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Wednesday, July 24, 2024 | Back issues
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CFTC Proposes New Customer Protections

WASHINGTON (CN) - The Commodity Futures Trading Commission proposed new rules to ensure that futures brokers cannot withdraw funds from customers.

The rules focus on safeguarding customers who deposit money, securities, or other property with a futures commission merchant, the formal name for a futures broker.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires futures commission merchant to segregate funds to ensure they are properly used in futures trading.

"The statutory mandate to segregate customer funds--to treat them as belonging to the customer and not use the funds inappropriately-takes on greater meaning in light of the devastating events experienced over the past year," the CFTC wrote in its preamble to the proposed rules.

Since October of last year, two futures commission merchants became insolvent, including MF Global Inc. That company, which was registered as both a futures merchant and a securities broker-dealer, reported a $900 million shortfall of funds needed to repay account balances because of customers trading futures on designated contract markets.

The CFTC says that shortfall was due to the company transferring funds out of customer accounts for other purposes.

The CFTC continued, in its proposal: "Those events...demonstrate that the risks of misfeasance and malfeasance, and the risks of failing to maintain sufficient excess funds in segregation: (i) Put customer funds at risk; and (ii) are exacerbated by stresses on the business of the futures commission merchants."

"Many of those risks can be mitigated significantly by better risk management systems and controls, along with an increase in risk-oriented oversight and examination of the futures commission merchants."

The CFTC said recent events "highlighted weaknesses in the customer protection regime" and "demonstrate the need for revisions."

Under the new rules, futures commission merchants would be required to hold sufficient funds in secured accounts to meet their total obligations to customers who trade on foreign markets.

The CFTC emphasized that a full understanding of a particular merchant is needed to determine what makes a "sufficient" amount of excess funds to be segregated.

Merchants could no longer hold lower amounts of funds representing the margin on their foreign futures, which was an alternative method the CFTC previously allowed.

The CFTC also proposed "bringing the regulators' view of customer accounts into the 21st century" by allowing self-regulatory organizations and the CFTC to access merchants' customer accounts electronically.

To learn more, click the document icon for this regulation and others.

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