• CFTC No-Action Relief-DCO Adoption July 2019

      • #
      • 19-02
      • Notice Date
      • 12 July 2019
      • Effective Date
      • 12 July 2019
    •  

      TO:                  Chief Executive Officers                                                                                #19-02

                              Chief Financial Officers

                              Chief Compliance Officers

      CC:                  Division of Clearing and Risk, CFTC

                              Division of Swap Dealer and Intermediary Oversight, CFTC

       

      DATE:             July 12, 2019

       

      SUBJECT:  CFTC Time-Limited No-Action Relief with Respect to the Treatment of Separate Accounts by Futures Commission Merchants

       

      On July 10, 2019, the Commodity Futures Trading Commission (“CFTC”) issued CFTC Letter No. 19-17, containing, in part, Time-Limited No-Action Relief with Respect to the Treatment of Separate Accounts by Futures Commission Merchants (“FCMs”) (the “CFTC Letter”).  The CFTC Letter provides no-action relief extending until June 30, 2021 with respect to CFTC Regulation 39.13(g)(8)(iii) under certain conditions as outlined in the letter.  The CFTC Letter, including the detailed conditions, may be found on the CFTC’s website at https://www.cftc.gov/csl/19-17/download.   

      Background

      CFTC Regulation 39.13(g)(8)(iii)

      CFTC Regulation 39.13(g)(8)(iii) requires a Derivatives Clearing Organization (“DCO”) to require its clearing members to ensure that their customers do not withdraw funds from their accounts with such clearing members 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 with respect to the products or portfolios in the customer’s account which are cleared by the DCO.  In proposing the requirement,[1] the CFTC stated that the requirement was consistent with the definition of “Margin Funds Available for Disbursement” in the JAC Margins Handbook.[2]  In accordance with the JAC Margins Handbook, when determining an account’s margin funds available for disbursement, all identically owned accounts (all accounts of the same beneficial owner), even if under different control, within the same regulatory account classification must be combined.

       

      CME/CBOT/NYMEX/COMEX Rule 930.F. and CME Rule 8G930.F.

      CME, CBOT, NYMEX, and COMEX Rule 930.F. and CME Rule 8G930.F. Release of Excess Performance Bond (collectively “Rule 930.F.”) governs the disbursement of excess performance bond to customers and noncustomers. 

      930.F. Release of Excess Performance Bond

      Subject to exceptions granted by Exchange staff, clearing members may only release performance bond deposits from an account if such deposits are in excess of initial performance bond requirements.

      8G930.F. Release of Excess Performance Bond

      Subject to exceptions granted by Exchange staff, IRS clearing members may only release performance bond deposits from an account if such deposits are in excess of initial performance bond requirements.

      In addition, the JAC Margins Handbook provides further requirements in the application of Rule 930.F. specifically that when determining an account’s margin funds available for disbursement, all identically owned accounts (all accounts of the same beneficial owner), even if under different control, within the same regulatory account classification must be combined.

      CFTC Time-Limited No-Action Relief with Respect to the Treatment of Separate Accounts by FCMS.

      In accordance with the CFTC Letter, the CFTC’s Division of Clearing and Risk (“DCR”) provided that a DCO may permit its FCM clearing members to treat separate accounts of a customer as accounts of separate entities for purposes of Regulation 39.13(g)(8)(iii) where the FCM clearing member’s written internal controls and procedures require it to, and the FCM in fact does, comply with the conditions for the relief as set forth in the CFTC Letter. 

      In accordance with the CFTC Letter, CME Clearing is permitting its FCM clearing members to treat separate accounts of the same beneficial owner as separate accounts under Rule 930.F. for purposes of determining performance bond funds available for disbursement under the conditions of the CFTC Letter.  The application of the CFTC Letter will be treated as an exception to Rule 930.F. granted by Exchange staff until the earlier of June 30, 2021 or such time as the CFTC amends Regulation 39.13(g)(8)(iii).

      All conditions of the CFTC Letter must be complied with in order for identically owned separate accounts (accounts of the same beneficial owner) to be treated as separate accounts during the Ordinary Course of Business for purposes of determining funds available for disbursement.  For clarity, for FCMs which have CME, CBOT, NYMEX or COMEX as their designated self-regulatory organization (“DSRO”), all conditions in the CFTC Letter requiring communication or notification to the FCM’s DSRO must be made through the WinJammer™ Online Filing System. 

      Therefore, FCM clearing members wishing to avail themselves of the time-limited no-action relief must update their policies and procedures to reflect the conditions in the CFTC Letter.  In addition, FCM clearing members should adopt strong controls and procedures to ensure that the conditions of the CFTC Letter are compiled with.

      If you have any questions, please contact the Financial and Regulatory Surveillance Department at 312-930-3230.

       

      [1]  Derivatives Clearing Organization General Provisions and Core Principles, 76 Fed. Reg. 69,334, 69,379 (Nov. 8, 2011).

      [2] Margin funds available for disbursement is defined by the JAC Margins Handbook (found at http://www.jacfutures.com) as an account’s net liquidating value + margin deposits – initial margin requirements (risk margin only) ≥ zero.  Alternatively, FCMs may compare the total equity plus margin deposits in an account to the initial margin requirement adjusted for the account’s option value, commonly referred to as the Total Equity Method.