The Legal Aspects of Portfolio Margining: A Move Toward the LSOC Model

Abstract

This article focuses on the legal aspects of portfolio margining in the United States (“US”) and its potential for reducing costs and facilitating the management of collateral for the participants involved. First, this article outlines the level of protection that customer margin receives in clearing systems using a Central Counterparty (“CCP”). Second, it explains the process of portfolio margining from a legal perspective and discusses the benefits of adopting this technique. Third, it argues that adopting the ‘Legal Segregation and Operationally Commingled Model’ (the “LSOC” Model) in the futures industry, as has been done for cleared swaps, can facilitate the implementation of portfolio margining. Finally, it explains how to implement the recommended changes.

Keywords: Portfolio Margining, LSOC Model, Futures Model, Margin Segregation, CFTC, Dodd-Frank Act, Commingling