Two CFTC No-Action Letters Regarding FCMs' Handling of Customer Funds (CFTC Letters 14-02 and 14-03) (with Lofchie Comment)

The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") issued two no-action letters regarding FCMs' handling of customer funds, both intended to deal with operational issues. The first letter (14-02) provides time-limited relief as to the situation where a customer makes a single margin transfer that is required to be divided up into two or three separate types of segregated accounts; e.g., between Part 30 Secured Funds, Section 4d(a)(2) U.S. futures funds and Cleared Swap Funds. An FCM receiving such a single payment may not be able to split the money instantaneously between the three accounts, which could result in an excess of money going into one of the accounts while the other two are briefly underfunded. The no-action letter allows FCMs an additional 60 days to establish procedures for the instantaneous division of the client money into the various accounts.

The second letter (14-03) provides no-action relief to FCMs that hold customer funds deposited to margin, guarantee, or secure foreign futures and option in foreign jurisdictions outside the U.S. that may not be consistent with CFTC Rule 30.7(c) ("Treatment of Foreign Futures or Foreign Options Secured Amount") where it may not be possible to move money instantaneously because of the different time zones and the need for currency conversion, among other factors. The letter stated the following conditions for the no-action relief:

1. The non-U.S. depositories qualify as depositories to hold 30.7 customer funds under Rule 30.7(b);
2. By noon each business day, the FCM prepares a daily computation of its secured amount requirement as of the close of business on the previous business day as required by Rule 30.7(l) and identifies the amount of 30.7 customer funds held in non-U.S. jurisdictions that exceeds 120 percent of the required margin for the 30.7 customers' positions and on the same business day initiates the request with the foreign depositories for the transfer of such excess funds to U.S. depositories; and
3. The FCM receives into its U.S. depositories the requested funds from the foreign depositories within 2 business days of initiating action to have such funds moved to the U.S. depositories.

Lofchie Comment: The notion that some meaningful regulatory issue is at stake because an FCM may allocate customer money for a brief period to one bankruptcy-protected segregated account, rather than to another, is simply silly. It is a waste of both regulatory and industry resources to focus on this kind of operational trivia, which must inevitably raise costs to customers without providing any material benefit.

That the CFTC would publish on January 13 a no-action letter (dated January 10) with respect to a rule that is to become effective on January 13 illustrates an arbitrary regulatory practice. It has been standard procedure for the CFTC to adopt rules with inadequate periods for firms to prepare. These late or after-the-fact no-action letters have become a pattern delaying an effective date that was impracticable from adoption.

See: No-Action Letter 14-02; No-Action Letter 14-03.