Statement of Commissioner Sharon Y. Bowen Regarding Regulation of Residual Interest

March 3, 2016

Thank you. It’s good to be here this morning to discuss our regulation governing residual interest. Along with the rest of my colleagues, I’m eager to hear the assembled experts discuss the substance of this rule. First though, I wanted to make a few opening remarks to remind us all of how we got to this point. In late 2013, following the collapse of notable FCMs due to inadequate funds, the CFTC promulgated new regulations that were aimed at increasing customer protection requirements on FCMs. One of the regulations in that package required that “an FCM had to maintain their own capital . . . in customer segregated accounts in an amount equal to or greater than its customers’ aggregate under-margined amounts.”1 In other words, we were requiring that FCMs had adequate money to cover customers if they had insufficient money in their own accounts. This reserve money is what we call residual interest, and it is a key protection for consumers. Absent this requirement, there is increased danger that an FCM will not be able to cover customers’ margin in the moment, and FCMs and their customers will be at risk of more FCMs failing unexpectedly. The fact that this is a protection for consumers and investors should remain in the front and back of our minds at this discussion.

Now, when we released this rule in 2013, we initially required that FCMs must post this residual interest to the customers’ accounts in need of it by 6 PM on the day of settlement.2 We expected that more research would be needed about whether this was the right deadline, and so we promised to release a report on that subject, and that we would hold a roundtable prior to publishing that report. Today is, of course, that roundtable, and I am looking forward to hearing your views on whether 6 PM is the right time to set as the deadline for posting.

Yet, I also want to remind everyone that 6 PM on the next day does not represent the earliest that the deadline has to be. When we promulgated the residual interest rulemaking in 2013, we also crafted a trigger that would have automatically moved the deadline at the end of 2018 to the time of settlement on the day of settlement.3 In November 2014, in a move I supported, the Commission voted to remove the trigger that will take effect in 2018. I did not vote to remove the trigger because I oppose the use of triggers; in fact, I think they can at times be very useful tools for establishing a glide path towards a policy goal. But in this specific case, I did not think the trigger was needed, partly because there appeared to be a universal consensus for removing the trigger. However, if this roundtable, the report, or other compelling evidence reveals that the deadline for posting residual interest should move to a different time, I would support voting for such a move. Thank you, and hopefully today’s discussion will shed some more light on just where this deadline should fall.

1 http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2015-06548a.pdf

2 https://www.gpo.gov/fdsys/pkg/FR-2013-11-14/pdf/2013-26665.pdf at 68632

3 https://www.gpo.gov/fdsys/pkg/FR-2013-11-14/pdf/2013-26665.pdf

Last Updated: March 3, 2016