US Regulator Enhances Client Funds Protection Mechanisms

The U.S. Commodities Futures Trading Commission has introduced a set of three new measures which are designated to deliver to clients of U.S. brokers better protection of client funds. The steps are enacted by the regulator in order to respond to certain concerns voiced by the industry.

The US regulator has approved an order that exempts Federal Reserve Banks that are holding client funds for derivatives clearing organizations (DCOs) from liability under the Commodity Exchange Act (CEA).

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This move allows DCOs that have been categorized as systemically important to use Federal Reserve Banks to hold customer funds without being subject to liability under the CEA. This is allowed provided that the client funds are not mixed with the cash, securities, or property in the account of any other person.

Additional measures touch on the use of money market funds (MMFs) by DCOs and futures commission merchants (FCMs).

“DCO’s will not be allowed to accept or hold initial margin in MMFs, or to invest funds belonging to the DCO, its clearing members, or clearing members’ customers in MMFs that retain authority to impose redemption restrictions. Government MMFs that do not retain the authority to impose redemption restrictions would continue to be viewed as acceptable margin collateral and investments,” the CFTC’s announcement states.

That said the CFTC is not to take an enforcement action against any Futures Commission Merchant that invests its funds held in segregated accounts in MMFs. Those could be retaining authority to impose redemption restrictions if the amount is limited to the funds the FCM holds in excess of the firm’s targeted residual interest. This point includes government MMFs.