October 15, 2019

October 14, 2019

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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.

©2019 Katten Muchin Rosenman LLP

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About this Author

Gary DeWaal, Securities Attorney, Katten Law Firm, New York
Special Counsel

Gary DeWaal focuses his practice on financial services regulatory matters. He counsels clients on the application of evolving regulatory requirements to existing businesses and structuring more effective compliance programs, as well as assists in defending and resolving regulatory disciplinary actions and enforcement matters. Gary also advises buy-side and sell-side clients, as well as trading facilities and clearing houses, on the developing laws and regulations related to cryptocurrencies and digital tokens.

Previously, Gary was a senior...

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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.

Kevin has served as counsel to the Futures Industry Association (FIA) for more than 20 years. In 2012 he was recognized for his exemplary efforts on behalf of the association and the industry, in particular for his guidance in navigating the challenges confronting FIA member firms in complying with the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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