Better Markets filed a Comment Letter to the Commodity Futures Trading Commission (CFTC) on a Proposed Rule on Foreign Sovereign Debt.

Why it Matters.  The Commodity Futures Trading Commission’s financial responsibility framework, aimed at protecting customer funds in CFTC-regulated derivative transactions, emphasizes the crucial practice of segregating customer funds from the assets of Futures Commission Merchants (FCMs) and Derivatives Clearing Organizations (DCOs). This segregation, mandated by the Commodity Exchange Act and Commission regulations, ensures that customer funds are held in designated accounts separate from those of FCMs or DCOs, thereby maintaining trust and integrity in financial transactions. This separation not only ensures the proper use of customer funds for their intended trading activities but also acts as a safeguard for the prompt return of funds in cases of FCM or DCO insolvency, as highlighted by the failures of MF Global and Peregrine Financial Group. This highlights the framework’s commitment to safeguarding client investments and mitigating systemic risks in the derivatives market.

What we said. Better Markets argues that the CFTC should not adopt the portion of the Proposed Rule relating to foreign sovereign debt as permissible investments because the agency lacks a substantial, public interest-driven reason to alter the cautious and prudent regulation established post-MF Global’s collapse. It is important to remember that MF Global’s disastrous bets on European sovereign debt were a key factor in its downfall.  Given this history, allowing investments in sovereign debt, even from countries known for their stable economies, presents a move that warrants caution, as it might compromise the protection of customer funds in favor of expanding the financial industry’s quest for increased profits.

Bottom Line.  Instead of adopting the Proposed Rule relating to foreign sovereign debt, Better Markets supports the continuation of evaluating exemptive requests on an individual basis. This approach, effective over the past 12 years, enables nuanced assessments of each case, taking into account specific circumstances, public interest, and current market liquidity. It reduces systemic risks while allowing for adaptability in response to market shifts. This method offers a more targeted and flexible approach compared to a fixed rule. In rapidly evolving markets, adjusting exemptive orders is often quicker and more efficient than revising regulations.