The Commodity Futures Trading Commission (CFTC) announced new rules and regulations related to customer fund protection earlier today. The Commission unanimously approved the new rules yesterday in response to MF Global’s demise one year ago and the revelation of fraud at PFGBest earlier this year.
Speaking at the annual Securities Industry and Financial Markets Association meeting, CFTC Chairman Gary Gensler announced the rules this morning. “I am pleased that yesterday the Commission voted unanimously to put out for public comment a proposal on enhanced protections for customer funds. This proposal is about ensuring customers have confidence that the funds they post as margin or collateral are fully segregated and protected,” he said in prepared remarks.
With proposed rules ranging from changes to Part 30 segregation requirements to granting regulators direct, view-only access to segregated funds, the proposed changes cover a lot of areas. John Roe, co-founder of the Commodity Customer Coalition, commends the Agency for the steps. “It’s a step in the right direction. They’re doing what they can within the framework of the statute of their powers,” he says.
Although Roe is supportive of the steps the CFTC is taking, he cautions the Agency about overstepping its capabilities. “I fully support requiring [futures commission merchants (FCMs)] to do daily segregation reports, but I’m not sure the extent to which that will be decipherable to the CFTC,” he says. “One of the problems with extra reporting is being able to actually be actionable. I’m not convinced this is.”
Commenting on the proposed rules, CFTC Commissioner Scott O’Malia echoed some of those concerns saying the Agency needs to enhance its technology. “While these measures are a good start, I believe that it is essential to focus on a comprehensive technological solution that goes beyond what the Commission has proposed in this release,” he says. “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.”
A number of the rules proposed already have been taken up by the National Futures Association (NFA), such as the so-called “MF Global Rule” that requires FCMs to notify regulators of any draw in excess segregated funds of 25% or more if the withdrawal is not for the benefit of customers. Roe explains that the NFA is the designated self-regulatory organization for only the non-clearing world, and by adopting these rules at the federal level, the CFTC is taking what the NFA already has done and is broadening it to the entire industry. “There doesn’t seem to be too much that is new and I’m not sure it’s going to provide us with the warm blanket that we need to assure customers that their money is safe,” he says.
As the CFTC has engaged in rulemaking over the last year under the Dodd-Frank Wall Street Reform Act, the agency has dealt with issues of cost-benefit analysis, and, although not prescribed under Dodd-Frank, these rules likely will face the same scrutiny. Speaking to that aspect, CFTC Commissioner Jill Sommers said in a statement, “As always, I am sensitive to the fact that some regulation, while well intended, may not further its stated goals or may be so burdensome that the benefits do not justify the costs.” She went on to encourage market participants to submit comments on the new rules.
With the proposed rules coming one week before the one-year anniversary of MF Global’s bankruptcy, Roe questions the timing. “Is timing optimal? No, these should have been done much sooner. Better now than never, though,” he says. “Coinciding with the one-year anniversary of MF Global, though, I don’t believe is coincidental.”
The rules were sent to the Federal Register yesterday and will be open to a 60-day comment period. Following is a list of the proposed rules as provided by the CFTC:
- 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.