CFTC Staff Provide Guidance, No-Action Relief With Respect to the Treatment of Separate Accounts by FCMs
The Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight and Division of Clearing and Risk have issued CFTC Staff Advisory 19-17 (the Advisory), providing 1) guidance with respect to CFTC Rule 1.56(b); and 2) time-limited no-action relief with respect to CFTC Rule 39.13(g)(8)(iii), as those rules relate to the treatment of separate accounts of the same customer (i.e., beneficial owner). The Advisory responds to several requests for guidance following the publication of Joint Audit Committee (JAC) Regulatory Alerts #19-02 and #19-03.
JAC Regulatory Alert #19-02 complements CFTC Rule 39.13(g)(8)(iii), which provides that each derivatives clearing organization (DCO) must require its clearing members to assure that their customers do not withdraw funds from their accounts with such clearing members, unless the net liquidating value plus the margin deposits remaining in the customer’s accounts after the withdrawal would be sufficient to meet the customer initial margin requirements with respect to the products or portfolios in the customer’s account cleared by the DCO. JAC Regulatory Alert #19-02 instructs FCMs to combine for margin purposes all accounts of the same beneficial owner for the same account classification type (i.e., segregated, secured, cleared swaps). While separate accounts may be continue to be margined separately, the FCM must combine all accounts of the same regulatory classification—even those under different control—to assess whether it may release excess funds from one account of a beneficial owner.
The Advisory adopts time-limited no-action relief, pursuant to which a DCO may permit the FCM to treat the separate accounts of a customer as accounts of separate entities for purposes of Rule 39.13(g)(8)(iii), provided the FCM’s written internal controls and procedures require the FCM to comply with the terms and conditions set out in the Advisory. The no-action relief extends to June 30, 2021, during which time, CFTC staff will consider whether to recommend that the CFTC adopt more permanent relief. DCOs are expected to take action promptly to implement the no-action relief.
JAC Regulatory Alert #19-03 begins by restating the provisions of CFTC Rule 1.56(b), which provides that no FCM may: 1) directly or indirectly guarantee a client against loss; 2) limit the loss of a customer; or 3) agree not to call for margin as established by the rules of an exchange. The alert explains that, where a beneficial owner has multiple accounts with multiple advisers at an FCM (or even multiple accounts with the same adviser traded pursuant to different programs), the FCM cannot agree that it will never look to recover losses in any one account from other accounts beneficially owned by the same owner—even if the other accounts are managed by another adviser, or subject to a different program of the same adviser.
The Advisory confirms that an FCM may not enter into an agreement with any customer, the terms of which conflict with the provisions of Rule 1.56(b). Further, the Advisory provides that, to address any shortfall in any separate account, “the FCM must retain the ability to ultimately look to funds in other accounts of the beneficial owner, including accounts that may be under different control, as well as the right to call the beneficial owner for additional funds.”
CFTC Staff Advisory 19-17 is available here.