CFTC Penalizes Macquarie Futures USA LLC for Failing to Maintain Adequate Funds in Secured Accounts
Commentary by Bob Zwirb
The CFTC issued an Order filing and settling charges against Macquarie Futures USA LLC for a one-day technical miscue that resulted in the firm's maintaining customer funds in the incorrect bankruptcy-protected account, violating CFTC Regulation 30.7 and resulting in a penalty of $150,000. The violation occurred in connection with the conversion of certain off-exchange instruments into on-exchange products. On October 15, 2012, ICE Clear Europe had converted its existing OTC swaps and options to U.S. exchange-listed futures and options to be listed for trading on ICE Futures U.S. Energy Division and ICE Futures Europe. Assets held by ICE Clear Europe corresponding to assets under secured funds were to be redesignated as segregated funds.
According to the Order, notice was given to all concerned firms, including Macquarie. Later in October, ICE Clear Europe redesignated approximately $45 million of Macquarie's secured funds to segregated funds, making the funds segregated assets rather than secured assets. The Order states that, because all of the secured assets pertaining to the ICE conversion were moved to the segregated accounts, but the entire secured client liability pertaining to the conversion on Macquarie's books was not moved to segregated accounts, a secured fund deficiency of $36,623,893 occurred - for which deficiency the firm was fined.
See: CFTC Press Release; CFTC Order against Macquarie Futures USA LLC.
See also: Robert Zwirb's article in Futures Derivatives Law Report, Trading Places: "Swaps" Morph into "Futures" via a CFTC 4d Order.
Commentary
The imposition of a fine here seems arbitrary. The lapse in financial accounting resulted from a highly unusual action, which occurred over the course of a weekend, to transfer customer funds securing OTC swaps held by Macquarie in a Rule 30.7 secured amount account to a futures segregated account governed by CEA Section 4d. This was an unprecedented action to accommodate a clearinghouse's transition of certain of its cleared OTC energy swap contracts to energy futures and options. It's not like the FCM (or any FCM, for that matter) had prior experience in undertaking such an unusual exercise. The money was never missing; it was simply located in another "account class," an account class that has significance only to a trustee in bankruptcy. In other words, it was in the wrong CFTC accounting pigeonhole for one day. Furthermore, Macquarie itself discovered, self-reported and immediately transferred funds to cure the deficiency within one day. As the CFTC press release notes:
"On October 16, 2012, Macquarie discovered that it was undersecured in the amount of $36.6 million, based on calculations made from balances as of the close of business on October 15. After learning of the deficiency, Macquarie immediately provided notice to the CFTC, the National Futures Association, and various exchanges, in accordance with its regulatory obligations. Macquarie also transferred approximately $45 million from its segregated account to its secured account, curing the deficiency."
In these unusual circumstances, it seems unreasonable for the CFTC to ding Macquarie for $150,000.