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CFTC Raises Capital Requirements for Brokers, Futures Merchants

The Commodity Futures Trading Commission (CFTC) on Thursday said it has adopted amendments to help ensure that market participants have adequate financial backing for the risks that are inherent in the market. The CFTC action comes as part of Washington's multi-pronged overhaul of the financial regulatory system following the economic crisis of the last few years.

The amendments will increase the minimum adjusted net capital requirement for introducing brokers (IB) from $30,000 to $45,000, and for futures commission merchants (FCM) from $250,000 to $1,000,000. The amendments also increase an FCM's margin-based capital requirements for noncustomer positions that the firm carries from 4% of the maintenance margin requirements to 8% of the maintenance margin requirements. The amendments also require capital computations for cleared over-the-counter positions carried in customer and noncustomer accounts of the FCM, similar to the computations currently required for exchange-traded futures in such accounts.

In the Federal Register, the CFTC said most FCMs already meet the new net capital requirement. "The effect of such a change also would be minimized because, as of Sept. 30, 2009, all but two FCMs holding customer funds already maintain adjusted net capital of $1 million or more," the Commission said.

However, the CFTC said the increases were necessary to deal with inflation. "The adjusted net capital requirements adopted in 1996 of $30,000 for IBs and $250,000 for FCMs do not reflect inflation and generally are no longer consistent with the regulatory objective of requiring registrants to maintain a minimum base of liquid capital from which to meet their financial obligations, including their obligations to customers," the Commission said.

Driven by the financial market excesses that led to the recent collapse of major financial institutions, the U.S. House of Representatives in mid-December passed by a vote of 223 to 202 a financial regulatory reform bill that would regulate OTC derivatives for the first time, set position limits for futures commodities trading, create a Consumer Financial Protection Agency and set an orderly process for winding down large, failing non-bank financial institutions (see NGI, Dec. 14, 2009).

If passed, the financial regulatory reform bill would greatly expand the regulatory powers of the CFTC and its responsibility for limiting excessive speculation in the commodities markets. A Senate committee is considering similar legislation and it is likely to be introduced on the Senate floor in early 2010 (see NGI, Nov. 16, 2009).

The new amendments will become effective in 90 days.

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