The CFTC has issued time-limited no-action relief regarding margin for separate accounts by futures commission merchants (FCMs). The relief allows derivatives clearing organizations (DCOs) to allow FCMs to treat separate accounts for the same beneficial owner separately for margin purposes, including the withdrawal of excess margin, provided that specified risk management conditions are met. The relief was accompanied by an advisory confirming that FCMs must not limit recourse to recover shortfalls (CFTC Letter No. 19-17, July 10, 2019).
“CFTC staff’s recognition of [FCM margining] practices carefully balances the needs of certain customer relationships without increasing the risk to clearing member FCMs, provided that the FCM also complies with rigorous risk management conditions,” said Matthew Kulkin, director of the Division of Swap Dealer and Intermediary Oversight (DSIO).
The no-action relief will extend until June 30, 2021 to allow time to assess whether rulemaking implementing permanent relief would be appropriate.
FCM margin practices. Under CFTC Regulation 39.13(g)(8)(iii), DCOs must require clearing members to ensure that their customers do not withdraw funds from their accounts unless the net liquidating value plus the margin deposits remaining in the customer’s account after the withdrawal would be sufficient to meet the customer initial margin requirements for the products or portfolios in the customer’s account.
However, the CFTC has learned through discussions with FCMs and the Futures Industry Association (FIA), among others, that FCMs and their customers are currently engaging in various diverse practices regarding handling of separate accounts of the same beneficial owner.
No-action relief. The staff of the Division of Clearing and Risk believes that for separate accounts, the risk management goals the regulation is designed to address are effectively addressed if an FCM carrying a customer (i.e., the beneficial owner of an account) with separate accounts meets certain risk management conditions. Accordingly, the staff will not recommend enforcement action against a DCO if the DCO permits its FCM clearing members to treat certain separate accounts as accounts of separate entities for purposes of Regulation 39.13(g)(8)(iii) under certain circumstances, as specified.
Advisory. In line with prohibitions against limitations on recourse under CFTC Regulation 1.56, DSIO staff confirmed that to address any shortfall, the FCM must retain the ability to ultimately look to funds in other accounts of the beneficial owner, including accounts that may be under different control, as well as the right to call the beneficial owner for additional funds.
Accordingly, DSIO staff specified that FCM customer agreements or other documents must not:
- preclude the FCM from calling the beneficial owner of an account for required margin;
- in the event the beneficial owner fails to meet the margin call, preclude the FCM from initiating a legal proceeding to recover any shortfall; or
- otherwise guarantee a beneficial owner against, or limit a beneficial owner’s, loss.