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FIA urges CFTC to fill gaps in customer protections before approving leveraged direct clearing

19 March 2024

Washington, DC — FIA has filed comments with the Commodity Futures Trading Commission on its proposed rulemaking related to the protection of clearing member funds held by designated clearing organizations (DCOs). FIA’s letter supports the proposed codification of segregation and additional protections for clearing member property, many of which are in place today at major clearinghouses. However, the letter cautions that the rulemaking is far from sound footing for the CFTC to approve new direct clearing models, such as the leveraged disintermediated clearing model first sought by FTX.
 
“The Commission’s action is a constructive first step to close the gap between the protections available to customer property and those available to clearing member property,” FIA President and CEO Walt Lukken said in the letter. “But it is only a first step. Finalizing the [proposed rule] in a vacuum may give market participants – and, in particular, retail customers – the mistaken impression that when they commit funds to a [clearinghouse] clearing under the non-traditional models that the CFTC has begun to license, they will receive the same protections as customers of [futures commission merchants].”
 
The letter highlights numerous areas where, even if the proposed rule were enacted, a customer clearing directly with a clearinghouse would not receive comparable protections as a customer clearing through a futures clearing merchant (FCM). Not only would the direct customer not benefit from the independent and complementary functional relationships between registered intermediaries, exchanges, and clearinghouses, each of which has mutually reinforcing risk management obligations, but it also would lose the protections afforded by FCM disclosures, anti-money laundering and customer due diligence and regulatory oversight, notably in respect of customer-facing activities.
 
Regulatory protections for market participants are the bedrock of US futures and derivatives markets, the letter emphasized. “We should not jeopardize the standing of these markets, much less the safeguarding of customer property, in the rush of new and untested models to market,” said Lukken.
 
FIA’s letter calls on the CFTC to perform a holistic review of its statutory authority, regulations and self-regulatory framework to ascertain what steps it needs to take to provide the same robust protections to customers across all clearing models. Only after this review is completed, and appropriate action taken, should the CFTC consider approving new models.

Read the letter in full.

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