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Comment for KISS Initiative Reporting

  • From: John E. Mattesich
    ETD Consultants, Inc.

    Comment No: 61307
    Date: 9/22/2017

    Comment Text:

    The purpose of Section 30.7 of the regulations under the Commodity Exchange Act (“CEA”) is to protect funds of customers trading on foreign derivatives markets. Futures commission merchants (“FCM’s”) must maintained sufficient funds in approved accounts to cover their obligations to customers. Obligations is further specified in the definition of “secured amount” found in Section 1.3(rr). In addition to these two rules, Appendix B to Part 30 of the regulations and the instructions for the preparation of the Form 1-FR further elaborate what constitutes the liability and eligible assets to determine compliance. The rules are complex, far more than they need to be.

    The term “secured amount” adopts, in part, margin requirements as a measure of account value. The margin requirement of an account is not a measure of account value. It may be more or less than the account value. When less than the account value, the regulations do not provide a full measure of protection which defeats the purpose of the law.

    In one situation the inadequacy of using margin requirements as a measure of account value can be substantial. Let’s take this example. A customer account has initial margin requirement of $1.0 million, unrealized gain $0.2 million, liquidating credit value of $1.1 million, excess margin $0.1 million. Customer liquidates his open position. Margin requirements are now zero. Amount required to be secured before liquidation $1.2 million, after liquidation zero.

    In 2000 when Part 30 of the regulations was being proposed and circulated for comment, I and perhaps others stated our opposition to the use of margin requirements as a measure of account value. This was to no avail. CFTC was intent on introducing a new segregation concept different than that which had been in existence for decades,
    i. e., the segregation of funds of customer trading on domestic derivatives markets.

    Industry came to the rescue when in 2012 the National Futures Association issued interpretation number 16. It mandated that FCM’s must use the equity method for the preparation of the daily segregation statement for secured amount. Of what importance then is it to amend secured regulations. You might say none. That is not the case. Should an FCM be found to have insufficient funds in secured locations, a formal complaint would have to be considered and instituted but Section 30.7 in its present form could not be cited. The facts of the case, insufficiency based on the equity method, would be inconsistent with the language of 30.7 and definition of secured amount.

    I recommend that the pertinent regulations be amended to eliminate reference to “margin requirements” and to conform the regulations to prevailing and acceptable procedures observed by futures commission merchants (“FCM’s”).

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