Statement of Support: Enhancements for the Protection of Customers and Customer Funds
Chairman Gary Gensler
October 23, 2012
I support the proposed rules to enhance the protections afforded customers that participate in the futures and swaps markets, including the protection of customer funds held by futures commission merchants (FCMs) and derivatives clearing organizations.
The CFTC’s mission is to ensure the integrity of the futures and swaps markets. As part of this, we must do everything within our authorities and resources to strengthen oversight programs and the protection of customers and their funds. And that’s the goal of this proposal. It’s about ensuring customers have confidence that the funds they post as margin or collateral are fully segregated and protected.
CFTC Commissioners and staff have reached out broadly on ways to enhance customer protections. We hosted two roundtables this year on issues ranging from the segregation of customer funds to examining the CFTC’s oversight of self-regulatory organizations (SROs).
In July, the CFTC approved a National Futures Association (NFA) proposal that stemmed from a coordinated effort by the CFTC, the SROs, other financial regulators, and market participants, including from the CFTC’s roundtable earlier this year.
This customer protection proposal incorporates these NFA rules into the Commission’s regulations so that the CFTC can directly enforce these important rules. Under this proposal, FCMs would be required to:
• Hold sufficient funds in Part 30 secured accounts (funds held for U.S. foreign futures and options customers trading on foreign contract markets) to meet their total obligations to customers trading on foreign markets computed under the net liquidating equity method. FCMs would no longer be allowed to use the alternative method, which had allowed them to hold a lower amount of funds representing the margin on their foreign futures;
• Maintain written policies and procedures governing the maintenance of excess funds in customer segregated and Part 30 secured accounts. Withdrawals of 25 percent or more would necessitate pre-approval in writing by senior management and must be reported to the designated SRO and the CFTC; and
• Make additional reports available to the SRO and the CFTC, including daily computations of segregated and Part 30 secured amounts.
Beyond the NFA rules, additional reforms in this proposal benefited from the CFTC’s broad outreach and consultation with the SROs and market participants, as well as substantial feedback from CFTC Commissioners. They include:
• First, bringing the regulators’ view of customer accounts into the 21st century by giving the SROs and the CFTC direct electronic access to FCMs’ bank and custodial accounts for customer funds, without asking the FCMs’ permission. Further, acknowledgement letters and confirmation letters must come directly to regulators from banks and custodians.
• Second, increasing disclosures to customers regarding the risks associated with futures trading and using FCMs to invest their funds. Futures customers, if they wish, should have access to information about how their assets are held, similar to that which is available to mutual fund and securities customers. FCMs would be required to provide current and potential customers with specific information about the FCM’s risks.
• Third, enhancing controls at FCMs regarding how customer accounts are handled, including policies and procedures on supervision and risk management of customer funds.
• Fourth, setting standards for the SROs’ examinations and the annual certified financial statement audits, including raising minimum standards for independent public accountants who audit FCMs.
• Fifth, requiring FCMs to ensure they back up segregated customer accounts with funds to cover potential margin deficits.
• Sixth, implementing a more effective early warning system for the Commission and the SROs that alerts them to certain problems, including a) when an FCM’s funds are insufficient to meet the targeted residual interest in customer accounts b) when there is a material adverse impact to the FCM’s creditworthiness and c) when there is a material change to the FCM’s clearing or financial arrangements.
• And seventh, instituting a liquidity requirement for FCMs, in addition to the existing capital requirement, to better detect FCMs that have become distressed and may put customer funds at risk.
Prior to this proposal, the Commission already made some important improvements to protections for customer funds. They include:
• The completed 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 will have to collect margin on a gross basis and FCMs will no longer be 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; and
• 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.
It is crucial that the CFTC, working with SROs and market participants, continues its efforts to enhance protections for the funds of both futures and swaps customers. We look forward to reviewing the public input on this proposal.
Last Updated: October 23, 2012