CFTC Extends Further Relief on FCM Customer Funds Segregation | Practical Law

CFTC Extends Further Relief on FCM Customer Funds Segregation | Practical Law

The CFTC granted a further extension of no-action relief to FCMs from certain conditions relating to the receipt and recording of customer funds under CFTC Regulations 1.20, 22.2, and 30.7. The relief has been extended indefinitely pending the CFTC’s further consideration of related logistical and technological issues for FCMs.

CFTC Extends Further Relief on FCM Customer Funds Segregation

Practical Law Legal Update 4-586-9470 (Approx. 4 pages)

CFTC Extends Further Relief on FCM Customer Funds Segregation

by Practical Law Finance
Published on 05 Nov 2014 • USA (National/Federal)
The CFTC granted a further extension of no-action relief to FCMs from certain conditions relating to the receipt and recording of customer funds under CFTC Regulations 1.20, 22.2, and 30.7. The relief has been extended indefinitely pending the CFTC’s further consideration of related logistical and technological issues for FCMs.
On October 31, 2014, the CFTC issued No-action Letter 14-131 (No-action 14-131), which indefinitely extends previously issued no-action relief granted to futures commissions merchants (FCMs) from compliance with certain conditions relating to the receipt and recording of customer funds under CFTC Regulations 1.20, 22.2, and 30.7. Customer funds are funds that are posted by customers of FCMs as margin to collateralize positions under futures contracts (see Legal Update, Final Rules on Protection of FCM Customer Funds Adopted by CFTC and Practice Note, The Dodd-Frank Act: Derivatives Margin Collateral Rules: FCM Segregation of Futures Collateral ("Customer Funds")).
The relief was originally granted in No-action Letter 14-02 (No-action 14-02) and was originally to expire on April 14, 2014, however, on April 7, 2014, the CFTC issued No-action Letter 14-45, which extended the relief until June 30, 2014. No-action Letter 14-88 then extended the relief to October 31, 2014 (see Legal Update, CFTC Extends Relief on FCM Segregation of Customer Funds). No-action 14-131 further extends the relief indefinitely, pending the CFTC’s further consideration of related logistical and technological compliance hurdles for FCMs relating to these requirements.
Under the final customer funds rules:
  • Regulation 1.20(e)(3) prohibits an FCM from commingling funds deposited by customers as margin for futures transactions executed on designated contract markets (DCMs) (Section 4d(a)(2) Funds) with either funds deposited by customers as margin for foreign futures and foreign options transactions executed on foreign boards of trade (Part 30 Secured Funds) or with funds deposited by customers as margin for cleared swap transactions (Cleared Swaps Funds).
  • Regulation 30.7(e)(3) prohibits an FCM from commingling Part 30 Secured Funds with Section 4d(a)(2) Funds or with Cleared Swaps Funds.
The extended relief was granted in response to concerns that these regulations present significant operational and technological challenges for FCMs, including:
  • Many FCMs lack the technology that allows for the simultaneous book entry credit to a customer’s Part 30 Secured Funds account or to a Cleared Swaps Funds account upon receipt and recording of the margin funds into the customer’s Section 4d(a)(2) Funds account.
  • Customers currently meet margin calls by submitting a single wire transfer to the Section 4d(a)(2) Funds account, Part 30 Secured Funds account or the Cleared Swaps Funds account and if such deposits are not permissible, it will take time for FCMs to open Section 4d(a)(2) Funds accounts in foreign jurisdictions and to provide new wire transfer instructions to customers directing them to submit wire transfers separately to a Section 4d(a)(2) Funds account.
No-action 14-02 provided time-limited relief for FCMs with respect to compliance with certain conditions of Regulations 1.20, 22.2, and 30.7 as long as the FCM maintains compliance with obligations to hold sufficient funds in Section 4d(a)(2) Funds accounts, Part 30 Secured Funds accounts and Cleared Swaps Funds accounts to meet the "net liquidating equities" of all of the FCM’s customers in each respective "account origin" at all times.
In order to qualify for the extended relief, each FCM must maintain compliance with its obligation to hold sufficient funds in the following accounts in order to meet the net liquidating equities of all the FCM's customers in each respective account origin at all times:
  • Section 4d(a)(2) Fund accounts.
  • Part 30 Secured Fund accounts.
  • Cleared Swaps Funds accounts.