This is the third of a multi-part series (Introduction; Part 1) on a February 20 proposal by the U.S. Commodity Futures Trading Commission (“CFTC”) to implement CFTC Regulation §1.44 (the “Proposed Rule”) and related amendments to other CFTC regulations.
This part will provide background information about the nature of the relationship between institutional investors and their investment managers, since that relationship is one of the primary reasons for the Proposed Rule in the first instance.
This is the second of a multi-part series on a February 20 rule proposal by the U.S. Commodity Futures Trading Commission (“CFTC”) to:
(1) require every futures commission merchant (“FCM”) to ensure that a customer does not withdraw funds from its account with the FCM if the post-withdrawal balance of that account would be insufficient to meet the initial margin requirements applicable to that customer (a “Margin Adequacy Requirement”); and
(2) permit an FCM to treat the separate accounts of a single customer as accounts of separate entities, subject to the satisfaction of risk-mitigation conditions.
To implement the Margin Adequacy Requirement in the separate account context, the CFTC has proposed the promulgation of new CFTC Regulation §1.44 (the “Proposed Rule”) and related amendments to various other existing CFTC regulations.
On February 20, 2024, the U.S. Commodity Futures Trading Commission (the “CFTC”) proposed regulations under the Commodity Exchange Act (the “CEA”) that will be of particular interest to futures commission merchants (“FCMs”) and their customers, including institutional investors and their investment managers.
Mandatory TBA Margining under FINRA Rule 4210 Starts May 22, 2024
On August 18, 2023, the Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 23-14 announcing that mandatory margining of certain delayed delivery agency mortgage-backed securities, including so-called TBAs (or “To Be Announced” securities), will go into effect on May 22, 2024.
This regulatory initiative began in 2012 as an industry standard promulgated by the New York Fed’s Treasury Market Practices Group.
Then, in 2016, FINRA proposed amendments to its Rule 4210, but deferred the implementation date of those amendments several times since their initial proposal. As summarized by FINRA:
FINRA has amended the requirements relating to Covered Agency Transactions that FINRA originally adopted in 2016. Covered Agency Transactions include (1) To Be Announced transactions, inclusive of adjustable rate mortgage transactions, (2) Specified Pool Transactions and (3) transactions in Collateralized Mortgage Obligations, issued in conformity with a program of an agency or Government-Sponsored Enterprise, with forward settlement dates, as recapped more fully in [Regulatory Notice 23-14].
This week’s BR Derivatives Report Regulatory Review focuses exclusively on a rule proposal issued by the U.S. Commodity Futures Trading Commission (“CFTC”) on October 2, 2023.
Type of Market Participant Involved
Registered Commodity Pool Operators (“CPOs”) and Commodity Trading Advisors (“CTAs”) relying on CFTC Regulation 4.7
Summary
The Commodity Exchange Act (“CEA”) regulates the entity or, in some cases, individuals responsible for the operation of an investment fund. In the language of the CEA, such an entity or individual is referred to as a “commodity pool operator” or CPO, while the investment fund itself is referred to as the “commodity pool.”
Similarly, the CEA regulates an investment adviser that provides advice for compensation or profit with respect to the purchase and sale of certain derivatives and other leveraged types of investments. Again, in the language of the CEA, such an adviser is a “commodity trading advisor” or CTA, while the derivatives and investments are called “commodity interests.”
The general regulatory architecture under the CEA involves the registration and substantive regulation of CPOs and CTAs through a myriad of disclosure, reporting, and recordkeeping obligations that apply to their investment and solicitation activities. Notably, the CFTC has issued its Regulation 4.7 to provide certain qualifying CPOs and CTAs relief from most of these obligations.