Chairman Gary Gensler Statements of Support
October 30, 2013
Protection of Collateral of Counterparties to Uncleared Swaps; Treatment of Securities in a Portfolio Margining Account in a Commodity Broker Bankruptcy
I support this final set of customer protection reforms, which comprehensively enhance the protection around the handling and segregation of futures and swaps customer funds.
Segregation of customer funds is the core foundation of the commodity futures and swaps markets. Segregation must be maintained at all times. That means every moment of every day.
Market events, though, of these last two years highlighted that the Commission must do everything within our authorities and resources to strengthen oversight programs and protection of customer funds.
These reforms are the sixth set of rules finalized by this Commission during a two-year process to ensure that customers have confidence that their funds are segregated and protected. These reforms benefit from the Commission's thorough review of existing customer protection rules – looking for any gaps in those rules and the oversight of these markets.
They benefit from significant public input, including staff roundtables, the Technology Advisory Committee, the Agricultural Advisory Committee and numerous reports submitted by market participants.
They also benefit from input through a coordinated effort of the CFTC with other regulators; the self-regulatory organizations (SROs), such as the CME and the National Futures Association (NFA); as well as congressional reports and input on these matters.
I support these rules, in summary, for at least six reasons:
- First, FCMs and clearing members must significantly enhance their supervision of and accounting for customer funds. They will have to put in place additional policies and procedures for these new protections.
- Second, significant enhancements around outside accounting and auditing – regarding the actual accountants or certified public accountants that audit futures commission merchants (FCMs), and also regarding the SROs and how they audit the FCMs.
- Third, significant customer fund protections with regard to how funds are moved around. Basically, when a firm moves money within a firm, how can they move that money around? Some of these reforms were adopted by SROs last year, such as requiring senior management signoff, and the pre-approval of moving those monies. There are also significant new changes to required acknowledgement letters from the banks and custodians.
- Fourth, reforms related to investing in foreign futures accounts. Our Part 30 regime really had not kept pace with protections for domestic futures accounts. With these reforms and the reforms that the NFA had put in place last year, investing in foreign futures accounts will be significantly aligned with the domestic protections.
- Fifth, there's significant new transparency. Transparency to the regulators – we will be able to see electronically custodial accounts and cash accounts on a daily basis. There is transparency to customers, as well, with the twice-a-month statements regarding the details of their funds in the investment accounts. These reforms also have been put in place by the SROs, but it is important that we do this at the federal level as well, and put them in our rules.
- Sixth, the final rules include provisions on capital and residual interest of the FCMs themselves. This was quite possibly the most debated feature of these reforms, but I think they are important. In response to commenters on this provision, we are phasing in compliance to smooth implementation. This section calls for studies and roundtables, and provides for a five-year phase in on these matters.
It is important that we look very closely at the law and work to ensure that one customer's funds or property are not used in some way to secure or guarantee other customer’s positions.
Prior to this final rule set, the Commission already had made important improvements to protections for customers:
- Amendments to rule 1.25 regarding the investment of funds that bring customers back to protections they had prior to exemptions the Commission granted between 2000 and 2005. Importantly, this prevents use of customer funds for in-house lending through repurchase agreements;
- Clearinghouses have to collect margin on a gross basis and FCMs are no longer able to offset one customer’s collateral against another and then send only the net to the clearinghouse;
- The so-called “LSOC rule” (legal segregation with operational comingling) for swaps ensures customer money is protected individually all the way to the clearinghouse;
- The Commission included customer protection enhancements in the final rule for designated contract markets. These provisions codify into rules staff guidance on minimum requirements for SROs regarding their financial surveillance of FCMs; and
- Rules enhancing the protection of customer funds when entering into uncleared swap transactions. These reforms fulfill Congress’ mandate that counterparties of swap dealers be given a choice regarding whether or not they get the protections that come from segregation of monies and collateral they post as initial margin.
Last Updated: November 4, 2013