Alert October 30, 2012

CFTC Proposes New Regulations for FCMs and DCOs Designed to Protect Customer and Other Assets

The CFTC unanimously proposed new regulations and amendments to existing regulations intended to enhance protections of customer money and other assets held by futures commission merchants (“FCMs”) and derivatives clearing organizations (“DCOs”).  The proposal includes a discussion of MF Global and Peregrine Financial, stating that those incidents (along with other factors) “demonstrate the need for new rules and amendments to existing rules.”

The proposed new regulations and amendments would make numerous changes.  For example, they would require FCMs to establish a risk management program and would allow the CFTC to order an FCM to transfer its customer business if it cannot “immediately certify,” with supporting evidence, that it has sufficient access to liquidity to continue operating.  The proposals would also require that the CFTC and SRO have read-only electronic access to accounts holding certain customer funds. 

The proposals would also prohibit an FCM from using one futures customer’s funds to margin or secure the positions of another futures customer, and would provide that an FCM bears sole responsibility for any losses resulting from the investment of customer funds in certain permitted financial investments.  Furthermore, they would impose additional safeguards such as prohibiting an FCM from withdrawing more than 25% of its residual interest in futures customer accounts unless the FCM’s CEO, CFO, or other senior official pre-approves the withdrawal in writing.

Under the proposed amendments, an FCM or DCO investing customer funds in a money market mutual fund where the investment is held directly with the money market mutual fund or its affiliate would be subject to the following conditions, among others:  (a) the value of the money market fund is computed and made available by 9:00 AM the following business day; (b) the fund is legally obligated to redeem shares and make payments to the FCM or DCO by the following business day; and (c) the money market mutual fund does not have any agreements in place that would prevent the FCM or DCO from pledging or transferring fund shares.

In addition, the proposals would mandate certain additions and enhancements to the reporting and disclosure obligations of FCMs and introducing brokers (“IBs”).  They would also require that public accountants that conduct audits of CFTC registrants must be registered with the Public Company Accounting Oversight Board (“PCAOB”) and have passed a PCAOB exam.

Comments on the proposal are due 60 days after its forthcoming publication in the Federal Register.