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.