CFTC Warns Court against Granting Investor Protections to FX Traders
The American Commodity Futures Trading Commission (CFTC) came out in court against a hedge fund’s demand for priority repayment from
The American financial regulator, the Commodity Futures Trading Commission (CFTC), has taken a strong stand against an interpretation of the U.S securities law that might extend investor protection to Over-the-Counter (OTC) FX traders.
Moore Capital Management LP is a hedge fund that used to trade OTC FX with Lehman Brothers before the investment bank went bankrupt. The fund appealed to a U.S court requesting to be considered as a client of Lehman Brothers and therefore getting priority over other unsecured creditors waiting for the repayment of Lehman’s debt.
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In a legal brief presented to the court on Friday, January 9th, the CFTC said that declaring the hedge fund a client of Lehman and giving priority to its $12 million FX debt would set a “dangerous precedent” that OTC FX deals that aren’t financed from segregated clients funds must be covered against losses by the Securities Investor Protection Act (SIPA), according to the legal news service Law360.
The CFTC said that it considers Moore Capital’s position “untenable as a matter of law because deposits that Moore made to Lehman Bros in connection with forex trades were never subject to the customer-property protections required by regulations for commodity contracts. Outside of those protections, the bankruptcy code alone cannot elevate unregulated, off-exchange transactions into the type that receives priority.”
In 2012, another U.S court already rejected the claim that OTC FX traders deserve to be be in the group of Lehman Brothers’ former clients who receive SIPA priority repayments. A number of institutional forex traders, such as Moore Capital, have appealed but considering the position of the CFTC it is unlikely any of them will eventually succeed in bypassing the line of creditors.
From the CFTC’s website / Mission & Responsibilities: The mission of the Commodity Futures Trading Commission (CFTC) is to protect market participants and the public from fraud, manipulation, abusive practices and systemic risk related to derivatives – both futures and swaps – and to foster transparent, open, competitive and financially sound markets. With this as its’ mission, the CFTC was enacted by US Congress and various versions of the Commodity Exchange Act to regulate OTC transactions. By law, their mission is (in part), “… protect market participants and the public from fraud, manipulation, abusive practices and systemic risk related to… Read more »
In the US, fx and futures clients of NFA/CFTC regulated dealers have no protection from counter-party insolvency equivalent to what’s available from SIPC . SIPC is primarily a members-funded insurance scheme available for FINRA regulated broker-dealers , and not NFA/CFTC regulated FCMs. SIPC has always excluded fx trades and futures contracts from its definition of “securities” under its $500,000 coverage limit. Other than SIPC, there are two other industry run insurance funds for client protection that I can think of. The FSCS covers the clients of FCA-regulated firms for a limit of £50,000 for investments, and the CIPF is a… Read more »
@Stephen Leahy, 100% correct statement. When it comes to ‘real’ protection that almost all traders would be worried about (segregated/insured client funds on deposit with a broker), the CFTC continuously ignores the issue for OTC Forex. In this case, they blatantly insist that a judge who actually gives a sh*t about public trust would be setting a bad precedent. But CFTC never mentions any alternatives. I would invite the CFTC to follow up here with comment or in a separate article to elaborate on why they insist that US residents trade with US brokers/IBs registered with the CFTC, but then… Read more »