Comment Text:
The 39.15(f)(3) proposed rule will mean that fully collateralized DCOs cannot both have direct members and also be intermediated. It will artificially limit fully collateralized DCOs to be either totally intermediated with no direct members, or only direct members with now FCM intermediation. While most fully collateralized DCOs are direct members, not all are, for example Nadex is allowed to have FCMs, and LedgerX’s order of designation allows it to have FCMs too. Future DCOs may also wish to have both direct members and FCM intermediation. There is definitely a place for both direct member models and FCMs and there is no reason why a DCO should be forced to have to be one or the other. The reason for this is that a fully collateralized DCO needs to collateralize all cleared transactions at the time of clearing. FCM customers and direct members can trade together. Trading will often, if not always, result in funds flowing from one member, or from a pool of funds, to another member. That means that collateral will be flowing from direct members to FCM customers and from FCM customers to direct members. Because the rule prohibits commingling the funds of FCM customers and direct members in the same bank account, that means that money has to physically move from one account to the other account in order to avoid commingling. Because trading happens throughout the day, this would mean that there will be a huge number of money movements that need to physically happen.
Additionally, market participants, especially retail market participants, expect to be able to access their funds quickly. If a trader has proceeds of $1,000, the trader reasonably expects to be able to trade with that $1,000 quickly. However, by requiring physical money movement, the reg results in very slow settlement, the opposite of a protection to direct members, it’s actually harming direct members. Additionally, it is simply impossible to expect that physical money movements will happen with such rapidity because that is not how banks work.
As a baseline, fully collateralized DCOs are more safe than their margin model counterparts. In a reg that is all about protecting market participants, full collateralization should be encouraged, not disadvantaged.
Fully collateralized DCOs should be excluded from this prohibition and allowed to commingle proprietary and customer funds together, as this does not increase any risk to the system, will facilitate full collateralization which is a significant protection for market participants, and overall benefit all participants.
Further, the cost section omits considering the costs to DCOs that wish to be fully collateralized and offer services to both direct members and FCM customers. This is a very high cost.
I agree with the Division’s proposal to allow proprietary funds to be commingled. That makes a lot of sense for the reasons stated.
