21 February 2024

CFTC Tightens FCM Customer Margin Requirements

The Commodity Futures Trading Commission (CFTC) finalized amendments to regulations regarding margin requirements for futures commission merchants (FCMs).

The rule aims to strengthen protections for customer funds held by FCMs by imposing stricter margin adequacy requirements. It also establishes conditions under which FCMs may engage in separate account treatment.

These are the key points of the new rule:

Margin Adequacy Requirements

The rule requires all FCMs, including non-clearing FCMs not members of a derivatives clearing organization (DCO), to ensure customer margin funds are sufficient to meet initial margin requirements before permitting withdrawals. This extends existing requirements that currently only apply indirectly to clearing FCMs.

FCMs must calculate margin adequacy based on positions and valuations as of the prior business day’s close before permitting withdrawals. This is intended to prevent customer withdrawals from creating or worsening under margined positions.

Allowance for Separate Account Treatment

The amendments will allow FCMs to treat separate accounts of the same customer as accounts of separate entities for the margin adequacy requirements. This provides operational flexibility for customers like funds that allocate assets across multiple outside managers in separate accounts.

However, FCMs can only engage in separate account treatment during the “ordinary course of business,” which excludes financial or operational distress events. These triggering events, both firm-specific and customer-specific, would necessitate a cessation of separate account treatment.

Conditions and Requirements

FCMs that engage in separate account treatment must comply with conditions designed to mitigate risks, ensure consistent application, and prohibit avoidance of the ‘one business day’ margin call requirement.

These include:

  • Stress testing, risk limits, and margin calculations on both a combined and per-account basis
  • Regulatory reporting when beginning or ceasing separate account treatment
  • Maintaining reliable direct contact with the underlying customer
  • Prominent disclosure that separate accounts will be combined in the event of bankruptcy

The requirements aim to promote flexibility in meeting customer needs while protecting against misuse of funds and systemic risks. However, some operational challenges regarding managing margin payments across currencies still need to be addressed.

The CFTC believes that codifying the rule with input from market participants will increase durability and certainty. FCMs and customers have already relied for years on related no-action letter relief that informed these amendments. After considering alternatives, the CFTC concluded that imposing adequate margin requirements across FCMs with the flexibility to facilitate customer activities responsibly constitutes a sound policy.

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