This is the second of a multi-part series on a February 20 rule proposal by the U.S. Commodity Futures Trading Commission (“CFTC”) to:

(1) require every futures commission merchant (“FCM”) to ensure that a customer does not withdraw funds from its account with the FCM if the post-withdrawal balance of that account would be insufficient to meet the initial margin requirements applicable to that customer (a “Margin Adequacy Requirement”); and

(2) permit an FCM to treat the separate accounts of a single customer as accounts of separate entities, subject to the satisfaction of risk-mitigation conditions.

To implement the Margin Adequacy Requirement in the separate account context, the CFTC has proposed the promulgation of new CFTC Regulation §1.44 (the “Proposed Rule”) and related amendments to various other existing CFTC regulations.

Looking Back, Looking Ahead

The first post in this series was an introduction to proposed CFTC Regulation §1.44.

This part will provide background in respect of the Margin Adequacy Requirement that will be implemented by that rule.

And, looking ahead, the next part will provide background information about the use of separate accounts in the investment management context.

The Margin Adequacy Requirement under CFTC Rule 1.44 Generally

As noted in the previous post, the recent CFTC rule proposal effectively replaces an April 2023 proposed rule (the “First Proposed Rule”) that was intended to codify administrative relief originally provided by two divisions of the CFTC in CFTC Letter No. 19-17.

The CFTC has expressed the view that the new regulations will further two fundamental purposes of the Commodity Exchange Act (the “CEA”): the avoidance of systemic risk and the protection of market participants from the misuses of customer assets (see Section 3(b) of the CEA).

As a threshold consideration, the CFTC has proposed the introduction of the Margin Adequacy Requirement in Part 1 of the CFTC’s Regulations, which applies to every futures commission merchant (“FCM”) (i.e., clearing and non-clearing), instead of Part 39 of the CFTC’s Regulations, which only applies to derivatives clearing organizations and clearing FCMs.

This distinction differentiates the proposed regulations from the approach taken under the First Proposed Rule and CFTC Letter 19-17. The proposed regulations, if adopted, will apply to every FCM, while the First Proposed Rule and CFTC Letter No. 19-17 would only apply to a clearing FCM.