Recent regulatory focus has concentrated firmly on a great many aspects relating to the safekeeping of client funds whilst in the custody of registered Futures Commission Merchants (FCMs).
To demonstrate this further, R.J. O’Brien and Associates was ordered to pay $125,000 on Friday, September 27 for violating rulings set forth by the US Commodity Futures Trading Commission (CFTC) which stipulate the methods by which customer funds should be protected.
Emphasizing The Importance of Omnibus Accounts
According to the CFTC’s order, on or about February 10, 2012, R.J. O’Brien, as carrying broker and depository for a non-clearing FCM, transferred $1,586,000 from the non-clearing FCM’s secured omnibus customer account (approximately $605,268 of which represented secured foreign futures or foreign options customer funds) and held, commingled, and deposited the secured customer funds in the non-clearing FCM’s segregated omnibus customer account.
The firm’s reason for doing so was to reduce a margin deficiency in the non-clearing FCM’s segregated omnibus account, without knowing whether the funds were part of the non-clearing FCM’s secured account requirements. Furthermore, the order finds that R.J. O’Brien did not make a margin call to the non-clearing FCM, and did not notify the non-clearing FCM that it was transferring the funds from the non-clearing FCM’s secured omnibus account.
In a comment it gave to Forex Magnates, the firm said: “RJO is pleased to have resolved this matter with the CFTC and notes that, as the CFTC order finds, the transfer did not result in any loss to customers. We reversed the transfer one business day after it occurred, at the non-clearing FCM’s request, and took immediate action to strengthen our internal fund transfer procedures”.
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Back in May this year, Forex Magnates reported that the CFTC had begun emphasizing the importance of maintaining omnibus accounts correctly, and had highlighted this to FCMs by issuing an advisory. At that time, the US regulator reinforced reporting duties to FCMs, detailing that any firm with an omnibus account should be reminded to report information regarding that account to the FCM, clearing member or foreign broker with whom the account is established in sufficient time to enable such futures commission merchant, clearing member or foreign broker to submit timely daily reports to the CFTC.
Subsequently, the fees chargeable by the National Futures Association for submitting late reports were increased, demonstrating that the authorities intend to ensure all daily activity is submitted on time, also alluding to a regulatory eye being kept on not only trade activity, but flow of capital between clients, FCMs and IBs.
Transfer Canceled, Charge Still Stands
The Commodity Exchange Act (CEA) and CFTC regulations contain provisions to protect the funds of customers trading on both U.S. and foreign exchanges. In relation to customers trading on foreign exchanges, an FCM must account for and maintain money, securities and property, in an amount at least sufficient to cover or satisfy all of its current obligations to foreign futures and options customers in a separate secured account.
As far as the CFTC’s findings are concerned, on Monday, February 13, 2012, the non-clearing FCM discovered that as a result of the above mentioned transfer of funds, it had insufficient funds in its secured accounts to meet its obligations to its secured customers.
The non-clearing FCM had sufficient funds otherwise available in other accounts to satisfy the segregated funds margin call if R.J. O’Brien had not moved funds from the secured omnibus account. The non-clearing FCM contacted R.J. O’Brien to reverse the transfer, which the company duly effected that same morning. Despite the immediate reversal of the transfer, the rules were transgressed and therefore, the penalty remains applicable.
Subsequently, the non-clearing FCM reported to the CFTC on the same morning that it did not have sufficient funds to meet its obligations to its secured customers. On this basis, the CFTC order finds that R.J. O’Brien, acting as a clearing FCM and depository, failed to comply with Regulation 30.7(d), which prohibits secured customer funds from being commingled with segregated customer funds.