The previous post in this series discussed how different market participants hold different views of the relationship between an investment manager and its clients, particularly in the separate account context. That post concluded our discussion of background considerations in respect of proposed CFTC Regulation §1.44 (the “Proposed Rule”) and the related Margin Adequacy Requirement in respect of separate accounts.

This part begins a consideration of the provisions and conditions in the Proposed Rule, and related comments made by the U.S. Commodity Futures Trading Commission (“CFTC”).

This post will focus on two key definitions in the Proposed Rule:

• “Account;” and
• “Separate account.”

Other parts of this series will address other defined terms in the context of the specific provisions of the Proposed Rule in which those terms are used.

Administrative History of CFTC Regulation §1.44

Paragraph (a) of CFTC Regulation §1.44 defines terms that are specific to the Proposed Rule. Two of the most important of these terms are “account” and “separate account.”

As a threshold matter, it is useful to briefly recall the administrative history of CFTC Regulation §1.44. The Proposed Rule 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.

As next explained, this administrative history is particularly relevant to the Proposed Rule’s definitions of “account” and “separate account.”

The Meanings of “Account” and “Separate Account”

The definition of an “account” captures a futures account, a Cleared Swaps Customer Account (both as defined in CFTC Regulation §1.3), and a §30.7 account (defined in CFTC Regulation §30.1 to mean an account that holds margin in respect of foreign futures and options positions).

Neither the First Proposed Rule nor CFTC Letter 19-17 applied to a §30.7 account. As explained by the CFTC in the proposing release, “This definition is intended to implement the Margin Adequacy Requirement and requirements for separate account treatment, with respect to accounts of all three types.”

The definition of a “separate account” captures every account of the same separate account customer that is carried by the same futures commission merchant (“FCM”).

The “separate account” definition in the Proposed Rule excludes the criteria that the FCM be a clearing member of a derivatives clearing organization, which distinguishes the Proposed Rule from both the First Proposed Rule and CFTC Letter 19-17.

The scope of these two definitions reflects the decision to include the Proposed Rule in Part 1 instead of Part 39 of the CFTC’s Regulations (i.e., the former applies to every FCM, while the latter only applies to clearing FCMs that are members of Derivatives Clearing Organizations).

The next part of this series will focus on the Proposed Rule’s Margin Adequacy Requirement.