Historically, many investment managers have negotiated limited recourse provisions into derivatives trading agreements entered into by the managers on behalf of their clients with banks, broker-dealers, and futures commission merchants (FCMs). In short, these provisions state that only the assets in the specified account under the control of that particular manager can be used to make the other party to the agreement whole for losses and costs that relate to the specified account.
However, recent regulatory pronouncements from two divisions of the Commodity Futures Trading Commission (the “CFTC”) and the Joint Audit Committee (the “JAC”) of several large futures exchanges and the National Futures Association prohibit the use of limited recourse provisions in futures customer agreements. This blog post is Part 1 of a series of posts that will address the impact of these recent regulatory developments on investment managers.
We start with the basics – investment management relationships and the use of limited recourse provisions in derivatives trading documents. Additional posts in this series will address the regulatory pronouncements and how those pronouncements may impact relationships that investment managers have with their clients and the FCMs through which the managers are trading on behalf of their clients. Continue Reading