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CFTC Proposes New Oversight Regulations

New CFTC regulations should improve protections for customers in the wake of MF Global and Peregrine failures

Published on: Oct 23, 2012

The Commodity Futures Trading Commission on Monday approved for public comment proposed new regulations and amendments to existing regulations that will enhance protections for customers and strengthen the safeguards surrounding the holding of money, securities and other property deposited by customers with futures commission merchants and derivatives clearing organizations.

The proposals are the result of the Commission's efforts to coordinate and consult with the futures industry on enhancing customer protections, including two public roundtables that were hosted by Commission staff. The proposals also expand upon previous Commission actions to enhance customer protections, including rolling back certain exemptions from investment standards for customer funds under Regulation 1.25 and the adoption of the legal segregation with operational commingling (LSOC model) for cleared swap transactions.

CFTC regulations should improve protections for customers
CFTC regulations should improve protections for customers

CFTC Chairman Gary Gensler said the proposals should strengthen oversight programs.

"[The proposals are] about ensuring customers have confidence that the funds they post as margin or collateral are fully segregated and protected," Gensler said.

Specifically, the proposals would:

• Amend 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;

• Prohibit FCMs from holding any positions in a Part 30 secured account other than customers' foreign futures and option positions and associated margin collateral;

• Require 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;

• Require 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;

• Require 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;

• Require 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;

• Require FCMs to adopt policies and procedures on supervision and risk management of customer funds;

• Require FCMs to provide potential customers with additional disclosures addressing firm specific risks; and

• Enhance the standards for the self-regulatory organizations' examinations of member FCMs.

CFTC Commissioner Scott D. O'Malia said the measures are a good start, but a comprehensive technological solution is needed.

"Technology can be a cost effective oversight tool for both customers and the Commission to enhance transparency and improve risk management. Improving our capacity to monitor money flows can serve as a significant deterrent against fraudulent behavior," O'Malia said.

Both O'Malia and Gensler encouraged public response to the proposed rules.

"It is crucial that the CFTC, working with SROs and market participants, continues its efforts to enhance protections for the funds of both futures and swaps customers. We look forward to reviewing the public input on this proposal," Gensler said.

The proposals will be open for public comment for 60 days after publication in the Federal Register.