress in broadening access to cross-margining arrangements, recently allowing an existing cross-margining program for Treasury securities and Treasury futures offered by the Fixed Income Clearing Corporation and CME Group to be extended to clients – an important step to ensuring Treasury clearing can be implemented efficiently. But so much more could – and should – be done.

For one thing, US capital rules currently do not recognize risk offsets in a portfolio when calculating capital under the standardized approach for counterparty credit risk. In some cases, the efficiencies created through cross-margining can perversely result in banks having to hold more capital, putting additional strain on balance sheets. The latest US Basel III proposal takes a step in the right direction by recognizing cross-product netting for certain repo and derivatives trades, including those between clearing members and their clients, but the methodology is overly blunt and would still generate disproportionately high capital requirements. In our response to that proposal, we set out an alternative approach that would better align capital with risk. We urge the CFTC and SEC to work with US prudential regulators – as well as their international counterparts – to ensure bank capital requirements do not prevent broad and efficient cross-margining.

The CFTC and SEC should also work together to cut the duplication, bureaucracy and uncertainty that have turned cross-margining approvals into lengthy bespoke exercises rather than a predictable regulatory process. Today, firms seeking approval must navigate overlapping regulatory frameworks, inconsistent supervisory expectations and separate filings with both agencies, often without a clear understanding of which standards apply or when a decision will be reached.

We believe the agencies should establish a formal joint review and approval framework, with transparent, principles-based criteria, a single application process and clearly defined timelines. Without these changes, the cost and complexity of compliance can outweigh the commercial benefit of offering cross-margining solutions at all. Importantly, the agencies should assess product eligibility for cross-margining solutions based on common economic drivers and underlying risk factors, while complementing correlation-based analysis with consideration of how those relationships may behave under stress. Market participants should also be able to comply with a single set of regulatory requirements, rather than navigating overlapping SEC/Financial Industry Regulatory Authority and CFTC/National Futures Association rules for the same activity.

There are also operational issues that need to be addressed to enable broader adoption of cross-margining, particularly where products are cleared at different clearing houses. The CFTC and SEC should work with central counterparties, clearing members and market participants to resolve these challenges and ensure a framework that works in practice.

Cross-margining programs are game-changing for our markets – they lead to lower liquidity demands, more efficient use of collateral and a closer alignment between margin requirements and actual risk. Yet adoption in the US has been slowed less by concerns about safety than by a maze of overlapping rules, duplicate reviews and administrative hurdles. The good news is that the CFTC and SEC have recognized the problem and are now looking at ways to streamline approvals and remove unnecessary barriers. The case for cross-margining has already been made. Now it’s time to ensure the regulatory process no longer stands in the way of implementation.