The Directors of the Division of Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight (the "Directors") responded to inquiries regarding the treatment of separate accounts of a single beneficial owner raised by previous Division guidance issued in CFTC Letter 19-17. In short, that letter provides that when a single beneficial owner has two more accounts at the same futures commission merchant ("FCM"), the collateral in both accounts must be available to the FCM in the event of a significant margin call on, or default by, the customer. (See prior description of the letter and corresponding compliance steps.)
In its new statement, the Directors say that FCMs must comply with relevant requirements by September 15, 2020, there will be no additional guidance on the treatment of separate accounts, and the deadline will not be extended.
The Directors also specifically responded to inquiries as to suggested inconsistencies between Letter 19-17 and Joint Audit Committee Alert 19-03. In particular, the Directors stated that an FCM can agree to a "protocol" to address circumstances where one account is undermargined, in which an FCM would follow specific steps before accessing funds in other accounts of the beneficial owner. The Directors also stated that they "expect" that an FCM will have discretion to determine when a shortfall is "extraordinary" and necessitates relying on the FCM's protocol for liquidation of additional accounts.
Commentary Nihal Patel
The CFTC staff, in June, issued a no-action letter that it knew was inconsistent with longstanding market practice and would create a significant amount of work for FCMs and their customers. Now, the CFTC has issued a follow-up statement in which it (i) says the existing letter was "comprehensive"; (ii) that any inconsistencies between the letter and other regulatory guidance is, essentially, a result of a lack of reading comprehension ("statements are not inconsistent with each other if they are interpreted properly"); (iii) nevertheless "explains" the inconsistency that better reading would have found; (iv) implicitly provides an extended compliance date for requirements stemming from the letter by stating that staff "expects" market participants will comply by September 2020; and (v) then "promises" that the staff "will not be extending this timeline at any point."
It is difficult to understand what exactly the CFTC is intending to accomplish through this kind of ad-hoc staff action that doesn't even go to the formality of a no-action letter. Treatment of separate accounts is a matter that should be addressed through formal Commission action. It is understandable, however, that as an interim matter staff action may be required. Here, however, the staff issued an interpretation that was highly prescriptive, without any opportunity for notice-and-comment, then followed by insisting nothing more was necessary and everyone better get to work because no extensions to the "expectation" deadline (established in a staff "statement") would be forthcoming.
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