The U.S. Commodity Futures Trading Commission approved the final rule today to segregate customer funds for cleared swaps. The rule is set to prohibit clearing organizations from using collateral of non-defaulting, innocent customers to protect themselves and their clearing members in swap trades.

“For the first time, customer money must be protected individually all the way to the clearinghouse,” said the Commission's chairman, Gary Gensler, in his opening statement at the meeting today. The rule was passed by a 4-1 vote.

In the final rule, all futures commission merchant (FCM) and derivatives clearing organization (DCO) must hold customer collateral in cleared swaps transactions in a separate account, detach from the property belonging to the FCM or DCO. The rule further outlines that the two entities must not use the collateral of one cleared swaps customer to cover the obligations of another cleared swaps customers or the obligations of the FCM.

Additionally, the rule also addressed how the customer collateral should be kept. Based on the Complete Legal Segregation Model proposed by the agency, collateral of all the FCM's cleared swaps customers can be kept together pre-bankruptcy in an account separate from the FCM or DCO. In the event of bankruptcy, DCO will only have recourse on customers' funds whose portfolios showed losses.

The rule was drawn and proposed last year by the Commission following the MF Global scandal which involved $600 million--and possibly as much as $1.2 billion--in customer's deposits that went missing after the financial derivatives broker filed for bankruptcy in late October last year. Those funds were supposed to be protected in the event of its bankruptcy.

“I believe that it is important to detail its (the rule) limitations, so that we do not offer market participants a misleading sense of comfort in light of the collapse of MF Global,” said Commissioner Scott O'Malia, adding that the rule only addresses the “fellow-customer” risk while ignoring two other important factors- operational risk and investment risk- that can still affect customers' investments.

At the meeting, the Commission also passed two other final rules including registration of swap dealers and major swap participants, and business conduct standards between the two with counterparties.

During the meeting, the CFTC also unveiled its proposed Volcker rule, which is identical to the versions proposed earlier by the other agencies involved in the rulemaking process. The Federal Deposit Insurance Corp., the Securities and Exchange Commission, the Federal Reserve, and the Office of the Comptroller of the Currency have all issued their proposals on the rule last year.

Commissioner Jill Sommers criticized the CFTC staff on the delay in the release of their version of the proprietary trading restrictions and prohibitions proposal. “As we vote on the Volker Rule proposal today, I can't help but question the timing of this vote and why the Commission did not join the other agencies in their proposal back in October. It certainly should not have come as a surprise to us last summer and early fall that the other agencies were getting close to being ready to issue their proposal. Moreover, we had a CFTC team dedicated to the Volker Rule, a team that hopefully was coordinating with the other agencies. Had we planned better, we could have joined the October proposal,” she said.