SPEECHES & TESTIMONY

Statement by the Directors of the Division of Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight Concerning the Treatment of Separate Accounts of the Same Beneficial Owner

September 13, 2019

As Directors of the Division of Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight, we wish to reemphasize that all registrants, in particular futures commission merchants (“FCMs”), must comply at all times with all Commission regulations and derivatives clearing organization (“DCO”) and self-regulatory organization rules.

On July 10, 2019, the Divisions issued CFTC Letter 19-17 (the “Letter”), which makes clear what firms must do to comply with the Commission’s requirements under CFTC Rule 1.56(b) as applied to separate accounts of the same beneficial owner.  Since that time, we have received questions from industry participants about certain aspects of the Letter.  We believe that the Letter is comprehensive and therefore do not think that any further clarifications by our Divisions are required.  Accordingly, we expect that industry participants are working hard to do what is necessary to conform their documentation, policies, and practices to the Commission’s requirements.  We further expect that these efforts—which we fully appreciate may be considerable—will nonetheless be concluded by September 15, 2020.

Industry participants have also asked whether there is an inconsistency between the statement in CFTC Letter 19-17 that “the FCM must retain the ability ultimately to look to funds in other accounts of the beneficial owner, including accounts that may be under different control,” on the one hand, and the statement in Joint Audit Committee Alert 19-03 that “the FCM must have at all times the absolute right to look to funds in all accounts of the beneficial owner, including accounts that are under different control,” on the other (emphasis added).  These statements are not inconsistent with each other if they are interpreted properly.

To wit, an FCM and its client (and the client’s asset manager) can, consistent with Regulation 1.56, agree to a protocol to address those rare occasions where margin calls in one account of the beneficial owner at the FCM are not timely met.  On such an occasion, the FCM would promptly follow a specific series of defined steps before resorting to liquidation or accessing the funds in the other accounts of the beneficial owner held at the FCM.  We fully expect that DCOs and FCMs and their customers will agree that FCMs must retain, at all times, the discretion to determine that the facts and circumstances of a particular shortfall are extraordinary and therefore necessitate accelerating the timeline and relying on the FCM’s protocol for liquidation or for accessing funds in the other accounts of the beneficial owner held at the FCM.

We do not believe that any further clarification by our Divisions is required.  We fully expect DCOs and FCMs and their customers will find solutions that satisfy the Commission’s requirements, as clarified in the Letter, by September 15, 2020.  We will not be extending this timeline at any point.  As such, we encourage DCOs and FCMs and their customers to work together and to rely on their professional advisors as necessary to meet the expectations that we have laid out for them.