Alert January 17, 2012

CFTC Approves Final Collateral Segregation Rule

The CFTC approved a rule requiring Futures Commissions Merchants (FCMs) and Derivatives Clearing Organizations (DCOs) to segregate collateral belonging to parties trading in cleared swaps.  The rule, approved on Wednesday, permits FCMs and DCOs to commingle customer collateral in the same accounts, but prohibits them from commingling customer collateral with their own funds.  It also requires FCMs and DCOs to track the changes in value of each customer’s collateral, individually, and prohibits them from tapping a non-defaulting customer’s collateral to cover another customer’s losses.

The CFTC adopted this approach after considering a more stringent alternative that would have required each customer’s collateral to be kept in a separate account, as well as two other alternatives that would have permitted the collateral of non-defaulting customers to cover other customer’s losses under certain circumstances.  All four alternatives are discussed in the CFTC’s Advanced Notice of Proposed Rulemaking.

The new rule applies only to swaps, not to futures.  For futures, the collateral of non‑defaulting customers still may be used to cover losses of other customers.  This dichotomy was the subject of intense discussion among the CFTC Commissioners.  Commissioner Jill Sommers argued that swaps and futures should be treated similarly; she rejected what she described as a “piecemeal approach” and cast the sole vote against the proposal.