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Mr. John D. Fisher
U.S. Government Accountability Office
Financial Markets and Community Investment
441 G Street, N.W.
Washington, DC 20548
Re: SEC/CFTC Harmonization Report
Dear Mr. Fisher:
National Futures Association appreciates the opportunity to comment on the SEC/CFTC Harmonization Report. NFA is a registered futures association under the Commodity Exchange Act and a self-regulatory organization for the U.S. futures industry. Regulation and customer protection are all that we do.
The SEC/CFTC Harmonization Report contains twenty recommendations. However, NFA will limit its comments to the one recommendation regarding portfolio margining because of the complexity associated with making changes as well as the potentially negative implications of making mistakes in this area. There are numerous issues that need to be addressed and resolved. First and foremost, any recommendations must preserve customer protection and financial integrity. For the futures markets, the CFTC's customer segregation rules and the portability of customer commodity futures positions in the event of an intermediary's bankruptcy are critical. For example, with respect to Lehman Brothers, virtually all futures positions were safely transferred to a solvent firm within days and the futures markets continued to function normally. It is essential to preserve this portability especially during times of market stress.
The Report recommends legislation to facilitate the holding of (i) futures products in an SRO securities portfolio margin account and (ii) securities options, SFPs and certain other securities derivatives in a futures portfolio margin account. The Report further states that the Commissions should also undertake, with input from experts, the industry, and the public, to explore whether further modifications to portfolio margining would be in the public interest. NFA fully supports initiatives that lead to more efficient, competitive and well-functioning markets. However, NFA would like to emphasize the importance of completing this study prior to the consideration of any legislative changes.
Portfolio margining is also addressed in the financial regulatory reform legislation recently passed by the House of Representatives. Title III of the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) mandates that the CFTC, SEC and prudential regulators transmit to Congress recommendations for legislative changes to the federal insolvency laws to (1) enhance the legal certainty with respect to swap participants clearing non-proprietary swap positions with a swap clearinghouse; (2) clarify and harmonize the insolvency law framework applicable to entities that are both commodity brokers and registered BDs; and (3) facilitate the portfolio margining of securities and commodity futures and options positions held through entities that are both FCMs and BDs. Portfolio margining will require the Commissions to confront and resolve significant legal and regulatory issues. Further, relevant provisions of the Securities Investor Protection Act and the Bankruptcy Code may need to be addressed. As stated earlier, it seems prudent that a thorough study of these issues be completed prior to consideration of any legislative changes.
We appreciate having the opportunity to comment on the important issues raised in the SEC/CFTC Harmonization Report. Please do not hesitate to contact me if you have any questions.
Daniel J. Roth