On January 26, the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight (Division) issued CFTC Letter No. 17-03, in which the Division authorized futures commission merchants (FCMs) that carry cleared swaps customer accounts to withdraw excess residual interest from the cleared swaps customer accounts prior to the time provided in CFTC Rule 22.17(b), subject to the terms and conditions in the letter. As explained by the Division, CFTC Regulation 22.2(f)(6)(iii)(A) requires an FCM, prior to the time of clearing settlement with a derivatives clearing organization (DCO), to maintain residual interest in cleared swaps customer accounts that is equal to, or exceeds, the aggregate amount by which each cleared swaps customer is undermargined. For cleared swaps, this means that an FCM must have funds or investments in the cleared swaps customer accounts to cover the aggregate undermargined amount before the time of settlement with DCOs. Margin payments from the cleared swaps customers are generally thereafter received throughout the day.
As margin payments from cleared swaps customers are received, the sum of the undermargined amount decreases and the FCM’s excess residual interest increases. However, CFTC Regulation 22.17(b) prohibits an FCM from making withdrawals from its residual interest in cleared swaps customer accounts prior to preparing its daily cleared swaps segregation calculation as of the close of business the prior business day. For many FCMs, this timing gap results in significant amounts of FCM liquid capital, above the cleared swaps targeted residual interest amount, being held in cleared swaps customer accounts for the duration of the day.
CFTC Letter No. 17-03 permits an FCM to withdraw excess residual interest to the extent that margin payments have been deposited by cleared swaps customers to reduce the undermargined amount in the cleared swaps customer accounts, subject to certain terms and conditions. In particular: (1) an FCM must have robust risk management processes and controls in place to assure that withdrawals will not result in any risk of intraday undersegregation in the cleared swaps customer accounts; (2) an FCM must document its consideration of the impact on cleared swaps segregation of any other disbursements not made for the benefit of cleared swaps customers; and (3) withdrawal may not result in an FCM holding less than 110 percent of its current targeted residual interest balance in cleared swaps customer accounts.
CFTC Letter No. 17-03 is available here.