CFTC Proposes Rule to Address Margin Adequacy and Treatment of Separate Accounts by FCMs

By: Matthew Rogers and Benjamin Skillin

On February 20, 2024, the CFTC approved a proposed rule that would apply a margin adequacy requirement to all futures commission merchants (FCMs), with respect to their customers. The new requirement—titled Regulation 1.44—is designed to ensure that an FCM does not permit a customer to withdraw funds from its account if the remaining balance would be insufficient to meet the customer’s initial margin requirements.

Currently, FCMs may elect to treat the separate accounts of a single beneficial owner as separate entities, provided the conditions in CFTC Letter 17-19 (and subsequent no-action letters) are satisfied. The CFTC decided to withdraw its April 2023 proposal and adopt a new proposal in response to industry concerns.

The proposed rule would codify the CFTC’s no-action relief by permitting an FCM, regardless of whether or not it is a clearing member, to treat a separate account as a separate entity for purposes of the new margin adequacy requirement, subject to certain conditions. Consistent with the 2023 proposal, FCMs, among other requirements, must (i) obtain additional information from customers, (ii) treat all separate accounts of a customer the same for bankruptcy purposes, and (ii) require separate accounts to be on a one business day margin call. In response to comments the CFTC received to its 2023 proposal, this proposal further clarifies how margin payments can be timely made in foreign currencies and how market participants are expected to handle administrative and operational errors that result in untimely margin payments.

Comments can be submitted electronically through the CFTC Comments online process until April 22, 2024.

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