Wall Street Gets More Leeway to Invest Client Margin Under CFTC Plan

(Bloomberg) — Wall Street futures-trading firms would get more flexibility to invest the margin they collect from clients under a new US proposal that removes a few guardrails erected after the financial crisis and the implosion of MF Global Holdings.

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The Commodity Futures Trading Commission’s plan announced Friday would allow futures brokers and derivative clearing houses to invest customer margin in the sovereign debt of Canada, France, Germany, Japan and the UK, as well as short-term US Treasury exchange-traded funds. It also would eliminate corporate notes, bonds and commercial paper as acceptable investments.

The measure marks a years-long drive by the Futures Industry Association and other market players to get the swaps and derivatives watchdog to loosen some restrictions on safeguarding client assets. Those restraints were proposed in 2010 as a response to the global financial crisis and finalized in 2011.

The latest rule changes wouldn’t unwind the toughest restrictions on handling client money that were put in place in December 2011 after MF Global’s wrong-way bets on European sovereign debt fueled the firm’s collapse. Still, the changes would mark a hard-fought victory for Wall Street.

The FIA, whose members include big banks like JPMorgan Chase & Co. and Goldman Sachs Group Inc., submitted a joint petition along with CME Group in May seeking the changes. Invesco Capital Management LLC, which operates a commodity pool, had asked for the changes for Treasury ETFs in a September petition.

Invesco and the FIA didn’t immediately respond to requests for comment. CME declined to comment.

CFTC Chairman Rostin Behnam called the proposal a “prudent, periodic reassessment” of the agency’s customer-protection regulations for futures brokers and derivatives clearinghouses.

The proposed changes would put futures brokers on more equal footing with derivatives clearinghouses, which have more leeway on where they can invest customer funds. Alignment of the types of permitted investments between the two groups of firms “is an essential component to maintaining market continuity and resiliency for customer clearing,” Behnam said.

The plan garnered bipartisan support from the commission, though Democratic Commissioner Christy Goldsmith Romero cautioned that the agency should proceed cautiously in undoing post-crisis reforms.

A fellow Democrat, Commissioner Kristin Johnson, said the blueprint’s plan to use credit default swap spreads to determine whether foreign bonds qualify should be carefully considered for each instrument “so that history does not repeat itself,” referring to the tumult in foreign sovereign debts more than a decade ago.

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