I support the Notice of Proposed Rulemaking on the Regulations to Address Margin Adequacy and to Account for the Treatment of Separate Accounts by Futures Commission Merchants (FCMs) (Treatment of Separate Accounts Proposal or NPRM), as well as the Commission’s withdrawal of the first proposal on this issue (2023 Proposal).[1]  Today’s Treatment of Separate Accounts Proposal gets the Commission closer to the pragmatic approach it was striving for in the 2023 Proposal.  To help ensure the Commission truly gets there in the final rule, I highlight specific areas for public comment below.

I would like to thank Daniel O’Connell and Bob Wasserman in the Division of Clearing and Risk, and Jennifer Bauer and Joshua Beale in the Market Participants Division, for their work on the NPRM.  I appreciate the staff’s generosity with their time for briefings and answering questions, as well as working with me to make revisions to address my concerns.

As the Treatment of Separate Accounts Proposal explains, two of the fundamental purposes of the Commodity Exchange Act (CEA) are the avoidance of systemic risk and the protection of market participants from misuses of customer assets.[2]  Regulation 39.13(g)(8)(iii) requires that a CFTC-registered derivatives clearing organization (DCO) requires its clearing members to ensure that their customers do not withdraw funds from clearing member accounts, with one exception.

Clearing member customers can withdraw funds if the net liquidating value plus the margin deposits remaining in the account meet the customer’s initial margin requirements with respect to all products and swap portfolios cleared by the DCO that are held in the customer’s account.  This is known as the “Margin Adequacy Requirement” because it helps ensure a clearing member has, from a customer, funds sufficient to cover the customer’s cleared initial margin requirements.  And, in light of the use of omnibus margin accounts, the Margin Adequacy Requirement avoids the clearing member covering one customer’s margin shortfall with another customer’s funds.  Overall, this is one of the many CFTC rules that protects customer funds.

The 2023 Proposal, among other things, proposed allowing DCOs to permit clearing FCMs to treat the separate accounts of a single beneficial owner, or customer, as accounts of separate legal entities to satisfy the requirements of Regulation 39.13(g)(8)(iii),[3] subject to multiple conditions.  The 2023 Proposal was intended to accommodate certain FCM customer agreements that provide that certain accounts carried by the FCM that have the same beneficial owner are treated as accounts for different legal entities for commercial purposes.

However, in response to comments, the Commission is now withdrawing the 2023 Proposal and issuing the Treatment of Separate Accounts Proposal.  I commend this decision because I believe this NPRM gets the Commission closer to what it set out to do in the 2023 Proposal: accommodate certain FCM customer agreements that provide that certain accounts carried by the FCM that have the same beneficial owner are treated as accounts for different legal entities for commercial purposes.

To aid in this effort, I have highlighted specific areas for public comment below.

Specific Areas for Public Comment

Ordinary course of business

I encourage commenters to review all of the definitions, in particular those in proposed new Regulation 1.44.  For instance, I am particularly interested in whether the Commission has improved the accuracy of the definition of “ordinary course of business,” along with what constitutes events inconsistent with the “ordinary course of business” in Regulation 1.44(e).  As we learned with the 2023 Proposal, getting this right is pivotal to having the proposed framework function as intended.

One business day margin call

As a second definitions example, I am interested in whether the Commission has improved the definition of “one business day margin call” along with its requirements in Regulation 1.44(f).  Commenters provided extensive comments on this provision, and while the NPRM has improved on it, we need to be sure the proposed definition does not impede FCM risk management practices and is consistent with the law or standard practices in other jurisdictions and operationally feasible.

The Treatment of Separate Accounts Proposal provides that the relevant deadline for payment of margin in fiat currencies other than USD may be extended by up to one additional business day and still be considered in compliance with the requirements of Regulation 1.44(f) if payment is delayed due to a banking holiday in the jurisdiction of issue of the currency. 

Regulation 1.44(f)(4) further provides that, for payments in EUR, either the separate account customer or the investment manager managing the separate account may designate only one country within the eurozone that they have the most significant contacts with for purposes of meeting margin calls in that separate account, whose banking holidays shall be referred to for such purpose. 

Since the eurozone is comprised of 20 countries, each with their own national laws and banking holidays, I am concerned that the CFTC is imposing an overly prescriptive and unworkable requirement with little practical benefit.  I am interested in whether commenters believe it will be impracticable to comply with Regulation 1.44(f)(4).  I encourage commenters to look at Question 7 in the NPRM—which staff added at my request—for specific examples and additional prompts.

Other circumstances involving banking holidays

Similarly, the Treatment of Separate Accounts Proposal also provides an exception from Regulation 1.44(f)(1), set forth in Regulation 1.44(f)(7), for the special case of certain holidays when some DCMs may be open for trading, but banks are closed.  I am interested in whether the Commission’s expansion of the exception from the 2023 Proposal fully resolves the issues raised by commenters, or still poses operational or compliance issues for FCMs.

Conclusion

Overall, I am pleased to support the Treatment of Separate Accounts Proposal and hope we can get it right in the final rule.  I look forward to the comments on the NPRM.