The Commodity Futures Trading Commission took up the issue of enhanced customer protections today, finalizing a rule that would require futures commission merchants (FCMs) to adopt new risk management programs that relate to operations, capital and customers fund segregation.
The new rule, passed this morning, will also require FCMs to keep so-called “residual interest in customer accounts.” The CFTC rule says FCMs must maintain residual interest “that is at least equal to its customers’ aggregate under margined amounts for the prior trade date by the point in time specified in the rule. Essentially, one year after the rule appears in the Federal Register, any margin deficit will be required to be topped up by 6pm Eastern time on the day after settlement (“T+1”). If the customer has not met such deficit, the FCM must take a capital charge on the amount of the deficit. After five years, the requirement moves from 6pm to the “first daily settlement”, which will likely be between 7 and 9am. (Thanks to Joanna Mallers for clarifying the time).
Within the next 30 months, the commission must conduct and release a study on the effects of this change on FCMs.
Chairman Gensler asked staffers, for the record, whether these customer protection regulations would prevent a Peregrine-type fraud, or an MF Global-type situation where the FCM can tap into into customer accounts, and the staffers said “yes.”
Commissioner Scott O’Malia introduced a proposed amendment that would not bind the Commission to the 5-year phase-in, but would rather allow future commissions to revisit the implementation timeline pending the results of the 30-month study. The amendment was defeated 3-1. The rule passed by the same 3-1 vote, with O’Malia voting against.
For cleared swaps customer accounts, the final rules do not alter the current residual interest requirement for cleared swaps, although, where applicable, they do amend certain language for consistency with other commission regulations.”
In short, the futures industry now has a residual interest rule.
For a full summary of the rule, with links to additional information, visit the final rule page on MarketsReformWiki.