CFTC Issues No-Action Relief to FCMs Relating to Enhanced Customer Protection Rules

by Katten Muchin Rosenman LLP

The Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight (DSIO) issued two no-action letters granting relief to futures commission merchants (FCMs) from certain requirements of the enhanced customer protection regulations (Customer Protection Rules) that went into effect on January 13.

First, in Letter 14-02, DSIO provided time-limited no-action relief from the provisions of CFTC Regulations 1.20, 22.2 and 30.7 that prohibit the commingling of customer segregated funds, cleared swaps customer collateral and 30.7 funds. In the Federal Register release accompanying the Customer Protection Rules, the CFTC explained that these provisions would not prevent an FCM from accepting a single wire transfer to margin transactions in multiple account origins, provided (i) the funds were first deposited into the customer’s account that holds funds used to margin transactions in futures executed on designated contract markets, and (ii) the FCM simultaneously recorded a book-entry credit to the customer’s cleared swaps collateral and/or foreign futures secured amount accounts, as appropriate. This relief provides additional time for FCMs to establish and implement the operational procedures necessary to comply with the simultaneous book-entry credit recording requirement and other provisions of the Customer Protection Rules relating to the prohibition on commingling customer funds.  Concurrently, DSIO has committed to assess the operational feasibility of the requirement for simultaneous book-entry credit. An FCM relying on this relief must maintain sufficient funds in its segregated funds, foreign futures secured amount and cleared swaps collateral customer accounts in amounts at least equal to the net liquidating equities of all of the FCM’s customers in each of those accounts at all times. The relief expires on April 14. 

Second, in Letter 14-03, DSIO established a procedure pursuant to which an FCM could comply with the requirements of CFTC Regulation 30.7(c), which provides that an FCM may not hold in jurisdictions outside of the United States customer funds deposited to margin, guarantee or secure foreign futures and foreign options transactions (30.7 Funds) in excess of 120 percent of customer margin requirements, including prefunding requirements established by a foreign board of trade, foreign clearing organization or foreign broker. Pursuant to the no-action letter, an FCM will be deemed to be in compliance with this requirement if: (i) the FCM identifies by noon each business day whether 30.7 Funds held for customers as of the close of the preceding business day exceed the 120 percent limit, (ii) the FCM initiates a transfer of any such excess funds from foreign depositories to US depositories on the same business day and (iii) such excess funds are received by the FCM’s US depositories within two business days after initiating the transfer of such excess funds.   

CFTC Letter 14-02 is available here.  

CFTC Letter 14-03 is 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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