On October 23, the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight (DSIO) issued an interpretation regarding the appropriate treatment of customer margin payments made to a futures commission merchant (FCM) using the Automated Clearing House (ACH) transaction system for purposes of compliance with CFTC Regulations 1.17, 1.22, 22.2, and 30.7. CFTC Regulations 1.22, 22.2, and 30.7(f) require each FCM to compute, as of the close of each business day, the amount by which each customer’s account may be undermargined. An FCM must also maintain a sufficient amount of its own funds (i.e., the FCM’s Residual Interest) equal to or in excess of the total customer undermargined amount. If the total customer undermargined amount exceeds an FCM’s Residual Interest, the FCM must increase its Residual Interest prior to the clearing settlement cycle on the next business day for cleared swaps accounts (CFTC Regulation 22.2), and by 6:00 p.m.. Eastern Time the next business day for futures accounts (CFTC Regulation 1.22) and for foreign futures accounts (CFTC Regulation 30.7).
DSIO’s interpretation confirms that, in computing the extent to which a customer’s account may be undermargined, an FCM may credit a customer’s trading account for a margin payment upon the FCM’s initiation of an ACH withdrawal from the customer’s bank account and is not required to wait until the funds are available in the FCM’s customer funds accounts. To take advantage of this interpretation, an FCM must: (1) enter into a written agreement with the customer authorizing the FCM to initiate ACH withdrawals; (2) conduct adequate due diligence of the customer’s credit risk; (3) establish a sufficient amount of Residual Interest as required by CFTC Regulation 1.11; (4) establish criteria to determine when certain customers must meet margin calls to ensure same-day receipt of funds; and (5) not have information that a customer’s account will have insufficient funds to meet an ACH withdrawal or margin call. Further, if an ACH transaction is subsequently rejected by the customer’s bank for any reason, the FCM must reverse the margin credit and may only credit the customer’s account upon actual receipt of the margin payment.
DSIO has also confirmed that, for purposes of computing undermargined capital charges as required by CFTC Regulation 1.17(c)(5)(viii), an FCM may consider a customer’s margin obligation met upon initiation of an ACH withdrawal by the FCM and is not required to take a capital charge for pending ACH transactions that ultimately clear into the customer’s trading account.
Finally, DSIO addressed inquiries from FCMs regarding maintenance of Residual Interest on business days when futures markets are open but banking systems are closed. On such days DSIO stated that, for futures and cleared swaps customer accounts subject to the US banking system, an FCM is required to maintain Residual Interest sufficient to cover the total customer undermargined amount on the next business day the banking system is open and US derivatives clearing organizations conduct a settlement cycle.
With respect to foreign futures and options accounts, an FCM is required to maintain Residual Interest in the 30.7 accounts in an amount sufficient to cover the total customer undermargined amount computed as of the close of business each day by 6:00 p.m. Eastern Time on the next business day. Because holidays on foreign markets will vary, an FCM carrying foreign futures accounts is responsible for ensuring it maintains sufficient Residual Interest to cover the total customer undermargined amount as of 6:00 p.m. Eastern Time on the next business day.
CFTC Letter no. 14-129 is available here.