Collateral Damage: Adopting the LSOC Model and Insurance in the US Futures Markets

It is confounding that futures customers currently receive a lower level of protection than cleared swaps customers under US law. This legal phenomenon has occurred because the law in the US derivatives markets developed in a piecemeal fashion over several decades.

The Commodity Exchange Act (“CEA”) was designed to include protections for the collateral (known as margin) that futures customers post with their Futures Commission Merchants (“FCM”).[1] Section 4d (a) contains a ‘segregation requirement’, which places the margin of a futures customer into a trust account. This prohibits an FCM from “using” a customer’s margin for its own purposes … Read more