CFTC agrees to modify demands

LONDON (FNS)--The Commodity Futures Trading Commission (CFTC) yesterday agreed to modify its demands that American customers doing business with London Metal Exchange brokers should have their accounts fully segregated.

The deal with the United Kingdom's Association of Futures Brokers and Dealers proposes that LME brokers use bank guarantees or letters of credit to secure any net-forward profits of their U.S. customers. The guarantees or letters can be for individual clients or in the form of a trust to cover all of a broker's American clients, according to the AFBD. "These arrangements are not available to U.S. brokers under U.S. segregation rules and thus acknowledge the unique nature of the LME trading and clearing system," it said.

Brokers also can opt for complete segregation of their U.S. customers' accounts if they wish.

The deal will take effect Nov. 15 unless the CFTC decides to drop its demands completely, which is unlikely. Christopher Sharples, the AFBD's chairman, said the association believes it has won the best deal possible and it will not fight the proposal any longer. "We have done what we can. It is now up to the LME to decide what to do next," he said.

LME officials could not be reached for comment at presstime on whether they were satisfied with the agreement.

The agreement means brokers will not have to set up a separate transaction account for U.S. customers at the clearing house, ICCH Ltd., which would have been costly. It also eliminates the need to establish client bank accounts for American customers, the AFBD said.

Sharples said the proposal should be a major improvement on the original CFTC requirements, "although we would have preferred for the CFTC to have agreed to our original proposals, which allowed U.S. commercial customers to opt out of segregation if they did not require it."

The CFTC said it could not do this because the regulatory systems in the United States and the United Kingdom were not the same, Sharples explained.

The proposal brings to an end a battle the AFBD has been fighting with the CFTC since May when the U.S. agency insisted U.S. customers could not opt out of segregation when dealing with British brokers. The AFBD used the LME as its test case because of the unique nature of the market, Sharples said.

The United Kingdom's Department of Trade and Industry and the CFTC still are discussing whether the United States has any jurisdiction over British brokers, however. Sharples said that is a matter for the courts to rule on and the AFBD does not plan to become involved in those talks.

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