Joint Letter to CFTC Regarding Use of Tri-Party Custody Accounts to Secure Futures Margin (with Lofchie Comment)

MFA and AIMA submitted a letter to the CFTC's Division of Clearing and Risk as well as the Division of Swap Dealer and Intermediary Oversight requesting that those Divisions repeal the "Amendment of Interpretation to the Financial and Segregation Interpretation No. 10 on the Treatment of Funds Deposited in Safekeeping Accounts" for futures and options transactions. Essentially, the repeal of the amendment would be intended to allow the use of tri-party arrangements in connection with cleared swaps. In the letter, MFA and AIMA said that their member firms were concerned by the recent MF Global and Peregrine insolvencies and the related misuse and misappropriation of customer assets. In addition, MFA and AIMA explained the typical control arrangements related to third-party custodial accounts used in the over-the-counter derivatives market in response to the CFTC’s concern about FCMs having immediate and unfettered access to customer collateral.

Lofchie Comment: This letter indirectly illustrates one of the most significant ways in which Dodd-Frank increased the risks to derivatives customers. That is, pre-Dodd-Frank, customers could negotiate to hold swaps collateral in tri-party arrangements with banks. Under Dodd-Frank, collateral for "futurized" swaps must be held with FCMs. However, in light of the failures of MF Global and Peregine, as noted in the joint letter, customers have less confidence in the FCM segregation scheme than they have in bank custody arrangements.

View letter in full here (links externally to MFA website).