Clearinghouses, not regulators, should be responsible for imposing risk management practices on clearing brokers when it comes to monitoring their end customers, says the trade group representing futures commission merchants.

The key reason: implementing any requirements proposed by the Commodity Futures Trading Commission would be pretty operationally difficult for FCMs, according to the Futures Industry Association.

In August, the CFTC sought comment on a new rule 1.73, which if implemented would require that members of clearinghouses processing derivatives would need to establish risk-based limits in proprietary accounts and customer accounts based on position size, order size margin requirements or similar factors, use automated means to screen orders for compliance with risk-based limits; monitor adherence to the risk-based limits intraday and overnight; conduct stress tests of all positions in the proprietary accounts iand in each customer account that could pose material risk to the FCM at least once each week; evaluate the FCM's ability to meet initial margin requierments at least once a week; evaluate the FCM's abnility to meet  variation requirements in cash once a week; evaluate the ability to liquidate positions in propretiary and customer accounts and estaimate the cost of liquidation at least once a month; and test all lines of credit at least once per quarter. FCMs will also be rqwuire to establish written procedures to comply with the CFTC's new rules.

To the extent that reviewing customers' trades is possible before they are executed, the executing broker and not the clearing broker can do so, according to the FIA. "Clearing member FCMs have no ability to screen customers' trades using automated means or otherwise before trades are executed," says the trade group in a September 29 letter to the CFTC. "To the contrary, they may not be aware of the trades until later in the day when they are given up by the FCM."

In addition, estimating the cost of liquidating defaulting customer positions is difficult, if not impossible, to achieve, says the FIA.

-- This article first appeared on Securities Technology Monitor.


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