CFTC Grants Exemption to Expand CME and FICC Cross-Margining Arrangements

The CFTC and the SEC permitted joint clearing members of the Chicago Mercantile Exchange ("CME") and the Fixed Income Clearing Corporation ("FICC") that are dually registered as broker-dealers and futures commission merchants "to hold futures customer funds in a commingled customer account at FICC."

In the CFTC Order granting the exemption, the agency allowed clearing members of FICC and CME to hold customer margin in respect of cash market and futures transactions in US government securities in the futures account, not in the security account. The agencies said that the exemption will enable cross-margining between the positions, and an overall reduction in margining requirements where the risks of the positions are offsetting.

The relief is subject to the following conditions:

1. Customer Agreements and Bankruptcy Acknowledgments

Before participating, BD-FCMs must execute a participation agreement with each cross-margining customer. The customer must explicitly agree and acknowledge that:

• Their FICC-held securities and margin (XM Securities Customer Property) will not receive standard customer treatment under the Securities Exchange Act or the Securities Investor Protection Act ("SIPA").

• Their property will instead be subject to the commodity broker liquidation protections under Subchapter IV of Chapter 7 of the U.S. Bankruptcy Code.

• Any claims to "customer property" under SIPA against the BD-FCM will be subordinated to the claims of all other SIPA customers.

2. Account and Margin Treatment by BD-FCMs

• Futures Account Requirement: BD-FCMs must carry all cross-margined assets in a futures account and treat them as belonging to the cross-margining customers, consistent with CEA Section 4d(a)(2) ("Dealing by unregistered futures commission merchants or introducing brokers prohibited; duties in handling customer receipts; conflict-of-interest systems and procedures; Chief Compliance Officer; rules to avoid duplicative ...").

• Margin Collection: BD-FCMs must collect from each customer, at a minimum, the aggregate amount of initial margin required by both FICC and CME for the customer's eligible positions.

3. FICC Operations and Depository Requirements

• Account Segregation: FICC must record customer positions and credit margin to specific, segregated cross-margining customer accounts.

• Permitted Depositories: FICC must hold all cross-margining customer margin at either the Federal Reserve Bank of New York ("FRBNY") or an FDIC-insured bank.

• Written Acknowledgments: These depository accounts must be subject to written notices and contracts ensuring the assets are kept separate, are held pursuant to the CFTC's Order, and are not subject to any liens or claims by the depository bank.

4. Required Rule Amendments (CME and FICC)

CME and FICC must amend their rulebooks and their proprietary cross-margining agreement to ensure:

• Mutual Consent: Cross-margining is only available if both the customer and the BD-FCM agree.

• Security Interests: The BD-FCM must grant CME a security interest in the customer's FICC-held eligible securities and margin. Conversely, FICC is prohibited from granting a security interest in this customer property.

• NYUCC Article 8 Protections: FICC must credit margin to a "securities account" and treat the margin as "financial assets" under Article 8 of the New York Uniform Commercial Code ("NYUCC") to protect the assets from FICC's general creditors in the event of an FICC insolvency.

• Exclusive Use: FICC must use the collateral exclusively to settle and margin the eligible securities positions of the BD-FCM's customers.

• Portability: FICC must not interfere with the transfer (porting) of customer property in the event of a BD-FCM default or bankruptcy, consistent with CFTC Regulation 190.07(a) ("Transfers").

5. Margin Calculation

Both FICC and CME must calculate initial margin requirements on a gross (customer-by-customer) basis using methodologies reviewed by their respective regulators (the SEC and CFTC).

6. Regulatory Reporting and Status

• Daily Reporting: FICC must report daily to the CFTC and SEC the amount of cash and securities (by CUSIP) held in its segregated accounts and owed to BD-FCMs on behalf of their customers.

• Account Restrictions: FICC may not establish any additional "securities accounts" under the NYUCC without prior consent from both the CFTC and SEC.

• Regulatory Status: FICC must maintain its status as a covered clearing agency registered with the SEC.

• General Compliance: CME and BD-FCMs must continue to comply with all other applicable CEA requirements and CFTC regulations.