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Segregation and Bankruptcy

  • Slide 1

    FCM 1.20 Account Segregation – Operations Considerations

    FIA Segregation Sub-committee meeting with CFTC

    Washington, 15 September 2010

    Agenda

    Agenda

    ♦Introduction & Overview 2:00 - 2:10

    ♦Key areas of consideration (1) 2:10 – 2:45

      –Account Structures

      –Omnibus accounts

      –Reconciliations

    ♦Key areas of consideration (2) 2:45 – 3:20

      –Cash Flows with Clearing House

      –Cash Flows with Customers

    ♦Summary Considerations – Operations and Systemic Risk 3:20 – 3:35

    ♦Current Financial Safeguards 3:35 – 3:45

    ♦Wrap Up 3:45 – 4:00

    Direct Accounts: Current State

    Direct Accounts: Current State

    Assets Held

    Externally

    US FCM

    FCM Overall Segregation Environment

    3rd Party

    customer

    Clearing House

    Assets

    Liabilities

    FCM Omni Client Clearing Account (Margin & Positions)

    Clearing House Omni

    Securities

    Cash

    Positions

    1

    1

    FCM Agents

    Customer Seg Account

    Bank Account

    FCM Settlement Account

    Bank Account

    Trust Account

    Investment Account

    1 customer with 1 CCP

    Fed & DTCC Box

    Collateral Account

    Number of Reconciliations

    Incremental per customer

    Incremental per CCP

    8

    0

    3

    Reconciliations

    P/L Account

    Commission& Fees

    3 customers with 2 CCPs

    Number of Reconciliations

    11

    2

    Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment

    Direct Accounts – CCP & FCM Segregation: Possible Future State

    Direct Accounts – CCP & FCM Segregation: Possible Future State

    Assets Held

    Externally

    FCM Overall Segregation Environment

    Assets

    Liabilities

    3rd Party

    customer

    Clearing House

    Customer Clearing A/C (Margin & Positions)

    Clearing House Omni

    Assets

    Securities

    Cash

    Customer A/c’s

    Positions

    FCM Agents

    FCM customer Segregation Environment

    Customer Trust A/c

    Customer Seg A/c

    Customer Bank Account

    Customer A/c by CCP (positions & cash)

    Customer Margin A/C

    1

    Customer Investment Account

    Customer Fed Box

    Customer DTCC Box

    Customer Collateral Account

    Customer Commission A/c

    Clearing House

    Securities

    FCM Clearing A/C

    FCM Clearing Account

    Cash

    Positions

    FCM Agents

    FCM Bank Account

    1 customer with 1 CCP

    14

    FCM Investment Account

    FCM Settlement Account

    FCM Investment Account

    7

    FCM Collateral Account

    Number of Reconciliations

    Incremental per customer

    Incremental per CCP

    6

    FCM Fed Box

    FCM DTCC Box

    3 customers with 2 CCPs

    Number of Reconciliations

    34

    Reconciliations

    P/L Account

    Commission& Fees

    3

    Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment

    Slide 9

    Direct Accounts – CCP Segregation Only: Possible Future State

    Assets Held

    Externally

    US FCM

    FCM Overall Segregation Environment

    3rd Party

    customer

    Clearing House

    Customer Clearing A/C (Margin & Positions)

    Clearing House Omni

    Assets

    Liabilities

    Securities

    Cash

    Customer A/c’s

    Positions

    Customer A/c by CCP (positions & cash)

    FCM customer Segregation Environment

    Customer Margin A/C

    1

    Customer Commission A/c

    Clearing House

    FCM Clearing A/C

    FCM Clearing Account

    FCM Agents

    FCM Bank Account

    1 customer with 1 CCP

    FCM Investment Account

    FCM Settlement Account

    FCM Investment Account

    10

    FCM Collateral Account

    Number of Reconciliations

    Incremental per customer

    Incremental per CCP

    3

    6

    FCM Fed Box

    FCM DTCC Box

    3 customer with 2 CCPs

    Number of Reconciliations

    22

    Reconciliations

    P/L Account

    Commission& Fees

    4

    Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment

    Omnibus Accounts: Current State

    Omnibus Accounts: Current State

    Assets Held

    Externally

    US FCM

    FCM Overall Segregation Environment

    •Legal Relationship between FCM and non member FCM

    •No look through to underlying customers

    3rd Party

    customer

    Clearing House

    Assets

    Liabilities

    FCM Clearing

    Clearing House Omni

    Securities

    •Legal Relationship between non member FCM and customer

    Cash

    Positions

    FCM Agents

    Non member FCM

    Customer Seg

    Bank Account

    Customer Omni

    (Non member FCM)

    Non member FCM Omni

    3A

    3A

    3B

    3B

    3C

    3C

    FCM Settlement Account

    Bank Account

    Trust Account

    Investment Account

    1 customer with 1 CCP

    Fed & DTCC Box

    Collateral Account

    8

    0

    0

    3

    Reconciliations

    P/L Account

    Commission& Fees

    Number of Reconciliations

    Incremental per omnibus FCM

    Incremental per omnibus customer

    Incremental per CCP

    3 omnibus customers with 2 CCPs

    Number of Reconciliations

    11

    5

    Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment

    Slide 13

    Omnibus Accounts – CCP & FCM Segregation: Possible Future State

    Assets Held Externally

    US FCM

    FCM Overall Segregation Environment

    Clearing House

    Customer3A Clearing A/C

    Recs *3

    Assets

    Liabilities

    FCM customer 3A Segregation Environment

    •Tri party legal Relationship between FCM, non member FCM and underlying customer

    3rd Party

    customer

    Customer 3A Clearing Account

    Bank Accounts

    Customer 3A Investment Account

    Customer Bank 3A Account

    Customer3A Bank Account

    Omni / 3A Positions A/c by CCP

    Customer 3A Investment Account

    Liabilities

    Customer 3A Fed Box

    Customer 3A DTCC Box

    Customer 3A Collateral Account

    Omni/ 3A Customer Margin A/C

    Clearing House

    Customer 3B Clearing A/C

    Recs *3

    Customer 3B Clearing Account

    Bank Accounts

    Customer3B Bank Account

    Omni / 3B Positions A/c by CCP

    Liabilities

    Non member FCM

    Customer 3B Investment Account

    Customer 3B Bank Account

    Customer 3B Investment Account

    FCM customer 3B Segregation Environment

    Customer 3B Collateral Account

    Omni/ 3B Customer Margin A/C

    Broker Omni

    3A

    3A

    3B

    3B

    Customer 3B Fed Box

    Customer 3B DTCC Box

    3C

    3C

    Clearing House

    Customer 3C Clearing A/C

    Recs *3

    Customer 3C Clearing Account

    Bank Accounts

    Customer3C Bank Account

    Omni / 3C Positions A/c by CCP

    Liabilities

    Customer 3C Investment Account

    Customer3C Bank Account

    Customer 3C Investment Account

    FCM customer 3C Segregation Environment

    Customer 3C Collateral Account

    Omni/ 3C Customer Margin A/C

    1 Omni A/c with 3 customers, 1 CCP

    Customer 3C Fed Box

    Customer3C DTCC Box

    Number of Reconciliations

    Incremental per omnibus FCM

    Incremental per omnibus customer

    Incremental per CCP

    28

    7

    Clearing House

    FCM Clearing A/C

    Recs *3

    FCM Clearing Account

    7

    Bank Accounts

    FCM Bank Account

    Omni Commission A/c

    FCM Investment Account

    12

    FCM Investment Account

    FCM Bank Account

    FCM Collateral Account

    1 Omni A/c with 10 customers, 2 CCP

    FCM Fed Box

    FCM DTCC Box

    Number of Reconciliations

    89

    Reconciliations

    P/L Account

    Commission& Fees

    6

    Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment

    Slide 15

    Start of Day Margin Processing Timelines - Today

    Scenario: Two customers, two CCPs, customer 1 pays on T+1, customer 2 pays on T+2

    T+1

    T+2

    05:00

    07:00

    12:00

    15:00

    18:00

    eod

    05:00

    07:00

    12:00

    15:00

    18:00

    CCPs call margin from FCM

    FCM Pays margin to CCP A for both customers

    FCM advances own funds to cover customer exposure

    FCM Pays margin to CCP B for both customers

    FCM advances own funds to cover customer exposure

    FCMs verify calls with customers

    Managed at CCP level across customers

    Customer 1 pays single margin amount for both CCPs

    Customer 2 pays single margin amount for both CCPs

    Managed at customer level across CCPs

    Note: This diagram shows the funding flows to the client following the CCP call on T+1. The first CCP margin funding run to the FCM is on an intraday trade date basis

    Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment

    Slide 17

    Start of Day Processing Timelines – Possible Future State (1)

    Scenario: Two customers, two CCPs, each call is $50, customer 1 pays on T+1, customer 2 pays on T+2

    T+1

    T+2

    05:00

    07:00

    12:00

    15:00

    18:00

    eod

    05:00

    07:00

    12:00

    15:00

    18:00

    CCPs call margin from FCM

    FCM Pays margin to CCP A for both customers

    FCM advances own funds to cover customer exposure

    FCM Pays margin to CCP B for both customers

    FCM advances own funds to cover customer exposure

    FCMs verify calls with customers

    Customer 1 pays margin amount for CCP A

    customer 2 pays margin amount for CCP A

    Customer 1 pays margin amount for CCP B

    Customer 2 pays margin amount for CCP B

    CCP records:

    CCP A, customer 1 = +$50

    CCP A, customer 2 = +$50

    CCP B, customer 1 = +$50

    CCP B, customer 2 = +$50

    Total seg amount A = $100

    Total seg amount B = $100

    Note: This diagram shows the funding flows to the client following the CCP call on T+1. The first CCP margin funding run to the FCM is on an intraday trade date basis

    FCM records:

    CCP A, customer 1 = $0

    CCP A, customer 2 = $0

    CCP B, customer 1 = $0

    CCP B, customer 2 = $0

    Total seg amount A = $0

    Total seg amount B = $0

    Total FCM own assets = $200

    CCP records:

    CCP A, customer 1 = +$50

    CCP A, customer 2 = +$50

    CCP B, customer 1 = +$50

    CCP B, customer 2 = +$50

    Total seg amount A = $100

    Total seg amount B = $100

    FCM records:

    CCP A, customer 1 = $50

    CCP A, customer 2 = $0

    CCP B, customer 1 = $50

    CCP B, customer 2 = +$0

    Total seg amount A = +$50

    Total seg amount B = +$50

    Total FCM own assets = $100

    Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment

    Slide 19

    Start of Day Processing Timelines – Possible Future State (2)

    Scenario: Two customers, two CCPs, each call is $50, customer 1 pays on T+1 and covers in securities, customer 2 pays on T+2 and covers in cash

    T+1

    T+2

    T+3

    05:00

    12:00

    18:00

    eod

    05:00

    12:00

    18:00

    eod

    05:00

    12:00

    18:00

    eod

    CCPs call margin from FCM

    FCM Pays margin to CCP A for both customers

    FCM Pays margin to CCP B for both customers

    FCMs verify calls with customers

    customer 1 deposits securities for CCP A

    customer 2 pays margin amount for CCP A

    FCMs calls customer 1 for top up of $20

    customer 1 pays margin call for CCP A

    customer 1 deposits securities for CCP B

    customer 2 pays margin amount for CCP B

    Customer 1 pays margin call for CCP B

    CCP records:

    CCP A, customer 1 = +$50

    CCP A, customer 2 = +$50

    CCP B, customer 1 = +$50

    CCP B, customer 2 = +$50

    Total seg amount A = $100

    Total seg amount B = $100

    FCM records:

    CCP A, customer 1 = TBills@ $50

    CCP A, customer 2 = $0

    CCP B, customer 1 = TBills@ $50

    CCP B, customer 2 = +$0

    Total seg amount A = +$50

    Total seg amount B = +$50

    Total FCM own assets = $100

    CCP records:

    CCP A, customer 1 = +$50

    CCP A, customer 2 = +$50

    CCP B, customer 1 = +$50

    CCP B, customer 2 = +$50

    Total seg amount A = $100

    Total seg amount B = $100

    FCM records:

    CCP A, customer 1 = TBills@ $40

    CCP A, customer 2 = +$50

    CCP B, customer 1 = TBills@ $40

    CCP B, customer 2 = +$50

    Total seg amount A = +$90

    Total seg amount B = +$90

    Total FCM own assets = $20

    Note: This diagram shows the funding flows to the client following the CCP call on T+1. The first CCP margin funding run to the FCM is on an intraday trade date basis

    Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment

    Current Financial Safeguards

    Current Financial Safeguards

    Performance Bonds/Concentration Performance Bonds. Performance bond requirements cover expected price moves of at least 95% to 99% over varying time-frames. Concentration performance bond requirements are imposed when a clearing firm’s potential exposure becomes large relative to its financial resources.

    Settlement Cycles. Two full settlement cycles are performed daily, marking open positions to market, collecting and payment variation margin, and resetting performance bond coverage.

    Capital Requirements. Clearing members have significant minimum capital requirements (OTC derivatives clearing members’ capital requirements are substantially higher). Institutional customers generally require clearing FCMs to maintain capital well in excess of the CFTC/SRO requirements.

      –The top 10 FCMs (ranked by adjusted net capital) have excess net capital ranging from slightly more than $10 billion to slightly less than $4 billion. The next ten have excess net capital ranging from slightly more than $2 billion to slightly less than $1 billion.

    Stress Tests. Daily stress tests are performed on clearing member positions on a portfolio basis and on the individual accounts of the clearing member’s large traders; the clearing member may be required to increase performance bond requirements or reduce or transfer positions.

    Reporting Requirements. FCMs calculate daily their segregation requirements and capital and report those numbers to their DSRO as required.

    Early Warning Requirements. FCMs and clearing organizations are subject to certain early warning requirements.

See Also:

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