6336 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

1See Dodd-Frank Act, Public Law 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

may be accessed at http://www.cftc.gov./

LawRegulation/OTCDERIVATIVES/index.htm. 2Pursuant to section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 3 7 U.S.C. 1 et seq. 4 In this release, the terms ‘‘swap dealer’’ and 

‘‘major swap participant’’ shall have the meanings 

set forth in section 721(a) of the Dodd-Frank Act, 

which added sections 1a(49) and (33) of the CEA. 

However, as directed by section 721(c) of the DoddFrank Act, the Commission is in the process of 

promulgating rules to further define, among other 

terms, ‘‘swap dealer’’ and ‘‘major swap participant.’’ 

See 75 FR 80173, Dec. 21, 2010. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 22 and 190 

RIN Number 3038–AC99 

Protection of Cleared Swaps Customer 

Contracts and Collateral; Conforming 

Amendments to the Commodity Broker 

Bankruptcy Provisions 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (the 

‘‘Commission’’) is adopting final 

regulations to implement new statutory 

provisions enacted by Title VII of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (the ‘‘DoddFrank Act’’). Specifically, these 

regulations impose requirements on 

futures commission merchants 

(‘‘FCMs’’) and derivatives clearing 

organizations (‘‘DCOs’’) regarding the 

treatment of cleared swaps customer 

contracts (and related collateral), and 

make conforming amendments to 

bankruptcy provisions applicable to 

commodity brokers under the 

Commodity Exchange Act (the ‘‘CEA’’). 

DATES: The rules will become effective 

April 9, 2012. All parties must comply 

with the Part 22 rules by November 8, 

2012. All parties must comply with the 

Part 190 rules by April 9, 2012. Prior to 

the compliance date for the Part 22 

rules, the definition of 190.01(pp) 

(‘‘Cleared Swap’’) shall be limited to 

transactions where the rules or bylaws 

of a derivatives clearing organization 

require that such transactions, along 

with the money, securities, and other 

property margining, guaranteeing or 

securing such transactions, be held in a 

separate account for Cleared Swaps 

only. 

FOR FURTHER INFORMATION CONTACT: 

Robert B. Wasserman, Chief Counsel, 

Division of Clearing and Risk (DCR), at 

202–418–5092 or rwasserman@cftc.gov; 

M. Laura Astrada, Associate Chief 

Counsel, DCR, at 202–418–7622 or 

lastrada@cftc.gov; Alicia Lewis, Special 

Counsel, DCR, at 202–418–5862 or 

alewis@cftc.gov; or Martin White, 

Assistant General Counsel, Office of the 

General Counsel, at 202–418–5129 or 

mwhite@cftc.gov, in each case, at the 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION:

Table of Contents 

I. Background 

A. Segregation Requirements. 

B. Overview of the Clearing Process as it 

Relates to the Segregation Requirements. 

C. Segregation Alternatives. 

D. Operation of the Segregation Models in 

an FCM Bankruptcy. 

E. Solicitation of Public Input. 

F. Clarification of the Application of 

Financial and Segregation Interpretation 

No. 10 to Cleared Swaps. 

II. The Final Rules 

III. Segregation Model for Cleared Swaps 

Customer Collateral 

A. Summary of the Comments. 

B. Discussion of the Comments. 

IV. Section by Section Analysis: Regulation 

Part 22 

A. Regulation 22.1: Definitions. 

B. Regulation 22.2—Futures Commission 

Merchants: Treatment of Cleared Swaps 

Customer Collateral. 

C. Regulation 22.3—Derivatives Clearing 

Organizations: Treatment of Cleared 

Swaps Customer Collateral. 

D. Regulation 22.4—Futures Commission 

Merchants and Derivatives Clearing 

Organizations: Permitted Depositories. 

E. Regulation 22.5—Futures Commission 

Merchants and Derivatives Clearing 

Organizations: Written 

Acknowledgment. 

F. Regulation 22.6—Futures Commission 

Merchants and Derivatives Clearing 

Organizations: Naming of Cleared Swaps 

Customer Accounts. 

G. Regulation 22.7—Permitted 

Depositories: Treatment of Cleared 

Swaps Customer Collateral. 

H. Regulation 22.8—Situs of Cleared 

Swaps Customer Accounts. 

I. Regulation 22.9—Denomination of 

Cleared Swaps Customer Collateral and 

Location of Depositories. 

J. Regulation 22.10—Application of other 

Regulatory Provisions. 

K. Regulation 22.11—Information to be 

Provided Regarding Customers and Their 

Cleared Swaps. 

L. Regulation 22.12—Information to be 

Maintained Regarding Cleared Swaps 

Customer Collateral. 

M. Regulation 22.13—Additions to Cleared 

Swaps Customer Collateral. 

N. Regulation 22.14—Futures Commission 

Merchant Failure to Meet a Customer 

Margin Call in Full. 

O. Regulation 22.15—Treatment of Cleared 

Swaps Customer Collateral on an 

Individual Basis. 

P. Regulation 22.16—Disclosures to 

Customers. 

V. Section by Section Analysis: Amendments 

to Regulation Part 190 

A. Background. 

B. Definitions. 

C. Amendments to Regulation 190.02— 

Operation of the Debtor’s Estate 

Subsequent to the Filing Date and Prior 

to the Primary Liquidation Date. 

D. Amendments to Regulation 190.03— 

Operation of the Debtor’s Estate 

Subsequent to the Primary Liquidation 

Date. 

E. Amendments to Regulation 190.04— 

Operation of the Debtor’s Estate— 

General. 

F. Amendments to Regulation 190.05— 

Making and Taking Delivery on 

Commodity Contracts. 

G. Amendments to Regulation 190.06— 

Transfers. 

H. Amendments to Regulation 190.07— 

Calculation of Allowed Net Equity. 

I. Amendments to Regulation 190.09— 

Member Property. 

J. Amendments to Regulation 190.10— 

General. 

K. Amendments to Appendix A to Part 

190—Bankruptcy Forms, Bankruptcy. 

L. Amendments to Appendix B to Part 

190—Special Bankruptcy Distributions. 

VI. Effective Date 

VII. Consideration of Costs and Benefits 

A. Introduction. 

B. Benefits and Costs of Complete Legal 

Segregation Model Relative to Futures 

Model. 

C. Conclusion. 

VIII. Related Matters. 

A. Paperwork Reduction Act. 

B. Regulatory Flexibility Act. 

IX. Text of Proposed Rules 

I. Background 

A. Segregation Requirements 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act.1 Title VII of 

the Dodd-Frank Act 2 amended the 

CEA 3 to establish a comprehensive new 

regulatory framework for swaps and 

certain security-based swaps. The 

legislation was enacted to reduce risk, 

increase transparency, and promote 

market integrity within the financial 

system by, among other things: (1) 

Providing for the registration and 

comprehensive regulation of swap 

dealers and major swap participants; 4

(2) imposing mandatory clearing and 

trade execution requirements on 

clearable swap contracts; (3) creating 

rigorous recordkeeping and real-time 

reporting regimes; and (4) enhancing the 

Commission’s rulemaking and 

enforcement authorities with respect to, 

among others, all registered entities and 

intermediaries subject to the 

Commission’s oversight. 

Section 724 of the Dodd-Frank Act 

prescribes the manner in which Cleared 


srobinson on DSK4SPTVN1PROD with RULES3
Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 6337 

5Regulation 22.1 defines ‘‘Cleared Swap’’ and 

‘‘Cleared Swaps Customer Collateral.’’ 

6Regulation 22.1 defines ‘‘Cleared Swaps 

Customer.’’ 

7 11 U.S.C. 761(4)(F). 

8See, e.g., 11 U.S.C. 764. 

9See, e.g., 11 U.S.C. 766(h) and (i). 

10See supra n. 1; S. Rep. No. 111–176, at 33 

(2010) (‘‘[w]ith appropriate collateral and margin 

requirements, a central clearing organization can 

substantially reduce counterparty risk and provide 

an organized mechanism for clearing transactions’’); 

Process for Review of Swaps for Mandatory 

Clearing, 76 FR 44464, July 26, 2011 (final rule); 

Derivatives Clearing Organizations General 

Provisions and Core Principles, 76 FR 69334, Nov. 

8, 2011 (final rule). 

11Section 4d(f)(1) of the CEA, 7 U.S.C. 6d(f)(1). 

12For purposes of this example, neither A nor B 

is a Clearing Member. 

Swaps (and related collateral) 5 must be 

treated prior to and after bankruptcy. 

Section 724(a) of the Dodd-Frank Act 

amends section 4d of the CEA to add a 

new paragraph (f), which imposes the 

following requirements on an FCM, as 

well as any depository thereof 

(including, without limitation, a DCO): 

1. The FCM must treat and deal with 

all collateral (including accruals 

thereon) deposited by a customer 6 to 

margin its Cleared Swaps as belonging 

to such customer; 

2. The FCM must separately account 

for and may not commingle such 

collateral with its own property and 

may not, with certain exceptions, use 

such collateral to margin the Cleared 

Swaps of any person other than the 

customer depositing such collateral; 

3. A DCO may not hold or dispose of 

the collateral that an FCM receives from 

a customer to margin Cleared Swaps in 

any manner that would indicate that 

such collateral belonged to the FCM or 

any person other than the customer; and 

4. The FCM and the DCO may only 

invest such collateral in enumerated 

investments. 

In other words, the FCM and the DCO 

(i) must hold such customer collateral in 

an account (or location) that is separate 

from the property belonging to the FCM 

or DCO, and (ii) must not use the 

collateral of one customer to (A) cover 

the obligations of another customer or 

(B) the obligations of the FCM or DCO. 

These basic requirements that Cleared 

Swaps Customer Collateral be treated as 

the property of customers and 

maintained in segregated accounts (or 

locations) are imposed by the statute 

and have the force of law regardless of 

the Commission’s particular 

implementing regulations. Moreover, by 

the terms of the statute, these 

requirements would apply even if the 

Commission promulgated no 

implementing regulations. 

Section 724(b) of the Dodd-Frank Act 

governs bankruptcy treatment of Cleared 

Swaps by clarifying that Cleared Swaps 

are ‘‘commodity contracts’’ within the 

meaning of section 761(4)(F) of the 

Bankruptcy Code.7 Therefore, in the 

event of an FCM or DCO insolvency, 

Cleared Swaps Customers may invoke 

the protections of Subchapter IV of 

Chapter 7 of the Bankruptcy Code 

(‘‘Subchapter IV’’). Such protections 

include: (i) protected transfers of 

Cleared Swaps and related collateral; 8

and (ii) if Cleared Swaps are subject to 

liquidation, preferential distribution of 

remaining collateral.9 However, section 

766(h) of the Bankruptcy Code (‘‘Section 

766(h)’’) subjects customers to 

mutualized risk by requiring that 

customer property be distributed 

‘‘ratably to customers on the basis and 

to the extent of such customers’ allowed 

net equity claims.’’ This requirement, in 

turn, limits the Commission’s flexibility 

in designing a model for the protection 

of customer collateral. 

B. Overview of the Clearing Process as 

It Relates to the Segregation 

Requirements 

1. Central Counterparties/Derivatives 

Clearing Organizations 

One of the primary objectives of the 

Dodd-Frank Act was to promote the 

central clearing of swaps and to 

establish the regulatory infrastructure 

for the clearing of swaps.10 Clearing is 

the process by which transactions in 

derivatives are processed, guaranteed, 

and settled by a central counterparty, 

also known as a DCO. In accordance 

with this overall Congressional purpose, 

section 724 of the Dodd-Frank Act 

amends the CEA to provide the statutory 

foundation for the protection of Cleared 

Swaps Customer Collateral. 

A DCO has members (‘‘Clearing 

Members’’) who clear derivatives 

transactions (e.g., swaps) through the 

DCO and who are subject to the DCO’s 

rules. Clearing Members may clear 

transactions on their own behalf (i.e., 

‘‘proprietary transactions’’) or on behalf 

of customers (i.e., ‘‘customer 

transactions’’). Clearing members that 

clear swaps for customers must be 

registered as futures commission 

merchants (‘‘FCMs’’).11

The term ‘‘central counterparty’’ 

means, conceptually, that the DCO 

becomes the seller to every buyer, and 

the buyer to every seller. More 

specifically, the DCO novates swap 

transactions initially entered into 

between various market participants, 

such as swaps users, dealers, or end 

users, and cleared either directly (if the 

market participant is itself a Clearing 

Member) or indirectly (through an FCM 

that is a Clearing Member) . The 

contractual obligations between the 

original parties (‘‘A’’ and ‘‘B’’) 12 are 

replaced by sets of equivalent 

obligations: between the Clearing 

Member FCMs acting for the original 

parties and the DCO and between the 

Clearing Member FCMs and their 

individual customers. Thus, if the 

original swap agreement would require 

a certain payment from A to B, as a 

result of the clearing process this 

obligation becomes (1) a duty by A’s 

clearing FCM to pay the DCO, (2) a 

corresponding claim by A’s FCM to 

recompense from A, (3) a duty by the 

DCO to pay B’s clearing FCM, and (4) 

a corresponding duty by B’s FCM to pay 

B. 

In economic effect, the DCO serves as 

a guarantor that every Clearing Member 

party to a cleared swap receives 

performance according to the terms of 

the swap, while the clearing FCM serves 

as a guarantor of its customers’ swaps 

obligations to the DCO. 

2. Variation 

To avoid the accumulation of large 

obligations, the DCO conducts a 

variation payment and collection cycle 

at least once a day, and in the case of 

many DCOs, twice a day. The DCO will 

first calculate the gain (and 

corresponding loss) on each contract 

through a process known as ‘‘marking to 

market,’’ using reported market prices 

where available, or other means (such as 

surveys of Clearing Members). The DCO 

will then aggregate and net the gains 

and losses for each Clearing Member 

(separately for proprietary and customer 

accounts), collect from those Clearing 

Members with net losses, and pay those 

Clearing Members with net gains. This 

process is highly time sensitive: The 

Clearing Member typically has only one 

or a few hours between the demand for 

payment and the time payment is due. 

Similarly, the Clearing Member FCMs 

will debit the accounts of those 

customers who have losses on their 

transactions, and credit the accounts of 

those customers who have gained. 

3. Margin (Collateral) 

To secure the prompt payment of 

variation obligations, the DCO will 

require each Clearing Member to post 

collateral (often referred to as ‘‘margin’’) 

for the transactions it clears (separately 

for customer positions and proprietary 

positions). If the Clearing Member does 

not promptly make a variation payment 

to the DCO—referred to as a default— 

the collateral may immediately be 

liquidated and applied to the obligation. 

Margin may only be used to meet the 


srobinson on DSK4SPTVN1PROD with RULES3
6338 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

13See regulation 39.13(g)(8)(ii) (stating that ‘‘[a] 

derivatives clearing organization shall require its 

clearing members to collect customer initial margin, 

as defined in § 1.3 of this chapter, from their 

customers, for nonhedge positions, at a level that 

is greater than 100 percent of the derivatives 

clearing organization’s initial margin requirements 

with respect to each product and swap portfolio.’’). 

76 FR at 69439. 

The purpose of this rulemaking is to protect 

Cleared Swaps Customer Collateral in the event that 

an FCM defaults to a DCO due to ‘‘Fellow-Customer 

Risk’’ (as such term is defined in section I(B)(6) 

herein). However, as section III(B) explores in 

greater detail, the segregation model selected in this 

rulemaking provides limited protection from 

operational and investment risks. 

14See generally, 76 FR 69334. See specifically 

regulation 39.13(g)(2)(ii) (setting forth a one-day 

minimum liquidation time for agricultural, energy, 

and metals swaps, and a five-day minimum 

liquidation time for all other swaps). 76 FR 69438. 

15The FCM is required to collect a higher level 

of collateral from its customers than that prescribed 

for Clearing Members (see id.) and may, in its 

discretion, collect a yet higher level. See regulation 

22.13(a)(1). 16See also infra at n. 250. 

17Examples of other risks include the possibility 

of misuse or misallocation of a Cleared Swaps 

Customer’s assets by a dishonest or negligent FCM. 

18See also supra n. 13. 

19As noted above, the amount the DCO will call 

for or pay to the FCM in respect of its Cleared 

Swaps Customers is the net of the gains and losses 

computed on a customer-by-customer basis. 

default of the Clearing Member posting 

that margin. While proprietary margin 

may be used to meet obligations in 

either the Clearing Member’s 

proprietary account or customer 

account, the reverse is not true: A 

Clearing Member’s customer margin 

may not be used to meet a default in the 

Clearing Member’s proprietary account. 

Similarly, FCMs will—indeed, are 

required to—collect collateral from each 

of their customers, based on each 

customer’s portfolio of positions, to 

secure the prompt payment of the 

customer’s variation obligations.13 If a 

customer fails to fulfill an obligation to 

the FCM arising out of a swap 

agreement the FCM clears for the 

customer, the FCM may use some or all 

of the value of the collateral that 

customer has posted to meet that 

obligation—that is the purpose of the 

collateral. 

The DCO will generally set minimum 

collateral levels for each type of swap, 

and will prescribe a ‘‘margin 

methodology’’ to determine the 

minimum margin level for portfolios of 

swaps. The DCO’s margin methodology 

will be designed to estimate the amount 

of loss a portfolio of swap positions may 

incur, calculated at a statistical 

confidence level no less than 99%, over 

a holding period generally between one 

and ten days, depending on the time it 

is estimated to take to liquidate the 

swaps in the portfolio.14 The FCM will, 

in turn, use the same or similar 

methodology in determining the 

minimum level of collateral it must 

collect from each customer.15

4. Default Resources 

As noted above, the margin collateral 

collected by a DCO is designed to cover 

most (e.g., 99%), but not all, potential 

losses incurred by a Clearing Member. 

DCOs cover the ‘‘tail risk’’ (i.e., the risk 

that a Clearing Member will incur, and 

default on, a loss in excess of the margin 

collected) by means of what is 

sometimes referred to as a default 

resources package, or ‘‘waterfall.’’ 

Elements of the waterfall may include a 

contribution of a specified amount of 

the DCO’s own capital, pre-funded 

contributions from Clearing Members (a 

‘‘guaranty fund’’),16 or (to a limited 

extent), a power by the DCO to assess 

additional contributions from Clearing 

Members. Unlike margin, a Clearing 

Member’s contribution to the guaranty 

fund will generally be usable to meet 

the default of another Clearing Member. 

In other words, the guaranty fund is 

‘‘mutualized.’’ Elements of the waterfall 

are applied in an order pre-determined 

by the DCO’s rules. Such rules will 

often apply the guaranty fund 

contribution of the defaulter before the 

DCO’s own capital, and the remainder 

of the guaranty fund (i.e., the guaranty 

fund contributions of the non-defaulting 

Clearing Members) thereafter. 

Though seemingly complex, 

centralized clearing has important 

advantages in terms of transparency, 

risk management, netting out of 

countervailing obligations, and reduced 

exposure of market participants to each 

other’s credit risk (by effectively 

substituting the DCO’s credit risk). 

5. Customer Accounts 

Generally, a clearing FCM will have 

two different types of Cleared Swaps 

Customer Accounts in connection with 

collateral provided to it by Cleared 

Swaps Customers. One account is 

maintained (generally at a bank) by the 

FCM on behalf of its Cleared Swaps 

Customers (the ‘‘FCM Customer 

Account’’). The FCM Customer Account 

holds assets provided by customers, or 

other assets of equivalent value, that are 

not currently posted with the DCO to 

support swaps positions cleared by the 

FCM on behalf of its Cleared Swaps 

Customers. The other account is 

maintained by the DCO for the FCM on 

behalf of the FCM’s Cleared Swaps 

Customers (the ‘‘DCO Customer 

Account’’). The DCO Customer Account 

holds customer assets, or assets of 

equivalent value, that the FCM has 

posted to the DCO as collateral for 

swaps positions that have been 

established and cleared by the FCM for 

its Cleared Swaps Customers. 

The collateral posted by each Cleared 

Swaps Customer is, however, 

potentially exposed to risks that do not 

arise out of the obligations that a 

Cleared Swaps Customer has directly 

incurred by assuming his or her swaps 

position. 17 The most important impact 

of such risks would occur in the case of 

an insolvency on the part of the FCM 

through which the Cleared Swaps 

Customer clears. As discussed in more 

detail below, the new CEA section 4d(f), 

and the Commission’s implementing 

regulations, are designed to provide 

protection for Cleared Swaps Customer 

Collateral against certain risks that may 

arise during an insolvency on the part 

of the FCM through which the Cleared 

Swaps Customer clears. 

6. Fellow-Customer Risk 

‘‘Fellow-Customer Risk’’ is the risk 

that a DCO would need to access the 

collateral of non-defaulting Cleared 

Swaps Customers to cure an FCM 

default. Fellow-Customer Risk arises in 

circumstances in which a Cleared 

Swaps Customer (the ‘‘defaulting 

customer’’) of a clearing FCM suffers a 

(significant) loss in connection with a 

cleared swap.18 The loss will result in 

a call by the DCO for a variation 

payment from the clearing FCM that 

carries that Cleared Swaps Customer’s 

Cleared Swaps.19 The clearing FCM may 

demand expedited payment from the 

defaulting Cleared Swaps Customer, but 

is in any event directly obligated 

promptly to meet the payment 

obligation to the DCO. 

If the loss is great enough, it may 

exceed the sum of the FCM’s available 

liquid assets, the swaps collateral 

posted by the Cleared Swaps Customer, 

and any additional payments 

immediately available from the Cleared 

Swaps Customer. In this situation, 

sometimes called a ‘‘double default,’’ 

the defaulting Cleared Swaps Customer 

will have defaulted on its obligation to 

the clearing FCM which, in turn, will 

default on its obligation to the DCO. In 

such circumstances, the FCM will likely 

have to file for protection in bankruptcy. 

Meanwhile, the defaulting Cleared 

Swaps Customer’s loss will translate to 

a gain by one or more other market 

participants. Notwithstanding the 

default by the clearing FCM, the DCO, 

in its capacity as central counterparty, is 

required to pay out these gains. The 

DCO will thus be faced with a 

potentially significant loss. 

A potential resource for the DCO to 

apply to this loss in a double default 


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Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 6339 

20See Notice of Proposed Rulemaking on the 

Protection of Cleared Swaps Customer Contracts 

and Collateral; Conforming Amendments to the 

Commodity Broker Bankruptcy Provisions, 76 FR 

33818, 33822, June 9, 2011. 

situation is the collateral held in the 

Cleared Swaps Customer Account 

maintained by the DCO for the 

defaulting FCM on behalf of the FCM’s 

Cleared Swaps Customers. Under the 

current rules applicable to futures 

clearing, a DCO is permitted to use all 

of the collateral in the Clearing 

Member’s customer account to meet a 

loss in that account, without regard to 

which customer(s) in fact supplied that 

collateral. Thus, in this case, the nondefaulting customers of the defaulting 

FCM clearing member would be 

exposed to loss due to ‘‘FellowCustomer Risk.’’ 

C. Segregation Alternatives 

In implementing new CEA section 

4d(f), the Commission considered five 

alternative segregation models for 

Cleared Swaps Customer Collateral in 

the notice of proposed rulemaking issue 

by the Commission on June 9, 2011 (the 

‘‘NPRM’’).20

1. Legal Segregation With Operational 

Commingling Model 

The first alternative explored by the 

Commission was legal segregation with 

operational commingling (the ‘‘LSOC 

Model’’ or ‘‘Complete Legal Segregation 

Model’’). Under the LSOC Model, each 

FCM and DCO would enter (or 

‘‘segregate’’), in its books and records, 

the Cleared Swaps of each individual 

customer and relevant collateral. Each 

FCM and DCO would ensure that such 

entries are separate from entries 

indicating (i) FCM or DCO obligations, 

or (ii) the obligations of non-cleared 

swaps customers. Operationally, 

however, each FCM and DCO would be 

permitted to hold (or ‘‘commingle’’) the 

relevant collateral in one account. Each 

FCM and DCO would ensure that such 

account is separate from any account 

holding FCM or DCO property or 

holding property belonging to noncleared swaps customers. 

Prior to the simultaneous default of an 

FCM and one of its Cleared Swaps 

Customers (as discussed above, a 

‘‘double default’’), the FCM would 

ensure that the DCO does not use the 

collateral of one Cleared Swaps 

Customer to support the obligations of 

another customer by making certain that 

the value of the Cleared Swaps 

Customer Collateral that the DCO holds 

equals or exceeds the value of all 

Cleared Swaps Customer Collateral that 

it has received to secure the contracts of 

the FCM’s customers. Following a 

double default, the DCO would be 

permitted to access the collateral of the 

defaulting Cleared Swaps Customers, 

but not the collateral of the nondefaulting Cleared Swaps Customers. 

Thus while, even under the LSOC 

Model, Section 766(h) requires the pro 

rata distribution of customer property, 

the collateral attributable to the nondefaulting Cleared Swaps Customers 

would be available to be distributed. 

2. Legal Segregation With Recourse 

Model 

Second, the Commission 

contemplated the Legal Segregation 

with Recourse Model (together with the 

LSOC Model, the ‘‘Legal Segregation 

Models’’). As with the LSOC Model, 

under the Legal Segregation with 

Recourse Model, each FCM and DCO 

would segregate the Cleared Swaps of 

each individual customer and relevant 

collateral in its books and records. 

However, each FCM and DCO would be 

permitted to commingle the relevant 

collateral in one account, provided that 

such account is separate from any 

proprietary accounts or accounts 

property belonging to non-cleared 

swaps customers. 

Again, as with the LSOC Model, prior 

to a double default, the FCM would 

ensure that the DCO does not use the 

collateral of one Cleared Swaps 

Customer to support the obligations of 

another customer by making certain that 

the value of the Cleared Swaps 

Collateral that the DCO holds equals or 

exceeds the value of all Cleared Swaps 

Collateral that it has received to secure 

the contracts of the FCM’s customers. 

However, unlike the LSOC Model, 

following a double default, the Legal 

Segregation with Recourse Model would 

not prohibit a DCO from accessing the 

collateral of the non-defaulting Cleared 

Swaps Customers, after the DCO applies 

its own capital to cure the default, as 

well as the guaranty fund contributions 

of its non-defaulting FCM members. 

3. Physical Segregation Model 

The Commission also explored the 

possibility of full physical segregation 

(the ‘‘Physical Segregation Model’’) for 

Cleared Swaps Customer Collateral. The 

Physical Segregation Model primarily 

differs from the Legal Segregation 

Models operationally. In the ordinary 

course of business (i.e., prior to a double 

default), as with the Legal Segregation 

Models, each FCM and DCO would 

enter (or ‘‘segregate’’), in its books and 

records, the Cleared Swaps of each 

individual customer and relevant 

collateral. However, unlike the Legal 

Segregation Models, each FCM and DCO 

would maintain separate individual 

accounts for the relevant collateral. 

Hence, the FCM would ensure that the 

DCO does not use the collateral of one 

Cleared Swaps Customer to support the 

obligations of another customer by 

making certain that the DCO does not 

mistakenly transfer collateral in (i) the 

account belonging to the former to (ii) 

the account belonging to the latter. 

Following a double default, the 

Physical Segregation Model would lead 

to the same result as the Complete Legal 

Segregation Model. Specifically, the 

DCO would be permitted to access the 

collateral of the defaulting Cleared 

Swaps Customers, but not the collateral 

of the non-defaulting customers. 

As discussed above, one important 

limitation on the effectiveness of the 

Physical Segregation Model is section 

766(h) of the Bankruptcy Code, which 

requires that customer property be 

distributed ratably. Thus, if because of 

Physical Segregation, certain Cleared 

Swaps Customer Collateral was better 

protected than the property of other 

Cleared Swaps Customers, it would not 

be permissible to pay Cleared Swaps 

Customers in the first group a higher 

proportion (i.e., a higher cents-on-thedollar distribution) of their net equity 

claims than Cleared Swaps Customers 

in the second group. Rather, Cleared 

Swaps Customers in both groups would 

receive the same proportion of their 

allowed net equity claims. In other 

words, in spite of incurring greater cost 

under the Physical Segregation Model, a 

Cleared Swaps Customer would 

essentially receive the same level of 

protection for its Cleared Swaps 

Customer Collateral under the Physical 

Segregation Model as it would under the 

LSOC Model. 

4. Futures Model 

The Commission also considered 

replicating the segregation requirement 

currently applicable to futures (the 

‘‘Futures Model’’). Under this model, 

DCOs treat each FCM’s customer 

account on an omnibus basis, that is, as 

belonging to an undifferentiated group 

of customers. 

Prior to a double default, the Futures 

Model shares certain similarities with 

the Legal Segregation Models. 

Specifically, each FCM would enter (or 

‘‘segregate’’), in its books and records, 

the Cleared Swaps of each individual 

customer and relevant collateral. Each 

DCO, however, would recognize, in its 

books and records, the Cleared Swaps 

that an FCM intermediates on a 

collective (or ‘‘omnibus’’) basis. Each 

FCM and DCO would be permitted to 

hold (or ‘‘commingle’’) all Cleared 

Swaps Customer Collateral in one 

account. 


srobinson on DSK4SPTVN1PROD with RULES3
6340 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

21For a more detailed discussion regarding the 

operation of the segregation models in an FCM 

bankruptcy, see section I.D. 

22See generally, CME Group, Inc. (‘‘CME’’) at 14– 

15 (discussing information deficits at bankrupt 

FCM). 

23See 76 FR at 69366–68. 

Following a double default, the 

Futures Model shares certain 

similarities with the Legal Segregation 

with Recourse Model. Specifically, the 

Futures Model would not prohibit a 

DCO from accessing the collateral of the 

non-defaulting Cleared Swaps 

Customers. However, unlike the Legal 

Segregation with Recourse Model, under 

the Futures Model the DCO would be 

permitted to access such collateral 

before applying its own capital or the 

guaranty fund contributions of nondefaulting FCM members.21

5. Optionality 

Finally, the Commission explored 

permitting a DCO to choose between (i) 

the Legal Segregation Models (whether 

Complete or with Recourse), (ii) the 

Physical Segregation Model, and (iii) the 

Futures Model, rather than mandating 

any particular alternative. 

D. Operation of the Segregation Models 

in an FCM Bankruptcy 

When discussing the issues 

surrounding an FCM bankruptcy under 

the Bankruptcy Code, analytically there 

are several scenarios to consider: (1) The 

bankruptcy is unrelated to the loss of 

customer funds, and there is no such 

loss; (2) The bankruptcy involves 

shortfalls in customer funds due to 

operational risks; (3) The bankruptcy 

involves losses due to customer risk 

(i.e., a customer incurs a loss in excess 

of the FCM’s financial ability to cover); 

or (4) the bankruptcy involves shortfalls 

in customer funds due to operational 

risk and losses due to customer risk. 

1. Bankruptcy Unrelated to Loss of 

Customer Funds 

An FCM bankruptcy that is unrelated 

to the loss of customer funds may arise 

because of financial difficulties in the 

FCM, financial difficulties in the 

proprietary accounts, or because of the 

impact of difficulties at a corporate 

parent or affiliate. Under this scenario, 

all models share important 

characteristics: Customer positions and 

related collateral, whether at a DCO or 

at the FCM, can be transferred to one or 

more willing transferee FCMs, or may be 

liquidated and returned to the trustee. 

With respect to fostering transfer, 

however, the Legal Segregation Models 

(whether Complete or with Recourse) 

and the Physical Segregation Model do 

have a significant advantage compared 

to the Futures Model: In each of them, 

information about the customers as a 

whole, and about each individual 

customer’s positions, are transmitted to 

the DCO every day, an information flow 

(and store) that is not present in the 

Futures Model. Thus, each DCO will 

have important customer information on 

a customer by customer basis that can 

be used to facilitate and implement 

transfers, and is thus less reliant upon 

the FCM for that information. 

2. Bankruptcy With Shortfalls Due to 

Operational Risks or Investment Risks 

An FCM bankruptcy with shortfalls 

due to operational risks would arise 

because of a shortfall in segregated 

funds due to, e.g., negligence, theft or 

other mishap. An FCM may also have 

shortfalls due to investment risks 

resulting from extraordinary losses on 

the set of investments permitted under 

regulation 1.25 (as included in new 

regulation 22.2(e)(3)). Under this 

scenario, all models again share 

important characteristics: Customer 

positions and related collateral at a DCO 

may be delivered to the Trustee, or may 

transferred by the DCO, but only to the 

extent of each customer’s pro rata share. 

Under all of the segregation models, to 

the extent there is a shortfall, each 

customer will ultimately receive the 

same cents-on-the-dollar proportion of 

the value of the customer’s account. 

However, with respect to fostering 

transfer, the other models again have a 

significant advantage compared to the 

Futures Model: In each of them, 

information about the customers as a 

whole, and about each individual 

customer’s positions, are transmitted to 

the DCO every day, an information flow 

(and store) that is not present in the 

Futures Model. Thus, each DCO will 

have important customer information on 

a customer by customer basis that can 

be used to facilitate and implement 

transfers, and accordingly is less reliant 

upon the FCM for that information. 

3. Bankruptcy With Shortfalls Due to 

Customer Risk 

An FCM bankruptcy with shortfalls 

due to customer risk would arise 

because a customer incurs a loss that 

exceeds both the customer’s collateral 

and the FCM’s ability to pay. 

Under the Futures Model, the DCO 

could use the entirety of the FCM’s 

customer account (or as much of it as 

necessary) to meet the entire loss 

created by the default. Transfer of 

customer positions would be difficult, 

in that the DCO would lack information 

as to which customers were in default, 

and which positions belonged to 

defaulting customers (and, presumably, 

would not be transferred) and which did 

not.22 The DCO would be permitted to 

liquidate customer positions, a process 

that might take between one and ten 

days.23 Once the loss was crystalized, 

the DCO would be able to turn over the 

collateral (less that used to meet the 

default) to the Trustee for use in the pro 

rata distribution. 

Under the LSOC Model, the DCO 

could only use the collateral attributable 

to defaulting customers (those whose 

positions suffered losses) to meet the 

loss. Thus, all collateral attributable to 

customers whose net positions gained or 

were ‘‘flat’’ (neither gained nor lost), 

and much of the collateral attributable 

to customers whose net positions lost, 

would be immediately available for 

transfer. Moreover, the DCO would have 

information that is no more than one 

business day old tying customers to 

portfolios of positions, and the DCO 

itself would maintain the margining 

methodology that would tie such 

portfolios of positions to the collateral 

requirement associated with such 

portfolios. Even if the DCO decided to 

liquidate all customer positions, the 

collateral of non-defaulting customers 

would be exposed to less loss than 

under the Futures Model because the 

DCO would not have the right to access 

it. 

The Physical Segregation Model 

would work in a manner similar to the 

LSOC Model. Again, all collateral 

attributable to customers whose net 

positions gained or were ‘‘flat’’ (neither 

gained nor lost), and the remaining 

collateral attributable to customers 

whose net positions lost, would be 

immediately available for transfer. The 

DCO would have specific information 

on how much collateral was, in fact, 

attributable to each customer. However, 

because of the ratable distribution 

requirement, any losses that did exist 

would be shared ratably among all 

customers. 

Under the Legal Segregation with 

Recourse, the DCO could only use the 

collateral attributable to defaulting 

customers (those whose positions 

suffered losses) to meet the loss—at 

first. It would also use the defaulting 

clearing member FCM’s own 

contribution to the guaranty fund, its 

own contribution to the guaranty fund, 

as well as the contributions of nondefaulting clearing members. However, 

if those resources were insufficient to 

cover the default, the DCO would have 

‘‘recourse’’ to the collateral of nondefaulting customers. While such 


srobinson on DSK4SPTVN1PROD with RULES3
Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 6341 

24A list of external meetings is available at: 

http://www.cftc.gov/LawRegulation/DoddFrankAct/

Rulemakings/DF_6_SegBankruptcy/index.htm. 

25The transcript from the First Roundtable (the 

‘‘First Roundtable Tr.’’) is available at: http://www.

cftc.gov/ucm/groups/public/@swaps/documents/

dfsubmission/dfsubmission6_102210-transcrip.pdf. 

26The transcript from the Second Roundtable (the 

‘‘Second Roundtable Tr.’’) is available at: http:// 

www.cftc.gov/ucm/groups/public/@swaps/

documents/dfsubmission/dfsubmission6_060311-

transcri.pdf. 

27As noted in section I.B.1, an FCM functions as 

a guarantor of customer transactions with a DCO. 

Section 4d(f) of the CEA prohibits an FCM from 

using the collateral deposited by one Cleared Swaps 

Customer to support the swap transactions of 

another Cleared Swaps Customer. Therefore, if one 

Cleared Swaps Customer owes money to the FCM 

(i.e., the Cleared Swaps Customer has a debit 

balance), the FCM, acting as guarantor, must 

deposit its own capital with the DCO to settle 

obligations attributable to such customer. If the 

Cleared Swaps Customer defaults to the FCM, and 

the Cleared Swaps Customer’s obligations are so 

significant that the FCM does not have sufficient 

capital to meet them, then the FCM would default 

to the DCO. 

As discussed in Section I.B.4, the financial 

resources DCOs maintain to cover Clearing Member 

defaults with respect to customer positions in 

excess of collateral provided by the Clearing 

Member include property of the defaulting Clearing 

Member (i.e., collateral deposited to support FCM 

proprietary transactions and contributions to the 

DCO guaranty fund). Other elements of such 

packages may include: (i) The collateral that the 

FCM deposited to support the transactions of nondefaulting customers; (ii) a portion of the capital of 

the DCO; and (iii) contributions to the guaranty 

fund from other DCO Clearing Members. Typically, 

a DCO would exhaust one element before moving 

onto the next element. Therefore, the risk that the 

DCO would use any one element depends on the 

position of that element in the package. 

28 ‘‘Investment Risk’’ is the risk that each Cleared 

Swaps Customer would share pro rata in any 

decline in the value of FCM or DCO investments of 

Cleared Swaps Customer Collateral. Section 4d(f) of 

the CEA permits an FCM to invest Cleared Swaps 

Customer Collateral in certain enumerated 

instruments. The Commission is proposing to 

expand such instruments to include those 

referenced in regulation 1.25 (as it may be amended 

from time to time). Even though (i) such 

investments are ‘‘consistent with the objectives of 

preserving principal and maintaining liquidity,’’ 

and (ii) both the FCM, as well as the DCO, value 

such investments conservatively (by, e.g., applying 

haircuts), the value of such investments may 

decline to less than the value of the collateral 

originally deposited. See regulation 1.25(b) (as 

amended in Investment of Customer Funds and 

Funds Held in an Account for Foreign Futures and 

Foreign Options Transactions, 76 FR 78776, 

December 19, 2011). In such a situation, all 

customers would share in the decline pro rata, even 

if the invested collateral belonged to certain 

customers and not others. 

29As described below, the term ‘‘Risks Costs’’ 

refers to the costs associated with the allocation of 

loss in the event of a default under the Complete 

Legal Segregation Model relative to the Futures 

Model. For a more detailed explanation of these 

costs, see the discussion in section VII.B.2.b., under 

the heading titled ‘‘‘Risk Costs’ and potential effects 

on margin levels and DCO guaranty fund levels in 

response to complete legal segregation.’’ 

30 75 FR at 75163. For example, one DCO 

estimated that it would have to increase the amount 

of collateral that each Cleared Swaps Customer 

must provide by 60 percent, if it could no longer 

access the collateral of non-defaulting Cleared 

Swaps Customers to cure certain defaults. See infra 

n. 258. 

31 Id. 

recourse is much less likely under the 

Legal Segregation with Recourse Model 

than under the Futures Model—because 

the fellow-customer collateral would 

not be reached unless the loss was great 

enough to consume the entire guaranty 

fund—until the amount of loss from the 

default was crystalized (through 

liquidation or transfer), the DCO might 

be reluctant or unable to release the 

collateral of non-defaulting customers. 

Accordingly, while Legal Segregation 

with Recourse would (in most cases) 

provide customers superior recovery in 

a liquidation, it would be much less 

well-suited to a prompt transfer of 

positions. 

E. Solicitation of Public Input 

The Commission sought public 

comment on the segregation alternatives 

mentioned above, and on the 

advisability of permitting the DCO to 

choose between alternatives. First, the 

Commission, through its staff, held 

extensive external meetings with three 

segments of stakeholders (i.e., DCOs, 

FCMs, and swaps customers).24 Second, 

on October 22, 2010, the Commission, 

through its staff, held a roundtable (the 

‘‘First Roundtable’’).25 Third, on 

November 19, 2010, the Commission 

issued an Advance Notice of Proposed 

Rulemaking for Protection of Cleared 

Swaps Customers Before and After 

Commodity Broker Bankruptcies (the 

‘‘ANPR’’). Fourth, on June 3, 2011, the 

Commission, through its staff, held a 

second roundtable (the ‘‘Second 

Roundtable’’).26 Fifth, after careful 

consideration of the comments the 

Commission received on the ANPR, the 

Commission issued the NPRM. 

1. First Roundtable 

As the ANPR describes, the First 

Roundtable revealed that stakeholders 

had countervailing concerns regarding 

the alternative segregation models that 

the Commission set forth. On the one 

hand, a number of swaps customers 

argued that the Commission should 

focus on effectively eliminating FellowCustomer Risk 27 and Investment Risk.28

Such swaps customers emphasized that 

(i) They currently transact in uncleared 

swaps, (ii) they are able to negotiate for 

individual segregation at independent 

third parties for collateral supporting 

such uncleared swaps, and therefore 

(iii) they are currently subject to neither 

Fellow-Customer Risk nor Investment 

Risk. Such customers found it 

inappropriate that, under certain 

alternatives set forth by the 

Commission, they should be subject to 

Fellow-Customer Risk and Investment 

Risk when they transact in Cleared 

Swaps. 

On the other hand, a number of FCMs 

and DCOs argued that the benefits of 

effectively eliminating Fellow-Customer 

Risk and Investment Risk are 

outweighed by the costs. With respect to 

benefits, these FCMs and DCOs noted 

that the Futures Model has served the 

futures industry well for many decades. 

With respect to costs, these FCMs and 

DCOs described two potential sources. 

First, FCMs and DCOs stated that, 

depending on the manner in which the 

Commission proposes to eliminate or 

mitigate Fellow-Customer Risk and 

Investment Risk, they may experience 

substantial increases to operational 

costs (e.g., costs associated with 

transaction fees, reconciliations, 

recordkeeping, reporting). Second, and 

more significantly, FCMs and DCOs 

stated that they may incur additional 

risk costs due to proposed financial 

resources requirements.29

In addition, some DCOs may have 

anticipated including collateral from 

non-defaulting Cleared Swaps 

Customers as an element in their 

financial resources packages. If DCOs no 

longer have access to such collateral, 

then those DCOs would need to obtain 

additional financial resources to meet 

proposed Commission requirements. 

Both FCMs and DCOs averred that the 

costs associated with obtaining such 

additional financial resources may be 

substantial, and would ultimately be 

borne by Cleared Swaps Customers.30

2. ANPR 

Given the concerns that stakeholders 

expressed at the First Roundtable, the 

Commission decided to seek further 

comment through the ANPR on the 

potential benefits and costs of (i) The 

Legal Segregation Models (whether 

Complete or with Recourse), (ii) the 

Physical Segregation Model, and (iii) the 

Futures Model. As the ANPR explicitly 

stated, ‘‘[t]he Commission [was] 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.’’ 31 In addition, the Commission 

requested comment on the impact of 

each model on behavior, as well as 

whether Congress evinced intent for the 

Commission to adopt any one or more 

of these models. 


srobinson on DSK4SPTVN1PROD with RULES3
6342 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

32All comment letters are available through the 

Commission’s Web site at: http://www.cftc.gov/

LawRegulation/FederalRegister/ProposedRules/

2010-29836. 

33See id. 

34See id. 

35The terms ‘‘portability,’’ ‘‘port,’’ and ‘‘porting’’ 

refer to the ability to reliably transfer the swaps 

(and related collateral) of a non-defaulting customer 

from an insolvent FCM to a solvent FCM, without 

the necessity of liquidating and re-establishing the 

swaps. 

36See ISDA comment letters on ANPR. 

37See id. 

38See Second Roundtable Tr. at 250, l.2 (In 

response to whether the Complete Legal Segregation 

Model would impose operational costs over the 

Futures Model, Ms. Bregasi stated that ‘‘[t]here is no 

additional cost between LSOC and the futures 

model;’’ Mr. Prager stated that ‘‘[w]e don’t see them 

incurring other than the start-up costs, the one time 

that everyone will have to incur to set up, the 

running cost. We don’t see any incremental cost;’’ 

and Mr. MacFarlane stated that ‘‘I would agree there 

are no additional operational costs.’’). See also, 

Second Roundtable Tr. at 239, l.8 (Mr. Frankel 

explaining that operational costs resulting from 

passing ‘‘the client identity and * * * some other 

multiplier that explains how much excess there is 

in the seg account for the client * * * [is] a small 

build.’’); Second Roundtable Tr. at 243, l.22 (Mr. 

Kahn stating that ‘‘in terms of the cost, the fact is 

OTC is a little different than futures because there 

is a tremendous build that everyone is doing in the 

case of OTC so if we need to build LSOC which in 

essence we’ve done in the LCH European model, 

there is a cost of that but I can’t really define what 

it is. It’s relatively small and not material.’’). 

39See Second Roundtable Tr. at 255, l.12 (Mr. 

Frankel arguing that ‘‘Moving to a 99.9 percent 

confidence of coverage we think will increase 

margins by about 60 percent [for rates] * * * I 

think for CDS it could be more than double.’’). See 

also Second Roundtable Tr. at 262, l.2 (Mr. Diplas 

arguing that ‘‘not having the additional pool of 

funds that are associated with the fellow customers 

means that we definitely need to actually margin 

from a CCP perspective, the higher confidence 

interval. That will differ depending on the asset 

class we’re looking at. Some of them, at least based 

on the existing pool of trades, it could be 

manageable like at 60, 70 percent in rates. We’ll talk 

about three to four times the amount that—in 

credit—and the more we get to instruments with 

fatter tails the higher the number is going to be. I 

think that is something that clients need to be 

cognizant of.’’). 

40See, e.g., Second Roundtable Tr. at 257, l.6 (Mr. 

MacFarlane stating that ‘‘what’s being said, if our 

transactions had to be margined on an individual 

basis it would require that we put up 60 to 70 

percent more, which says that then the real risk of 

that transaction is 75 percent more than what we’re 

collateralizing. So in the event of a default, not by 

us but by another counterparty potentially, they 

will be under-collateralized relative to what their 

individual transaction would require, and then that 

potentially could work its way back to us.’’). 

41See, e.g., Second Roundtable Tr. at 259, l.6 

(quoting Mr. Frankel). For a more detailed 

discussion of cost and benefit considerations, 

please see discussion below in section VII. 

As described in the NPRM, the 

Commission received thirty-one 

comments from twenty-nine 

commenters.32 The comments were 

generally divided by the nature of the 

commenter: Most (though not all) of the 

comments from current or potential 

Cleared Swaps Customers favored either 

the Legal Segregation Models (whether 

Complete or with Recourse) or the 

Physical Segregation Model, manifesting 

a willingness to bear the added costs.33

Most of the FCMs and DCOs favored the 

Futures Model, though one commenter 

favored the Complete Legal Segregation 

Model.34 Finally, another commenter, in 

its supplemental comment, opined that 

the most important factor that the 

Commission should consider is the 

extent to which a model fostered the 

portability 35 of Cleared Swaps 

belonging to non-defaulting 

customers.36 This commenter noted that 

the Physical Segregation Model and 

what is now referred to as the Complete 

Legal Segregation Model were most 

conducive to that goal.37

After careful consideration of the First 

Roundtable discussion and the 

comments received in response to the 

ANPR, the Commission issued the 

NPRM on June 9, 2011. 

3. Second Roundtable 

Discussions during the Second 

Roundtable generally reflected the 

conflicting concerns expressed by 

market participants regarding the 

alternative segregation models set forth 

by the Commission. Swaps customers 

continued to state that the Commission 

should focus on mitigating FellowCustomer Risk, with some also 

advocating for the elimination of 

Investment Risk, while FCMs and DCOs 

reiterated that the Commission should 

select the Futures Model as the 

segregation model for Cleared Swaps 

Customer Collateral because the Futures 

Model has served the futures industry 

well for many decades. Pension funds, 

and a few investment managers, 

remained concerned about their 

potential exposure to Fellow-Customer 

Risk and Investment Risk and continued 

to press the Commission to adopt the 

Physical Segregation Model either 

outright or on an optional basis. 

In addition, participants discussed 

various cost and benefits issues arising 

in relation to the Futures and the Legal 

Segregation Models. Specifically, 

several participants believed that the 

operational costs would not be 

significantly different between the 

Futures Model and the Complete Legal 

Segregation Model.38 Moreover, 

although some participants projected 

that risk costs would significantly 

increase if the Commission were to 

select the Complete Legal Segregation 

Model,39 one participant argued that 

these risk costs would not be 

incremental risk costs; rather they are 

risk costs that exist in the Futures 

Model that would most likely ultimately 

be borne by customers.40 Finally, one 

participant argued that any model that 

facilitates the ability to port ‘‘is superior 

to one that doesn’t’’ because ‘‘the 

closeout cost in the future’s model was 

the most expensive,’’ meaning that 

‘‘closing out a client account and rates 

could be extremely devastating to the 

market, and * * * be really significant 

losses * * * [and] any way [the losses] 

can be avoided would be beneficial to 

every participant in the market.’’ 41

4. NPRM 

After carefully considering all 

comments to the ANPR and statements 

made during the First Roundtable 

discussion, the Commission proposed in 

the NPRM the Complete Legal 

Segregation Model as the segregation 

model for Cleared Swaps Collateral 

because the Complete Legal Segregation 

Model provided the best balance 

between benefits and costs in order to 

protect market participants and the 

public. Nonetheless, due in part to the 

strong opposing views expressed by 

market participants, the NPRM made 

clear that the Commission was still 

considering whether to adopt, in the 

alternative, the Legal Segregation with 

Recourse Model, and was continuing to 

assess the feasibility of an optional 

approach and the Futures Model. 

Commenters to the ANPR generally 

observed that customers ultimately 

would bear the costs of implementing 

whatever segregation model was 

selected by the Commission. 

Nonetheless, most (though not all) of the 

buy-side commenters favored individual 

protection for Cleared Swaps Customer 

Collateral. These commenters generally 

viewed the Complete Legal Segregation 

Model as the minimum level of 

protection necessary for Cleared Swaps 

Customer Collateral. Because it was 

largely recognized that customers would 

ultimately bear the costs of 

implementing the selected segregation 

model, the Commission believed it 

appropriate to give weight to the views 

of market participants who would bear 

those costs, and found it compelling 

that most buy-side commenters favored 

adoption of either the LSOC Model or 

the Physical Segregation Model. The 

Commission noted that the Legal 

Segregation Models and the Physical 

Segregation Model would provide 

greater individualized protection to 

Cleared Swaps Customer Collateral than 

the Futures Model, and was in 

accordance with section 4d(f) of the 

CEA. In addition, the Commission noted 

that the LSOC Model and the Physical 

Segregation Model may provide 

substantial benefits in the form of (i) 


srobinson on DSK4SPTVN1PROD with RULES3
Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 6343 

42For a more detailed discussion regarding risk 

costs, see section VII.B.2.b., infra. 

43See 33818 FR at 33828. 44See Committee on Investment of Employee 

Benefit Assets (‘‘CIEBA’’) December 22, 2011 letter 

(‘‘CIEBA Supplemental’’) at 2. 45Amendment of Interpretation, 70 FR 24768, 

May 11, 2005 (Notice) The underlying Financial 

and Segregation Interpretation No. 10 (‘‘Segregation 

Interpretation 10’’) was issued on May 23, 1984, 

and can be found at Comm. Fut. L. Rep. (CCH) 

¶7120. 

46CIEBA Supplemental at 4. 

47These conditions include limitations regarding 

the titling and location of the third-party 

safekeeping account, and requirements concerning 

the FCM’s rights to promptly liquidate positions 

and access collateral. 

48See CIEBA Supplemental at 12 

49See generally CIEBA August 8, 2011 letter 

(‘‘CIEBA Original’’) at 1–5; Salzman at 1–9; CME at 

18; State Street at 2–4. 

Decreased Fellow-Customer Risk, (ii) 

increased likelihood of portability, (iii) 

decreased systemic risk, and (iv) 

positive impact on portfolio margining, 

and asked for comment as to whether 

and why commenters favor or oppose 

adoption of the Futures Model. 

In choosing between the Legal 

Segregation Models and the Physical 

Segregation Model, the Commission 

noted that the operational costs for the 

Physical Segregation Model would be 

substantially higher than the operational 

costs for the Legal Segregation Models 

(whether Complete or with Recourse). 

With respect to benefits, the 

Commission believed that the Physical 

Segregation Model would provide only 

incremental advantages over the 

Complete Legal Segregation Model with 

respect to the mitigation of FellowCustomer Risk. In addition, the 

Commission noted that while the 

Physical Segregation Model does 

eliminate Investment Risk, (i) the 

Commission was in the process of 

further addressing Investment Risk by 

proposing amendments to regulation 

1.25, and (ii) each FCM and DCO 

already values investments 

conservatively. Finally, the Commission 

observed that the Physical Segregation 

Model would generally enhance 

portability to the same extent as the 

Complete Legal Segregation Model, and 

therefore would have similar effects on 

systemic risk. In addition, the 

Commission stated that the Physical 

Segregation Model and the Complete 

Legal Segregation Model would likely 

enhance portfolio margining to the same 

extent. Therefore, the Commission 

chose not to propose the Physical 

Segregation Model in the NPRM. 

In choosing between the Complete 

Legal Segregation Model and the Legal 

Segregation with Recourse Model, the 

Commission noted that commenters 

argued that implementing the former 

would result in significant Risk Costs,42

whereas implementing the latter would 

result in no Risk Costs. In addition, the 

Commission believes that comments to 

the ANPR that question the assumptions 

underlying the upper estimates of Risk 

Costs for the Complete Legal 

Segregation Model have raised credible 

issues regarding the accuracy of those 

estimates. Nevertheless, the 

Commission recognized that such 

assumptions formed an area of 

divergence between commenters, and 

therefore asked for additional comment 

on the Risk Costs for the Complete Legal 

Segregation Model. The Commission 

also observed that operational costs for 

the Complete Legal Segregation Model 

and the Legal Segregation with Recourse 

Model were approximately the same. 

With respect to benefits, the 

Commission noted that the Complete 

Legal Segregation Model would (i) 

Mitigate Fellow-Customer Risk even in 

extreme FCM defaults, unlike the Legal 

Segregation with Recourse Model, (ii) 

enhance portability (and therefore 

mitigate systemic risk) to a significantly 

greater extent than the Legal Segregation 

with Recourse Model, and (iii) have an 

incremental advantage over the Legal 

Segregation with Recourse Model with 

respect to impact on portfolio 

margining.43 Consequently, the 

Commission chose not to propose the 

Legal Segregation with Recourse Model 

in the NPRM, but stated that it was still 

considering this model as an alternative. 

F. Clarification of the Application of 

Financial and Segregation 

Interpretation No. 10 to Cleared Swaps 

In response to the Commission’s 

NPRM, clarification was requested 44

regarding the applicability to the cleared 

swaps market of the Commission’s 2005 

Amendment to Financial and 

Segregation Interpretation No. 10 on the 

Treatment of Funds Deposited in 

Safekeeping Accounts (‘‘Segregation 

Interpretation 10–1’’).45 The commenter 

noted that ‘‘[u]ntil 2005, the CFTC 

permitted the use of third-party 

custodial accounts for futures margin by 

pension plans and investment 

companies registered under the 1940 

Act * * *. In 1984, the CFTC issued 

Financial and Segregation Interpretation 

No. 10 * * *, permitting the use of 

third party custodial accounts for the 

holding of customer property subject to 

certain conditions ensuring that an FCM 

would have immediate and unfettered 

access to customer funds.’’ 46 However, 

Segregation Interpretation 10–1 made it 

clear that, with limited exceptions, 

FCMs would not be in compliance with 

the requirements of section 4d(a)(2) of 

the CEA if they hold customer funds in 

a third-party custodial account. 

The Commission agrees that 

Segregation Interpretation 10–1 does not 

apply to Cleared Swaps. Accordingly, 

and subject to the conditions described 

below, Cleared Swaps Customer 

Collateral may be deposited at a bank in 

a third-party safekeeping account, in 

lieu of posting such collateral directly to 

the FCM, without the FCM being 

deemed in violation of section 4d(f) of 

the CEA, and FCMs are permitted to 

allowed Cleared Swaps Customers to 

elect to have their Cleared Swaps 

Customer Collateral held in such 

accounts. 

However, if an FCM uses, or allows 

the use of, a third-party safekeeping 

account, that FCM must comply with all 

of the conditions for such accounts set 

forth in Segregation Interpretation 10 as 

originally issued in 1984.47 In addition, 

as noted in Segregation Interpretation 

10, though the use of third-party 

safekeeping accounts is not prohibited, 

such collateral constitutes customer 

property within the meaning of the 

Bankruptcy Code. As such, positions 

and collateral held in third-party 

custodial accounts are subject to the 

U.S. Bankruptcy Code and applicable 

provisions in the CEA, which provide 

for the pro rata share of available 

customer property. 

The commenter also requested that 

the Commission revise or repeal 

Segregation Interpretation 10–1 to allow 

futures and options customers to have 

their collateral held in third-party 

safekeeping accounts.48 However, while 

the Commission does not believe it 

would be appropriate to address this 

request at this time, as it is beyond the 

scope of this rulemaking, the 

Commission may address this concern 

in the future. 

The Commission also notes that a 

number of commenters49 have proposed 

alternative arrangements that would 

provide individual protection for 

collateral belonging to cleared swaps 

market participants (and, in some cases, 

futures customers) that are willing and 

able to bear the associated costs. 

However, these proposals raise 

important risk management and cost 

externality issues, particularly with 

respect to ensuring that collateral is 

promptly available to DCOs in the event 

of a default, ensuring proper capital 

treatment for the relevant market 

participants, and protecting all 

customers. 

The Commission has directed staff to 

carefully analyze these proposals with 

the goal of developing proposed rules 

that provide additional protection for 


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6344 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

50The Commission also notes that any market 

participant may become a clearing member of a 

DCO, consistent with the DCO’s membership 

eligibility requirements and the CEA and 

Commission regulations, with all the rights and 

responsibilities associated therewith. 

51See CIEBA Supplemental at 14. 

52All comment letters are available through the 

Commission’s Web site at: http://comments.cftc.

gov/PublicComments/CommentList.aspx?id=1038. 

Comments addressing the proposed rules were 

received from: APG Algemene Pensioen Groep N.V. 

and the European Federation Retirement Provision 

(‘‘APG/EFRP’’), American Council of Life Insurers 

(‘‘ACLI’’), Association of Institutional Investors 

(‘‘AII’’), Bank of America, N.A., BlackRock, Inc. 

(‘‘BlackRock’’), Chris Barnard, CME, CIEBA, Federal 

Home Loan Banks (‘‘FHLB’’), Fidelity Management 

& Research Co. (‘‘Fidelity’’), Freddie Mac, Futures 

Industry Association (‘‘FIA’’), 

IntercontinentalExchange, Inc. (‘‘ICE’’), Investment 

Company Institute (‘‘ICI’’), International Swaps and 

Derivatives Association, Inc. (‘‘ISDA’’), 

LCH.Clearnet Group Limited (‘‘LCH’’), Managed 

Funds Association (‘‘MFA’’), Natural Gas Exchange, 

Inc. (‘‘NGX’’), Newedge USA, LLC (‘‘Newedge’’), 

Och-Ziff Capital Management Group (‘‘Och-Ziff’’), 

Jerrold E. Salzman, Securities Industry and 

Financial Markets Association (‘‘SIFMA’’), Tudor 

Investment Corporation (‘‘Tudor’’), and Vanguard. 

Note, CIEBA, Fidelity and the MFA each submitted 

two comment letters. 

53The following commenters support the 

Complete Legal Segregation Model outright: ACLI, 

AII, BlackRock, Mr. Barnard, Freddie Mac, ICI, 

ISDA, LCH, SIFMA, and Vanguard. APG/EFRP, 

CIEBA, Fidelity, MFA, Tudor and FHLB support 

implementation of the Physical Segregation Model. 

54The commenters in favor of adoption of the 

Futures Model were CME, ICE, Newedge, and Mr. 

Salzman. 

55See ACLI at 2; AII at 1; BlackRock at 1; Barnard 

at 2; Fidelity at 2; Freddie Mac at 2; LCH at 1–2; 

SIFMA at 3; Vanguard at 8. 

56CIEBA at 1; and FHLB at 1. 

57See BlackRock at 3; Fidelity at 5–6; FIA at 3, 

n. 10; ICI at 2; Mr. Barnard at 1; and SIFMA at 3, 

n. 7. 58See, e.g., AII at 3 (stating that the Complete 

Legal Segregation Model effectively eliminates 

Fellow-Customer Risk, enhances portability of 

positions and related margin, and largely avoids the 

costs associated with establishing individually 

segregated accounts); BlackRock at 2 (arguing that 

the Complete Legal Segregation Model ‘‘eliminates 

Fellow-Customer Risk and facilitates ‘immediate’ 

portability of customer positions if required’’); 

CIEBA Original at 5 (acknowledging that the 

Complete Legal Segregation Model could eliminate 

Fellow-Customer Risk); FHLB at 3 (agreeing that the 

Complete Legal Segregation Model greatly reduces 

Fellow-Customer Risk); ICI at 3 (stating that the 

Complete Legal Segregation Model mitigates 

Fellow-Customer Risk); ISDA at 1–2 (agreeing that 

Complete Legal Segregation Model facilitates postdefault portability); MFA at 3–4 (stating that the 

Complete Legal Segregation Model eliminates 

Fellow-Customer Risk and enhances the portability 

of customer positions); Vanguard at 4–6 (arguing 

that the Complete Legal Segregation Model 

addresses counterparty risk and Fellow-Customer 

Risk); and SIFMA at 5 (stating that Complete Legal 

Segregation Model minimizes Fellow-Customer 

Risk and facilitates the ability of Cleared Swaps 

Customers to port their positions to a nondefaulting FCM). 

59AII at 1. 60BlackRock at 6. 61Fidelity at 6. See also LCH at 2–3. The 

Commission has adopted a gross margining 

requirement. See 76 FR at 69374–76. 

collateral belonging to market 

participants.50

The Commission agrees with the 

comment that ‘‘swap margin is not 

meant to enhance the swap dealers’ 

bottom line, but to protect the system 

against counterparty failure,’’ 51 and 

remains committed to protecting the 

market and market participants. 

II. The Final Rules 

In determining the scope and content 

of the final rules, the Commission has 

taken into account issues raised by 

commenters, including those issues 

with respect to the costs and benefits 

associated with the proposed 

segregation model for Cleared Swaps 

Customer Collateral. The Commission 

received twenty-eight (28) comment 

letters on the proposed rules,52 twentyfive (25) of which addressed the issue of 

which segregation model the 

Commission should adopt for Cleared 

Swaps Customer Collateral. Of these 

twenty-five (25), the strong weight of the 

commenters rested in favor of 

individual protection for Cleared Swaps 

Customer Collateral, with twenty (20) 

comment letters supporting 

implementation of the Complete Legal 

Segregation Model, the Physical 

Segregation Model or some combination 

thereof.53 Four (4) comment letters 

supported adoption of the current 

Futures Model,54 with one (1) comment 

letter, from the FIA, showing support for 

both the Complete Legal Segregation 

Model and the Futures Model. 

After carefully considering all 

comments, the Commission has selected 

the Complete Legal Segregation Model 

as the most appropriate segregation 

model for Cleared Swaps Customer 

Collateral under section 4d(f) of the 

CEA. The Commission believes this 

model provides the best balance 

between benefits and costs in order to 

protect market participants and the 

public. The Commission has adopted a 

number of clarifications and corrections 

suggested in the comment letters. In 

other cases the final rules are adopted 

as proposed. The discussion below 

provides a more detailed analysis of the 

issues raised by the comment letters. 

III. Segregation Model for Cleared 

Swaps Customer Collateral 

In the NPRM, the Commission 

proposed the Complete Legal 

Segregation Model but made clear that, 

because the costs and benefits 

associated with the Complete Legal 

Segregation Model were still being 

evaluated, the Commission was 

considering whether to adopt the Legal 

Segregation with Recourse Model as an 

alternative, and was continuing to 

assess the feasibility of the Futures 

Model and a clearinghouse-byclearinghouse Optional Approach. 

Below is a summary of the comments 

the Commission received regarding the 

alternative segregation models for 

Cleared Swaps Customer Collateral. 

A. Summary of the Comments 

1. Complete Legal Segregation Model 

As mentioned above, the majority of 

the comment letters supported adoption 

of the Complete Legal Segregation 

Model either outright or as a viable 

alternative to the Physical Segregation 

Model, with most arguing that the 

Complete Legal Segregation Model 

presents the best balance between costs 

and adequacy of collateral protections,55

and several calling it a ‘‘significant 

improvement over the’’ Futures 

Model.56 Several commenters also 

opined that the Complete Legal 

Segregation Model is supported by the 

statutory language and purposes of the 

Dodd-Frank Act.57

In addition, many of the comment 

letters asserted that the Complete Legal 

Segregation Model largely mitigates 

Fellow-Customer Risk and enhances the 

portability of cleared swap positions 

and associated collateral.58 One 

commenter stated that the Complete 

Legal Segregation Model is ‘‘the most 

cost effective framework to adequately 

protect the margin customers post to 

cleared swap transactions’’ because it 

effectively mitigates Fellow-Customer 

Risk, avoids the costs associated with 

establishing the Physical Segregation 

Model by allowing margin to be held in 

an omnibus account, and enhances the 

portability of cleared swap positions 

and related margin.59 Another 

commenter stated that the Complete 

Legal Segregation Model ‘‘provides the 

most operationally efficient framework 

to manage risk on a daily basis or port 

portfolios especially in periods of 

stress.’’ 60 And yet other commenters 

argued that there has been little 

substantiation of the ‘‘increased costs’’ 

that would arise from implementation of 

the Complete Legal Segregation Model, 

especially with respect to costs 

surrounding the reporting requirements 

associated with maintaining separate 

legal accounts given that ‘‘other 

regulatory rulemakings that require 

similar reporting will likely result in 

many of these incremental operational 

costs being incurred regardless of which 

model is chosen.’’ 61


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62BlackRock at 2–4; Fidelity at 4; SIFMA at 2; 

Vanguard at 3–4. 

63See Fidelity at 2–4; Freddie Mac at 1; and LCH 

at 1. See also Tudor at 2 (arguing that the 

segregation model selected by the Commission 

should not provide a lesser degree of protection for 

Cleared Swaps Customer Collateral). 

64LCH at 1. 

65See, e.g., ICE at 11. 

66See CME at 5 (stating that ‘‘the framework 

established by the [Complete Legal Segregation 

Model] concept and the proposed regulations will 

be wholly inadequate to achieve the Commission’s 

desired objectives: Namely, in an FCM default, the 

preservation of non-defaulting cleared swaps 

customers’ collateral and the ability to port their 

positions and collateral to another FCM.’’). 

67See, e.g., CME at 6–8. See also Mr. Salzman at 

7 (stating that ‘‘the benefits promised by the 

proponents of the [Complete Legal Segregation 

Model] are illusory,’’ and arguing that the 

Commission’s authority to adopt, and a bankruptcy 

court’s willingness to respect, such model are 

questionable). 

68See ICE at 3. 

69See, e.g., Newedge at 8; and CME at 23. 

70See, e.g., Newedge at 4–5. 

71See, e.g., CME at 7. 

72Fraud-related risks are risks associated to an 

FCM’s fraudulent activity with respect to the 

cleared swap margin account. 

73See, e.g., Tudor at 4; CIEBA Original at 1; and 

FHLB at 3–6 (each advocating for the adoption and 

implementation, either outright or on an optional 

basis, of the Physical Segregation Model, though 

acknowledging that the Complete Legal Segregation 

Model is preferable to the Futures Model). 

74See CME at 21–22 (arguing that if Congress 

intended to change the framework for the protection 

of customer collateral it would have explicitly done 

so); FIA at 3, n. 10 (agreeing that the complete legal 

segregation model is permitted by the language of 

section 4d(f), but arguing that Commission reliance 

on the differences between sections 4d(a) and 4d(b) 

are misplaced); and ICE at 5 (arguing that the 

Commission should not rely on the language in 

section 4d(f) because there is no legislative history 

interpreting the statutory language). 

75FHLB at 1; Tudor at 1–2. 

76ACLI at 2; CIEBA at 2; MFA at 2; Mr. Salzman 

at 8. 

77BlackRock at 6; Vanguard at 6. 

78See, e.g., ICI at 2 and 9. 

79See, e.g., ACLI at 2; BlackRock at 5. 

80See, e.g., AII at 2; ICE at 9; FIA at 6; SIFMA 

at 4 n. 9; and Vanguard at 6. 

81CME at 23. 

82 Id. at 2. 

83 Id. 

Several commenters also argued that, 

in selecting a segregation model for 

Cleared Swaps Customer Collateral, the 

Commission should take into account 

the differences between the risk profiles 

of futures and over the counter (‘‘OTC’’) 

swaps.62

Furthermore, commenters argued that, 

unlike the Futures Model, the Complete 

Legal Segregation Model would not 

degrade the collateral protections that 

currently exist in the OTC swaps 

market.63 In addition, one commenter 

indicated that the Complete Legal 

Segregation Model is ‘‘the model that 

most closely parallels the protections 

that [LCH] understand[s] will be 

required in Europe under the European 

Commission’s proposal for a European 

Market Infrastructure Regulation 

(‘‘EMIR’’).’’ 64

Commenters who did not support 

adoption of the Complete Legal 

Segregation Model largely argued that 

(1) The costs of implementing the 

Complete Legal Segregation Model 

outweigh any of the purported benefits 

of such model; 65 (2) the Complete Legal 

Segregation Model would, in the view of 

the commenter, fail to work 

operationally or legally,66 and does not 

take into account the operational 

complexities of multi-tiered and multiDCO clearing; 67 (3) individualized 

segregation potentially introduces 

systemic costs because it impedes 

timely market settlements during 

periods of market stress; 68 (4) since the 

Futures Model has served the industry 

well during times of stress in the futures 

market, it should be the segregation 

model for Cleared Swaps Customer 

Collateral; 69 (5) the Complete Legal 

Segregation Model introduces moral 

hazard; 70 or (6) the Complete Legal 

Segregation Model does not provide 

enough protection of Cleared Swaps 

Customer Collateral because there is 

some residual Fellow-Customer Risk,71

and it does not protect against fraudrelated risks,72 record-keeping/ 

operational risk, and Investment 

Risks.73 Moreover, several commenters 

disagreed with the Commission’s 

interpretation of the statutory language 

in the Dodd-Frank Act, and argued that 

the statutory language cited by the 

Commission does not indicate 

Congressional intent for individual 

protection for Cleared Swaps Customer 

Collateral.74

2. Physical Segregation Model 

Comments with respect to the 

Physical Segregation Model were mixed, 

with some commenters advocating the 

adoption of the Physical Segregation 

Model outright,75 others advocating for 

its adoption on an optional basis,76 and 

others arguing that the Physical 

Segregation Model should not be 

adopted because the increased costs and 

operational burdens associated with 

adoption of the Physical Segregation 

Model outweigh the benefits.77

Two commenters requested that the 

Commission reconsider adoption of the 

Physical Segregation Model on the basis 

that (i) Customer collateral should be 

individually segregated at both the FCM 

and the DCO to provide the same level 

of customer collateral protection that 

currently exists in the OTC swaps 

market, (ii) none of the other models are 

sufficient to fully protect customer 

collateral from recordkeeping/ 

operational, investment and fraudrelated risks, (iii) the Physical 

Segregation Model facilitates porting 

more than the other models, and (iv) the 

commenters would be willing to bear 

any increased costs associated with the 

adoption of the Physical Segregation 

Model.78

In addition, though several 

commenters supported the Complete 

Legal Segregation Model as the best 

alternative under consideration, these 

commenters urged the Commission to 

develop a framework for the adoption of 

the Physical Segregation Model because 

(i) The protections offered by the 

Physical Segregation Model are greater 

than those offered by the Complete 

Legal Segregation Model, (ii) the 

Physical Segregation Model facilitates 

porting more than the other models, and 

(iii) the costs assertions resulting from 

implementing the Physical Segregation 

Model have either not been 

substantiated or are costs that the 

commenters are willing to bear.79

Commenters that opposed adoption of 

the Physical Segregation Model 

generally did so on the basis that 

implementation of the model would 

give rise to substantial increased costs 

with little increased benefit, as 

compared with the Complete Legal 

Segregation Model.80

3. Futures Model 

As mentioned above, four comment 

letters supported adoption of the 

Futures Model, with one commenter 

supporting adoption of both the 

Complete Legal Segregation Model and 

the Futures Model. 

CME argued that the Futures Model 

provides the best balance of costs versus 

industry risk as a whole and is ‘‘the only 

approach that provides both legal and 

operational certainty to all parties in the 

event of an FCM default.’’ 81 According 

to CME, the Complete Legal Segregation 

Model imperfectly protects customer 

collateral and thus, ‘‘the Commission 

[should] not rush [sic] to implement a 

‘solution’ that gives superficial comfort, 

but may not work either operationally or 

legally in the event of an actual 

default.’’ 82 CME encouraged the 

Commission to ‘‘engage in further study, 

and establish a review process that 

includes a representative group of 

interested parties with expertise in the 

area, in order to evaluate alternative 

approaches.’’ 83 Because the Futures 

Model has effectively protected 

customer interests in the futures market, 

CME recommended that, in the interim, 

the Commission implement swaps 

clearing employing the Futures 


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84See id. at 23. 

85 ICE at 3. 

86 Id. 

87 Id. at 3, n. 3. 

88 ICE at 1–2. 

89Newedge at 2. 

90Newedge argues that such disclosure be 

provided in ‘‘plain English’’ on an annual basis, and 

include the following data: 

The FCM’s total equity, regulatory capital and net 

worth; 

The dollar value of the FCM’s proprietary margin 

requirements as a percentage of its segregated and 

secured customer margin requirements; 

What number of the FCM’s customers comprise 

an agreed significant percentage of its customer 

segregated funds; 

The aggregate notional value of non-hedged, 

principal OTC transactions into which the FCM has 

entered; 

The amount, generic source and purpose of any 

unsecured and uncommitted short-term funding the 

FCM is using; 

The aggregate amount of financing the FCM 

provides for customer transactions involving 

illiquid financial products for which it is difficult 

to obtain timely and accurate prices; 

The percentage of customer ‘‘bad debts’’ the FCM 

had during the prior year compared to its year-end 

segregated and secured customer funds; and 

A summary of the FCM’s current risk practices, 

controls and procedures. 

Newedge at 7. See also FHLB at 7, n. 14 

(encouraging the Commission, in response to a 

question in the NPRM regarding additional 

disclosure of FCM financial information, to make 

such information publicly available on a real time 

basis); and MFA at 5 (arguing that ‘‘if the 

Commission mandates the disclosure by FCMs of 

certain financial information, customers will be in 

a better position than they are today to evaluate the 

financial strength of their FCM.’’). 

91See, e.g., AII at 1–2; BlackRock at 2, 7–8; CIEBA 

Original at 5; FHLB at 6–7; Fidelity at 3; Freddie 

Mac at 1–2; SIFMA at 5; and Vanguard at 4–5. 

92Blackrock at 8. 

93 Id. 

94Freddie Mac at 2. 

95FHLB at 6–7. 

96FHLB at 7. FHLB also states that market 

participants have a statutory right to segregate 

initial margin they post for uncleared swaps with 

an independent custodian. Id. at 6. 

97FHLB at 7. 

Model.84 Moreover, CME suggests that 

the Commission support a new industry 

effort to, at some point in the future, 

develop and implement a guaranteed 

clearing participant relationship that 

would allow a client, on an optional 

basis, to have a direct relationship with 

a DCO, with the client’s positions 

guaranteed by a guaranteeing clearing 

member of the DCO and the client’s 

Cleared Swaps Customer Collateral held 

in an outside account by a third party 

custodian. 

Mr. Salzman supported adoption of 

the Futures Model with optional full 

physical segregation of Cleared Swaps 

Customer Collateral. 

ICE advocated adoption of the Futures 

Model, arguing against fundamentally 

changing a clearinghouse’s existing 

operations, and positing that customers 

that wish to avoid Fellow-Customer 

Risk might explore becoming direct 

clearing participants once they ‘‘fully 

appreciate[e] the substantial costs * * * 

associated with implementing and 

maintaining [the Complete Legal 

Segregation Model].’’ 85 However, ICE 

also proposed, as a middle ground, a 

model that appears to be based on the 

Futures Model but that provides some 

protection against Fellow-Customer 

Risk. ICE explained that its ICE Clear 

Credit affiliate had adopted a model 

under which, ‘‘customers are exposed to 

‘fellow-customer risk’ only with respect 

to the customer’s pro-rata share of the 

net customer-related margin 

requirement of its clearing member.’’ 86

ICE Clear Credit considers ‘‘the 

difference between a customer’s gross 

margin requirement and the customer’s 

net margin requirement’’ to be ‘‘Excess 

Margin.’’ 87 ICE stated that a customer’s 

Excess Margin is segregated and held by 

ICE Clear Credit on a custodial basis and 

is therefore not exposed to FellowCustomer Risk. ICE argued that this 

model would provide some protection 

against Fellow-Customer Risk but would 

be more cost-effective than the proposed 

Complete Legal Segregation Model. In 

addition, ICE stated that individual 

segregation should be offered to 

customers at the option of a DCO, and 

also advanced the notion that the 

Commission should ‘‘carefully consider 

and weigh the costs and benefits of 

potential customer-related OTC clearing 

models by asset class * * *.’’ 88

Newedge, which submitted a 

comment on behalf of itself, DRW 

Trading Group and nine ‘‘Customers,’’ 

supported adoption of the Futures 

Model on the basis that the Futures 

Model ‘‘is the model most consistent 

with the general purposes of Title VII of 

Dodd-Frank as well as least likely to add 

moral hazard to the industry.’’ 89

Newedge argued that Title VII is about 

the reduction of systemic risk through 

the mutualization of risk, and that by 

mutualizing credit risk the Futures 

Model promotes the purpose of the 

Dodd-Frank Act because such 

mutualization encourages the creation 

and maintenance of well-capitalized 

FCMs. In addition, Newedge argued that 

the loss of customer off-sets would 

increase moral hazard because it would 

encourage FCMs to maintain less excess 

capital. Furthermore, Newedge 

suggested that, as an alternative to the 

adoption of the Complete Legal 

Segregation Model, the Commission 

should require greater FCM disclosure 

to allow customers to better assess 

Fellow-Customer Risk.90

Comment letters supporting 

individual protection for customer 

collateral over the Futures Model 

generally did so on the basis that the 

Futures Model (i) does not protect 

Cleared Swaps Customer Collateral from 

Fellow-Customer Risk, Investment Risk, 

operational risk or fraud-related risk, 

and (ii) does not facilitate the portability 

of customer positions and associated 

collateral in the event of an FCM’s 

default.91

BlackRock argued that not only does 

the Futures Model fail to address the 

core risk differences between futures 

and OTC swaps, but because of the 

buffer created by the mutualized risk 

provided by the customer collateral, the 

Futures Model may result in less 

stringent selection and oversight of 

customers by FCMs.92 In addition, 

BlackRock argued that the moral hazard 

argument advocated by proponents of 

the Futures Model presumes that futures 

customers have access to information 

that allows them to make informed 

decisions regarding their fellow 

customers. However, BlackRock stated 

that access to such information is 

currently lacking, there are no 

requirements or incentives for a DCO or 

FCM to inform a customer when a 

fellow customer is in a stress or 

potential default situation and, as a 

result, customers are forced to rely on 

DCOs and regulators for protection.93

Freddie Mac argued that by allowing 

DCOs to access the collateral of nondefaulting customers to cover the losses 

of defaulting customers, the Futures 

Model provides a ‘‘subsidy to DCOs, 

FCMs and their riskiest customers at the 

expense of customers that present less 

risk[, and] this non-transparent shifting 

of risk would create moral hazard and 

inefficient credit decisions.’’ 94

Similarly, FHLB argued that DCOs 

and FCMs should bear all FellowCustomer Risk as they are in a superior 

position to conduct analyses of other 

cleared swap customers.95 In addition, 

FHLB indicated that if the Commission 

adopts the Futures Model as the 

segregation model for Cleared Swaps 

Customer Collateral, it would be 

anomalous for market participants to 

have the initial margin they post for 

Cleared Swaps face greater risk than the 

initial margin they post for uncleared 

swaps.96 Moreover, the Futures Model 

would impede portability because the 

collateral posted for Cleared Swaps 

‘‘could be tied up in the omnibus 

account indefinitely.’’ 97

SIFMA stated that avoiding FellowCustomer Risk presented by the Futures 

Model should be the most important 


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98SIFMA at 3. 

99See SIFMA at 4–6. 

100 Vanguard at 5. 

101 Id. 

102 Id. 

103See BlackRock at 7; FHLB at 7; Freddie Mac 

at 2; FIA at 6–7; MFA at 2; and Vanguard at 4. 

104See, e.g., CME at 16. 

105See, e.g., MFA at 3 n. 11 (stating ‘‘[t]he 

Commission should allow market participants to 

elect the Physical Segregation Model but only to the 

extent that it is compatible with the Complete Legal 

Segregation Model. We are not advocating that the 

Commission adopt the ‘‘Optional Approach’’ set 

forth in the Proposing Release, because we believe 

that approach would be very difficult to 

implement.’’); ACLI at 2 (supporting the option to 

negotiate and select the Physical Segregation 

Model); BlackRock at 5 (stating that BlackRock 

would support an optional approach if the 

Commission believes such an approach would be 

prudent, but cautions that optionality may present 

implementation challenges and result in portability 

delays); CIEBA Original at 1 (promoting optional 

individual segregation of Cleared Swaps Customer 

Collateral); CME at 17–20 (arguing that the 

Commission should support efforts to establish 

programs that would permit individuals to 

physically segregate the collateral associated with 

their Cleared Swaps positions on an optional basis); 

and Tudor at 6 (arguing that if the Commission does 

not adopt the Physical Segregation Model, the 

Commission should ‘‘require DCOs to offer various 

segregation models to their cleared swaps 

customers, including full physical segregation.’’). 

106See 76 FR at 33825. 

107See 76 FR at 33829. 

108CME at 20. 

109 ISDA at 2. 

110FIA at 6. 

111CME at 6. 

112See supra note 13. 

113See supra at Section 1.B.6. 

114 76 FR at 33821 n. 21. 

objective in selecting a segregation 

model for Cleared Swaps Customer 

Collateral and, as such, none of the 

members of the Asset Management 

Group supports the Futures Model.98 In 

addition, SIFMA argued that the Futures 

Model does not facilitate portability to 

the same extent as the Complete Legal 

Segregation Model and, therefore, is not 

as effective at reducing systemic risk.99

Vanguard asserted that the Futures 

Model exposes market participants to 

Fellow-Customer Risk and because this 

risk is not a factor in the OTC swaps 

markets, the magnitude of such risk is 

not something that a customer could 

ever assess, especially given the 

‘‘complete lack of transparency with 

respect to [an] FCM’s other customers 

and their trading positions.’’ 100

Furthermore, Vanguard stated that 

mutualization of customer losses 

effectively allows ‘‘less sophisticated 

analysis of the risk presented by 

individual customers and their trading 

portfolios as such individual risk can 

ultimately be covered by the overall 

pool of margin posted by all of the 

FCM’s customers,’’ with the result that 

‘‘riskier customers (and trading 

portfolios) [are] likely to be under 

margined and safer clients (and trading 

portfolios) [are] likely to be over 

margined relative to their actual level of 

risk presented to the system.’’ 101 In 

sum, Vanguard stated that, given the 

differences between the swaps and 

futures markets, the Futures Model 

could expose a Cleared Swaps Customer 

to significantly greater and potentially 

unlimited risk.102

4. Legal Segregation With Recourse 

Model 

None of the comment letters received 

by the Commission appeared to support 

the Legal Segregation with Recourse 

Model. Commenters that discussed this 

model generally stated that the 

Commission should not adopt the Legal 

Segregation with Recourse Model 

because either (1) by failing to mitigate 

Fellow-Customer Risk, it is substantially 

inferior to the Complete Legal 

Segregation Model 103 or (2) it suffers 

from the same shortcomings as the 

Complete Legal Segregation Model since 

it is costly to implement and fails to 

mitigate investment and operational 

risks.104

5. Optional Approach 

Though some commenters expressed 

a desire to have optional full physical 

segregation of Cleared Swaps Customer 

Collateral, none of the commenters 

supported the Optional Approach 

outlined by the Commission.105 Under 

this approach, each DCO would choose 

the level of customer collateral 

protection it chooses to offer.106 The 

Commission noted that this approach 

might be reconciled with section 766(h) 

of the Bankruptcy Code by permitting 

DCOs to require that FCMs establish 

separate legal entities, each of which is 

limited to clearing at DCOs that use only 

the same customer collateral protection 

model.107

One commenter stated that it is 

‘‘likely that the benefits of creating such 

a regulatory structure would be 

illusory,’’ 108 while another argued that 

‘‘[o]ptionality will produce complexity 

and expense that might be tolerable 

when the cleared swaps market is well 

established, but that will be burdensome 

to a developing market.’’ 109 In addition, 

one commenter expressed concern 

regarding the appropriateness of the 

Commission adopting a segregation 

regime ‘‘that provides protection to 

customers based on their ability and 

willingness to pay.’’ 110

B. Discussion of the Comments 

After careful analysis of the issues 

raised by the comment letters with 

respect to the selection of a segregation 

model for Cleared Swaps Customer 

Collateral, the Commission is adopting 

the Complete Legal Segregation Model. 

As described above, the majority of 

market participants supported adoption 

of either the Complete Legal Segregation 

Model or the Physical Segregation 

Model. In addition, while certain 

technical corrections/clarifications were 

requested, none of the commenters 

identified material new information 

with respect to costs or benefits 

associated with the adoption of the 

Complete Legal Segregation Model or 

any other model under consideration. 

Some commenters did, however, reiterate their view that their business 

model depended upon receiving 

stronger protection for their Cleared 

Swaps Customer Collateral than what 

exists under the Futures Model. These 

commenters are accustomed to paying 

for the higher costs implicit in separate 

accounting in the current bilateral 

market. 

On the other hand, CME, ICE, and Mr. 

Salzman identified a number of issues 

with the Complete Legal Segregation 

Model, including a number of 

limitations on the protection it provides 

to customers. They did not, however, 

provide reason to reject the conclusion 

that the Complete Legal Segregation 

Model provides substantially greater 

protection against Fellow-Customer Risk 

than the Futures Model. 

CME notes 111 that a portion of the 

Cleared Swaps Customer Collateral will 

be held at the FCM, not the DCO, and 

that this collateral will not be protected 

by Complete Legal Segregation in the 

event that an FCM becomes insolvent. 

This proposition is true 112 but is of 

little or no relevance to the comparison 

of Complete Legal Segregation with the 

Futures Model favored by these 

commenters. Complete Legal 

Segregation is intended to protect 

against Fellow-Customer Risk. As 

discussed in the NPRM and above,113

Fellow-Customer Risk is the risk that 

the collateral of one customer will be 

used to compensate a DCO for market 

losses resulting from the swaps of 

another customer.114 In other words, 

Fellow-Customer Risk arises in 

connection with collateral maintained 

in an FCM’s customer account posted 

with a DCO because, under the Futures 

Model, the DCO is potentially entitled 

to take all of the collateral in this 

account to cover losses created by the 

swaps of any customer. However, 

Cleared Swaps Customer Collateral held 

at the FCM (or at a location other than 

at the DCO, such as a bank) is not 

accessible to the DCO. Thus, such 


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6348 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

115As explained above, FCMs typically maintain 

two separate Cleared Swaps Customer Accounts. 

One is maintained at the DCO and contains 

collateral required by the DCO to secure current 

swaps positions. The second is maintained by the 

FCM itself, typically at a bank, and contains 

collateral provided to the FCM by customers but not 

currently posted to the account at the DCO. 

116Section 4d(f)(2)(B) of the CEA, 7 U.S.C. 

6d(f)(2)(B). 

117Moreover, as noted above (see supra section 

I.D.2), while the LSOC Model does not protect 

against operational risk any more than the Futures 

Model, it is superior in that it enhances the ability 

to transfer collateral after an insolvency caused by 

operational risk. 

118See regulation 1.25(b). 

119CME at 9. 

120Commission regulation 1.12(h) emphasis 

added. 

121CME at 13. 

122 Id. at 12. 

123 Id. at 14. 

124The Lehman Brothers FCM was placed into a 

Securities Investor Protection Corporation 

liquidation on Friday, September 19, 2008. 

125CME at 14 (citation omitted). 

126This transfer was authorized in the hours 

immediately following the commencement of 

Lehman’s liquidation, and was implemented in the 

hours immediately thereafter. 

127CME at 15. 

collateral is not subject to FellowCustomer Risk.115 While Cleared Swaps 

Customer Collateral in the customer 

account at the FCM is available to meet 

customers’ swaps-related obligations to 

the FCM, the FCM is prohibited by 

statute from using one customer’s 

Cleared Swaps Customer Collateral as 

margin or security for another 

customer’s swaps.116

To be sure, Cleared Swaps Customer 

Collateral is subject to operational risk— 

the risk that, due to fraud, 

incompetence, or other mishap, 

customer funds that are required to be 

segregated are lost. Operational risk, 

however, is common to all of the 

segregation models for Cleared Swaps 

Customer Collateral, including the 

Physical Segregation Model.117

Collateral at the FCM is also subject to 

a modicum of Investment Risk. But 

Commission regulation 1.25, upon 

which regulation 22.2(e)(1) is based, is 

designed to ensure that customer 

segregated funds are invested in a 

manner that minimizes their exposure 

to credit, liquidity, and market risks 

both to preserve their availability to 

customers and DCOs and to enable 

investments to be quickly converted to 

cash at a predictable value in order to 

avoid systemic risk. Towards these 

ends, regulation 1.25 establishes a 

general prudential standard by requiring 

that all permitted investments be 

‘‘consistent with the objectives of 

preserving principal and maintaining 

liquidity.’’ 118

CME also provides a detailed 

description of how, due to the ‘‘the 

extended operational timeline for 

derivatives clearing and the netting of 

payments,’’ a customer could default on 

a payment on Tuesday, but the DCO 

would, due to a countervailing gain by 

a different customer or customers of the 

same clearing member, not see such a 

default until after Wednesday’s clearing 

cycle (payments for which may not be 

due until Thursday morning).119 This 

analysis elides the fact that, pursuant to 

the calculations required under 

regulation 22.2(f), an FCM with a 

customer who incurred a loss in excess 

of that customer’s Cleared Swaps 

Customer Collateral would, unless and 

until that customer posted additional 

collateral, be required to have covered 

such loss with the FCM’s own capital 

deposited into the Cleared Swaps 

Customer Account. If, at any moment, 

such customer loss was not covered by 

the FCM’s own capital, then the FCM 

would be in violation of its segregation 

requirements. Pursuant to Commission 

regulation 1.12(h), 

[w]henever a person registered as a futures 

commission merchant knows or should know 

that the total amount of its funds on deposit 

in segregated accounts on behalf of customers 

* * * is less than the total amount of such 

funds required by the Act and the 

Commission’s rules to be on deposit in 

segregated * * * accounts on behalf of such 

customers, the registrant must report such 

deficiency immediately by telephonic notice 

* * * to the registrant’s designated selfregulatory organization and the principal 

office of the Commission in Washington, DC 

* * *.120

Thus, an FCM whose customer suffers 

such a loss which is not covered by the 

FCM’s own capital on deposit in the 

Cleared Swaps Customer Account will 

certainly know of such deficiency no 

later than noon the next day 

(Wednesday in CME’s example), when it 

will be required, pursuant to regulation 

22.2(g), to compute its segregated funds 

requirements and the amount of 

segregated funds it has on deposit to 

meet such requirements. Moreover, the 

Commission believes that an FCM 

carrying a customer account that suffers 

losses in excess of that firm’s ability to 

cover ‘‘should know’’ of such losses by 

the end of that trading day (Tuesday in 

CME’s example). 

Such notice will permit the 

Commission to act to notify the relevant 

clearing organizations and to ensure that 

prompt action is taken to either bring 

capital in to enable the FCM to meet its 

segregated funds requirements or to 

otherwise act to minimize customer 

losses. 

CME implies that a successful porting 

of customer accounts requires 

information that is ‘‘100% accurate,’’ 121

and that an FCM is unlikely to meet that 

standard each day. CME also notes that 

there may be portfolio changes in 

customer accounts on the day of 

default.122 Moreover, CME notes that a 

defaulting FCM may have systems that 

fail.123 CME notes that in the case of 

Lehman Brothers,124 there was a 

‘‘rushed, confused, uncertain and nearpanic atmosphere,’’ as described in the 

report of the SIPA Trustee.125

Recent experience demonstrates, 

however, that transfers can occur 

despite less than perfect information. 

For example, in the case of the 

bankruptcy of Lehman Brothers the 

commodity customer accounts were 

effectively transferred to Barclays over 

the weekend of September 20–21, 2008, 

immediately following the 

commencement of the liquidation of the 

firm,126 and any discrepancies were 

resolved, despite the difficulties 

described. Indeed, the key issue will be 

to identify the collateral attributable to 

the defaulting customer, as 

distinguished from the collateral 

attributable to all other customers, as 

discrepancies between non-defaulting 

customers can be resolved either as 

transferred accounts are reconciled, or 

through the claims process. 

Thus, while CME is correct in stating 

that ‘‘the risk of ultimate financial loss 

to customers due to a fellow-customer 

default is reduced but certainly not 

eliminated under CLSM,’’ 127 the 

Commission concludes, based on its 

experience with its rules in general and 

with FCM bankruptcies in particular, 

that the probability and probable 

amount of such loss is far less than CME 

implies. 

Moreover, the swift portability of 

collateral associated with customer 

positions in the event of an FCM’s 

default remains problematic under the 

Futures Model where there is a 

customer default. Furthermore, many of 

the imperfections of the Complete Legal 

Segregation Model and the residual 

Fellow-Customer Risk associated 

therewith that were highlighted by CME 

arise from the ‘‘last-day risk’’ that 

results from the fact that information 

about each customer’s positions is only 

provided once each day. However, the 

NPRM made clear in relevant portions 

of sections 22.11 and 22.12, and the 

Commission reiterates herein, that 

information must be provided and 

calculations must be made at least once 

a business day. In other words, many of 

the imperfections discussed by CME are 

not inherent to the Complete Legal 

Segregation Model. Rather, each DCO is 

free to make improvements to that 


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Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 6349 

128 Id. at 9 (emphasis supplied). 

129 In addition, during the Second Roundtable, 

Ms. Taylor of CME stated that with respect to risk 

management, CME is ‘‘set up to do it in the overthe-counter business at the individual customer 

level.’’ See Second Roundtable Tr. at168, l. 10. 

130See also Second Roundtable Tr. at 171, l. 18 

(Ms. Taylor stating that ‘‘on a day-to-day basis we 

don’t see the collateral that’s in the account of a 

customer at an FCM, but we do have transparency 

into the efficacy of the practices of holding margin 

and holding it in segregated accounts through the 

financial supervision and audit functions so that 

there is ongoing monitoring of that * * *’’). 

131See Second Roundtable at p. 183, 1.12–p. 184, 

1.10 (In reference to the disclosure of additional 

FCM information, Mr. Kahn stating ‘‘Barclays does 

agree and would be willing to show our riskmanagement procedures and policies, and we do 

talk to our buy side clients about that * * * [but] 

if Barclays is providing clearing services for any of 

the individual firms on the other side of the table, 

we do not say that, nor would we ever give out any 

position level information. It is very important to 

us that in whatever paradigm it’s set up and how 

you evaluate from a risk-management standpoint 

that the buy side and their trades that they’ve put 

on that we are serving remains confidential and 

does not leak to the market in any side.’’); and 

Second Roundtable at p. 185, 1.6 (Ms. Taylor stating 

that ‘‘when we know when people clear, that’s very 

confidential information and I’m very sympathetic 

to the fear about fellow customer risk, but I’m also 

very sympathetic to the fact that none of you would 

want your information disclosed so that there is a 

balance on the other side * * *’’). See also In re 

Stotler and Co., 144 B.R. 385, 393 (Bankr.N.D.Ill. 

1992) (‘‘[T]he legislative history of 11 U.S.C. 766 

emphasizes that the risk of a broker’s bankruptcy 

is not to be borne by the customer * * *.’’ 

Individual customers ‘‘face a formidable task in 

researching the relative solvency, reputation, and 

success of competing FCMs.’’). 

132CME at 16. 

133 Id. 

134Under the Commission’s proposal, the term 

‘‘clearing member’’ means ‘‘any person that has 

clearing privileges such that it can process, clear 

and settle trades through a derivatives clearing 

organization on behalf of itself or others. The 

derivatives clearing organization need not be 

organized as a membership organization.’’ 

135The Commission proposed to define 

‘‘permitted depository’’ as a depository that is a 

bank located in the United States, a trust company 

located in the United States, a Collecting Futures 

Commission Merchant registered with the 

Commission (but only with respect to a Depositing 

Futures Commission Merchant providing Cleared 

Swaps Customer Collateral), or a derivatives 

clearing organization registered with the 

Commission. In addition, the FCM or the DCO must 

hold a written acknowledgment letter from the 

depository as required by proposed regulation 22.5. 

minimum regulatory standard if the 

DCO finds such improvements to be 

technologically feasible and 

economically justifiable. For example, a 

DCO could require its clearing members 

to identify the customer associated with 

each swap as it is cleared, and the DCO 

could use this information to associate 

gains and losses more tightly with each 

customer, thereby minimizing ‘‘last-day 

risk.’’ The NPRM and this final rule 

simply set a minimum threshold for 

daily tracking. 

With respect to costs associated with 

evaluating the credit risks of individual 

customers, CME noted that it calculates, 

‘‘at the end of each trading day * * * 

for each FCM’s cleared swaps customer 

account * * * the net position of each 

customer in the account [and] the net 

margin requirement for each customer 

in the account.’’ 128 Thus, based on 

CME’s description of its current clearing 

practices, it would appear that CME 

already undertakes an individualized 

evaluation of the sufficiency of the 

collateral posted by each customer of an 

FCM.129 In addition, as CME notes, 

‘‘FCMs are subject to compliance audits 

that are conducted for each FCM by the 

DCO serving as its ‘‘designated selfregulatory organization.’’ 130 It would 

therefore seem that at least some of the 

costs associated with evaluating the 

credit risk of individual customers are 

already being incurred by DCOs. 

With respect to ICE’s proposal, the 

Commission notes that it would provide 

less Fellow-Customer Risk protection 

than the Complete Legal Segregation 

Model. The fact that swap customers 

seem to overwhelmingly favor at least as 

much Fellow-Customer Risk protection 

as afforded to them under the Complete 

Legal Segregation Model, 

notwithstanding the potential costs, 

weighs in favor of the Complete Legal 

Segregation Model rather than ICE’s 

proposal. 

With respect to Newedge’s suggestion 

for increased disclosure of FCM 

information, additional disclosure is 

often beneficial, and the Commission 

will consider additional disclosure 

requirements as a means of enhancing 

protection for collateral belonging to 

market participants. However, because 

of confidentiality concerns, any feasible 

enhanced disclosure is insufficient for 

quantifying risk exposure to FellowCustomer Risk and, thus, insufficient for 

providing Cleared Swaps Customers 

with the ability to effectively manage 

such exposure.131 Moreover, even if it 

were practical to provide Cleared Swaps 

Customers with information sufficient 

to assess Fellow-Customer Risk, that 

task is better left to the DCO since (1) 

DCOs have a concentrated ability to 

ensure adequate risk mitigation, and (2) 

having each Cleared Swaps Customer 

effectively risk-manage each FCM 

would likely entail duplication with 

resulting cost. 

Thus, after careful analysis of the 

comments, the Commission believes 

that the Complete Legal Segregation 

Model provides the most appropriate 

framework for the protection of Cleared 

Swaps Customer Collateral at this time. 

None of the segregation models the 

Commission considered provides 

perfect protection for Cleared Swaps 

Customer Collateral, and the degree of 

imperfection of any of the models is 

influenced by ‘‘the facts and 

circumstances’’ of an FCM default. 

However, as CME notes, the Complete 

Legal Segregation Model ‘‘would, on its 

face, lead to greater protection of cleared 

swaps customer collateral against 

Fellow-Customer Risk than the Futures 

Model’’ 132 and is ‘‘more likely to 

facilitate portability of cleared swaps 

customer positions than the Futures 

Model, in the event of an FCM default 

in its cleared swaps customer account 

* * *.’’ 133 Furthermore, the Complete 

Legal Segregation Model provides the 

best balance between benefits and costs 

in order to protect market participants 

and the public. 

Finally, while the Complete Legal 

Segregation Model is a critical step in 

the efforts to protect customers and their 

collateral, as noted above, the 

Commission is actively considering 

seeking notice and comment on a 

proposal to allow individual protection 

of client assets. In addition, the 

Commission is directing staff to look 

into the possibility of adopting the 

Complete Legal Segregation Model for 

the futures market. The Commission 

remains committed to protecting market 

participants. 

IV. Section by Section Analysis: 

Regulation Part 22 

A. Regulation 22.1: Definitions 

Proposed regulation 22.1 established 

definitions for, inter alia, the following 

terms: ‘‘cleared swap,’’ ‘‘cleared swaps 

customer,’’ ‘‘cleared swaps customer 

account,’’ ‘‘cleared swaps customer 

collateral,’’ ‘‘cleared swaps proprietary 

account,’’ ‘‘clearing member,’’ 134

‘‘collecting futures commission 

merchant,’’ ‘‘commingle,’’ ‘‘customer,’’ 

‘‘depositing futures commission 

merchant,’’ ‘‘permitted depository,’’ 135

and ‘‘segregate.’’ 

1. ‘‘Segregate’’ and ‘‘Commingle’’ 

Regulation 22.1 proposed definitions 

for the terms ‘‘segregate’’ and 

‘‘commingle’’ that are intended to codify 

the common meaning of such terms 

under the part 1 of the Commission’s 

regulations (the ‘‘Part 1 Provisions’’). 

Pursuant to the proposal, to ‘‘segregate’’ 

two or more items means to keep them 

in separate accounts and to avoid 

combining them in the same transfer 

between accounts. In contrast, 

‘‘commingle’’ means to hold two or 

more items in the same account, or to 

combine such items in a transfer 

between accounts. The Commission did 

not receive comments on these 


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6350 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

136Section 4d(a) of the CEA, 7 U.S.C. 6d(a). 

137Section 4d(f) of the CEA, 7 U.S.C. 6d(f). 

138 76 FR 69441. 

139Proposed regulation 22.1 provides that 

‘‘Cleared Swaps Customer Collateral’’ includes 

collateral that an FCM or a DCO receives from, for, 

or on behalf of a Cleared Swaps Customer that 

either (i) is actually margining, guaranteeing, or 

securing a Cleared Swap or (ii) is intended to 

margin, guarantee, or secure a Cleared Swap. This 

provision is a clarification of ‘‘customer funds’’ as 

defined in regulation 1.3, which includes ‘‘all 

money, securities, and property received by a 

futures commission merchant or by a clearing 

organization from, for, or on behalf of, customers or 

option customers * * * to margin, guarantee, or 

secure futures contracts.’’ 

140See FIA at 7–8. 

proposed definitions and is, therefore, 

adopting them as proposed. 

2. ‘‘Cleared Swap’’ 

Regulation 22.1 proposed a definition 

of the term ‘‘Cleared Swap’’ that (i) 

excludes, for purposes of Part 22 only, 

cleared swaps (and related collateral) 

that, pursuant either to a Commission 

rule, regulation, or order (including an 

order under section 4d(a) of the CEA) or 

to a DCO rule approved in accordance 

with regulation 39.15(b)(2),136 are 

commingled with futures contracts (and 

related collateral) in a customer account 

established for the futures contracts, but 

(ii) includes, for purposes of Part 22 

only, futures contracts or foreign futures 

contracts (and, in each case, related 

collateral) that, pursuant to either a 

Commission rule, regulation, or order 

(including an order under section 4d(f) 

of the CEA) or to a DCO rule approved 

in accordance with regulation 

39.15(b)(2),137 are commingled with 

cleared swaps (and related collateral) in 

a customer account established for the 

cleared swaps. The Commission did not 

receive comments on the proposed 

definition of ‘‘Cleared Swap’’ and is 

adopting it as proposed with one 

change. The Commission finalized 

regulation 39.15 on October 18, 2011.138

That final regulation requires a DCO 

seeking to commingle Cleared Swaps 

(and related collateral) with futures 

contracts (and related collateral) in a 

futures account to petition for a 

Commission order under section 4d(a) 

of the CEA. Thus, the final definition of 

‘‘Cleared Swap’’ in this rulemaking 

removes the reference to DCO rule 

approval procedures relevant to such 

commingling. 

3. ‘‘Cleared Swaps Customer’’ and 

‘‘Customer’’ 

Regulation 22.1 proposed definitions 

of ‘‘Cleared Swaps Customer’’ and 

‘‘Customer.’’ The Commission is 

adopting the definitions of ‘‘Cleared 

Swaps Customer’’ and ‘‘Customer’’ 

essentially as proposed, except that a 

technical amendment is made to the 

definition of Cleared Swaps Customer to 

clarify that a clearing member of a DCO 

is not a Cleared Swaps Customer with 

respect to Cleared Swaps cleared on that 

DCO. 

4. ‘‘Cleared Swaps Customer Collateral’’ 

Proposed regulation 22.1 defined 

Cleared Swaps Customer Collateral to 

include (i) money, securities, or other 

property that an FCM or a DCO receives, 

from, for, or on behalf of a Cleared 

Swaps Customer that is intended to or 

does margin, guarantee, or secure a 

Cleared Swap 139 or, if the Cleared Swap 

is in the form or nature of an option, 

constitutes the settlement value of such 

option and (ii) ‘‘accruals,’’ which are the 

money, securities, or other property that 

an FCM or DCO receives, either directly 

or indirectly, as incident to or resulting 

from a Cleared Swap that the FCM 

intermediates for a Cleared Swaps 

Customer. The proposed definition 

explicitly included a Cleared Swap in 

the form or nature of an option as 

Cleared Swaps Customer Collateral, but 

did not explicitly include option 

premiums as Cleared Swaps Customer 

Collateral. The proposed definition also 

explicitly included in ‘‘accruals’’ the 

money, securities, or other property that 

a DCO may receive relating to the 

Cleared Swap that an FCM 

intermediates for a Cleared Swap 

Customer. 

FIA suggested that the Commission 

confirm that the term Cleared Swaps 

Customer Collateral includes all assets 

provided by a Cleared Swaps Customer, 

including any sums required by an FCM 

to margin a Cleared Swap, even if that 

sum is in excess of the amount required 

by the relevant DCO, as well as 

collateral ‘‘voluntarily’’ deposited by a 

Cleared Swaps Customer in a Cleared 

Swaps Customer Account.140 In 

response, the Commission is clarifying 

that the definition of Cleared Swaps 

Customer Collateral includes any sums 

required by an FCM that is intended to, 

or does, margin a Cleared Swap as well 

as collateral ‘‘voluntarily’’ deposited by, 

or on behalf of, a Cleared Swaps 

Customer in a Cleared Swaps Customer 

Account. Moreover, in response to this 

comment, the Commission is adding a 

new section 22.13(c), which states that 

collateral posted by a Cleared Swaps 

Customer in excess of the amount 

required by a DCO (the ‘‘excess 

collateral’’) may be transmitted by the 

Cleared Swaps Customer’s FCM to the 

DCO if, but only if, (i) the FCM is 

permitted to do so by DCO rule and (ii) 

the DCO provides a mechanism by 

which the FCM can identify the amount 

of such excess collateral attributable to 

each Cleared Swaps Customer, and such 

mechanism is employed effectively to 

accomplish that goal. 

5. ‘‘Cleared Swaps Customer Account’’ 

and ‘‘Cleared Swaps Proprietary 

Account’’ 

As proposed, regulation 22.1 defined 

a ‘‘Cleared Swaps Customer Account’’ 

as (i) an account that an FCM maintains 

at a Permitted Depository for the 

Cleared Swaps (and related collateral) of 

its Cleared Swaps Customers, or (ii) an 

account that a DCO maintains at a 

Permitted Depository for collateral 

related to Cleared Swaps that the FCM 

members intermediate for their Cleared 

Swaps Customers. Regulation 22.1 also 

proposed a definition for ‘‘Cleared 

Swaps Proprietary Account’’ that is 

substantially similar to regulation 1.3, 

which defines ‘‘Proprietary Account’’ 

for futures contracts. The Commission 

requested comment on whether the 

proviso in paragraph (b)(8), which states 

that ‘‘an account owned by any 

shareholder or member of a cooperative 

association of producers, within the 

meaning of section 6a of the Act, which 

association is registered as an FCM and 

carries such account on its records, shall 

be deemed to be a Cleared Swaps 

Customer Account and not a Cleared 

Swaps Proprietary Account of such 

association, unless the shareholder or 

member is an officer, director, or 

manager of the association,’’ remains 

relevant, particularly with respect to 

Cleared Swaps. The Commission did 

not receive comments on these 

proposed definitions and is, therefore, 

adopting the definitions of ‘‘Cleared 

Swaps Customer Account’’ and 

‘‘Cleared Swaps Proprietary Account’’ 

as proposed. 

6. ‘‘Clearing Member’’ 

Regulation 22.1 proposed a definition 

of ‘‘Clearing Member.’’ The Commission 

did not receive comments on this 

proposed definition. Therefore, the 

Commission is adopting the definition 

of ‘‘Clearing Member’’ as proposed. 

7. ‘‘Collecting Futures Commission 

Merchant’’ and ‘‘Depositing Futures 

Commission Merchant’’ 

Proposed regulation 22.1 defined a 

‘‘Collecting Futures Commission 

Merchant’’ or ‘‘Collecting FCM’’ as one 

that carries Cleared Swaps on behalf of 

another FCM and the Cleared Swaps 

Customers of that other FCM and, as 

part of doing so, collects Cleared Swaps 


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141For the avoidance of doubt, an FCM does not 

become a Collecting FCM simply by intermediating 

the proprietary transactions of another FCM. An 

FCM only becomes a Collecting FCM by 

intermediating, on behalf of another FCM, Cleared 

Swaps belonging to Cleared Swaps Customers (and 

the relevant collateral). 

142As the discussion on the proposed definition 

of ‘‘Cleared Swaps’’ highlights, if the Commission 

adopts a rule or regulation or issues an order 

pursuant to section 4d(a) of the CEA, or if the 

Commission approves DCO rules pursuant to 

regulation 39.15(b)(2) permitting such 

commingling, the Commission would apply the 

corresponding provisions and Part 190 to the 

Cleared Swap (and related collateral) as if the swap 

constituted a futures contract (and related 

collateral). 

In contrast, if the Commission adopts a rule or 

regulation or issues an order pursuant to section 

4d(f) of the CEA, or if the Commission approves 

DCO rules pursuant to regulation 39.15(b)(2) 

permitting such commingling, the proposed 

definition of ‘‘Cleared Swap’’ would operate to 

apply Part 22 and Part 190 to (i) the futures contract 

(and related collateral) or (ii) the foreign futures 

contract (and related collateral) as if such contracts 

constituted Cleared Swaps (and related collateral). 

143As mentioned above, an entity may 

simultaneously transact (i) Futures contracts, (ii) 

foreign futures contracts, (iii) Cleared Swaps, and 

(iv) uncleared swaps. Such entity would constitute 

a Cleared Swaps Customer only with respect to its 

Cleared Swaps. 

144 ISDA at 4–5. 

145See MFA at 5–6. 

Customer Collateral.141 In contrast, a 

‘‘Depositing Futures Commission 

Merchant’’ or ‘‘Depositing FCM’’ was 

defined as one that carries Cleared 

Swaps on behalf of its Cleared Swaps 

Customers through a Collecting FCM, 

and, as part of doing so, deposits 

Cleared Swaps Customer Collateral with 

such Collecting FCM. The Commission 

did not receive comments on these 

proposed definitions and is adopting the 

definitions of ‘‘Collecting Futures 

Commission Merchant’’ and 

‘‘Depositing Futures Commission 

Merchant’’ as proposed. 

8. ‘‘Permitted Depository’’ 

Regulation 22.1 proposed a definition 

of ‘‘Permitted Depository.’’ The 

Commission did not receive comments 

on this proposed definition and is, 

therefore, adopting the definition of 

‘‘Permitted Depository’’ as proposed. 

B. Regulation 22.2—Futures 

Commission Merchants: Treatment of 

Cleared Swaps Customer Collateral 

Regulation 22.2 proposed 

requirements for an FCM’s treatment of 

Cleared Swaps Customer Collateral, as 

well as the associated Cleared Swaps. 

1. In General 

Proposed regulation 22.2(a) required 

an FCM to treat and deal with the 

Cleared Swaps of Cleared Swaps 

Customers, as well as associated Cleared 

Swaps Customer Collateral, as belonging 

to the Cleared Swaps Customers. The 

Commission did not receive any 

comments on regulation 22.2(a) and is 

therefore adopting regulation 22.2(a) as 

proposed. 

2. Location of Collateral 

Proposed regulation 22.2(b) required 

that an FCM segregate all Cleared Swaps 

Customer Collateral that it receives. 

Additionally, proposed regulation 

22.2(b) required that an FCM adopt one 

of two methods to hold segregated 

Cleared Swaps Customer Collateral, 

which parallel either implicit 

assumptions or explicit provisions of 

regulation 1.20(a). 

The Commission did not receive any 

comments on regulation 22.2(b) and is 

therefore adopting regulation 22.2(b) as 

proposed. 

3. Commingling 

Proposed regulation 22.2(c) permitted 

an FCM to commingle the Cleared 

Swaps Customer Collateral of multiple 

Cleared Swaps Customers, while 

prohibiting the FCM from commingling 

Cleared Swaps Customer Collateral 

with: 

• FCM property, except as permitted 

under proposed regulation 22.2(e) (as 

discussed below); or 

• ‘‘customer funds’’ (as regulation 1.3 

defines such term) for futures contracts 

or the ‘‘foreign futures or foreign options 

secured amount’’ (as regulation 1.3 

defines such term), except as permitted 

by a Commission rule, regulation or 

order (or a derivatives clearing 

organization rule approved pursuant to 

regulation 39.15(b)(2)).142

The Commission did not receive any 

comments on regulation 22.2(c) and is 

therefore adopting regulation 22.2(c) as 

proposed. 

4. Limitations on Use 

Proposed regulation 22.2(d) 

prohibited an FCM from (i) using, or 

permitting the use of, the Cleared Swaps 

Customer Collateral of one Cleared 

Swaps Customer to purchase, margin, or 

settle the Cleared Swaps, or any other 

transaction, of a person other than the 

Cleared Swaps Customer; (ii) using 

Cleared Swaps Customer Collateral to 

margin, guarantee, or secure the nonCleared Swap contracts (e.g., futures or 

foreign futures contracts) of the entity 

constituting the Cleared Swaps 

Customer; 143 (iii) imposing, or 

permitting the imposition of, a lien on 

Cleared Swaps Customer Collateral, 

including on any FCM residual financial 

interest therein; and (iv) claiming that 

any of the following constitutes Cleared 

Swaps Customer Collateral: 

• Money invested in the securities, 

memberships, or obligations of any 

DCO, designated contract market 

(‘‘DCM’’), swap execution facility 

(‘‘SEF’’), or swap data repository 

(‘‘SDR’’); or 

• Money, securities, or other property 

that any DCO holds and may use for a 

purpose other than to margin, guarantee, 

secure, transfer, adjust or settle the 

obligations incurred by the FCM on 

behalf of its Cleared Swaps Customers. 

ISDA argued that these proposed rules 

could prevent or inhibit portfolio 

margining, even where netting itself is 

legally enforceable, and stated that the 

Commission should ‘‘acknowledge in 

rule that excess collateral may be 

managed and applied so as to facilitate 

portfolio based-margining (including to 

the benefit of uncleared swaps).’’ 144 FIA 

requested that the Commission confirm 

that regulation 22.2(d) will permit FCMs 

to take security interests in their Cleared 

Swaps Customers’ Cleared Swaps 

Customer Accounts in support of other 

positions held by such customers at the 

FCM, or for other entities (including 

affiliates of FCMs) to take such security 

interests in support of financing the 

Cleared Swaps Customer’s margin 

obligations. MFA asked the Commission 

to ensure that Cleared Swaps Customers 

are able to grant liens on Cleared Swaps 

Customer Collateral (subordinate to a 

DCO’s rights) to be able to continue 

entering into cross-product, and other 

multilateral, netting agreements. MFA 

also argued that the Commission should 

either (i) modify proposed regulation 

22.2(d)(2) to limit application of the rule 

to ‘‘prohibiting an FCM’s creditors from 

obtaining a lien on [Cleared Swaps 

Customer Collateral]’’ or (ii) clarify in 

the final rule release or in interpretive 

guidance that the language of proposed 

regulation 22.2(d) is not intended to 

limit a Cleared Swaps Customer’s ability 

‘‘to grant liens on entitlements to 

cleared swap positions and related 

collateral as contemplated by UCC 9– 

102(14), 102(15), 9–102(16), 9–102(17), 

9–102(49);’’ provided such lien does not 

impair a DCO’s first priority interests to 

such collateral.145

As explained above, ‘‘excess’’ 

collateral refers to the collateral that a 

Cleared Swaps Customer deposits with 

an FCM or DCO that is more than the 

amount required by the FCM or DCO to 

margin such customer’s Cleared Swaps 

portfolio. Since the ‘‘excess’’ collateral 

belongs to the Cleared Swaps Customer, 

and is not required by the FCM or DCO, 

it is entirely proper for the Cleared 

Swaps Customer to manage the 

collateral. The Cleared Swaps Customer 

may manage ‘‘excess’’ collateral by 

giving instructions to the FCM to, 


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6352 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

146Regulation Part 22 creates the presumption 

that all money, securities, and other property 

deposited in a Cleared Swaps Customer Account 

constitutes Cleared Swaps Customer Collateral. 

Therefore, in order for a Cleared Swaps Customer 

to use ‘‘excess’’ collateral to margin, e.g., uncleared 

swaps, such customer must direct the transfer of 

such collateral from the Cleared Swaps Customer 

Account. 

147An FCM customer account is an account 

maintained by the FCM on behalf of a specific 

Cleared Swaps Customer that holds assets provided 

by that Cleared Swaps Customer, or other assets of 

equivalent value, that are not currently posted with 

the DCO to support swaps positions cleared by the 

FCM on behalf of such Cleared Swaps Customer. 

Typically, an FCM customer account constitutes a 

notation in the books and records of the FCM, and 

not a separate account at a depository. For a more 

detailed discussion of FCM customer accounts, see 

the discussion in section I.B.5. 

148Regulation 22.2(e)(3) proposes to permit an 

FCM to deposit only those securities that are 

unencumbered and are of the types specified in 

regulation 1.25. Such proposal accords with 

regulation 1.23. See regulation 1.23. The 

Commission notes, however, that this proposal does 

not, and is not meant to, require a DCO to accept 

all of the types of securities or other property 

specified in regulation 1.25. 

149See SIFMA at 10; and Vanguard at 7. 150See ISDA at 8–9. 

among other things, transfer such 

collateral from one account (e.g., a 

Cleared Swaps Customer Account) to 

another account (e.g., a futures 

account).146 However, it is less clear 

how collateral that is not ‘‘excess’’— 

namely, collateral margining cleared 

positions (for which the counterparty is 

the DCO, through the FCM)—can also be 

used to margin uncleared positions (for 

which the counterparty is, by definition, 

other than a DCO). Accordingly, while 

the Commission supports the benefits of 

portfolio margining, the Commission 

does not believe it would be prudent to 

permit collateral margining cleared 

positions to simultaneously be used to 

margin uncleared positions. 

In addition, the Commission clarifies 

that an FCM may not, under any 

circumstances, grant a lien to any 

person (other than to a DCO) on its 

Cleared Swaps Customer Account, or on 

the FCM’s residual interest in its 

Cleared Swaps Customer Account. On 

the other hand, a Cleared Swaps 

Customer may grant a lien on the 

Cleared Swaps Customer’s individual 

cleared swaps account (an ‘‘FCM 

customer account’’) that is held and 

maintained at the Cleared Swaps 

Customer’s FCM.147 The Commission 

notes that by permitting a Cleared 

Swaps Customer to grant a lien on that 

Cleared Swaps Customer’s FCM 

customer account, an FCM is not 

permitting the grant of a lien on Cleared 

Swaps Customer Collateral. 

Furthermore, the Commission confirms 

that regulation 22.2(d) permits (i) FCMs 

to take a security interest in a Cleared 

Swaps Customer’s FCM customer 

account in support of other positions 

held by such customer at the FCM, and 

(ii) other entities (including affiliates of 

FCMs) to take a security interest in a 

Cleared Swaps Customer’s FCM 

customer account in support of 

financing the Cleared Swaps Customer’s 

margin obligations. 

5. Exceptions 

Regulation 22.2(e) proposed certain 

exceptions to the abovementioned 

requirements and limitations. 

Specifically, proposed regulation 

22.2(e)(1) allowed an FCM to invest 

Cleared Swaps Customer Collateral in 

accordance with regulation 1.25, as such 

regulation may be amended from time to 

time. Proposed regulation 22.2(e)(2) 

permitted an FCM to withdraw Cleared 

Swaps Customer Collateral for such 

purposes as meeting margin calls at a 

DCO or a Collecting FCM, or to meet 

charges lawfully accruing in connection 

with a cleared swap, such as brokerage 

or storage charges. Proposed regulation 

22.2(e)(3) permitted an FCM (i) to place 

its own property in an FCM Physical 

Location or (ii) to deposit its own 

property in a Cleared Swaps Customer 

Account.148 Finally, as proposed, 

regulation 22.2(e)(4) clarified that, if an 

FCM places or deposits its own property 

in an FCM Physical Location or a 

Cleared Swaps Customer Account, as 

applicable, then that property becomes 

Cleared Swaps Customer Collateral. 

However, an FCM would be permitted 

to retain a residual financial interest in 

property in excess of that necessary. 

SIFMA and Vanguard argued that the 

Commission should require an FCM to 

identify when it has used its own 

capital to meet a Cleared Swap 

Customer’s margin obligation and 

whether such capital can be used by a 

DCO to cure a defaulting Cleared Swap 

Customer’s margin obligations.149 To 

address this comment, the Commission 

is amending regulation 22.2(e)(3) to 

distinguish between (a) cases where an 

FCM uses its own capital to cure a 

Cleared Swaps Customer’s 

undermargined or deficit account and 

(b) cases where an FCM uses its own 

capital to create a ‘‘buffer’’ in the 

Cleared Swaps Customer Account. The 

Commission notes that in case (a), the 

FCM has, in essence, provided an 

advance to the Cleared Swaps Customer, 

and the DCO should be able to use such 

collateral to meet a default by that 

Cleared Swaps Customer to the same 

extent as if that Cleared Swaps 

Customer provided the collateral. 

However, in case (b) the FCM has 

provided collateral that does not belong 

to any specific Cleared Swaps Customer, 

and thus there is no reason to restrict 

the use of that collateral to any specific 

Cleared Swaps Customer. The 

Commission also notes that, to the 

extent the DCO permits the FCM to post 

‘‘excess’’ collateral, the DCO must, 

through its own rules, require that the 

FCM separately account for the 

separately identified ‘‘buffer collateral’’ 

(which originated from the FCM’s own 

capital) and the collateral attributed (at 

the DCO) to the FCM’s Cleared Swaps 

Customers (which belongs to those 

customers). 

ISDA noted that the use of ‘‘such’’ in 

regulation 22.2(e)(4)(ii) is ambiguous 

and could imply that an FCM has a 

residual interest only in the particular 

account (i.e., cash versus securities) into 

which it has deposited property. ISDA 

argued that this might cause unintended 

consequences if the customer deposits a 

security and the FCM, faced with a need 

to advance variation margin on behalf 

such customer in cash, does not 

liquidate the security but rather deposits 

cash secured by that security. ISDA 

suggested that the Commission clarify 

the language by making clear that the 

FCM has a residual interest in all 

property in Cleared Swaps Customer 

Accounts in excess of that required by 

the regulation 22.2(f)(4) segregation 

requirement.150 In response, the 

Commission clarifies that an FCM has a 

residual interest in all property in 

Cleared Swaps Customer Accounts in 

excess of that required by the regulation 

22.2(f)(4) segregation requirements. 

e. Requirements As to Amount 

As proposed, regulation 22.2(f) set 

forth an explicit calculation for the 

amount of Cleared Swaps Customer 

Collateral that an FCM must maintain in 

segregation, which did not materially 

differ in the Form 1–FR–FCM from the 

calculation for ‘‘customer funds’’ of 

futures customers. First, proposed 

regulation 22.2(f) defined ‘‘account’’ to 

reference an FCM’s books and records 

pertaining to the Cleared Swaps 

Customer Collateral of a particular 

Cleared Swaps Customer. Second, 

proposed regulation 22.2(f) required an 

FCM to reflect in its account for each 

Cleared Swaps Customer the market 

value of any Cleared Swaps Collateral 

that it receives from such customer, as 

adjusted for: 

• Any uses that proposed regulation 

22.2(d) permits; 

• Any accruals or losses on 

investments permitted by proposed 

regulation 22.2(e) that, pursuant to the 

applicable FCM customer agreement, 


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151 ISDA at 6–7. 

152See FIA at 7–8 & nn. 25–30. 

153The FIA cited to a number of cases where 

courts have stated that ‘‘Congress intended that 

futures commission merchants be entitled to any 

and all interest on their investment of customer 

margin funds.’’ See id. at n. 29 (citing Marchese v. 

Shearson Hayden Stone, Inc. 644 F.Supp. 1381 

(C.D. Cal. 1986), aff’d, 822 F.2d 876 (9th Cir. 1987); 

Craig v. Refco, 624 F.Supp 944 (N.D. Ill. 1983), 

aff’d. 816 F.2d 347 (7th Cir. 1987) (confirming that 

‘‘the FCM, not the customer, bears the risk of any 

decline in the value of investments purchased with 

customer funds’’); and Bibbo v. Dean Witter 

Reynolds, Inc., 151 F.3d 559 (6th Cir. 1998). See 

also id. at 8–9 & n. 31. 

154AII at 4. The term ‘‘initial margin’’ is defined 

in regulation 1.3(ccc) and means ‘‘money, 

securities, or property posted by a party to a futures, 

option, or swap as performance bond to cover 

potential future exposures arising from changes in 

the market value of the position.’’ The term 

‘‘variation margin’’ is defined in regulation 1.3(fff) 

and means ‘‘a payment made by a party to a futures, 

option, or swap to cover the current exposure 

arising from changes in the market value of the 

position since the trade was executed or the 

previous time the position was marked to market.’’ 

155Because of pro rata distribution, limiting the 

investments of customer funds attributable to 

individual customers would be insufficient to 

protect such customers from Investment Risk 

attributable to the investment of customer funds 

attributable to other customers within the same 

account class. 

156See FIA at 10–11. 

are creditable or chargeable to such 

Cleared Swaps Customer; 

• Any charges lawfully accruing to 

the Cleared Swaps Customer, including 

any commission, brokerage fee, interest, 

tax, or storage fee; and 

• Any appropriately authorized 

distribution or transfer of the Cleared 

Swaps Collateral. 

Third, proposed regulation 22.2(f) 

categorized accounts of Cleared Swaps 

Customers as having credit or debit 

balances. Accounts where the market 

value of Cleared Swaps Customer 

Collateral is positive after adjustments 

have credit balances. Conversely, 

accounts where the market value of 

Cleared Swaps Customer Collateral is 

negative after adjustments have debit 

balances. Fourth, proposed regulation 

22.2(f) required an FCM to maintain in 

segregation, in its FCM Physical 

Location and/or its Cleared Swaps 

Customer Accounts at Permitted 

Depositories, an amount equal to the 

sum of any credit balances that Cleared 

Swaps Customers have in their 

accounts, excluding from such sum any 

debit balances that Cleared Swaps 

Customers have in their accounts (the 

‘‘Collateral Requirement’’). Finally, 

regulation 22.2(f) proposed an exception 

to the exclusion of debit balances. 

Specifically, to the extent that a Cleared 

Swaps Customer deposited ‘‘readily 

marketable securities’’ with the FCM to 

secure a debit balance in its account, 

then the FCM must include such 

balance in the Collateral Requirement. 

‘‘Readily marketable’’ was defined as 

having a ‘‘ready market’’ as such latter 

term is defined in rule 15c3–1(c)(11) of 

the Securities and Exchange 

Commission (§ 241.15c3–1(c)(11) of this 

title). Proposed regulation 22.2(f) 

deemed a debit balance ‘‘secured’’ only 

if the FCM maintains a security interest 

in the ‘‘readily marketable securities,’’ 

and holds a written authorization to 

liquidate such securities in its 

discretion. To determine the amount of 

the debit balance that the FCM must 

include in the Collateral Requirement, 

proposed regulation 22.2(f) required the 

FCM (i) to determine the market value 

of such securities, and (ii) to reduce 

such market value by applicable 

percentage deductions (i.e., ‘‘securities 

haircuts’’) as set forth in rule 15c3– 

1(c)(2)(vi) of the Securities and 

Exchange Commission. The FCM would 

include in the Collateral Requirement 

that portion of the debit balance, not 

exceeding 100 percent, which is secured 

by such reduced market value. The 

Commission requested comment on the 

Collateral Requirement proposed in 

regulation 22.2(f). Specifically, the 

Commission requested comment on 

whether the explicit calculation of such 

Collateral Requirement materially 

differs from the implicit calculation in 

the Part 1 Provisions for segregated 

‘‘customer funds’’ of futures customers. 

ISDA expressed concern that the 

definition of Cleared Swaps Customer 

Collateral may sweep in investment 

returns, which may be inconsistent with 

regulation 22.10 that allows DCOs and 

FCMs to keep investment returns unless 

otherwise agreed and regulation 

22.2(f)(2)(ii) that refers to investment 

returns creditable to a customer by 

agreement.151 FIA asked the 

Commission to clarify whether the 

definition of Cleared Swaps Customer 

Collateral included the interest earned 

on investments of customer funds, 

which FCMs have traditionally been 

permitted to retain.152 In addition, FIA 

stated that because an FCM is required 

to include accruals or losses on 

investments of customer collateral 

under proposed regulation 22.3, the 

provision appears to state that 

customers can agree to assume all or a 

portion of the losses incurred in 

connection with the investment of 

customer collateral. FIA ‘‘does not 

believe that a customer may agree to 

share in losses incurred in connection 

with investments under Rule 1.25.’’ 153

The Commission confirms that 

investment returns are includable in 

Cleared Swaps Customer Collateral only 

to the extent creditable pursuant to the 

customer agreement. As such, the 

Commission is deleting the words ‘‘or 

losses’’ and ‘‘or chargeable,’’ from 

regulation § 22.2(f)(2)(ii). To be clear, 

Cleared Swaps Customers are not 

responsible for losses on investments 

made pursuant to, and in accordance 

with, regulation 1.25. 

AII requested that the Commission 

‘‘ensure that swaps customers may 

direct the investments in which initial 

margin is invested, as is done today 

through bilateral agreements with dealer 

counterparties.’’ 154 While Cleared 

Swaps Customers in the Cleared Swaps 

Customer Account Class would share in 

Investment Risk, the Commission notes 

that these comments are beyond the 

limited scope of these regulations, and 

it will consider how to address them 

outside of this rulemaking. However, 

nothing contained herein would limit 

an FCM from adopting as a policy—and 

commit itself by contract with its 

customers—to further limit its 

investments of customer funds for all 

customers of one or more account 

classes (i.e., futures, foreign futures, 

Cleared Swaps).155

FIA argued that the calculation 

requirements set forth in regulation 22.2 

pose an excessive burden because an 

FCM cannot offset negative and positive 

balances in different currencies. Thus, if 

a Cleared Swaps Customer has a 

positive balance in USD but a negative 

balance in Euro, the FCM would need 

to deposit its own capital to cover the 

negative balance in Euro without 

respect to the Cleared Swaps Customer’s 

positive balance in USD. FIA noted that 

though proposed regulation 22.2(g) 

mirrors existing regulation 1.32(a), there 

is an important difference in 

circumstances that warrants different 

treatment of the two cases: while 

relatively few futures contracts traded 

on U.S. DCMs are denominated in a 

foreign currency, a significant number 

of Cleared Swaps are expected to be 

denominated in foreign currencies.156 In 

response, the Commission recognizes 

the concerns expressed by the FIA. 

However, efforts to provide that an FCM 

may, in making its segregation 

calculations, include a debit balance to 

the extent such balance is secured by 

funds in other currencies, subject to 

appropriate haircuts, are beyond the 

limited scope of this rulemaking. The 

Commission will, therefore, consider 

how to address these issues outside of 

this rulemaking. 

f. Segregated Account; Daily 

Computation and Record 

Proposed regulation 22.2(g) required 

an FCM to compute, as of the close of 


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6354 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

157 ‘‘Noon’’ refers to noon in the time zone where 

the FCM’s principal office is located. 

158See 76 FR at 69390–92. 159 ISDA at 5. See FIA at 9. 

160FIA at 9 (emphasis supplied). 

161 ICE at 10. 

162 ISDA at 5. 

163 Id. 

164 Id. at 6. 

165FIA at 9, n. 33. 

166 ISDA at 6. 

each business day, on a currency-bycurrency basis: 

• The aggregate market value of the 

Cleared Swaps Customer Collateral in 

all FCM Physical Locations and all 

Cleared Swaps Customer Accounts at 

Permitted Depositories (the ‘‘Collateral 

Value’’); 

• The Collateral Requirement; and 

• The amount of the residual 

financial interest that the FCM holds in 

such Cleared Swaps Customer Collateral 

(i.e., the difference between the 

Collateral Value and the Collateral 

Requirement). 

Proposed regulation 22.2(g) also 

required the FCM to complete the 

abovementioned computation prior to 

noon157 on the next business day, and 

to keep all computations, together with 

supporting data, in accordance with 

regulation 1.31. 

The Commission did not receive any 

comments on regulation 22.2(g) and is 

therefore adopting regulation 22.2(g) as 

proposed. 

C. Regulation 22.3—Derivatives Clearing 

Organizations: Treatment of Cleared 

Swaps Customer Collateral 

Regulation 22.3 proposed 

requirements for DCO treatment of 

Cleared Swaps Customer Collateral from 

FCMs, as well as the associated Cleared 

Swaps. Specifically, regulation 22.3(a) 

required a DCO to treat Cleared Swaps 

Customer Collateral deposited by an 

FCM as belonging to the Cleared Swaps 

Customers of that FCM and not other 

persons. Moreover, regulation 22.3(b) 

required DCOs to segregate all Cleared 

Swaps Customer Collateral either with 

itself or a Permitted Depository. 

Proposed regulation 22.3(c) allowed a 

DCO to commingle the Cleared Swaps 

Customer Collateral that it receives from 

multiple FCMs on behalf of their 

Cleared Swaps Customers, while 

prohibiting the DCO from commingling 

Cleared Swaps Customer Collateral with 

(i) The money, securities, or other 

property belonging to the DCO, (ii) the 

money, securities, or other property 

belonging to any FCM, or (iii) other 

categories of funds that it receives from 

an FCM on behalf of Customers, 

including ‘‘customer funds’’ (as 

regulation 1.3 defines such term) for 

futures contracts or the ‘‘foreign futures 

or foreign options secured amount’’ (as 

regulation 1.3 defines such term), except 

as permitted by a Commission rule, 

regulation or order (or by a derivatives 

clearing organization rule approved 

pursuant to regulation 39.15(b)(2)).158

Regulations 22.3(d) and (e), on the other 

hand, proposed certain exceptions to 

the abovementioned requirements and 

limitations. Regulation 22.3(d) as 

proposed (i) allowed a DCO to place 

money, securities, or other property 

belonging to an FCM in a DCO Physical 

Location, or deposit such money, 

securities, or other property in the 

relevant Cleared Swaps Customer 

Account, pursuant to an instruction 

from the FCM, and (ii) to permit FCM 

withdrawals of money, securities, or 

other property from a DCO Physical 

Location or Cleared Swaps Customer 

Account. Proposed regulation 22.3(d) is 

being deleted consistent with the 

changes to regulation 22.2(e)(3), which 

require delineation between cases where 

an FCM posts collateral on behalf of a 

particular customer and cases where an 

FCM posts collateral on behalf of its 

customer account in general. Proposed 

regulation 22.3(e) (now, regulation 

22.3(d)) allowed a DCO to invest 

Cleared Swaps Customer Collateral in 

accordance with regulation 1.25, as such 

regulation may be amended from time to 

time. 

The Commission requested comment 

on what, if any, changes to proposed 

regulation 22.3 may be appropriate to 

accommodate the possibility that a 

depository registered with either 

domestic or foreign banking regulators 

may seek to become a DCO, and that 

such depository may seek to hold 

Cleared Swaps Customer Collateral, as 

well as other forms of customer 

property. Specifically, the Commission 

requested comment on (i) whether a 

DCO that is also a registered depository 

should be permitted to hold both 

tangible and intangible forms of Cleared 

Swaps Customer Collateral from FCMs 

itself, (ii) the challenges that a DCO 

holding tangible and intangible forms of 

Cleared Swaps Customer Collateral pose 

to the protection (including effective 

segregation) of Cleared Swaps Customer 

Collateral (as well as other forms of 

customer property), and (iii) how any 

challenges identified in (ii) might be 

addressed. 

ISDA stated that the definition of 

Cleared Swaps Customer Collateral does 

not distinguish between initial and 

variation margin. Both FIA and ISDA 

expressed concerns that, if variation 

margin is considered as collateral, 

regulations 22.3(a) and 22.3(b) would 

prevent a DCO from taking Cleared 

Swaps Customer Collateral received 

from one FCM as variation margin ‘‘and 

transferring it to an FCM whose 

customers are on the opposite side of 

the relevant trades.’’ 159 FIA asked the 

Commission to confirm that a DCO may 

pass variation margin to the receiving 

party ‘‘if such variation is characterized 

as collateral and not as a settlement 

payment by the parties to the swap.’’ 160

Similarly, ICE requested clarification 

that a DCO that has received ‘‘variation 

or mark-to-market margin (as opposed to 

initial margin)’’ may be used to settle 

variation for offsetting swaps. ICE 

argues that without an amendment 

permitting DCOs to treat ‘‘variation or 

mark-to-market’’ margin as a passthrough, ‘‘clearinghouses could 

effectively be prohibited from clearing 

much of the OTC swaps market as it 

transacts today.’’ 161 The Commission is 

adopting regulation 22.3 as proposed. 

The Commission recognizes the 

concerns expressed by commenters and 

confirms that regulation 22.3 is 

intended to permit DCOs to use 

variation margin collected from Cleared 

Swaps Customers to pay variation 

margin to, among others, Cleared Swaps 

Customers. 

ISDA also observed that a variation 

margin payment ‘‘may be considered as 

a settlement payment—a realized profit/ 

loss—as in the case of listed futures; or 

as collateralizing current exposure, a 

payment representing unrealized profit/ 

loss, as in the case of bilateral 

(uncleared) swap contracts.’’ 162 ISDA 

argued that Cleared Swaps Customers 

would be subject to a ‘‘mark-to-market’’ 

tax regime, paying ordinary income on 

swap returns, if a DCO were to treat as 

a contract settlement, a variation margin 

payment made with respect to a Cleared 

Swap.163 Accordingly, ISDA noted that 

recording daily mark-to-market income 

on swaps would poorly match the 

periodic realized coupon income on the 

bonds hedged by such swaps.164

Similarly, FIA noted that it has ‘‘been 

advised that, because cleared swaps are 

not subject to section 1256 of the 

Internal Revenue Code, the 

characterization of such payments as 

settlement payments may have tax 

consequences that may impair the 

ability of certain financial end-users 

* * * to enter into cleared swaps 

transactions.’’ 165 ISDA suggested that 

Congress did not intend to change the 

tax treatment of swaps, because section 

1601 of the Dodd-Frank Act explicitly 

exempts Cleared Swaps from being 

treated as ‘‘section 1256 contracts.’’ 166

As such, ISDA requested that the 


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167 Id. 168As proposed, for a DCO or an FCM, a 

Permitted Depository must (subject to regulation 

22.9) be: (i) A bank located in the United States; (ii) 

a trust company located in the United States; or (iii) 

a DCO. 169The function of a written acknowledgment 

letter is to ensure and provide evidence that a 

potential Permitted Depository is aware that (i) The 

FCM or DCO is opening a Cleared Swaps Customer 

Account, (ii) the funds deposited in such account 

constitute Cleared Swaps Customer Collateral, and 

(iii) such Cleared Swaps Customer Collateral is 

subject to the requirements of section 4d(f) of the 

CEA and Part 22 (when finalized). 170 ISDA at 8. 171NGX at 4. 

Commission clarify that DCOs can treat 

variation margin as collateral rather 

than settlement payments.167 These 

comments are beyond the limited scope 

of these regulations and outside the 

scope of the Commission’s authority. 

The Commission does not take any view 

on the proper treatment of variation 

margin associated with swaps for tax 

purposes. Rather, the Commission 

believes that the Internal Revenue 

Service is the regulatory body best 

equipped to address the identified 

taxation issue. 

D. Regulation 22.4—Futures 

Commission Merchants and Derivatives 

Clearing Organizations: Permitted 

Depositories 

Proposed regulation 22.4 listed 

depositories permitted to hold Cleared 

Swaps Customer Collateral (the 

‘‘Permitted Depositories’’),168 and noted 

that an FCM could serve as a Permitted 

Depository, but only if it is a Collecting 

FCM carrying the Cleared Swaps (and 

related Cleared Swaps Customer 

Collateral) of a Depositing FCM. The 

Commission sought public comment 

regarding the appropriateness of 

allowing an FCM to serve as a Permitted 

Depository only if the FCM is a 

‘‘Collecting FCM.’’ The Commission did 

not receive any comments in response 

thereto or on regulation 22.4 generally. 

The Commission is, therefore, adopting 

regulation 22.4 as proposed. 

E. Regulation 22.5—Futures 

Commission Merchants and Derivatives 

Clearing Organizations: Written 

Acknowledgement 

As proposed, regulation 22.5 required 

a DCO or FCM to obtain written 

acknowledgement letters from 

depositories (including, by implication, 

depositories located outside the United 

States) before opening a Cleared Swaps 

Customer Account.169 Proposed 

regulation 22.5 also set forth substantive 

requirements for such acknowledgement 

letter. The Commission requested 

comment on the appropriateness of the 

following: (i) the addition of regulation 

1.20 (as the Commission may choose to 

amend such regulation) in proposed 

regulation 22.5, and (ii) the adaptation 

of any form letter that the Commission 

may choose to promulgate under 

regulation 1.20 to accommodate Cleared 

Swaps Customer Collateral under 

regulation 22.5. 

ISDA stated that an acknowledgement 

letter from a foreign depository ‘‘may be 

difficult to get and of little purpose, if 

obtained’’ because the letter would not 

alter the fact that the foreign depository 

would be subject to local bankruptcy 

jurisdiction.170 The Commission is 

adopting regulation 22.5 as proposed. 

The Commission notes that under 

regulation 1.49(d)(1) depositories in the 

futures market must provide the 

depositing FCM or DCO with the 

appropriate written acknowledgements 

required under regulations 1.20 and 

1.26. The requirements set forth in 

regulation 22.5 parallel the 

requirements set forth under regulations 

1.20 and 1.26. The Commission has no 

reason to believe that written 

acknowledgements from foreign 

depositories would be any more 

difficult to obtain in the swaps market 

than they would be in the futures 

market. Moreover, the written 

acknowledgment is intended to clearly 

establish the commercial expectations of 

the parties before a bankruptcy or 

insolvency event. In addition, the 

written acknowledgements could aid a 

bankruptcy judge’s or trustee’s 

allocation of assets to the extent a 

bankruptcy court or other insolvency 

regime finds the commercial 

expectations of the parties to be helpful 

information. 

F. Regulation 22.6—Futures 

Commission Merchants and Derivatives 

Clearing Organizations: Naming of 

Cleared Swaps Customer Accounts 

Proposed regulation 22.6 required an 

FCM or DCO to ensure that the name of 

each Cleared Swaps Customer Account 

that it maintains with a Permitted 

Depository (i) clearly identifies the 

account as a ‘‘Cleared Swaps Customer 

Account,’’ and (ii) clearly indicates that 

the collateral therein is ‘‘Cleared Swaps 

Customer Collateral’’ subject to 

segregation in accordance with section 

4d(f) of the CEA and Part 22. The 

Commission did not receive any 

comments on this regulation and is, 

therefore, adopting regulation 22.6 as 

proposed. 

G. Regulation 22.7—Permitted 

Depositories: Treatment of Cleared 

Swaps Customer Collateral 

As proposed, under regulation 22.7 a 

Permitted Depository is (i) required to 

treat all funds in a Cleared Swaps 

Customer Account as Cleared Swaps 

Customer Collateral and (ii) prohibited 

from holding, disposing of, or using any 

Cleared Swaps Customer Collateral as 

belonging to any person other than the 

Cleared Swaps Customers of the FCM 

maintaining such Cleared Swaps 

Customer Account or the Cleared Swaps 

Customers of the FCMs for which the 

DCO maintains such Cleared Swaps 

Customer Account. The Commission 

did not receive any comments on this 

proposed rule and is adopting 

regulation 22.7 as proposed. 

H. Regulation 22.8—Situs of Cleared 

Swaps Customer Accounts 

1. Proposed Requirements 

Proposed regulation 22.8 required (i) 

each FCM to designate the United States 

as the site (i.e., the legal situs) of the 

FCM Physical Location and the 

‘‘account’’ (as regulation 22.2(f)(1) 

defines such term) that the FCM 

maintains for each Cleared Swaps 

Customer, and (ii) each DCO to 

designate the United States as the site 

(i.e., the legal situs) of the DCO Physical 

Location and the Cleared Swaps 

Customer Account that the DCO 

maintains on its books and records for 

the Cleared Swaps Customers of each 

FCM. The Commission sought comment 

on whether, as proposed, regulation 

22.8 ensured that Cleared Swaps 

Customer Collateral be treated in 

accordance with the U.S. Bankruptcy 

Code, to the extent possible, and if it did 

not achieve this purpose, what 

alternatives the Commission should 

consider to achieve such purpose. 

Additionally, the Commission requested 

comment on the benefits and costs of 

proposed regulation 22.8, as well as any 

alternatives. 

NGX states that the requirement of 

U.S. situs for a customer account may 

increase legal uncertainty with respect 

to the insolvency regime that would 

apply to a bankruptcy, and such 

uncertainty may slow down resolution 

of a clearing participant’s default and 

bankruptcy. Moreover, NGX argues that 

‘‘it is unclear how the U.S. account situs 

requirement will interact with the 

choice of law provision’’ 171 of a nonU.S. DCO that chooses to apply its home 

country insolvency regime. In light of 

this uncertainty, NGX recommends that 

the Commission adopt the approach it 

proposed for foreign non-U.S. 

clearinghouses seeking DCO 

registration; namely, that the DCO 

registration application include a 

‘‘memorandum of local law analyzing 


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172 Id. at 5 (citing to the ‘‘Risk Management 

Requirements for Derivative Clearing 

Organizations,’’ 76 FR. 3698, 3742, Jan. 20, 2011). 

173 Id. at 4–5. 

174As discussed in the NPRM, the Commission 

does not intend for regulation 22.8 to affect the 

actual location in which an FCM or DCO may keep 

Cleared Swaps Customer Collateral. Though the 

legal situs of an ‘‘account’’ (as regulation 22.2(f)(1) 

defines the term) and a Cleared Swaps Customer 

Account must be in the United States, the 

Commission recognizes that Cleared Swaps 

Customer Collateral may, in actuality, be kept 

outside the United States in certain circumstances. 

However, the Commission notes that regulation 

22.8 does not override other Commission 

regulations regarding the location of customer 

funds. Specifically, regulation 22.9, which applies 

regulation 1.49 to Cleared Swaps, requires, among 

other things, FCMs and DCOs to hold, in a 

segregated account on behalf of Cleared Swaps 

Customers, sufficient United States dollars in the 

United States to meet all United States dollar 

obligations. 

175 ISDA at 8. 

176 Id. 

177See FIA at 11. 

178Section 4d(f)(3)(A)(ii) of the CEA permits 

customer property to be used to margin a cleared 

swap with a member of a DCO, i.e., a collecting 

FCM. However, the Commission notes that a foreign 

bank that meets the requirements of regulation 

1.49(d)(3)(i) is a good depository, and such a foreign 

bank may itself hold foreign securities in an 

account at a foreign central securities depository. 

179FHLB at 9. 

180Regulation 1.27 requires FCMs and DCOs 

investing customer funds to maintain specified 

records concerning such investments. 

181Regulation 1.28 requires FCMs investing 

customer funds to record and report such 

investment at no greater than market value. 

182Regulation 1.29 permits FCMs and DCOs 

investing customer funds to receive and retain any 

increment or interest thereon. 

183Regulation 1.30 permits FCMs to loan their 

own funds to customers on a secured basis, and to 

repledge or sell such security pursuant to agreement 

with such customers. However, regulation 1.30 does 

make clear that the proceeds of such loans, when 

used to purchase, margin, guarantee, or secure 

futures contracts, shall be treated as customer 

funds. 

insolvency issues in the [relevant] 

foreign jurisdiction * * * and 

describing how the applicant has 

addressed any conflict of law issues, 

which jurisdiction’s law is intended to 

apply to each aspect of the applicant’s 

clearing house’s operations, and the 

enforceability of the choice of law in the 

relevant jurisdictions.’’ 172 However, 

NGX requested that the Commission 

provide greater guidance regarding the 

operation of the proposed rule if it opts 

to retain the account situs requirements, 

specifically making clear that ‘‘a DCO 

choice of law rule should be able to 

include both choice of forum as well as 

the substantive law to be applied’’ with 

respect to a clearinghouse’s insolvency 

and the remedies available to a 

clearinghouse in the event of a clearing 

member’s default or insolvency.173

The Commission notes that, in the 

event of an FCM’s bankruptcy, the legal 

situs provision is intended to make clear 

that the insolvency regime that will 

apply to the customers of the FCM is the 

U.S. insolvency regime embodied in 

Subchapter IV of Chapter 7 of the U.S. 

Bankruptcy Code and Part 190 of the 

Commission’s regulations.174 While a 

DCO is free to make the choice that local 

law applies to all other aspects of a 

DCO’s relationships with its members, 

the Commission has historically 

required, and intends to continue 

requiring, that customers of FCMs in 

bankruptcy be treated in accordance 

with U.S. bankruptcy law. 

I. Regulation 22.9—Denomination of 

Cleared Swaps Customer Collateral and 

Location of Depositories 

Proposed regulation 22.9 applies 

regulation 1.49 to Cleared Swaps 

Customer Collateral. Regulation 1.49 

sets forth rules determining the 

permitted denominations of customer 

funds (i.e., permitted currencies and 

amounts in each currency), permitted 

locations of customer funds (i.e., 

permitted countries and amounts in 

each country), and qualifications that 

entities outside of the United States 

must meet to become Permitted 

Depositories (e.g., minimum regulatory 

capital). Specifically, regulation 

1.49(b)(1)(iii) permits an FCM’s 

obligations to a customer to be 

denominated in ‘‘a currency in which 

funds have accrued to the customer as 

a result of trading conducted on a 

designated contract market or registered 

derivatives transaction execution 

facility,’’ while regulation 1.49(d)(3) 

requires depositories that are located 

outside the United States to be (i) A 

bank or trust company that meets 

certain financial requirements, (ii) an 

FCM, or (iii) a DCO. In addition, 

regulation 22.9 proposed to allow an 

FCM to serve as a Permitted Depository 

only if the FCM was a Collecting FCM 

carrying the Cleared Swaps, and 

associated Cleared Swaps Customer 

Collateral, for the Cleared Swaps 

Customers of a Depositing FCM. 

ISDA stated that regulation 

1.49(b)(1)(iii) should be amended to 

reflect the wider scope of execution 

methods available for Cleared Swaps.175

In response, the Commission is 

amending regulation 22.9 to allow the 

FCM’s obligations to a Cleared Swaps 

Customer to be denominated in the 

currency in which funds have accrued 

to the Cleared Swaps Customer as a 

result of a Cleared Swap carried through 

such FCM, to the extent of such 

accruals. However, the Commission 

notes that it cannot amend regulation 

1.49(b)(1)(iii) at this time because such 

an amendment was not part of the 

NPRM. 

ISDA also requested that the 

Commission make plain that central 

securities depositories are acceptable 

depositories.176 Similarly, FIA argued 

that Euroclear, a central securities 

depository for Euro-denominated 

securities, should be permitted to act as 

a depository under Commission 

regulations.177 The Commission notes 

that although the notion of a central 

securities depository as an acceptable 

depository for securities has 

considerable intuitive appeal, CEA 

§ 4d(f)(3)(A)(i) limits acceptable 

depositories for commingled funds to 

‘‘any bank or trust company or * * * a 

derivatives clearing organization.’’ 178

Because these comments are beyond the 

limited scope of these regulations, the 

Commission will consider how to 

address them outside of this 

rulemaking. 

Finally, FHLB argued that ‘‘customer 

collateral should only be held in banks 

or trust companies located in the United 

States.’’ 179 The Commission does not 

believe it would be appropriate to 

address this comment at this time, as it 

is beyond the scope of this rulemaking. 

J. Regulation 22.10—Application of 

Other Regulatory Provisions 

Proposed regulation 22.10 applies 

1.27 (Record of investments),180 1.28 

(Appraisal of obligations purchased 

with customer funds),181 1.29 

(Increment or interest resulting from 

investment of customer funds),182 and 

1.30 (Loans by futures commission 

merchants; treatment of proceeds) 183 to 

Cleared Swaps Customers and Cleared 

Swaps Customer Collateral. 

While several commenters cited 

regulation 22.10, they did so in the 

context of discussion of other 

regulations. Because the Commission 

did not receive any comments regarding 

the substance of regulation 22.10, it is 

adopting regulation 22.10 as proposed. 

K. Regulation 22.11—Information To Be 

Provided Regarding Customers and 

Their Cleared Swaps 

Proposed regulation 22.11 required 

that (i) each Depositing FCM provide to 

its Collecting FCM and (ii) each FCM 

member provide to its DCO, in each 

case, information sufficient to identify 

Cleared Swaps Customers on a one-time 

basis, and information sufficient to 

identify the portfolio of rights and 

obligations belonging to such customers 

with respect to their Cleared Swaps ‘‘at 

least once each business day.’’ If a 

Depositing FCM or FCM member also 

serves as a Collecting FCM, then it must 


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184See ISDA at 9. 

185See, e.g., ICI at 5; SIFMA at 8; and FHLB at 

4. 

186FHLB also argues that this information should 

be provided to Cleared Swaps Customers on a daily 

basis so that they can correct any discrepancies in 

the records, which would, in turn, reduce 

operational risk. See FHLB at 4. 

187CME at 15, n. 30. Cf. FHLB at 3, n. 2 (stating 

FHLB’s understanding that LCH has the technology 

necessary to track individual customer collateral on 

a real-time basis, but acknowledging that it is ‘‘not 

in a position to calculate the costs associated with 

such technology.’’). 

188CME at 6–7. 

189 Id. at 7 (emphasis in original). 

190See AII at 3; SIFMA at 8; and Vanguard at 6. 

191See CME at 3–4, and 13–15. 

192CME at 15. 

193See FIA at 12. FIA cites to ‘‘Proposed Rule 

22.12,’’ but it is regulation § 22.11 that requires 

FCMs to provide information to a clearing FCM or 

DCO. 

194AII at 3; SIFMA at 8; and Vanguard at 6–7. 

195CME at 8, n. 20. 

196See regulation 22.13(a)(1)(C). 

provide the specified information with 

respect to each individual Cleared 

Swaps Customer for which it acts (on 

behalf of a Depositing FCM) as a 

Collecting FCM. As proposed, 

regulation 22.11 also held the DCO 

responsible for taking appropriate steps 

to confirm that the information that it 

receives is accurate and complete, and 

ensure that the information is being 

produced on a timely basis. However, 

because the DCO may not have a direct 

relationship with, e.g., a Depositing 

FCM, the regulation required the DCO to 

take ‘‘appropriate steps’’ to ensure that 

its FCM members enter into suitable 

arrangements with, e.g., a Depositing 

FCM to verify the accuracy and 

timeliness of information. The 

Commission requested comment on 

whether (i) The proposed requirement 

in regulation 22.11 for a Depositing 

FCM to provide a Collecting FCM with 

information sufficient to identify its 

Cleared Swaps Customers raises any 

competitive concerns, (ii) such 

concerns, if any, could be resolved if the 

identities of the Cleared Swaps 

Customers are coded, with the DCO, but 

not the Collecting FCM, receiving a 

copy of such code, and (iii) other 

methods were available to resolve any 

such concerns. 

ISDA requested that the Commission 

further clarify the language of regulation 

22.11 to make explicit that an FCM must 

provide identifying information to the 

DCO or to the Collecting FCM the first 

time the FCM intermediates a swap for 

a Cleared Swaps Customer with the 

particular relevant DCO or collecting 

FCM.184 In response, the Commission is 

amending the language of regulation 

22.11 to make clear that an FCM must 

provide identifying information to a 

DCO or Collecting FCM the first time it 

intermediates a Cleared Swap with that 

DCO or Collecting FCM. 

In addition, a number of commenters 

raised concerns regarding the need for 

specific recordkeeping and reporting 

requirements.185 These commenters 

requested that the Commission mandate 

reporting and recordkeeping 

requirements for DCOs and require 

DCOs to implement rules requiring their 

clearing members to comply with such 

reporting and recordkeeping 

requirements. FHLB argued that, at a 

minimum, an FCM should have to 

identify (i) collateral posted by an 

individual customer as cash or 

securities and (ii) with respect to 

identifiable securities, which customer 

posted such securities.186 CME, by 

contrast, stated that auditing for 

accuracy of ‘‘a full breakdown of all 

forms of collateral at all levels of 

clearing for each end customer, 

allocated specifically to each DCO 

* * * will increase costs 

exponentially.’’ 187 CIEBA, CME, ICE, 

FHLB, SIFMA, BlackRock, and 

Vanguard stated that it is important to 

be able to ensure that an FCM’s books 

and records are accurate in order to 

support implementation of Cleared 

Swaps Customer Collateral in 

bankruptcy. The preferred means of 

addressing this problem ranged from 

increasing recordkeeping and 

monitoring burdens on FCMs and DCOs 

to abandoning the Complete Legal 

Segregation Model. On the other hand, 

CME complained that the phrase 

‘‘portfolio of rights and obligations 

arising from the Cleared Swaps that 

such futures commission merchant 

intermediates for such customer’’ is 

unclear as to whether it covers the 

collateral supporting such positions.188

CME stated that it ‘‘read[s] the proposed 

regulations as requiring a DCO to 

allocate to each non-defaulting customer 

its specific required margin only 

* * *,’’ and that it intends to ‘‘allocate 

to any defaulting customer the 

difference between its specific required 

margin and the collateral within the 

DCO’s access and control * * * .’’189

AII, SIFMA, and Vanguard requested 

that the Commission require DCOs to 

carefully monitor clearing member 

compliance with DCO rules, including 

through periodic audits, by amending 

regulation 22.11(e) to provide specific 

and concrete examples of the steps a 

DCO must take to confirm that 

information from an FCM is accurate, 

complete and timely. In addition, AII, 

SIFMA, and Vanguard requested that 

the words ‘‘appropriate steps’’ in 

regulation 22.11(e) be replaced with ‘‘all 

steps necessary.’’ 190 CME argued that 

regulation 22.11 should specify the 

contents of the daily FCM report to the 

DCO,191 and that the Commission 

should clarify the intent behind the 

language ‘‘take additional steps,’’ 

specifically with respect to what the 

Commission ‘‘intends each DCO to 

accomplish under the verification 

requirement.’’ 192

FIA noted that the proposed rule does 

not require the information to be 

provided by any specific time each 

business day, and recommended that 

the Commission specify such a 

deadline.193 Vanguard, SIFMA and AII 

also suggested that the Commission 

consider requiring information to be 

provided ‘‘as frequently as necessary’’ 

rather than ‘‘at least once each business 

day.’’ 194 Finally, CME stated that it 

‘‘presume[d] that the Commission’s 

intention is to continue to treat omnibus 

accounts of a foreign broker clearing 

through an FCM as a single ‘customer’ 

for purposes of the requirements of Part 

22.’’195

The Commission notes that under the 

Complete Legal Segregation Model, 

DCOs must, in the event of the 

insolvency of a clearing member 

carrying Cleared Swaps Customer 

positions, either return to the Trustee, or 

transfer to another FCM, the value of the 

collateral associated with each Cleared 

Swaps Customer’s positions (as adjusted 

in accordance with Commission 

regulations). This requirement 

corresponds to the margin required for 

the Cleared Swaps Customer’s swaps 

cleared through that DCO, including any 

individualized surcharge or voluntary 

contribution.196 Thus, a DCO has no 

responsibility to monitor the nature or 

amount of collateral each Cleared Swaps 

Customer actually posts with the FCM, 

or the provenance of the specific items 

of collateral the DCO receives from the 

FCM. Rather, the DCO should take the 

steps appropriate, in the professional 

judgment of its staff, to verify that FCM 

members have and are using systems 

and appropriate procedures to track 

accurately, and to provide to the DCO 

accurately, the positions of each 

customer. Furthermore, the Commission 

is clarifying that the responsibilities of 

a DCO under Part 22 are analogous to 

the responsibilities of a DCM under 

regulation 1.52 with respect to margin 

(the calculation of which requires an 

accurate accounting of the customer’s 

positions). As noted by one commenter, 

FCMs are already subject to DSRO 


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6358 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

197See CME at 15. 

198See id. at 8, n. 20. 

199SIFMA at 9. See also AII at 3. 200See ISDA at 9; FIA at 11–12. 

201See ISDA at 9–10. 202For further detail, see the discussion above in 

section IV.A.4. under the definition of ‘‘Cleared 

Swaps Customer Collateral.’’ 203See supra at n. 28. 204See FIA at 12; SIFMA at 10. 

audits on an approximately annual 

basis.197

At this time, the Commission is not 

requiring that information be provided 

‘‘as frequently as necessary’’ or by a 

specific time. Regulation 22.11 requires 

information to be provided ‘‘at least 

once a day,’’ thereby permitting DCOs to 

require by rule the collection of this 

information more frequently. If more 

frequent collection of such information 

becomes an industry standard at a later 

point in time, the Commission might 

then consider increasing the frequency 

of this reporting requirement. In 

addition, the Commission notes that a 

DCO may set, by rule, the time or times 

by which such information must be 

provided. 

Finally, the Commission confirms the 

presumption ‘‘that the Commission’s 

intention is to continue to treat omnibus 

accounts of a foreign broker clearing 

through an FCM as a single ‘customer’ 

for purposes of the requirements of Part 

22.’’ 198 However, to the extent a foreign 

broker is required to provide individual 

protection for swaps customer collateral 

under the laws of another jurisdiction, 

the Commission intends that the 

regulations under Part 22 foster 

compliance with such other laws. 

L. Regulation 22.12—Information To Be 

Maintained Regarding Cleared Swaps 

Customer Collateral 

As proposed, regulation 22.12 

required DCOs and Collecting FCMs to 

use the information provided pursuant 

to proposed regulation 22.11 to 

calculate and record, no less frequently 

than once each business day, the 

amount of collateral required (i) for each 

relevant Cleared Swaps Customer 

(including each such customer of a 

Depositing FCM), based on the portfolio 

of rights and obligations arising from its 

Cleared Swaps; and (ii) for all relevant 

Cleared Swaps Customers. 

SIFMA argued that DCOs and FCMs 

should be required to perform the 

calculations specified in regulation 

22.12 ‘‘as frequently as technologically 

possible’’ rather than ‘‘no less frequently 

than once each business day.’’ 199 The 

Commission is adopting regulation 

22.12 as proposed. The calculations 

required by regulation 22.12 are based 

on information provided under 

regulation 22.11, which is sent to the 

DCOs and FCMs ‘‘at least once each 

business day.’’ It would be anomalous 

for the Commission to require a more 

frequent calculation of collateral 

requirements when the information on 

which such calculation is based is only 

required to be provided once each 

business day. However, if more frequent 

collection of such information becomes 

an industry standard at a later point in 

time, the Commission might then 

consider requiring more frequent 

calculation of collateral requirements by 

regulation. 

FIA and ISDA observed that the 

reference in the NPRM in the discussion 

of regulation 22.12 to an advance by the 

FCM to a Cleared Swaps Customer as a 

‘‘loan’’ combined with regulation 22.10, 

which, among other things, prohibits an 

FCM from granting unsecured loans to 

customers, could be read to prohibit 

unsecured short-term advances of 

margin funds to Cleared Swaps 

Customers by FCMs. They asked that 

the Commission clarify that unsecured 

short term advances of margin are 

permissible.200 The Commission 

clarifies that, consistent with current 

practice, unsecured short term advances 

of margin are not considered ‘‘loans’’ for 

purposes of existing regulation 1.30, or 

new regulation 22.10. The Commission 

notes, however, that such advances 

should be either promptly repaid or 

promptly replaced with a secured loan. 

M. Regulation 22.13—Additions to 

Cleared Swaps Customer Collateral 

Regulation 22.13 proposed two tools 

that DCOs or Collecting FCMs may use 

to manage the risk they incur with 

respect to individual Cleared Swaps 

Customers. Because the proposed tools 

were not intended to be mandatory or 

exclusive, the Commission sought 

comment on how it could enable DCOs 

or Collecting FCMs to use other tools to 

manage such risk. In addition, proposed 

regulation 22.13(a) clarified that a DCO 

or Collecting FCM could increase the 

collateral required of a particular 

Cleared Swaps Customer or group of 

such customers, based on an evaluation 

of the credit risk posed by such 

customer(s). The proposed clarification 

was not intended to interfere with the 

right of any FCM to increase the 

collateral requirements with respect to 

any of its customers, and the 

Commission requested comment 

regarding whether a DCO or a Collecting 

FCM wished to increase the collateral 

required for any reason other than credit 

risk. Similarly, proposed regulation 

22.13(b) provided that collateral 

deposited by an FCM that is identified 

as collateral in which such FCM has a 

residual financial interest (i.e., the 

FCM’s own funds) may, to the extent of 

such residual financial interest, be used 

by the DCO or Collecting FCM to secure 

the Cleared Swaps of any or all Cleared 

Swaps Customers. 

ISDA suggests that the final rule 

attribute the collateral deposited by an 

FCM that is identified as collateral in 

which such FCM has a residual 

financial interest to individual Cleared 

Swaps Customers to determine which 

Cleared Swaps Customers have a credit 

balance and which have a debit 

balance.201 The Commission notes that 

collateral attributable to an FCM’s 

residual financial interest is, by 

definition, not the property of any 

Cleared Swaps Customer. Accordingly, 

there is no customer-protection-based 

reason to deny a DCO or Collecting FCM 

the ability to use such collateral to meet 

the default of any Cleared Swaps 

Customer. In addition, as mentioned 

above, the Commission is adding a new 

section 22.13(c), which states that, 

subject to certain requirements, 

collateral posted by a Cleared Swaps 

Customer in excess of the amount 

required by a DCO (the ‘‘excess 

collateral’’) may be transmitted by the 

Cleared Swaps Customer’s FCM to the 

DCO.202

N. Regulation 22.14—Futures 

Commission Merchant Failure To Meet 

a Customer Margin Call in Full 

Proposed regulation 22.14 required a 

defaulting FCM to transmit to the DCO 

or Collecting FCM, as applicable, 

Cleared Swaps Customer Collateral on 

deposit at the FCM for each Cleared 

Swaps Customer whose swaps 

contributed to the call, and the identity 

and the amount transmitted on behalf 

of, each such customer. Regulation 

22.14 also proposed a detailed sequence 

of events following an FCM’s default. 

Specifically, proposed regulations 

22.14(e) and (f) addressed the issue of 

allocation of the loss of value of 

collateral (also known as Investment 

Risk) 203 despite the application of 

haircuts. The Commission sought 

comment on the proposed allocation of 

Investment Risk. 

FIA suggested that the regulations 

make clear that the DCO or Collecting 

FCM may reasonably rely on the 

information provided by the defaulting 

FCM (or on information previously 

provided if the defaulting FCM does not 

promptly provide information on the 

day of the default).204 In response, the 

Commission is amending regulation 

22.14 to add subsection (2) to 

specifically permit such reliance on 


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205See Vanguard at 7. 

206Pursuant to regulation 190.06(b)(3)(iii), for a 

particular customer, a negative equity balance in 

one account class must be offset against a positive 

equity balance in any other account class. 

207See FIA at 12–13. 

208SIFMA at 10. 

209See ICI at 5. 

210See Vanguard at 7. 

211See CME at 14. 

212See id. 

213See id. at 7–8. 

214See id. at 9. 

215Cf. 11 U.S.C. 764(b). 

216See FIA at 12. 

information provided by a defaulting 

FCM. 

Vanguard and SIFMA requested 

clarification regarding how a DCO 

should handle simultaneous defaults in 

a futures and Cleared Swaps Customer 

Account, and how the FCM and DCO 

resources should be allocated between 

the two accounts.205 The Commission 

notes that defaults in multiple accounts 

are already addressed in the 

Commission’s regulations and, in 

particular, Part 190, which treats 

account classes separately. For example, 

in the event of a default in a futures 

customer account, the default would be 

treated in accordance with the Futures 

Model, and the FCM would be 

permitted to apply all customer 

collateral to meet that default and 

would, after liquidation of positions, 

return any remaining customer 

collateral to the Trustee for distribution 

as above. A default in the Cleared 

Swaps Customer Account, on the other 

hand, would be treated in accordance 

with the Complete Legal Segregation 

Model, with remaining positions and 

collateral either transferred to another 

FCM or returned to the Trustee. Thus, 

swaps customer accounts and futures 

customer accounts are treated separately 

by the DCO, with balances that are not 

transferred being returned to the Trustee 

for distribution.206 The Trustee would 

distribute customer property, including 

collateral received from a DCO, pari 

passu within each account class. Any 

surplus in any account class would be 

re-distributed in accordance with 

regulation 190.08. In addition, the 

Commission notes that a separate 

proprietary account for swaps is not 

required under Commission regulations. 

Thus, a clearing member’s own swaps 

and futures (and related collateral) may 

be held together in a proprietary 

account and a default in such account 

should proceed in accordance with 

existing Commission regulations. For 

example, if there is a default only in the 

proprietary account, property in either 

customer account will not be liable for 

that default, and such customer 

property will either be transferred along 

with customer positions to another FCM 

or, after the liquidation of customer 

positions, would be returned to the 

Trustee for distribution as part of the 

appropriate account classes pursuant to 

regulation 190.08. 

With respect to the application of 

DCO resources, the Commission notes 

that if there is a shortfall in more than 

one account class, after the application 

of collateral as permitted in the 

proposed and existing rules, the DCO 

would apply its default resources to the 

remaining shortfalls in each account in 

accordance with its then-existing rules. 

O. Regulation 22.15: Treatment of 

Cleared Swaps Customer Collateral on 

an Individual Basis 

As proposed, regulation 22.15 set 

forth the basic principle of individual 

collateral protection. It required each 

DCO and each Collecting FCM to treat 

the amount of collateral required with 

respect to the portfolio of rights and 

obligations arising out of the Cleared 

Swaps intermediated for each Cleared 

Swaps Customer as belonging to that 

customer, which amount could not be 

used to margin, guarantee or secure the 

Cleared Swaps, or any other obligations, 

of an FCM, or of any other customer. 

FIA urged the Commission to confirm 

that, in the event of an FCM default, 

clearing FCMs and DCOs have 

flexibility to liquidate all positions in an 

omnibus account (with the restriction 

that proceeds of positions of nondefaulting customers may not be used to 

offset sums owed by defaulting 

customers to the FCM or by the clearing 

FCM to the DCO).207 SIFMA stated that 

proposed regulation 22.15 required that 

‘‘any temporary misallocation of nondefaulting customer property due to 

[intra-day price movements on the day 

of a default] * * * be rectified as 

promptly as possible so that the 

property of non-defaulting customers is 

fully restored.’’ 208 ICI argued that if at 

the time of an FCM default there is a 

misallocation of Cleared Swaps 

Customer Collateral, the Commission 

should require such misallocation to be 

corrected as soon as practicable.209

Similarly, Vanguard requested that the 

Commission clarify that any initial 

misallocation related to delayed 

recordkeeping be rectified as promptly 

as possible such that the property of the 

non-defaulting parties is fully 

restored.210 CME cautioned that errors 

in the § 22.11 information from an FCM 

could heighten the risk of misallocating 

Cleared Swaps Customer Collateral in a 

default scenario, because a DCO will not 

have the time or legal ability to resolve 

discrepancies in a portfolio.211 CME 

asked the Commission to clarify the 

allocation of this risk among Cleared 

Swaps Customers.212 In addition, CME 

questioned how to allocate excess 

collateral that is posted to a DCO for 

purposes of daily reporting and in 

response to customer default, 213 and 

sought confirmation that the 

Commission intended to preserve the 

finality of the clearing cycle.214

The Commission has amended 

regulation 22.15 to make clear that 

clearing FCMs and DCOs have the 

flexibility to liquidate all positions in an 

omnibus account in the event of the 

default of a depositing FCM or clearing 

member respectively. In addition, the 

Commission notes that there will not be 

any unallocated excess collateral 

because such collateral is either 

collateral in which the FCM has a 

residual interest and does not belong to 

a customer, or collateral that must be 

attributed to individual Cleared Swaps 

Customers. Furthermore, any temporary 

misallocation of non-defaulting Cleared 

Swaps Customer property or excess 

collateral would be resolved by the 

Trustee, in computing the claims by 

such customers against the estate (or, 

where appropriate, by the estate against 

such customers). In addition, these 

discrepancies would not be the 

responsibility of the DCO, even if the 

DCO transferred an amount on behalf of 

a Cleared Swaps Customer that was later 

found to be too much, nor would such 

a transfer be subject to avoidance.215

Finally, it is not the Commission’s 

intent to disrupt or unwind a complete 

and final settlement cycle, and northing 

in these regulations should be construed 

to do so. 

P. Regulation 22.16—Disclosures to 

Customers 

As proposed, regulation 22.16 

requires each FCM to disclose, to each 

of its Cleared Swaps Customers, the 

governing provisions of each DCO (or 

the provisions of the customer 

agreement with respect to a Collecting 

FCM) relating to use of Cleared Swaps 

Customer Collateral and related matters. 

The FIA advocated that these FCM 

disclosures be the subject of a uniform 

disclosure document prepared by the 

industry, subject to Commission 

approval.216 Given the diversity of 

industry practice in the swaps market, 

the Commission is reluctant to mandate 

the use of a uniform disclosure 

document. Nonetheless, the 

Commission sees no reason to object to 

an FCM’s use of a document prepared 


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217See Account Class, 75 FR 17297, Apr. 6, 2010. 

by a committee, so long as the document 

accurately provides the required 

information for each DCO on which the 

customer’s positions are cleared. 

V. Section by Section Analysis: 

Amendments to Regulation Part 190 

A. Background 

In April of 2010, prior to the 

enactment of the Dodd-Frank Act, the 

Commission promulgated rules to 

establish an account class for cleared 

OTC derivatives (and related 

collateral).217 At that time, there were 

questions concerning the Commission’s 

authority to require the segregation of 

cleared OTC derivatives (and related 

collateral) or to establish a separate 

account class for cleared OTC 

derivatives in a DCO insolvency. As a 

result, protection for cleared OTC 

derivatives (and related) collateral was 

limited to those cases where such 

derivatives and collateral were required 

to be segregated pursuant to the rules of 

a DCO, and the reach of the account 

class was limited to cases of the 

bankruptcy of a commodity broker that 

is an FCM. Moreover, while section 

4d(a)(2) of the CEA permitted the 

inclusion in the domestic futures 

account class of transactions and related 

collateral from outside that class, there 

was no similar provision permitting the 

inclusion in the cleared OTC account 

class of transactions and related 

collateral from outside that latter class. 

Section 724 of the Dodd-Frank Act 

has resolved these questions. As 

mentioned above, section 4d(f) of the 

CEA, as amended by the Dodd-Frank 

Act, requires, among other things, 

segregation of Cleared Swaps and 

Cleared Swaps Customer Collateral. 

Section 4d(f)(3)(B) of the CEA permits 

the inclusion of positions in other 

contracts (such as exchange-traded 

futures) and related collateral with 

Cleared Swaps and Cleared Swaps 

Customer Collateral. Section 724(b) of 

the Dodd-Frank Act amends the 

Bankruptcy Code to include in the 

definition of ‘‘commodity contracts’’ 

Cleared Swaps with respect to both 

FCMs and DCOs. Thus, this section V 

proposes amendments to regulation Part 

190, pursuant to Commission authority 

under section 20 of the CEA, in order to 

give effect to section 724 of the DoddFrank Act, to implement Public Law 

111–16, the Statutory Time-Periods 

Technical Amendments Act of 2009, 

and to provide technical clarifications. 

Such amendments conform to proposed 

Part 22. 

B. Definitions 

1. Proposed Amendment to Regulation 

190.01(a)—Account Class 

The Commission proposed 

amendments to regulation 190.01(a) to 

change the definition of account class to 

include a class for cleared swaps 

accounts, delete commodity option 

accounts from the definition, make clear 

that options on futures and options on 

commodities should not be grouped into 

one account class, clarify that 

Commission orders putting futures 

contracts and related collateral in the 

cleared swaps account class (pursuant 

to new section 4d(f)(3)(B) of the CEA) 

are treated, for bankruptcy purposes, in 

a manner analogous to orders putting 

Cleared Swaps and related collateral in 

the futures account class (pursuant to 

CEA section 4d(a)(2)), and clarify that if, 

pursuant to a Commission rule, 

regulation or order (or a DCO rule 

approved pursuant to regulation 

39.15(b)(2)), positions or transactions 

that would otherwise belong to one 

class are associated with positions and 

related collateral in commodity 

contracts in another account class, then 

the former positions and related 

collateral shall be treated as part of the 

latter account class. The Commission 

did not receive any comments on 

proposed regulation 190.01(a) and is 

adopting regulation 190.01(a) as 

proposed. 

2. Proposed New Regulation 190.01(e)— 

Calendar Day 

The Commission proposed defining 

the term ‘‘calendar day’’ to include the 

time from midnight to midnight. The 

Commission did not receive any 

comments on proposed regulation 

190.01(e) and is adopting regulation 

190.01(e) as proposed. 

3. Proposed Amendment to Regulation 

190.01(f)—Clearing Organization 

The Commission proposed to amend 

the definition of clearing organization to 

remove, as unnecessary, the reference to 

commodity options traded on or subject 

to the rules of a contract market or board 

of trade. The Commission did not 

receive any comments on proposed 

regulation 190.01(f) and is adopting 

regulation 190.01(f) as proposed. 

4. Proposed Amendment to Regulation 

190.01(cc)—Non-Public Customer 

The Commission proposed to amend 

the definition of non-public customer to 

include references to non-public 

customers under regulation 30.1(c) 

(with respect to foreign futures and 

options customers) and in the definition 

of Cleared Swaps Proprietary Aaccount. 

The Commission did not receive any 

comments on proposed regulation 

190.01(cc) and is adopting regulation 

190.01(cc) as proposed. 

5. Proposed Amendment to Regulation 

190.01(hh)—Principal Contract 

The Commission proposed to amend 

the definition of principal contract to 

include an exclusion for cleared swaps 

contracts. The Commission did not 

receive any comments on proposed 

regulation 190.01(hh) and is adopting 

regulation 190.01(hh) as proposed. 

6. Proposed Amendment to Regulation 

190.01(ll)—Specifically Identifiable 

Property 

The Commission proposed to amend 

the definition of specifically identifiable 

property to update references and 

change terms to conform to other 

proposed changes to Part 190 and other 

business practices. The Commission did 

not receive any comments on proposed 

regulation 190.01(ll) and is adopting 

regulation 190.01(ll) as proposed. 

7. Proposed Amendment to Regulation 

190.01 (pp)—Cleared Swap 

Proposed regulation 190.01(pp) 

replaced the definition of ‘‘Cleared OTC 

Derivative’’ that the Commission 

previously adopted with a definition of 

cleared swap that includes the 

definition of that term in regulation 

22.1. The Commission did not receive 

any comments on proposed regulation 

190.01(pp) and is adopting regulation 

190.01(pp) as proposed. 

C. Proposed Amendments to Regulation 

190.02—Operation of the Debtor’s 

Estate Subsequent to the Filing Date and 

Prior to the Primary Liquidation Date 

The Commission proposed certain 

clarifications as well as technical 

amendments to § 190.02 to (1) expand 

the regulation to apply to Cleared Swaps 

(and related collateral) and (2) change 

references to ‘‘business days’’ to 

‘‘calendar days,’’ and require transfer 

instructions by the sixth calendar day 

after the order for relief and instruct 

transfers to be completed by the seventh 

calendar day after the order for relief, in 

order to fall within the protection of 

section 764(b) of the U.S. Bankruptcy 

Code. The Commission did not receive 

any comments on proposed regulation 

190.02. However, in light of a recent 

demonstration of the efficiency of 

transfer arrangements, it appears that a 

full calendar day may not be necessary 

to execute such instructions. 

Accordingly, the Commission is 

changing the amendment to require 

transfer instructions to be provided by 

the seventh calendar day after the order 


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218Open commodity contracts traded on a 

designated contract market would continue to be 

liquidated in accordance with the rules of the 

relevant designated contract market. 

for relief, at an hour to be specified by 

the trustee. 

D. Proposed Amendments to Regulation 

190.03—Operation of the Debtor’s 

Estate Subsequent to the Primary 

Liquidation Date 

The Commission proposed certain 

technical amendments to regulation 

190.03 to clarify that maintenance 

margin refers to the maintenance margin 

requirements of the applicable 

designated contract market or swap 

execution facility. The Commission did 

not receive any comments on proposed 

regulation 190.03 and is adopting 

regulation 190.03 as proposed. 

E. Proposed Amendments to Regulation 

190.04—Operation of the Debtor’s 

Estate—General 

Proposed amendments to regulation 

190.04 would extend the liquidation of 

open commodity contracts to 

commodity contracts traded on swap 

execution facilities.218 These 

commodity contracts would be 

liquidated in accordance with the rules 

of the relevant SEF or DCM. Open 

commodity contracts that are liquidated 

by book entry may also be offset using 

the settlement price as calculated by the 

relevant clearing organization pursuant 

to its rules, which rules are required to 

be submitted to the Commission for 

approval pursuant to section 5c(c) of the 

CEA, or approved by the Commission 

(or its delegate) pursuant to regulation 

190.10(d). The Commission did not 

receive any comments on proposed 

regulation 190.04 and is adopting 

regulation 190.04 as proposed. 

F. Proposed Amendments to Regulation 

190.05—Making and Taking Delivery on 

Commodity Contracts 

The Commission proposed technical 

amendments to regulation 190.05 to 

change a reference to ‘‘contract market’’ 

to ‘‘designated contract market, swap 

execution facility, or clearing 

organization,’’ and require the 

submission of rules for approval subject 

to section 5c(c) of the CEA. The 

Commission did not receive any 

comments on proposed regulation 

190.05 and is adopting regulation 

190.05 as proposed. 

G. Proposed Amendments to Regulation 

190.06—Transfers 

The Commission proposed 

amendments to regulation 190.06 to (i) 

Clarify that nothing in subparagraph (a) 

would constrain the contractual right of 

the DCO to liquidate open commodity 

contracts, (ii) permit the trustee to 

transfer accounts with no open 

commodity contracts, as the 

Commission has permitted in a number 

of recent FCM bankruptcies, (iii) 

prohibit the trustee from avoiding prepetition transfers made by a clearing 

organization as long as the money, 

securities, or other property 

accompanying such transfer would not 

exceed the funded balance of accounts 

held for or on behalf of customers based 

on information available as of the close 

of business on the calendar day 

immediately preceding such transfer 

minus the value on the date of return or 

transfer of any property previously 

returned or transferred thereto, and (iv) 

change ‘‘business day’’ to ‘‘calendar 

day.’’ The Commission did not receive 

any comments on proposed regulation 

190.06 and is adopting regulation 

190.06 as proposed. 

H. Proposed Amendments to Regulation 

190.07—Calculation of Allowed Net 

Equity 

Proposed amendments to regulation 

190.07 clarify that individual Cleared 

Swaps Customer Accounts within an 

omnibus account are to be treated 

individually, correct a typographical 

error, change the valuation of an open 

commodity contract so that the value of 

the commodity contract would be 

derived from the settlement price as 

calculated by the relevant clearing 

organization pursuant to its rules, and 

change references to securities traded 

over-the-counter pursuant to the 

National Association of Securities 

Dealers Automated Quotation System to 

securities not traded on an exchange. 

The Commission did not receive any 

comments on proposed regulation 

190.07. However, the Commission is 

adding ‘‘paragraph (c)’’ before ‘‘(1)(ii)’’ 

in regulation 190.7(c)(1)(i)(A) to clarify 

the cross reference. 

I. Proposed Amendments to Regulation 

190.09—Member Property 

The Commission proposed 

amendments to regulation 190.09 to 

include references to an account 

excluded pursuant to the proviso in 

regulation 30.1(c) (referring to 

proprietary accounts in the context of 

foreign futures and options) and to the 

Cleared Swaps Proprietary Account. 

The Commission did not receive any 

comments on proposed regulation 

190.09 and is adopting regulation 

190.09 as proposed. 

J. Proposed Amendments to Regulation 

190.10—General 

Proposed amendments to regulation 

190.10 have been made to require notice 

by email and overnight mail. The 

Commission did not receive any 

comments on proposed regulation 

190.10. However, the Commission is 

changing the reference to the ‘‘Division 

of Clearing and Intermediary Oversight’’ 

to the ‘‘Division of Clearing and Risk’’ 

in regulation 190.10(a) to reflect changes 

based on a structural reorganization 

within the Commission. 

K. Proposed Amendments to Appendix 

A to Part 190—Bankruptcy Forms, 

Bankruptcy 

The Commission proposed changes to 

appendix A, form 1 to include 

references to ‘‘transfers’’ generally, and 

to make certain technical amendments 

to (i) Reflect the addition of section 4d(f) 

of the CEA by section 724 of the DoddFrank Act, (ii) clarify that Commission 

approval with respect to the rules of a 

registered entity that require 

Commission approval means 

Commission approval under section 

5c(c) of the CEA, and (iii) conform 

certain time periods to the proposed 

changes made by the Commission to 

implement Public Law 111–16, the 

Statutory Time-Periods Technical 

Amendments Act of 2009. The 

Commission did not receive any 

comments on the proposed amendments 

to appendix A and is adopting appendix 

A as proposed. 

L. Proposed Amendments to Appendix 

B to Part 190—Special Bankruptcy 

Distributions 

The Commission proposed 

amendments to Framework 1 of 

Appendix B to clarify that the cross 

margining program is intended to apply 

only to futures customers and customer 

funds for futures contracts, and to 

Framework 2 of Appendix B to address 

shortfalls in Cleared Swaps Customer 

Collateral. The Commission did not 

receive any comments on the proposed 

amendments to appendix B. However, 

the Commission is making certain 

technical corrections to bring the 

language of the appendix in line with 

current statutory language. 

VI. Effective Date 

The Commission asked for comment, 

in the NPRM and at the Second 

Roundtable, on the appropriate timing 

of effectiveness for the final rules, and 

whether six months after the 

promulgation of final rules would be 

sufficient. 

At the Second Roundtable, several 

panelists stated that it would take 


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219Second Roundtable Tr. at 58, 1.14 to 61, 1.17. 

220 Id. 

221Second Roundtable Tr. at 62, 1.11 to 62, 1.19 

(Mr. Diplas stating that six months ‘‘seems to live 

within the low side from the standpoint in terms 

of the work, the IT work that needs to take place 

between, like, FCMs and DCOs, the testing, et 

cetera, and also even the agreements that we might 

have to do in terms of consistency, of how these 

reports should look, and how the client IDs should 

be done, et cetera, so that we don’t have—each DCO 

have a different methodology in that respect.’’). 

222Second Roundtable Tr. at 63, 1.2 to 63, 1.4. 

223See ISDA at 11. 

224See FIA at 6. 

225 ICE at 11. 

226 ICI at 2. 227 7 U.S.C. 19(a). 

228As described above, clearing is the process by 

which transactions in derivatives are processed, 

guaranteed, and settled by a central clearing 

organization, the DCO. See section I.B. 

229For a detailed discussion of clearing as it 

pertains to swap transactions, see section I.B. 

230Though treating futures customer collateral on 

a collective basis may, at one time, have been 

practically necessary ‘‘for convenience,’’ such 

practice is not standard in the current swaps market 

nor is it as critical in an era where account 

information is stored and processed on an 

automated basis. For example, and as noted above, 

DCOs are already assessing risks posed by clearing 

members’ customers at the individual customer 

level. See supra n.122. 

approximately 18 months to 2 years 

after finalization of the segregation rules 

to complete all of the documentation 

and other infrastructure work that 

would be necessary to implement the 

segregation regime selected by the 

Commission.219 These commenters 

indicated that this lead time would be 

the same for the Legal Segregation 

Models and the Full Physical 

Segregation Model, but may be longer if 

the Commission were to select the 

Futures Model.220 In other words, this 

18 month to 2 year time period is ‘‘a 

cost of moving to the cleared world 

regardless of how it’s done.’’ Another 

panelist, however, did state that six 

months did not seem to provide 

sufficient time to complete all of the 

work that would need to be 

completed,221 though this commenter 

acknowledged that ‘‘the real 

constraining factor * * * is getting that 

final documentation with the 

clients.’’ 222

Comments to the NPRM generally 

reinforced the need for additional time. 

ISDA recommended that there be a 

minimum of 18 months between final 

promulgation of the rules and 

effectiveness.223 In addition, FIA stated 

that, according to certain representatives 

from investment management firms, it 

would take one to two years to 

implement whatever model is chosen by 

the Commission.224 ICE requested that, 

if a model other than the Futures Model 

is adopted, the Commission provide 

sufficient time to FCMs and DCOs to 

allow them ‘‘to analyze, develop and 

implement the necessary systems and 

processes relating to’’ the selected 

segregation model.225 In addition, ICI 

stated that market participants need 

time to develop ‘‘the operational and 

systems infrastructure necessary to 

facilitate a smooth transition to 

clearing.’’ 226

As acknowledged by some 

commenters, the 18 month to 2 year 

time period is the time period needed to 

transition to clearing. It is not the time 

period necessary to implement the 

Complete Legal Segregation Model. 

Because the Commission did not receive 

any specific comments regarding the 

time period needed to implement the 

Complete Legal Segregation model, the 

Commission considered adopting the 

effective date that was proposed in the 

NPRM. However, given representations 

from market participants regarding the 

amount and tenor of the work that 

would need to be completed to 

implement clearing, the Commission is 

extending the compliance date for the 

Part 22 rules to November 8, 2012, the 

compliance date set forth in the rules 

implementing DCO Core Principles for 

the gross margining requirement of 

Regulation 39.13(g)(8)(i). 

Given the importance of 

implementing the time period changes 

in Part 190 as soon as possible, and 

because the implementation issues 

raised by Part 22 do not apply to Part 

190, which imposes obligations 

primarily on bankruptcy trustees, the 

compliance date for the Part 190 rules 

is the effective date of these rules. 

However, during the period between the 

compliance date for Part 190 and the 

compliance date for Part 22, 

Commission rules will not require 

segregation of Cleared Swaps or Cleared 

Swaps Collateral. Accordingly, 

consistent with the approach applicable 

under current Part 190, where 

protection for cleared OTC derivatives 

(and related) collateral is limited to 

those cases where such derivatives and 

collateral are required to be segregated 

pursuant to the rules of a DCO, during 

that period, the definition of 190.01(pp) 

(‘‘Cleared Swap’’) shall be limited to 

transactions where the rules or bylaws 

of a derivatives clearing organization 

require that such transactions, along 

with the money, securities, and other 

property margining, guaranteeing or 

securing such transactions, be held in a 

separate account for Cleared Swaps 

only. 

VII. Consideration of Costs and Benefits 

A. Introduction 

Section 15(a) of the CEA 227 requires 

the Commission to consider the costs 

and benefits of its actions before issuing 

a rulemaking under the CEA. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. To the 

extent that these new rules reflect the 

statutory requirements of the DoddFrank Act, they will not create costs and 

benefits beyond those mandated by 

Congress in passing the legislation. 

However, the rules may generate costs 

and benefits attributable to the 

Commission’s determinations regarding 

implementation of the Dodd-Frank Act’s 

statutory requirements. The costs and 

benefits of the Commission’s 

determinations are considered in light 

of the five factors set forth in CEA 

section 15(a). 

1. Business and Legal Context of the 

Segregation Requirement for Cleared 

Swaps Customer Collateral 

The Commission’s Part 22 rules are 

one component of the regulatory 

infrastructure for clearing 228 swaps 

transactions mandated by the DoddFrank Act. Though a significant fraction 

of swaps transactions may be required 

to be cleared through DCOs, many 

swaps transactions may voluntarily be 

cleared though DCOs. Swaps users and 

some swap dealers transact with the 

DCO through FCMs that the DCO admits 

as ‘‘clearing members’’ and who are 

subject to DCO rules. As described 

above in detail, for every transaction 

received by or matched through its 

facilities, a DCO acts as the buyer to 

every seller and the seller to every 

buyer, essentially guaranteeing financial 

performance.229

2. Overview of the Statute and 

Regulation 

Proposed Part 22 implements the 

requirement of the newly enacted CEA 

section 4d(f) that property provided by 

Cleared Swaps Customers to FCMs to 

serve as collateral for Cleared Swaps 

transactions be treated as the property of 

the customers, not the FCM or DCO; and 

that such property be maintained in 

accounts separate from the property of 

the FCM or DCO, although such 

accounts can hold the commingled 

collateral of more than one Cleared 

Swaps Customer ‘‘for convenience.’’ 230

These basic requirements that Cleared 


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231See discussion in sections IV.B through IV.J. 

232See id. 

233See discussion above in section IV.P and 

section V.B.1. 

234See discussion above in section IV.K through 

section IV.O. 

235See discussion above in sections IV.K., IV.L. 

and IV.N. Having such information at the DCO can 

be quite valuable in a situation where the FCM is 

bankrupt. 

236See discussion above in section IV.N. 

237See discussion above in section IV.E. 

238See discussion above in section IV.M. 

239As discussed above, in addition to the Futures 

Model and the Complete Legal Segregation Model, 

the Commission gave consideration to other 

alternatives: the Legal Segregation with Recourse 

Model and the Physical Segregation Model. No 

commenters supported the Legal Segregation with 

Recourse Model on grounds that it involved the 

same costs as the Legal Segregation Model, but with 

fewer benefits. Accordingly, its costs and benefits 

are not considered further in this analysis. Several 

commenters did support the Physical Segregation 

Model; however, as noted above, the effectiveness 

of the Physical Segregation Model is limited due to 

the application of the ratable distribution 

requirements of section 766(h) of the Bankruptcy 

Code. As such, these limitations were disqualifying. 

240CIEBA, FHLB, SIFMA, and Fidelity argue that 

the correct baseline for making cost and benefit 

comparisons should be the current practice in the 

uncleared swaps markets rather than the Futures 

Model (See CIEBA Original at 12; FHLB at 9; 

SIFMA at 7; and Fidelity at 7). In principle, using 

this benchmark rather than the Futures Model 

would change the absolute level of costs and 

benefits of the alternatives under consideration but 

would not change the relative ranking of those 

alternatives so long as comparisons to the 

benchmark were made in a consistent fashion. 

There are, however, practical advantages to using 

the Futures Model as a benchmark because current 

practice with regard to protection of collateral in 

the uncleared swaps market is unregulated and the 

level of protection provided varies considerably 

across transactions. Moreover, CEA, as amended by 

the Dodd-Frank Act, does not permit the 

Commission to retain the current practice regarding 

uncleared swaps. Because the appropriate baseline 

for the consideration of costs and benefits is the 

Futures Model rather than the uncleared swaps 

model, the costs and benefits of the basic 

requirement that swaps customer collateral be kept 

in segregated accounts and treated as the property 

of customers rather than the property of FCMs or 

DCOs are included within the baseline and not 

evaluated separately. 

Swaps Customer Collateral be treated as 

the property of customers and 

maintained in segregated accounts are 

imposed by the statute independently of 

the Commission’s particular 

implementing regulations and, by the 

terms of the statute, would apply even 

if the Commission promulgated no 

implementing regulations. Generally, 

the core statutory segregation 

requirements serve two functions: (1) 

They help ensure that FCMs, DCOs, and 

other depositories of assets deposited by 

swaps customers to serve as collateral 

for their Cleared Swaps transactions 

treat such customer collateral as the 

property of the customers and not use 

it for their own proprietary business 

purposes; and (2) in conjunction with 

Subchapter IV of Chapter 7 of the 

Bankruptcy Code, they provide 

protection of Cleared Swaps Customer 

Collateral from the claims of other 

creditors in the event of the bankruptcy 

of an FCM. 

Sections 22.2 through 22.10 

implement the basic architecture of a 

system of segregation for swaps 

customer funds roughly comparable to 

the system used for customer funds for 

futures contracts under CEA sections 

4d(a)(2) and 4d(b) and Commission 

regulations 1.20 through 1.30 and 

1.49.231 Some provisions of sections 

22.2 through 22.10 essentially restate 

the statutory requirements. Other 

provisions of these sections set forth 

requirements intended to (a) ensure that 

the objectives of the statute are met and 

(b) clarify FCMs’ and DCOs’ duties 

under the statute and facilitate carrying 

out those duties in an efficient 

manner.232 The basic architecture 

established by sections 22.2 through 

22.10 is supplemented by section 22.16, 

a disclosure requirement designed to 

inform swaps customers of DCO and 

FCM policies regarding the handling of 

their collateral in case of default and by 

amendments to part 190 of the 

Commission’s rules intended to ensure 

that cleared swaps customer accounts of 

the sort required by Part 22 are treated 

as a separate account class under 

bankruptcy law in the event the relevant 

FCM files for bankruptcy.233

Proposed sections 22.11 through 

22.15 add to this basic segregation 

architecture provisions designed to 

implement the Complete Legal 

Segregation Model for protecting swaps 

customer funds against FellowCustomer Risk.234 Proposed sections 

22.11, 22.12, and 22.14 are intended to 

ensure that DCOs have available 

information that will enable them to 

attribute the value of assets in an FCM’s 

customer account to individual 

customers in the event of an FCM’s 

default on obligations to the DCO 

arising in connection with swaps 

transactions cleared for customers.235

Section 22.14 also requires certain 

transfers of customer collateral among 

FCMs in response to margin calls.236

Section 22.5 prohibits the DCO from 

using asset value in an FCM’s customer 

account attributable to one customer to 

margin, guarantee, or secure the Cleared 

Swaps or other obligations of the 

relevant FCM or of other customers.237

Section 22.13 clarifies that DCO’s have 

the right, at their election, to require (on 

the grounds of risk management) larger 

amounts of collateral from selected 

customers.238

3. Organization and Focus of the 

Consideration of Costs and Benefits 

Section VII.B presents the 

Commission’s considerations regarding 

the costs and benefits arising from the 

Commission’s choice of the Complete 

Legal Segregation Model as set forth in 

sections 22.11 through 22.15.239 The 

costs and benefits of the Commission’s 

choice of model for addressing FellowCustomer Risk are, in the view of the 

Commission, the most significant costbenefit issues in this final rulemaking, 

as is reflected in the fact that 

discussions of cost-benefit issues in 

comments to the NPRM focused almost 

exclusively on the choice of model. This 

section of the discussion employs the 

Futures Model—in essence, the rule 

without sections 22.11 through 22.15— 

as a baseline for comparison because 

this model was favored by several 

commenters and because comparison 

with this model provides a useful and 

appropriate methodology for isolating, 

to the extent possible, the relative costs 

and benefits of the alternative models 

presented by the commenters and 

considered by the Commission.240

Notably, this comparative analysis 

pivots, in the first instance, on who 

bears the cost of the most significant 

cost driver—Fellow-Customer Risk. 

Where the risk is assigned to one 

constituency (e.g., swap users in the 

Futures Model baseline) a virtually 

mirror image risk mitigation benefit is 

conferred on others (e.g., DCOs and 

clearing members in the Futures Model 

baseline). 

Under any model, however, once such 

risks are initially assigned, the affected 

entities and market participants, may 

then attempt to re-allocate or shift such 

assigned risks or costs to other entities 

or market participants. The LSOC 

Model, in the first instance places 

fellow risk on DCOs and clearing 

members with corresponding mitigation 

of risk to swaps users. However, as 

explained in detail below, market 

participants can be expected to adapt to 

the direct allocation of risk associated 

with one or another of the models in a 

variety of ways, and the ultimate costs 

and benefits of the rule will reflect both 

its direct allocation of risk and the effect 

of adaptations to that allocation. 

For example, as described below, 

some, though not all, DCOs commented 

that they would be likely to adapt to the 

LSOC Model by increasing margin 

levels. To the extent that this occurs, the 

rule would have the effect of reducing 

the risks of losses to the DCO and the 

FCM because there would be a reduced 


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241For a discussion of Fellow-Customer Risk, see 

supra section I.B.6. 

242According to comments on the ANPR, the 

direct benefit to customers in the form of reduced 

risk of loss of collateral stemming from the 

activities of fellow customers may generate indirect 

benefits. For example, commenters indicated that 

increased security for collateral could increase their 

ability to use swaps for business purposes, although 

this effect could be counterbalanced by increased 

dollar costs. Commenters also stated that the 

increased protection against Fellow-Customer Risk 

would reduce their need to incur costs to protect 

against the effects of loss of Cleared Swaps 

Customer Collateral. 

243CME Comment on ANPR at 7 (estimated $500 

billion in collateral for swaps expected to be cleared 

by CME); ISDA February 16, 2011 Comment on 

ANPR at 2 (estimated $833 billion industry-wide). 

244 Id. 

245Several clearing houses do, however, have 

experience clearing swaps on a voluntary basis. For 

example, LCH has been clearing interest rate swaps 

for over a decade, and ICE actively clears credit 

default swaps. In addition, while there are 

examples of FCM defaults related to clearing futures 

(e.g., Griffin Trading Co., Klein Futures, Inc. and 

Lehman Brothers, Inc.), there have been no FCM 

failures related to the clearing of swaps 

transactions. 

246 In the past two decades, there have been only 

two cases of double defaults in the futures markets: 

Griffin Trading Co. and Klein Futures, Inc. See 

Trustee v. Griffin, 440 B.R. 148 (2010); CFTC 

Division of Trading and Markets, Report on Lessons 

Learned from the Failure of Klein & Co. Futures, 

Inc., July 2001, available at http://www.cftc.gov/

files/tm/tmklein_report071101.pdf. With respect to 

FCM defaults generally in the futures markets, one 

commenter observed, ‘‘The United States, 

fortunately has seen only a handful of FCM failures 

in recent decades. As a result, the FCM liquidation 

process, including the availability of porting, has 

not been tested under a wide variety of 

circumstances.’’ ISDA at 3. 

247See, e.g., Second Roundtable Tr. at 165, 283– 

84 (characteristics of swaps may make it more 

difficult to liquidate or transfer customer positions 

in case of an FCM insolvency than for futures). 

248E.g. MFA at 7–8; BlackRock at 7; Fidelity at 

6; LCH at 2. The numerical estimates of higher 

margin and guaranty fund levels for Complete Legal 

Segregation relative to the Futures Model described 

in the text below were also described in the NPRM 

so swaps users who commented in response to the 

NPRM presumably were aware of them. However, 

some commenters who supported Complete Legal 

Segregation indicated that they did not give full 

likelihood of any given customer 

incurring losses that exceed the margin 

posted by that customer. In return for 

the benefit of reduced fellow customer 

risk and legal allocation of the residual 

risk to DCOs and their members, swaps 

users would incur the opportunity cost 

of having to use more capital as 

collateral for their Cleared Swaps. Thus, 

to the extent that DCOs adapt to the 

LSOC Model in this fashion, the rule 

would function in a manner analogous 

to insurance, with swaps users incurring 

somewhat higher costs in their routine 

use of swaps in return for a lower risk 

of wholesale loss of collateral as a result 

of some other swaps user’s market 

losses. As also described below, the 

LSOC Model is expected to alter 

behavioral incentives for market 

participants relative to the Futures 

Model in variety of other ways that will 

create costs and benefits but that the 

Commission believes will lead to a net 

increase in monitoring of risky behavior 

by FCMs and that, on balance, will 

facilitate transfer of customer positions 

and collateral in the event of the 

simultaneous default of an FCM and one 

or more customers. 

B. Benefits and Costs of Complete Legal 

Segregation Model Relative to Futures 

Model 

1. Introduction 

As noted above, the Complete Legal 

Segregation Model is intended to 

provide swaps customers with 

protection against Fellow-Customer 

Risk.241

The basic difference between the 

Complete Legal Segregation Model and 

the Futures Model thus relates to a 

difference in the allocation of loss 

arising out of a double default of both 

a customer and the customer’s FCM. 

Under the Futures Model, this risk is 

borne by customers in the form of 

‘‘Fellow-Customer Risk’’— the risk that 

a customer will lose some or all of the 

value of its collateral due to the default 

of some other swaps customer or 

customers of the clearing FCM. Under 

the LSOC Model, this risk to customers 

is substantially, though not completely, 

eliminated. However, the corresponding 

loss, in the event of a double default, 

falls on the DCO and, through the 

guaranty fund, its non-defaulting 

members. In practice, under the LSOC 

Model, DCOs can be expected to take 

measures to protect themselves against 

the risk of loss from a double default, 

and some of the material benefits and 

costs are likely to flow from a DCO’s 

adaptations to the rule. 

The next section reviews, 

respectively, the material benefits and 

costs that the Commission believes will 

arise from the Commission’s selection of 

the LSOC Model. 

2. Material Benefits and Costs Arising 

From the Complete Legal Segregation 

Model 

a. Benefits to Customers of Protection 

Against Fellow-Customer Risk 

The primary benefit of the Complete 

Legal Segregation Model to customers is 

the protection of non-defaulting Cleared 

Swaps Customers against loss of the 

value of their collateral due to the use 

of such value by the relevant DCO in the 

event of a double default.242 The 

associated cost to those customers is the 

payment they will be required to make 

for protection against this risk, where 

this payment will likely originate from 

some combination of the capital cost of 

posting higher initial margins and/or 

higher fees for swaps transactions (see 

subsection b below). 

Comments regarding this rulemaking 

have indicated that, as a result of the 

statutory clearing requirements in the 

Dodd-Frank Act, once the cleared swaps 

market has matured, Cleared Swaps 

Customers would be posting upwards of 

$500 billion in collateral to secure their 

Cleared Swaps positions.243 The 

Commission notes that the precise 

amount will depend on how the market 

evolves and can be expected to change 

over time.244 Under the Futures Model, 

the value of this collateral will be 

exposed to greater Fellow-Customer 

Risk than under the other models 

considered. In addition, it does not 

appear possible to reliably quantify the 

probability of the actual loss of value of 

collateral by a given customer due to 

Fellow-Customer Risk for a number of 

reasons. By their nature, double defaults 

are rare events, though potentially 

important if they involve major FCMs. 

Because the mandatory clearing of 

swaps under the Dodd-Frank Act has 

not yet gone into effect, there is, as yet 

no body of experience with such 

clearing in practice, and a fortiori no 

experience with FCM defaults under the 

Dodd-Frank clearing regime.245 There 

has been experience with FCM default 

in the futures industry, but the numbers 

are too small to permit reliable 

extrapolation.246 In addition, a number 

of commenters suggested that FellowCustomer Risk may be greater in the 

cleared swaps market than in the futures 

market because swaps are less liquid 

than exchange-traded futures (thereby 

resulting in greater volatility of prices, 

particularly in times of financial stress) 

and because the aggregate value of 

transactions in the swaps market is 

many times greater than the aggregate 

value of transactions in the futures 

market.247 The Commission notes these 

commenters requested increased 

protection for their funds to guard 

against Fellow-Customer Risk. 

Notwithstanding its inability to 

reasonably quantify the value of benefits 

associated with Fellow-Customer Risk 

elimination, the Commission, in light of 

comments received in response to both 

the ANPR and NPRM, believes that the 

Complete Legal Segregation Model 

confers benefits to swaps users. In fact, 

buy-side commenters represented that 

they desired the protection afforded 

through the Complete Legal Segregation 

Model, notwithstanding the costs 

associated with that protection.248 The 


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credence to the higher of the cost estimates. E.g., 

MFA at 7–8. 

249 Id. See also Second Roundtable Tr. at 183– 

185. 

250E.g., Tudor at 2; Fidelity at 3; MFA at 3–8. See 

also supra at 50–51. 

251See 76 FR at 69442. 

252 In addition, as discussed in section 

VII.B.3.b.iv., there are efficiency gains in 

centralizing FCM monitoring in a small number of 

parties. Moreover, because of confidentiality 

considerations, among other things, DCOs have 

greater access to information from their Clearing 

Members than Cleared Swaps Customers do. As a 

result of this greater access to information and 

because of the increased incentive on DCOs to 

actively monitor the risks posed by their Clearing 

Member FCMs and Cleared Swaps Customers, the 

overall effectiveness of risk management may be 

increased. 

253Section 725(c)(2)(B)(ii) of the Dodd-Frank Act 

requires that a DCO possess financial resources that, 

at a minimum, would allow the DCO to meet its 

financial obligations notwithstanding a default by 

the member or participant creating the largest 

financial exposure for that organization in extreme 

but plausible market conditions. See also 76 FR at 

69344–45. In determining what financial resources 

are needed to comply with section 725(c)(2)(B)(ii) 

and its implementing regulations, a DCO will need 

to evaluate and take into consideration the effect of 

Complete Legal Segregation. However, within 

limits, the statute and regulations permit the 

exercise of judgment by the DCO as to the methods 

it will use to do this. As is indicated in the 

discussion in the text below, in comments to the 

proposed rulemaking, different DCOs have 

suggested that they may differ in their evaluation 

of the practical effects of Complete Legal 

Segregation, in the value they ascribe to fellowcustomer collateral as a resource, and in the steps 

they will take to maintain adequate financial 

resources in light of their evaluation. 

254A guaranty fund is a fund created by a DCO 

to which the clearing members contribute, in 

proportion generally set by DCO rule. See supra 

section I.B.4 and n. 27. The assets in the fund are 

then available to cover losses resulting from 

defaults by one or more clearing members, whether 

in their proprietary capacity or due to customer 

accounts, to the extent those losses are not covered 

by available collateral provided by the defaulting 

Clearing Member (limited to proprietary collateral 

for a default in the clearing member’s proprietary 

account, or including customer collateral for a 

customer default). In addition, a DCO may retain by 

rule the right to call upon the members to 

contribute additional assets, up to a defined 

amount, if the pre-funded default resources are 

insufficient (referred to as an ‘‘assessment power’’). 

255 ICE contends that DCOs will choose to adjust 

to Complete Legal Segregation entirely by 

increasing margins rather than guaranty funds 

because Complete Legal Segregation increases the 

risk that assets in guaranty funds will actually be 

used to cover losses in the event of a double default. 

According to ICE, excessive reliance on margin is 

undesirable because guaranty funds offer the DCO 

more flexibility in responding to defaults and may 

be more liquid than assets used as margin. See ICE 

at 6–7. However, while ICE may be correct that 

clearing member FCMs, all other things being equal, 

would prefer less risk of loss of assets contributed 

to guaranty funds, there may be counterbalancing 

factors. For example, clearing customers may prefer 

a DCO with a larger guaranty fund and lower 

margin levels. Similarly, if a structure of default 

resources with an excessive ratio of margin to 

guaranty fund is, in fact, less effective or efficient 

for dealing with FCM defaults, a DCO that employs 

such a structure might be at a competitive 

disadvantage. 

256 ISDA January 18, 2011 Comment on ANPR at 

9. The assumption that DCOs would use a 99.9% 

confidence level under Complete Legal Segregation 

was based on ‘‘suggestions’’ made at the 

Commission’s First Roundtable. See First 

Roundtable Tr. at 110–111. 

257See, e.g., First Roundtable Tr. at 110–114; 

Second Roundtable Tr. at 255–57. 

258CME Comment on ANPR at 7–8. 

259See CME Comment on ANPR at 8 (describing 

methodology used in general terms). 

ability of a swaps customer to determine 

Fellow-Customer Risk at a particular 

FCM is limited, because confidentiality 

restraints inherently limit the amount of 

information that an FCM can provide 

customers with respect to the 

creditworthiness, swaps positions, and, 

in some cases, even identity of its other 

customers.249 This, in turn, impairs (if 

not completely precludes) the 

customer’s ability to evaluate FellowCustomer Risk, hindering their ability to 

manage it, insure against it, or 

appropriately account for it in business 

decision-making.250

Both the benefit to customers of 

greater protection for their collateral 

provided under the Complete Legal 

Segregation Model as well as the 

associated costs depends, to an extent, 

on customer behavior in advance of a 

double default. Prior to an FCM 

insolvency, customers have the right to 

find another FCM to carry their 

accounts, and to have their existing 

FCM transfer their positions and 

collateral to that clearing FCM.251 Under 

the extreme assumption that all 

customers costlessly anticipate the 

default and move their positions to 

another FCM before the default occurs, 

the Complete Legal Segregation Model 

offers no apparent greater benefit to 

customers over the Futures Model. 

However, on this assumption the 

Complete Legal Segregation model also 

imposes no additional losses to the DCO 

compared with the Futures Model since, 

in this instance, under neither model is 

the collateral of non-defaulting 

customers available to the DCO to cure 

the default. As a result, the extent to 

which customers can anticipate a 

fellow-customer default will tend to 

decrease both the benefits and the costs 

of the Complete Legal Segregation 

Model. 

b. ‘‘Risk Costs’’ and Potential Effects on 

Margin Levels and DCO Guaranty Fund 

Levels in Response To Complete Legal 

Segregation. 

Risk Costs refer to the costs associated 

with the allocation of loss in the event 

of a default under the Complete Legal 

Segregation Model relative to the 

Futures Model. This can usefully be 

divided into direct and indirect costs 

(and associated benefits). The direct cost 

of the Complete Legal Segregation 

Model is the increased risk the DCO will 

face when a Cleared Swaps Customer 

and its FCM default, which equals the 

probability of a default by a Cleared 

Swaps Customer and its FCM, 

multiplied by the expected contribution 

that fellow customers would have 

provided toward the uncovered loss. (As 

discussed in the previous section, there 

is a corresponding gain to Cleared 

Swaps Customers which is the value 

they place on avoiding this same cost, 

i.e., the value of having the equivalent 

of insurance against Fellow-Customer 

Risk.) 252 Thus, the Complete Legal 

Segregation Model will potentially 

result in a decrease in the financial 

resources package available to the DCO 

in the event of default. Maintaining the 

same assurance of performance of the 

DCO’s function as central counterparty 

in the circumstances of a double default 

may require the DCO to, therefore, raise 

additional financial resources.253 The 

comments submitted to the Commission 

by DCOs and others have suggested two 

possible ways by which DCO’s default 

resource structure under the Complete 

Legal Segregation Model might differ 

from the Futures Model: Either through 

higher initial customer margins or by 

increasing the size of the DCO’s 

guaranty fund.254 Of course, actual 

DCOs could use a mixture of 

adjustments to margins and guaranty 

funds. Commenters who estimated 

higher costs resulting from Complete 

Legal Segregation therefore estimated 

potential effects on margins and 

guaranty funds in isolation, while 

generally recognizing that this is a 

simplification of what actual practice is 

likely to be.255

Assuming no change in guaranty fund 

levels, ISDA suggested that the 

Complete Legal Segregation Model 

would require an increase of roughly 

60% in initial margins relative to the 

Futures Model.256 A number of other 

participants in the Commission’s 

roundtables thought that the method 

used to arrive at the estimate was a 

reasonable way to roughly model the 

effect of Complete Legal Segregation on 

margin levels.257

CME estimated that Complete Legal 

Segregation would require an increase 

in margin in the range of 60% to 

90%.258 CME did not specify the 

quantitative assumptions underlying its 

estimate.259 To illustrate effects on 

margin in dollar terms, CME made the 

assumption that, in a mature swaps 

market, it might expect to clear interest 

rate swaps with a notional value of $200 

trillion. On this assumption, CME 

projected required margin from 


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260CME Comment on ANPR at 7–8. 

261 ISDA January 18, 2011 Comment on ANPR at 

10. 

262 ISDA at 1. For a more detailed discussion of 

the benefits of Complete Legal Segregation for 

porting, see section VII.B.3.b.ii. 

263Second Roundtable Tr. at 255. 

264CME Comment on ANPR at 7–8. The comment 

states that under Complete Legal Segregation CME, 

in determining the size of the guaranty fund ‘‘would 

likely change [from an approach treating customer 

margin accounts as diversified unitary pools] to an 

approach geared toward assessing the largest loss 

associated with a certain number of the largest 

individual customer accounts. Currently, we 

presume that five such customer accounts would be 

our target, although experience and prudence 

would be our guide. In any event, our stress-test 

loss profile of the largest customer accounts would 

almost certainly generate larger ‘worst loss’ results 

[under Complete Legal Segregation] than under [the 

Futures Model].’’ Id. 

265 Id. at 8–9. 

266 Id. 

267 ISDA January 18, 2011 Comment on ANPR at 

10. ISDA stated that this estimate referred to the 

funded component of guaranty funds and did not 

include DCO’s right to call for more assets from 

member FCMs when needed. 

268 ISDA January 18, 2011 Comment on ANPR at 

9–10 and n.8 (referring to CME estimate). 

269Evaluating the Costs of Complete Legal 

Segregation, Aug. 2011, at 6–11 (‘‘LCH White 

Paper’’). 

270 76 FR at 33847, n. 177. 

271LCH White Paper at 8. 

272LCH at 3. 

273CME at 14. See also id. (describing a situation 

where ‘‘an increasing number of customers were 

removing their assets and accounts.’’). 

274LCH White Paper at 8. 

customers clearing through CME of $500 

billion under the Futures Model and 

$800–900 billion under Complete Legal 

Segregation.260 ISDA estimated that, 

industry-wide, Complete Legal 

Segregation would require $581 billion 

more margin than the Futures Model (a 

69.75% increase over a baseline, for the 

Futures Modal, of $833 billion). ISDA 

made clear that this estimate was based 

on a number of assumptions about 

future market activity and on data 

obtained from only four FCMs. 

Therefore, this figure is best construed 

as an estimate of the general magnitude 

of the effects expected by ISDA and not 

as a precise predicted dollar figure.261

Nonetheless and notwithstanding this 

estimate of higher initial margin, ISDA 

concluded that Complete Legal 

Segregation was ‘‘the most appropriate 

choice of holding model for cleared 

swaps collateral’’ of the models 

proposed in the NPRM and supported 

this approach because it facilitated 

porting of customer positions in the 

event of an FCM default.262

Although the above estimates were 

based on data for interest rate swaps, 

commenters and participants in 

roundtable discussions indicated that 

somewhat higher margin levels might be 

needed to maintain adequate default 

resources in connection with credit 

default swaps because of the high 

volatility and idiosyncratic risks 

associated with this type of swap.263

Using data concerning credit default 

swaps it currently clears, albeit not 

under the Dodd-Frank legal regime, ICE 

estimated that the required initial 

margin increases would range from 40% 

to 371%. 

These estimates assume that the entire 

default resource shortfall resulting from 

the DCO’s lost reliance on collateral 

posted as margin by non-defaulting 

customers is reflected in higher initial 

margins. To illustrate the other extreme, 

CME estimated the cost of responding to 

Complete Legal Segregation purely by 

means of an increase in its guaranty 

fund. According to CME, it would be 

necessary to double the size of the 

guaranty fund using this approach, 

although their comment indicates that 

this should be taken as a rough estimate 

likely to be adjusted based on 

experience in the future.264 Under its 

assumption that in the future it might 

clear a notional value of $200 trillion in 

interest rate swaps, CME estimates that 

it would require a guaranty fund of $50 

billion under the Futures Model and 

$100 billion under Complete Legal 

Segregation. CME also stated that it 

might prove possible to adapt to 

Complete Legal Segregation using ‘‘what 

is traditionally called ‘concentration’ 

margin whereby the DCO sets a level of 

risk at which it would begin to charge 

higher margins based on indicative 

stress-test levels.’’ According to CME, if 

it proved possible to implement such a 

system, likely ‘‘concentration charges’’ 

would fall in the range of $50-$250 

billion.265 However, CME stated that it 

currently lacked sufficient information 

to precisely assess an appropriate 

methodology using this approach and 

that this approach could have 

disadvantages which would need to be 

addressed before it was considered as a 

practical approach.266 ISDA estimated 

that industry-wide guaranty funds 

under the Futures Model would come to 

$128 billion.267 ISDA apparently did not 

independently estimate the effect of 

Complete Legal Segregation on guaranty 

funds, but, relying upon DCO estimates 

that they would approximately double, 

estimated an increment of an additional 

$128 billion for Complete Legal 

Segregation industry-wide.268 If 

guaranty funds are larger as a result of 

Complete Legal Segregation, it is likely 

that some or all of the cost would be 

passed on by FCMs to their customers 

in the form of higher fees. However, in 

the absence of more information about 

future competitive conditions in the 

cleared swaps market and similar 

matters, it is not possible to reliably 

estimate the extent to which this would 

occur. 

By contrast to CME, ICE, and ISDA, 

LCH stated that it is not appropriate to 

attribute higher margins and/or guaranty 

funds to the Complete Legal Segregation 

Model than to the Futures Model and 

that the appropriate level of default 

resources for DCOs, is the same under 

both models.269 LCH has a more than a 

decade’s worth of experience clearing 

OTC swaps. LCH states that a 

methodology in which no 

diversification of customer collateral is 

assumed represents their current 

practice, and is appropriately 

‘‘conservative’’ in terms of capital 

adequacy.270 LCH maintains that, even 

if it is legally permissible for a DCO to 

take advantage of fellow customer 

collateral, it is imprudent to assume that 

any funds in the omnibus Cleared 

Swaps Customer Account will remain at 

the time of default.271 In the event that 

default occurs not as a sudden shock, 

but rather, as the end of a process of 

credit deterioration taking place over a 

number of days (potentially a number of 

weeks), the Cleared Swaps Customers 

may have time (and, if subject to 

Fellow-Customer Risk, strong incentive) 

to port (i.e., transfer) their Cleared 

Swaps Contracts and associated 

collateral away from the defaulting 

FCM.272 CME also has noted that an 

FCM default is likely to be preceded by 

a period of financial turmoil: ‘‘In a 

situation where an FCM has defaulted 

on its obligations to one or more DCOs, 

it is entirely possible that the FCM or its 

parent company has been under severe 

financial stress for some period of 

time.’’ 273

Thus, according to the logic of LCH’s 

approach, the size of the guaranty fund 

and/or initial margin levels would need 

to be as high under the Futures Model 

as under the Complete Legal Segregation 

Model.274

The divergence in the approaches of 

LCH and the other two clearinghouse 

commenters is due in part to different 

implicit assumptions about fellow 

customer behavior, and how such 

behavior should affect a DCO’s design of 

default resources. Under Complete Legal 

Segregation, such an approach likely 

requires an assessment of the largest 

stressed loss on a small (or 

concentrated) number of the largest 

customers of the given FCM since, in 

this instance, the DCO would not have 

access to the collateral of non-defaulting 

customers. Under the Futures Model, by 

contrast, consideration of the largest 


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275 In addition, and as discussed above, section 

724(a) of the Dodd-Frank Act added a new 

paragraph (f) to section 4(d) of the CEA, which 

requires that neither an FCM nor a DCO may not 

use the collateral of one customer to cover the 

obligations of another customer or the obligations 

of the FCM or the DCO. 

276An additional offset to this cost is the value 

that customers assign to the increased safety of their 

collateral from Fellow-Customer Risk, as discussed 

in section VII.B.2. 

277There will also be an implicit cost to the FCM 

reflecting the risk that the contributed assets will 

need to be used by the DCO to cover losses in a 

default situation. 

278Black Rock at 2; Fidelity at 5; FIA at 4; MFA 

at 4. 

279See ISDA February 16, 2011 Comment on 

ANPR at 2. 

280See, e.g., id. at 2–4; and MFA at 4. 

stressed loss might occur over an 

expanded (and, to a degree, more 

diversified) pool of customers because 

the DCO is permitted to use the 

mutualized pool of customer collateral. 

Hence, the Complete Legal Segregation 

Model effectively prohibits the DCO 

from using the mutualized pool of 

customer deposits as a resource in the 

event of double default. It follows that 

the extent to which the Complete Legal 

Segregation Model actually affects the 

DCO’s resources relative to the Futures 

Model depends upon the degree to 

which non-defaulting Cleared Swaps 

Customers collateral will be present 

following a default. If all Cleared Swaps 

Customer Contracts remained with the 

defaulting FCM through the default, 

then the DCO could potentially measure 

the adequacy of guaranty funds based 

on a fully diversified pool of customer 

positions. Conversely, if all customers 

would transfer their positions to a 

different FCM in anticipation of the 

default, then the diversification (and its 

consequence for the DCO’s financial 

resources package) would be eliminated. 

More generally, the extent to which 

the Complete Legal Segregation Model 

leads to a higher guaranty fund or 

higher levels of margin per customer 

than the Futures Model depends on the 

extent to which Cleared Swaps 

Customer Contracts can be expected to 

remain with the defaulting FCM during 

the period immediately preceding a 

default. Since the circumstances of 

particular FCM defaults will vary, 

DCOs, in determining their financial 

resources package, should be expected 

to take into consideration the possibility 

that, at least for some FCM defaults, 

there will be warning signs, resulting in 

a portion of Cleared Swaps Customer 

Collateral being transferred out of the 

Cleared Swaps Customer Account 

maintained by the defaulting FCM. 

While determining the appropriate 

assumptions regarding customer 

behavior under the Futures Model is 

central to the issue of the adequacy of 

a DCO’s default resources, it may prove 

less central to the consideration of 

relative costs and benefits under this 

rule, since both of those costs and 

benefits depend on the extent to which 

Cleared Swaps Customers will transfer 

their Cleared Swaps Contracts. In 

general, the greater the extent to which 

customers will move their positions, the 

lower the benefits of the Complete Legal 

Segregation Model over the Futures 

Model. However, this benefit afforded 

the customer needs to be balanced 

against the cost to the DCO of insuring 

against the uncertainty.275 Both the 

capital costs and associated benefits of 

the LSOC Model relative to the Futures 

Model will tend to be lower to the 

extent customers are likely to move 

their positions in advance of an FCM 

default and higher to the extent 

customers are unlikely to be able to do 

so. Differing assumptions about 

customer mobility in advance of default 

are, therefore, likely to have smaller 

implications for the relative costs and 

benefits between approaches than they 

do for the Risk Costs considered in 

isolation. 

A distinct question in evaluating Risk 

Cost is how to translate a margin or 

guaranty fund increase into a cost 

increase. A customer that is required to 

post an additional $100 of margin is not 

adversely affected in the amount of 

$100. Moreover, the cost to the customer 

is, at least in part, offset by the benefit 

to the DCO. The cost to a customer of 

a margin increase of $100 is the 

difference between the gain he or she 

would have received by retaining that 

$100, and the return he or she will 

receive on the asset while it is on 

deposit with the FCM or DCO. For 

example, the customer might invest the 

$100 in buying and holding grain over 

the pendency of the swap if the initial 

margin were not increased, while he or 

she is limited to the return on assets the 

DCO will accept as margin payment 

(e.g., the T-bill rate) under the new, 

higher margins. The exact difference in 

rate of returns is dependent on the 

individual customer’s investment 

options as well as his/her risk tolerance, 

and hence is difficult to calculate 

precisely. Offsetting this cost are the 

statutory goal of protecting customer 

funds and the gain to the DCO of having 

additional assets available in the event 

of a combined Cleared Swaps Customer 

and FCM default, which may enable it 

to obtain a higher rate of return on some 

of its other assets.276 Similarly, the cost 

to an FCM of a guaranty fund 

contribution increase is equal to the 

difference in return between acceptable 

instruments for deposit to the guaranty 

fund and the FCM’s potential return on 

those additional funds if they were not 

deposited to the guaranty fund.277

c. Effects on Likelihood That Customer 

Swaps Positions Will Be ‘‘Ported’’ to 

New FCMs Rather Than Liquidated in 

the Event of an FCM Default 

According to several commenters, a 

central issue to consider when 

designing a customer collateral 

protection regime is the ability of 

customers to ‘‘port,’’ i.e., transfer, their 

swaps positions to a solvent FCM in the 

event that their current FCM defaults.278

Following a default by an FCM, the 

swaps positions of the FCM’s customers 

either have to be moved to another 

FCM, or closed. Moving a position to 

another FCM allows the DCO to 

maintain its net position in that contract 

at zero, which is generally a goal of a 

DCO. It also relieves the customer of the 

necessity of reestablishing a position, 

which potentially can be costly, 

especially in a stressed economic 

state.279 Finally, according to 

commenters, the ability to port rather 

than liquidate customer positions can 

have important systematic benefits for 

the market at large, because the forced 

liquidation of the swaps cleared by a 

major FCM could have severe disruptive 

effects on prices and market 

conditions.280

Rules governing customer collateral 

accounts have an indirect, but 

potentially important, effect on the 

likelihood of successful porting in the 

event of an FCM default. If swaps 

positions are transferred to a new FCM, 

the new FCM will have to add to its 

customer account with the DCO enough 

collateral to secure the ‘‘ported’’ swaps. 

The most ready source of such collateral 

is the customer account of the 

defaulting FCM, which already contains 

collateral securing the relevant swaps. 

However, if collateral from the 

defaulting FCM’s customer account 

cannot be transferred, then porting of 

market positions requires customers to, 

at least temporarily, provide the new 

FCM with new collateral. This is, at 

best, a burden, and may, in some cases, 

make porting infeasible—particularly 

the prompt porting of numerous 

customers with varied financial 

resources and liquidity. 

From the perspective of porting, the 

Complete Legal Segregation Model has 

several related advantages over the 

Futures Model in circumstances of a 

double default. As discussed above, 

under the Futures Model, if even a 


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281For a more detailed discussion of the 

operation of the segregation models in an FCM 

bankruptcy, see supra section I.D. 

282Second Roundtable Tr. at 253, l.17; FIA at 5; 

Newedge at 4. Cf. MFA at 4–5; BlackRock at 8. 

283Blackrock at 8; Freddie Mac at 2; Vanguard at 

5. 

284See e.g., Kevin Dowd, Re-Examining the Case 

for Government Deposit Insurance, 59 S. Econ. J. 

363, 370 (1993). 

285See, e.g., Andrei Shleifer and Robert W. 

Vishny, A Survey of Corporate Governance, 52 J. 

Fin. 737, 753 (1997) (discussing effect of ‘‘free 

rider’’ issues on monitoring in context of corporate 

governance). 

286See discussion at section VII.A.2; supra n.224. 

287 76 FR at 33845–33846. 

288 Id. (citing ISDA estimates for operational costs 

received in response to the ANPR). 

289LCH at 2 (‘‘If the Commission adopts [the gross 

margining requirement for DCOs], any DCO offering 

any swaps clearing service under any of the models 

outlined by the Commission in the Proposed 

Rulemaking will be required to track margin on an 

individual client basis and FCMs will be required 

to do the same.’’). See also 76 FR at 69374–76. In 

addition, some individual customer information 

already resides at the DCO. See CME at 9 (‘‘At the 

single customer is in default, the DCO 

is entitled to as much of the customer 

account as is necessary to make up its 

loss. As a result, the DCO has incentives 

to postpone transfer of the customer 

account until the full ramifications of 

the customer default—and thus the size 

of the DCO’s claim against the 

account—are resolved. By contrast, 

under Complete Legal Segregation, the 

DCOs claim against the customer 

account is limited by law to that portion 

of the account attributable to individual 

customers in default. The DCO will 

therefore have little or no incentive to 

resist transfer of that portion of the 

account attributable to other customers. 

At the same time, the Complete Legal 

Segregation Model, unlike the Futures 

Model, provides a legal framework for 

attributing the value of the customer 

account to individual customers. 

Further, it requires that FCMs provide 

DCOs with the necessary information 

and that DCOs make the attribution at 

least once daily, so as to be prepared for 

a possible FCM default. As a result, the 

Complete Legal Segregation Model, has 

clear advantages over the Futures Model 

in terms of facilitating the transfer of the 

collateral of non-defaulting customers in 

circumstances where one or more 

customers have defaulted.281

Because of the infrequent occurrence 

of double default situations it is not 

possible to predict how frequently 

Complete Legal Segregation will permit 

porting in circumstances where porting 

would not be possible, or would be 

delayed, under the Futures Model. 

Nevertheless, the structural advantages 

of Complete Legal Segregation for 

purposes of facilitating porting, and the 

analysis in ISDA’s comment, imply that 

this is an important benefit of this 

model. 

d. Effects on Incentives for DCOs and 

Customers to Monitor and Control Risky 

Behavior by FCMs 

CME and other commenters have 

argued that the Complete Legal 

Segregation Model could potentially 

reduce the incentives of individual 

customers to carefully evaluate clearing 

FCMs and only do business with the 

least risky.282 In effect, they argue that 

because the financial condition of the 

FCM, and of the FCM’s other customers, 

will be less relevant to the customer’s 

exposure to loss in the event of a fellow 

customer’s default than under the 

Futures Model, the customer will devote 

less effort to monitoring the FCM and its 

other customers. 

However, while it is possible that the 

protection against Fellow-Customer Risk 

provided by the Complete Legal 

Segregation Model may cause 

customers, on average, to devote less 

effort to monitoring the activities of 

their respective FCMs than under the 

Futures Model, that incentive is not 

removed. For example, customers 

remain exposed to Operational Risk. 

Moreover, the Complete Legal 

Segregation Model creates offsetting 

increased monitoring incentives on the 

DCO and its member FCMs, to the 

benefit of customers. Because of the 

increased likelihood that a customer 

default would impact the guaranty fund 

under the Complete Legal Segregation 

Model, increased incentives exist to 

protect that fund through more careful 

monitoring by the suppliers of the 

guaranty fund and their agent (the 

DCO). Indeed, commenters observe that 

the availability of fellow-customer 

collateral as a buffer reduces the 

incentives of DCOs to provide vigorous 

oversight.283 The net effect of these 

incentive changes on the incentive to 

monitor is difficult to quantify. 

However, the basic economics of 

monitoring suggest that there are 

efficiency gains to centralizing 

monitoring in a small number of 

parties.284 This is because of ‘‘free 

rider’’ effects associated with diffuse 

exposure to risk of loss. When the risk 

of loss from the activities of a firm, such 

as an FCM, is spread over a large 

number of agents, each individual agent 

gains little from devoting resources to 

monitoring the firm relative to the total 

potential benefit of monitoring to the 

affected agents as a group.285 This effect 

is compounded by an information effect; 

even if the incentive exists, it is difficult 

for individual customers to gain access 

to real-time information about the 

financial condition of the FCM, and 

even more so to gain real-time 

information about the financial 

condition of their fellow customers. In 

contrast, the DCO is in a position to 

obtain good information about the 

financial condition of FCMs and 

customers since, via its rules, it can 

require FCMs to provide such 

information as a condition for becoming 

and remaining clearing members. Based 

on these considerations, there is reason 

to believe that, while Complete Legal 

Segregation may reduce incentives for 

customers to monitor their FCMs, it will 

increase incentives for monitoring of 

FCMs by DCOs and, on balance is likely 

to increase the effectiveness and 

efficiency with which risk taking by 

clearing FCMs is monitored. 

e. Operational Costs 

As discussed above, in order for the 

Complete Legal Segregation Model to 

work better than the Futures Model in 

the event of a double default, the DCO 

must have information that will enable 

it to attribute the assets in the defaulting 

FCM’s customer account to individual 

customers of the FCM.286 Moreover, 

because the occurrence of a double 

default is rare, and because an FCM in 

the process of default may not (despite 

its regulatory obligations) be able to 

provide a DCO with accurate and timely 

information on its customers, section 

22.11 requires clearing FCMs to provide 

the necessary information to DCOs on at 

least a daily basis. The Commission 

notes that section 22.12 similarly 

requires DCOs to use this information to 

calculate and record the amount of 

collateral required to support each 

customer’s Cleared Swaps transactions 

on at least a daily basis. This daily 

information processing is not provided 

under the Futures Model and will add 

to the operational costs of clearing. 

The NPRM discussed the likely 

magnitude of increased operational 

costs associated with the more extensive 

information requirement.287 The 

Commission noted there that one 

estimate suggested the operational costs 

of the Complete Legal Segregation 

Model (relative to the Futures Model) 

were likely to be slightly less than $1 

million per year per FCM, with one-time 

costs of about $700,000.288 A DCO’s cost 

of accommodating this additional 

information was estimated to be of the 

same general magnitude. Another 

comment observed that the operational 

costs would be the same across all 

models being considered given a 

requirement for DCOs to collect margin 

on a gross basis.289 The Commission 


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end of each trading day, CME Clearing calculates, 

for each FCM’s cleared swaps customer 

account* * * the net margin requirement for each 

customer in the account.’’). 

290 In fact, FHLB states that the costs and risks 

associated with the additional operational 

complexity ‘‘may be difficult to quantify.’’ FHLB at 

4. 

291Fidelity at 6. 

292See supra n. 243. 

293See, e.g., Second Roundtable Tr. at 245–249; 

Second Roundtable Tr. at 140, l.12 (Mr. MacFarlane 

stating that ‘‘Tudor would happily pay the 

incremental costs, both in terms of collateral and 

operational costs [for greater protection].’’). 

294This analysis is also informed by the extent to 

which clearing certain types of swaps is mandatory, 

as well as by the cost already incurred in the 

uncleared swaps market. 

295See supra n. 243. 296See supra n. 269. 

297See e.g., Second Roundtable at 141, l.3 (Mr. 

MacFarlane stating’’the uncertainty that’s created 

by not knowing who we’re sharing risk in the 

omnibus pool would cause us to pull our capital 

back from the market.’’). 

received no alternative quantitative 

estimates in response to the NPRM,290

although Fidelity suggested that some of 

the operational costs associated with 

Complete Legal Segregation will be 

incurred regardless of the segregation 

model that is chosen because other 

CFTC rulemakings (i.e., the real time 

reporting rulemaking and the reporting 

of certain post-enactment swap 

transactions rulemaking) require similar 

reporting.291

Based on estimates by CME and ISDA 

described above, the expected scale of 

the cleared swaps market will require 

hundreds of billions of dollars of 

collateral to adequately secure swaps 

positions under any segregation model, 

and will thus potentially expose this 

collateral to some degree of FellowCustomer Risk. In light of the projected 

magnitude of the customer funds at 

stake, the Commission believes that 

operational costs of the Complete Legal 

Segregation Model are a relatively minor 

factor in choosing a model that would 

protect customer funds consistent with 

section 4d(f) of the CEA, and that this 

would be true even if operational costs 

proved to be considerably higher than 

the estimate described in the NPRM. 

f. Additional Potential Sources of Costs 

and Benefits Arising From Complete 

Legal Segregation 

As discussed in section I.D.1 above, 

the Complete Legal Segregation Model 

provides a significant advantage 

compared to the Futures Model with 

respect to fostering transfer. 

Specifically, under the Complete Legal 

Segregation Model, information about 

the Cleared Swaps Customers as a 

whole, and about each individual 

Cleared Swaps Customer’s positions, are 

transmitted to the DCO every day, an 

information flow (and store) that is not 

present in the Futures Model. Thus, in 

the event of an FCM bankruptcy, each 

DCO will have important information 

on a customer by customer basis that 

can be used to facilitate and implement 

transfers, thereby making the DCO less 

reliant upon the FCM for that 

information. 

3. Application to CEA Section 15(a) 

Considerations 

a. Protection of Market Participants 

As discussed above, the primary 

benefit of the Complete Legal 

Segregation Model is the protection of 

Cleared Swaps Customers from the risk 

of losing the value of their collateral as 

a result of a double default. Based on 

estimates by CME and ISDA, the cleared 

swaps market is likely to require 

upwards of $500 billion in customer 

collateral regardless of the segregation 

model chosen by the Commission.292

These assets will be potentially exposed 

to Fellow-Customer Risk. It is not 

possible to reliably quantify the 

likelihood of fellow customer losses in 

the absence of Complete Legal 

Segregation for reasons discussed in 

section VII.B.2.a. above. In addition, the 

magnitude of Fellow-Customer Risk in 

particular default situations will be 

affected by the extent to which 

customers foresee or anticipate a default 

and accordingly move their accounts to 

other FCMs; and the extent to which a 

default is foreseeable or anticipated will 

vary in different defaults. The risk cost 

imposed on DCOs and their members by 

Complete Legal Segregation will be 

affected by the foreseeability of default 

in a roughly parallel way. 

Notwithstanding these uncertainties, 

swaps users who participated in this 

rulemaking process, with only limited 

exceptions, consistently placed great 

value on protection against FellowCustomer Risk and supported either 

Complete Legal Segregation or stronger 

measures to provide such protection 

despite estimates of high dollar costs in 

the form of the capital cost of higher 

margins or guaranty funds.293 Since 

swaps users most likely ultimately will 

bear, directly or indirectly, most of the 

dollar costs of protection against 

Fellow-Customer Risk, the Commission 

places substantial weight on their 

valuation of such protection. 

b. Efficiency, Competitiveness, and 

Financial Integrity of Markets 

i. Dollar Costs and Swaps Usage 

Complete Legal Segregation could add 

materially to the dollar cost of clearing 

swaps, affecting competitiveness in 

particular.294 Moreover, there were 

estimates (albeit somewhat speculative 

estimates) that Complete Legal 

Segregation might require on the order 

of 70% higher margins, 100% higher 

DCO guaranty funds, or some 

combination of smaller increases in 

both. In light of the expected large scale 

of the cleared swaps market, these 

estimates imply industry wide 

increments in margin on the order of 

$500 billion or more, increments in 

guaranty funds of over $100 billion, or 

a combination of smaller increments of 

both.295 The cost of these measures 

would not be the dollar amount of 

margin or guaranty fund contributions, 

but, rather, the opportunity cost of using 

capital for these purposes rather than 

other business purposes. Considerable 

uncertainty is added to the evaluation of 

these estimates of the dollar cost of 

Complete Legal Segregation by the fact 

that DCOs do not yet have experience 

clearing under the Dodd-Frank regime 

(although they do currently clear swaps 

pursuant to the rules of the exchanges) 

and by LCH’s observation that, under 

the method it uses to determine needed 

financial resources to protect against 

default, the same level of resources is 

required under both Complete Legal 

Segregation and the Futures Model.296

If Complete Legal Segregation results 

in higher dollar costs to swaps users, 

this may discourage some use of swaps 

for hedging or other beneficial economic 

uses. The Commission does not have 

precise information about the price 

responsiveness of swaps usage that 

would make it possible to quantify this 

effect. A countervailing consideration is 

that comments to this rulemaking 

indicate that customers are already 

transacting in uncleared swaps, and are 

paying for full segregation of the 

collateral they are posting because of the 

importance to them of protection of that 

collateral against the defaults of others. 

Moreover, as some commenters noted, 

concern over exposure to FellowCustomer Risk that they currently pay 

for and receive could discourage swaps 

usage in the absence of Complete Legal 

Segregation or other protection against 

such risk.297 Comments by swaps users 

indicated that such effects would occur 

though they did not provide 

quantitative estimates. The evidence 

from the comments, specifically the 

statements of swap users regarding their 

willingness to pay for legal segregation, 

suggests that the demand-enhancing 


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298See e.g., Second Roundtable Tr. at 245 (Mr. 

Thum stating that ‘‘we’re prepared to bear the cost 

to provide for the margin protection that our clients 

need.’’). 

299See discussion at sections VII.B.2.b, VII.B.2.c, 

VII.B.2.d, and VII.B.3.b.i. 

300See supra n. 255. 301See supra section VII.B.2.d. 

effects of the increased safety associated 

with Complete Legal Segregation are 

larger than the demand-reducing effects 

of higher margins and/or fees associated 

with it.298

ii. Financial Integrity of Markets 

Complete Legal Segregation is likely 

to have several effects on the financial 

integrity of markets, the specifics of 

which are discussed in more detail 

under other headings.299 As explained 

above, Complete Legal Segregation is 

expected to lead to a net improvement 

in the monitoring of risky behavior by 

FCMs, with the effects of increased 

incentives for such monitoring by DCOs 

outweighing the effects of reduced 

incentives for such monitoring by 

customers. This net improvement in 

monitoring of FCMs can be expected to 

enhance the financial integrity of the 

markets in which clearing FCMs 

participate. 

By facilitating porting, Complete 

Legal Segregation is expected to 

enhance the financial integrity of 

cleared swaps markets in financial 

stress situations involving FCMs by 

reducing the likelihood that a double 

default will result in the need to 

liquidate large volumes of swaps 

positions with resulting costs to 

customers and the DCO and the 

potential to seriously disrupt the market 

at large. 

By prohibiting DCOs from using the 

collateral of non-defaulting customers in 

a double default situation, Complete 

Legal Segregation potentially could have 

a negative effect on the financial 

integrity of DCOs by reducing the 

financial resources available to apply to 

losses arising from double defaults. 

However, the record indicates that 

DCOs would substitute additional 

resources in the form of higher margin 

levels, larger guaranty funds, or a 

combination of both as need to maintain 

the ability to cover losses from FCM and 

customer defaults.300 Importantly, 

prohibiting DCOs from using the 

collateral of non-defaulting customers to 

protect a DCO from risks within a DCO’s 

control is consistent with the statute’s 

goal of protecting customer funds. As a 

result, the loss of the ability to rely on 

the collateral of non-defaulting 

customers would be expected to 

translate to higher dollar costs than 

under the Futures Model rather than 

reduced financial integrity. 

c. Price Discovery 

Complete Legal Segregation is not 

expected to have a significant effect on 

price discovery under normal market 

conditions. In circumstances of a double 

default involving a large FCM, Complete 

Legal Segregation may help protect 

price discovery in the swaps markets by 

reducing the likelihood of the need for 

a large scale liquidation of swaps 

positions that would disrupt normal 

pricing. 

d. Sound Risk Management Practices 

As discussed above,301 Complete 

Legal Segregation is expected to 

produce a net improvement in the 

monitoring of risky behavior by FCMs. 

While there may be some reduction in 

the incentives to Cleared Swaps 

Customers to monitor their FCMs, there 

is a corresponding increase in the 

incentives by DCOs to do so. There are 

efficiency gains in centralizing this 

responsibility in a small number of 

parties, and the DCOs (as membership 

organizations) have greater access to 

information from their Clearing 

Members, in contrast to Cleared Swaps 

Customers, who (due to considerations 

of confidentiality) may have little ability 

to obtain information about an FCM’s 

activities with respect to fellowcustomers. 

e. Other Public Interest Considerations 

By better protecting Cleared Swaps 

Customer Collateral against fellowcustomer risk, the LSOC Model will 

enhance compliance with the values of 

CEA Section 4d(f), which requires that 

the property of each individual 

customer be protected. 

C. Conclusion 

The Commission has carefully 

considered the available evidence 

regarding the costs and benefits of 

Complete Legal Segregation Model and 

has concluded that the Complete Legal 

Segregation Model best accomplishes 

the statutory objective of protecting 

customer deposits. In terms of benefits, 

customers have much greater assurance 

of the safety of their margin deposits 

against Fellow-Customer Risk under the 

Complete Legal Segregation Model than 

under the Futures Model. In addition, 

Complete Legal Segregation will 

facilitate porting rather than liquidation 

of customer positions in double default 

situations with associated benefits to 

customers and, for defaults of large 

FCMs, reduced risk of disruption of 

markets as a result of large volumes of 

customer positions. Complete Legal 

Segregation also will increase incentives 

for DCOs to monitor risky behavior by 

member FCMs and that this effect can 

be expected to outweigh reduced 

incentives for customers to monitor 

their FCMs. In determining that 

Complete Legal Segregation is the 

appropriate model, the Commission has 

placed weight on, among other 

considerations, the comments of many 

swaps users that they place great value 

on assurance of their margins and their 

positions and are willing to incur 

substantial costs to achieve such 

assurance and on comments by a range 

of market participants placing great 

importance on porting of customer 

positions as a response to FCM defaults. 

On the cost side, several DCOs that 

employ the Futures Model for the 

futures-side of their business and other 

commenters argued that Complete Legal 

Segregation will require some 

combination of substantially higher 

margin levels and guaranty fund 

contributions than the Futures Model. 

However, one major DCO reported that, 

under the approach it uses to establish 

margin and guaranty fund level, these 

levels would be the same under 

Complete Legal Segregation and the 

Futures Model. Complete Legal 

Segregation will impose some 

operational costs but such costs are 

small enough to be a minor 

consideration relative to the other 

aspects of cost; e.g., the potential 

increases in margins and guaranty 

funds. 

The Commission notes that, as 

discussed above, there are a number of 

sources of uncertainty in evaluating the 

costs and benefits of Complete Legal 

Segregation, such as market participants 

not yet having experience clearing 

swaps under the Dodd-Frank legal 

regime and the infrequency of double 

defaults. However, the costs and 

benefits of all the models considered by 

the Commission are subject to similar 

uncertainties as to the probability of 

double defaults and customer behavior 

in anticipation of such defaults. 

Accordingly, such uncertainties do not 

militate against the selection of the 

Complete Legal Segregation Model as 

the preferred alternative. 

VIII. Related Matters 

A. Paperwork Reduction Act 

1. Introduction 

Sections 22.2(g), 22.5(a), 22.11, 22.12, 

and 22.16 of these rules impose new 

information disclosure and 

recordkeeping requirements that 

constitute the collection of information 


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302 44 U.S.C. 3501 et seq. 303 Id. 304See generally, Notice of Proposed Rulemaking, 

Privacy of Consumer Financial Information; 

Conforming Amendments Under Dodd-Frank Act, 

75 FR 66014, Oct. 27, 2010. 

305 5 U.S.C. 601 et seq. 

306See 66 FR 45605, 45609 (Aug. 29, 2001) 

(DCOs); 47 FR 18618, 18619–20 (April 30, 1982) 

(FCMs). 

within the meaning of the Paperwork 

Reduction Act of 1995 (‘‘PRA’’).302

Under the PRA, an agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless it displays a 

currently valid control number.303 The 

Commission therefore has requested 

that the Office of Management and 

Budget (‘‘OMB’’) assign a control 

number for this collection of 

information. The Commission has also 

submitted the NPRM, this final rule 

release, and supporting documentation 

to OMB for review in accordance with 

44 U.S.C. 3507(d) and 5 CFR 1320.11. 

The title for this collection of 

information is ‘‘Disclosure and 

Retention of Certain Information 

Relating to Cleared Swaps Customer 

Collateral,’’ OMB Control Number 

3038–0091. This collection of 

information will be mandatory. The 

information in question will be held by 

private entities and, to the extent it 

involves consumer financial 

information, may be protected under 

Title V of the Gramm-Leach-Bliley Act 

as amended by the Dodd-Frank Act.304

OMB has not yet approved the 

collection of this information. 

2. Comments Received on Collection of 

Information Proposed in NPRM 

Sections 22.2(g), 22.5(a), 22.11, 22.12, 

and 22.16 and estimates of the expected 

information collection burden were 

published for comment in the NPRM. 

The collection of information required 

by the final versions of these rules and 

the associated information collection 

burden is identical to that of the rules 

as proposed. Comments were received 

regarding proposed sections 22.5(a), 

22.11, 22.12, and 22.16. The substance 

of these comments and the 

Commission’s response to them is set 

forth above in sections IV.E, IV.K, IV.L., 

and IV.P of this preamble. 

In addition, in response to a comment 

on the definition of ‘‘Cleared Swaps 

Customer Collateral’’ by the FIA 

requesting that the Commission confirm 

that the term ‘‘Cleared Swaps Customer 

Collateral’’ includes all assets provided 

to an FCM by a Cleared Swaps 

Customer, including amounts in excess 

of the amount required to margin a 

Cleared Swap by the relevant DCO, the 

Commission has included in the final 

rule a new permissive provision, 

subsection 22.13(c)(2). Subsection 

22.13(c)(2) provides that an FCM may 

transmit to a DCO collateral posted by 

a Cleared Swaps Customer in excess of 

the amount required by the DCO if (1) 

the rules of the DCO permit such 

transmission; and (2) the DCO provides 

a mechanism by which the FCM is able 

to, and maintains rules requiring the 

FCM to, identify each business day, for 

each Cleared Swaps Customer, the 

amount of collateral posted in excess of 

the amount required by the DCO. This 

rule subsection may have the effect of 

causing some FCMs to perform a daily 

computation of the amount of collateral 

posted in excess of the amount required 

by the relevant DCO. In the view of the 

Commission, this provision does not 

materially change, or add to the burden 

of, the information collection required 

by the Part 22 rules as proposed. This 

is so because the computation of the 

amount of collateral posted in excess of 

the amount required by the relevant 

DCO will be performed using same data 

sources that would be used for the 

information collections required by 

subsections 22.2(g), 22.11, and 22.12. 

Moreover, this burden would only be 

imposed (and enforced) by voluntary 

action of the DCO in permitting, and the 

FCM in transmitting, such additional 

collateral. 

There were no comments specifically 

addressing the Commission’s numerical 

estimates of information collection 

burden in section VII.B.2 of the NPRM. 

B. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 305 requires that agencies 

consider whether their rules will have a 

significant economic impact on a 

substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis of that impact. These 

Part 22 rules and amendments to Part 

190 apply to DCOs and FCMs. In the 

NPRM, the Chairman, pursuant to 

section 605(b) of the RFA, 5 U.S.C. 

605(b), certified on behalf of the 

Commission that these rules and 

amendments will not have a significant 

economic impact on a substantial 

number of small entities based on 

previous determinations by the 

Commission that DCOs and FCMs are 

not small entities for purposes of the 

RFA.306

List of Subjects 

17 CFR Part 22 

Brokers, Clearing, Consumer 

protection, Reporting and recordkeeping 

requirements, Swaps. 

17 CFR Part 190 

Bankruptcy, Brokers, Commodity 

futures, Reporting and recordkeeping 

requirements, Swaps. 

IX. Text of Final Rules 

For the reasons stated in this release, 

the Commission hereby amends Chapter 

17 as follows: 

■ 1. Add Part 22 to read as follows: 

PART 22—CLEARED SWAPS 

Sec. 

22.1 Definitions. 

22.2 Futures Commission Merchants: 

Treatment of Cleared Swaps Customer 

Collateral. 

22.3 Derivatives Clearing Organizations: 

Treatment of Cleared Swaps Customer 

Collateral. 

22.4 Futures Commission Merchants and 

Derivatives Clearing Organizations: 

Permitted Depositories. 

22.5 Futures Commission Merchants and 

Derivatives Clearing Organizations: 

Written Acknowledgement. 

22.6 Futures Commission Merchants and 

Derivatives Clearing Organizations: 

Naming of Cleared Swaps Customer 

Accounts. 

22.7 Permitted Depositories: Treatment of 

Cleared Swaps Customer Collateral. 

22.8 Situs of Cleared Swaps Customer 

Accounts. 

22.9 Denomination of Cleared Swaps 

Customer Collateral and Location of 

Depositories. 

22.10 Application of other Regulatory 

Provisions. 

22.11 Information to be Provided 

Regarding Customers and their Cleared 

Swaps. 

22.12 Information to be Maintained 

Regarding Cleared Swaps Customer 

Collateral. 

22.13 Additions to Cleared Swaps 

Customer Collateral. 

22.14 Futures Commission Merchant 

Failure to Meet a Customer Margin Call 

in Full. 

22.15 Treatment of Cleared Swaps 

Customer Collateral on an Individual 

Basis. 

22.16 Disclosures to Customers. 

Authority: 7 U.S.C. 1a, 6d, 7a–1 as 

amended by Pub. L. 111–203, 124 Stat. 1376. 

§ 22.1 Definitions. 

For the purposes of this part: 

Cleared Swap. This term refers to a 

transaction constituting a ‘‘cleared 

swap’’ within the meaning of section 

1a(7) of the Act. 

(1) This term shall exclude any swap 

(along with money, securities, or other 

property received to margin, guarantee, 

or secure such a swap) that, pursuant to 

a Commission rule, regulation, or order, 

is (along with such money, securities, or 

other property) commingled with a 

commodity future or option (along with 

money, securities, or other property 


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received to margin, guarantee, or secure 

such a future or option) that is 

segregated pursuant to section 4d(a) of 

the Act. 

(2) This term shall include any trade 

or contract (along with money, 

securities or other property received to 

margin, guarantee, or secure such a 

trade or contract), that 

(i) Would be required to be segregated 

pursuant to section 4d(a) of the Act, or 

(ii) Would be subject to § 30.7 of this 

chapter, but which is, in either case, 

pursuant to a Commission rule, 

regulation, or order (or a derivatives 

clearing organization rule approved in 

accordance with § 39.15(b)(2) of this 

chapter), commingled with a swap 

(along with money, securities, or other 

property received to margin, guarantee, 

or secure such a swap) in an account 

segregated pursuant to section 4d(f) of 

the Act. 

Cleared Swaps Customer. This term 

refers to any person entering into a 

Cleared Swap, but shall exclude: 

(1) Any owner or holder of a Cleared 

Swaps Proprietary Account with respect 

to the Cleared Swaps in such account; 

and 

(2) A clearing member of a derivatives 

clearing organization with respect to 

Cleared Swaps cleared on that 

derivatives clearing organization. A 

person shall be a Cleared Swaps 

Customer only with respect to its 

Cleared Swaps. 

Cleared Swaps Customer Account. 

This term refers to any account for the 

Cleared Swaps of Cleared Swaps 

Customers and associated Cleared 

Swaps Customer Collateral that: 

(1) A futures commission merchant 

maintains on behalf of Cleared Swaps 

Customers (including, in the case of a 

Collecting Futures Commission 

Merchant, the Cleared Swaps Customers 

of a Depositing Futures Commission 

Merchant) or 

(2) A derivatives clearing organization 

maintains for futures commission 

merchants on behalf of Cleared Swaps 

Customers thereof. 

Cleared Swaps Customer Collateral. 

(1) This term means all money, 

securities, or other property received by 

a futures commission merchant or by a 

derivatives clearing organization from, 

for, or on behalf of a Cleared Swaps 

Customer, which money, securities, or 

other property: 

(i) Is intended to or does margin, 

guarantee, or secure a Cleared Swap; or 

(ii) Constitutes, if a Cleared Swap is 

in the form or nature of an option, the 

settlement value of such option. 

(2) This term shall also include 

accruals, i.e., all money, securities, or 

other property that a futures 

commission merchant or derivatives 

clearing organization receives, directly 

or indirectly, which is incident to or 

results from a Cleared Swap that a 

futures commission merchant 

intermediates for a Cleared Swaps 

Customer. 

Cleared Swaps Proprietary Account. 

(1) This term means an account for 

Cleared Swaps and associated collateral 

that is carried on the books and records 

of a futures commission merchant for 

persons with certain relationships with 

that futures commission merchant, 

specifically: 

(i) Where such account is carried for 

a person falling within one of the 

categories specified in paragraph (2) of 

this definition, or 

(ii) Where ten percent or more of such 

account is owned by a person falling 

within one of the categories specified in 

paragraph (2) of this definition, or 

(iii) Where an aggregate of ten percent 

or more of such account is owned by 

more than one person falling within one 

or more of the categories specified in 

paragraph (2) of this definition. 

(2) The relationships to the futures 

commission merchant referred to in 

paragraph (1) of this definition are as 

follows: 

(i) Such individual himself, or such 

partnership, corporation or association 

itself; 

(ii) In the case of a partnership, a 

general partner in such partnership; 

(iii) In the case of a limited 

partnership, a limited or special partner 

in such partnership whose duties 

include: 

(A) The management of the 

partnership business or any part thereof; 

(B) The handling, on behalf of such 

partnership, of: 

(1) The Cleared Swaps of Cleared 

Swaps Customers or 

(2) The Cleared Swaps Customer 

Collateral; 

(C) The keeping, on behalf of such 

partnership, of records pertaining to 

(1) the Cleared Swaps of Cleared 

Swaps Customers or 

(2) the Cleared Swaps Customer 

Collateral; or 

(D) The signing or co-signing of 

checks or drafts on behalf of such 

partnership; 

(iv) In the case of a corporation or 

association, an officer, director, or 

owner of ten percent or more of the 

capital stock of such organization; 

(v) An employee of such individual, 

partnership, corporation or association 

whose duties include: 

(A) The management of the business 

of such individual, partnership, 

corporation or association or any part 

thereof; 

(B) The handling, on behalf of such 

individual, partnership, corporation, or 

association, of the Cleared Swaps of 

Cleared Swaps Customers or the Cleared 

Swaps Customer Collateral; 

(C) The keeping of records, on behalf 

of such individual, partnership, 

corporation, or association, pertaining to 

the Cleared Swaps of Cleared Swaps 

Customers or the Cleared Swaps 

Customer Collateral; or 

(D) The signing or co-signing of 

checks or drafts on behalf of such 

individual, partnership, corporation, or 

association; 

(vi) A spouse or minor dependent 

living in the same household of any of 

the foregoing persons; 

(vii) A business affiliate that, directly 

or indirectly, controls such individual, 

partnership, corporation, or association; 

or 

(viii) A business affiliate that, directly 

or indirectly, is controlled by or is 

under common control with, such 

individual, partnership, corporation or 

association. Provided, however, that an 

account owned by any shareholder or 

member of a cooperative association of 

producers, within the meaning of 

section 6a of the Act, which association 

is registered as a futures commission 

merchant and carries such account on 

its records, shall be deemed to be a 

Cleared Swaps Customer Account and 

not a Cleared Swaps Proprietary 

Account of such association, unless the 

shareholder or member is an officer, 

director, or manager of the association. 

Clearing Member. This term means 

any person that has clearing privileges 

such that it can process, clear and settle 

trades through a derivatives clearing 

organization on behalf of itself or others. 

The derivatives clearing organization 

need not be organized as a membership 

organization. 

Collecting Futures Commission 

Merchant. A futures commission 

merchant that carries Cleared Swaps on 

behalf of another futures commission 

merchant and the Cleared Swaps 

Customers of the latter futures 

commission merchant, and as part of 

carrying such Cleared Swaps, collects 

Cleared Swaps Customer Collateral. 

Commingle. To commingle two or 

more items means to hold such items in 

the same account, or to combine such 

items in a transfer between accounts. 

Customer. This term means any 

customer of a futures commission 

merchant, other than a Cleared Swaps 

Customer, including, without limitation: 

(1) Any ‘‘customer’’ or ‘‘commodity 

customer’’ within the meaning of § 1.3 

of this chapter; and 


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(2) Any ‘‘foreign futures or foreign 

options customer’’ within the meaning 

of § 30.1(c) of this chapter. 

Depositing Futures Commission 

Merchant. A futures commission 

merchant that carries Cleared Swaps on 

behalf of its Cleared Swaps Customers 

through another futures commission 

merchant and, as part of carrying such 

Cleared Swaps, deposits Cleared Swaps 

Customer Collateral with such futures 

commission merchant. 

Permitted Depository. This term shall 

have the meaning set forth in § 22.4 of 

this part. 

Segregate. To segregate two or more 

items is to keep them in separate 

accounts, and to avoid combining them 

in the same transfer between two 

accounts. 

§ 22.2 Futures Commission Merchants: 

Treatment of Cleared Swaps and 

Associated Cleared Swaps Customer 

Collateral. 

(a) General. A futures commission 

merchant shall treat and deal with the 

Cleared Swaps of Cleared Swaps 

Customers and associated Cleared 

Swaps Customer Collateral as belonging 

to Cleared Swaps Customers. 

(b) Location of Cleared Swaps 

Customer Collateral. (1) A futures 

commission merchant must segregate all 

Cleared Swaps Customer Collateral that 

it receives, and must either hold such 

Cleared Swaps Customer Collateral 

itself as set forth in paragraph (b)(2) of 

this section, or deposit such collateral 

into one or more Cleared Swaps 

Customer Accounts held at a Permitted 

Depository, as set forth in paragraph 

(b)(3) of this section. 

(2) If a futures commission merchant 

holds Cleared Swaps Customer 

Collateral itself, then the futures 

commission merchant must: 

(i) Physically separate such collateral 

from its own property; 

(ii) Clearly identify each physical 

location in which it holds such 

collateral as a ‘‘Location of Cleared 

Swaps Customer Collateral’’ (the ‘‘FCM 

Physical Location’’); 

(iii) Ensure that the FCM Physical 

Location provides appropriate 

protection for such collateral; and 

(iv) Record in its books and records 

the amount of such Cleared Swaps 

Customer Collateral separately from its 

own funds. 

(3) If a futures commission merchant 

holds Cleared Swaps Customer 

Collateral in a Permitted Depository, 

then: 

(i) The Permitted Depository must 

qualify pursuant to the requirements set 

forth in § 22.4 of this part, and 

(ii) The futures commission merchant 

must maintain a Cleared Swaps 

Customer Account with each such 

Permitted Depository. 

(c) Commingling. (1) A futures 

commission merchant may commingle 

the Cleared Swaps Customer Collateral 

that it receives from, for, or on behalf of 

multiple Cleared Swaps Customers. 

(2) A futures commission merchant 

shall not commingle Cleared Swaps 

Customer Collateral with either of the 

following: 

(i) Funds belonging to the futures 

commission merchant, except as 

expressly permitted in paragraph (e)(3) 

of this section; or 

(ii) Other categories of funds 

belonging to Customers of the futures 

commission merchant, including 

customer funds (as § 1.3 of this chapter 

defines such term) and the foreign 

futures or foreign options secured 

amount (as § 1.3 of this chapter defines 

such term), except as expressly 

permitted by Commission rule, 

regulation, or order, or by a derivatives 

clearing organization rule approved in 

accordance with § 39.15(b)(2) of this 

chapter. 

(d) Limitations on Use. (1) No futures 

commission merchant shall use, or 

permit the use of, the Cleared Swaps 

Customer Collateral of one Cleared 

Swaps Customer to purchase, margin, or 

settle the Cleared Swaps or any other 

trade or contract of, or to secure or 

extend the credit of, any person other 

than such Cleared Swaps Customer. 

Cleared Swaps Customer Collateral shall 

not be used to margin, guarantee, or 

secure trades or contracts of the entity 

constituting a Cleared Swaps Customer 

other than in Cleared Swaps, except to 

the extent permitted by a Commission 

rule, regulation or order. 

(2) A futures commission merchant 

may not impose or permit the 

imposition of a lien on Cleared Swaps 

Customer Collateral, including any 

residual financial interest of the futures 

commission merchant in such collateral, 

as described in paragraph (e)(4) of this 

section. 

(3) A futures commission merchant 

may not include, as Cleared Swaps 

Customer Collateral, 

(i) Money invested in the securities, 

memberships, or obligations of any 

derivatives clearing organization, 

designated contract market, swap 

execution facility, or swap data 

repository, or 

(ii) Money, securities, or other 

property that any derivatives clearing 

organization holds and may use for a 

purpose other than those set forth in 

§ 22.3 of this part. 

(e) Exceptions. Notwithstanding the 

foregoing: 

(1) Permitted Investments. A futures 

commission merchant may invest 

money, securities, or other property 

constituting Cleared Swaps Customer 

Collateral in accordance with § 1.25 of 

this chapter, which section shall apply 

to such money, securities, or other 

property as if they comprised customer 

funds or customer money subject to 

segregation pursuant to section 4d(a) of 

the Act and the regulations thereunder. 

(2) Permitted Withdrawals. Such 

share of Cleared Swaps Customer 

Collateral as in the normal course of 

business shall be necessary to margin, 

guarantee, secure, transfer, adjust, or 

settle a Cleared Swaps Customer’s 

Cleared Swaps with a derivatives 

clearing organization, or with a 

Collecting Futures Commission 

Merchant, may be withdrawn and 

applied to such purposes, including the 

payment of commissions, brokerage, 

interest, taxes, storage, and other 

charges, lawfully accruing in connection 

with such Cleared Swaps. 

(3) Deposits of Own Money, 

Securities, or Other Property. 

(i) In order to ensure that it is always 

in compliance with paragraph (f) of this 

section, a futures commission merchant 

may place in an FCM Physical Location 

or deposit in a Cleared Swaps Customer 

Account its own money, securities, or 

other property (provided, that such 

securities or other property are 

unencumbered and are of the types 

specified in § 1.25 of this chapter). 

(ii) Money, securities, or other 

property deposited by a futures 

commission merchant pursuant to 

22.13(b) and available to a derivatives 

clearing organization or Collecting 

Futures Commission Merchant to meet 

the obligations of the futures 

commission merchant’s Cleared Swaps 

Customers collectively, shall be 

maintained in an account separate from 

the Cleared Swaps Customer Account. 

(4) Residual Financial Interest. (i) If, 

in accordance with paragraph (e)(3)(i) of 

this section, a futures commission 

merchant places in an FCM Physical 

Location or deposits in a Cleared Swaps 

Customer Account its own money, 

securities, or other property, then such 

money, securities, or other property 

(including accruals thereon) shall 

constitute Cleared Swaps Customer 

Collateral. 

(ii) The futures commission merchant 

shall have a residual financial interest 

in any portion of such money, 

securities, or other property in excess of 

that necessary for compliance with 

paragraph (f)(4) of this section. 

(iii) The futures commission merchant 

may withdraw money, securities, or 

other property from the FCM Physical 


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6374 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

Location or Cleared Swaps Customer 

Account, to the extent of its residual 

financial interest therein. At the time of 

such withdrawal, the futures 

commission merchant shall ensure that 

the withdrawal does not cause its 

residual financial interest to become 

less than zero. 

(f) Requirements as to Amount. (1) For 

purposes of this § 22.2(f), the term 

‘‘account’’ shall reference the entries on 

the books and records of a futures 

commission merchant pertaining to the 

Cleared Swaps Customer Collateral of a 

particular Cleared Swaps Customer. 

(2) The futures commission merchant 

must reflect in the account that it 

maintains for each Cleared Swaps 

Customer the market value of any 

Cleared Swaps Customer Collateral that 

it receives from such customer, as 

adjusted by: 

(i) Any uses permitted under § 22.2(d) 

of this part; 

(ii) Any accruals on permitted 

investments of such collateral under 

§ 22.2(e) of this part that, pursuant to 

the futures commission merchant’s 

customer agreement with that customer, 

are creditable to such customer; 

(iii) Any charges lawfully accruing to 

the Cleared Swaps Customer, including 

any commission, brokerage fee, interest, 

tax, or storage fee; and 

(iv) Any appropriately authorized 

distribution or transfer of such 

collateral. 

(3) If the market value of Cleared 

Swaps Customer Collateral in the 

account of a Cleared Swaps Customer is 

positive after adjustments, then that 

account has a credit balance. If the 

market value of Cleared Swaps 

Customer Collateral in the account of a 

Cleared Swaps Customer is negative 

after adjustments, then that account has 

a debit balance. 

(4) The futures commission merchant 

must maintain in segregation, in its 

FCM Physical Locations and/or its 

Cleared Swaps Customer Accounts at 

Permitted Depositories, an amount 

equal to the sum of any credit balances 

that the Cleared Swaps Customers of the 

futures commission merchant have in 

their accounts, excluding from such 

sum any debit balances that the Cleared 

Swaps Customers of the futures 

commission merchant have in their 

accounts. 

(5) Notwithstanding the foregoing, the 

futures commission merchant must 

include, in calculating the sum 

referenced in paragraph (f)(4) of this 

section, any debit balance that a Cleared 

Swaps Customer may have in its 

account, to the extent that such balance 

is secured by ‘‘readily marketable 

securities’’ that the Cleared Swaps 

Customer deposited with the futures 

commission merchant. 

(i) For purposes of this section, 

‘‘readily marketable’’ shall be defined as 

having a ‘‘ready market’’ as such latter 

term is defined in Rule 15c3–1(c)(11) of 

the Securities and Exchange 

Commission (§ 241.15c3–1(c)(11) of this 

title). 

(ii) In order for a debit balance to be 

deemed secured by ‘‘readily marketable 

securities,’’ the futures commission 

merchant must maintain a security 

interest in such securities, and must 

hold a written authorization to liquidate 

the securities at the discretion of the 

futures commission merchant. 

(iii) To determine the amount secured 

by ‘‘readily marketable securities,’’ the 

futures commission merchant shall: 

(A) Determine the market value of 

such securities; and 

(B) Reduce such market value by 

applicable percentage deductions (i.e., 

‘‘securities haircuts’’) as set forth in 

Rule 15c3–1(c)(2)(vi) of the Securities 

and Exchange Commission (§ 240.15c3– 

1(c)(2)(vi) of this title). The portion of 

the debit balance, not exceeding 100 per 

cent, that is secured by the reduced 

market value of such readily marketable 

securities shall be included in 

calculating the sum referred to in 

paragraph (f)(4) of this section. 

(g) Segregated Account; Daily 

Computation and Record. (1) Each 

futures commission merchant must 

compute as of the close of each business 

day, on a currency-by-currency basis: 

(i) The aggregate market value of the 

Cleared Swaps Customer Collateral in 

all FCM Physical Locations and all 

Cleared Swaps Customer Accounts held 

at Permitted Depositories (the 

‘‘Collateral Value’’); 

(ii) The sum referenced in paragraph 

(f)(4) of this section (the ‘‘Collateral 

Requirement’’); and 

(iii) The amount of the residual 

financial interest that the futures 

commission merchant holds in such 

Cleared Swaps Customer Collateral, 

which shall equal the difference 

between the Collateral Value and the 

Collateral Requirement. 

(2) The futures commission merchant 

must complete the daily computations 

required by this section prior to noon on 

the next business day and must keep 

such computations, together with all 

supporting data, in accordance with the 

requirements of § 1.31 of this chapter. 

§ 22.3 Derivatives Clearing Organizations: 

Treatment of Cleared Swaps Customer 

Collateral. 

(a) General. A derivatives clearing 

organization shall treat and deal with 

the Cleared Swaps Customer Collateral 

deposited by a futures commission 

merchant as belonging to the Cleared 

Swaps Customers of such futures 

commission merchant and not other 

persons, including, without limitation, 

the futures commission merchant. 

(b) Location of Cleared Swaps 

Customer Collateral. (1) The derivatives 

clearing organization must segregate all 

Cleared Swaps Customer Collateral that 

it receives from futures commission 

merchants, and must either hold such 

Cleared Swaps Customer Collateral 

itself as set forth in paragraph (b)(2) of 

this section, or deposit such collateral 

into one or more Cleared Swaps 

Customer Accounts held at a Permitted 

Depository, as set forth in paragraph 

(b)(3) of this section. 

(2) If a derivatives clearing 

organization holds Cleared Swaps 

Customer Collateral itself, then the 

derivatives clearing organization must: 

(i) Physically separate such collateral 

from its own property, the property of 

any futures commission merchant, and 

the property of any other person that is 

not a Cleared Swaps Customer of a 

futures commission merchant; 

(ii) Clearly identify each physical 

location in which it holds such 

collateral as ‘‘Location of Cleared Swaps 

Customer Collateral’’ (the ‘‘DCO 

Physical Location’’); 

(iii) Ensure that the DCO Physical 

Location provides appropriate 

protection for such collateral; and 

(iv) Record in its books and records 

the amount of such Cleared Swaps 

Customer Collateral separately from its 

own funds, the funds of any futures 

commission merchant, and the funds of 

any other person that is not a Cleared 

Swaps Customer of a futures 

commission merchant. 

(3) If a derivatives clearing 

organization holds Cleared Swaps 

Customer Collateral in a Permitted 

Depository, then: 

(i) The Permitted Depository must 

qualify pursuant to the requirements set 

forth in § 22.4 of this part; and 

(ii) The derivatives clearing 

organization must maintain a Cleared 

Swaps Customer Account with each 

such Permitted Depository. 

(c) Commingling. (1) A derivatives 

clearing organization may commingle 

the Cleared Swaps Customer Collateral 

that it receives from multiple futures 

commission merchants on behalf of 

their Cleared Swaps Customers. 

(2) A derivatives clearing organization 

shall not commingle the Cleared Swaps 

Customer Collateral that it receives from 

a futures commission merchant on 

behalf of Cleared Swaps Customers with 

any of the following: 


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(i) The money, securities, or other 

property belonging to the derivatives 

clearing organization; 

(ii) The money, securities, or other 

property belonging to any futures 

commission merchant; or 

(iii) Other categories of funds that it 

receives from a futures commission 

merchant on behalf of Customers, 

including customer funds (as § 1.3 of 

this chapter defines such term) and the 

foreign futures or foreign options 

secured amount (as § 1.3 of this chapter 

defines such term), except as expressly 

permitted by Commission rule, 

regulation or order, (or a derivatives 

clearing organization rule approved in 

accordance with § 39.15(b)(2) of this 

chapter). 

(d) Exceptions; Permitted 

Investments. Notwithstanding the 

foregoing and § 22.15 of this part, a 

derivatives clearing organization may 

invest the money, securities, or other 

property constituting Cleared Swaps 

Customer Collateral in accordance with 

§ 1.25 of this chapter, which section 

shall apply to such money, securities, or 

other property as if they comprised 

customer funds or customer money 

subject to segregation pursuant to 

section 4d(a) of the Act and the 

regulations thereunder. 

§ 22.4 Futures Commission Merchants and 

Derivatives Clearing Organizations: 

Permitted Depositories. 

In order for a depository to be a 

Permitted Depository: 

(a) The depository must (subject to 

§ 22.9) be one of the following types of 

entities: 

(1) A bank located in the United 

States; 

(2) A trust company located in the 

United States; 

(3) A Collecting Futures Commission 

Merchant registered with the 

Commission (but only with respect to a 

Depositing Futures Commission 

Merchant providing Cleared Swaps 

Customer Collateral); or 

(4) A derivatives clearing organization 

registered with the Commission; and 

(b) The futures commission merchant 

or the derivatives clearing organization 

must hold a written acknowledgment 

letter from the depository as required by 

§ 22.5 of this part. 

§ 22.5 Futures Commission Merchants and 

Derivatives Clearing Organizations: Written 

Acknowledgement. 

(a) Before depositing Cleared Swaps 

Customer Collateral, the futures 

commission merchant or derivatives 

clearing organization shall obtain and 

retain in its files a separate written 

acknowledgment letter from each 

depository in accordance with §§ 1.20 

and 1.26 of this chapter, with all 

references to ‘‘customer funds’’ 

modified to apply to Cleared Swaps 

Customer Collateral, and with all 

references to section 4d(a) or 4d(b) of 

the Act and the regulations thereunder 

modified to apply to section 4d(f) of the 

Act and the regulations thereunder. 

(b) The futures commission merchant 

or derivatives clearing organization 

shall adhere to all requirements 

specified in §§ 1.20 and 1.26 of this 

chapter regarding retaining, permitting 

access to, filing, or amending the 

written acknowledgment letter, in all 

cases as if the Cleared Swaps Customer 

Collateral comprised customer funds 

subject to segregation pursuant to 

section 4d(a) or 4d(b) of the Act and the 

regulations thereunder. 

(c) Notwithstanding paragraph (a) of 

this section, an acknowledgement letter 

need not be obtained from a derivatives 

clearing organization that has made 

effective, pursuant to section 5c(c) of the 

Act and the regulations thereunder, 

rules that provide for the segregation of 

Cleared Swaps Customer Collateral, in 

accordance with all relevant provisions 

of the Act and the regulations 

thereunder. 

§ 22.6 Futures Commission Merchants and 

Derivatives Clearing Organizations: Naming 

of Cleared Swaps Customer Accounts. 

The name of each Cleared Swaps 

Customer Account that a futures 

commission merchant or a derivatives 

clearing organization maintains with a 

Permitted Depository shall: 

(a) Clearly identify the account as a 

‘‘Cleared Swaps Customer Account’’ 

and 

(b) Clearly indicate that the collateral 

therein is ‘‘Cleared Swaps Customer 

Collateral’’ subject to segregation in 

accordance with the Act and this part. 

§ 22.7 Permitted Depositories: Treatment 

of Cleared Swaps Customer Collateral. 

A Permitted Depository shall treat all 

funds in a Cleared Swaps Customer 

Account as Cleared Swaps Customer 

Collateral. A Permitted Depository shall 

not hold, dispose of, or use any such 

Cleared Swaps Customer Collateral as 

belonging to any person other than: 

(a) The Cleared Swaps Customers of 

the futures commission merchant 

maintaining such Cleared Swaps 

Customer Account or; 

(b) The Cleared Swaps Customers of 

the futures commission merchants for 

which the derivatives clearing 

organization maintains such Cleared 

Swaps Customer Account. 

§ 22.8 Situs of Cleared Swaps Customer 

Accounts. 

The situs of each of the following 

shall be located in the United States: 

(a) Each FCM Physical Location or 

DCO Physical Location; 

(b) Each ‘‘account,’’ within the 

meaning of § 22.2(f)(1), that a futures 

commission merchant maintains for 

each Cleared Swaps Customer; and 

(c) Each Cleared Swaps Customer 

Account on the books and records of a 

derivatives clearing organization with 

respect to the Cleared Swaps Customers 

of a futures commission merchant. 

§ 22.9 Denomination of Cleared Swaps 

Customer Collateral and Location of 

Depositories. 

(a) Subject to paragraph (b) of this 

section, futures commission merchants 

and derivatives clearing organizations 

may hold Cleared Swaps Customer 

Collateral in the denominations, at the 

locations and depositories, and subject 

to the same segregation requirements 

specified in § 1.49 of this chapter, which 

section shall apply to such Cleared 

Swaps Customer Collateral as if it 

comprised customer funds subject to 

segregation pursuant to section 4d(a) of 

the Act. 

(b) Notwithstanding the requirements 

set forth in § 1.49 of this chapter, a 

futures commission merchant’s 

obligations to a Cleared Swaps 

Customer may be denominated in a 

currency in which funds have accrued 

to the customer as a result of a Cleared 

Swap carried through such futures 

commission merchant, to the extent of 

such accruals. 

(c) Each depository referenced in 

paragraph (a) of this section shall be 

considered a Permitted Depository for 

purposes of this part. Provided, 

however, that a futures commission 

merchant shall only be considered a 

Permitted Depository to the extent that 

it is acting as a Collecting Futures 

Commission Merchant (as § 22.1 of this 

part defines such term). 

§ 22.10 Application of other Regulatory 

Provisions. 

Sections 1.27, 1.28, 1.29, and 1.30 of 

this chapter shall apply to the Cleared 

Swaps Customer Collateral held by 

futures commission merchants and 

derivatives clearing organizations to the 

same extent as if such sections referred 

to: 

(a) ‘‘Cleared Swaps Customer 

Collateral’’ in place of ‘‘customer 

funds;’’ 

(b) ‘‘Cleared Swaps Customers’’ 

instead of ‘‘commodity or option 

customers’’ or ‘‘customers or option 

customers;’’ 


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(c) ‘‘Cleared Swaps Contracts’’ instead 

of ‘‘trades, contracts, or commodity 

options;’’ and 

(d) ‘‘Section 4d(f) of the Act’’ instead 

of ‘‘section 4d(a)(2) of the Act.’’ 

§ 22.11 Information To Be Provided 

Regarding Customers and Their Cleared 

Swaps. 

(a) Each Depositing Futures 

Commission Merchant shall: 

(1) The first time that the Depositing 

Futures Commission Merchant 

intermediates a Cleared Swap for a 

Cleared Swaps Customer with a 

Collecting Futures Commission 

Merchant, provide information 

sufficient to identify such customer to 

the relevant Collecting Futures 

Commission Merchant; and 

(2) At least once each business day 

thereafter, provide information to the 

relevant Collecting Futures Commission 

Merchant sufficient to identify, for each 

Cleared Swaps Customer, the portfolio 

of rights and obligations arising from the 

Cleared Swaps that the Depositing 

Futures Commission Merchant 

intermediates for such customer. 

(b) If an entity serves as both a 

Depositing Futures Commission 

Merchant and a Collecting Futures 

Commission Merchant, then: 

(1) The information that such entity 

must provide to its Collecting Futures 

Commission Merchant pursuant to 

paragraph (a)(1) of this section shall also 

include information sufficient to 

identify each Cleared Swaps Customer 

of the Depositing Futures Commission 

Merchant for which such entity serves 

as a Collecting Futures Commission 

Merchant; and 

(2) The information that such entity 

must provide to its Collecting Futures 

Commission Merchant pursuant to 

paragraph (a)(2) of this section shall also 

include information sufficient to 

identify, for each Cleared Swaps 

Customer referenced in paragraph (b)(1) 

of this section, the portfolio of rights 

and obligations arising from the Cleared 

Swaps that such entity intermediates as 

a Collecting Futures Commission 

Merchant, on behalf of its Depositing 

Futures Commission Merchant, for such 

customer. 

(c) Each futures commission merchant 

that intermediates a Cleared Swap for a 

Cleared Swaps Customer, on or subject 

to the rules of a derivatives clearing 

organization, directly as a Clearing 

Member shall: 

(1) The first time that such futures 

commission merchant intermediates a 

Cleared Swap for a Cleared Swaps 

Customer, provide information to the 

relevant derivatives clearing 

organization sufficient to identify such 

customer; and 

(2) At least once each business day 

thereafter, provide information to the 

relevant derivatives clearing 

organization sufficient to identify, for 

each Cleared Swaps Customer, the 

portfolio of rights and obligations 

arising from the Cleared Swaps that 

such futures commission merchant 

intermediates for such customer. 

(d) If the futures commission 

merchant referenced in paragraph (c) of 

this section is a Collecting Futures 

Commission Merchant, then: 

(1) The information that it must 

provide to the derivatives clearing 

organization pursuant to paragraph 

(c)(1) of this section shall also include 

information sufficient to identify each 

Cleared Swaps Customer of any entity 

that acts as a Depositing Futures 

Commission Merchant in relation to the 

Collecting Futures Commission 

Merchant (including, without 

limitation, each Cleared Swaps 

Customer of any Depositing Futures 

Commission Merchant for which such 

entity also serves as a Collecting Futures 

Commission Merchant); and 

(2) The information that it must 

provide to the derivatives clearing 

organization pursuant to paragraph 

(c)(2) of this section shall also include 

information sufficient to identify, for 

each Cleared Swaps Customer 

referenced in paragraph (d)(1) of this 

section, the portfolio of rights and 

obligations arising from the Cleared 

Swaps that the Collecting Futures 

Commission Merchant intermediates, on 

behalf of the Depositing Futures 

Commission Merchant, for such 

customer. 

(e) Each derivatives clearing 

organization shall: 

(1) Take appropriate steps to confirm 

that the information it receives pursuant 

to paragraphs (c)(1) or (c)(2) of this 

section is accurate and complete, and 

(2) Ensure that the futures 

commission merchant is providing the 

derivatives clearing organization the 

information required by paragraphs 

(c)(1) or (c)(2) of this section on a timely 

basis. 

§ 22.12 Information To Be Maintained 

Regarding Cleared Swaps Customer 

Collateral. 

(a) Each Collecting Futures 

Commission Merchant receiving Cleared 

Swaps Customer Funds from an entity 

serving as a Depositing Futures 

Commission Merchant shall, no less 

frequently than once each business day, 

calculate and record: 

(1) the amount of collateral required 

at such Collecting Futures Commission 

Merchant for each Cleared Swaps 

Customer of the entity acting as 

Depositing Futures Commission 

Merchant (including, without 

limitation, each Cleared Swaps 

Customer of any Depositing Futures 

Commission Merchant for which such 

entity also serves as a Collecting Futures 

Commission Merchant); and 

(2) the sum of the individual 

collateral amounts referenced in 

paragraph (a)(1) of this section. 

(b) Each Collecting Futures 

Commission Merchant shall calculate 

the collateral amounts referenced in 

paragraph (a) of this section with 

respect to the portfolio of rights and 

obligations arising from the Cleared 

Swaps that the Collecting Futures 

Commission Merchant intermediates, on 

behalf of the Depositing Futures 

Commission Merchant, for each Cleared 

Swaps Customer referenced in 

paragraph (a)(1) of this section. 

(c) Each derivatives clearing 

organization receiving Cleared Swaps 

Customer Funds from a futures 

commission merchant shall, no less 

frequently than once each business day, 

calculate and record: 

(1) the amount of collateral required 

at such derivatives clearing organization 

for each Cleared Swaps Customer of the 

futures commission merchant; and 

(2) the sum of the individual 

collateral amounts referenced in 

paragraph (c)(1) of this section. 

(d) If the futures commission 

merchant referenced in paragraph (c) of 

this section is a Collecting Futures 

Commission Merchant, then the 

derivatives clearing organization shall 

also perform and record the results of 

the calculation required in paragraph (c) 

of this section for each Cleared Swaps 

Customer of an entity acting as a 

Depositing Futures Commission 

Merchant in relation to the Collecting 

Futures Commission Merchant 

(including, without limitation, any 

Cleared Swaps Customer for which such 

entity is also acting as a Collecting 

Futures Commission Merchant). 

(e) Each futures commission merchant 

shall calculate the collateral amounts 

referenced in paragraph (c) of this 

section with respect to the portfolio of 

rights and obligations arising from the 

Cleared Swaps that the futures 

commission merchant intermediates 

(including, without limitation, as a 

Collecting Futures Commission 

Merchant on behalf of a Depositing 

Futures Commission Merchant), for 

each Cleared Swaps Customer 

referenced in paragraphs (c)(1) and (d) 

of this section. 

(f) The collateral requirement 

referenced in paragraph (a) of this 


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section with respect to a Collecting 

Futures Commission Merchant shall be 

no less than that imposed by the 

relevant derivatives clearing 

organization with respect to the same 

portfolio of rights and obligations for 

each relevant Cleared Swaps Customer. 

§ 22.13 Additions to Cleared Swaps 

Customer Collateral. 

(a)(1) At the election of the derivatives 

clearing organization or Collecting 

Futures Commission Merchant, the 

collateral requirement referred to in 

§§ 22.12(a), (c), and (d) of this part 

applicable to a particular Cleared Swaps 

Customer or group of Cleared Swaps 

Customers may be increased based on 

an evaluation of the credit risk posed by 

such customer or group, in which case 

the derivatives clearing organization or 

Collecting Futures Commission 

Merchant shall collect and record such 

higher amount as provided in § 22.12 of 

this part. 

(2) Nothing in paragraph (a)(1) of this 

section is intended to interfere with the 

right of a futures commission merchant 

to increase the collateral requirements at 

such futures commission merchant with 

respect to any of its Cleared Swaps 

Customers or Customers. 

(b) Any collateral deposited by a 

futures commission merchant 

(including a Depositing Futures 

Commission Merchant) pursuant to 

§ 22.2(e)(3)(ii) of this part, which 

collateral is identified as such futures 

commission merchant’s own property 

may be used by the derivatives clearing 

organization or Collecting Futures 

Commission Merchant, as applicable, to 

margin, guarantee or secure the Cleared 

Swaps of any or all of such Cleared 

Swaps Customers. 

(c) A futures commission merchant 

may transmit to a derivatives clearing 

organization any collateral posted by a 

Cleared Swaps Customer in excess of 

the amount required by the derivatives 

clearing organization if: 

(1) the rules of the derivatives clearing 

organization expressly permit the 

futures commission merchant to 

transmit collateral in excess of the 

amount required by the derivatives 

clearing organization; and 

(2) the derivatives clearing 

organization provides a mechanism by 

which the futures commission merchant 

is able to, and maintains rules pursuant 

to which the futures commission 

merchant is required to, identify each 

Business Day, for each Cleared Swaps 

Customer, the amount of collateral 

posted in excess of the amount required 

by the derivatives clearing organization. 

§ 22.14 Futures Commission Merchant 

Failure To Meet a Customer Margin Call in 

Full. 

(a) A Depositing Futures Commission 

Merchant which receives a call for 

either initial margin or variation margin 

with respect to a Cleared Swaps 

Customer Account from a Collecting 

Futures Commission Merchant, which 

call such Depositing Futures 

Commission Merchant does not meet in 

full, shall, with respect to each Cleared 

Swaps Customer of such Depositing 

Futures Commission Merchant whose 

Cleared Swaps contribute to such 

margin call, 

(1) Transmit to the Collecting Futures 

Commission Merchant an amount equal 

to the lesser of 

(i) The amount called for; or 

(ii) The remaining Cleared Swaps 

Collateral on deposit at such Depositing 

Futures Commission Merchant for that 

Cleared Swaps Customer; and 

(2) Advise the Collecting Futures 

Commission Merchant of the identity of 

each such Cleared Swaps Customer, and 

the amount transmitted on behalf of 

each such customer. 

(b) If the entity acting as Depositing 

Futures Commission Merchant 

referenced in paragraph (a) of this 

section is also a Collecting Futures 

Commission Merchant, then: 

(1) Such entity shall include in the 

transmission required in paragraph 

(a)(1) of this section any amount that it 

receives, pursuant to paragraph (a)(1) of 

this section, from a Depositing Futures 

Commission Merchant for which such 

entity acts as a Collecting Futures 

Commission Merchant; and 

(2) Such entity shall present its 

Collecting Futures Commission 

Merchant with the information that it 

receives, pursuant to paragraph (a)(2) of 

this section, from a Depositing Futures 

Commission Merchant for which such 

entity acts as a Collecting Futures 

Commission Merchant. 

(c) A futures commission merchant 

which receives a call for either initial or 

variation margin with respect to a 

Cleared Swaps Customer Account from 

a derivatives clearing organization, 

which call such futures commission 

merchant does not meet in full, shall, 

with respect to each Cleared Swaps 

Customer of such futures commission 

merchant whose Cleared Swaps 

contribute to such margin call: 

(1) Transmit to the derivatives 

clearing organization an amount equal 

to the lesser of 

(i) The amount called for; or 

(ii) The remaining Cleared Swaps 

Collateral on deposit at such futures 

commission merchant for each such 

Cleared Swaps Customer; and 

(2) Advise the derivatives clearing 

organization of the identity of each such 

Cleared Swaps Customer, and the 

amount transmitted on behalf of each 

such customer. 

(d) If the futures commission 

merchant referenced in paragraph (c) is 

a Collecting Futures Commission 

Merchant, then: 

(1) Such Collecting Futures 

Commission Merchant shall include in 

the transmission required in paragraph 

(c)(1) of this section any amount that it 

receives from a Depositing Futures 

Commission Merchant pursuant to 

paragraph (a)(1) of this section; and 

(2) Such Collecting Futures 

Commission shall present the 

derivatives clearing organization with 

the information that it receives from a 

Depositing Futures Commission 

Merchant pursuant to paragraph (a)(2) of 

this section. 

(e) If, 

(1) On the business day prior to the 

business day on which the Depositing 

Futures Commission Merchant fails to 

meet a margin call with respect to a 

Cleared Swaps Customer Account, such 

Collecting Futures Commission 

Merchant referenced in paragraph (a) of 

this section held, with respect to such 

account, Cleared Swaps Collateral of a 

value no less than the amount specified 

in § 22.12(a)(2) of this part, after the 

application of haircuts specified by 

policies applied by such Collecting 

Futures Commission Merchant in its 

relationship with the Depositing Futures 

Commission Merchant, and 

(2) As of the close of business on the 

business day on which the margin call 

is not met, the market value of the 

Cleared Swaps Collateral held by the 

derivatives clearing organization or 

Collecting Futures Commission 

Merchant is, due to changes in such 

market value, less than the amount 

specified in § 22.12(a)(2) of this part, 

then the amount of such collateral 

attributable to each Cleared Swaps 

Customer pursuant to § 22.12(a)(1) of 

this part shall be reduced by the 

percentage difference between the 

amount specified in § 22.12(a)(2) of this 

part and such market value. 

(f) If: 

(1) On the business day prior to the 

business day on which the futures 

commission merchant fails to meet a 

margin call with respect to a Cleared 

Swaps Customer Account, the 

derivatives clearing organization 

referenced in paragraph (c) of this 

section held, with respect to such 

account, Cleared Swaps Collateral of a 

value no less than the amount specified 

in § 22.12(c)(2) of this part, after the 

application of haircuts specified by the 


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rules and procedures of such derivatives 

clearing organization, and 

(2) As of the close of business on the 

business day on which the margin call 

is not met, the market value of the 

Cleared Swaps Collateral held by the 

derivatives clearing organization is, due 

to changes in such market value, less 

than the amount specified in 

§ 22.12(c)(2) of this part, then the 

amount of collateral attributable to each 

Cleared Swaps Customer pursuant to 

§ 22.12(c)(1) of this part shall be 

reduced by the percentage difference 

between the amount specified in 

§ 22.12(c)(2) and such market value. 

(g) A derivatives clearing organization 

or Collecting Futures Commission 

Merchant is entitled to reasonably rely 

upon any information provided by a 

defaulting futures commission merchant 

under § 22.14. If the defaulting futures 

commission merchant does not provide 

such information on the date of the 

futures commission merchant’s default, 

a derivatives clearing organization or 

Collecting Futures Commission 

Merchant may rely on the information 

previously provided to it by the 

defaulting futures commission 

merchant. 

§ 22.15 Treatment of Cleared Swaps 

Customer Collateral on an Individual Basis. 

Subject to § 22.3(d) of this part, each 

derivatives clearing organization and 

each Collecting Futures Commission 

Merchant receiving Cleared Swaps 

Customer Collateral from a futures 

commission merchant shall treat the 

value of collateral required with respect 

to the portfolio of rights and obligations 

arising out of the Cleared Swaps 

intermediated for each Cleared Swaps 

Customer, and collected from the 

futures commission merchant, as 

belonging to such customer, and such 

amount shall not be used to margin, 

guarantee, or secure the Cleared Swaps 

or other obligations of the futures 

commission merchant or of any other 

Cleared Swaps Customer or Customer. 

Nothing contained herein shall be 

construed to limit, in any way, the right 

of a derivatives clearing organization or 

Collecting Futures Commission 

Merchant to liquidate any or all 

positions in a Cleared Swaps Customer 

Account in the event of default of a 

clearing member or Depositing Futures 

Commission Merchant. 

§ 22.16 Disclosures to Customers. 

(a) A futures commission merchant 

shall disclose, to each of its Cleared 

Swaps Customers, the governing 

provisions, as described in paragraph (c) 

of this section, relating to use of Cleared 

Swaps Customer Collateral, transfer, 

neutralization of the risks, or liquidation 

of Cleared Swaps in the event of a 

default by the futures commission 

merchant relating to the Cleared Swaps 

Customer Account, as well as any 

change in such governing provisions. 

(b) If the futures commission 

merchant referenced in paragraph (a) of 

this section is a Depositing Futures 

Commission Merchant, then such 

futures commission merchant shall 

disclose, to each of its Cleared Swaps 

Customers, the governing provisions, as 

described in paragraph (c) of this 

section, relating to use of Cleared Swaps 

Customer Collateral, transfer, 

neutralization of the risks, or liquidation 

of Cleared Swaps in the event of a 

default by: 

(1) Such futures commission 

merchant or 

(2) Any relevant Collecting Futures 

Commission Merchant relating to the 

Cleared Swaps Customer Account, as 

well as any change in such governing 

provisions. 

(c) The governing provisions referred 

to in paragraphs (a) and (b) of this 

section are the rules of each derivatives 

clearing organization, or the provisions 

of the customer agreement between the 

Collecting Futures Commission 

Merchant and the Depositing Futures 

Commission Merchant, on or through 

which the Depositing Futures 

Commission Merchant will intermediate 

Cleared Swaps for such Cleared Swaps 

Customer. 

PART 190—BANKRUPTCY 

■ 2. The authority citation for part 190 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 

7a, 12, 19, and 24, and 11 U.S.C. 362, 546, 

548, 556, and 761–766, unless otherwise 

noted. 

§§ 190.01, 190.02, 190.03, 190.05, 190.06, 

190.07, 190.10 [Amended] 

■ 3. In 17 CFR part 190: 

■ a. Remove the words ‘‘commodity 

account’’ and add, in their place, the 

words ‘‘commodity contract account’’ 

in: 

■ i. Sections 190.01(w), (y), and (kk)(6); 

■ ii. Sections 190.02(d)(1), (6), and (7); 

■ iii. Section 190.06(g)(3); and 

■ iv. Section 190.10(d)(1). 

■ b. Remove the words ‘‘commodity 

futures account’’ and add, in their place, 

the words ‘‘commodity contract 

account’’ in: 

■ i. Section 190.03(a)(2); and 

■ ii. Section 190.10(h). 

■ c. Remove the words ‘‘commodity 

transactions’’ and add, in their place, 

the words ‘‘commodity contract 

transactions’’ in § 190.02(d)(3). 

■ d. Remove the words ‘‘commodity 

futures contract’’ and add, in their 

place, the words ‘‘commodity contract’’ 

in § 190.05(a)(1) and (b)(1). 

■ e. Remove the words ‘‘commodity 

accounts’’ and add, in their place, the 

words ‘‘commodity contract accounts’’ 

in § 190.06(g)(1)(i) and (ii). 

■ f. Remove the words ‘‘board of trade’’ 

and add, in their place, the words 

‘‘designated contract market’’ in 

§ 190.07(e)(1). 

■ g. Remove the words ‘‘contract 

market’’ and add, in their place, the 

words ‘‘designated contract market’’ in 

§ 190.07(e)(2)(ii)(B). 

■ 4. In § 190.01, 

■ a. Redesignate paragraphs (e) through 

(oo) as (f) through (pp); 

■ b. Add a new paragraph (e); and 

■ c. Revise paragraphs (a), and newly 

redesignated paragraphs (f), (cc), (hh), 

(ll)(2)(ii), (ll)(4), (ll)(5), and (pp) to read 

as follows: 

§ 190.01 Definitions. 

* * * * * 

(a)(1) Account class means each of the 

following types of customer accounts 

which must be recognized as a separate 

class of account by the trustee: futures 

accounts, foreign futures accounts, 

leverage accounts, delivery accounts as 

defined in § 190.05(a)(2) of this part, 

and cleared swaps accounts. 

(2)(i) To the extent that the equity 

balance, as defined in § 190.07 of this 

part, of a customer in a commodity 

option, as defined in § 1.3 of this 

chapter, may be commingled with the 

equity balance of such customer in any 

domestic commodity futures contract 

pursuant to regulations under the Act, 

the aggregate shall be treated for 

purposes of this part as being held in a 

futures account. 

(ii) To the extent that such equity 

balance of a customer in a commodity 

option may be commingled with the 

equity balance of such customer in any 

cleared swaps account pursuant to 

regulations under this act, the aggregate 

shall be treated for purposes of this part 

as being held in a cleared swaps 

account. 

(iii) If positions or transactions in 

commodity contracts that would 

otherwise belong to one account class 

(and the money, securities, or other 

property margining, guaranteeing, or 

securing such positions or transactions), 

are, pursuant to a Commission rule, 

regulation, or order (or a derivatives 

clearing organization rule approved in 

accordance with § 39.15(b)(2) of this 

chapter), held separately from other 

positions and transactions in that 

account class, and are commingled with 

positions or transactions in commodity 


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contracts of another account class (and 

the money, securities, or other property 

margining, guaranteeing, or securing 

such positions or transactions), then the 

former positions (and the relevant 

money, securities, or other property) 

shall be treated, for purposes of this 

part, as being held in an account of the 

latter account class. 

* * * * * 

(e) Calendar day. A calendar day 

includes the time from midnight to 

midnight. 

(f) Clearing organization shall have 

the same meaning as that set forth in 

section 761(2) of the Bankruptcy Code. 

* * * * * 

(cc) Non-public customer means any 

person enumerated in the definition of 

Proprietary Account in § 1.3 or § 31.4(e) 

of this chapter, any person excluded 

from the definition of ‘‘foreign futures or 

foreign options customer’’ in the proviso 

to section 30.1(c) of this chapter, or any 

person enumerated in the definition of 

Cleared Swaps Proprietary Account in 

§ 22.1 of this chapter, in each case, if 

such person is defined as a ‘‘customer’’ 

under paragraph (k) of this section. 

* * * * * 

(hh) Principal contract means a 

contract which is not traded on a 

designated contract market, and 

includes leverage contracts and dealer 

options, but does not include: 

(1) Transactions executed off the floor 

of a designated contract market 

pursuant to rules approved by the 

Commission or rules which the 

designated contract market is required 

to enforce, or pursuant to rules of a 

foreign board of trade located outside 

the United States, its territories or 

possessions; or 

(2) Cleared swaps contracts. 

* * * * * 

(ll) * * * 

(2) * * * 

(ii) Is a bona fide hedging position or 

transaction as defined in § 1.3 of this 

chapter or is a commodity option 

transaction which has been determined 

by the registered entity to be 

economically appropriate to the 

reduction of risks in the conduct and 

management of a commercial enterprise 

pursuant to rules which have been 

approved by the Commission pursuant 

to section 5c(c) of the Commodity 

Exchange Act; and 

* * * * * 

(4) Any cash or other property 

deposited prior to the entry of the order 

for relief to pay for the taking of 

physical delivery on a long commodity 

contract or for payment of the strike 

price upon exercise of a short put or a 

long call option contract on a physical 

commodity, which cannot be settled in 

cash, in excess of the amount necessary 

to margin such commodity contract 

prior to the notice date or exercise date, 

which cash or other property is 

identified on the books and records of 

the debtor as received from or for the 

account of a particular customer on or 

after three calendar days before the first 

notice date or three calendar days before 

the exercise date specifically for the 

purpose of payment of the notice price 

upon taking delivery or the strike price 

upon exercise, respectively, and such 

customer takes delivery or exercises the 

option in accordance with the 

applicable designated contract market 

rules. 

(5) The cash price tendered for any 

property deposited prior to the entry of 

the order for relief to make physical 

delivery on a short commodity contract 

or for exercise of a long put or a short 

call option contract on a physical 

commodity, which cannot be settled in 

cash, to the extent it exceeds the amount 

necessary to margin such contract prior 

to the notice date or exercise date, 

which property is identified on the 

books and records of the debtor as 

received from or for the account of a 

particular customer on or after three 

calendar days before the first notice date 

or three calendar days before the 

exercise date specifically for the 

purpose of a delivery or exercise, 

respectively, and such customer makes 

delivery or exercises the option in 

accordance with the applicable contract 

market rules. 

* * * * * 

(pp) Cleared Swap. This term shall 

have the same meaning as set forth in 

§ 22.1 of this chapter. 

■ 5. In § 190.02, revise paragraphs (a), 

(b)(1), (b)(2), (d)(11), (e), (f)(1)(i), (f)(1(ii) 

and (g)(2)(i) to read as follows: 

§ 190.02 Operation of the debtor’s estate 

subsequent to the filing date and prior to 

the primary liquidation date. 

* * * * * 

(a) Notices to the Commission and 

Designated Self-Regulatory 

Organizations. 

(1) General. Each commodity broker 

which files a petition in bankruptcy 

shall, at or before the time of such filing, 

and each commodity broker against 

which such a petition is filed shall, as 

soon as possible, but no later than one 

calendar day after the receipt of notice 

of such filing, notify the Commission 

and such broker’s designated selfregulatory organization, if any, in 

accordance with § 190.10(a) of the filing 

date, the court in which the proceeding 

has been filed, and the docket number 

assigned to that proceeding by the court. 

(2) Of transfers under section 764(b) 

of the Bankruptcy Code. As soon as 

possible, but in no event later than the 

close of business on third calendar day 

after the order for relief, the trustee, the 

applicable self-regulatory organization, 

or the commodity broker must notify the 

Commission in accordance with 

§ 190.10(a) whether such entity or 

organization intends to transfer or to 

apply to transfer open commodity 

contracts on behalf of the commodity 

broker in accordance with section 

764(b) of the Bankruptcy Code and 

§ 190.06 (e) or (f). 

(b) Notices to customers. (1) 

Specifically identifiable property other 

than commodity contracts. The trustee 

must use its best efforts to promptly, but 

in no event later than two calendar days 

after entry of the order for relief, 

commence to publish in a daily 

newspaper or newspapers of general 

circulation approved by the court 

serving the location of each branch 

office of the commodity broker, for two 

consecutive days a notice to customers 

stating that all specifically identifiable 

property of customers other than open 

commodity contracts which has not 

otherwise been liquidated will be 

liquidated commencing on the sixth 

calendar day after the second 

publication date if the customer has not 

instructed the trustee in writing on or 

before the fifth calendar day after the 

second publication date to return such 

property pursuant to the terms for 

distribution of specifically identifiable 

property contained in § 190.08(d)(1) 

and, on the seventh calendar day after 

such second publication date, if such 

property has not been returned in 

accordance with such terms on or prior 

to that date. Such notice must describe 

specifically identifiable property in 

accordance with the definition in this 

part and must specify the terms upon 

which that property may be returned. 

Publication of the form of notice set 

forth in the appendix to this part will 

constitute sufficient notice for purposes 

of this paragraph (b)(1). 

(2) Request for instructions regarding 

transfer of open commodity contracts. 

The trustee must use its best efforts to 

request promptly, but in no event later 

than two calendar days after entry of an 

order for relief, customer instructions 

concerning the transfer or liquidation of 

the specifically identifiable open 

commodity contracts, if any, not 

required to be liquidated under 

paragraph (f)(1) of this section. The 

request for customer instructions 

required by this paragraph (b)(2) must 

state that the trustee is required to 

liquidate any such commodity contract 

for which transfer instructions have not 


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6380 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

been received on or before the seventh 

calendar day after entry of the order for 

relief, at an hour specified by the 

trustee, and any such commodity 

contract for which instructions have 

been received which has not been 

transferred in accordance with 

§ 190.08(d)(2) on or before the seventh 

calendar day after entry of the order for 

relief. A form of notice is set forth in the 

appendix to this part. 

* * * * * 

(d) * * * 

(11) Whether the claimant’s positions 

in security futures products are held in 

a futures account or a securities 

account, as these terms are defined in 

§ 1.3 of this chapter; 

* * * * * 

(e) Transfers—(1) All cases. The 

trustee for a commodity broker must 

immediately use its best efforts to effect 

a transfer in accordance with § 190.06 

(e) and (f) no later than the seventh 

calendar day after the order for relief of 

the open commodity contracts and 

equity held by the commodity broker for 

or on behalf of its customers. 

(2) Involuntary cases. A commodity 

broker against which an involuntary 

petition in bankruptcy is filed, or the 

trustee if a trustee has been appointed 

in such case, must use its best efforts to 

effect a transfer in accordance with 

§ 190.06 (e) and (f) of all open 

commodity contracts and equity held by 

the commodity broker for or on behalf 

of its customers and such other property 

as the Commission in its discretion may 

authorize, on or before the seventh 

calendar day after the filing date, and 

immediately cease doing business: 

Provided, however, That the commodity 

broker may trade for liquidation only, 

unless otherwise directed by the 

Commission, by any applicable selfregulatory organization or by the court: 

And, Provided further, That if the 

commodity broker demonstrates to the 

Commission within such period that it 

was in compliance with the segregation 

and financial requirements of this 

chapter on the filing date, and the 

Commission determines, in its sole 

discretion, that such transfer or 

liquidation is neither appropriate nor in 

the public interest, the commodity 

broker may continue in business subject 

to applicable provisions of the 

Bankruptcy Code and of this chapter. 

(f) * * * 

(1) * * * 

(i) Dealer option contracts, if the 

dealer option grantor is not the debtor, 

which cannot be transferred on or before 

the seventh calendar day after the order 

for relief; and 

(ii) Specifically identifiable 

commodity contracts as defined in 

§ 190.01(kk)(2) for which an instruction 

prohibiting liquidation is noted 

prominently in the accounting records 

of the debtor and timely received under 

paragraph (b)(2) of this section. 

Notwithstanding the foregoing, an open 

commodity contract must be offset if: 

such contract is a futures contract or a 

Cleared Swaps contract which cannot be 

settled in cash and which would 

otherwise remain open either beyond 

the last day of trading (if applicable), or 

the first day on which notice of intent 

to deliver may be tendered with respect 

thereto, whichever occurs first; such 

contract is a long option on a physical 

commodity which cannot be settled in 

cash and would be automatically 

exercised, has value and would remain 

open beyond the last day for exercise; 

such contract is a short option on a 

physical commodity which cannot be 

settled in cash; or, as otherwise 

specified in these rules. 

* * * * * 

(g) * * * 

(2) * * * 

(i) 100% of the maintenance margin 

requirements of the applicable 

designated contact market or swap 

execution facility, if any, with respect to 

the open commodity contracts in such 

account; or 

* * * * * 

■ 6. In § 190.03, revise paragraphs (a)(3), 

(b)(3), (b)(4), (b)(5), and (c) to read as 

follows: 

§ 190.03 Operation of the debtor’s estate 

subsequent to the primary liquidation date. 

* * * * * 

(a) * * * 

(3) Margin calls. The trustee must 

promptly issue margin calls with 

respect to any account referred to under 

paragraph (a)(1) of this section in which 

the balance does not equal or exceed 

100% of the maintenance margin 

requirements of the applicable 

designated contact market or swap 

execution facility, if any, with respect to 

the open commodity contracts in such 

account, or if there are no such 

maintenance margin requirements, 

100% of the clearing organization’s 

initial margin requirements applicable 

to the open commodity contracts in 

such account, or if there are no such 

maintenance margin requirements or 

clearing organization initial margin 

requirements, then 50% of the customer 

initial margin applicable to the 

commodity contracts in such account: 

Provided, That no margin calls need be 

made to restore customer initial margin. 

* * * * * 

(b) * * * 

(3) The trustee has received no 

customer instructions with respect to 

such contract by the sixth calendar day 

after entry of the order for relief; 

(4) The commodity contract has not 

been transferred in accordance with 

§ 190.08(d)(2) on or before the seventh 

calendar day after entry of the order for 

relief; or 

(5) The commodity contract would 

otherwise remain open (e.g., because it 

cannot be settled in cash) beyond the 

last day of trading in such contract (if 

applicable) or the first day on which 

notice of delivery may be tendered with 

respect to such contract, whichever 

occurs first. 

(c) Liquidation of specifically 

identifiable property other than open 

commodity contracts. All specifically 

identifiable property other than open 

commodity contracts which have not 

been liquidated prior to the primary 

liquidation date, and for which no 

customer instructions have been timely 

received must be liquidated, to the 

extent reasonably possible, no later than 

the sixth calendar day after final 

publication of the notice referred to in 

§ 190.02(b)(1). All other specifically 

identifiable property must be liquidated 

or returned, to the extent reasonably 

possible, no later than the seventh 

calendar day after final publication of 

such notice. 

■ 7. In § 190.04, revise paragraph (d)(1) 

to read as follows: 

§ 190.04 Operation of the debtor’s estate— 

general. 

* * * * * 

(d) Liquidation — (1) Order of 

Liquidation. (i) In the Market. 

Liquidation of open commodity 

contracts held for a house account or 

customer account by or on behalf of a 

commodity broker which is a debtor 

shall be accomplished pursuant to the 

rules of a clearing organization, a 

designated contract market, or a swap 

execution facility, as applicable. Such 

rules shall ensure that the process for 

liquidating open commodity contracts, 

whether for the house account or the 

customer account, results in competitive 

pricing, to the extent feasible under 

market conditions at the time of 

liquidation. Such rules must be 

submitted to the Commission for 

approval, pursuant to section 5c(c) of 

the Act, and be approved by the 

Commission. Alternatively, such rules 

must otherwise be submitted to and 

approved by the Commission (or its 

delegate pursuant to § 190.10(d) of this 

part) prior to their application. 

(ii) Book entry. Notwithstanding 

paragraph (d)(1) of this section, in 

appropriate cases, upon application by 


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the trustee or the affected clearing 

organization, the Commission may 

permit open commodity contracts to be 

liquidated, or settlement on such 

contracts to be made, by book entry. 

Such book entry shall offset open 

commodity contracts, whether matched 

or not matched on the books of the 

commodity broker, using the settlement 

price for such commodity contracts as 

determined by the clearing organization. 

Such settlement price shall be 

determined by the rules of the clearing 

organization, which shall ensure that 

such settlement price is established in a 

competitive manner, to the extent 

feasible under market conditions at the 

time of liquidation. Such rules must be 

submitted to the Commission for 

approval pursuant to section 5c(c) of the 

Act, and be approved by the 

Commission. Alternatively, such rules 

must otherwise be approved by the 

Commission (or its delegate pursuant to 

§ 190.10(d) of this part) prior to their 

application. 

* * * * * 

■ 8. In § 190.05, revise paragraph (b) 

introductory text to read as follows: 

§ 190.05 Making and taking delivery on 

commodity contracts. 

* * * * * 

(b) Rules for deliveries on behalf of a 

customer of a debtor. Except in the case 

of a commodity contract which is 

settled in cash, each designated contract 

market, swap execution facility, or 

clearing organization shall adopt, 

maintain in effect and enforce rules 

which have been submitted in 

accordance with section 5c(c) of the Act 

for approval by the Commission, which: 

* * * * * 

■ 9. In § 190.06, 

■ a. Remove paragraph (e)(1)(iv) and 

redesignate paragraph (e)(1)(v) as 

(e)(1)(iv); 

■ b. Revise paragraphs (a), (e)(1)(iii), 

(e)(2), (f)(3)(i), (g)(2) and 

■ c. Add paragraph (g)(1)(iii) to read as 

follows: 

§ 190.06 Transfers. 

(a) Transfer rules. No clearing 

organization or other self-regulatory 

organization may adopt, maintain in 

effect or enforce rules which: 

(1) Are inconsistent with the 

provisions of this part; 

(2) Interfere with the acceptance by its 

members of open commodity contracts 

and the equity margining or securing 

such contracts from futures commission 

merchants, or persons which are 

required to be registered as futures commission merchants, which are required 

to transfer accounts pursuant to 

§ 1.17(a)(4) of this chapter; or 

(3) Prevent the acceptance by its 

members of transfers of open 

commodity contracts and the equity 

margining or securing such contracts 

from futures commission merchants 

with respect to which a petition in 

bankruptcy has been filed, if such 

transfers have been approved by the 

Commission. Provided, however, that 

this paragraph shall not limit the 

exercise of any contractual right of a 

clearing organization or other registered 

entity to liquidate open commodity 

contracts. 

* * * * * 

(e) * * * 

(1) * * * 

(iii) Dealer option accounts, if the 

debtor is the dealer option grantor with 

respect to such accounts; or 

* * * * * 

(2) Amount of equity which may be 

transferred. In no case may money, 

securities or property be transferred in 

respect of any eligible account if the 

value of such money, securities or 

property would exceed the funded 

balance of such account based on 

available information as of the calendar 

day immediately preceding transfer less 

the value on the date of return or 

transfer of any property previously 

returned or transferred with respect 

thereto. 

(f) * * * 

(3) * * * 

(i) Of the customer estate. If all 

eligible customer accounts held by a 

debtor cannot be transferred under this 

section, a partial transfer may 

nonetheless be made. The Commission 

will not disapprove such a transfer for 

the sole reason that it was a partial 

transfer if it would prefer the transfer of 

accounts, the liquidation of which could 

adversely affect the market or the 

bankrupt estate. Any dealer option 

contract held by or for the account of a 

debtor which is a futures commission 

merchant from or for the account of a 

customer which has not previously been 

transferred, and is eligible for transfer, 

must be transferred on or before the 

seventh calendar day after entry of the 

order for relief. 

* * * * * 

(g) * * * 

(1) * * * 

(iii) The transfer prior to the order for 

relief by a clearing organization of one 

or more accounts held for or on behalf 

of customers of the debtor, provided 

that (I) the money, securities, or other 

property accompanying such transfer 

did not exceed the funded balance of 

each account based on available 

information as of the close of business 

on the business day immediately 

preceding such transfer less the value 

on the date of return or transfer of any 

property previously returned or 

transferred thereto, and (II) the transfer 

is not disapproved by the Commission. 

(2) Post-relief transfers. On or after the 

entry of the order for relief, the 

following transfers to one or more 

transferees may not be avoided by the 

trustee: 

(i) The transfer of a customer account 

eligible to be transferred under 

paragraph (e) or (f) of this section made 

by the trustee of the commodity broker 

or by any self-regulatory organization of 

the commodity broker: 

(A) On or before the seventh calendar 

day after the entry of the order for relief; 

and 

(B) The Commission is notified in 

accordance with § 190.02(a)(2) prior to 

the transfer and does not disapprove the 

transfer; or 

(ii) The transfer of a customer account 

at the direction of the Commission on or 

before the seventh calendar day after the 

order for relief upon such terms and 

conditions as the Commission may 

deem appropriate and in the public 

interest. 

* * * * * 

■ 10. In § 190.07, 

■ a. Redesignate paragraph (b)(2)(xiii) as 

paragraph (b)(2)(xiv); 

■ b. Add a new paragraph (b)(2)(xiii); 

and 

■ c. Revise paragraphs (b)(2)(viii), 

(b)(2)(ix), (b)(3)(v), (c)(1)(i), (e) 

introductory text, (e)(1) and (e)(4) to 

read as follows: 

§ 190.07 Calculation of allowed net equity. 

* * * * * 

(b) * * * 

(2) * * * 

(viii) Subject to paragraph (b)(2)(ix) of 

this section, the futures accounts, 

leverage accounts, options accounts, 

foreign futures accounts, delivery 

accounts (as defined in § 190.05(a)(2)), 

and cleared swaps accounts of the same 

person shall not be deemed to be held 

in separate capacities: Provided, 

however, that such accounts may be 

aggregated only in accordance with 

paragraph (b)(3) of this section. 

(ix) An omnibus customer account of 

a futures commission merchant 

maintained with a debtor shall be 

deemed to be held in a separate capacity 

from the house account and any other 

omnibus customer account of such 

futures commission merchant. 

* * * * * 

(xiii) With respect to the cleared 

swaps account class, each individual 

customer account within each omnibus 

customer account referred to in 


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6382 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

paragraph (ix) of this section shall be 

deemed to be held in a separate capacity 

from each other such individual 

customer account; subject to the 

provisions of paragraphs (b)(2)(i) 

through (xii) of this paragraph (b)(2). 

* * * * * 

(3) * * * 

(v) The rules pertaining to separate 

capacities and permitted setoffs 

contained in this section must be 

applied subsequent to the entry of an 

order for relief; prior to the filing date, 

the provisions of § 1.22 of this chapter 

and of sections 4d(a)(2) and 4d(f) of the 

Act (and, in each case, the regulations 

promulgated thereunder) shall govern 

what setoffs are permitted. 

* * * * * 

(c) * * * 

(1) * * * 

(i) Multiplying the ratio of the amount 

of the net equity claim less the amounts 

referred to in paragraph (c)(1)(ii) of this 

section of such customer for any 

account class bears to the sum of the net 

equity claims less the amounts referred 

to in paragraph (c)(1)(ii) of this section 

of all customers for accounts of that 

class by the sum of: 

(A) The value of the money, securities 

or property segregated on behalf of all 

accounts of the same class less the 

amounts referred to in paragraph 

(c)(1)(ii) of this section; 

(B) The value of any money, securities 

or property which must be allocated 

under § 190.08 to customer accounts of 

the same class; and 

(C) The amount of any add-back 

required under paragraph (b)(4) of this 

section; and 

* * * * * 

(e) Valuation. In computing net 

equity, commodity contracts and other 

property held by or for a commodity 

broker must be valued as provided in 

this paragraph (e): Provided, however, 

that for all commodity contracts other 

than those listed in paragraph (e)(1) of 

this section, if identical commodity 

contracts, securities, or other property 

are liquidated on the same date, but 

cannot be liquidated at the same price, 

the trustee may use the weighted 

average of the liquidation prices in 

computing the net equity of each 

customer holding such contracts, 

securities, or property. 

(1) Commodity Contracts. Unless 

otherwise specified in this paragraph 

(e), the value of an open commodity 

contract shall be equal to the settlement 

price as calculated by the clearing 

organization pursuant to its rules: 

Provided, that such rules must either be 

submitted to the Commission, pursuant 

to section 5c(c)(4) of the Act and be 

approved by the Commission, or such 

rules must be otherwise approved by the 

Commission (or its delegate pursuant to 

§ 190.10(d) of this part) prior to their 

application; Provided, further, that if 

such contract is transferred its value 

shall be determined as of the end of the 

settlement cycle in which it is 

transferred; and Provided, finally, that if 

such contract is liquidated, its value 

shall be equal to the net proceeds of 

liquidation. 

* * * * * 

(4) Securities. The value of a listed 

security shall be equal to the closing 

price for such security on the exchange 

upon which it is traded. The value of all 

securities not traded on an exchange 

shall be equal in the case of a long 

position, to the average of the bid prices 

for long positions, and in the case of a 

short position, to the average of the 

asking prices for the short positions. If 

liquidated prior to the primary 

liquidation date, the value of such 

security shall be equal to the net 

proceeds of its liquidation. Securities 

which are not publicly traded shall be 

valued by the trustee, subject to 

approval of the court, using such 

professional assistance as the trustee 

deems necessary in its sole discretion 

under the circumstances. 

* * * * * 

■ 11. In § 190.09, revise paragraph (b) to 

read as follows: 

§ 190.09 Member property. 

* * * * * 

(b) Scope of Member Property. 

Member property shall include all 

money, securities and property 

received, acquired, or held by a clearing 

organization to margin, guarantee or 

secure, on behalf of a clearing member, 

the proprietary account, as defined in 

§ 1.3 of this chapter, any account not 

belonging to a foreign futures or foreign 

options customer pursuant to the 

proviso in § 30.1(c), and any Cleared 

Swaps Proprietary Account, as defined 

in § 22.1: Provided, however, that any 

guaranty deposit or similar payment or 

deposit made by such member and any 

capital stock, or membership of such 

member in the clearing organization 

shall also be included in member 

property after payment in full of that 

portion of the net equity claim of the 

member based on its customer account 

and of any obligations due to the 

clearing organization which may be 

paid therefrom in accordance with the 

by-laws or rules of the clearing 

organization, including obligations due 

from the clearing organization to 

customers or other members. 

■ 12. In § 190.10, revise paragraph (a) to 

read as follows: 

§ 190.10 General. 

(a) Notices. Unless instructed 

otherwise by the Commission, all 

mandatory or discretionary notices to be 

given to the Commission under this part 

shall be directed by electronic mail to 

bankruptcyfilings@cftc.gov, with a copy 

sent by overnight mail to Director, 

Division of Clearing and Risk, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. For purposes of this part, notice 

to the Commission shall be deemed to 

be given only upon actual receipt. 

* * * * * 

■ 13. Revise appendix A to part 190 to 

read as follows: 

Appendix A to Part 190—Bankruptcy 

Forms 

Bankruptcy Appendix Form 1—Operation of 

the Debtor’s Estate—Schedule of Trustee’s 

Duties 

For the convenience of a prospective 

trustee, the Commission has constructed an 

approximate schedule of important duties 

which the trustee should perform during the 

early stages of a commodity broker 

bankruptcy proceeding. The schedule 

includes duties required by this part, 

subchapter IV of chapter 7 of the Bankruptcy 

Code as well as certain practical suggestions, 

but it is only intended to highlight the more 

significant duties and is not an exhaustive 

description of all the trustee’s 

responsibilities. It also assumes that the 

commodity broker being liquidated is an 

FCM. Moreover, it is important to note that 

the operating facts in a particular bankruptcy 

proceeding may vary the schedule or obviate 

the need for any of the particular activities. 

All Cases 

Date of Order for Relief 

1. Assure that the commodity broker has 

notified the Commission, its designated selfregulatory organization (‘‘DSRO’’) (if any), 

and all applicable clearing organizations of 

which it is a member that a petition or order 

for relief has been filed (§ 190.02(a)(1)). 

2. Attempt to effectuate the transfer of 

entire customer accounts wherein the 

commodity contracts are transferred together 

with the money, securities, or other property 

margining, guaranteeing, or securing the 

commodity contracts (hereinafter the 

‘‘transfer’’). 

3. Attempt to estimate shortfall of customer 

funds segregated pursuant to sections 4d(a) 

and (b) of the Act; customer funds segregated 

pursuant to section 4f of the Act; and the 

foreign futures or foreign options secured 

amount, as defined in § 1.3 of this chapter. 

a. The trustee should: 

i. Contact the DSRO (if any) and the 

clearing organizations and attempt to 

effectuate a transfer with such shortfall under 

section 764(b) of the Code; notify the 

Commission for assistance (§ 190.02(a)(2) and 


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(e)(1), § 190.06(b)(2), (e), (f)(3), (g)(2), and (h)) 

but recognize that if there is a substantial 

shortfall, a transfer of such funds or amounts 

is highly unlikely. 

ii. If a transfer cannot be effectuated, 

liquidate all customer commodity contracts 

that are margined, guaranteed, or secured by 

funds or amounts with such shortfall, except 

dealer options and specifically identifiable 

commodity contracts which are bona fide 

hedging positions (as defined in 

§ 190.01(kk)(2)) with instructions not to be 

liquidated. (See §§ 190.02(f) and 

190.06(d)(1)). (In this connection, depending 

upon the size of the debtor and other 

complications of liquidation, the trustee 

should be aware of special liquidation rules, 

and in particular the availability under 

certain circumstances of book-entry 

liquidation (§ 190.04(d)(1)(ii)). 

b. If there is a small shortfall in any of the 

funds or amounts listed in paragraph 2, 

negotiate with the clearing organization to 

effect a transfer; notify the Commission 

(§§ 190.02(a)(2) and (e)(1), 190.06(b)(2), (e), 

(f)(3), (g)(2), and (h)). 

4. Whether or not a transfer has occurred, 

liquidate or offset open commodity contracts 

not eligible for transfer (e.g., deficit accounts) 

(§ 190.06(e)(1)). 

5. Offset all futures contracts and Cleared 

Swaps contracts which cannot be settled in 

cash and which would otherwise remain 

open either beyond the last day of trading (if 

applicable) or the first day on which notice 

of intent to deliver may be tendered with 

respect thereto, whichever occurs first; offset 

all long options on a physical commodity 

which cannot be settled in cash, have value 

and would be automatically exercised or 

would remain open beyond the last day of 

exercise; and offset all short options on a 

physical commodity which cannot be settled 

in cash (§ 190.02(f)(1)). 

6. Compute estimated funded balance for 

each customer commodity contract account 

containing open commodity contracts 

(§ 190.04(b)) (daily thereafter). 

7. Make margin calls if necessary 

(§ 190.02(g)(1)) (daily thereafter). 

8. Liquidate or offset any open commodity 

contact account for which a customer has 

failed to meet a margin call (§ 190.02(f)(1)) 

(daily thereafter). 

9. Commence liquidation or offset of 

specifically identifiable property described in 

§ 190.02(f)(2)(i) (property which has lost 10% 

or more of value) (and as appropriate 

thereafter). 

10. Commence liquidation or offset of 

property described in § 190.02(f)(3) (‘‘all 

other property’’). 

11. Be aware of any contracts in delivery 

position and rules pertaining to such 

contracts (§ 190.05). 

First Calendar Day After the Entry of an 

Order for Relief 

1. If a transfer occurred on the date of entry 

of the order for relief: 

a. Liquidate any remaining open 

commodity contracts, except any dealer 

option or specifically identifiable commodity 

contract [hedge] (See § 190.01(kk)(2) and 

§ 190.02(f)(1)), and not otherwise transferred 

in the transfer. 

b. Primary liquidation date for transferred 

or liquidated commodity contracts 

(§ 190.01(ff)). 

2. If no transfer has yet been effected, 

continue attempt to negotiate transfer of open 

commodity contracts and dealer options 

(§ 190.02(c)(1)). 

3. Provide the clearing organization or 

Collecting Futures Commission Merchant (as 

such term is defined in § 22.1) with 

assurances to prevent liquidation of open 

commodity contract accounts available for 

transfer at the customer’s instruction or 

liquidate all open commodity contracts 

except those available for transfer at a 

customer’s instruction and dealer options. 

Second Calendar Day After the Entry of an 

Order for Relief 

If no transfer has yet been effected, request 

directly customer instructions regarding 

transfer of open commodity contracts and 

publish notice for customer instructions 

regarding the return of specifically 

identifiable property other than commodity 

contracts (§§ 190.02(b) (1) and (2)). 

Third Calendar Day After the Entry of an 

Order for Relief 

1. Second publication date for customer 

instructions (§ 190.02(b)(1)) (publication is to 

be made on two consecutive days, whether 

or not the second day is a business day). 

2. Last day on which to notify the 

Commission with regard to whether a 

transfer in accordance with section 764(b) of 

the Bankruptcy Code will take place 

(§ 190.02(a)(2) and § 190.06(e)). 

Sixth Calendar Day After the Entry of an 

Order for Relief 

Last day for customers to instruct the 

trustee concerning open commodity contracts 

(§ 190.02(b)(2)). 

Seventh Calendar Day After the Entry of an 

Order for Relief 

1. If not previously concluded, conclude 

transfers under § 190.06(e) and (f). (See 

§ 190.02(e)(1) and § 190.06(g)(2)(i)(A)). 

2. Transfer all open dealer option contracts 

which have not previously been transferred 

(§ 190.06(f)(3)(i)). 

3. Primary liquidation date (§ 190.01(ff)) 

(assuming no transfers and liquidation 

effected for all open commodity contracts for 

which no customer instructions were 

received by the sixth calendar day). 

4. Establishment of transfer accounts 

(§ 190.03(a)(1)) (assuming this is the primary 

liquidation date); mark such accounts to 

market (§ 190.03(a)(2)) (daily thereafter until 

closed). 

5. Liquidate or offset all remaining open 

commodity contracts (§ 190.02(b)(2)). 

6. If not done previously, notify customers 

of bankruptcy and request customer proof of 

claim (§ 190.02(b)(4)). 

Eighth Calendar Day After the Entry of an 

Order for Relief 

Customer instructions due to trustee 

concerning specifically identifiable property 

(§ 190.02(b)(1)). 

Ninth Calendar Day After the Entry of an 

Order for Relief 

Commence liquidation of specifically 

identifiable property for which no 

arrangements for return have been made in 

accordance with customer instructions 

(§§ 190.02(b)(1), 190.03(c)). 

Tenth Calendar Day After the Entry of an 

Order for Relief 

Complete liquidation to the extent 

reasonably possible of specifically 

identifiable property which has yet to be 

liquidated and for which no customer 

instructions have been received (§ 190.03(c)). 

Separate Procedures for Involuntary Petitions 

for Bankruptcy 

1. Within one calendar day after notice of 

receipt of filing of the petition in bankruptcy, 

the trustee should assure that proper 

notification has been given to the 

Commission, the commodity broker’s 

designated self-regulatory organization 

(§ 190.02(a)(1)) (if any), and all applicable 

clearing organizations; margin calls should 

be issued if necessary (§ 190.02(g)(2)). 

2. On or before the seventh calendar day 

after the filing of a petition in bankruptcy, 

the trustee should use his best efforts to effect 

a transfer in accordance with § 190.06(e) and 

(f) of all open commodity contracts and 

equity held for or on behalf of customers of 

the commodity broker (§ 190.02(e)(2)) unless 

the debtor can provide certain assurances to 

the trustee. 

Bankruptcy Appendix Form 2— Request for 

Instructions Concerning Non-Cash Property 

Deposited With (Commodity Broker) 

Please take notice: On (date), a petition in 

bankruptcy was filed by [against] 

(commodity broker). Those customers of 

(commodity broker) who deposited certain 

kinds of non-cash property (see below) with 

(commodity broker) may instruct the trustee 

of the estate to return their property to them 

as provided below. 

As no customer may obtain more than his 

or her proportionate share of the property 

available to satisfy customer claims, if you 

instruct the trustee to return your property to 

you, you will be required to pay the estate, 

as a condition to the return of your property, 

an amount determined by the trustee. If your 

property is not margining an open contract, 

this amount will approximate the difference 

between the market value of your property 

and your pro rata share of the estate, as 

estimated by the trustee. If your property is 

margining an open commodity contract, this 

amount will be approximately the full fair 

market value of the property on the date of 

its return. 

Kinds of Property to Which This Notice 

Applies 

1. Any security deposited as margin which, 

as of (date petition was filed), was securing 

an open commodity contract and is: 

—registered in your name, 

—not transferrable by delivery, and 

—not a short-term obligation. 

2. Any fully-paid, non-exempt security 

held for your account in which there were no 

open commodity contracts as of (date 


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6384 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

petition was filed). (Rather than the return, 

at this time, of the specific securities you 

deposited with (commodity broker), you may 

instead request now, or at any later time, that 

the trustee purchase ‘‘like-kind’’ securities of 

a fair market value which does not exceed 

your proportionate share of the estate). 

3. Any warehouse receipt, bill of lading or 

other document of title deposited as margin 

which, as of (date petition was filed), was 

securing an open commodity contract and— 

can be identified in (commodity broker)’s 

records as being held for your account, and— 

is neither in bearer form nor otherwise 

transferable by delivery. 

4. Any warehouse receipt bill of lading or 

other document of title, or any commodity 

received, acquired or held by (commodity 

broker) to make or take delivery or exercise 

from or for your account and which—can be 

identified in (commodity broker)’s records as 

received from or for your account as held 

specifically for the purpose of delivery or 

exercise. 

5. Any cash or other property deposited to 

make or take delivery on a commodity 

contract may be eligible to be returned. The 

trustee should be contacted directly for 

further information if you have deposited 

such property with (commodity broker) and 

desire its return. 

Instructions must be received by (the 5th 

calendar day after 2d publication date) or the 

trustee will liquidate your property. (If you 

own such property but fail to provide the 

trustee with instructions, you will still have 

a claim against (commodity broker) but you 

will not be able to have your specific 

property returned to you). 

Note: Prior to receipt of your instructions, 

circumstances may require the trustee to 

liquidate your property, or transfer your 

property to another broker if it is margining 

open commodity contracts. If your property 

is transferred and your instructions were 

received within the required time, your 

instructions will be forwarded to the new 

broker. 

Instructions should be directed to: 

(Trustee’s name, address, and/or telephone). 

Even if you request the return of your 

property, you must also pay the trustee the 

amount he specifies and provide the trustee 

with proof of your claim before (the 7th 

calendar day after 2d publication date) or 

your property will be liquidated. (Upon 

receipt of customer instructions to return 

property, the trustee will mail the sender a 

form which describes the information he 

must provide to substantiate his claim). 

Note: The trustee is required to liquidate 

your property despite the timely receipt of 

your instructions, money, and proof of claim 

if, for any reason, your property cannot be 

returned by (close of business on the 7th 

calendar day after 2d publication date). 

Bankruptcy Appendix Form 3—Request for 

Instructions Concerning Transfer of Your 

Hedge Contracts Held by (Commodity 

Broker) 

United States Bankruptcy Court llDistrict 

of llIn re ll, Debtor, No. ll. 

Please take notice: On (date), a petition in 

bankruptcy was filed by [against] 

(commodity broker). 

You indicated when your hedge account 

was opened that the commodity contracts in 

your hedge account should not be liquidated 

automatically in the event of the bankruptcy 

of (commodity broker), and that you wished 

to provide instructions at this time 

concerning their disposition. 

Instructions to transfer your commodity 

contracts and a cash deposit (as described 

below) must be received by the trustee by (the 

6th calendar day after entry of order for 

relief) or your commodity contracts will be 

liquidated. 

If you request the transfer of your 

commodity contracts, prior to their transfer, 

you must pay the trustee in cash an amount 

determined by the trustee which will 

approximate the difference between the value 

of the equity margining your commodity 

contracts and your pro rata share of the estate 

plus an amount constituting security for the 

nonrecovery of any overpayments. In your 

instructions, you should specify the broker to 

which you wish your commodity contracts 

transferred. 

Be further advised that prior to receipt of 

your instructions, circumstances may, in any 

event, require the trustee to liquidate or 

transfer your commodity contracts. If your 

commodity contracts are so transferred and 

your instructions are received, your 

instructions will be forwarded to the new 

broker. 

Note also that the trustee is required to 

liquidate your positions despite the timely 

receipt of your instructions and money if, for 

any reason, you have not made arrangements 

to transfer and/or your contracts are not 

transferred by (7 calendar days after entry of 

order for relief). 

Instructions should be sent to: (Trustee’s or 

designee’s name, address, and/or telephone). 

[Instructions may also be provided by 

phone]. 

Bankruptcy Appendix Form 4—Proof of 

Claim 

[Note to trustee: As indicated in § 190.02(d), 

this form is provided as a guide to the 

trustee and should be modified as 

necessary depending upon the information 

which the trustee needs at the time a proof 

of claim is requested and the time provided 

for a response.] 

Proof of Claim 

United States Bankruptcy Court llDistrict 

of llIn re ll, Debtor, No. ll. 

Return this form by ll or your claim will 

be barred (unless extended, for good cause 

only). 

I. [If claimant is an individual claiming for 

himself] The undersigned, who is the 

claimant herein, resides at ll. 

[If claimant is a partnership claiming 

through a member] The undersigned, who 

resides at ll, is a member of ll, a 

partnership, composed of the undersigned 

and ll, of ll, and doing business at ll, 

and is duly authorized to make this proof of 

claim on behalf of the partnership. 

[If claimant is a corporation claiming 

though a duly authorized officer] The 

undersigned, who resides at ll is the ll 

of ll, a corporation organized under the 

laws of ll and doing business at ll, and 

is duly authorized to make this proof of claim 

on behalf of the corporation. 

[If claim is made by agent] The 

undersigned, who resides at ll, is the agent 

of ll, and is duly authorized to make this 

proof of claim on behalf of the claimant. 

II. The debtor was, at the time of the filing 

of the petition initiating this case, and still 

is, indebted to this claimant for the total sum 

of $ ll. 

III. List EACH account on behalf of which 

a claim is being made by number and name 

of account holder[s], and for EACH account, 

specify the following information: 

a. Whether the account is a futures, foreign 

futures, leverage, option (if an option 

account, specify whether exchange-traded, 

dealer or cleared swap), ‘‘delivery’’ account, 

or a cleared swaps account. A ‘‘delivery’’ 

account is one which contains only 

documents of title, commodities, cash, or 

other property identified to the claimant and 

deposited for the purposes of making or 

taking delivery on a commodity underlying 

a commodity contract or for payment of the 

strike price upon exercise of an option. 

b. The capacity in which the account is 

held, as follows (and if more than one is 

applicable, so state): 

1. [The account is held in the name of the 

undersigned in his individual capacity]; 

2. [The account is held by the undersigned 

as guardian, custodian, or conservator for the 

benefit of a ward or a minor under the 

Uniform Gift to Minors Act]; 

3. [The account is held by the undersigned 

as executor or administrator of an estate]; 

4. [The account is held by the undersigned 

as trustee for the trust beneficiary]; 

5. [The account is held by the undersigned 

in the name of a corporation, partnership, or 

unincorporated association]; 

6. [The account is held as an omnibus 

customer account of the undersigned futures 

commission merchant]; 

7. [The account is held by the undersigned 

as part owner of a joint account]; 

8. [The account is held by the undersigned 

in the name of a plan which, on the date the 

petition in bankruptcy was filed, had in 

effect a registration statement in accordance 

with the requirements of § 1031 of the 

Employee Retirement Income Security Act of 

1974 and the regulations thereunder]; or 

9. [The account is held by the undersigned 

as agent or nominee for a principal or 

beneficial owner (and not described above in 

items 1–8 of this II, b)]. 

10. [The account is held in any other 

capacity not described above in items 1–9 of 

this II, b. Specify the capacity]. 

c. The equity, as of the date the petition in 

bankruptcy was filed, based on the 

commodity contracts in the account. 

d. Whether the person[s] (including a 

general partnership, limited partnership, 

corporation, or other type of association) on 

whose behalf the account is held is one of the 

following persons OR whether one of the 

following persons, alone or jointly, owns 

10% or more of the account: 

1. [If the debtor is an individual— 

A. Such individual; 

B. Relative (as defined below in item 8 of 

this III.d) of the debtor or of a general partner 

of the debtor; 


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C. Partnership in which the debtor is a 

general partner; 

D. General partner of the debtor; or 

E. Corporation of which the debtor is a 

director, officer, or person in control]; 

2. [If the debtor is a partnership— 

A. Such partnership; 

B. General partner in the debtor; 

C. Relative (as defined in item 8 of this 

III.d) of a general partner in, general partner 

of, or person in control of the debtor; 

D. Partnership in which the debtor is a 

general partner; 

E. General partner of the debtor; or 

F. Person in control of the debtor]; 

3. [If the debtor is a limited partnership— 

A. Such limited partnership; 

B. A limited or special partner in such 

partnership whose duties include: 

i. The management of the partnership 

business or any part thereof; 

ii. The handling of the trades or customer 

funds of customers of such partnership; 

iii. The keeping of records pertaining to the 

trades or customer funds of customers of 

such partnership; or 

iv. The signing or co-signing of checks or 

drafts on behalf of such partnership]; 

4. [If the debtor is a corporation or 

association (except a debtor which is a 

futures commission merchant and is also a 

cooperative association of producers)— 

A. Such corporation or association; 

B. Director of the debtor; 

C. Officer of the debtor; 

D. Person in control of the debtor; 

E. Partnership in which the debtor is a 

general partner; 

F. General partner of the debtor; 

G. Relative (as defined in item 8 of this 

III.d) of a general partner, director, officer, or 

person in control of the debtor; 

H. An officer, director or owner of ten 

percent or more of the capital stock of such 

organization]; 

5. [If the debtor is a futures commission 

merchant which is a cooperative association 

of producers— 

Shareholder or member of the debtor 

which is an officer, director or manager]; 

6. [An employee of such individual, 

partnership, limited partnership, corporation 

or association whose duties include: 

A. The management of the business of such 

individual, partnership, limited partnership, 

corporation or association or any part thereof; 

B. The handling of the trades or customer 

funds of customers of such individual, 

partnership, limited partnership, corporation 

or association; 

C. The keeping of records pertaining to the 

trades or funds of customers of such 

individual, partnership, limited partnership, 

corporation or association; or 

D. The signing or co-signing of checks or 

drafts on behalf of such individual, 

partnership, limited partnership, corporation 

or association]; 

7. [Managing agent of the debtor]; 

8. [A spouse or minor dependent living in 

the same household of ANY OF THE 

FOREGOING PERSONS, or any other 

relative, regardless of residency, (unless 

previously described in items 1–B, 2–C, or 4– 

G of this III.d) defined as an individual 

related by affinity or consanguinity within 

the third degree as determined by the 

common law, or individual in a step or 

adoptive relationship within such degree]; 

9. [‘‘Affiliate’’ of the debtor, defined as: 

A. Entity that directly or indirectly owns, 

controls, or holds with power to vote, 20 

percent or more of the out-standing voting 

securities of the debtor, other than an entity 

that holds such securities— 

i. In a fiduciary or agency capacity without 

sole discretionary power to vote such 

securities; or 

ii. Solely to secure a debt, if such entity has 

not in fact exercised such power to vote; 

B. Corporation 20 percent or more of 

whose outstanding voting securities are 

directly or indirectly owned, con-trolled, or 

held with power to vote, by the debtor, or by 

an entity that directly or indirectly owns, 

controls, or holds with power to vote, 20 

percent or more of the outstanding voting 

securities of the debtor, other than an entity 

that holds such securities— 

i. In a fiduciary or agency capacity without 

sole discretionary power to vote such 

securities; or 

ii. Solely to secure a debt, if such entity has 

not in fact exercised such power to vote; 

C. Person whose business is operated 

under a lease or operating agreement by the 

debtor, or person substantially all of whose 

property is operated under an operating 

agreement with the debtor; 

D. Entity that otherwise, directly or 

indirectly, is controlled by or is under 

common control with the debtor]; 

E. Entity that operates the business or all 

or substantially all of the property of the 

debtor under a lease or operating agreement; 

or 

F. Entity that otherwise, directly or 

indirectly, controls the debtor; or 

10. [Any of the persons listed in items 1– 

7 above of this III.d if such person is 

associated with an affiliate (see item 9 above) 

of the debtor as if the affiliate were the 

debtor]. 

e. Whether the account is a discretionary 

account. (If it is, the name in which the 

‘‘attorney in fact’’ is held). 

f. If the account is a joint account, the 

amount of the claimant’s percentage interest 

in the account. (Also specify whether 

participants in a joint account are claiming 

separately or jointly). 

g. Whether the claimant’s positions in 

security futures products are held in a futures 

account or securities account, as those terms 

are defined in § 1.3 of this chapter. 

IV. Describe all claims against the debtor 

not based upon a commodity contract 

account of the claimant (e.g., if landlord, for 

rent; if customer, for misrepresentation or 

fraud). 

V. Describe all claims of the DEBTOR 

against the CLAIMANT not already included 

in the equity of a commodity contract 

account[s] of the claimant (see III.c above). 

VI. Describe any deposits of money, 

securities or other property held by or for the 

debtor from or for the claimant, and indicate 

if any of this property was included in your 

answer to III.c above. 

VII. Of the money, securities, or other 

property described in VI above, identify any 

which consists of the following: 

a. With respect to property received, 

acquired, or held by or for the account of the 

debtor from or for the account of the claimant 

to margin, guarantee or secure an open 

commodity contract, the following: 

1. Any security which as of the filing date 

is: 

A. Held for the claimant’s account; 

B. Registered in the claimant’s name; 

C. Not transferable by delivery; and 

D. Not a short term obligation; or 

2. Any warehouse receipt, bill of lading or 

other document of title which as of the filing 

date: 

A. Can be identified on the books and 

records of the debtor as held for the account 

of the claimant; and 

B. Is not in bearer form and is not 

otherwise transferable by delivery. 

b. With respect to open commodity 

contracts, and except as otherwise provided 

below in item g of this VII, any such contract 

which: 

1. As of the date the petition in bankruptcy 

was filed, is identified on the books and 

records of the debtor as held for the account 

of the claimant; 

2. Is a bona fide hedging position or 

transaction as defined in Rule 1.3 of the 

Commodity Futures Trading Commission 

(‘‘CFTC’’) or is a commodity option 

transaction which has been determined by a 

registered entity to be economically 

appropriate to the reduction of risks in the 

conduct and management of a commercial 

enterprise pursuant to rules which have been 

approved by the CFTC pursuant to section 

5c(c) of the Commodity Exchange Act; 

3. Is in an account designated in the 

accounting records of the debtor as a hedging 

account. 

c. With respect to warehouse receipts, bills 

of lading or other documents of title, or 

physical commodities received, acquired, or 

held by or for the account of the debtor for 

the purpose of making or taking delivery or 

exercise from or for the claimant’s account, 

any such document of title or commodity 

which as of the filing date can be identified 

on the books and records of the debtor as 

received from or for the account of the 

claimant specifically for the purpose of 

delivery or exercise. 

d. Any cash or other property deposited 

prior to bankruptcy to pay for the taking of 

physical delivery on a long commodity 

contract or for payment of the strike price 

upon exercise of a short put or a long call 

option contract on a physical commodity, 

which cannot be settled in cash, in excess of 

the amount necessary to margin such 

commodity contract prior to the notice date 

or exercise date which cash or other property 

is identified on the books and records of the 

debtor as received from or for the account of 

the claimant within three or less days of the 

notice date or three or less days of the 

exercise date specifically for the purpose of 

payment of the notice price upon taking 

delivery or the strike price upon exercise. 

e. The cash price tendered for any property 

deposited prior to bankruptcy to make 

physical delivery on a short commodity 

contract or for exercise of a long put or a 

short call option contract on a physical 

commodity, which cannot be settled in cash, 


srobinson on DSK4SPTVN1PROD with RULES3
6386 Federal Register / Vol. 77, No. 25 / Tuesday, February 7, 2012 / Rules and Regulations 

to the extent it exceeds the amount necessary 

to margin such contract prior to the notice 

exercise date which property is identified on 

the books and records of the debtor as 

received from or for the account of the 

claimant within three or less days of the 

notice date or of the exercise date specifically 

for the purpose of a delivery or exercise. 

f. Fully paid, non-exempt securities 

identified on the books and records of the 

debtor as held by the debtor for or on behalf 

of the commodity contract account of the 

claimant for which, according to such books 

and records as of the filing date, no open 

commodity contracts were held in the same 

capacity. 

g. Open commodity contracts transferred to 

another futures commission merchant by the 

trustee. 

VIII. Specify whether the claimant wishes 

to receive payment in kind, to the extent 

possible, for any claim for securities. 

IX. Attach copies of any documents which 

support the information provided in this 

proof of claim, including but not limited to 

customer confirmations, account statements, 

and statements of purchase or sale. 

This proof of claim must be filed with the 

trustee no later than __, or your claim will 

be barred unless an extension has been 

granted, available only for good cause. 

Return this form to: 

(Trustee’s name (or designee’s) and address) 

llllllllllllllllllll

Dated: lllllllllllllllll

(Signed) llllllllllllllll

Penalty for Presenting Fraudulent Claim. 

Fine of not more than $5,000 or 

imprisonment for not more than five years 

or both—Title 18, U.S.C. 152. 

(Approved by the Office of Management and 

Budget under control number 3038–0021) 

■ 14. Revise appendix B to part 190 to 

read as follows: 

Appendix B to Part 190—Special 

Bankruptcy Distributions 

Framework 1—Special Distribution of 

Customer Funds for Futures Contracts When 

FCM Participated in Cross-Margining 

The Commission has established the 

following distributional convention with 

respect to ‘‘customer funds’’ (as § 1.3 of this 

chapter defines such term) for futures 

contracts held by a futures commission 

merchant (FCM) that participated in a crossmargining (XM) program which shall apply 

if participating market professionals sign an 

agreement that makes reference to this 

distributional rule and the form of such 

agreement has been approved by the 

Commission by rule, regulation or order: 

All customer funds for futures contracts 

held in respect of XM accounts, regardless of 

the product that customers holding such 

accounts are trading, are required by 

Commission order to be segregated separately 

from all other customer segregated funds. For 

purposes of this distributional rule, XM 

accounts will be deemed to be commodity 

interest accounts and securities held in XM 

accounts will be deemed to be received by 

the FCM to margin, guarantee or secure 

commodity interest contracts. The 

maintenance of property in an XM account 

will result in subordination of the claim for 

such property to certain non-XM customer 

claims and thereby will operate to cause such 

XM claim not to be treated as a customer 

claim for purposes of the Securities Investors 

Protection Act and the XM securities to be 

excluded from the securities estate. This 

creates subclasses of futures customer 

accounts, an XM account and a non-XM 

account (a person could hold each type of 

account), and results in two pools of 

segregated funds belonging to futures 

customers: An XM pool and a non-XM pool. 

In the event that there is a shortfall in the 

non-XM pool of customer class segregated 

funds and there is no shortfall in the XM 

pool of customer segregated funds, all futures 

customer net equity claims, whether or not 

they arise out of the XM subclass of accounts, 

will be combined and will be paid pro rata 

out of the total pool of available XM and nonXM customer funds for futures contracts. In 

the event that there is a shortfall in the XM 

pool of customer segregated funds and there 

is no shortfall in the non-XM pool of 

customer segregated funds, then futures 

customer net equity claims arising from the 

XM subclass of accounts shall be satisfied 

first from the XM pool of customer segregated 

funds, and futures customer net equity 

claims arising from the non-XM subclass of 

accounts shall be satisfied first from the nonXM customer segregated funds. Furthermore, 

in the event that there is a shortfall in both 

the non-XM and XM pools of customer 

segregated funds: (1) If the non-XM shortfall 

as a percentage of the segregation 

requirement in the non-XM pool is greater 

than or equal to the XM shortfall as a 

percentage of the segregation requirement in 

the XM pool, all futures customer net equity 

claims will be paid pro rata; and (2) if the 

XM shortfall as a percentage of the 

segregation requirement in the XM pool is 

greater than the non-XM shortfall as a 

percentage of the segregation requirement of 

the non-XM pool, non-XM futures customer 

net equity claims will be paid pro rata out 

of the available non-XM segregated funds, 

and XM futures customer net equity claims 

will be paid pro rata out of the available XM 

segregated funds. In this way, non-XM 

customers will never be adversely affected by 

an XM shortfall. 

The following examples illustrate the 

operation of this convention. The examples 

assume that the FCM has two customers, one 

with exclusively XM accounts and one with 

exclusively non-XM accounts. However, the 

examples would apply equally if there were 

only one customer, with both an XM account 

and a non-XM account. 

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307Protection of Cleared Swaps Customer 

Contracts and Collateral; Conforming Amendments 

to the Commodity Broker Bankruptcy Provisions (to 

be codified at 17 CFR parts 22 and 190) (referenced 

herein as the ‘‘rulemaking’’), available at: http://

www.cftc.gov/PressRoom/Events/opaevent_

cftcdoddfrank011112. 

308See section I(D)(2) of the preamble to this 

rulemaking. 

309 Id. 

310See sections 22.2(e)(1) and 22.3(d) of the rule 

text to this rulemaking (to be codified at 17 CFR 

22.2(e)(1) and 22.3(d)) (limiting an FCM and a DCO 

to investing cleared swaps customer collateral in 

instruments enumerated in regulation 1.25). 

311See ‘‘Opening Statement of Commissioner 

Scott D. O’Malia’’, dated December 5, 2011, 

available at: http://www.cftc.gov/PressRoom/

SpeechesTestimony/omaliastatement120511. 

312See section 766(h) of the Bankruptcy Code, 11 

U.S.C. 766(h). 

313See comment letters from (i) Managed Funds 

Association, dated December 2, 2011; (ii) Fidelity 

Investments, dated December 8, 2011; (iii) Och-Ziff 

Capital Management Group, dated circa December 

12, 2011; (iv) State Street Corporation, dated 

December 14, 2011; (v) the Committee on 

Investment of Employee Benefit Assets, dated 

December 22, 2011; (vi) the European Federation for 

Retirement Provision (‘‘EFRP’’) and APG Algemene 

Pensioen Groep, N.V. (‘‘APG’’), dated December 23, 

2011; (vii) the Federal Home Loan Banks, dated 

January 9, 2012; and (viii) BlueMountain Capital 

Management, LLC, Elliot Management Corporation, 

Moore Capital Management, LP, Paulson & Co. Inc., 

and Tudor Investment Corporation, dated January 9, 

2012 (the ‘‘Moore et. al. letter’’). In each case, the 

comment letters were filed in answer to the notice 

of proposed rulemaking on the Protection of 

Cleared Swaps Customer Contracts and Collateral; 

Conforming Amendments to the Commodity Broker 

Bankruptcy Provisions, 76 FR 33818, Jun. 9, 2011. 

All comment letters to such notice are available at: 

http://www.cftc.gov/ucm/groups/public/@

lrfederalregister/documents/file/2011-10737a.pdf. 

314See, e.g., comment letters from (i) Fidelity 

Investments, dated December 8, 2011; (ii) Och-Ziff 

Capital Management Group, dated circa December 

12, 2011; and (iii) CIEBA, dated December 22, 2011. 

315Section I(F) of the preamble to this 

rulemaking. 

316See comment letter from CIEBA, dated 

December 22, 2011 (stating that ‘‘* * * the 

Commission should not permit mandatory clearing 

of swaps to become effective until a physical 

segregation option, such as the individual 

settlement account * * * or another satisfactory 

structure, has been made available to swaps 

customers.’’ [emphasis original]). 

This rulemaking does attempt to resolve one 

request repeated in the comment letters filed since 

December 2, 2011. In section I(F) of the preamble, 

the rulemaking makes clear that the Commission’s 

2005 Amendment to Financial and Segregation 

Interpretation No. 10, 70 FR 24768, May 11, 2005 

(‘‘Segregation Interpretation 10–1’’), does not apply 

to cleared swaps. Therefore, Segregation 

Interpretation 10–1 would not prohibit an 

intermediary from entering into a tri-party custody 

agreement with a cleared swaps customer. 

However, this rulemaking similarly makes clear that 

Segregation Interpretation No. 10, which the 

Commission issued in 1984, would continue to 

Continued 

Issued in Washington, DC on January 11, 

2012, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Appendices to Protection of Cleared 

Swaps Customer Contracts and 

Collateral; Conforming Amendments to 

the Commodity Broker Bankruptcy 

Provisions—Commission Voting 

Summary and Statements of 

Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Chilton, O’Malia and Wetjen 

voted in the affirmative; Commissioner 

Sommers voted in the negative 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the final rules on segregation of 

customer funds for cleared swaps. These 

rules are an important step forward in 

protecting customers and reducing the risk of 

swaps trading. The rules carry out the DoddFrank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act) mandate 

that futures commission merchants (FCMs) 

and derivatives clearing organizations (DCOs) 

segregate customer collateral supporting 

cleared swaps. FCMs and DCOs must hold 

customer collateral in a separate account 

from that belonging to the FCM or DCO. It 

prohibits clearing organizations from using 

the collateral of non-defaulting, innocent 

customers to protect themselves and their 

clearing members. For the first time, 

customer money must be protected 

individually all the way to the clearinghouse. 

We received a tremendous amount of 

public input on this rule, including through 

two roundtables, as well as through 

comments on an advanced notice of 

proposed rulemaking and a proposal. This 

rule builds on customer protections included 

in the clearinghouse core principles rule we 

finalized in October requiring DCOs to 

collect initial margin on a gross basis for their 

clearing members’ customer accounts. 

Appendix 3—Statement of 

Commissioner Scott D. O’Malia 

Today, the Commodity Futures Trading 

Commission (the ‘‘Commission’’) is voting to 

finalize a rulemaking on protection of cleared 

swaps customer collateral.307 Whereas I 

support this rulemaking, I believe that it is 

important to detail its limitations, so that we 

do not offer market participants a misleading 

sense of comfort in light of the collapse of 

MF Global, Inc. (‘‘MF Global’’). As I will 

explain further, the Commission has much 

more work to do to increase confidence in 

the customer protections that our regulations 

offer. 

This rulemaking does not address MF 

Global. 

First, this rulemaking does not address MF 

Global. The rulemaking is entitled, in part, 

Protection of Cleared Swaps Customer 

Contracts and Collateral. Therefore, it 

benefits cleared swaps customers, and not 

futures customers (who are bearing the brunt 

of MF Global). This rulemaking would not 

have prevented a shortfall in the customer 

funds of the ranchers and farmers that 

transact daily in the futures market. Nor 

would it have expedited the transfer of 

positions and collateral belonging to such 

customers in the event of a collapse similar 

to that of MF Global. 

This rulemaking may expose swaps 

customers to more risk. 

Second, this rulemaking only addresses 

one of three categories of risk that an 

intermediary—like MF Global—can pose to 

its customers. The three categories of risk are 

(i) ‘‘fellow-customer’’ risk, (ii) operational 

risk, and (iii) investment risk. By its own 

admission, this rulemaking only protects 

against ‘‘fellow-customer’’ risk. It does not 

protect against operational risk—namely, the 

risk that an intermediary improperly 

segregates cleared swaps customer 

collateral.308 Moreover, it does not protect 

against investment risk—namely, the risk 

that an intermediary experiences losses on its 

investment of cleared swaps customer 

collateral, which it cannot cover using its 

capital.309 To be plain, I support limiting 

intermediaries from investing customer 

collateral in risky instruments—regardless of 

whether such collateral margins futures or 

swaps contracts.310 However, I am not naı ̈ve 

enough to believe that such limitations— 

without additional Commission oversight or 

action—would be sufficient. I have warned 

against complacency in the past.311 I reiterate 

such warning here. 

Under this rulemaking, what happens if an 

intermediary—like MF Global—becomes 

insolvent as operational or investment 

irregularities are revealed? Basically, under 

the Bankruptcy Code,312 cleared swaps 

customers would share pro rata in any 

shortfall. A shortfall would complicate the 

porting of cleared swaps customer contracts 

and associated collateral, notwithstanding 

the enhanced recordkeeping and reporting 

requirements of this rulemaking. 

By not protecting against operational and 

investment risk, this rulemaking may have 

the effect of exposing some swaps customers 

to more risk than they currently bear in the 

over-the-counter markets. Since December 2, 

2011, we have received eight comment letters 

from end-users, many of which explicitly 

asked the Commission to not finalize this 

rulemaking until it explores other 

alternatives that may provide greater 

protection.313 These end-users include 

Fidelity Investments, the Committee on 

Investment of Employee Benefit Assets 

(‘‘CIEBA’’), and the Federal Home Loan 

Banks. According to many of these comment 

letters, swaps customers in the over-thecounter markets currently have the option to 

enter into tri-party custody agreements. In 

general, these agreements may provide 

superior protection to this rulemaking against 

not only fellow-customer risk, but also 

operational and investment risk.314

I understand that staff has been directed to 

‘‘carefully analyze’’ various proposals that 

commenters have advanced ‘‘with the goal of 

developing proposed rules that provide 

additional protection for collateral belonging 

to market participants.’’ 315 This is a laudable 

goal. I only hope that we achieve this goal 

before mandatory clearing becomes 

effective.316 Otherwise, we may be subjecting 


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apply to collateral segregated according to a triparty custody agreement. In other words, cleared 

swaps customers could not avoid the pro rata 

distribution provisions of the Bankruptcy Code (as 

well as regulation Part 190). Therefore, the 

resolution in this rulemaking may provide 

commenters with cold comfort. 

317Section VII(B)(2) of the preamble to this 

rulemaking (citing estimates provided by CME 

Group, Inc. and the International Swaps and 

Derivatives Association, Inc.). 

318Comment letter from Och-Ziff Capital 

Management Group, dated circa December 12, 2011. 

319See the Moore et. al. letter (stating ‘‘[g]iven the 

crucial role that central clearing will play in 

reducing systemic risk in the swaps market, we see 

no valid argument to suggest that customers to 

cleared swaps should be subject to weaker 

regulatory protections than those afforded 

counterparties to uncleared swaps.’’); and comment 

letter from EFRP and APG, dated December 23, 

2011 (stating ‘‘EFRP and APG support the CFTC’s 

efforts to reduce risk, enhance transparency, and 

promote market integrity, as the U.S. Congress 

intended by enacting Title VII of the Dodd-Frank 

* * * Act. It should be clear though that such 

reform will only improve financial stability, if it is 

prudent from the perspective of end users, such as 

pension funds. However, as currently framed the 

Proposed Rules subject us to increased risks.’’). 

320Section I(B)(6) of the preamble to this 

rulemaking. 

321 Id. 

322Section VII(B)(2) of the preamble to this 

rulemaking (stating that ‘‘double defaults are rare 

events.’’). 

323Regulation 1.12(h) requires an intermediary 

that knows or should know that it is undersegregated to report to the Commission and its 

designated self-regulatory organization. Usually, 

under-segregation results from minor operational 

failure, and does not lead to the collapse of an 

intermediary. However, a pattern of operational 

failure would draw greater attention and inquiry. 

324Sections 22.11 to 22.16 of the rule text to this 

rulemaking (to be codified at 17 CFR 22.11 

(Information to be Provided Regarding Customers 

and Their Cleared Swaps), 22.12 (Information to be 

Maintained Regarding Cleared Swaps Customer 

Collateral), 22.13 (Additions to Cleared Swaps 

Customer Collateral), 22.14 (Futures Commission 

Merchant Failure to Meet a Customer Margin Call 

in Full), 22.15 (Treatment of Cleared Swaps 

Collateral on an Individual Basis), 22.16 

(Disclosures to Customers)). 

325See, e.g., section 22.10 to the rule text of this 

rulemaking (to be codified at 17 CFR 22.10 

Application of other Regulatory Provisions). 

326See Derivatives Clearing Organization General 

Provisions and Core Principles, 76 FR 69334, 

69438, Nov. 8, 2011 (to be codified at 17 CFR 

39.13(g)(8)). 

327See section III(B) of the preamble to this 

rulemaking (stating ‘‘CME notes that a portion of 

the Cleared Swaps Customer Collateral will be held 

at the FCM, not the DCO, and that this collateral 

will not be protected by Complete Legal Segregation 

in the event that an FCM becomes insolvent. This 

proposition is true but is of little or no relevance 

to the comparison of Complete Legal Segregation 

with the Futures Model favored by these 

commenters.’’). 

328Section I(D)(2) of the preamble to this 

rulemaking. To be fair, this rulemaking does make 

the point that enhanced recordkeeping and 

reporting requirements may also foster portability 

in the event of operational or investment risk. 

329See, e.g., comment letters from (i) the Federal 

Home Loan Banks, dated January 9, 2012 and (ii) 

CIEBA, dated December 22, 2011. See also the 

Moore et. al. letter. 

330Section IV(K) of the preamble to this 

rulemaking. 

331See Statement on MF Global: Next Steps, 

dated November 16, 2011, available at: http://www.

cftc.gov/PressRoom/SpeechesTestimony/

omaliastatement111611. 

a substantial portion of cleared swaps 

customer collateral to operational risk and 

investment risk. To provide some context, 

such collateral—in the aggregate—may 

amount to anywhere from $500 billion to 

$833 billion.317 As one commenter stated, 

‘‘[i]t would seem to be a perverse result that, 

because of rulemaking promulgated under 

the Dodd-Frank * * * Act, which was * * * 

meant to enhance the safety of the over-thecounter markets by reducing systemic and 

counterparty risks, market participants were 

to be placed [in] [sic] a worse position with 

regard to risk than they are currently.’’ 318

Other commenters supported this 

statement.319

This rulemaking may imperfectly address 

fellow-customer risk. 

Let me now say a few words on ‘‘fellowcustomer’’ risk. Preliminarily, what is it? 

According to this rulemaking, it is the risk 

that a derivatives clearing organization 

(‘‘DCO’’) will access the collateral of nondefaulting cleared swaps customers to cure 

the default of an intermediary.320 Under what 

circumstances could a DCO access such 

collateral? Under this rulemaking, there are 

two circumstances and they have to occur 

simultaneously. First, a swaps customer 

would need to default to an intermediary. 

Second, as a result of such default, the 

intermediary must be unable to meet its DCO 

obligations. In short, swaps customer losses 

must exceed the capitalization of the 

intermediary.321 As this rulemaking 

acknowledges, ‘‘fellow-customer’’ risk is 

rare.322 In comparison, according to notices 

received by the Commission, operational risk 

is far more prevalent.323

Of course, just because a risk is rare does 

not mean that the Commission should not 

protect against it. But let us take a closer look 

at the protection that this rulemaking is 

offering. First, although it is close to 230 

pages, with nearly 100 pages in rule text, 

only a couple of the provisions of this 

rulemaking address ‘‘fellow-customer’’ risk. 

They are regulations 22.11 to 22.16.324 The 

remainder of regulation Part 22, as well as 

the majority of changes to regulation Part 190 

(Bankruptcy), simply aligns the cleared 

swaps segregation regime with the existing 

futures segregation regime.325 As MF Global 

reveals, the futures segregation regime may 

have some vulnerabilities. In this 

rulemaking, the Commission is unthinkingly 

replicating these vulnerabilities. 

Second, this rulemaking only offers 

protection to a portion of the cleared swaps 

customer collateral that an intermediary 

holds. In general, cleared swaps customer 

collateral may fall within two categories: (i) 

collateral needed to support contracts; and 

(ii) collateral in excess of that needed to 

support contracts (‘‘Excess Collateral’’). The 

Commission, in its final rulemaking on 

Derivatives Clearing Organization General 

Provisions and Core Principles, states that a 

DCO must require its clearing members to 

collect Excess Collateral.326 However, as 

certain commenters have astutely observed, 

and as this rulemaking readily admits, this 

rulemaking does not protect Excess Collateral 

deposited outside of the DCO.327 So, the 

Commission has required cleared swaps 

customers to provide collateral that it then 

does not protect. 

Third, this rulemaking cites, as a major 

benefit, the possibility of enhanced 

portability of cleared swaps customer 

contracts, as well as associated collateral, 

after an intermediary defaults due to ‘‘fellowcustomer’’ risk.328 The rulemaking sets forth 

more stringent recordkeeping and reporting 

requirements as a foundation for enhanced 

portability. As commenters have identified, 

these requirements have two significant 

weaknesses. 

Preliminarily, to maximize portability, 

each intermediary must (i) keep complete 

and accurate records and (ii) comply with 

reporting requirements. As MF Global and 

earlier intermediary collapses have 

demonstrated, a distressed intermediary may 

not prioritize recordkeeping and reporting.329

Secondarily, despite requests from various 

commenters (including the Association of 

Institutional Investors and Vanguard), this 

rulemaking does not provide guidance on the 

concrete steps that a DCO should take to 

ensure that an intermediary is providing 

accurate and complete information. Instead, 

the rulemaking states: ‘‘* * * the DCO 

should take the steps appropriate, in the 

professional judgment of its staff, to verify 

that [intermediaries] have and are using 

systems and appropriate procedures to track 

accurately, and to provide to the DCO 

accurately, the positions of each 

customer.’’ 330 In light of MF Global, the 

Commission should give this provision—and 

the requests of commenters—more thought. 

Finally, this rulemaking is silent on one 

important factor that may affect the 

portability of cleared swaps customer 

contracts, as well as associated collateral— 

namely, whether the intermediary is both a 

futures commission merchant and a 

securities broker-dealer. I am touching on 

this issue in the interest of full disclosure. 

A comprehensive solution is needed. 

Despite its limitations, I ultimately support 

this rulemaking. As I have stated previously, 

the Commission must immediately take 

action to renew public confidence in our 

customer protection regime.331 Although this 

rulemaking largely replicates futures 

segregation, this rulemaking—if it works as 

promised in an intermediary bankruptcy— 

may enhance portability for cleared swaps 

customers in the event of ‘‘fellow-customer’’ 

risk. Even the possibility of such 

enhancement is non-negligible—especially in 

the volatile economic environment that exists 

today. 

However, this rulemaking also vividly 

illustrates some of my concerns regarding our 

Dodd-Frank rulemaking process. First, the 

Commission has a duty to regulate the swaps 

market. It also owes a duty to futures 

customers. Right now, it is unclear from this 

rulemaking how the Commission means to 

address futures customer concerns. I 

understand that the investigation into the MF 

Global collapse is ongoing. However, the 

Commission could examine the manner in 


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332See supra note 17. 

which operational and investment risks 

contribute to undersegregation. Our 

undersegregation reports would help us with 

such an examination, as well as the detection 

of potential causal patterns for 

undersegregation.332

Second, instead of rushing to complete this 

rulemaking, I would have preferred that the 

Commission focus on providing a more 

comprehensive solution to operational, 

investment, and ‘‘fellow-customer’’ risk. 

Moreover, I would have preferred that the 

Commission more fully explore the 

alternatives that various commenters have 

advanced, which may provide greater 

protection for futures, as well as cleared 

swaps customer, collateral. Further, it would 

have been helpful for the Commission to 

have weighed, in one analysis, the benefits 

and costs of offering a combination of (i) this 

rulemaking and (ii) one or more alternatives. 

Finally, the Commission needs to 

contemplate whether any alternative would 

be workable in light of the pro rata 

distribution provisions of the Bankruptcy 

Code. If not, the Commission should 

contemplate recommending to Congress 

changes to the Bankruptcy Code. 

After MF Global, the Commission needs to 

provide market participants with real, fully 

developed reforms. I look forward to the 

Commission taking such action. 

[FR Doc. 2012–1033 Filed 2–6–12; 8:45 am] 

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