CFTC proposes rules for customer funds

The U.S. agency that oversees derivatives, criticized for poor oversight of MF Global Holdings Ltd. and Peregrine Financial Group Inc., proposed new rules to improve segregation and protection of customer funds.

The Commodity Futures Trading Commission’s five members unanimously approved the proposals yesterday without a public meeting, CFTC Chairman Gary Gensler said in a speech prepared for delivery at a Securities Industry and Financial Markets Association conference in New York.

“This proposal is about ensuring customers have confidence that the funds they post as margin or collateral are fully segregated and protected,” Gensler said of the measures, which will be open to public comment before it is completed.

The CFTC and National Futures Association, a self- regulatory group, are bolstering industry oversight after Peregrine, a commodities brokerage, collapsed in July with at least $200 million in client funds missing. MF Global, which filed the eighth-largest U.S. bankruptcy Oct. 31, is being liquidated to pay customers facing a $1.6 billion shortfall.

“These are a series of strong reforms,” Gensler said in an interview at the Sifma conference. “We’re taking all that which we worked with the NFA this summer on and putting it in federal rules.”

Those changes include additional protections for excess customer money held at futures brokerages and accounting enhancements, he said.

The proposal would enhance the protection of customers and customer funds by:

  • Amending 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;
  • Prohibiting FCMs from holding any positions in a Part 30 secured account other than customers’ foreign futures and option positions and associated margin collateral;
  • Requiring 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;
  • Requiring 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;
  • Requiring 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;
  • Requiring 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;
  • Requiring FCMs to adopt policies and procedures on supervision and risk management of customer funds;
  • Requiring FCMs to provide potential customers with additional disclosures addressing firm specific risks; and
  • Enhancing the standards for the self-regulatory organizations’ examinations of member FCMs.

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