On October 31, the Division of Swap Dealer and Intermediary Oversight (DSIO) of the Commodity Futures Trading Commission issued Letter No. 18-26 to provide continuing relief to a futures commission merchant (FCM) from certain requirements regarding the holding of customer-owned securities as margin for trading on foreign futures and foreign options markets. This letter supersedes CFTC Letter No. 16-88 and was issued to address certain changes in European law with regard to the clearing of positions of clearing members’ indirect clients.
As reported in the April 14, 2017, edition of the Corporate and Financial Weekly Digest covering Letter No. 16-88, European Union central counterparty (CCP) rules generally require a clearing member to have (1) sole and legal beneficial ownership in any securities posted with the EU CCP as margin; or (2) have the customer’s consent to treat such securities as if it had such ownership. Such rules are inconsistent with CFTC Regulation 30.7, which provides that an FCM may not by contract or otherwise waive any of the protections afforded customer funds under the laws of the foreign jurisdiction. Therefore, Regulation 30.7 would not permit an FCM to (1) transfer legal and beneficial ownership of customer-owned securities; or (2) grant an affiliate the right to reuse such securities (which would constitute a transfer of legal title of the securities at the time such right of reuse is exercised). Notwithstanding this inconsistency, Letter No. 16-88 authorized the FCM to deposit customer-owned securities with a UK CCP, subject to a number of conditions, including a requirement to hold such customer-owned securities in an individual segregated account (ISA) established in accordance with the European Market Infrastructure Regulation (EMIR).
With the implementation of the requirements governing the clearing of positions of clearing members’ indirect clients set out in the Markets in Financial Instruments Regulation and the Regulatory Technical Standards on Indirect Clearing, CCPs have generally elected not to offer ISAs for the accounts of indirect clients. Instead, they are offering so-called gross omnibus segregated accounts (GOSAs), which are designed to provide protections that are of “equivalent effect” to ISAs.
Based upon the representations set out in the request for a no-action position, including the representation that the FCM would maintain customer-owned securities in a GOSA, DSIO determined that continued no-action relief would be appropriate.
CFTC Staff Letter 16-88 is available here.
CFTC Staff Letter 18-26 is available here.