Staff of the Commodity Futures Trading Commission issued an advisory authorizing derivatives clearing organizations to permit their futures commission merchant clearing members carrying multiple accounts for the same beneficial owner to treat each account as an account of a separate entity for purposes of disbursements under ordinary circumstances, subject to conditions. Specifically, an FCM can remit funds back to a customer from an over-margined account, while another account of the same customer is subject to a margin call.
For customer accounts under the same beneficial ownership at an FCM to benefit from this treatment, each account must satisfy all initial and variation margin calls within “a one day period.” Moreover, the customer cannot be in default under the FCM’s customer agreement, and neither the customer nor the FCM can be in financial distress or bankruptcy, among other circumstances. If the FCM chooses to offer this arrangement to a customer, it cannot repeatedly change it; must disclose in writing to the customer that in case of the FCM’s bankruptcy, all separate accounts will be combined; and must disclose to all customers – whether they might take advantage of the FCM authority or not – that it makes these arrangements available. By no later than July 1, 2020, FCMs seeking to take advantage of these arrangements must update their internal risk management policies and procedures to include stress testing and credit limits on individual accounts and combined accounts of the same beneficial owner.
Notwithstanding, no FCM documentation may prevent an FCM from (1) calling the beneficial owner of an account for margin or (2) commencing a lawsuit against a beneficial owner for a shortfall in any account where the beneficial owner fails to meet a margin call. No FCM documentation may guarantee a beneficial owner against any loss or promise to limit loss.
In response to the CFTC advisory, CME Clearing authorized its clearing member FCMs to effectuate the CFTC’s advisory for their customers (click here to access). The CFTC’s Guidance was issued by the Divisions of Clearing and Risk and Swap Dealer and Intermediary Oversight.
My View: In May 2019, the futures industry’s Joint Audit Committee issued two reminders to futures commission merchants, one regarding the prohibition against making guarantees against loss contained in a CFTC rule (click here to access CFTC Rule 1.56(b).), and the other mandating aggregation of all accounts of the same beneficial owner for the same regulatory account classification (e.g., customer segregated, customer secured and cleared swaps customer) for margin purposes, as previously advised by JAC in May 2014 (click here to access JAC Regulatory Alert 14-03).
(Click here for background regarding the JAC’s May 2019 guidances in the article “Futures Industry Self-Regulators Warn FCMs Against Limiting Losses of Customers and Not Combining Accounts for Aggregate Margin Call Calculations” in the May 19, 2019 edition of Bridging the Week.)
The new CFTC advisory reiterates JAC’s reminder regarding customer documentation, but modifies JAC’s instructions on the handling of different accounts of the same beneficial owner for margin purposes for each DCO that implements the CFTC advisory (as CME Clearing already has).
As a result, the JAC should conform its May 2019 guidance to the CFTC’s current advisory to eradicate regulatory ambiguity as soon as possible. It would be helpful, when doing so, for the JAC to address what is “one business day” for purposes of meeting a margin call (24 hours or end of the following business day) as well as providing expectations regarding intra-day margin calls.