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

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

On June 26, 2014, the CFTC extended time-limited no-action relief granted to FCMs with respect to compliance with CFTC Regulations 1.20, 22.2, and 30.7, which relate to FCM segregation of customer funds. The new deadline for compliance with these rules is October 31, 2014.

CFTC Extends Relief on FCM Segregation of Customer Funds

Practical Law Legal Update 3-573-2425 (Approx. 4 pages)

CFTC Extends Relief on FCM Segregation of Customer Funds

by Practical Law Finance
Published on 07 Jul 2014 • USA (National/Federal)
On June 26, 2014, the CFTC extended time-limited no-action relief granted to FCMs with respect to compliance with CFTC Regulations 1.20, 22.2, and 30.7, which relate to FCM segregation of customer funds. The new deadline for compliance with these rules is October 31, 2014.
On June 26, 2014, the CFTC released No-action Letter 14-88 (No-action 14-88), which extended until October 31, 2014 previously issued no-action relief granted to futures commission merchants (FCMs) from compliance with certain conditions relating to the receipt and recording of customer funds contained in a CFTC interpretation of CFTC Regulations 1.20, 22.2, and 30.7 granted in No-action Letter 14-02 (No-action 14-02). Customer funds are funds that are posted by customers of FCMs as margin to collateralize positions under futures contracts (for more details on FCM customer funds segregation rules, see Practice Note, The Dodd-Frank Act: Derivatives Margin Collateral Rules: FCM Segregation of Futures Collateral ("Customer Funds")).
For details on these and other final customer funds rules, see Legal Update, Final Rules on Protection of FCM Customer Funds Adopted by CFTC.
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 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.
In No-action 14-88, the CFTC also clarified that the prohibition on the commingling of customer funds in Regulations 1.20(e)(3), 22.2(c)(2)(ii) and 30.7(e)(3) does not prohibit a customer from meeting margin calls for Section 4d(a)(2) Funds, Part 30 Secured Funds, and/or Cleared Swaps Funds with a single payment provided that:
  • The FCM initially receives the customer’s margin deposit into the customer’s Section 4d(a)(2) Funds account.
  • The FCM simultaneously records book entry credits to the customer’s Part 30 Secured Funds account and/or Cleared Swaps Funds account (as applicable) as directed by the customer upon the receipt and recording of the margin deposit into the customer’s Section 4d(a)(2) Funds account.
The extended relief was granted in response to concerns that the regulations present significant operational and technological challenges for FCMs, including:
  • FCMs may not have 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 account in foreign jurisdictions and to provide new wire transfer instructions to these customers directing them to submit wire transfers to a Section 4d(a)(2) Funds account.
The CFTC, therefore, granted the further extension to allow FCMs to establish and implement procedures and infrastructure necessary to assure compliance with these regulations.
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 account 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.
This relief was originally to expire on April 14, 2014, however, on April 7, 2014, the CFTC released No-action letter 14-45, which extended this relief until June 30, 2014. No-action 14-88 further extends this compliance deadline to October 31, 2014.
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.
A reminder that on February 5, 2014 the CFTC also issued relevant guidance to FCMs and depositories on procedures for new filing requirements. The guidance, among other things, details procedures for submitting notices and reports required under regulations protecting FCM customer funds.