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Joint Audit Committee Publishes Regulatory Alert Regarding Residual Interest Withdrawals

On August 14, the Joint Audit Committee (JAC) released Regulatory Alert #18-04. The Alert, which responds to industry requests, clarifies the procedures that a futures commission merchant (FCM) should follow prior to making an intra-day withdrawal from the residual interest amount that the FCM maintains in its segregated, secured 30.7 and cleared swap customer accounts (Accounts) in order to ensure compliance with applicable Commodity Futures Trading Commission regulations.

CFTC regulations require FCMs to maintain in each Account a targeted residual interest amount, which is comprised of the FCM’s own funds. This target amount is designed to reasonably ensure that the FCM maintains sufficient funds in each Account to comply with applicable regulations. Specifically, an FCM must ensure that it has enough residual interest in the segregated and secured 30.7 accounts, by 6:00 p.m. EST each business day, to cover the aggregated gross margin deficiencies associated with its customers’ remaining (unmet) margin calls from the prior business day. For cleared swaps customers, the FCM must have sufficient residual interest to cover the aggregated gross margin deficiencies of all cleared swaps customers prior to the end-of-day and intra-day payment cycle of initial and/or variation margin.

An FCM may only make withdrawals of the residual interest amount from an Account (other than for the benefit of customers) after completing and submitting to the CFTC and the FCM’s designated self-regulatory organization the required segregation calculation for the prior day for each Account. The calculations must be submitted by 12:00 p.m.

Prior to making any withdrawal of residual interest from an Account (not for the benefit of customers), the Alert instructs FCMs to prepare a pro-forma segregation calculation with respect to the relevant account, taking into consideration (1) any withdrawals from the Account; (2) any deposits into the Account; (3) estimated debit/deficits arising from market movements and trading activity; and (4) any significant events or other material impacts that may materially impact residual interest. The pro forma calculation must be retained.

The Alert notes that strong internal controls and procedures pertaining to the withdrawal of residual interest amounts are necessary to ensure the protection of customers and the maintenance of sufficient customer funds at all times.

The Alert is available here.

©2018 Katten Muchin Rosenman LLP

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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
Stanley V. Polit, Katten Muchin, Financial Services lawyer, Corporate Regulatory Matters Attorney
Associate

Stanley Polit concentrates his practice in transactional, corporate and regulatory aspects of financial services matters. Stan is able to provide legal services to a wide variety of clients including proprietary trading firms, hedge funds, broker-dealers, registered investment advisers, commodity trading advisers, financial institutions and general corporate clients.

Prior to joining Katten, Stan served as a council member for a national crisis management firm, where he specialized in crisis communication and merged media strategies. He has lectured extensively and conducted trainings related to these topics at numerous national and international conferences, including the National Communication Association's National Convention, the International Crisis and Risk Communication Conference and the Disaster Recovery Journal's World Business Continuity Conference.

312.902.5420