NEW YORK The Institute of
Scrap Recycling Industries has asked the Commodity Futures
Trading Commission (CFTC) to give commodities customers the
option to opt out of granting futures commission merchants
access to their funds for investment purposes.
In order to open a commodity
trading account with a particular futures commission merchant,
a customer currently must comply with a clause in the agreement
that allows merchants to use client funds at their own
discretion, according to a letter from ISRI. "Allowing (a
futures commission merchant) unfettered use of customer funds
without a mechanism for such funds to be guaranteed or insured
exposes those customer funds to risk of loss."
ISRIs letter was in
response to measures proposed by the CFTC in October to enhance
protection for customers and customer funds held by futures
commission merchants and derivatives clearing organizations as
a result of brokerage MF Global Holdings Ltd.s collapse
Such measures include requiring
futures commission merchants to hold sufficient funds in
secured accounts to meet their total obligation to both U.S.
and foreign customers foreign contract markets; to adopt
policies and procedures on supervision and risk management of
customer funds; and to provide potential customers with
additional disclosures addressing firm-specific risks.
"We applaud the CFTC for taking
such strong measures in connection with the enhanced customer
protections and we fully support all of the proposals. ...
However, there remain critical open issues of concern to metal
recyclers," ISRI said. While the CFTCs proposals seek to
create a higher level of trust and confidence that customer
funds will not be put at risk by futures commission merchants,
it does not contain a provision that provides commodity
customers with an option to opt out of granting merchants
access to their collateral, ISRI said.
Metal recyclers use hedging on
commodity futures exchanges to mitigate risk of exposure to
metals pricing volatility. Under their agreements with
futures commission merchants, they have to agree to the clause
in question to be able to trade.
"Commodity customers are
powerless to negotiate changes," ISRI said. "We ask that the
CFTC mandate that (futures commission merchants) provide
commodity customers the option to opt out of
granting (futures commission merchants) access to invest
customer funds yet permit those commodity customers to continue
to actively trade."
The customer funds that are
still unavailable after MF Globals demise represent a
significant level of working capital that might never be
recovered, according to ISRI. "Many metal recyclers who ...
have hundreds of millions of dollars or more still tied up in
both the domestic and U.K. MF Global cases would clearly prefer
that (futures commission merchants) not have the ability to
invest customer funds for the (merchants) benefit."
ISRIs nonferrous committee
in July appointed a subcommittee of companies affected by MF
Globals demise to review and analyze the CFTCs
proposals. The comments to the CFTC reflect their findings.
ISRI is asking for other
interested parties to submit comments during the public comment
period, which ends Jan. 14. Parties can write their own
position or submit a comment on ISRIs position.