CFTC staff say clearing houses may use trust companies for daily settlement

The CFTC’s Division of Clearing and Risk issued a no-action letter on November 5 saying it won’t recommend enforcement against any derivatives clearing organization that uses a trust company for daily settlements with clearing members. The condition is that the clearing house treats the trust company as if it were a settlement bank for compliance with the CFTC’s settlement rules.

The letter answers a request from Nodal Clear, LLC. The issue is one of wording. The CFTC’s rule on settlement procedures defines a settlement bank, in relevant part, as “a bank,” and doesn’t mention trust companies. The CFTC’s customer protection rules, by contrast, require customer funds to be held with a “bank or trust company.”

The digital asset angle

According to the letter, Nodal represents that state-regulated trust companies are among the leading custodians of digital assets. It says clarifying the rule will help clearing houses accept those assets as margin collateral, by fitting them into their existing daily collateral workflows.

Nodal also argued that trust companies face comprehensive state oversight and that clearing houses can use their existing procedures for evaluating and monitoring settlement banks. It noted that the rule has not been substantively revised since it was adopted, while derivatives markets have evolved significantly.

What it means for traders

The letter changes who a clearing house can use to move money each day. It doesn’t itself approve any digital asset as margin, and the release says nothing about new collateral types. Traders would see any such change through clearing house and broker rules. Regulators elsewhere are looking at a related question: the Bank of England has consulted on tokenized collateral in central clearing.

The limits of the letter

The position applies to any derivatives clearing organization, not only Nodal, but it comes from the division alone and doesn’t bind the Commission. It concerns enforcement only and isn’t a legal conclusion on how the rules apply. Clearing houses still have to meet all other requirements, and different facts could void the letter. The division can also condition, modify, suspend or terminate it. Richard Haynes, the division’s acting director, signed it.