The Futures Industry Association has filed a comment letter with the Commodity Futures Trading Commission expressing its views on the CFTC’s proposed amendments to the minimum financial requirements for futures commission merchants and introducing brokers. The FIA strongly opposed two specific measures that would dramatically increase the capital requirements for FCMs and warned that these two changes could have anti-competitive effects. The FIA endorsed several other proposed amendments, however, including an increase in the minimum adjusted net capital of FCMs to $1 million, an increase in the capital required to cover the risk of non-customer positions, and the inclusion of OTC cleared derivatives in capital computations.
“The FIA fully supports most of the major provisions in the proposed rules as well as the overall objective of enhancing the financial integrity of the futures markets,” FIA President John Damgard said. “Assuring that FCMs maintain sufficient capital to maintain their futures-related and other business activities is absolutely essential to preserving customer confidence in our markets. The CFTC’s proposals are grounded on the recognition that our markets have undergone several important changes in recent years, most notably in the provision of clearing services to credit default swaps and other products traded over the counter. However, we believe that the current 8% charge for customer positions is sufficient and therefore we oppose an increase to 10%.”
Under the current rules, the minimum adjusted net capital requirement for FCMs must be 8% of the total risk margin requirement for positions carried in customer accounts, plus 4% of the total risk margin requirement for positions carried in non-customer accounts. The CFTC is proposing to raise this to 10% of the total risk margin requirement across both types of accounts. The FIA in its letter agreed with the CFTC that under conditions of financial stress, the risk associated with non-customer accounts may not necessarily be less than the risk associated with customer accounts. The FIA therefore expressed its support for applying the same percentage to customer and non-customer accounts in calculating an FCM’s risk-based capital requirement.
The FIA said, however, that it opposes the proposal to increase this percentage to 10% and instead encouraged the CFTC to require that risk-based capital be calculated at 8% for positions carried in both customer and non-customer accounts. The FIA said that an increase to 10% has not been justified and warned that it could harm competition by encouraging the further concentration of customer funds in a handful of FCMs.
The CFTC also asked for comment on whether firms that are dually registered as FCMs with the CFTC and as broker-dealers with the Securities and Exchange Commission should maintain adjusted net capital equal to the sum of the firm’s CFTC and SEC capital requirements. Under current rules, FCM/broker-dealers are required to meet the greater of the two requirements. In its comment letter, the FIA expressed strong opposition to such a change, which could have the same adverse impact on the level of competition in the industry as the proposed increase to a 10% requirement.
“In light of the fact that the Commission’s current capital rules served the industry and the markets well during the recent financial crisis, including the unwinding of Bear Stearns & Co. and the bankruptcy of Lehman Brothers Holdings, Inc., we encourage the Commission to move cautiously before imposing additional capital requirements that may be unnecessary to protect customers and the financial integrity of the markets and would serve only to reduce further competition within the financial services industry,” the FIA wrote.