October 30, 2013
Each of us took an oath to uphold the law. Sometimes that’s pretty easy, other times, not so much. As rule writers, many times the law allows us a bit of discretion, some latitude. Other times, it’s pretty clear what we are supposed to do. On these customer protections, I think the key components are straightforward. We are supposed to ensure that customers’ money is protected. Our law mandates this: full protection, complete protection, 100% of customer money, 100% of the time.
For too long, we haven’t had the kind of clear guidelines we’re putting in place today to ensure against improper comingling of funds at Futures Commission Merchants (FCMs) and Designated Clearing Organizations (DCOs). This rule will provide greater protection of these customer funds by eliminating some tolerated methodologies for computing the amount of funds held and how funds are treated. It prescribes new modes of calculation, especially for excess funds. These include: prescribing when foreign funds can be included in the calculation; restricting the amount of customer funds that an FCM may hold in depositories outside of the United States to the amount of margin required by a foreign clearing organization or broker, plus a 20% cushion; and requiring each FCM to compute a targeted amount of excess funds (i.e., proprietary funds or “residual interest”) that the FCM seeks to maintain in customer segregated or secured accounts as a cushion to help ensure that the FCM does not become undersegregated or undersecured.
The rule also imposes some risk management requirements for FCMs, including written policies and procedures reasonably designed to ensure that customer funds are separately accounted for and segregated or secured as belonging to customers as required by the Act and Commission regulations. The rule requires FCMs to provide the CFTC with notices to provide an early warning system on seg violations; amends FCM capital requirements to require that FCMs demonstrate, upon CFTC request, access to sufficient liquidity; and requires FCMs to file daily seg and secured amount schedules and other reporting.
Section 4d of the CEA is a cornerstone of our law, fundamental to the protection of customers and markets. It requires that an FCM may not use the funds of one customer to margin or guarantee the trades or contracts, or to secure or extend the credit, of another customer. That is the law. We aren’t Congress. We don’t have the latitude to do something other than what Congress has specifically and clearly required of us. There are some that suggest perhaps Congress didn’t mean what the law says. Fine, if so Congress can change the law. We can’t.
And I disagree with the contention of some that this rule will have the perverse effect of funding customer protections on the back of America’s farmers and ranchers—nothing could be further from the truth. Indeed, quite the opposite is the case: this rule will ensure that, in the event of another MFG, another Peregrine, the U.S. agricultural sector will not find itself funding those kinds of tragic losses. That’s the kind of protection I’m talking about today.
This is a good rule, and I commend the staff for their work. It provides plenty of time for compliance. And it provides for a study to gain more information and a full five years for the commission to act if what we have done needs alteration. And, as always, if there are issues brought before us relating to technological or practical challenges with good faith compliance, I am open to provision of appropriately tailored relief as needed. And again, if Congress has concerns, they can change the law.
It is a good rule and I support it.
Last Updated: October 30, 2013