/>iThis post continues our multi-part series on proposed CFTC Regulation §1.44 (the “Proposed Rule”).
If adopted, the Proposed Rule will 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. The proposing release published by the U.S. Commodity Futures Trading Commission (the “CFTC”) refers to this requirement as a “Margin Adequacy Requirement.”
This post will provide additional information about this requirement, which arguably is the keystone of the proposal.
The Margin Adequacy Requirement of Proposed CFTC Regulation §1.44
Paragraph (b) of proposed CFTC Regulation §1.44 is the Margin Adequacy Requirement proper and it parallels the requirement that derivatives clearing organizations must apply to their clearing FCMs under CFTC Regulation §39.13(g)(8)(iii).
Specifically, the Proposed Rule requires an FCM to ensure that a customer does not withdraw funds from its accounts with that FCM unless the net liquidating value—calculated as of the close of business on the previous business day—plus the margin deposits remaining in the customer’s account after such withdrawal are sufficient to meet the customer initial margin requirements with respect to all products held in such customer’s accounts.
The Proposed Rule will make an exception to the Margin Adequacy Requirement for separate accounts under “ordinary course of business conditions,” a concept that will be discussed in later parts of this series.
What to Do When a Holiday Is a Business Day for Markets (But Not Banks)
As previously explained, under the Margin Adequacy Requirement, net liquidating value must be calculated as of the close of business on the previous business day.
As used in proposed CFTC Regulation §1.44, the term “business day” means any day other than a Saturday, Sunday, or holiday with “holiday” further defined as any Federal holiday established by 5 U.S.C. 6103.
Given these definitions, there is a possibility that a particular holiday could be a day when markets are open, but banks are not. Veterans Day is one example of such a holiday.
The Proposed Rule addresses this anomalous situation by:
- Clarifying that net liquidating value should be determined as of the close of business on any such holiday (CFTC Regulation §1.44(b)(2)) ; and
- Requiring an FCM to issue margin calls on any such holiday (CFTC Regulation §1.44(f)(7)).
Doing What Proposed CFTC Regulation §1.44 Requires Is the Minimum
Finally, in the commentary on the Proposed Rule, the CFTC stated that the end-of-day timing of calculations under Margin Adequacy Requirement “are not intended to prevent an FCM from exercising its judgement in connection with good risk manage practice to prevent the disbursement of customer funds based on intervening intraday market movements resulting in losses to a customer account between the calculation benchmark set for in proposed regulation §1.44(b) and the time at which a customer requests to withdraw funds.”
In other words, the timing calculation for margin adequacy is the minimum standard as to what is acceptable, rather than a limit that would in any way prevent or discourage an FCM from undertaking margin adequacy calculations on an intraday basis.
