CFTC blocks its ears to industry wailing over margin rules

Despite industry hand-wringing and earlier indications of flexibility, the CFTC yesterday signalled that it sees little prospect of relaxing its long-standing proposed margin rules.  Current practice allows a broker to use one client’s excess margin to cover the shortfall in another’s, allowing clients up to three days to meet a margin call. The proposed rule mandates client money segregation, implying that a broker will have to request excess initial margin to cover an anticipated shortfall, or use its own capital to cover an actual one. Responding to criticism, CFTC staff said the rule merely mirrored existing law. ISDA estimates that the margin rules will cost the futures industry up to $120 billion and, reflective of its larger size and controversially larger margin requirements, up to $558 billion for the swap industry. Futures broker RJ O’Brien described the rule as “very, very costly”.

An impartial observer may regard the numerous scandals occasioned by the temptation of client money as equally or more costly. In the long shadow cast by Peregrine Financial and MF Global, it was always likely that the CFTC would take a strict interpretation of rules that Chairman Gary Gensler has previously said are “at the heart of our regulatory regime”. As usual, in order to avoid the unproductive immobilisation of capital, practical implementation will require significant investment in enhanced reporting systems and communication processes.