On July 13th, the CFTC approved new financial rules submitted by the NFA in a May 29th petition (available here). These new rules are intended to strengthen the protection of customer funds held by a futures commission merchant ("FCM"). The following are key highlights of the new rules.

1) Increased Protections for Foreign Futures and Options Customers 

FCMs must compute the amount of funds held in segregated accounts relating to foreign futures and options - so-called "Part 30 secured accounts" - on the basis of the net liquidating equity method plus the market value of any securities held in customers' accounts.

As a result, FCMs may no longer use the "alternative method," a change that is expected to afford greater customer protections. (As explained in April 2012 report from the MF Global Trustee, " In the case of MF Global, reliance on the Alternative Method in the time period leading up to the liquidation resulted in substantially fewer funds being segregated than under the Net Liquidating Equity Method.")

 2) Written Policies and Procedures Regarding the Use of Customer Funds 

FCMs must maintain written policies and procedures regarding the maintenance of excess funds (i.e., the "residual interest" of the FCM in customer funds in excess of the amount required to meet segregation requirements) in customer segregated accounts for both domestic and foreign futures and options contracts. These policies must establish a target amount that the FCM will seek to maintain as its residual interest in these accounts and ensure that the FCM meets its target.

3) CEO/CFO Approval and Notice Requirements - The Corzine Rule

The FCM's CEO, CFO or other qualified member of senior management must pre-approve any with drawl from a customer segregated account in excess of 25% of the FCM's residual interest in any customer segregated account (i.e., for both domestic and foreign futures contracts). The FCM must also notify the NFA of such pre-approval immediately after it happens. The notice must include, among other things, a description of the reason for the withdrawal and an identification of the intended recipients.

This aspect of the NFA's new financial rules is often referred to as the "Corzine Rule," since Jon Corzine indicated that he was unaware of transfers from MF Global's customer segregated accounts in the days leading up to MF Global's failure.

4) Recordkeeping and Reporting - To Be Made Available To The Public

Under the new rules, FCMs will be required to file daily and monthly reports with the NFA. By noon of each business day, the FCM will be required to file its daily segregated account computations as of the close of the preceding business day.

On a monthly basis, the FCM will be required to file detailed reports identifying the value of the customer segregated funds, the bank at which the funds are held, and how the funds are invested. Any such investment must be made in accordance with CFTC Rule 1.25.

Additionally, monthly reports will need to be made regarding the FCM's net capital and leverage. For purposes of these reports, leverage is defined as "total balance sheet assets,  less any instruments guaranteed by the U.S. government and held as an asset or to collateralize an asset (e.g., a reverse repo) divided by total capital (the sum of stockholder's equity and subordinated debt)" all computed in accordance with U.S. GAAP.

In the May 29th petition filed with the CFTC, the NFA indicated that it intends to seek approval of the NFA's board to make this information publicly available.

Good day. Good protections. TSR