CFTC Proposes Rules to Enhance Protections for Customer Funds


[authors: Kenneth M. Rosenzweig, Ross Pazzol, Blake J. Brockway]

The Commodity Futures Trading Commission published proposed rules that are designed to increase protections for customers and customer funds held by futures commission merchants (FCMs) and derivatives clearing organizations (DCOs). The proposed rules clarify that an FCM must comply with the CFTC’s segregation requirements at all times, including on an intra-day basis, and that FCMs bear sole responsibility for all losses that arise from investing customer segregated funds.

The proposed rules require an FCM to adopt a risk management program that, among other things, includes written procedures for establishing a target level for the amount of the FCM’s own funds deposited in customer segregated funds accounts (commonly referred to as a residual interest), which exceeds the sum of all of such customers’ margin deficits. The proposal also prohibits FCMs from loaning funds on an unsecured basis to finance customer trading activity. In the event that an FCM cannot immediately certify to the CFTC that it has sufficient access to liquidity to continue operations as a going concern, the proposed rules would authorize the CFTC to require the FCM to transfer its customer accounts and cease operations.

Under proposed Regulation 1.23, if an FCM deposits unencumbered proprietary funds into its customer segregated funds accounts, the FCM cannot withdraw any such funds unless it has completed its daily segregation calculation and such calculation shows that there are excess segregated funds in these accounts. If a withdrawal exceeds 25% of the FCM’s residual interest, then the FCM must immediately file a written notice with the CFTC and its designated self-regulatory organization (DSRO). The proposed rules also require an FCM to disclose its residual interest targets on the Segregation and Secured Amount Schedules to the Form 1-FR. FCMs would be required to electronically file their segregation, secured amount and cleared swaps collateral calculations with the CFTC and their DSROs every business day.

The proposed rules require all customer funds that are deposited with a bank or trust company to be available for immediate withdrawal upon demand by the FCM or a DCO. In addition, any depository that holds customer segregated funds would be required to provide the CFTC and the DSRO read-only electronic access to the accounts in which such funds are held.

The CFTC has additionally proposed to require FCMs to hold customer funds in secured amount accounts in the United States, except when necessary to margin, guarantee or secure customers’ foreign futures or foreign options positions.

The proposed rules are available here.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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