In 2014, the Joint Audit Committee issued a Regulatory Alert insisting that futures commission merchant (FCM) clearing members treat separate accounts of the same beneficial owner as a single account for purposes of US futures margin rules. In 2019, in response to the vigorous objections of FCMs to this interpretation, Commodity Futures Trading Commission (CFTC) staff fashioned a matrix of compliance requirements (Letter 19-17) designed to permit FCM clearing members to treat separate accounts of the same beneficial owner as separate accounts for margin purposes, promising in doing so that these requirements would in due course be codified. (History buffs can relive all the twists and turns of the story here, here and here.) 

That promise has now been redeemed; the CFTC has adopted a new “margin adequacy” rule, as well as conforming amendments to its definitions, the regulatory capital rule for FCMs, and procedures for computing the segregated, secured amount, and cleared swaps customer funds requirements (among other provisions). The effect of these amendments is to substantially codify in the CFTC rulebook the compliance program created under Letter 19-17. 

As proposed (and then re-proposed), the seemingly straightforward codification exercise seemed aimed at something more ambitious. The rules as proposed would have implemented substantial modifications to the compliance protocols that have evolved under Letter 19-17, including: 

• Revisions to the regulatory capital rule for FCMs that would have required FCMs to suspend separate account treatment for purposes of computing current assets and charges against net capital for undermargined accounts where any separately margined account failed to cover its previous day’s margin deficit within one business day (for purposes of the calculation of current assets), or within the close of business at the end of the second business day following the call (for purposes of the undermargined capital charge).
• Where Letter 19-17 permits FCMs to grant a one-day grace period for a separately margined customer’s failure to settle a margin call within one day of the call where “administrative error or operational constraints” prevent the call from being met within that one-day period, the CFTC proposed to reformulate that standard, first, by requiring situations of “administrative error or operational constraints” to be “unusual,” and, second, by requiring FCMs, in effect, to document each determination of failure to settle based on administrative error or operational constraints in light of whether “the separate account customer or investment manager acting diligently and in good faith” could have “reasonably foreseen” the error or constraints giving rise to the settlement failure.
• The rules as proposed provided that a separate account customer or its investment manager may designate one country within the Eurozone with which they have the most significant contacts for purposes of meeting margin calls in that separate account, and whose banking holidays may be referred to for purposes of receiving the benefit of a one business day extension of a Euro-denominated margin call in consideration of non-US local banking holidays; they also provided that that settlement in non-USD currencies may be extended by “up to one additional business day and still be considered in compliance” with the “one business day margin call” requirement for separately margined accounts.
• As proposed, the rules included a new 30-day toll on the reinstatement of separate account treatment for separately margined customers whose separate account treatment has been suspended or revoked for any reason.

In the event, the CFTC rescinded all of these proposed modifications to the Letter 19-17 framework. Specifically: 

• The proposed amendments to the regulatory capital rule for FCMs were modified to provide that, if a separate account does not meet a previous day’s margin call for a deficit or debit balance, the FCM is not required to exclude all separate accounts of that separate account customer carried by the FCM that have a deficit or debit ledger balance from current assets. In addition, if a call for margin for any separate account of a particular separate account customer is outstanding for more than one business day, the FCM need not look across to all outstanding margin calls for that separate account and treat those as if they too are outstanding for more than one business day (therefore, required to be deducted from net capital until all such calls have been met in full). 
• A separate customer’s failure to meet a margin call within one business day may be extended for one business day where “due to administrative error or operational constraints” (without additional determinations by the FCM that the failure was “unusual” and not “reasonably foreseeable” to a customer or manager acting in good faith and with reasonable diligence (provided that the FCM’s determination is reasonable in light of information known to it at the time of the relevant administrative error or operational constraint).
• The bifurcation between Eurozone and other non-USD holiday conventions has been replaced with a single standard: the deadline for one business day settlement in any non-USD currency “may be extended to the next business day following any banking holiday in the jurisdiction of issue of the currency” (or succession of bank holidays) and still be considered in compliance with the one business day margin settlement requirement for separately margined accounts, if payment is delayed due to such banking holiday (or holidays).
• The proposed 30-day tolling period for an FCM to reinstate an election for separate account treatment has been eliminated.

The result is that the various components of Letter 19-17 have been substantially replicated in the CFTC regulations, without material divergence — the result the CFTC professed to have at the outset and one that ensures minimal disruption to the industry as it moves on from old controversies. 

The voting draft of the adopting release and a fact sheet are available here. The compliance deadline for the new regulations is 180 days from the date of publication in the Federal Register for FCMs that are clearing members of a derivatives clearing organization and 365 days from the date of publication for all other FCMs (or, in each case, the next business day).