CFTC Requests Comment on Proposal to Create New Type of Clearing Membership

The CFTC requested comment on a proposal by Chicago Mercantile Exchange, Inc. to create a new category of direct clearing member called a “Direct Funding Participant” (“DFP”).

As previously covered, the proposal would allow a DFP firm to clear trades on a CME-operated exchange solely for its own account, as long as obligations to CME’s clearinghouse that arose from the firm’s DFP activity were guaranteed by at least one other clearing member registered with the CFTC as a futures commission merchant (“DFP Guarantor”). Unlike existing customers of FCMs, a DFP would post collateral to and settle all payments with the clearinghouse directly. The CME represented that the DFP program would allow firms to eliminate certain customer risk through individual account segregation, and would allow the DFP’s collateral to prevent exposure to the risk of pro rata loss allocation that it might otherwise face if the DFP instead were a customer of an FCM.

In response to a request from the CFTC, the CME provided additional information and proposed further amendments, including:

  • adding further information on financial resource sizing under the DFP program;
  • clarifying exchange membership requirements for DFPs;
  • updating the form of Reimbursement Agreements; and
  • adding text describing types of permissible service arrangements between DFP Guarantors and DFPs.

Comments on the proposal must be submitted to the CFTC by January 12, 2018.

Lofchie Comment: Historically, the CFTC had allowed clients of an FCM to have a separate account that was walled off from other clients of the FCM. See CFTC Financial and Segregation Interpretation No. 10: Treatment of Funds Deposited in Safekeeping Accounts. Eventually, the CFTC effectively prohibited the use of such accounts by denying that they would receive favorable treatment in insolvency. See CFTC Advisory: Responsibilities of Futures Commission Merchants and Relevant Depositories with Respect to Third Party Custodial Accounts. The CME proposal would, in effect, allow for the recreation of Interpretation 10, albeit in somewhat different legal form.

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