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."
ISRI’s 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 last year.
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 CFTC’s 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 Global’s 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 (merchant’s) benefit."
ISRI’s nonferrous committee in July appointed a subcommittee of companies affected by MF Global’s demise to review and analyze the CFTC’s 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 ISRI’s position.