CFTC Approves Final Rule Regarding Residual Interest Deadline for FCMs
Commentary by Bob Zwirb
The CFTC unanimously approved a final rule removing the automatic termination of the phased-in compliance period for the Residual Interest Deadline for futures commission merchants ("FCMs"). The termination was scheduled to occur on December 31, 2018.
Under the phased-in compliance schedule in CFTC Rule 1.22 ("Use of Customer Funds Restricted"), an FCM is required to maintain a sufficient amount of its own funds ("residual interest") in customer segregated accounts by the Residual Interest Deadline of 6:00 p.m., Eastern time, on the next business day to cover customers' under-margined amounts that were computed as of the close of business on the previous day.
The final rule amends CFTC Rule 1.22 by removing December 31, 2018 as the automatic termination date of the phased-in compliance period. As a result, the Residual Interest Deadline will remain 6:00 p.m., Eastern time, pending the possibility of future CFTC rulemaking.
CFTC Chair Massad and Commissioners Wetjen and Giancarlo all issued statements of support regarding the adoption of the amendment to Rule 1.22, with Commissioner Wetjen noting that public comments received by the CFTC favored the changes to the final rule "overwhelmingly." According to Chair Massad, the action is a step toward making sure that CFTC rules "do not impose undue burdens or unintended consequences for the nonfinancial commercial businesses that depend on the derivatives markets to hedge commercial risks."
In his statement, Commissioner Giancarlo called on the CFTC to apply the "deliberative approach" taken in this action to the de minimis exception to the definition of "swap dealer" to prevent the automatic adjustment of the de minimis level from $8 billion to $3 billion absent a rulemaking with proper notice and a comment period.
See: Text of the Final Rule; CFTC Press Release.
See also: Chair Massad's Statement; Commissioner Wetjen's Statement; Commissioner Giancarlo's Statement.
Commentary
From the very start, the CFTC's pending acceleration of the residual interest deadline threatened to raise costs and burdens for FCMs and their customers. See, e.g., S. Brush, "Futures Brokers Say Rule May Put Them out of Business," Bloomberg (Mar. 7, 2013). That's why it is encouraging to see the CFTC adopt corrective measures to ensure that such action does not take place until the CFTC (i) conducts a thorough study to determine whether the action would be in the best interests of the marketplace and (ii) engages in a separate rulemaking process before revising the Residual Interest Deadline.
The separate statements issued by Chair Massad and Commissioner Wetjen reflect their important and sober recognition of the trade-offs involved. Chair Massad does a particularly good job of explaining the residual interest requirement and how it affects the times during which customers must post collateral. Additionally, Commissioner Wetjen's statement reviews the array of requirements to which FCMs are subject with respect to customer funds and engages in the kind of cost-benefit calculus that is missing in the agency's Federal Register release. Commissioner Wetjen's recognition of "the risk of concentration within the FCM community as a whole, and what that means for the costs to customers of trading in derivatives and its related impacts on liquidity in those markets," highlights important issues with respect to CFTC regulatory actions.