The CFTC is proposing to adopt new regulations and amend existing regulations to require enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures, and auditing and examination programs for futures commission merchants (FCMs). The proposal also addresses certain related issues concerning derivatives clearing organizations (DCOs) and chief compliance officers (CCOs). The CFTC’s summary of the high points of the rule changes are listed below:
- Amending Part 30 of the regulations to require FCMs to hold sufficient funds in secured accounts to meet their total obligations to both U.S.-domiciled and foreign-domiciled customers trading on foreign contract markets, computed under the net liquidating equity method;
- Prohibiting FCMs from holding any positions in a Part 30 secured account other than customers’ foreign futures and option positions and associated margin collateral;
- Requiring FCMs to hold sufficient proprietary funds in segregated accounts and Part 30 secured accounts to reasonably ensure that the firms are properly segregated and secured at all times, and to cover margin deficiencies in customers’ trading accounts;
- Requiring FCMs to maintain written policies and procedures governing the maintenance of excess funds in customer segregated and Part 30 secured accounts, and requiring FCMs to obtain the pre-approval of management prior to the withdrawal of 25 percent or more of the excess funds held in segregated or secured accounts if the withdrawals were not for the benefit of the FCMs’ customers;
- Requiring FCMs to provide the Commission and their respective designated self-regulatory organizations with daily reporting of the segregation and Part 30 secured amount computations, and semi-monthly reporting of the location of customer funds and how such funds are invested under Regulation 1.25;
- Requiring FCMs and DCOs to provide the Commission and designated self-regulatory organizations, as applicable, with read-only direct electronic access to bank and custodial accounts holding customer funds;
- Requiring FCMs to adopt policies and procedures on supervision and risk management of customer funds;
- Requiring FCMs to provide potential customers with additional disclosures addressing firm specific risks; and
- Enhancing the standards for the self-regulatory organizations’ examinations of member FCMs.
Comments Due: January 14, 2013.
Cross-References: CFTC Rules Parts 1 (General Regulations), 3 (Registration), 22 (Cleared Swaps), 30 (Foreign Futures and Foreign Swaps), and 140 (Organization, Functions, and Procedures of the Commission).
Lofchie Comment: This is a very extensive set of rule changes (the Release runs over 400 pages) that will require close review by FCMs.
On the one hand, it was inevitable that there would be significant additional custody and related requirements imposed on firms following the failures of Peregrine and MF Global. (Many of the requirements, such as the required procedures around the handling of customer funds, are a direct function of the specific events leading to the failure of those two firms. In fact, one might trace the changes to the part 30 rules and to the supervision of customer funds largely to MF Global.) On the other hand, these changes are not necessitated directly by Dodd-Frank, but lie on top of all that is required under Dodd-Frank. At some point, one wonders just how many rule changes, even rule improvements, the financial system can tolerate in a short period of time.
One interesting aspect of the rule changes is the increased responsibility put on futures SROs for the supervision of FCMs. Given the tremendous scope of the new Dodd-Frank responsibilities assumed by the CFTC, it would seem likely that we will see a greater imposition of regulatory responsiblities on the SROs. This would be consistent with the historical direction of the regulation of broker-dealers.