This post is an overview of the “one business day margin call requirement” that applies to separate account customers under CFTC Regulation §1.44, as proposed by the U.S. Commodity Futures Trading Commission (the “CFTC”) on February 20, 2024 (the “Proposed Rule”).

The Proposed Rule seeks to balance the risk mitigation benefits of margin calls with practical limitations resulting from what the CFTC’s proposing release describes as “the mechanics of international payment systems (e.g., time zones and schedules of correspondent banks).”

Generally, the Proposed Rule requires margin calls to be met on a same day basis when paid in United States dollars (USD) and Canadian dollars (CAD), with one or two business day allowances made when margin is posted in other specified currencies.

As such, it is somewhat of a misnomer to refer to this requirement as a “one business day” requirement. A draft version of this post was titled “The (Kind Of, Sort Of) One Business Day Margin Requirement under CFTC Regulation §1.44.” Yet, editorial practicalities required accuracy to give way to brevity—at least, kind of, sort of

Background: Mitigating against the Risks of Undermargining

A futures commission merchant (“FCM”) may treat the separate accounts of a separate account customer as accounts of separate entities for purposes of the Proposed Rule’s Margin Adequacy Requirement (as discussed in earlier posts), subject to the satisfaction of several conditions, including the one business day margin call requirement.

This requirement seeks to mitigate against the risk that a separate account will become “undermargined” as a result of market movements or position changes on the previous day. An account is “undermargined” when its “unmargined amount” is greater than zero.

Paragraph (a) of CFTC Regulation §1.44 defines “unmargined amount” as the amount, if any, by which margin requirements with respect to all products held in that account exceeds the net liquidating value plus the margin deposits currently remaining in that account. And, “margin requirements” means “the level of maintenance margin or performance bond (including, as appropriate, the equity component or premium for long or short option positions) required for the positions in the account by the applicable exchanges or clearing organizations.”

As succinctly explained by the CFTC in footnote 145 of the proposing release,

The undermargined amount is based on maintenance margin, which may be lower than initial margin. However, if an account falls below the maintenance margin level, the amount of the margin call is generally required to be the amount necessary to bring the account back to the (potentially higher) initial margin level.

In short, an FCM must make a margin call when market movements or position changes on the previous day cause a separate account to be unmargined.

The Deadline for Meeting Margin Calls Can Vary by Currency

So, there is a one business day margin call requirement. But, the deadline for meeting that margin call can vary, depending on the type of currency that a customer is paying to the FCM.

In sum, a separate account customer must meet the FCM’s margin call:

• On the same United States business day by the close of Fedwire Funds Service, if the FCM issued the margin call by 11 a.m. ET and the customer is paying USD or CAD;
• By 12:00 p.m., ET on the second United States business day after the business day on which the FCM issued the margin call and the customer is paying one of the currencies listed in Appendix A to Part 1 of the CFTC’s Regulations (the “Appendix A Currencies”); and
• By 12:00 p.m., ET on the first United States business day after the business day on which the FCM issued the margin call and the customer is paying a fiat currency other than USD, CAD, or one of the Appendix A Currencies.

The following is the proposed list of Appendix A Currencies:

Australian dollar (AUD)
Chinese renminbi (CNY)
Hong Kong dollar (HKD)
Hungarian forint (HUF)
Israeli new shekel (ILS)
Japanese yen (JPY)
New Zealand dollar (NZD)
Singapore dollar (SGD)
South African rand (ZAR)
Turkish lira (TRY)

As covered in greater detail in Part 5 of this series, “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.

The Proposed Rule also deals with the scenario in which the occurrence of a foreign holiday during which banks are closed may also create difficulties in payment of margin in a fiat currency other than USD. Specifically, paragraph (4) of CFTC Regulation §1.44(f) provides that, the relevant deadline for payment of margin in fiat currencies other than USD may be extended by up to one additional business day and still be considered in compliance with the requirements of proposed CFTC Regulation § 1.44(f) if payment is delayed due to a banking holiday in the jurisdiction of issue of the currency.

So, as previously alluded to, the Proposed Rule definitely has a kind of, sort of, one business day margin requirement. The next post will deal with miscellaneous considerations related to this requirement.

Read Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, and Part 7