CFTC suspends deadline on brokers’ margin

The main US futures regulator has indefinitely suspended a plank of customer protections passed in response to the catastrophic collapse of MF Global, reflecting the agency’s flexibility under a new chairman.

The rule addresses margin, or good-faith money that market participants post to back their positions in futures markets. Futures brokers collect and disburse margin to customers as the value of these positions fluctuates. There is often a delay between the time that brokers demand extra margin and customers are able to deliver it. In the interim, brokers put up their own funds to plug the gap.

After MF Global collapsed in 2011 it left a $1.6bn hole in customer accounts and two years later, the Commodity Futures Trading Commission passed a series of new customer safeguards. The most controversial was a rule addressing how brokers post their own funds, known as residual interest.

The rule said brokers must cover gaps in customer margin with their own funds by a day after discovering a shortfall. But the deadline would have sped up after December 2018 as the rule mandated brokers to contribute residual interest on the same day. FIA, the futures industry association, warned in 2013 that the new rule would require brokers to contribute an additional $100bn to customer fund accounts.

On Tuesday, the CFTC unanimously eliminated the automatic change in 2018, instead maintaining the “day two” deadline unless the commission decides otherwise.

The change is the latest sign of a more flexible approach to regulation under CFTC chairman Tim Massad since his arrival last June. The customer protection rule was passed under Gary Gensler, the hard-charging previous chairman.

Mr Massad said in a statement that an earlier deadline could help ensure sufficient margin but also impose costs on customers. The CFTC plans to study the costs and benefits of changing the deadline, he said.

The action, he said, “reflects one of my key priorities since taking office, which is to make sure our rules do not impose undue burdens or unintended consequences for the non-financial commercial businesses that depend on the derivatives markets to hedge commercial risks.”

The residual interest rule was fought not only by brokers but smaller customers such as farmers and grain merchants less able to meet margin calls immediately.

The National Grain and Feed Association said the revision “strikes the appropriate balance of customer protection and the financial interests of futures customers by removing the threat of pre-hedging for futures accounts”.