CFTC Issues Rule Interpretation Concerning Deposit of Customer Funds with U.K. Depositories (CFTC Letter 14-110)
Commentary by Bob Zwirb
The CFTC Division of Swap Dealer and Intermediary Oversight issued an interpretation of CFTC Rule 30.7(c) ("Treatment of Foreign Futures or Foreign Options Secured Amount").
CFTC Rule 30.7(c) provides that a futures commission merchant ("FCM") must deposit customer funds under the laws and regulations of the foreign jurisdiction that affords the greatest degree of protection to such funds, and provides further that an FCM may not waive any of the protections afforded to customer funds under the laws of that foreign jurisdiction.
The interpretation in CFTC Letter 14-110 permits FCMs to deposit customer funds margining foreign futures positions with UK-licensed investment firms that hold such funds in accordance with either the client money rules of the U.K. Financial Conduct Authority ("FCA") or as bank deposits subject to the regulations of the U.K. Prudential Regulation Authority ("PRA").
Previously, the CFTC provided time-limited no-action relief in CFTC Letter 14-08, which permits an FCM to hold 30.7 customer funds in account(s) with investment firms that were also licensed deposit-taking banks in the United Kingdom or Hong Kong, and which is set to expire on September 10, 2014. According to the CFTC, the interpretation in Letter 14-110 was issued to address requests received from FCMs for confirmation that an FCM is not waiving protections provided to customer funds if it elects to deposit, with U.K. investment firms that are licensed banks, customer funds as bank deposits subject to PRA regulation in lieu of client money deposits subject to FCA regulation.
See: CFTC Letter 14-110.
Related news: CFTC Issues a Time-Limited No-Action Letter Regarding FCM Holding Foreign Futures Secured Amount outside the U.S. (CFTC Letter 14-08) (February 7, 2014); CFTC Publishes Final Rules Enhancing Customer Protections (Fed. Reg.) (November 14, 2013).
Commentary
Unlike funds deposited by a customer with an FCM to secure commodity contracts traded on a domestic U.S. exchange, customer funds for foreign futures and foreign options generally are not subject to segregation (unless the foreign country where they are deposited requires it). Instead, such funds are governed by CFTC Rule 30.7's complicated scheme, which is intended to provide segregation-like protection but ultimately is subject to whatever protections a foreign jurisdiction provides.
Under Rule 30.7, as recently amended, a CFTC-registered FCM that deposits 30.7 customer funds with a foreign depository must do so pursuant to the laws or regulations of the applicable foreign jurisdiction that provides the "greatest degree of protection" to such funds. The question here is whether funds held pursuant to the U.K.'s "bank exemption" - which permits banks to hold cash as a deposit (i.e., the firm will hold the funds as a bank and not as a trustee) - meet this standard. That is, the issue is whether funds held as a bank deposit (under the U.K. bank exemption) offer protection equal to that of funds held as "client money" under U.K. law, which the CFTC regards as offering a high degree of protection. A previous no-action letter (CFTC Letter 14-08) took no position on this issue, but it appears that the guidance issued today will allow it under certain conditions. Thus, this guidance permits 30.7 customer funds to be held by investment firms who are also U.K. licensed deposit-taking banks.