CFTC clears over-the-counter ethanol contracts

By Bryan Sims | October 06, 2008
Web exclusive posted Oct. 20, 2008 at 10:33 a.m. CST

The Commodity Futures Trading Commission has issued an order permitting the Chicago Mercantile Exchange to clear over-the-counter (OTC) ethanol contracts.

The CFTC issued an order Oct. 9 to the Chicago Board of Trade to permit the CME and clearing member futures commission merchants to commingle customer funds used to margin, secure or guarantee specified OTC cleared-only contracts in denatured fuel ethanol with other funds held in a segregated account. The order is in accordance with Section 4d of the Commodity Exchange Act.

A future commission merchant (FCM) is a merchant involved in the solicitation or acceptance of a commodity order for future delivery of commodities related to the futures contract market. An FCM is able to handle futures contract orders as well as extend credit to customers wishing to enter into those positions. These include many of the brokerages that investors in the futures markets deal with.

Additionally, the order calls for the CME and the FCMs to apply appropriate risk management procedures to these transactions and to provide specified information to the CFTC.

The CFTC also issued an interpretive statement regarding the treatment of customer funds related to cleared-only positions held by a futures commission merchant, in the event of that FCM's bankruptcy. The interpretive statement clarified the appropriate treatment under the commodity broker provisions of the Bankruptcy Code and Part 190 of the commission's regulations of claims arising from cleared-only contracts that, although executed or traded on a registered exchange, are subsequently submitted for clearing at a registered derivatives (or securities) clearing organization.