Proposal to Provide Exemptive Relief to Facilitate Cross-Margining of Customer Positions Cleared at CME, Inc. and FICC

Summary

SIFMA and SIFMA AMG provided comments to the U.S. Commodity Futures Trading Commission (CFTC) in support of the CFTC’s proposed order (the “Proposal”) providing exemptive relief from the Commodity Exchange Act (“CEA”) and CFTC regulations to allow the Chicago Mercantile Exchange, Inc. (“CME”) and the Fixed Income Clearing Corporation (“FICC”) to make their existing cross-margining arrangement available to certain customers of dually registered broker-dealers (“BDs”)/futures commission merchants (“FCMs”), subject to the conditions detailed in the Proposal.

Excerpt

As discussed in the Proposal, the CEA and CFTC regulations prevent FCMs that are dually registered as BDs with the Securities and Exchange Commission and are joint clearing members of CME and FICC from holding futures customer funds and futures customer positions with any other positions or funds. These restrictions arise from the existing segregation, custody, and permissible investment requirements applicable to futures customer funds, rather than from concerns regarding the risk-reducing nature of cross-margining itself. In addition, the CEA and CFTC regulations require that futures customer funds be held with a bank or trust company. Therefore, CME and FICC petitioned the CFTC to grant exemptive relief permitting BD-FCMs to (1) hold non-futures customer funds and positions together with futures customer funds and positions in a futures account, and (2) deposit at FICC, and enable FICC to hold customer funds and margin associated with futures positions. SIFMA and SIFMA AMG support the Proposal as an appropriately tailored approach to achieving broader capital efficiency while maintaining the customer and market resiliency protections of centralized clearing.

As noted in the CFTC’s Global Markets Advisory Committee’s (“GMAC”) February 2024 recommendation entitled FICC-CME Customer Position Cross-Margining Structure Recommendation, there is a history of regulated central clearing counterparties successfully leveraging limited cross-margining to optimize capital efficiency without undermining the market resiliency afforded by centralized clearing and associated margin requirements. ¹ For example, since 2004, CME and FICC have had a cross-margining agreement that applies only to the proprietary futures and securities positions of CME-FICC joint clearing members, enabling them to more efficiently manage the risk associated with their proprietary positions in U.S. Treasuries and Treasury futures as a single portfolio. The Proposal would extend this cross-margining program to customer accounts of eligible BD-FCMs (many of which are sophisticated institutional customers), allowing participating customers to benefit from the same level of capital efficiencies as BD-FCMs.

Expanding the CME-FICC cross-margining program to customers of eligible BD-FCMs, subject to the conditions such as customer opt-in, continued segregation of customer funds, and compliance with risk management and collateral requirements described in the Proposal, also will have broader benefits to the financial markets. As noted in the Proposal, cross-margining reduces clearing costs. These cost reductions will help support and counterbalance potential clearing cost increases Treasury market participants may experience with mandatory clearing of certain U.S. Treasury transactions taking effect later this year and in 2027. As mandatory clearing requirements expand, the volume of cleared Treasury trades will increase, making capital efficiency through cross-margining even more important for market participants. In addition, the clearing efficiencies flowing from cross-margining also will ensure that margin requirements reflect risk offsets in participants’ portfolios which generally will enhance liquidity in the Treasury markets.