The second half was all about costs – how will increase and who will pay for those increases.

An hour’s worth of very good and technical discussion about the of mutualization of losses. Issues discussed were:

Use of initial margin vs. increases to a guarantee fund vs. doing both

Making independent seg optional vs. mandatory (and effect on the ability of a customer to recover in the event of a loss)

Transmission of systemic risk through design of margin and guarantee fund models.

Clearinghouse Views: The more you alter pooling of margin and / or customer positions, then there is an increased likelihood of increased costs through increased guarantee fund and/or increased margin. If the costs are too high, then the number of clearing members may decrease, the cost to remaining CMs may increase, and there may be decreased liquidity in clearing. Because of these potentially bad outcomes, clearinghouses reiterated their view that individual seg should not be mandated but rather should be optional.

Buy-side Views: Interesting – all agree that customers will pay more, regardless of whether costs take form of increased margin or guarantee funds. Fiduciary representatives expressed a view that increased costs for customers are expected – likely to manifest itself  as a drag on performance. Interesting point was made by the representative from the agricultural sector – if margin gets too high, then even bona fide hedgers will simply not use the market.

Miscellaneous Notes

1) Insurance Fund: The insurance fund approach was thrown out again for discussion (purely editorial view of TSR is that it received a chilly reception from one CFTC representative on the basis that there is already enough to do under Title VII and that sort of a structure does not yet exist).

2) Closing View:  Much remains to be done on the issue of individual seg and costs; lots of talk, little in the way of discernible trends to the outcome of today’s roundtable (other than everybody can expect margin to increase one way or another).