CFTC Proposes to Allow FCMs to Grant Separate Account Treatment to Customers

Steven Lofchie Commentary by Steven Lofchie

The CFTC withdrew its original proposal and newly proposed to allow an FCM, subject to certain conditions, to treat separate accounts of a single beneficial owner as if they were owned by different persons, for purposes of margin withdrawals from the separate accounts. The proposed rulemaking would "require an FCM to ensure that a customer does not withdraw funds from its account with the FCM if the balance in such account after such withdrawal would be insufficient to meet the customer’s initial margin requirements." (For the withdrawn proposal, see "CFTC Proposes to Codify Treatment of Separate Accounts by FCMs".)

The new proposal would amend CFTC Rule 1.44, however, these requirements impact a number of other CFTC Rules, which would also be amended to conform to the proposed rule.

According to the new proposal, in order for a customer to be eligible for separate account treatment, the customer would be contractually required to meet margin calls on a one business day margin call basis; i.e., if a separate account is under-margined based on position values at the end of a business day, the FCM must call for sufficient margin the next business day and the customer must meet that margin call by the close of Fedwire on that business day. The rule allows for extended payment periods in a variety of circumstances, including to account for deliveries of foreign currencies and for foreign holidays.

The CFTC said that an FCM would not be permitted to treat separate accounts of a single owner as belonging to separate customers where events were outside the ordinary course of business. Such unusual events would include both distress at the customer, such as failure to meet a margin call or insolvency, and distress at the FCM, in which case the FCM would be required to cease separate account treatment for all of its customers.

The CFTC stated that in order to be allow separate account treatment, an FCM would be required to fulfill a number of procedural and operational requirements, including notifying its designated SRO that it intends to allow customers to benefit from such treatment, and that the FCM must maintain an ongoing list of all customers that receive such treatment and of each such customer's various account. For purposes of stress testing and the application of credit limits, an FCM would be required to assess the accounts on both a separate account and a combined account basis.

The CFTC is not allowing for separation of the accounts in the event of the bankruptcy of the FCM (e.g., excess margin in one separate account may be used to pay down a deficit in another account.)

Comments are due by April 22, 2024.

Commentary

As the long list of related news items demonstrates, the treatment of separate accounts of individual customers has been the subject of considerable and extended discussion. Happily, the outcome appears on a course to be consistent with the reasonable expectations of both FCMs and customers, and with operational necessities.  

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