CFTC Staff Letters

The Division of Clearing and Risk issued a letter interpreting Regulation 39.13(g)(8)(ii) (customer margin rule) to clarify that registered derivatives clearing organizations, in establishing customer initial margin requirements, may preserve historical practices by which customer initial margin requirements are based on the type of customer account and reflect the application of prudential standards that result in FCMs collecting customer initial margin at levels commensurate with the risk presented by each type of customer account.

The Division of Market Oversight issued an interpretation addressing whether, under Part 151 of the Commission’s regulations, an electric company may treat as bona fide hedging transactions certain derivative transactions that reduce the price risk associated with its unfilled anticipated requirements for natural gas, even though it has entered into some long-term, firm purchases of natural gas at an unfixed price. The interpretation notes that unfilled anticipated requirements may be recognized as the basis of a bona fide hedging position or transaction under Commission Regulation 151.5(a)(2)(ii)(C) when a commercial enterprise has entered into long-term, unfixed-price supply or requirements contracts as the price risk of such “unfilled” anticipated requirements is not offset by an unfixed price forward contract as the price risk remains with the commercial, even though the commercial enterprise has contractually assured a supply of the commodity. Instead, the price risk continues until the forward contract’s price is fixed; once the price is fixed on the supply contract, the commercial enterprise no longer has price risk and the derivative position, to the extent the position is above an applicable speculative position limit, must be liquidated in an orderly manner in accordance with sound commercial practices.

The Division of Swap Dealer and Intermediary Oversight issued an interpretation regarding the time period for which past performance is required to be disclosed by persons required to register as CTAs because they engage in off-exchange retail foreign currency transactions (“retail forex”). Such persons (“Forex CTAs”) are required to disclose performance information for the period beginning October 18, 2010, the date upon which the Commission’s regulations governing retail forex became effective. A Forex CTA that chooses to present past performance information for any period of time prior to October 18, 2010 must do so in accordance with the time period as specified in Regulation 4.35(a)(5), must include all accounts directed by the Forex CTA, must present the information in the format specified in Regulation 4.35, and must have and maintain adequate books and records to substantiate the information.

The North American Derivatives Exchange (Nadex) has requested guidance regarding its Amended Order of Registration as a Derivatives Clearing Organization (the Nadex DCO Order) and Nadex’s Amended Order as a Designated Contract Market (the Nadex DCM Order, and, together with the Nadex DCO Order, the Nadex Orders), both dated March 30, 2010. Among other things, the Nadex Orders allow intermediation of contracts traded on Nadex’s designated contract market provided that such contracts are fully collateralized. Because a futures commission merchant (FCM) customer with a fully collateralized position on Nadex may suffer losses on another exchange such that the customer would owe a balance to its FCM, Nadex sought an interpretation from the Division confirming that the position on Nadex would be considered “fully collateralized” notwithstanding such a scenario. The Division of Clearing and Intermediary Oversight has concluded that an intermediated contract traded on Nadex, on behalf of the intermediary’s customer, remains “fully collateralized,” as contemplated by the Nadex Orders, notwithstanding subsequent balances owed by that customer to the intermediary due to losses suffered on other exchanges, as long as Nadex holds, at all times, sufficient funds of such customer to cover the maximum possible loss that may be sustained by such customer upon liquidation of any or all Nadex contracts.

The Division confirmed that under the specific facts represented to it, a firm that was required to be registered as an IB, and was so registered, would not also be required to register as a CTA in connection with providing certain services to its retail foreign exchange customers.

The Division of Clearing and Intermediary Oversight issued an interpretation that a limited liability company and a trust operated by the limited liability company are not commodity pools where all participants are close family members.

Securities and Exchange Commission (SEC) rule 22e-3 (Rule 22e-3), adopted by the SEC February 23, 2010 and effective May 5, 2010, allows a money market mutual fund (MMMF or fund) to suspend redemptions and postpone payment of redemption proceeds to facilitate an orderly liquidation of the fund. The Division of Clearing and Intermediary Oversight (the Division) received a letter from the Joint Audit Committee requesting an interpretation of the impact, if any, of Rule 22e-3 on Reg. 1.25. In its response, the Division provided an overview of the Reg. 1.25 treatment of MMMFs, outlined Rule 22e-3, and discussed the interplay of Reg. 1.25 and Rule 22e-3. The Division concluded that Rule 22e-3 falls within the parameters of Reg. 1.25(c)(5)(ii)(D) and therefore the status of an MMMF that otherwise qualifies as a Reg. 1.25 permitted investment would not change as a result of the new rule.

DCIO responded to a request for guidance from the Joint Audit Committee (JAC) as to investments of customer funds by futures commission merchants (FCMs) in corporate debt securities guaranteed by the Federal Deposit Insurance Corporation (FDIC) under its Temporary Liquidity Guarantee Program (TLGP). The letter sets forth the conditions under which TLGP securities guaranteed by the FDIC may be permitted investments for customer segregated funds under Regulation 1.25 or customer secured amount funds under Regulation 30.7, and further specifies the necessary haircuts to FCM adjusted net capital under Regulation 1.17. The letter also provides guidance to the JAC as to whether, and to what extent, Regulation 1.32 permits offsets of FCM customer account deficits against TLGP securities the customer has deposited for its account with the FCM.

The Division of Clearing and Intermediary Oversight issued an interpretation that a family partnership is not a commodity pool where all participants are close family members. This interpretation would not be affected by family members forming a CTA which will manage both the family partnership’s commodity interest trading and the trading of non-related persons.

The Division of Clearing and Intermediary Oversight issued an interpretation that a charitable foundation would not be a commodity pool, and that its directors would not be commodity pool operators, if the foundation traded commodity interests. This interpretation was based on, among others, representations that: (1) no current or future donor to the foundation will be entitled to receive any of the assets, net earnings, income or profits of the foundation; and (2) no (other) charitable organization has any entitlement, on an annual or other basis, to a contribution from the foundation.