CFTC Proposes Rules Protecting Certain Margin Collateral of FCM Customers | Practical Law

CFTC Proposes Rules Protecting Certain Margin Collateral of FCM Customers | Practical Law

An update on rules proposed under the Dodd-Frank Act by the CFTC designed to protect margin collateral relating to the cleared swaps of customers of futures commission merchants (FCMs).

CFTC Proposes Rules Protecting Certain Margin Collateral of FCM Customers

Practical Law Legal Update 9-505-8897 (Approx. 3 pages)

CFTC Proposes Rules Protecting Certain Margin Collateral of FCM Customers

by PLC Finance
Published on 28 Apr 2011 • USA (National/Federal)
An update on rules proposed under the Dodd-Frank Act by the CFTC designed to protect margin collateral relating to the cleared swaps of customers of futures commission merchants (FCMs).
On April 27, 2011, the Commodities and Futures Trading Commission (CFTC) proposed rules designed to protect margin collateral relating to the cleared swaps (cleared swaps customer collateral) of customers of futures commission merchants (FCMs). The proposed rules implement Section 724(a) of the Dodd-Frank Act, which imposes the following requirements on FCMs and depositories, including derivatives clearing organizations (DCOs):
  • FCMs must treat as belonging to the customer all cleared swaps customer collateral that is deposited by a customer to collateralize its cleared swaps.
  • FCMs may not commingle cleared swaps customer collateral with its own property and may not use such collateral to collateralize the cleared swaps of any person other than the customer that posted the collateral.
  • DCOs may not treat cleared swaps customer collateral deposited by an FCM as belonging to the FCM or any person other than the customer that posted the collateral.
In response to public comments received on a related advance notice of proposed rulemaking (ANPR) issued on November 19, 2010, the CFTC proposes to adopt what it refers to as the Complete Legal Segregation model to protect cleared swaps customer collateral (described in the ANPR as Legal Segregation with Commingling). However, the CFTC continues to examine the costs and benefits of each model for the protection of cleared swaps customer collateral contemplated in the ANPR, and the proposed rules request additional public feedback on these models. For more information on the ANPR and the alternative models for the protection of cleared swaps customer collateral, see Legal Update, CFTC to Propose Margin Collateral Protections for Certain Cleared Commodity Swap Counterparties.
The Complete Legal Segregation model requires cleared swaps customer collateral be segregated from the FCM's own property, but allows an FCM to keep cleared swaps customer collateral together in a single account if it is not in bankruptcy. The CFTC release notes that in the event of a default of both an FCM member and one or more of its cleared-swaps customers, a DCO would have recourse against the collateral of defaulting customers but not against the collateral of non-defaulting customers.
Public comments on the proposed rule must be submitted within 60 days of its publication in the Federal Register.
For more information on the proposed rules, see the CFTC's Fact Sheet and Q&A.
For more information on provisions of the Dodd-Frank Act applicable to swaps and derivatives, see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives.
For information on rulemaking activities implementing the Dodd-Frank Act, see Practice Note, Road Map to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.