The United States Commodity Futures Trading Industry (CFTC) approved the finalization of new rules proposed a year earlier to improve the futures industry. The members of the commission voted in favor of the changes 3-1 despite warnings from brokers, grain traders, and exchanges that the new regulations would hold back markets.


The new rules were created by the CFTC

The new rules were created by the CFTC in response to the irregularities in customer accounts committed by MF Global and Peregrine Financial Group in 2011 and 2012, respectively. The measures are intended to protect customers by closing loopholes and reinforcing internal risk controls. It will also compel brokers to provide more information to their clients.

According to CFTC chairman Gary Gensler, “This new information is critical in today’s world of high-frequency trading. Thus, with these reforms, the commission will get additional tools to oversee the markets’ largest day traders and high-frequency traders.”

CFTC Commissioner Bart Chilton added, “It’s really pretty clear that we are supposed to protect customer funds all the time. In fairness, we haven’t done as well, if you look at the history, as I think we should have. This rule gets to where we need to be.”

The new rules prohibit brokers

The new rules prohibit brokers from using the excess margin of a particular customer to guarantee the shortfalls of another client. Brokers had been quite comfortable with such practices in the past. In the case of MF Global, the company used margin funds to fulfill its obligations causing $1.6 billion discrepancy in customer accounts, which led to its bankruptcy.

Brokers will no longer be able use excess customer margin to cover gap, instead they have to use their residual interest to resolve any deficit. The new measures also require stricter auditing standards and brokers are required to submit daily reports including information about each of the accounts of every client. Brokers will submit the reports electronically.

Based on the estimate of the Futures Industry Association, brokers need to hold $100 billion more in customer accounts under the strict legal interpretation of the new rules. The association opined that it would push smaller brokers and clients out of the market.

Earlier this month, CME Group Inc (NASDAQ:CME), the largest U.S. futures exchange warned that the new rules would “unnecessarily drain liquidity and increase the cost of hedging financial and commercial risk.”

On the other hand, CFTC Commissioner Mark Wetjen described the new rules “reasonable and measured.”