The Financial Services Authority, UK financial services regulator has included spot forex contracts in its Title Transfer Collateral Arrangements since 1st October 2011.
The regulator has been under extensive pressure post Lehman and Credit Crisis by governments and industry bodies to put more measures in regulations of OTC products. The Dodd Frank rulings are a clear indication of the changes OTC products are facing.
The Title Transfer Collateral Arrangements can be defined as (in legal terms): a title of transfer of financial collateral arrangement or a security financial collateral arrangement, whether or not these are covered by a master agreement or general terms and conditions.
TTCAs are utilised by derivatives firms that enter into margined transactions with clients – primarily contracts for differences (CFD) and spread betting firms in the context of retail clients.
TTCAs allow those firms to treat margin (the amount paid by the client as collateral to open the position or bet) as their own working capital, rather than client money (which must be segregated). Often, those firms subsequently use that money to fund their hedging arrangements, or other business ventures. In the event of a firm’s insolvency, margin money that fell under a TTCA would be recoverable only on an unsecured creditor basis (rather than a ring-fenced trust basis), and might therefore be irrecoverable if the firm has no assets to distribute on insolvency.
The new ruling could pose difficulty for small to medium-sized brokers who use some client funds to assist them in hedging or covering exposure. Firms offering high leverage e.g. 500:1 need additional capital to fund their position with their prime brokers which are typically 33:1.
FSA is strengthening its position as the market leader in OTC derivates and with its stringent policies and procedures, it emphasizes protection for clients on all levels.