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CFTC Staff Issues Guidance Regarding Risk Assessment of Customer Accounts for Futures Commission Merchants

On March 29, the Division of Clearing and Risk (DCR) of the Commodity Futures Trading Commission issued guidance regarding the implementation of revised Regulation 39.13(g)(8)(ii). Regulation 39.13(g)(8)(ii) provides that a derivatives clearing organization (DCO) must require its clearing members to collect from their customers initial margin at a level that is at least equal to the DCO’s own initial margin requirements with respect to each product and portfolio and commensurate with the risk presented by each customer account. The regulation further requires that a DCO must set both (1) a baseline level of initial margin (“clearing initial margin”), which serves as the minimum amount its clearing members must in turn collect from their customers; and (2) an increased level of initial margin (“customer initial margin”) for categories of customers determined by a clearing member to have a “heightened risk profile.”

When it was originally adopted in 2011, Regulation 39.13(g)(8)(ii) required clearing members to collect customer initial margin for “non-hedge,” i.e., speculative positions. In 2012, DCR issued guidance clarifying that while DCOs generally set customer risk profiles as “hedge” or “non-hedge,” a DCO could choose to use a different set of risk-based criteria. In 2020, the CFTC replaced the term “non-hedge” with “heightened risk profile,” raising concerns among market participants that FCMs could apply the term narrowly to offer lower margin requirements to customers, ultimately resulting in a market-wide reduction in customer margin.

In Letter No. 21-08, DCR clarified that, although the terminology may change, it did not expect to see significant changes in margining practices as a result of the 2020 amendment to the rule. DCR explained that, in order to comply with a DCO’s rules, a clearing member must analyze the risk profile of each customer to determine if the customer presents a heightened risk profile (HRP). DCR added that an FCM can only categorize an account as “non-HRP” that was previously categorized as a “non-hedge” account if it can demonstrate that it is warranted based on the risk profile of the customer. DCR also emphasized that an FCM could assess whether a customer account a customer account presents a “heightened risk profile” based on whether the account is a hedging or speculative account, provided that the FCM maintains policies and procedures that demonstrate that is the risk analysis the FCM uses to determine whether to collect additional initial margin from a customer.

CFTC Letter No. 21-08

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume XI, Number 92
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About this Author

Kevin M. Foley, Finance Lawyer, Katten Llaw Firm
Partner

Kevin M. Foley has extensive experience in commodities law and advises a wide range of clients, both in the United States and abroad, on compliance with the Commodity Exchange Act and the rules of the Commodity Futures Trading Commission (CFTC) affecting traditional exchange-traded products, as well as the over-the-counter markets involving swaps and other derivative instruments. His clients include futures commission merchants, derivatives clearing organizations, designated contract markets, foreign boards of trade and an industry trade association.

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312-902-5372
Gregory Uffner, Financial Services Attorney, Katten Law Firm
Associate

Gregory Uffner is an associate in the Financial Services practice. 

While in law school, Gregory was an associate editor for the Moot Court Board, a member of the Fordham Urban Law Journal and served as managing editor for the Fordham Sports Law Forum.

212.940.6485
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