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CFTC releases results of limited reviews of futures commission merchants

The Commodity Futures Trading Commission (CFTC or Commission) has released findings of limited reviews of futures commission merchants (FCMs) to assess compliance with requirements to segregate customer funds pursuant to Section 4d of the Commodity Exchange Act (ACT). 

The limited reviews also covered the FCMs’ obligation to set aside in secured accounts funds deposited by customers for trading on foreign boards of trade under Section 4(b) of the Act and Part 30 of the Commission’s regulations.  As of the review date for each FCM, all of the FCMs were in compliance with the segregation or Part 30 secured amount requirements.

Last fall, after the collapse of MF Global, Inc, the Commission initiated a coordinated review with the CME and NFA of all FCMs that carried customer funds to assess compliance with the protection of customer funds and Commission regulations.  There were 120 FCMs registered with the Commission as of 31 October, 2011.  Seventy of the FCMs held Section 4d segregated funds or Part 30 secured amount funds, and were subject to the limited reviews.  The remaining 50 FCMs did not carry customer segregated or Part 30 secured funds, and were not subject to the limited reviews.

In order to obtain an immediate “snapshot” of each FCM’s compliance with the segregation and Part 30 secured requirements, staff of the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO), Chicago Mercantile Exchange (CME), and National Futures Association (NFA) did not conduct an audit, which would entail a more detained and lengthy examination of the FCMs. The limited reviews relied to a great extent on the records and third-party source documents maintained at the FCMs. Staff did not confirm balances directly with depositories or other entities holding customer funds. However, several FCMs reviewed by the CME were subject to more detailed testing procedures, as the special limited reviews were incorporated into CME’s routine FCM examinations already in process during November and December 2011.

The Commission directed CFTC staff to conduct limited reviews of 14 of the largest FCMs to determine whether the entities maintained sufficient assets in segregated and Part 30 accounts to meet their regulatory obligation to futures customers.  The CME and NFA conducted similar reviews of the remaining 56 FCMs.

The limited reviews of the 70 FCMs found that, as of the review date, each firm maintained assets in Section 4d segregated accounts in excess of the net liquidating equities of each of its customers as required under Section 4d of the Act and Commission regulations. The limited reviews further found that, as of the review date, each FCM maintained assets in Part 30 secured accounts in excess of the aggregate margin required on all customers’ open futures positions, plus any unrealised gains and less any unrealised losses on the open positions, as required by Commission Regulation 30.7.

The FCMs held a total of approximately USD166 billion in segregated accounts, which was approximately USD13 billion (or 9%) in excess of the USD153 billion owed to customers. The FCMs also held approximately USD48 billion in Part 30 secured accounts, which was approximately USD7 billion (or 17%) in excess of the Part 30 secured amount obligation.

USD137 billion of the total segregated funds of USD166 billion (or 82.5%) and USD42 billion of the total Part 30 secured funds of USD48 billion (or 87.5%) was concentrated in the 14 FCMs reviewed by Commission staff.

The FCMs posted approximately USD74 billion of segregated funds with Commission-designated derivatives clearing organisations. This represents 45% of the total segregated balance of USD166 billion.

The FCMs held approximately USD33 billion of the total Part 30 secured funds of USD48 billion (or 68%) deposited by customers for trading on foreign futures and options markets at affiliated banks and affiliated foreign brokers.  FCMs also invested approximately USD3 billion of Part 30 secured funds in internal reverse repurchase transactions and reverse repurchase transactions with affiliated entities.

The FCMs held approximately USD30 billion of Section 4d segregated funds (or 18% of the total segregated funds of USD166 billion) with affiliated banks and/or custodian entities.  FCMs also invested approximately USD12 billion of Section 4d segregated funds in internal reverse repurchase transactions and reverse repurchase transactions with affiliated entities.

To determine whether FCMs maintained sufficient assets in segregated accounts to meet their obligations to all futures customers, the Commission directed the DSIO to conduct limited reviews of 14 of the largest FCMs, and to coordinate with the CME and NFA the review of 56 other FCMs carrying customer funds.  The principal goal of the limited reviews was to obtain an appropriate level of assurance that FCMs holding customer funds were not in violation of the segregation and Part 30 secured amount requirements as of the review date.
DSIO staff conducted an onsite limited review of 14 FCMs.  DSIO staff obtained from each FCM a detailed listing of assets held in segregated and Part 30 secured accounts as reflected in the firm’s books and records.  The listing of assets was compared to independent third-party source documents and reconciliations maintained at the FCM’s offices supporting the asset balances.  Staff also reviewed the third-party account documentation to determine that the funds were maintained in properly titled segregated or secured accounts, as appropriate.  In addition, staff reviewed each FCM’s reported segregation and Part 30 secured amount liabilities and reviewed underlying firm records to ensure that the records reflected such liabilities.  The staffs of the CME and NFA performed comparable review procedures.

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