On April 11, the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediate Oversight (DSIO) made publicly available No-Action Letter No. 16-88. This letter grants no-action relief to a futures commission merchant (FCM) intending to deposit customer-owned securities in an individual client account (ISA) with a United Kingdom affiliate (Affiliate) for purposes of margining such customers’ foreign futures or foreign options positions executed on a foreign board of trade located in the UK and cleared through a clearing organization that (1) is a central counterparty (CCP) that has received a recognition order as a recognized clearing house (RCH) and is subject to supervision by the Bank of England under Part 18 of the Financial Services and Markets Act 2000; and (2) has been authorized as a CCP pursuant to Article 17 of Regulation (EU) No 648/2012 of the European Parliament and the July 4, 2012 Council on OTC derivatives, central counterparties and trade repositories (an EU CCP).

EU CCP rules generally require a clearing member to have (1) sole and legal beneficial ownership in any securities posted with the EU CCP as margin; or (2) have the customer’s consent to treat such securities as if it had such ownership. Such rules are inconsistent with CFTC Regulation 30.7, which provides that an FCM may not by contract or otherwise waive any of the protections afforded customer funds under the laws of the foreign jurisdiction. Therefore, Regulation 30.7 would not permit an FCM to (1) transfer legal and beneficial ownership of customer-owned securities; or (2) grant an affiliate the right to reuse such securities (which would constitute a transfer of legal title of the securities at the time such right of reuse is exercised).

In response to these regulatory inconsistencies, the FCM, seeking no-action relief, proposed a series of amendments to its Futures Agreement. Such amendments included, but were not limited to, requirements that (1) the FCM authorize all transfers out of an ISA at an EU CCP; and (2) the Affiliate transfer securities directly from the FCM’s custody account to the ISA at the EU CCP promptly upon receipt of such securities. In addition, the proposed Futures Agreement would restrict the Affiliate’s right to reuse customer funds to ensure such transfers complied with the UK’s Financial Conduct Authority’s Custody Rules. The FCM further agreed to obtain a customer’s consent before transferring customer-owned securities to its Affiliate for this purpose.

Based on the foregoing, DSIO granted no-action relief, noting that customer-owned securities transferred to an ISA under such an arrangement would be consistent with CFTC rules. Such no-action relief is conditioned upon the FCM’s continued compliance with a series of conditions including, but not limited to, the FCM and the Affiliate not lending, appropriating, disposing of or otherwise using customer-owned securities for their own purposes when exercising their right to reuse.

The CFTC’s no-action letter is available here.