75162 Federal Register / Vol. 75, No. 231 / Thursday, December 2, 2010 / Proposed Rules 

1 7 U.S.C. 6d(a). 

2 7 U.S.C. 6d(f)(2). 

3Section 4d(f)(3)(A) of the CEA provides an 

exception permitting commingling ‘‘for 

convenience.’’ 

4 7 U.S.C. 6d(f)(6) (emphasis added). This section 

was added by Section 724(a) of Dodd-Frank, Public 

Law 111–203, 124 Stat. 1376. 

5Section 4d(a)(2) provides a similar exception 

permitting commingling ‘‘for convenience.’’. 

TABLE 1—SERVICE BULLETINS

Service Bulletin Revision Date 

328 Support Services Alert Service Bulletin ASB–328–57–037 .............................................................................. 2 May 20, 2008. 

328 Support Services Alert Service Bulletin ASB–328J–57–015 ............................................................................ 2 May 20, 2008. 

328 Support Services Service Bulletin SB–328–57–481 ......................................................................................... 1 October 15, 2009. 

328 Support Services GmbH Service Bulletin SB–328J–57–230 ............................................................................ 1 October 15, 2009. 

Issued in Renton, Washington on 

November 22, 2010. 

Ali Bahrami, 

Manager, Transport Airplane Directorate, 

Aircraft Certification Service. 

[FR Doc. 2010–30282 Filed 12–1–10; 8:45 am] 

BILLING CODE 4910–13–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 190 

RIN 3038–AD99 

Protection of Cleared Swaps 

Customers Before and After 

Commodity Broker Bankruptcies 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Advanced notice of proposed 

rulemaking; request for comments. 

SUMMARY: The Commodity Futures 

Trading Commission (the ‘‘CFTC’’ or 

‘‘Commission’’) seeks comment on 

possible models for implementing new 

statutory provisions enacted by Title VII 

of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (‘‘DoddFrank’’) concerning the protection of 

collateral posted by customers clearing 

swaps. 

DATES: Submit comments on or before 

January 18, 2011. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AD99, 

by any of the following methods: 

• Agency Web site, via its Comments 

Online process: http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: same as 

mail above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments by only 

one method. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that you believe is exempt from 

disclosure under the Freedom of 

Information Act, a petition for 

confidential treatment of the exempt 

information may be submitted according 

to the procedures established in CFTC 

Regulation 145.9, 17 CFR 145.9. 

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from www.cftc.gov that it may deem to 

be inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted or removed that 

contain comments on the merits of the 

rulemaking will be retained in the 

public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Robert B. Wasserman, Associate 

Director, Division of Clearing and 

Intermediary Oversight (DCIO), at 202– 

418–5092 or rwasserman@cftc.gov; 

Martin White, Assistant General 

Counsel, at 202–418–5129 or 

mwhite@cftc.gov; or Nancy Liao 

Schnabel, Special Counsel, DCIO, at 

202–418–5344 or nschnabel@cftc.gov. in 

each case, also at the Commodity 

Futures Trading Commission, Three 

Lafayette Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

This Advanced Notice of Proposed 

Rulemaking (‘‘ANPR’’) is intended to 

obtain comment from interested parties 

concerning the appropriate model for 

protecting the margin collateral posted 

by customers clearing swaps 

transactions. As discussed in more 

detail below, the statutory language in 

Dodd-Frank concerning the protection 

of swaps customer margin is 

substantially similar, though not 

identical, to analogous provisions in 

Section 4d(a) of the Commodity 

Exchange Act (‘‘CEA’’) 1 applicable to the 

protection of collateral posted by 

customers with respect to exchangetraded futures. The Commission 

therefore is seeking comment on 

whether to adopt a similar model to 

protect the margin collateral posted by 

customers clearing swaps transactions 

as it currently employs with respect to 

exchange-traded futures, or whether 

another model is appropriate. 

Section 4d(f)(2) of the CEA,2 as added 

by Section 724 of Dodd-Frank, provides 

that ‘‘property of a swaps customer 

[received to margin a swap]* * * shall 

not be commingled with the funds of 

the futures commission merchant or be 

used to margin, secure or guarantee any 

trades or contracts of any swaps 

customer or person other than the 

person for whom the same are held.3

Section 4d(f)(6) of the CEA makes it 

unlawful for a depository, including a 

derivatives clearing organization 

(‘‘DCO’’), that has received such swaps 

customer property ‘‘to hold, dispose of, 

or use any such * * * property as 

belonging to * * * any person other 

than the swaps customer of the futures 

commission merchant.’’ 4

The provisions applicable to the 

margin posted by exchange-traded 

futures customers are similar, but not 

identical. Section 4d(a)(2) provides that 

‘‘property received [by a futures 

commission merchant] to margin, 

guarantee or secure the [exchangetraded] contracts of any customer of 

such [futures commission merchant] 

* * * shall not be commingled with the 

funds of such commission merchant or 

be used to guarantee the trades or 

contracts * * * of any person other 

than the one for whom the same are 

held.’’ 5 Section 4d(b) makes it unlawful 

for a DCO that has received such 

customer property ‘‘to hold, dispose of, 

or use any such * * * property as 

belonging to * * * any person other 

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6 17 CFR 1.22. 

7See generally CEA 2(h), added by Dodd-Frank 

723(a). 

8See, e.g., Staff Roundtable on Individual 

Customer Collateral Protection (‘‘Roundtable’’) at 

20–21 (Statement of Mr. Szycher), 12, 79 

(Statements of Mr. Kaswell), 10 (Statement of Mr. 

Thum), available at http://www.cftc.gov/

LawRegulation/DoddFrankAct/OTC_

6_SegBankruptcy.html. 

9Roundtable at 18 (Statement of Mr. Szycher). 

10See Financial Resources Requirements for 

Derivatives Clearing Organizations, 75 FR 63113, 

63118 (proposed regulation 39.11(a)(1)) (Oct. 14, 

2010). 

11 Id. at 63119 (proposed regulation 39.29(a)). 

12Customers would not be exposed to loss in the 

case of a default arising from their FCM’s 

proprietary account. 

13See, e.g., CME Rule 802. 

14 See, e.g., Roundtable at 137–138 (Colloquy 

between Ms. Taylor and Mr. Maguire). 

15 See, e.g., Roundtable at 62–73 (Statements of 

Ms. Burke). 

than the customers of such futures 

commission merchant.’’ 

Commission Regulation (‘‘Reg. § ’’) 

1.22 6 prohibits a futures commission 

merchant (‘‘FCM’’) from using, or 

permitting the use, of one futures’ 

customer’s funds to margin, guarantee 

or secure another customer’s futures 

trades or contracts. Thus, if a futures 

customer sustains losses sufficient to 

cause it to have a debit balance (i.e., the 

customer owes the FCM money), the 

FCM must deposit its own capital to 

‘‘top up’’ the loss. Pursuant to existing 

industry custom and Reg § 1.20(b), 

however, futures commission merchants 

(‘‘FCMs’’) segregate futures customer 

property posted as collateral with a DCO 

on an omnibus basis: Such property is 

treated separately from the property of 

the FCM, but futures customers are 

treated as a group, rather than 

individually. 

Thus, if a futures customer suffers 

sufficient losses that the customer’s 

debit balance exceeds the FCM’s 

available capital, and such customer 

(the ‘‘defaulting customer’’) fails to 

promptly pay such loss, the FCM may, 

as a practical matter, be unable to ‘‘top 

up’’ the loss, and the FCM may be 

unable to make a required payment to 

a DCO with respect to that FCM’s 

customer account. Such an FCM would 

then be a defaulter to the DCO (a 

‘‘Defaulting FCM’’). In case of such an 

FCM default in the futures customer 

account, the DCO is permitted to use the 

collateral of all customers of the 

Defaulting FCM to meet the net 

customer obligation of the Defaulting 

FCM to the DCO (including the use of 

any customer gains to meet customer 

losses), without regard to which 

customers gained or lost, or which 

customers defaulted or made full 

payment. 

In such a case, customers of the 

Defaulting FCM other than the 

defaulting customer may lose collateral 

they have posted with the Defaulting 

FCM, and/or gains on their positions. 

The risk these other customers face shall 

be referred to as ‘‘fellow-customer risk.’’ 

II. Maximizing Customer Protection 

and Minimizing Cost 

In considering how to implement 

Section 4d(f) of the Dodd-Frank Act, the 

Commission and its staff have heard 

countervailing concerns from various 

stakeholders. Some customers have 

noted that, in the context of uncleared 

swaps that they currently engage in— 

and may be obligated to clear under 

Dodd-Frank 7—they are able to negotiate 

for individual segregation, with 

independent third parties, of collateral 

that they post for such uncleared swaps. 

These customers contend that it is 

inappropriate that they should be 

subject to an additional risk (fellowcustomer risk) when clearing their 

positions.8 Pension funds, in particular, 

are concerned about their obligations 

under the Employee Retirement Income 

Security Act, and about having their 

collateral used to subsidize others.9

FCMs and DCOs, on the other hand, 

point out that models of protecting 

swaps customer collateral that are 

different from the current model for 

protecting futures customer collateral 

would bring significant added costs, 

which they aver would ultimately be 

borne by the customers. Moreover, the 

use of fellow-customer collateral is 

included in existing DCO models for 

dealing with member defaults. The 

Commission has proposed to require 

DCOs to maintain default resources 

sufficient to 

[e]nable the derivatives clearing 

organization to meet its financial obligations 

to its clearing members notwithstanding a 

default by the clearing member creating the 

largest financial exposure for the derivatives 

clearing organization in extreme but 

plausible market conditions.10

Systemically-important DCOs would be 

required to maintain default resources 

sufficient to cover a default by the two 

clearing members creating the largest 

combined financial exposure in such 

conditions.11

Typically, DCOs use a variety of 

resources in addressing defaults arising 

from a member’s customer account.12

These resources, which are frequently 

referred to as a ‘‘waterfall,’’ typically 

include, in order, the property of the 

Defaulting Member, the margin posted 

on behalf of all of that members’ 

customers, a portion of the capital of the 

DCO, and the default fund contributions 

of other members of the DCO.13

If the collateral of non-defaulting 

swaps customers is not available as a 

default resource, DCOs will need to 

change their models for sizing their 

default waterfalls, and/or the size of the 

components of those default waterfalls. 

One means to do this would be to 

increase the collateral required to 

margin each customer’s positions. One 

DCO estimated that it might need to 

increase collateral from a 99% 

confidence level to a 99.99% confidence 

level, which would cause an increase in 

required collateral of approximately 

60%.14 These increases in required 

margin levels would be passed on to 

customers, as an FCM is required to 

collect margin from a customer at a level 

no less than that imposed by the 

clearing house on the clearing member 

FCM. The Commission requests that 

DCOs provide data in support of their 

assertions. 

An alternative approach to reacting to 

changes in the model for sizing default 

waterfalls would be to increase clearing 

members’ default fund contributions. 

FCMs note that if they are required to 

commit added capital to clearing, they 

would pass such costs on to customers. 

Certain models for protecting collateral 

posted by customers clearing swaps 

could also cause significant added 

administrative costs, in requiring more 

transactions per customer every day, 

which costs would also be passed on to 

customers.15 The Commission requests 

that FCMs provide data supporting 

these assertions. 

The Commission is seeking to achieve 

two basic goals: Protection of customers 

and their collateral, and minimization of 

costs imposed on customers and on the 

industry as a whole. It is considering 

four models of achieving these goals 

with respect to cleared swaps. These are 

listed in order below, from most 

protective of customer collateral to least 

protective of customer collateral. 

Each of these various models would 

potentially impose different levels of 

costs upon the various parties—i.e., 

customers, FCMs, and DCOs—both preand post-default. Accordingly, the 

Commission seeks to obtain further 

information about the costs and benefits 

of such models. 

III. Description of the Models 

The Commission seeks comment on 

each of the following four potential 

models, as well as any additional 

models that may be proposed by 

commenters: 

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75164 Federal Register / Vol. 75, No. 231 / Thursday, December 2, 2010 / Proposed Rules 

16 17 CFR 1.25. 

17See supra footnotes 10–11. 

(1) Full Physical Segregation—Each 

customer’s cleared swaps account, and 

all property collateralizing that account, 

is kept separately for and on behalf of 

that cleared swaps customer, at the 

FCM, at the DCO, and at each 

depository. 

a. Impact on Customers’ Risk: Each 

customer is protected from losses on the 

positions or investments of any other 

customer. 

b. Impact on DCO Default Resources: 

The collateral attributable to any nondefaulting customer is not available as 

a DCO default resource 

(2) Legal Segregation With 

Commingling—The collateral of all 

cleared swaps customers of an FCM 

member of a DCO is kept on an omnibus 

basis, but is attributed to each customer 

based on the collateral requirements, as 

set by the clearinghouse, attributable to 

each customer’s swaps. 

a. Process: Payments and collections 

of both initial margin and variation 

margin between the DCO and its 

member FCMs customer accounts are 

made on an omnibus basis. Each FCM 

member reports to the DCO, on a daily 

basis, the portfolio of rights and 

obligations attributable to each cleared 

swaps customer. The performance bond 

collateral required at the DCO for each 

customer’s swaps is a function, defined 

by the DCO, of that portfolio of rights 

and obligations. The collateral required 

for all of an FCM member’s customers 

is the sum of the collateral requirements 

for each of such customers. 

b. Posting Collateral: 

i. The FCM may post the total 

required customer margin on an 

omnibus basis, without regard to the 

customer to whom any particular item 

of collateral (e.g., a particular security) 

belongs. 

ii. If the FCM loans to a customer any 

portion of the property necessary to 

margin that customer’s positions, that 

collateral is treated at the DCO as 

belonging to the customer, and at the 

FCM as a debt from the customer to the 

FCM. 

iii. The DCO may require an FCM to 

post its own capital as collateral for its 

guarantee of its customers. 

c. Use of Collateral in Case of 

Default—If the FCM defaults, the DCO 

must treat each customer’s swaps 

positions, and related margin (based on 

the positions reported as of the day 

previous to the default) individually, 

debiting each customer’s account with 

losses attributable to that customer’s 

positions, and crediting each customer’s 

account with gains attributable to that 

customer’s positions. However, if the 

value of the margin account is reduced 

below the required level as a result of 

market fluctuations in the value of the 

collateral, the margin attributed to each 

customer would be adjusted accordingly 

on a pro rata basis. The DCO has 

recourse to any collateral posted by the 

FCM as part of its own capital. 

d. Transfer or Return of Positions and 

Collateral—The DCO may, at its 

election, transfer the swaps positions 

and related collateral of any or all of the 

defaulting FCM’s customers to a willing 

transferee, or liquidate such swaps 

positions and return the remaining 

collateral to the FCM (or its trustee in 

bankruptcy). 

e. Impact on Customers’ Risk—Each 

customer of the defaulting FCM is 

protected from losses on the positions of 

other customers, but bears some risk of 

loss on the value of collateral (subject to 

the investment restrictions of 

Commission Regulation 1.25).16

f. Impact on DCO Default Resources— 

The remaining collateral attributable to 

each of the defaulting FCM’s customers 

is not available as a DCO Default 

Resource. 

(3) Moving Customers to the Back of 

the Waterfall—This model is similar to 

Model 2 above, Legal Segregation With 

Commingling, with two modifications: 

a. The DCO may use the remaining 

collateral attributable to each of the 

defaulting FCM’s customers as a DCO 

default resource. 

b. Before using the remaining 

collateral attributable to any customer, 

however, the DCO must first apply (i) 

the DCO’s contribution to its default 

resources from its own capital and (ii) 

the guarantee fund contributions of all 

members of the DCO. 

c. Impact on Customers’ Risk—Each 

customer of the defaulting FCM is 

protected from losses on the positions of 

other customers, except in the most 

extreme of circumstances (a default 

which consumes the DCO’s guarantee 

fund), in which case the customers are 

at risk of losing their collateral. 

Customers also bear some risk of loss on 

the value of collateral (subject to the 

investment restrictions of Regulation 

1.25). 

d. Impact on DCO Default 

Resources—The remaining collateral 

attributable to each of the defaulting 

FCM’s customers is available as a DCO 

Default Resource. Because the total 

required default resources (including 

the DCO’s contribution and the 

guarantee fund) are substantial,17 the 

remaining collateral of customers will 

only be used in the case of an extremely 

large default. 

(4) Baseline Model—The current 

approach to futures. The rights and 

obligations arising out of the cleared 

swaps positions of all cleared swaps 

customers of an FCM member of a DCO, 

as well as the money, securities and 

other property collateralizing such 

rights and obligations, are held at the 

DCO on an omnibus basis. The DCO has 

recourse to all such collateral in the 

event of any failure of the FCM member 

to meet a margin call (initial or 

variation) with respect to the FCM’s 

cleared swaps customer account at that 

DCO. 

a. Impact on Customers’ Risk—Each 

customer of the defaulting FCM is 

exposed to loss of their collateral due to 

losses on the positions of other 

customers. Customers also bear some 

risk of loss on the value of collateral 

(subject to the investment restrictions of 

Regulation 1.25). 

b. Impact on DCO Default 

Resources—The remaining collateral 

attributable to each of the defaulting 

FCM’s customers is fully available as a 

DCO default resource, and may be used 

before the DCO’s contribution or the 

default fund contributions of other 

clearing members. 

IV. Cost and Benefit Questions 

The Commission seeks comment on 

all of the following questions from all 

members of the public, but will direct 

specific questions to three particular 

groups of stakeholders: 

(1) Cleared Swaps Customers, 

including asset management firms and 

others who may act on their behalf. 

(2) FCMs who currently intermediate 

swaps on behalf of customers, or who 

intend to do so in the future, or trade 

organizations with FCM members. 

(3) DCOs. 

1. For Cleared Swaps Customers 

a. What are the benefits of each of the 

models relative to the baseline model 

and relative to other models? 

b. What costs would you expect to 

incur for each of the models relative to 

the baseline model? Please provide a 

detailed basis for that estimate. 

c. How should the Commission 

balance such costs and benefits? 

2. For FCMs 

For Each Model (Other Than the 

Baseline Model) 

a. Compliance: 

i. What compliance activities 

(including gathering of information) 

would you need to perform as a result 

of that model that you do not perform 

now (i.e., as part of the baseline model). 

ii. What is a reasonable estimate of the 

initial and annualized ongoing cost of 

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18See Sections 5b(c)(2)(C)(i)(I), (c)(2)(C)(ii), 

(c)(2)(D) of the CEA (participant eligibility and risk 

management). 

such incremental activities (relative to 

the baseline model) for your institution? 

Please provide a detailed basis for that 

estimate. 

iii. How can such costs be estimated 

industry-wide? Please provide a 

detailed basis for that estimate? 

b. Risk environment: 

i. How do you see the industry 

adapting to the risk changes attendant to 

the model? 

ii. What types of costs would you 

expect your institution to incur if the 

industry adapts to that model in the 

most efficient manner feasible? How are 

these costs different from the costs you 

would incur under the baseline model? 

iii. What is a reasonable estimate of 

the initial and annualized ongoing 

incremental cost incurred by your 

institution? Are these costs the same for 

each FCM clearing member, or a 

function of activity level? Please 

provide a detailed basis for that 

estimate. 

iv. How can such costs be estimated 

industry-wide? Please provide a 

detailed basis for that estimate? 

c. What benefits does the model 

present relative to the baseline model, 

and relative to other models? 

3. For DCOs 

For Each Model (Other Than the 

Baseline Model) 

a. Compliance (internal): 

i. What compliance activities 

(including gathering of information) 

would you need to perform as a result 

of that model that you do not perform 

now (i.e., as part of the baseline model)? 

ii. What is a reasonable estimate of the 

initial and annualized ongoing cost of 

such incremental activities (relative to 

the baseline model) for your DCO? 

Please provide a detailed basis for that 

estimate. 

b. Compliance (members): 

i. What compliance activities 

(including gathering of information) 

would you expect each of your members 

to perform as a result of that model that 

they do not perform now (i.e., as part of 

the baseline model). 

ii. What is a reasonable estimate of the 

initial and annualized ongoing cost of 

such incremental activities (relative to 

the baseline model) for each such 

member? Do these costs vary with the 

member’s level of activity? How? Please 

provide a detailed basis for your 

estimates. 

iii. What is a reasonable estimate of 

the initial and ongoing costs of such 

activities across your membership? May 

there be some members who do not 

incur these costs? Please provide a 

detailed basis for these estimates. 

c. Changes to default management 

structure: 

i. What changes to your default 

management structure (relative to the 

baseline model) would the model 

require? 

ii. Costs to the DCO 

1. What types of costs would these 

changes impose on the DCO if the 

industry adapts to that model in the 

most efficient manner feasible? How are 

these costs different from the costs the 

DCO would incur under the baseline 

model? 

2. What is a reasonable estimate of the 

initial and annualized ongoing 

incremental cost to the DCO? Please 

provide a detailed basis for that 

estimate. 

iii. Costs to members 

1. What types of costs would these 

changes to the DCO’s default 

management impose on members if the 

industry adapts to that model in the 

most efficient manner feasible? How are 

these costs different from the costs the 

members would incur under the 

baseline model? 

2. What is a reasonable estimate of the 

initial and annualized ongoing 

incremental cost to each member? Are 

these costs the same for each member, 

or are they a function of activity level? 

Please provide a detailed basis for that 

estimate. 

3. What is a reasonable estimate of the 

initial and ongoing costs of such 

activities across your membership? May 

there be some members who do not 

incur these costs? Please provide a 

detailed basis for these estimates. 

iv. To what extent do the costs 

identified above represent increased 

costs to the system as a whole (i.e., 

customers, FCMs, and DCOs considered 

together) and to what extent do they 

represent a shift of risk and/or cost 

between those groups? 

b. What benefits does the model 

present relative to the baseline model, 

and relative to other models? 

For all commenters: 

2. Optional Models 

A point frequently raised is that 

individual customer protection should 

be made available on an optional basis. 

There are questions as to how such a 

model could be implemented, and how 

the costs imposed by a customer 

obtaining individual protection could be 

attributed to—and charged to—that 

customer. For example, in the ‘‘Full 

Physical Segregation’’ and ‘‘Legal 

Segregation with Commingling’’ models 

discussed above, a significant portion of 

the marginal costs may arise from the 

fact that the collateral posted by the 

opting-out customer would not be 

available in the event of a default 

caused by other customers of the same 

FCM. How could a payment by the 

opting-out customer be used to address 

the changes to the DCO’s default 

management structure that would be 

attributable to that opting out? 

Considered from another perspective, 

how much cost would be avoided from 

an optional as contrasted to a mandatory 

implementation of each of the models 

above? Also, what would be the effect 

on customers of an FCM in bankruptcy 

if different DCOs of which the FCM was 

a member adopted different voluntary 

models? If a marketplace in which 

varying models were in use was 

otherwise desirable, what changes to the 

Regulation Part 190 rules regarding 

bankruptcy account classes could or 

should be made to accommodate such 

variety? 

3. Moral Hazard: Customers riskmanaging their FCMs: 

Another point frequently raised is that 

customers should risk-manage their 

FCMs, and provide market discipline by 

doing business with FCMs that pose less 

risk. DCOs already monitor the 

eligibility of their members, supervising 

the member’s risk relative to collateral 

and capital, and considering members’ 

risk management.18 The Commission is 

aware of concerns that, if the risk that 

customers will lose swaps collateral 

posted at an FCM is minimized, there 

will be less incentive for FCMs to 

maintain capital in excess of the 

minimum levels required by the 

Commission and the DCOs of which 

such FCMs are members. These 

concerns lead to a number of questions: 

a. To what extent would each model 

lead to moral hazard concerns? How, if 

at all, could such concerns be 

addressed? 

b. Are the capital requirements 

currently imposed by the Commission 

on FCMs and by DCOs on their clearing 

members sufficient? If not, what steps 

should DCOs or the Commission take to 

address this insufficiency? 

c. Do the rules and procedures of 

DCOs currently provide adequate tools 

and incentives for DCOs to supervise 

their clearing members so as to mitigate 

the risk of default? If not, what steps 

should DCOs or the Commission take to 

address this inadequacy? 

In analyzing costs, the Commission 

needs to consider the additional cost 

incurred by customers risk-managing 

their FCMs on an initial and ongoing 

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75166 Federal Register / Vol. 75, No. 231 / Thursday, December 2, 2010 / Proposed Rules 

19Cf. Roundtable at 45–46 (Statement of Mr. 

Prager) (DCOs have advantages over clients in 

conducting risk management of FCMs). 

basis.19 This leads to a number of 

questions: 

d. What information would each 

customer need, on an initial and an 

ongoing basis, to effectively manage the 

risk posed by fellow-customers at an 

FCM? 

e. What information should be 

provided to each customer regarding the 

FCM’s risk management policies, and 

how those policies are, in fact, 

implemented with respect to other 

customers, on both an initial and 

ongoing basis? 

f. What information should be 

provided to each customer regarding 

fellow-customer risk, on both an initial 

and ongoing basis? 

g. What is or would be the cost, per 

customer, on an annualized basis, of 

conducting this risk management? 

h. What is or would be the cost to the 

industry as a whole, on an annualized 

basis, of customer-conducted FCM risk 

management? 

V. Other Questions 

1. Did Congress evince an intent as to 

whether the Commission should adopt 

any one or more of these models? 

How do commenters view 

Interpretation 85–3, and how should it 

inform the rulemaking on segregation of 

collateral for cleared swaps customers? 

(A copy of this interpretation is attached 

as an appendix to this Request for 

Comment.) 

Issued in Washington, DC, on November 

19, 2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

APPENDIX 

Interpretative Statement, No. 85–3, 

Regarding the Use of Segregated Funds by 

Clearing Organizations Upon Default by 

Member Firms. (OGC Aug. 12, 1985) 

Use of Segregated Funds by Clearing 

Organizations Upon Defaults By Member 

Firms 

The rights of a clearing organization to 

make use of margin funds deposited by a 

clearing member firm that has defaulted on 

an obligation to the clearing organization are 

defined by the rules and by-laws of the 

clearing organization subject to limitations 

imposed by the Commodity Exchange Act 

(‘‘Act’’) and the rules and regulations 

promulgated thereunder, 17 CFR 1, et seq. 

(1984). Clearing organization rules and bylaws commonly provide that upon the failure 

of a member firm to satisfy an obligation 

owed the clearing organization, the clearing 

organization may use all margin funds and 

property of the member firm within the 

clearing organization’s custody to satisfy the 

firm’s obligations to the clearing 

organization. In our view, Section 4d(2) of 

the Act does not preclude the clearing 

organization from applying all margin 

deposits of a defaulting firm to discharge 

such firm’s obligations on behalf of the 

customer account for which they were 

deposited with the clearing organization. The 

clearing organization may be precluded from 

exercising such rights in limited 

circumstances, however, by reason of its 

knowledge of or participation in a violation 

of the Act or other provision of law by the 

defaulting firm or other parties that renders 

its rights to such funds inferior to those of 

the clearing firm’s customers. 

Section 4d(2) of the Act, 7 U.S.C. 6d, 

defines the manner in which futures 

commission merchants (‘‘FCMs’’), clearing 

organizations, and other depositories of 

funds deposited by commodity customers to 

margin or settle futures transactions, or 

accruing to customers as the result of such 

trades, must deal with such funds. Section 

4d(2) requires that FCMs ‘‘treat and deal 

with’’ funds deposited by a customer to 

margin or settle trades or contracts or 

accruing as the result of such trades or 

contracts ‘‘as belonging to such customer,’’ 

separately account for such funds, and 

refrain from using such funds ‘‘to margin or 

guarantee the trades or contracts, or to secure 

or extend the credit, of any customer or 

person other than the one for whom the same 

are held.’’ Section 4d(2) specifically 

authorizes FCMs to commingle such funds, 

for purposes of convenience, in the same 

account or accounts with any bank, trust 

company or clearing organization of a 

contract market. This provision also 

authorizes withdrawals from such funds of 

‘‘such share thereof as in the normal course 

of business shall be necessary’’ to margin, 

guarantee, secure, transfer, adjust, or settle 

trades or contracts, ‘‘including the payment of 

commissions, brokerage, interest, taxes, 

storage and other charges, lawfully accruing 

in connection with such contracts and 

trades.’’ 

The final sentence of Section 4d(2) defines 

the obligations of clearing organizations, 

depositories and all other recipients of 

customer margin funds and property in the 

following terms: 

It shall be unlawful for any person, 

including but not limited to any clearing 

agency of a contract market and any 

depository, that has received any money, 

securities, or property for deposit in a 

separate account as provided in paragraph (2) 

of this section, to hold, dispose of or use any 

such money, securities, or property as 

belonging to the depositing futures 

commission merchant or any person other 

than the customers of such futures 

commission merchant. 

This provision prohibits clearing 

organizations and all other depositories of 

customer funds from using such funds to 

discharge proprietary obligations of the 

depositing FCM or for any purpose other 

than to margin, guarantee, secure, transfer, 

adjust, or settle trades or contracts of the 

depositing firm’s customers, including the 

payment of commissions and other charges 

‘‘lawfully accruing in connection with’’ such 

contracts and trades. 

In our view, Section 4d(2)’s provisions 

with respect to clearing organizations’ 

treatment of customer funds must be 

construed in light of the fact that clearing 

organizations’ direct customers are, 

generally, clearing firms, not the ultimate 

‘‘customers’’ who entered into the futures 

contracts and options positions accepted for 

clearance by the clearing organization. 

Margin deposits posted with clearing 

organizations by their member firms 

normally consist, at least in part, of funds 

belonging to clearing firm customers, whose 

margin deposits were posted with the 

clearing firm and subsequently drawn upon 

by the clearing firm to satisfy its margin 

obligations to the clearing organization. The 

clearing organization normally has no direct 

dealings with such customers and has 

knowledge neither of their specific identities 

nor of the extent of their respective 

ownership interests in margin funds posted 

by its clearing firms. Consequently, to the 

extent that Section 4d(2) of the Act requires 

that clearing organizations use margin 

deposits on behalf of the ‘‘customers of such 

[depositing] futures commission merchant,’’ 

we are of the view that it requires only that 

the clearing organization use such funds as 

the property of the clearing firm’s customers 

collectively, but does not require the clearing 

organization to treat such funds as the 

property of the particular customers who 

deposited them or to whose positions they 

have accrued. 

This view accords with the legislative 

history of Section 4d(2) of the Act. The Act 

did not specifically govern the treatment of 

commodity customer funds by clearing 

organizations and other depositories of 

customer margin funds until the enactment 

of Section 4d(2)’s final paragraph, quoted 

above, in 1968. The legislative history of this 

provision reflects Congress’s intention to 

ensure that customer funds would not be 

used to discharge the general obligations of 

the FCM or otherwise diverted from their 

lawful purposes. According to the Senate 

Report, for example, the amendment was 

proposed ‘‘to prohibit expressly customers’ 

funds from being used to offset liabilities of 

the futures commission merchants or 

otherwise being misappropriated.’’ S. Rep. 

No. 947, 90th Cong. 2d Sess. 7 (1968). See 

also H.R. Rep. No. 743, 90th Cong., 1st Sess. 

4–5 (1967). 

The Commodity Exchange Authority’s 

Administrator described the 1968 

amendment as one which would afford 

additional protection against a situation 

presented in the De Angelis salad oil case ‘‘in 

which one of the banks actually took over 

funds of customers of one of the brokerage 

firms to offset liabilities of the firm.’’ Amend 

the Commodity Exchange Act: Hearings on 

H.R. 11930 and H.R. 12317 Before the House 

Comm. on Agriculture 57 (1967) (Testimony 

of Alex C. Caldwell, Administrator, 

Commodity Exchange Authority). The 

proposed amendment would require that 

banks and other depositories ‘‘keep separate 

the funds of the customers and of the 

brokerage firms which they do not have to do 

now.’’ Id. The Act’s legislative history thus 

evinces an intention that depositories treat 

customers’ funds as the property of the 

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Federal Register / Vol. 75, No. 231 / Thursday, December 2, 2010 / Proposed Rules 75167 

1To the extent that the final sentence of 

Regulation 1.20(a), 17 CFR 1.20(a) (1984), may be 

read to require that clearing organizations treat 

customer funds as the property of the particular 

customer who deposited them, we consider it 

inconsistent with Regulation 1.20(b), which more 

specifically addresses the obligations of clearing 

organizations, and with this agency’s view of 

clearing organizations’ obligations. The current 

language of Regulation 1.20(a)’s final sentence 

apparently reflects an unintentionally broad 

modification of that provision made in connection 

with amendments of a number of Commission 

regulations to reflect establishment of the 

Commission’s exchange-traded options program. 

Until these 1981 revisions of the Commission’s 

regulations, Regulation 1.20(a)’s last sentence 

referred to ‘‘customers’’ in the plural, made no 

express reference to clearing organizations and was 

substantially consistent with the final sentence of 

Section 4d(2). The Commission’s proposed rules 

regarding exchange-traded options would have 

modified this language only to the extent of 

including option customers within its protections: 

‘‘Nor shall any such funds be held, disposed of, or 

used as belong [sic] to the depositing futures 

commission merchant or any person other than the 

commodity or option customers of such futures 

commission merchant.’’ 46 FR 33315 (1981). As 

adopted, however, the Commission’s final rules 

concerning the regulation of exchange-traded 

commodity options included Regulation 1.20(a)’s 

final sentence in its current form, a modification 

that apparently was not intended to be substantive. 

In the preamble to these rules, the Commission 

stated that it was adopting revised Regulations 1.20 

through 1.30 ‘‘essentially as proposed.’’ 46 FR 54508 

(1981). We suggest that a technical amendment to 

Regulation 1.20(a) be proposed in the near future 

to conform its final sentence to its intended 

meaning. 

2See also Regulation 1.36, which governs 

recordkeeping concerning securities and other 

property received from customers and option 

customers. Regulation 1.36 requires FCMs to 

maintain a record, showing ‘‘separately for each 

customer or option customer’’ the securities or 

property received, name and address of the 

depositing customer and other pertinent 

information. By contrast, clearing organizations 

with which clearing member firms deposit 

securities or property belonging to particular 

customers or option customers of such members in 

lieu of cash margin are required to maintain records 

‘‘which will show separately for each member’’ the 

date of receipt of such securities and property and 

other pertinent data but are not required to 

maintain records of the names of the particular 

customers of the member firm from whom such 

securities and property were received. 

3This prohibition includes a proscription against 

the use of customer margin funds deposited in 

connection with futures or option transactions to 

discharge obligations, including customers’ 

obligations, incurred in connection with 

transactions that are not within the purview of the 

Act or the rules and regulations promulgated 

thereunder. 

customers of the depositing FCM, as 

distinguished from the FCM’s own property 

or that of any other person. 

Our conclusion that Section 4d(2) 

generally allows clearing organizations to 

treat customer funds as the property of the 

depositing firm’s customers, collectively, 

without regard to the respective interests of 

particular customers, also finds support in 

the legislative history of the Bankruptcy 

Reform Act of 1978. In recommending new 

provisions to govern bankruptcy liquidations 

of commodity firms, the Commission 

described the clearing house system then 

(and now) operant in the futures market as 

one in which ‘‘a clearing house deals only 

with its clearing members’’ and thus ‘‘does 

not know the specific customer on whose 

behalf a particular contract was entered into 

by one of its clearing members.’’ Bankruptcy 

Act Revision: Hearings on H.R. 31 and H.R. 

32 Before the Subcomm. on Civil and 

Constitutional Rights, House Comm. on the 

Judiciary, 94th Cong., 2d Sess. 2377, 2395 

(Statement of William T. Bagley) (1976). The 

Commission explained that this system 

allows a clearing organization to use 

‘‘whatever funds are on deposit with it on 

behalf of customers to meet variation margin 

calls with respect to customers’ trades or 

contracts’’ and, following a clearing member 

default, the defaulting firm’s ‘‘original margin 

deposits are immediately available to offset 

any losses the clearing house might incur’’ as 

a result of answering variation margin calls 

to the defaulting firm. Id. at 2397, 2405. 

The Commission’s regulations are also 

consistent with the view that the clearing 

organization’s direct obligations under 

Section 4d(2) include an obligation to treat 

customer funds as the property of the 

depositing FCM’s customers but do not 

include a duty to separately account for or to 

employ such funds as the property of 

particular customers. Regulation 1.20(b), 17 

CFR 1.20(b) (1984), for example, requires that 

a clearing organization separately account for 

and segregate all customers’ funds received 

from a member of the clearing organization 

to purchase, margin, guarantee, secure or 

settle the trades, contracts or commodity 

options of the clearing member’s customers 

and all money accruing to such customers as 

the result of such trades, contracts, or 

commodity options ‘‘as belonging to such 

commodity or option customers,’’ and 

specifies that a clearing organization shall 

not hold, use or dispose of such customer 

funds ‘‘except as belonging to such 

commodity or option customers.’’ 17 CFR 

1.20(b) (1984).1

Regulation 1.22, 17 CFR 1.22 (1984), which 

precludes FCMs from using or permitting the 

use of ‘‘the customer funds of one commodity 

and/or option customer to purchase, margin, 

or settle the trades, contracts, or commodity 

options of, or to secure or extend the credit 

of, any person other than such customer or 

option customer,’’ refers only to FCMs and, 

hence, does not govern clearing organizations 

or other depositories of customer funds.2

Our conclusion that Section 4d(2) does not 

preclude a clearing organization from using 

all margin funds deposited by a clearing 

member firm to satisfy obligations arising 

from the account for which such funds were 

deposited reflects the essential function of 

margin deposits in the futures markets’ 

clearing system. Clearing organizations 

generally stand as guarantors of the net 

futures and options obligations of the 

member firms and require margin deposits as 

security for the performance of obligations 

which, in the event of a member’s default, 

the clearing organization must discharge. 

Margin deposits at the clearing level thus 

facilitate the clearing organization’s 

performance of its guarantee obligations, 

serving to confine losses stemming from a 

clearing firm default to the defaulting firm 

and preventing their spread to the market as 

a whole. 

In sum, we conclude that clearing 

organization rules and by-laws awarding 

clearing organizations the right to apply all 

customer margin funds within their custody 

to satisfy nonproprietary obligations of 

defaulting clearing firms are not inconsistent 

with Section 4d(2) of the Act or the 

Commission’s regulations. Clearing 

organizations’ rights with regard to the use of 

customer margin deposits of their member 

firms are not, however, wholly unlimited. A 

clearing organization may not use the margin 

deposits of one clearing member firm to 

satisfy obligations of another clearing firm or 

of any other person. In addition, as noted 

above, the final paragraph of Section 4d(2) of 

the Act was enacted to present use of 

customer funds to satisfy the FCM’s own 

obligations. Consequently, customer margin 

funds deposited by a member FCM may not 

be used to margin, guarantee or settle the 

futures or options transactions or to satisfy 

any other proprietary obligation of the 

depositing firm. Such funds must be used to 

margin, guarantee, secure, or settle trades or 

contracts of the depositing FCM’s customers 

or for charges ‘‘lawfully accruing in 

connection with’’ such contracts and not for 

any other purpose.3 Finally, a clearing 

organization’s rights with respect to the use 

of customer margin funds may be limited in 

particular circumstances by reason of the 

clearing organization’s knowledge of or 

participation in a violation of the Act or other 

provision of law that precludes it from 

obtaining rights to such funds superior to 

those of one or more customers of the 

defaulting clearing member. Such a violation 

could occur, for example, in circumstances in 

which the clearing organization received 

particular margin funds with actual 

knowledge that the depositing firm has 

breached its duty under Section 4d(2) to 

segregate and separately account for 

customer funds and that the funds in 

question have been deposited with it to 

margin, secure, guarantee or settle the trades 

or contracts of a person other than the 

customer who deposited such funds or to 

whom they have accrued. The clearing 

organization’s knowing participation in such 

use of customer funds could subject it to 

aiding and abetting liability under Section 

13(a) of the Act and would preclude it from 

obtaining rights to such funds superior to 

those of the innocent customer. 

Statement of Chairman Gary Gensler: 

Protection of Cleared Swaps Customers 

Before and After Commodity Broker 

Bankruptcies 

I support the advance notice of proposed 

rulemaking concerning protection of 

collateral of customers entering into cleared 

swaps. There has been much public input 

into these matters, but I think it is 

appropriate to have a formal ANPR soliciting 

input on a number of options and questions 

on how best to protect customers’ collateral 

in the event of another customer’s default. 

This is particularly important as we move 

forward to implement Congress’s mandate 

that for the first time standardized swaps 

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75168 Federal Register / Vol. 75, No. 231 / Thursday, December 2, 2010 / Proposed Rules 

must be cleared. I am hopeful that we will 

hear from a broad range of market 

participants, including clearinghouses, 

futures commission merchants, pension 

funds, asset managers and other end-users, 

on the costs, benefits and feasibility of 

various approaches to protecting customers’ 

money. 

[FR Doc. 2010–29836 Filed 12–1–10; 8:45 am] 

BILLING CODE 6351–01–P 

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