On August 14, the Joint Audit Committee (JAC) released Regulatory Alert #18-04. The Alert, which responds to industry requests, clarifies the procedures that a futures commission merchant (FCM) should follow prior to making an intra-day withdrawal from the residual interest amount that the FCM maintains in its segregated, secured 30.7 and cleared swap customer accounts (Accounts) in order to ensure compliance with applicable Commodity Futures Trading Commission regulations.
CFTC regulations require FCMs to maintain in each Account a targeted residual interest amount, which is comprised of the FCM’s own funds. This target amount is designed to reasonably ensure that the FCM maintains sufficient funds in each Account to comply with applicable regulations. Specifically, an FCM must ensure that it has enough residual interest in the segregated and secured 30.7 accounts, by 6:00 p.m. EST each business day, to cover the aggregated gross margin deficiencies associated with its customers’ remaining (unmet) margin calls from the prior business day. For cleared swaps customers, the FCM must have sufficient residual interest to cover the aggregated gross margin deficiencies of all cleared swaps customers prior to the end-of-day and intra-day payment cycle of initial and/or variation margin.
An FCM may only make withdrawals of the residual interest amount from an Account (other than for the benefit of customers) after completing and submitting to the CFTC and the FCM’s designated self-regulatory organization the required segregation calculation for the prior day for each Account. The calculations must be submitted by 12:00 p.m.
Prior to making any withdrawal of residual interest from an Account (not for the benefit of customers), the Alert instructs FCMs to prepare a pro-forma segregation calculation with respect to the relevant account, taking into consideration (1) any withdrawals from the Account; (2) any deposits into the Account; (3) estimated debit/deficits arising from market movements and trading activity; and (4) any significant events or other material impacts that may materially impact residual interest. The pro forma calculation must be retained.
The Alert notes that strong internal controls and procedures pertaining to the withdrawal of residual interest amounts are necessary to ensure the protection of customers and the maintenance of sufficient customer funds at all times.
The Alert is available here.