Ensuring Compliance with CFTC 1.73 to Manage Client Risk Exposure

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Summary

Sagence’s deep experience in financial regulatory compliance helped a multi-national futures clearing merchant (FCM) better understand client risk exposure and ensure compliance with CFTC 1.73.

Challenge

Our client, a multi-national full service brokerage and one of the largest FCM’s in the world needed to create risk-based limits for all futures and options positions being cleared and executed to comply with CFTC 1.73. The FCM is also responsible for monitoring adherence to communicated risk-based limits intraday. They required capabilities to evaluate their ability to liquidate, in an orderly manner, the positions in customer accounts and estimate the cost of liquidation.

Solution

The Sagence team profiled client exposure through various execution platforms and clearing patterns to establish risk-based limits for customers. We communicated risk-based limits to execution brokers for clearing customers and committed to adhering to limits established by other clearing firms that trades are given up to through the use of a ‘Screening Agreement.’ We enhanced intraday monitoring capabilities through the clients existing risk platform and crated a limit database for the management of all communicated risk-based limits. Lastly, the Sagence team developed operational models for the onboarding and execution desk for compiling with CFTC 1.73

Results

The client had greater transparency and insight into customer risk exposure and is in compliance with CFTC 1.73. The Risk Organization enhanced its intraday monitoring capabilities through additional risk metrics and further transparency into clients’ positions. Additionally, the client has capabilities to conduct stress tests under extreme, but plausible conditions of all positions to expose accounts that could pose material risks; limit the impact of a MF Global event in the future.

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