By Tom Polansek
Sept 26 (Reuters) – The Commodity Futures Trading Commission
should reconsider a proposal to bar brokers from using excess
money from one customer to cover the temporary shortfall of
another, a top U.S. derivatives regulator said on Thursday.
CFTC member Scott O’Malia, in a speech at a derivatives
conference in Geneva, said the agency had not assessed the cost
that the rule would impose on futures customers.
The proposal is part of a broad regulatory effort to protect
customer money after the failures of two brokerages, MF Global
Inc and Peregrine Financial Group, led to shortfalls in client
funds.
However, futures brokers say it would impose unnecessary
costs that could drive traders away from regulated markets, and
would put more, not less, customer money at risk in the event a
brokerage fails.
The CFTC proposal “makes no effort to quantify the cost
borne by those customers, or to link that cost directly to the
actual risk those customers introduce into the derivatives
markets,” O’Malia said in remarks released by the CFTC.
At issue is the collateral, known as margin, that customers
lodge with their brokers to back their futures trades.
Under the proposal, brokers would be required to calculate
the potential margin deficit for each customer throughout the
trading day. Then they would have to set aside an amount equal
to the gross estimated deficit so that no customer’s excess
margin is used to cover the position of another customer.
The CFTC had allowed brokers to meet their margin
requirements by maintaining additional funds in an amount equal
to the net deficit. The amount was calculated once a day, not in
real time.
To stay in compliance, brokers have said they will likely
need to collect extra money from customers ahead of time.
It would be a big shift for farmers and grain elevators who
use futures markets to hedge their production risks. They “have
indicated they aren’t able to shift funds like large commercial
banks and need flexibility to make their margin payment,”
O’Malia said.
“When the rules propose reforms that significantly increase
the cost to a point that it becomes uneconomic to hedge, it is
hard to argue that we are protecting customers,” he said.
Last week, the National Grain & Feed Association, the
largest U.S. grain group, and 20 other agricultural groups told
the CFTC that the rule would discourage crop producers from
using futures markets to offset their risks.
“If adopted, customers will be exposed to significantly
greater financial risk,” the groups wrote in a letter.
ISDA, the main lobby group for swaps dealers, told
regulators earlier this year that the new rule could cost $200
billion to $250 billion for the derivatives industry as a whole.
The CFTC is expected to decide soon whether to adopt the
rule.
(Reporting by Tom Polansek; editing by Jim Marshall)
