Joint Audit Committee Releases Two Regulatory Alerts
On May 14, the Joint Audit Committee (JAC), a representative committee of US futures exchanges and the National Futures Association (NFA), released two regulatory alerts of particular importance to futures commission merchants (FCMs) that clear for customers whose accounts are managed by third-party advisers. The regulatory alerts “reconfirm and reiterate” the JAC’s view of existing law regarding guarantees against loss and margin in the context of multiple accounts of a single beneficial owner at an FCM, which accounts are managed by different advisers and/or traded pursuant to different programs of the same adviser.
JAC Regulatory Alert #19-02 instructs FCMs that all accounts of the same beneficial owner for the same account classification type (e.g., segregated, secured, cleared swaps) must be combined for margin purposes. This does not mean that accounts for the same beneficial owner must be margined as a single account on a daily basis. Separate accounts may be continue to be margined separately. However, the alert explains that, when an FCM considers whether it may release excess funds from one account of a beneficial owner, the alert advises the FCM that it must combine all accounts of the same regulatory classification—even those under different control—to assess what might be available to pay out.
JAC Regulatory Alert #19-03 begins by restating the provisions of Commodity Futures Trading Commission Rule 1.56, 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 (e.g., 1, 2 and 3) at an FCM (or even multiple accounts with the same adviser traded pursuant to different programs—e.g., 1a, 1b and 1c), 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 where the other accounts are managed by another adviser, or subject to a different program of the same adviser. Further, under no circumstance may an FCM limit losses to funds on deposit.
Importantly, the alert instructs FCMs to comprehensively and thoroughly review existing customer (and noncustomer agreements) to ensure the agreements contain no non-compliant language.
JAC Regulatory Alert #19-02 is available here.
JAC Regulatory Alert #19-03 is available here.