The Commodity Futures Trading Commission has frozen the current residual interest funding deadline by when, each business day—the so-called “settlement date”—futures commission merchants must post sufficient amounts of their own funds to cover their customers’ aggregate undermargined amounts incurred on the prior day. Without this action, by December 31, 2018, the deadline would have automatically been accelerated from 6 p.m. on each settlement date to the actual time of settlement each morning unless the Commission had proactively amended the earlier deadline by then. The CFTC now commits to having a distinct rulemaking (including the solicitation of public comment) prior to amending the existing residual interest deadline—if at all. In voting for the amended rule, Timothy Massad, chairman of the CFTC, noted that there are arguments both for and against changing the residual interest deadline that the Commission should consider rather than simply let the deadline change automatically. “An earlier deadline can help make sure that FCMs always hold sufficient margin and do not use one customer’s margin to support another customer,” said the chairman. “[B]ut it can also impose costs on customers who must deliver margin sooner.”
My View: Following the collapse of MF Global in October 2011, the CFTC rapidly enacted a number of rules to enhance customer protection. Most quickly, in late 2011, the Commission restricted the investments futures commission merchants could make with customer funds, prohibiting, among other things, purchases of non-US sovereign debt—even though at the time the ability of FCMs to invest in non-US sovereign debt was already prudentially restricted. In part, this action was taken in the belief at the time that MF Global had improperly utilized customer funds to purchase non-US sovereign obligations. However, this appears not to have been the case. As a result, US FCMs are now prohibited from investing customer funds in non-US sovereign debt, even when such investment would more appropriately align the obligations of an FCM currency-wise to its customers. Similarly, a year later, the CFTC enacted the residual interest funding deadline to better ensure that some customers’ funds were not used by an FCM to offset other customers’ undermargined accounts. However, this good-faith effort to protect customers from their FCMs potentially could increase customers’ exposures if FCMs required clients to leave more funds up front to anticipate changing market conditions. Moreover, this measure added to FCMs’ costs. Indeed, a better route may have been for the CFTC to work with Congress to amend the bankruptcy laws to permit individual segregated accounts for customers (as in Europe)—which FCMs could then offer to customers and separately charge for. But this was not the route chosen. It is tough to anticipate unintended consequences; however, effective regulation requires holistic thinking and not just to react and do something for the sake of doing something following a crisis. The CFTC is commended for stepping back somewhat from a 2013 knee-jerk reaction and ameliorating the potential adverse impact of an automatic acceleration of the residual interest deadline.