This post is the final installment of our multi-part series on CFTC Regulation §1.44, as proposed by the U.S. Commodity Futures Trading Commission (the “CFTC”) on February 20, 2024 (the “Proposed Rule”).

This post provides an overview of proposed changes to other CFTC regulations that will be made if the Proposed Rule is adopted.

Changes to four other CFTC regulations have been proposed, as part of the proposal to adopt CFTC Regulation §1.44. Some of these changes relate directly to the Proposed Rule, while others do not.

Gross Margining and More—Amendments to CFTC Regulations §§39.13(g)(8) and 1.58

Proposed CFTC Regulation §1.44(g)(2), if adopted, will require a futures commission merchant (“FCM”) to calculate margin for each separate account of a separate account customer independently from margin requirements for all of the other separate accounts of that customer without any offsets or spreads recognized across the accounts. In other words, the Proposed Rule, if adopted, will subject separate accounts to margining on a gross basis.

The Proposed Rule’s approach to margin is consistent with the general approach taken under other CFTC regulations involving futures contracts and cleared swaps.

As background, an FCM must maintain an account for all of its customers’ futures or cleared swap positions and any margin posted by those customers in support of those positions. A similar requirement applies at the level of a derivatives clearing organization (“DCO,” commonly referred to as a clearinghouse), which must maintain an account for each clearing member FCM on behalf of all of the FCM’s customers. In other words, there is an omnibus “customer account” at the level of both the clearing FCM and relevant DCO.

Notwithstanding the use of such an omnibus account structure, CFTC Regulation §39.18(g)(8)(i) requires a DCO to collect customer margin from a clearing member FCM equal to the sum of initial margin amounts that would be required by the DCO for each individual customer within that FCM’s omnibus customer account as if each individual customer were itself a clearing member. In other words, a DCO collects margin from a clearing FCM on a “gross basis” without any offsets among the positions of different customers.

As part of the current rule proposal, the CFTC is proposing amendments to clarify that, for purposes of the gross margining requirement of CFTC Regulation §39.18(g)(8)(i), each separate account of a separate account customer shall be treated as an account of a separate individual customer. Therefore, if adopted as proposed, gross margining will apply at the individual separate account level within an FCM’s omnibus account.

Separately, the CFTC has proposed amendments to a margin adequacy requirement under CFTC Regulation §39.13(g)(8)(iii) that would otherwise prohibit the withdrawal of funds by a customer of a clearing FCM if such withdrawal would result in the account being undermargined. These amendments, if adopted, will provide an exception to this prohibition in order to account for the margin adequacy requirement and separate account provisions of CFTC Regulation §1.44.

The CFTC is also proposing amendments to CFTC Regulation §1.58 to require the gross margining of separate accounts of separate account customers in the context where a non-clearing (or depositing) FCM has an omnibus account carried by a clearing (or carrying) FCM.

The proposed amendments to CFTC Regulation §1.58 would add a new clause (c) and require a non-clearing FCM with an omnibus account at a clearing FCM to calculate and deposit initial and maintenance margin separately for each separate account. Footnote 223 of the proposing release provides the following helpful example of how the proposed amendments under CFTC Regulation §1.58(c) are intended to work:

If non-clearing FCM N has customers P and Q, and Q is a separate account customer with separate accounts R, S, and T, then N would calculate, on a gross basis, the margin requirements for accounts P, R, S, and T, consistent with proposed regulation § 1.58(c). That gross margin requirement, across those four accounts, will be the amount that, consistent with regulation § 1.58(a), N must deposit and N’s clearing FCM, C, must collect.

Finally, and as a separate matter, the CFTC has also proposed amendments to CFTC Regulation §§1.58(a) and (b) that, if adopted, will apply other gross margining concepts in the non-clearing FCM context to futures contracts and cleared swaps. Presently, these concepts only apply to futures contracts.

Expansion of Risk Management Requirements to Non-Clearing FCMs

The CFTC has proposed amendments to Regulation §1.73 that, if adopted, will apply certain risk management standards for clearing FCMs to any non-clearing FCM that makes the election under proposed CFTC Regulation §1.44 to treat the separate accounts of a customer as accounts of separate entities. These standards relate to stress testing and credit limits, and are more fully discussed in Part 10 of this series.

CFTC Regulation §1.44 and Foreign Futures—Amendments to CFTC Regulation §30.2

Finally, the CFTC has proposed amendments to CFTC Regulation §30.2 to ensure that the requirements of CFTC Regulation §1.44 in respect of margin adequacy and separate accounts apply to foreign futures and options. In addition, the CFTC has proposed a technical amendment to Regulation §30.2 to delete outdated references to former CFTC Regulations §1.41 through 1.43.

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