NFA's Roth takes on residual interest rule

October 3, 2013 05:57 AM
Blog first appeared in DanCollinsReport on Oct. 3, 2013

Dan Roth President and CEO of the National Futures Association, said that while the NFA fully supports many of the customer protection provisions offered by the Commodity Futures Trading Commission (CFTC), the residual interest provision “does not just fix something that is not broken, it threatens to do real harm to a longstanding system that has worked well for both customers and the markets,” during testimony before the House Agriculture committee on Oct. 2.

Roth noted in written testimony before the committee that the residual interest provision, which would require Futures Commission Merchants (FCMs) to maintain at all times a residual interest sufficient to exceed the sum of all customer margin deficits, “has absolutely nothing to do with the problems encountered at either MF Global or PFG.”

Further he noted that the provision would require FCMs to “assume that every customer will default on every margin call,” and have sufficient capital in their segregated accounts to cover such a contingency.

Roth noted, “The impact of this proposal could be devastating for both agricultural end users and the relative handful of FCMs that service those customers.”

He did support measures that would require self-regulatory organizations (SROs) to expand their testing of FCM internal controls, require FCMs to certify annual financial reports within 60 days of the firm's fiscal year end; require undercapitalized FCMs to provide immediate notice to the Commission and its Designated Self-Regulatory Organization (DSRO) and require each FCM to establish a risk management program.


Roth also addressed the idea of creating an insurance program for the futures industry similar to the Securities Investor Protection Corporation (SIPC). The NFA along with the Futures Industry Association (FIA), CME Group and the Institute for Financial Markets sponsored a feasibility study conducted by Dr. Christopher Culp to look into a SIPC type plan. Cup presented his preliminary results to the committee and Roth noted, “Based on his data, we would agree with his preliminary conclusions that for the vast majority of customers at the larger FCMs various forms of customer account insurance would be of little or no interest and that, given the size of these larger customers, the cost of a mandatory insurance program for all customers of all FCMs would be cost prohibitive.”

Click link for Roth Testimony: Roth131002

Click link for Insurance report: Culp Futures Insurance


About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.