“The FIA looks forward to partnering with end-users, regulators, legislators and clearinghouses to restore customer confidence in the futures markets,” said Michael Dawley, chairman of the FIA and managing director, Goldman Sachs & Co. “Although we still do not know for certain what caused the significant shortfall in customer segregated funds required to be held at MF Global, any loss of customer assets is entirely unacceptable and the reasons for the deficiency need to be identified.” 

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The Futures Industry Association submitted comments to the Commodity Futures Trading Commission on Jan. 17 related to the position limits rules that the agency adopted on Oct. 18, 2011. The final rules set limits for 28 physical commodity futures contracts as well as limits for swaps that are economically equivalent to such futures contracts , so called “referenced contracts.” The CFTC also set interim final position limit rules on spot month cash settled referenced contracts and asked for public comment on whether a different ratio or formula should be used to set these limits than the Commission used to set other position limits. The FIA letter addressed the interim rules.

The FIA requested that the CFTC either withdraw the rules until it has adequate data or substantially modify them. The FIA recommended that “at a minimum” the CFTC should establish higher and less restrictive limits rather than “automatically utilizing the same percentage of deliverable supply formula for different contracts linked only by a common commodity.” In addition, the FIA recommended that the CFTC provide a six-month safe harbor transition period, that the CFTC permit netting in the spot-month between all economically equivalent referenced contracts including physical delivery and cash-settled contracts, and that the CFTC only require aggregation of positions in cash-settled referenced contracts based on common control.

“Withdrawal of the position limits rules is the only action that will ensure the Commission does not impair liquidity, efficient price discovery, and the ability of market participants to hedge against risk at a particularly fragile time for the U.S. economy,” the FIA wrote.

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The FIA has expressed support for a petition filed by ICE Clear Credit for regulatory approval to hold customer positions in credit default swaps in a single futures account so that the clearinghouse and its members can offer portfolio margining to their customers.

The petition, currently under review by the Commodity Futures Trading Commission and the Securities and Exchange Commission, proposes to commingle credit default swaps held by customers, including broad-based index CDS, narrow-based index CDS and single-name CDS, as well as the funds posted by customers to margin these products, in a single customer omnibus account that is subject to section 4d(f) of the Commodity Exchange Act and Chapter 7 of the Bankruptcy Code. The ICE petition also asks for permission to calculate margin for the customer omnibus account on a portfolio margin basis, thus allowing margin offsets between index and single-name CDS.

In a comment letter submitted on Dec. 21 to the CFTC and SEC, the FIA said it supports the petition because of clarifying changes made in the Bankruptcy Code by section 713 of the Dodd-Frank Act. That law amended the Securities Exchange Act to provide that cash and securities, including security based swaps, that are carried in a futures segregated account in accordance with an approved portfolio margining program will be subject to commodity broker liquidation provisions of Chapter 7 of the Bankruptcy Code.

The FIA acknowledged in its letter that the association had raised concerns previously about the bankruptcy treatment of such commingled accounts, but said those concerns were addressed by the Dodd-Frank amendment, which removed “a major impediment to implementation of portfolio margining.” The FIA also said it agreed with ICE Clear Credit that a commingled portfolio margining account would allow the clearinghouse to provide its clearing members and their customers with “greater operational efficiencies, capital efficiency and a more comprehensive offering of products that can be cleared.”

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In its letter, the FIA noted that the IRS proposal would define “notional principal contracts” in such a way that it might include certain futures contracts, and in so doing exclude those contracts from Section 1256. In addition, options on such futures contracts would no longer be classified as non-equity options under Section 1256 and would lose Section 1256 treatment.      

 “In our view, a far better approach to implementing the swap exclusion would be to simply exclude from Section 1256 treatment those futures contracts that have cash flow payments prior to maturity separate and apart from variation margin payments,” the FIA said. “Under this approach, traditional futures contracts and options on these contracts would continue to receive Section 1256 treatment, but futures contracts that are structurally equivalent to OTC swaps would be excluded from Section 1256.”

Click here for the comment letter