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March 15, 2007

NASD Permits Portfolio Margining for Member Firms

By Nina Mehta

The NASD joins the New York Stock Exchange and Chicago Board Options Exchange in planning to give member firms the ability to offer portfolio margining to qualified customers.

The NASD last month submitted a proposed rule change to the Securities and Exchange Commission that would permit portfolio margining. The filing amends NASD Rule 2520, which prescribes minimum maintenance margin requirements, to allow new, portfolio-based margining. NASD noted in its filing that its submission was "substantially similar" to margin rule amendments by the CBOE and NYSE, which the SEC approved in December.

If the SEC approves NASD's filing, NASD members will be able to unveil portfolio margining pilot programs starting in April.

The NASD has 5,100 member firms. Most of the larger broker-dealers likely to offer portfolio margining to customers are dually regulated by the NASD and the NYSE. They already have the ability to launch portfolio margining pilots through the NYSE, also starting in April.

The NASD's proposed rule filing extends that benefit to NASD-only regulated broker-dealers, according to an NASD spokesperson.

Portfolio margining is expected to reduce customers' margin requirements beyond the levels currently dictated by strategy-based margin requirements. Portfolio margining calculates the net loss of positions under multiple market scenarios and computes the margin required based on that. The risk analysis methodology brokers use must be approved by the SEC.

Equities, listed options, securities futures, unlisted derivatives and other products can be margined in the same account.

The NASD's rule filing also amends NASD's Rule 2860. The rule requires broker-dealer members to provide customers using portfolio margin accounts with disclosure statements.