| July 25
July 25 U.S futures regulators on Thursday
signaled they will keep new rules barring brokers from using
excess money from one customer to cover the temporary shortfall
of another, despite criticism that the change could cost the
industry hundreds of billions of dollars.
The rules are part of a broader regulatory effort to protect
customer money after the spectacular failures of two large
brokerages, MF Global Inc and Peregrine Financial Group, led to
giant and unanticipated shortfalls in client funds.
Grain traders, futures brokers and even the powerful head
of the world's biggest futures exchange operator, CME Group Inc,
have assailed the Commodity Futures Exchange Commission's
proposed rules on margin, saying they impose unnecessary costs
that could drive traders away from regulated markets, and put
more, not less, customer money at risk in the event of a broker
At issue is the collateral, known as margin, that customers
lodge with their brokers to back their futures trades. If the
exchange demands additional collateral and the money is not
already in the customer's account, the proposed rule would force
futures brokers to use their own capital to cover the shortfall.
Alternatively, the broker could collect extra money from
customers ahead of time, to ensure their margin accounts do not
fall into deficit.
Either way, the cost would be huge, many in the industry
have argued. One trade group, the International Swaps and
Derivatives Association, told the CFTC the margin rules would
cost the futures industry as much as $120 billion and the swaps
industry, where trading is newly subject to CFTC rules, as much
as $558 billion.
But on Thursday, at an open meeting of the Agricultural
Advisory Committee to the CFTC, regulators were unmoved by the
The proposed rules, said Ananda Radhakrishnan, director of
the CFTC's division of clearing and risk, merely clarify what
the law already says: funds from one customer must not be used
to pay for the position or deficit of another customer
"Nobody's been able to make the argument, with all due
respect, that what we are suggesting is not what the law says it
is," Radhakrishnan said. "The arguments we've heard ... (are)
that it's going to be expensive, the earth is going to fall and
so on and so forth. But nobody has done, to my view, a legal
analysis saying, 'your analysis is wrong.'"
Radhakrishnan stopped short of saying the CFTC was committed
to the proposed rule, emphasizing that his view was that of the
CFTC staff, and the CFTC's commissioners would have final say.
The CFTC staff plans to get a final draft of the new rules
in front of the agency's four commissioners in coming weeks.
But CFTC Chairman Gary Gensler, who also attended the
meeting, gave little sense that he disagreed with the staff.
Under current practice, brokers give traders as much as
three days to pony up the money to make a margin call, even
though the money is actually due on the same day the call is
made. The broker covers any shortfall during that time, and it
is "totally appropriate" to use its own capital to do so,
The problem, Gensler said, is if the futures brokerage uses
the extra money from another of its customers to cover the first
trader's temporary margin deficit -- and then the brokerage goes
A show of hands, he asked the group, from any who would want
their surplus margin to be used for another's deficit?
"I haven't seen any raised hands," he said. "That's the
challenge that we have."