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This is part of a multi-part series (Introduction, Part 1) on the U.S. Commodity Futures Trading Commission’s (“CFTC”) Feb. 20 implementation of CFTC Rule §1.44 (the “Proposed Rule”) and related proposed amendments. Third. Other CFTC regulations.
This part provides background information on the nature of the relationship between institutional investors and their investment managers. Because that relationship is one of the primary reasons for the proposed rule in the first place.
A futures customer agreement between a futures merchant (“FCM”) and some of its customers provides that different accounts of the same customer at the FCM are treated independently of each other, i.e., in effect, the same as the customer’s assets. It is common for a clause to clarify what is being handled. Another legal entity. The proposed regulations refer to such accounts as “separate accounts.”
Investment managers are typically agents of their clients and open derivatives trading accounts with the FCM on behalf of their clients, i.e., customers of the FCM. In other words, FCM deals with the customer’s agent rather than the customer (In other wordsprincipal) itself.
Institutional investors, such as investment funds and pension plans, may hire multiple investment advisers to manage their investors’ assets. Also, a single institutional investor may hire the same investment advisor to manage multiple accounts for the same investor according to different investment strategies (for example, equity obligations and debt obligations).
In such situations, the same beneficiary (In other wordsInstitutional Investor) has one or more agents (In other wordsInvestment Manager), each account is managed independently of the other.
From the perspective of institutional investors and their investment managers, each account has its own risk and return profile, and the assets and liabilities of that account are effectively independent of the assets and liabilities of other accounts. Additionally, each account is generally governed by its own investment strategy, including limits on the amount and type of derivatives allowed.
In short, despite common beneficial ownership, the assets of one account are not considered available to repay the debts of another account. This is because the intention of investors with separate accounts is to separate one account from another.
To be clear, institutional investors do not necessarily segregate investment obligations at the “account level” to prevent intermediaries such as FCMs from accessing client assets in the event of a default. Rather, such segregation reflects the fact that each account actually has access to the assets. Individual investment strategies with their own risk profiles and limitations.
Therefore, investment managers take risk positions on behalf of their clients based on available assets. exclusively At the account level.
And importantly, FCM performs risk management analysis for each account based on the assets in that account, rather than on an aggregated or multi-account basis.
In the next part of the series, we will consider various views arising from the relationship between institutional investors and their investment managers, particularly as they relate to the proposed rule.
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