33818 Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 

1 17 CFR 145.9. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 22 and 190 

RIN 3038–AC99 

Protection of Cleared Swaps Customer 

Contracts and Collateral; Conforming 

Amendments to the Commodity Broker 

Bankruptcy Provisions 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (the 

‘‘Commission’’) hereby proposes rules to 

implement new statutory provisions 

enacted by Title VII of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (the ‘‘Dodd-Frank Act’’). 

Specifically, the proposed rules 

contained herein 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: Comments must be received on 

or before August 8, 2011. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AC99, 

by any of the following methods: 

• The agency’s Web site, at http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one method. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that you believe is exempt from 

disclosure under the Freedom of 

Information Act, a petition for 

confidential treatment of the exempt 

information may be submitted according 

to the procedures established in § 145.9 

of the Commission’s regulations.1

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from http://www.cftc.gov that it may 

deem to be inappropriate for 

publication, such as obscene language. 

All submissions that have been redacted 

or removed that contain comments on 

the merits of the rulemaking will be 

retained in the public comment file and 

will be considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Robert B. Wasserman, Associate 

Director, Division of Clearing and 

Intermediary Oversight (DCIO), at 202– 

418–5092 or rwasserman@cftc.gov; Jon 

DeBord, Attorney-Advisor, DCIO, at 

202–418–5478 or jdebord@cftc.gov; 

Martin White, Assistant General 

Counsel, at 202–418–5129 or 

mwhite@cftc.gov; David Reiffen, Senior 

Economist, Office of the Chief 

Economist, at 202–418–5602 or 

dreiffen@cftc.gov; or Todd Prono, 

Financial Economist, Office of the Chief 

Economist, at 202–418–5460 or 

tprono@cftc.gov, in each case, also at the 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction 

II. Background 

A. Segregation Requirements 

B. Implementation Alternatives 

C. Solicitation of Public Input Regarding 

the Alternatives 

1. Roundtable 

2. ANPR 

a. Questions 

b. Comments: Background 

c. Comments: Discussion 

1. Statutory Issues 

2. What is the appropriate starting point? 

3. Costs 

a. Operational Costs 

b. The Risk Costs 

i. The Physical Segregation Model and the 

Complete Legal Segregation Model 

ii. The Legal Segregation With Recourse 

Model and the Futures Model 

c. Assumptions Underlying Risk Costs 

4. Benefits 

a. Fellow-Customer Risk and Investment 

Risk 

b. Portability 

c. Systemic Risk 

d. Induced Changes in Behavior 

e. Portfolio Margining 

5. The Optional Approach 

III. The Proposed Rules 

A. Statutory Issues and the Appropriate 

Starting Point 

B. Costs 

1. Rationale 

2. Questions 

C. Benefits 

1. Rationale 

a. Fellow-Customer Risk and Investment 

Risk 

b. Portability 

c. Systemic Risk 

d. Induced Changes in Behavior 

e. Portfolio Margining 

2. Questions 

D. Proposing the Complete Legal 

Segregation Model: Weighing of Costs 

and Benefits 

E. The Optional Approach 

1. Rationale 

2. Questions 

F. Structure of These Proposed Regulations 

IV. Section by Section Analysis: Segregation 

of Cleared Swaps for Customers 

A. Proposed Regulation 22.1: Definitions 

1. ‘‘Segregate’’ and ‘‘Commingle’’ 

2. ‘‘Cleared Swap’’ 

3. ‘‘Cleared Swaps Customer’’ and 

‘‘Customer’’ 

4. ‘‘Cleared Swaps Customer Collateral’’ 

5. ‘‘Cleared Swaps Customer Account’’ and 

‘‘Cleared Swaps Proprietary Account’’ 

6. ‘‘Collecting Futures Commission 

Merchant’’ and ‘‘Depositing Futures 

Commission Merchant’’ 

B. Proposed Regulation 22.2—Futures 

Commission Merchants: Treatment of 

Cleared Swaps Customer Collateral 

1. In General 

2. Location of Collateral 

a. The First Method 

b. The Second Method 

3. Commingling 

4. Limitations on Use 

5. Exceptions 

a. Permitted Investments 

b. Permitted Withdrawals 

c. Deposits of Own Money, Securities, or 

Other Property 

d. Residual Financial Interest 

e. Requirements as to Amount 

i. Background 

ii. Proposed Requirement 

iii. Question 

f. Segregated Account; Daily Computation 

and Record 

C. Proposed Regulation 22.3—Derivatives 

Clearing Organizations: Treatment of 

Cleared Swaps Customer Collateral 

1. In General 

2. Location of Collateral 

a. The First Method 

b. The Second Method 

c. Questions 

3. Commingling 

4. Exceptions 

a. FCM Deposits and Withdrawals 

b. Permitted Investments 

D. Proposed Regulation 22.4—Futures 

Commission Merchants and Derivatives 

Clearing Organizations: Permitted 

Depositories 

1. The Permitted Depositories 

2. Question 

E. Proposed Regulation 22.5—Futures 

Commission Merchants and Derivatives 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 33819 

2See 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. 

3See section 724 of the Dodd-Frank Act. There is 

some controversy with respect to section 4d(f)(6) of 

the CEA as applied to a DCO. See section II(C) 

herein. 

4A list of external meetings is available at: 

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

Rulemakings/DF_6_SegBankruptcy/index.htm. 

5A transcript of the Staff Roundtable on 

Individual Customer Collateral Protection (the 

‘‘Roundtable’’) is available at: http://www.cftc.gov/

ucm/groups/public/@swaps/documents/

dfsubmission/dfsubmission6_102210-transcrip.pdf. 

6See Advance Notice of Proposed Rulemaking for 

Protection of Cleared Swaps Customers Before and 

After Commodity Broker Bankruptcies, 75 FR 

75162, Dec. 2, 2010. 

Clearing Organizations: Written 

Acknowledgment 

1. Substantive Requirements 

2. Question 

F. Proposed Regulation 22.6—Futures 

Commission Merchants and Derivatives 

Clearing Organizations: Naming of 

Cleared Swaps Customer Accounts 

G. Proposed Regulation 22.7—Permitted 

Depositories: Treatment of Cleared 

Swaps Customer Collateral 

H. Proposed Regulation 22.8—Situs of 

Cleared Swaps Accounts 

1. Proposed Requirements 

2. Questions 

I. Proposed Regulation 22.9— 

Denomination of Cleared Swaps 

Customer Collateral and Location of 

Depositories 

J. Proposed Regulation 22.10— 

Incorporation by Reference 

K. Proposed Regulation 22.11—Information 

To Be Provided Regarding Customers 

and Their Cleared Swaps 

1. Proposed Requirements 

2. Questions 

L. Proposed Regulation 22.12—Information 

To Be Maintained Regarding Cleared 

Swaps Customer Collateral 

M. Proposed Regulation 22.13—Additions 

to Cleared Swaps Customer Collateral 

N. Proposed Regulation 22.14—Futures 

Commission Merchant Failure To Meet a 

Customer Margin Call in Full 

O. Proposed Regulation 22.15—Treatment 

of Cleared Swaps Customer Collateral on 

an Individual Basis 

P. Proposed Regulation 22.16—Disclosures 

to Customers 

V. Section by Section Analysis: Amendments 

to Regulation Part 190 

A. Background 

B. Definition 

1. Proposed Amendment to Regulation 

190.01(a)—Account Class 

2. Proposed New Regulation 190.01(e)— 

Calendar Day 

3. Proposed Amendment to Regulation 

190.01(f)—Clearing Organization 

4. Proposed Amendment to Regulation 

190.01(cc)—Non-Public Customer 

5. Proposed Amendment to Regulation 

190.01(hh)—Principal Contract 

6. Proposed Amendment to Regulation 

190.01(ll)—Specifically Identifiable 

Property 

7. Proposed Amendment to Regulation 

190.01(pp)—Cleared Swap 

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 

D. Proposed Amendments to Regulation 

190.03—Operation of the Debtor’s Estate 

Subsequent to the Primary Liquidation 

Date 

E. Proposed Amendments to Regulation 

190.04—Operation of the Debtor’s 

Estate—General 

F. Proposed Amendments to Regulation 

190.05—Making and Taking Delivery on 

Commodity Contracts 

G. Proposed Amendments to Regulation 

190.06—Transfers 

H. Proposed Amendments to Regulation 

190.07—Calculation of Allowed Net 

Equity 

I. Proposed Amendments to Regulation 

190.09—Member Property 

J. Proposed Amendments to Regulation 

190.10—General 

K. Proposed Amendments to Appendix A 

to Part 190—Bankruptcy Forms, 

Bankruptcy 

L. Proposed Amendments to Appendix B 

to Part 190—Special Bankruptcy 

Distributions 

VI. Effective Date 

VII. Administrative Compliance 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

1. Introduction 

2. Information Provided by Reporting 

Entities 

3. Information Collection Comments 

C. Cost-Benefit Analysis 

1. Introduction 

a. Requirement Under Section 15(a) of the 

CEA 

b. Structure of the Analysis 

2. Costs of the Complete Legal Segregation 

Model, the Legal Segregation With 

Recourse Model, and the Futures Model 

a. Operational Costs 

b. Risk Costs 

c. Induced Changes in Behavior 

d. Portability 

e. Potential Preferences of Cleared Swaps 

Customers 

f. The Optional Approach 

3. Summary of Benefits of Legal 

Segregation Models 

a. Fellow-Customer Risk 

b. Portability and Systemic Risk 

c. Induced Changes in Behavior 

4. Relevance to Section 15(a)(2) 

Considerations 

a. Protection of Market Participants and the 

Public 

b. Efficiency, Competitiveness, and 

Financial Integrity of Markets 

c. Price Discovery 

d. Sound Risk Management 

e. Other Public Interest Considerations 

5. Public Comment 

VIII. Text of Proposed Rules 

I. Introduction 

The Dodd-Frank Act 2 mandates that 

each FCM and DCO ‘‘segregate’’ 

customer collateral supporting cleared 

swaps. 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.3

In order to implement the segregation 

requirements in the Dodd-Frank Act, the 

Commission has determined to propose 

that each FCM and DCO be required to 

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

records, the cleared swaps of each 

individual customer and relevant 

collateral. The Commission also 

proposes to permit each FCM and DCO 

to operationally hold (or ‘‘commingle’’) 

all relevant collateral in one account. 

The Commission further proposes that, 

in the event that an FCM defaults 

simultaneously with one or more 

cleared swaps customers, the DCO may 

access the collateral of the FCM’s 

defaulting cleared swaps customers to 

cure the default, but not the collateral of 

the FCM’s non-defaulting cleared swaps 

customers. However, the Commission is 

continuing to assess the benefits and 

costs of the proposal, and is considering 

whether to permit the DCO to access the 

collateral of non-defaulting cleared 

swaps customers, after the DCO 

attempts to cure the default by applying 

its own capital and the guaranty fund 

contributions of its non-defaulting FCM 

members. Moreover, the Commission is 

also continuing to assess the feasibility 

of permitting each DCO to choose the 

level of protection that it would accord 

to the cleared swaps customer collateral 

of its FCM members. 

In deciding to propose the above 

requirements, the Commission looked to 

current practices for the protection of 

uncleared swaps collateral, as well as 

current practices for the protection of 

collateral supporting futures customer 

contracts. The Commission, through its 

staff, sought comment from a wide 

variety of stakeholders (i.e., swaps 

customers, FCMs, and DCOs), through 

external meetings 4 and a public 

roundtable.5 Further, the Commission 

issued an advanced notice of proposed 

rulemaking (the ‘‘ANPR’’).6 After 

carefully considering all comments, the 

Commission has reached the conclusion 

that this proposal (i) protects cleared 

swaps customer collateral in the manner 

mandated by the Dodd-Frank Act, and 

(ii) provides the best balance between 

(A) the benefits of mitigating FellowCustomer Risk, Investment Risk (as such 

terms are defined below) and systemic 

risk, inducing changes in behavior, and 

enhancing portability as well as 

potentially facilitating portfolio 

margining, and (B) the operational and 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
33820 Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 

7See section II(C)(3) below. 

8Pursuant to section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 

9 7 U.S.C. 1 et seq. 

10 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, section 721(c) of the Dodd-Frank Act 

directs the Commission to promulgate rules to 

further define, among other terms, ‘‘swap dealer’’ 

and ‘‘major swap participant.’’ The Commission is 

in the process of this rulemaking. See 75 FR 80173, 

Dec. 21, 2010. 

11Proposed regulation 22.1 defines ‘‘Cleared 

Swap’’ and ‘‘Cleared Swaps Customer Collateral.’’ 

12Proposed regulation 22.1 defines ‘‘Cleared 

Swaps Customer.’’ 

13 11 U.S.C. 761(4)(F). 

14See, e.g., 11 U.S.C. 764. 

15See, e.g., 11 U.S.C. 766(h) and (i). 

16The Complete Legal Segregation Model was 

referred to as the Legal Segregation with 

Commingling model in the ANPR. 

17The Legal Segregation with Recourse Model 

was known as the Moving Customers to the Back 

of the Waterfall model in the ANPR. 

18 In the ANPR, the Commission referred to this 

model as Full Physical Segregation. 

risk costs 7 associated with 

implementation. This notice of 

proposed rulemaking (the ‘‘NPRM’’) sets 

forth the rationale for such conclusion. 

The Commission requests comment on 

each element of its rationale, its 

conclusion, and any alternatives to the 

proposal that it is considering (such as, 

whether to permit the DCO to access the 

collateral of non-defaulting cleared 

swaps customers and whether to permit 

each DCO to choose the level of 

protection for such collateral). 

II. Background 

A. Segregation Requirements 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act. Title VII of 

the Dodd-Frank Act 8 amended the 

CEA 9 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: (i) 

Providing for the registration and 

comprehensive regulation of swap 

dealers and major swap participants; 10

(ii) imposing mandatory clearing and 

trade execution requirements on 

clearable swap contracts; (iii) creating 

robust recordkeeping and real-time 

reporting regimes; and (iv) enhancing 

the rulemaking and enforcement 

authorities of the Commission with 

respect to, among others, all registered 

entities and intermediaries subject to 

the oversight of the Commission. 

Section 724 of the Dodd-Frank Act 

prescribes the manner in which cleared 

swaps (and related collateral) 11 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). New section 4d(f) 

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 12 to 

margin its cleared swaps as belonging to 

such customer; 

2. The FCM 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 as 

belonging 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. 

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.13 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; 14 and (ii) 

if cleared swaps are subject to 

liquidation, preferential distribution of 

remaining collateral.15

B. Implementation Alternatives 

The Commission considered several 

alternatives for implementing new 

section 4d(f) of the CEA. The first 

alternative that the Commission 

explored was legal segregation with 

operational commingling (the ‘‘Legal 

Segregation Model’’). Under the Legal 

Segregation 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 noncleared 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. 

Under the Legal Segregation Model, 

the FCM, prior to default, 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. The 

Commission considered two possible 

scenarios after a simultaneous default of 

the FCM and of one or more cleared 

swaps customers. First, the Commission 

contemplated permitting the DCO to 

access the collateral of the defaulting 

cleared swaps customers, but not the 

collateral of the non-defaulting cleared 

swaps customers (the ‘‘Complete Legal 

Segregation Model’’).16 Second, the 

Commission contemplated permitting 

the DCO to access 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 (the 

‘‘Legal Segregation with Recourse 

Model’’).17

As its second alternative, the 

Commission explored full physical 

segregation (the ‘‘Physical Segregation 

Model’’).18 Prior to FCM default, the 

Physical Segregation Model differs from 

the Legal Segregation Model only 

operationally. Like the Legal 

Segregation Model, 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 Model, each FCM and DCO 

would maintain separate individual 

accounts for the relevant collateral. 

Hence, prior to 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 

DCO does not mistakenly transfer 

collateral in (i) the account belonging to 

the former to (ii) the account belonging 

to the latter. After a simultaneous 

default of the FCM and of one or more 

cleared swaps customers, the Physical 

Segregation Model leads 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 its third alternative, the 

Commission explored replicating the 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 33821 

19See sections 4d(a) and (b) of the CEA, as well 

as regulations 1.20 to 1.30. The Futures Model was 

referred to as the Baseline model in the ANPR. 

20A list of external meetings is available at: 

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

Rulemakings/DF_6_SegBankruptcy/index.htm. 

21 ‘‘Fellow-Customer Risk’’ is the risk that a DCO 

would access the collateral of non-defaulting 

cleared swaps customers to cure an FCM default. 

Basically, among other things, 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 transactions of another 

customer. Therefore, if one cleared swaps customer 

owes money to the FCM (i.e., the 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 such 

customer defaults to the FCM, and the obligations 

attributable to such customer are so significant that 

the FCM does not have sufficient capital to meet 

such obligations, then the FCM would default to the 

DCO. 

In general, DCOs maintain packages of financial 

resources to cure the default. The first element of 

such packages is the property of the defaulting FCM 

(i.e., collateral deposited to support FCM 

proprietary transactions and contributions to the 

DCO guaranty fund). As mentioned above, other 

elements of such packages may include: (i) The 

collateral that the FCM deposited to support the 

transactions of non-defaulting cleared swaps 

customers; (ii) a portion of the capital of the DCO; 

and (iii) contributions to the guaranty fund from 

other DCO 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. 

22 ‘‘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 

proposed to be amended in Investment of Customer 

Funds and Funds Held in an Account for Foreign 

Futures and Foreign Options Transactions, 75 FR 

67642, Nov. 3, 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. 

23 75 FR at 75163. 

24For a more detailed discussion regarding risk 

costs, see section II(C)(3)(b) infra. 

25Financial Resources Requirements for 

Derivatives Clearing Organizations, 75 FR 63113, 

63118, Oct. 14, 2010 (proposed regulation 

39.11(a)(1)). 

The Commission has proposed to require 

systemically-important DCOs to maintain a 

financial resources package sufficient to cover a 

default by the two clearing members creating the 

largest combined financial exposure in extreme but 

plausible market conditions. Id. at 63119 (proposed 

regulation 39.29(a)). 

segregation requirement currently 

applicable to futures (the ‘‘Futures 

Model’’).19 Prior to default, the Futures 

Model shares certain similarities with 

the Legal Segregation Model. 

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 

collateral in one account. After default, 

the Futures Model shares certain 

similarities with the Legal Segregation 

with Recourse Model. Specifically, the 

DCO would be permitted to access the 

collateral of the non-defaulting cleared 

swaps customers. However, 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. 

Finally, the Commission explored 

permitting a DCO to choose between 

(i) the Legal Segregation Model (whether 

Complete or with Recourse), (ii) the 

Physical Segregation Model, and (iii) the 

Futures Model, rather than mandating 

any particular alternative. 

C. Solicitation of Public Input Regarding 

the Alternatives 

Throughout the fall and winter of 

2010, the Commission sought public 

comment on the 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).20 Second, on October 

22, 2010, the Commission, through its 

staff, held the Roundtable. Third, on 

November 19, 2010, the Commission 

issued the ANPR. 

1. Roundtable 

As the ANPR describes, the 

Roundtable revealed that stakeholders 

had countervailing concerns regarding 

the alternatives that the Commission set 

forth. On the one hand, a number of 

swaps customers argued that the 

Commission should focus on effectively 

eliminating fellow-customer risk 21 and 

investment risk.22 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 that the Commission set 

forth, they should be subject to FellowCustomer Risk and Investment Risk 

when they transact in cleared swaps. As 

the ANPR noted, pension funds were 

specifically concerned about whether 

Fellow-Customer Risk and Investment 

Risk would be incompatible with their 

obligations under the Employee 

Retirement Income Security Act.23

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. Second, and more significantly, 

FCMs and DCOs stated that they may 

incur additional risk costs due to 

proposed financial resources 

requirements.24 Specifically, the 

Commission has proposed to require 

each DCO to maintain a package of 

financial resources sufficient, at a 

minimum, to: 

[e]nable the derivatives clearing organization 

to meet its financial obligations to its clearing 

members notwithstanding a default by the 

clearing member creating the largest financial 

exposure for the derivatives clearing 

organization in extreme but plausible market 

conditions.25

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. As the ANPR noted, 

DCOs stated that they could obtain such 

financial resources in two ways (or a 

combination thereof). They can increase 

the amount of collateral that each 

cleared swaps customer must provide to 

margin its cleared swaps. Alternatively, 

they can increase the amount of capital 

that each FCM must contribute to the 

relevant DCO guaranty funds. Both 

FCMs and DCOs averred that the costs 

associated with obtaining such 

additional financial resources may be 


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33822 Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 

26 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. 

27 Id. 

28Federated Investors submitted two comments, 

both of which focused on the investment of cleared 

swaps customer collateral. ISDA submitted two 

comments, an original comment (the ‘‘ISDA 

Original’’) and, later, a supplemental comment (the 

‘‘ISDA Supplemental’’). 

29Buy-side firms or groups (collectively, the 

‘‘buy-side’’) included the following: (i) Alternative 

Investment Management Association (‘‘AIMA’’); 

(ii) BlackRock, Inc. (‘‘BlackRock’’); (iii) California 

Public Employees Retirement System (‘‘CALPERS’’); 

(iv) Coalition for Derivatives End Users (by Gibson, 

Dunn & Crutcher); (v) Coalition for Energy End 

Users; (vi) Committee on Investment of Employee 

Benefit Assets (‘‘CIEBA’’); (vii) Federal Farm Credit 

Banks Funding Corp.; (viii) Federal Home Loan 

Banks (‘‘FHLB’’); (ix) Fidelity Investments 

(‘‘Fidelity’’); (x) Freddie Mac; 

(xi) Investment Company Institute; (xii) Managed 

Funds Association; (xiii) Securities Industry and 

Financial Markets Association Asset Management 

Group (‘‘SIFMA–AMG’’); (xiv) Tudor Investment 

Corporation; and (xv) Vanguard. 

30FCMs or investment firms (or organizations 

thereof) (collectively, the ‘‘FCMs’’) included the 

following: (i) Citigroup Global Markets, Inc. 

(‘‘Citigroup Capital Markets’’); (ii) Federated 

Investors, Inc. (Freeman and Hawke); (iii) Futures 

Industry Association; (iv) International Swaps and 

Derivatives Association (‘‘ISDA’’) (Original and 

Supplemental); (v) Newedge USA, LLC 

(‘‘Newedge’’); (vi) Norges Bank Investment 

Management; (vii) Securities Industry and Financial 

Markets Association (‘‘SIFMA’’); and (viii) State 

Street Corporation. 

31 DCOs (collectively, the ‘‘DCOs’’) included the 

following: (i) CME Group (‘‘CME’’); (ii) 

IntercontinentalExchange, Inc. (‘‘ICE’’); (iii) LCH 

Clearnet Group (‘‘LCH’’); and (iv) Minneapolis Grain 

Exchange, Inc. 

32 Jerrold Salzman. 

33Portability refers to the ability to reliably 

transfer the swaps (and related collateral) of a nondefaulting customer from an insolvent FCM to a 

solvent FCM, without the necessity of liquidating 

and re-establishing the swaps. 

34CIEBA at 4 at note 2. 35FHLB at 3 at note 3. 

Additionally, some commenters maintained that 

the Futures Model depends on an interpretive 

statement issued by the Office of the General 

Counsel, which they describe as ‘‘dated and 

questionable’’ in relation to cleared swaps. See 

FHLB at 4, Federal Farm Credit Banks Funding 

Corporation at 3. See also Interpretative Statement, 

No. 85–3, Regarding the Use of Segregated Funds 

by Clearing Organizations Upon Default by Member 

Firms (OGC Aug. 12, 1985). 

36CME at 5. 

substantial, and would ultimately be 

borne by cleared swaps customers.26

2. ANPR 

a. Questions 

Given the countervailing concerns 

that stakeholders expressed at the 

Roundtable, the Commission decided to 

seek further comment through the 

ANPR on the potential benefits and 

costs of (i) the Legal Segregation Model 

(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.’’ 27

Although the ANPR sought comment 

on the abovementioned models from the 

general public, it addressed specific 

questions to the three segments of 

stakeholders (i.e., DCOs, FCMs, and 

swaps customers). The Commission 

asked all three segments to identify the 

benefits of each model relative to the 

others. The Commission then asked all 

three segments to estimate the costs of 

implementing each model from their 

perspective. Specifically, for FCMs, the 

Commission asked for estimates of 

(i) FCM compliance costs for each 

model (other than the Futures Model) 

and (ii) FCM costs resulting from DCOs 

seeking additional financial resources to 

meet proposed Commission 

requirements. For DCOs, the 

Commission asked for estimates of: (i) 

DCO, as well as FCM, compliance costs 

for each model (other than the Futures 

Model); and (ii) DCO, as well as FCM, 

costs resulting from DCOs seeking 

additional financial resources to meet 

proposed Commission requirements. In 

addition to the above, 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. 

b. Comments: Background 

The Commission received thirty-one 

comments from twenty-nine 

commenters.28 Of the commenters, 

fifteen represented current or potential 

cleared swaps customers (i.e., buy-side 

firms or groups),29 eight represented 

FCMs or investment firms (or 

organizations thereof),30 four were 

DCOs,31 one was the National Futures 

Association (‘‘NFA’’), and one was from 

a legal practitioner.32 The Commission 

invites further comment on any of the 

issues raised and the factual and 

analytical points made in the comments 

received in response to the ANPR. 

The comments were generally divided 

by the nature of the commenter: most 

(though not all) of the buy-side 

commenters favored either the Legal 

Segregation Model (whether Complete 

or with Recourse) or the Physical 

Segregation Model, manifesting a 

willingness to bear the added costs. 

Most of the FCMs and DCOs favored the 

Futures Model. LCH favored the 

Complete Legal Segregation Model. 

Finally, ISDA, 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 33 of 

cleared swaps belonging to nondefaulting customers. ISDA noted that 

the Physical Segregation Model and 

what is now referred to as the Complete 

Legal Segregation Model were most 

conducive to that goal. 

c. Comments: Discussion 

In general, comments to the ANPR 

addressed the following major issues: (i) 

Concerns with statutory interpretation; 

(ii) the appropriate basis for comparison 

of benefits and costs for each model; (iii) 

estimates of costs, and the assumptions 

underlying such estimates; (iv) the 

benefits of individual collateral 

protection (e.g., on Fellow-Customer 

Risk, Investment Risk, systemic risk, 

induced changes in behavior, and 

portfolio margining); and (v) the 

appropriateness of optional models. 

1. Statutory Issues 

Section 4d(f)(6) of the CEA prohibits 

‘‘any person, including any derivatives 

clearing organization * * *’’ from 

holding, disposing, or using cleared 

swaps customer collateral ‘‘for deposit 

in a separate account or accounts * * * 

as belonging to * * * any person other 

than the swaps customer of the futures 

commission merchant.’’ The emphasis 

on ‘‘separate account or accounts’’ and 

the use of ‘‘customer’’ in the singular 

contrasts with section 4d(b) of the CEA 

(applicable to futures customer 

contracts and related collateral). In the 

ANPR, the Commission asked for 

comment as to whether Congress 

evinced intent to create a segregation 

regime that protects cleared swaps (and 

related customer collateral) on a more 

individualized basis than futures (and 

related customer collateral). In general, 

commenters presented opposing views. 

For example, one commenter viewed 

use of the singular term ‘‘customer’’ in 

section 4d(f)(6) of the CEA as a ‘‘critical 

difference.’’ 34 Similarly, another 

commenter viewed such use ‘‘as 

direction to the * * * Commission to 

ensure that customer initial margin [for 

cleared swaps] is not put at risk on 

account of actions of other 

customers.’’ 35 In contrast, a third 

commenter expressed doubt as to 

whether Congress would ‘‘adopt such a 

subtle method of moving away from 

[omnibus customer protection] and 

directing the use of individually 

segregated accounts for cleared 

swaps.’’ 36 The commenter further 

observed that it would be anomalous to 

afford greater protection to cleared 


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Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 33823 

37See CME at 5–6. 

38For example, the swaps markets have 

historically been bespoke, whereas the futures 

markets have historically been more standardized. 

Such historical differences may persist while the 

swaps markets transition from the over-the-counter 

environment to a cleared and transparent 

environment. Specifically, while the swaps market 

‘‘dwarf[s]’’ the futures market, ‘‘the tremendous 

diversity in products and trade parameters’’ in the 

swaps market ‘‘effectively results in a lower 

liquidity,’’ thereby resulting in the risks that 

omnibus clearing poses for swaps customers to be 

significantly greater than they are for futures 

customers. See Fidelity at 6, Vanguard at 2–5. 

39Additionally, induced changes in behavior may 

create a systemic cost. Such costs have been 

addressed under the rubric of moral hazard below. 

40Some commenters claim that it may be difficult 

for FCMs and DCOs to maintain separate models for 

futures customer collateral and cleared swaps 

customer collateral. 

41 ISDA Original at 10. 

42See generally ICE at 10–12. 

As mentioned above, the Physical Segregation 

Model would require that each FCM and DCO 

maintain a separate account for each cleared swaps 

customer. Therefore, the costs that commenters 

identify include, among other things, (i) the costs 

to establish and maintain such accounts, (ii) the 

costs to effect separate fund transfers between such 

accounts, (iii) the costs of account reconciliation, 

and (iv) the costs to establish the information 

technology infrastructure for such accounts. 

43See ISDA Supplemental at 7. This modifies the 

ongoing figure in ISDA Original at 10 (the upfront 

figure there is correct). 

In contrast to the Physical Segregation Model, the 

Legal Segregation Model (whether Complete or with 

Recourse) would permit an FCM and a DCO to 

continue maintaining omnibus accounts, while 

requiring enhanced reporting. Therefore, the costs 

that commenters identify pertain mostly to such 

reporting. 

44One should note that the dollar figures for Risk 

Costs presented by commenters and described in 

the text represent increased use of capital, not 

actual costs. The cost associated with these figures 

would reflect the opportunity cost of forgoing 

possible higher return from alternative uses of the 

capital in question. 

45See ISDA Original at 12–13. One should note 

that this amount represents increased use of capital, 

and thus does not represent hundreds of billions in 

costs. 

46See CME at 8–9. This commenter also would 

consider the use of ‘‘concentration margin’’ to cover 

such Risk Costs. According to such commenter, 

charging concentration margin would constitute a 

‘‘more targeted approach,’’ because a DCO would 

charge extra margin ‘‘to the customer cleared-swap 

accounts in the clearing system with the largest 

potential shortfalls,’’ rather than increasing the 

overall size of the guaranty fund. The commenter 

acknowledges that it ‘‘currently lack[s] sufficient 

information to precisely assess an appropriate 

methodology to incorporate concentration margin 

in a potential financial-safeguards regime,’’ but does 

state that ‘‘likely concentration charges would fall 

in the range of $50 billion to $250 billion.’’ The 

commenter anticipates that customers using 

‘‘cleared swaps to hedge exposures in other markets 

may bear the brunt of a concentration margin 

approach.’’ The Commission notes that such an 

approach may arguably provide for better alignment 

of risk-creation and risk-assumption, which 

commenters from the buy-side have requested. 

swaps customers, many of which are 

large and presumed to be sophisticated, 

than futures customers, some of whom 

might be individual or ‘‘retail’’ 

customers.37

2. What is the appropriate starting 

point? 

In general, commenters presented 

opposing views on whether the 

Commission should consider the 

benefits and costs of each model in light 

of current swaps practice or current 

futures practice. Most buy-side 

commenters stated that benefits and 

costs of each model should be informed 

by current swaps practice. First, these 

commenters emphasized that they are 

currently able to negotiate for individual 

collateral protection at independent 

third parties, and are therefore exposed 

to neither Fellow-Customer Risk nor 

Investment Risk. Second, these 

commenters stated that they are 

accustomed to the costs associated with 

individual collateral protection and note 

that their counterparties enjoy profit 

from this business model. Finally, these 

commenters maintained that the Futures 

Model forms an inappropriate basis for 

the consideration of benefits and costs 

because: 

(i) The Commission is contemplating 

the appropriate segregation regime for 

cleared swaps and related customer 

collateral; (ii) the Futures Model 

references industry conventions for 

futures contracts and related collateral; 

and (iii) the market for cleared swaps 

has developed and may continue to 

develop in a different manner than the 

market for futures contracts.38

In contrast, a number of commenters, 

primarily the FCMs and the DCOs, 

suggested that the benefits and costs of 

each model should be informed by 

current futures practice. In support of 

this position, these commenters note 

that the futures segregation requirement 

has served the futures industry well for 

many decades. 

3. Costs 

In general, commenters estimated the 

costs of implementing each model in 

light of the basis for consideration that 

they viewed most appropriate. For 

example, those commenters that argued 

that current swaps practice should 

inform the benefits and costs of each 

model emphasized that they have been 

willing to bear the costs for individual 

collateral protection. In contrast, those 

commenters that argued that current 

futures practice should inform the 

benefits and costs of each model 

emphasized that implementing either 

the Legal Segregation Model (whether 

Complete or with Recourse) or the 

Physical Segregation Model would lead 

to substantial costs. As mentioned 

above, they described two major sources 

for such costs: (i) Operational costs; and 

(ii) costs associated with obtaining 

additional financial resources to meet 

proposed Commission requirements 

(assuming that the Commission 

prohibits a DCO from accessing the 

collateral of non-defaulting cleared 

swaps customers to cure an FCM 

default) (the ‘‘Risk Costs’’).39 Certain 

other commenters disagreed with the 

assumptions underlying estimates of 

Risk Costs, but not those underlying 

estimates of operational costs. 

a. Operational Costs 40

For the Physical Segregation Model, 

one commenter estimates that an FCM 

would incur upfront operational costs of 

$33 million and ongoing operational 

costs of $136 million.41 Another 

commenter estimates that a DCO would 

incur upfront operational costs of $7.5 

million and ongoing operational costs of 

$40 million.42 In contrast, for the Legal 

Segregation Model (whether Complete 

or with Recourse), commenters have 

suggested that the operational costs 

would be more modest. For example, 

commenters estimate that an FCM 

would incur upfront operational costs of 

$1 million and ongoing operational 

costs of $700,000.43

b. The Risk Costs 

i. The physical segregation model and 

the complete legal segregation model. 

Both the Physical Segregation Model 

and the Complete Legal Segregation 

Model would result in Risk Costs,44

because they both prohibit a DCO from 

accessing the collateral of nondefaulting cleared swaps customers. As 

mentioned above, a DCO may seek to 

cover Risk Costs in two different ways 

(or a combination thereof). First, the 

DCO may increase the amount of 

collateral that each cleared swaps 

customer must provide to margin its 

cleared swaps. One commenter 

estimated that this increase may equal 

69.75 percent (i.e., a total increase of 

$581 billion). Second, a DCO may 

increase the amount of resources that 

each FCM must contribute to the 

guaranty fund. The same commenter 

estimated that a DCO may double such 

contributions (i.e., a total increase of 

$128 billion).45 Another commenter—a 

DCO—agrees with such estimate, stating 

that it would double FCM contributions 

to its guaranty fund (i.e., the guaranty 

fund would increase from $50 billion to 

$100 billion).46

ii. The legal segregation with recourse 

model and the futures model. 

Based on the rationale articulated 

above, neither the Legal Segregation 

with Recourse Model nor the Futures 

Model would result in a need to obtain 


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47See ISDA Original at 12–13. See ISDA 

Supplemental at 5–6. For a sense of scale, ISDA 

estimated that, under the Futures Model and the 

Legal Segregation with Recourse Model, industrywide initial margin for cleared swaps customer 

contracts would total $833 billion, and DCO 

guaranty funds would total $128 billion. 

48See ISDA Supplemental at 6. 

49See, e.g., Citigroup Capital Markets at 1–2 

(‘‘customers of a deteriorating, non-defaulted FCM 

have the ability pursuant to CFTC regulation and 

clearing house rules to move their positions to an 

alternative FCM’’), Federal Farm Credit Banks 

Funding Corp. at 4 (‘‘when faced with a clearing 

member’s potential deterioration in credit * * * a 

customer [may] transfer its positions to another 

clearing member which could have the unintended 

effect of accelerating a clearing member’s credit 

problems’’), LCH at 2–3 (stating that while in a 

‘‘shock event,’’ a DCO may access collateral from 

non-defaulting cleared swaps customers, in the 

contrasting case of an FCM default following a 

gradual decline, ‘‘the assumption of access to nondefaulting client Initial Margin does not hold’’). 

50For example, LCH stated that, in order for 

DCOs [to be] managed prudently * * * their risk 

waterfalls must cater for all events, not just ‘shock’ 

events. This requires that DCOs clearing swaps 

must always assume that no client Initial Margin is 

available at the point of a default, as this is the most 

conservative assumption from a risk management 

standpoint. 

Id. 

51Compare CME at 4 (‘‘ * * * adopting an 

individual segregation model for customer cleared 

swaps * * * would impose significantly higher 

costs on customers and clearing members * * * the 

increased costs may decrease participation in the 

CFTC-regulated cleared swaps market * * * .’’) 

with BlackRock at 2 (‘‘We fail to understand why 

protecting collateral for segregation for the OTC 

Derivative Account Class when done at an FCM is 

associated with high costs when the OTC 

derivatives market has been able to function as a 

profitable business with collateral segregation as 

part of this business model’’). 

52See ISDA Supplemental at 4. 

53See id. at 4, 7. ISDA also noted that ‘‘[f]ellow 

customer risk, properly conceived, includes the cost 

incurred by non-defaulting clients as the result of 

a DCO closing out their positions following a client 

and FCM default.’’ See also id. at 2 (‘‘We believe that 

the client desire for continuance of transactions and 

the avoidance of systemic risk requires additional 

focus on the facilitation of trade portability and the 

re-prioritization of close-out procedures as the 

option of last resort. From a client point of view, 

the enforced close-out of positions could lead to 

significant losses, particularly for a financial entity 

hedging other rate exposures. The close-out of even 

a portion of a large derivative book, like that which 

is currently run by a GSE, for example, may create 

huge losses for the swap hedger, and ultimately 

significant costs to the taxpayer. Further, for clients 

that are subject to regulatory capital requirements, 

a reduction in the ability to port positions may lead 

to higher regulatory capital costs’’). 

54See id. at 5. The commenter further observed 

that the Legal Segregation with Recourse Model 

represents a ‘‘wealth transfer’’ from the DCO and its 

FCM members to cleared swaps customers relative 

to the Futures Model, which may increase systemic 

risk to the extent that such transfer weakens the 

DCO and the FCMs. 

55See FHLB at 7 (‘‘the primary way for customers 

to manage their fellow-customer risk is to have 

advance arrangements in place that would allow 

them to quickly move their cleared trades from a 

defaulting clearing member to another clearing 

member * * * [this] may prompt the equivalent 

of a ‘run on the bank’ when information becomes 

available that suggests a clearing member may be 

facing financial stress’’ which may not ‘‘make[] 

sense from a systemic risk perspective’’). See also 

AIMA at 1 (where ‘‘client collateral is inadequately 

protected, ’’ ‘‘lack of confidence in the system 

* * * can cause customers to seek to avoid losses 

by liquidating or moving their positions in stressed 

market conditions, causing ‘runs’ on futures 

commission merchants, greatly exacerbating market 

stress and contributing to wider financial 

instability’’). 

56See, e.g., Freddie Mac at 3, 4; BlackRock at 5; 

Vanguard at 7. 

additional financial resources to meet 

proposed Commission requirements, 

since under these models DCOs would 

have access to the collateral of nondefaulting customers in the event of a 

simultaneous default by an FCM and 

one or more customers.47 However, one 

commenter observed that the Legal 

Segregation with Recourse Model 

increases the likelihood that a DCO 

would access (i) its own contribution 

and (ii) the guaranty fund contributions 

of non-defaulting FCM members, in 

each case, to cure a default. The 

commenter stated that ‘‘[t]he increased 

risk to which the DCO and clearing 

members would be exposed represents a 

real wealth transfer from the clearing 

infrastructure (DCOs and clearing 

members), upon which systemic safety 

is to depend, to clients.’’ 48

c. Assumptions Underlying Risk Costs 

Certain commenters disagreed with 

the assumptions underlying the 

estimates of Risk Costs for the Complete 

Legal Segregation Model and the 

Physical Segregation Model. 

Specifically, they questioned whether, 

upon an FCM default, a DCO would 

have any collateral of non-defaulting 

cleared swaps customers left to access. 

These commenters noted that, if an FCM 

declines over time, customers may begin 

transferring their cleared swaps 

collateral to more creditworthy FCMs.49

Therefore, a DCO may choose not to rely 

on the collateral of non-defaulting 

cleared swaps customers for risk 

management reasons. If the DCO makes 

such a choice, it would incur no Risk 

Costs in adopting either the Complete 

Legal Segregation Model or the Physical 

Segregation Model. These commenters 

observed that certain DCOs experienced 

in clearing swaps have already made 

such a choice.50

4. Benefits 

a. Fellow-Customer Risk and Investment 

Risk 

In general, commenters agreed that 

the Physical Segregation Model would 

eliminate Investment Risk, and that 

such model, along with the Legal 

Segregation Model (whether Complete 

or with Recourse), would mitigate 

Fellow-Customer Risk. As mentioned 

above, commenters disagreed on 

whether such benefits would outweigh 

the operational costs and Risk Costs, as 

applicable, which would be incurred to 

implement such models.51

b. Portability 

One commenter emphasized that the 

most important factor that the 

Commission should consider in 

deciding which model to propose is the 

effect of that model on the portability of 

the cleared swaps of non-defaulting 

customers in the event of an FCM 

default. The commenter stated that the 

Physical Segregation Model and the 

Complete Legal Segregation Model 

would most facilitate portability.52

c. Systemic Risk 

A number of commenters described 

ways in which the Legal Segregation 

Model (whether Complete or with 

Recourse) or the Physical Segregation 

Model may mitigate systemic risk. The 

commenter that emphasized the 

importance of portability stated that the 

Complete Legal Segregation Model or 

the Physical Segregation Model would 

mitigate systemic risk by enhancing 

portability of the cleared swaps of nondefaulting customers in the event of 

FCM default.53 However, this 

commenter did not believe that the 

Legal Segregation with Recourse Model 

would mitigate systemic risk to the 

same extent since it would not facilitate 

portability to the same extent as the 

Complete Legal Segregation Model.54

Second, certain commenters suggested 

that the Legal Segregation Model 

(whether Complete or with Recourse) or 

the Physical Segregation Model may 

ameliorate certain pro-cyclical 

incentives under the Futures Model for 

bank-style ‘‘runs’’ on FCMs that are 

perceived to be weakening.55

d. Induced Changes in Behavior 

In general, commenters offered 

different opinions on the appropriate 

focus of induced changes in behavior 

analysis. For example, certain 

commenters focused on the effects of 

the Futures Model on the motivations of 

the DCO. As mentioned above, under 

the Futures Model, a DCO may access 

the collateral of non-defaulting cleared 

swaps customers prior to its own capital 

in the event of an FCM default. 

Therefore, the above-mentioned 

commenters argued that under the 

Futures Model a DCO may be less 

motivated to ensure that each FCM 

member is managing the risks posed by 

cleared swaps customers properly than 

under Legal Segregation or Physical 

Segregation models.56


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57See, e.g., CME at 4, ISDA Supplemental at 6. 

58See, e.g., ISDA Supplemental at 6. 

59See SIFMA at 3–4, Investment Company 

Institute at 5–6, Futures Industry Association at 6. 

60The Optional Approach may be implemented 

in two ways. First, the Commission may permit 

each DCO to offer more than one model for 

protecting cleared swaps customer contracts and 

related collateral. For example, certain FCM 

members may choose the Complete Legal 

Segregation Model, whereas other FCM members 

may choose the Legal Segregation with Recourse 

Model. Second, the Commission may permit each 

DCO to offer a different model for protecting cleared 

swaps customer contracts and related collateral. For 

example, a DCO could choose to offer the Complete 

Legal Segregation Model to all of its FCM members, 

whereas another DCO could choose to offer the 

Futures Model. 

61See, e.g., Freddie Mac at 3 (‘‘requiring DCOs to 

provide individual segregation on an optional basis 

is the best way to achieve the Commission’s twin 

goals of maximizing customer protection and 

minimizing cost’’), NFA at 2 (The ‘‘better mousetrap 

may involve * * * clearing organizations adopting 

one of the other models discussed by the 

Commission. The Commission’s regulations should 

ensure that DCOs have the flexibility to offer those 

alternative structures * * *’’). 

62See, e.g., ICE at 12 (‘‘ICE’s general sense is that 

any bifurcated or optional model will further 

complicate the settlement process and lead to 

greater uncertainty during times of financial 

stress’’), Investment Company Institute at 6 (‘‘Due to 

the host of legal, regulatory, operational and other 

issues which would be presented, ICI does not 

believe that it would be appropriate to implement 

individual customer protection on an optional 

rather than a mandatory basis in connection with 

this rulemaking proceeding * * *’’). 

63See, e.g., ISDA Original at 13 (‘‘if highly credit 

worthy customers choose the more expensive, 

higher protection option,’’ pooling may be less 

effective from the point of view of the DCO, which 

may be required to increase initial margin for all 

customers, including those choosing to bear fellow 

customer risk, forcing the latter to bear both 

increased funding cost and a greater amount of 

funds at risk). 

64For additional discussion of cost issues, with 

particular reference to the costs of the proposed 

Complete Legal Segregation Model and the Legal 

Continued 

Other commenters focused on the 

effect of the Legal Segregation Model 

(especially Complete) and the Physical 

Segregation Model on the motivations of 

cleared swaps customers and FCMs. 

First, these commenters argued that 

such models would cause changes in 

behavior, because cleared swaps 

customers benefitting from individual 

collateral protection would be less 

motivated to create market discipline by 

clearing thorough less risky firms.57

Second, these commenters contended 

that FCMs would be less motivated to 

maintain substantial excess net capital 

in order to present a more attractive 

profile to customers.58

Finally, a number of commenters 

observed that an important 

consideration in selecting a model is the 

effect that the model would have on the 

willingness of cleared swaps customers 

to maintain excess margin. The more 

protective of cleared swaps customer 

collateral a model is, the more likely it 

is that cleared swaps customers would 

be willing to maintain excess margin. 

e. Portfolio Margining 

A number of commenters expressed 

concern that the use of models other 

than the Futures Model would create 

fragmented segregation requirements 

(whether across securities and 

commodities accounts, or between 

different classes of commodities 

accounts), which in turn would create 

barriers to the ability of cleared swaps 

customers to portfolio margin.59

5. The Optional Approach 60

Finally, a number of commenters 

suggested that the Commission permit 

DCOs the option of offering different 

models for protecting cleared swaps 

customer contracts and related collateral 

(the ‘‘Optional Approach’’).61 However, 

other commenters found the Optional 

Approach to be impracticable.62 Still 

other commenters stated that the 

Optional Approach may not succeed in 

reducing costs for those cleared swaps 

customers that do not opt for greater 

protection, and that the Optional 

Approach, depending on the manner in 

which it is structured, may indeed 

increase the amount of funds such 

customers have at risk.63

III. The Proposed Rules 

After carefully considering all 

comments, the Commission has decided 

to propose the Complete Legal 

Segregation Model in this NPRM for the 

following reasons. 

First, as discussed in section III(A) 

herein, the Commission believes that 

section 4d(f) of the CEA provides it with 

authority to propose the Complete Legal 

Segregation Model. Further, the 

Commission believes that the language 

of section 4d(f) of the CEA supports 

strongly considering the current swaps 

practice. 

Second, as discussed in section III(D) 

herein, the Commission believes that 

the Complete Legal Segregation Model 

provides the best balance between 

benefits and costs in order to protect 

market participants and the public. 

Section III(B) herein describes the 

Commission’s evaluation of the costs of 

each model, whereas section III(C) 

herein describes the Commission’s 

evaluation of the benefits of each model. 

As mentioned in section I 

(Introduction) herein, the Commission 

is continuing to assess the benefits and 

costs of the Complete Legal Segregation 

Model. As part of such assessment, the 

Commission is considering whether to 

adopt, in the alternative, the Legal 

Segregation with Recourse Model. 

Further, the Commission is continuing 

to assess the feasibility of the Optional 

Approach and the Futures Model, and 

seeks comments thereon. 

The Commission requests comments 

on (i) its proposal, (ii) whether it should 

adopt, in the alternative, the Legal 

Segregation with Recourse Model, and 

(iii) whether it should adopt the 

Optional Approach or the Futures 

Model. The Commission has set forth 

specific questions below. 

A. Statutory Issues and the Appropriate 

Starting Point 

Section 4d(f) of the CEA provides the 

Commission with the authority to afford 

individualized protection to cleared 

swaps customer collateral. As 

mentioned above, new section 4d(f)(6) 

of the CEA prohibits ‘‘any person, 

including any derivatives clearing 

organization * * * ’’ from holding, 

disposing, or using customer collateral 

‘‘for deposit in a separate account or 

accounts * * * as belonging to * * * 

any person other than the swaps 

customer of the futures commission 

merchant.’’ The reference to ‘‘separate 

account or accounts’’ and the use of 

‘‘customer’’ in the singular contrasts 

with section 4d(b) of the CEA, which 

governs the handling of customer 

collateral by DCOs in the futures 

market. Section 4d(b) prohibits a DCO 

from holding, disposing, or using 

customer collateral ‘‘for deposit in a 

separate account * * * as belonging to 

* * * any person other than the 

customers of such futures commission 

merchant,’’ using the plural form 

‘‘customers’’ to refer to the property of 

customers collectively. The contrast 

between sections 4d(b) and 4d(f)(6) of 

the CEA suggests that the Commission 

need not treat cleared swaps customer 

collateral in the same manner as futures 

customer collateral. This is particularly 

true because the reference to ‘‘separate 

account or accounts’’ and ‘‘customer’’ in 

section 4d(f)(6) of the CEA accords with 

the individual collateral protection 

currently available in the swaps markets 

and contrasts with the omnibus 

approach traditionally used in futures 

markets. For the same reason, the 

Commission is persuaded that the costs 

of and protections provided by current 

swaps practices are highly relevant to 

the evaluation of alternative models for 

implementing the statute. 

B. Costs 64

1. Rationale 

As mentioned above, the Commission 

believes that current swaps practices 


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33826 Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 

Segregation with Recourse Model relative to the 

Futures Model, see the cost-benefit analysis at 

section VII(C) infra. 

65The Commission is not persuaded by the claim 

that it may be difficult for FCMs and DCOs to 

maintain separate models for futures customer 

collateral and cleared swaps customer collateral. 

Many FCMs are part of organizations that currently 

(and in the future will) maintain separate models 

for futures and uncleared swaps, and there has been 

no evidence of problems with the ability of such 

FCMs to operate both business lines. Indeed, there 

are DCOs that currently maintain different guaranty 

funds for cleared swaps and futures contracts, and 

that apply materially different margin models to 

such contracts (e.g., futures contracts vs. credit 

default swaps vs. interest rate swaps), again without 

reported trouble. 

66Regarding the comment stating that the Legal 

Segregation with Recourse Model would result in 

a ‘‘wealth transfer’’ from the DCO and its FCM 

members to cleared swaps customers, the 

Commission notes that such comment did not 

include an estimate for any additional costs 

resulting from such ‘‘transfer.’’ Moreover, such 

statement is simply the obverse of the observation 

by other commenters that the Futures Model would 

involve implicit costs to customers. See, e.g., 

Federal Farm Credit Banks Funding Corp. at 3 

(‘‘Under the [futures] model, the hundreds of 

millions of dollars that the System Banks will likely 

post as initial margin and variation margin for 

cleared trades would be at economic risk’’). 

67For example, the size of the customer account 

at Lehman declined substantially in the days before 

its bankruptcy filing and caused DCOs to declare it 

in default. For additional discussion of the 

relationship of estimates of Risk Costs to 

assumptions about the availability of the collateral 

of non-defaulting customers in the event of an FCM 

default, see the discussion of fellow-customer 

behavior and ‘‘diversification’’ effects in relation to 

the design of a DCO’s financial resources package 

in the cost-benefit analysis at section VII(C)(2)(b) 

infra. 

68See section II(C)(2)(c)(2) supra. 

69See, e.g., note 38, supra. 

70For additional discussion of benefits issues, 

with particular reference to the benefits of the 

proposed Complete Legal Segregation Model and 

the Legal Segregation with Recourse Model relative 

to the Futures Model, see the cost-benefit analysis 

at section VII(C) infra. 

71As discussed further below, section 766(h) of 

the Bankruptcy Code, 11 U.S.C. 766(h), requires 

that customer property be distributed ‘‘ratably to 

customers on the basis and to the extent of such 

customers’ allowed net equity claims * * *.’’ 

72Because the DCO would allocate collateral 

between defaulting and non-defaulting cleared 

swaps customers based on information the FCM 

provided the day prior to default, such allocation 

would not reflect movement in the cleared swaps 

portfolio of such customers on the day of default. 

forms an appropriate perspective for 

considering the costs of each model for 

protecting cleared swaps customer 

collateral. The Commission further 

believes that the operational costs and 

Risk Costs that commenters have 

identified for each model should be 

examined in light of the current practice 

of many swaps customers to incur costs 

to obtain individual collateral 

protection with independent thirdparties. 

With respect to operational costs, the 

Commission notes that commenters 

appeared to have relied upon 

appropriate assumptions in their 

estimates for the Legal Segregation 

Model (whether Complete or with 

Recourse) and the Physical Segregation 

Model.65 With respect to Risk Costs, the 

Commission observes that commenters 

appeared to have relied upon 

appropriate assumptions in their 

estimates for the Legal Segregation with 

Recourse Model and the Futures 

Model.66 In contrast, the Commission 

finds, at least initially, persuasive the 

comments questioning the estimates of 

Risk Costs for the Complete Legal 

Segregation Model and the Physical 

Segregation Model, to the extent that 

such estimates are based on the 

assumption that collateral from nondefaulting cleared swaps customers 

would be fully available to DCOs in 

practice.67

2. Questions 

The Commission seeks comment on 

potential operational costs associated 

with implementing the Futures Model, 

and whether such costs could vary 

depending on the volume of swaps to be 

cleared. 

Further, the Commission seeks 

comment on potential operational costs 

and Risk Costs for all models other than 

the Futures Model, especially with 

respect to (i) the extent to which such 

costs could be offset against the costs 

that swaps customers currently incur to 

obtain individual collateral protection, 

and (ii) the extent to which such costs 

may correspond to the implicit costs 

that customers may bear due to FellowCustomer Risk. 

The Commission also seeks comment 

on the assumptions underlying 

estimates of Risk Costs for the Complete 

Legal Segregation Model and the 

Physical Segregation Model. 

• Specifically, is it plausible that an 

FCM might decline gradually over time 

rather than in a sudden event? If so, is 

it plausible that customers of such a 

declining FCM might transfer their 

cleared swaps and related collateral to 

another FCM? 

• If the Commission were to permit a 

DCO to access collateral from nondefaulting cleared swaps customers to 

cure a default, would it be prudent, in 

light of answers to the foregoing 

questions, for the DCO to rely upon 

such collateral in calculating the 

financial resources package that it must 

hold? Why or why not, or to what 

extent? If not, or if only to a limited 

extent, how does that conclusion affect 

the Risk Costs for the Complete Legal 

Segregation Model (as well as the 

Physical Segregation Model)? Do DCOs 

account for potential differences 

between fellow customer collateral at 

the time of calculation and expected 

fellow-customer collateral at the time of 

default in their default resource 

calculations? If so, how? 

In addition, as discussed above, a 

number of commenters on the ANPR 

suggested that consideration of the costs 

and benefits of all models should be 

informed by the protections for 

collateral obtained by customers in the 

existing swaps market and of the costs 

incurred for such protections.68 The 

Commission invites additional comment 

on these subjects, including quantitative 

information. Specifically, the 

Commission invites the submission of 

additional information on the costs of 

each level of protection, as well as the 

submission of detailed quantitative 

information on the effects, if any, of the 

absence of Fellow-Customer Risk on 

guaranty fund levels, margin levels and 

other economic characteristics of the 

use of collateral in the cleared swaps 

market. Additionally, the Commission 

invites the submission of detailed 

quantitative information on the costs 

currently incurred to protect collateral 

in the cleared and uncleared swaps 

markets. 

Finally, some commenters on the 

ANPR stated that swaps, including 

cleared swaps, have inherent 

characteristics that differentiate them 

from exchange-traded futures contracts 

and that affect the magnitude of the 

exposure that Cleared Swaps Customers 

have to Fellow-Customer Risk.69 The 

Commission invites additional comment 

on the prevalence of such characteristics 

and their bearing on the costs and 

benefits of the proposed rule and 

potential alternatives. 

C. Benefits 70

1. Rationale 

a. Fellow-Customer Risk and Investment 

Risk 

The Commission agrees with 

commenters that the Legal Segregation 

Model (whether Complete or with 

Recourse) and the Physical Segregation 

Model would mitigate Fellow-Customer 

Risk and Investment Risk to differing 

extents. With respect to FellowCustomer Risk, the Commission believes 

that: (i) The Physical Segregation Model 

would eliminate Fellow-Customer Risk, 

albeit only to the extent permitted under 

the Bankruptcy Code; 71 (ii) the 

Complete Legal Segregation Model 

would largely mitigate Fellow-Customer 

Risk in FCM defaults of all 

magnitudes; 72 and (iii) the Legal 

Segregation with Recourse Model would 


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73 Id. 

74See CPSS–IOSCO, CPSS–IOSCO Principles 

(March 10, 2011), available at http://www.bis.org/ 

publ/cpss94.pdf. 

75See European Commission, EU Proposal (Sept. 

15, 2010), available at http://ec.europa.eu/ 

internal_market/financial-markets/docs/ 

derivatives/20100915_proposal_en.pdf. 

76See CPSS–IOSCO Principles at 69. 

77See EU Proposal at 10 (Sept. 15, 2010). 

78See section VII(C)(2) herein for a description of 

induced changes in behavior for DCOs if the 

Commission adopts either the Complete Legal 

Segregation or the Legal Segregation with Recourse 

Models. 

79See, e.g., CME at 4, ISDA Supplemental at 6. 

80See, e.g., ISDA Supplemental at 6. 

81E.g., ADM at 3, BlackRock at 5, CIEBA at 2, 4– 

6, FFCB at 4, FHLB at 1, MFA at 8, Tudor at 2. 

82E.g., BlackRock at 5, FHLB at 2. 

83See NewEdge at 3 to 5. 

largely mitigate Fellow-Customer Risk 73

in all but the most extreme FCM 

defaults. 

The Commission agrees with 

commenters that the Physical 

Segregation Model would eliminate 

Investment Risk because the FCM and 

DCO would invest the collateral of one 

cleared swaps customer separately from 

the collateral of another such customer. 

Therefore, the FCM or DCO may 

attribute losses on such investments to 

one particular customer. The 

Commission believes that the Legal 

Segregation Model (whether Complete 

or with Recourse) and the Futures 

Model would not mitigate Investment 

Risk. Such models permit the FCM and 

DCO to hold the collateral of all cleared 

swaps customers in one account, and 

therefore neither the FCM nor the DCO 

would be able to attribute investments 

(and losses thereon) to one particular 

customer. 

b. Portability 

The Commission agrees with 

commenters that the Complete Legal 

Segregation Model and the Physical 

Segregation Model would enhance 

portability of the cleared swaps of nondefaulting customers in the event of an 

FCM default. The Commission notes 

that the Legal Segregation with Recourse 

Model would not likely facilitate 

portability to the same extent, because 

the DCO is unlikely to release the 

collateral of such non-defaulting 

customers until it has completed the 

process of liquidating the portfolio of 

the defaulting FCM and customers. 

Therefore, even if the DCO or trustee 

ports the cleared swaps of nondefaulting customers, such customers 

may need to post additional collateral at 

the non-defaulting FCM to support such 

swaps. Such customers may not be able 

to meet such increased capital demands, 

especially during a time of resource 

scarcity. 

c. Systemic Risk 

The Commission agrees with 

comments that the Complete Legal 

Segregation Model and the Physical 

Segregation Model would most mitigate 

systemic risk by enhancing portability 

of the cleared swaps of non-defaulting 

customers in the event that an FCM 

defaults. The Commission notes that 

certain international regulators also 

emphasize the importance of portability. 

For example, the Consultative Report on 

the Principles for Financial Market 

Infrastructures (the ‘‘CPSS–IOSCO 

Principles’’) 74 issued by the Committee 

on Payment and Settlement Systems 

(‘‘CPSS’’) and the Technical Committee 

of the International Organization of 

Securities Commissions (‘‘IOSCO,’’ and 

together ‘‘CPSS–IOSCO’’) and the 

Proposal for a Regulation on OTC 

Derivatives, Central Counterparties and 

Trade Repositories by the European 

Parliament and Council (the ‘‘EU 

Proposal’’) 75 highlight the importance of 

portability of cleared swaps customer 

contracts and related collateral. As 

stated in the CPSS–IOSCO Principles, 

the ‘‘[e]fficient and complete portability 

of customer positions and collateral is 

important in both pre-default and postdefault scenarios, but is particularly 

critical when a participant defaults or is 

undergoing insolvency proceedings’’.76

The EU Proposal explains that 

segregation and portability are ‘‘critical 

to effectively reduc[ing] counterparty 

credit risk through the use of [central 

counterparties], to achiev[ing] a level 

playing field among European [central 

counterparties] and to protect the 

legitimate interests of clients of clearing 

members’’.77

d. Induced Changes in Behavior 78

The Commission agrees with 

commenters that argued that the better 

the protection that a model affords to 

the collateral of non-defaulting cleared 

swaps customers, the more likely 

customers would leave excess margin at 

an FCM. In contrast, the Commission 

does not find persuasive arguments that 

the Legal Segregation Model (especially 

Complete) and the Physical Segregation 

Model would cause changes in 

behavior, by (i) discouraging cleared 

swaps customers from creating market 

discipline by clearing through less risky 

firms,79 or (ii) discouraging FCMs from 

maintaining substantial excess net 

capital to present a more attractive 

profile to customers.80

With respect to (i), cleared swaps 

customers generally cannot exert 

material market discipline because they 

lack information to accurately assess the 

risk of their FCMs. For example, certain 

commenters noted that cleared swaps 

customers cannot obtain information 

about the risk profile of fellow 

customers.81 Buy-side commenters 

reinforced such observation by stating 

that they would not want fellow 

customers learning of their own risk 

profiles.82 Even if FCMs were to 

disclose general policies regarding the 

risk profiles of customers that they 

accept, it is not clear how cleared swaps 

customers would learn about exceptions 

to the FCM policies that may be granted. 

Given the foregoing, the Commission is 

interested in whether FCM disclosures 

to cleared swaps customers could be 

improved. What measures could FCMs 

take to provide more comprehensive 

and useful disclosures regarding their 

proprietary risks and the risk profiles of 

their customers? For example, one 

commenter suggested that the 

Commission could require FCM 

disclosures to include the following: 

• 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 defaulting assets 

(debits and deficits) 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.83

The Commission requests comment as 

to whether it would make the FCM 

disclosure more useful to customers if 

such disclosure contained one or more 

of the elements above. Which elements 

would be most helpful to customers? 

What would be the cost to FCMs of 

generating such disclosures? What 

would be the costs and benefits to 


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84See, e.g., Newedge Letter of June 8, 2009 at 2 

(‘‘increasing capital requirements does not 

necessarily ensure fiscal solvency.’’), id. at 4 

(increasing capital requirements would be anticompetitive). (Attachment B to the Newedge 

comment to this rulemaking). 

85See section VII(C)(2)(c) infra for additional 

discussion of induced changes in behavior for 

DCOs, including effects on monitoring of FCM risk, 

if the Commission adopts either the Complete Legal 

Segregation or the Legal Segregation with Recourse 

Models. 

86See section IV(A)(2) herein for a more detailed 

description of Commission orders under section 

4d(f) of the CEA. 

87See SIFMA at 3–4, Investment Company 

Institute at 5–6, Futures Industry Association at 6. 

88See Notice of Proposed Rulemaking on Risk 

Management Requirements for Derivatives Clearing 

Organizations, 76 FR 3698 (Jan. 20, 2011). 

customers of receiving and reviewing 

such disclosures? 

With respect to (ii), the Commission 

notes that FCMs have claimed in recent 

net capital rulemakings that 

Commission capital requirements are 

sufficient.84 If such capital requirements 

are sufficient, it would appear that 

excess net capital is not necessary.85

e. Portfolio Margining.86

In response to concerns regarding the 

impact of models other than the Futures 

Model on portfolio margining,87 the 

Commission believes that such impact 

would likely be positive. Specifically, a 

DCO could more easily justify to the 

Commission that issuing an order under 

section 4d(f) of the CEA (or approving 

rules permitting commingling pursuant 

to proposed regulation 39.15(b)(2)) 88 is 

appropriate if the regulations under 

such section mitigate Fellow-Customer 

Risk, since the impact of any different 

risk from the product being brought into 

the portfolio would be limited to the 

customer who chooses to trade that 

product. This is in contrast to the 

Futures Model, where the risks that the 

product being brought into the portfolio 

affect customers who do not—and 

would not—trade that product. 

2. Questions 

The Commission seeks comment on 

the above analysis of benefits accorded 

by each model, including whether there 

are any additional benefits that the 

Commission should consider. What 

benefits would be realized by, 

alternatively, adopting the Futures 

Model? 

D. Proposing the Complete Legal 

Segregation Model: Weighing of Costs 

and Benefits 

As mentioned above, commenters 

generally agreed that customers would 

bear the costs of implementing any 

model. Therefore, the Commission 

believes that it is appropriate to give 

weight to the preference of customers. 

The Commission finds it compelling 

that most (although not all) buy-side 

commenters to the ANPR favored a 

model other than the Futures Model. 

The Commission notes that models 

other than the Futures Model would 

provide more individualized protection 

to cleared swaps customer collateral in 

accordance with section 4d(f) of the 

CEA. Any such model may provide 

substantial benefits in the form of (i) 

decreased Fellow-Customer Risk (as 

well as Investment Risk, in certain 

circumstances), (ii) increased likelihood 

of portability, (iii) decreased systemic 

risk, and (iv) positive impact on 

portfolio margining. The Commission 

seeks additional comments, in 

particular from customers, as to whether 

and why, in light of this NPRM, they 

favor or oppose adoption of the Futures 

Model. The Commission anticipates 

that, to the extent it decides to adopt the 

Futures Model, the proposed rule text 

from proposed regulation 22.2 to 

proposed regulation 22.10 would 

implement such model. The 

Commission notes that changes to the 

language of proposed regulation 22.15 

may be necessary. Specifically, 

proposed regulation 22.15 would need 

to include an additional section to the 

effect that a DCO may, if its rules so 

provide, use the Cleared Swaps 

Customer Collateral of all Cleared 

Swaps Customers of a Depositing 

Futures Commission Merchant that has 

defaulted on a payment to the DCO with 

respect to its Cleared Swaps Customer 

Account. 

In choosing between the Legal 

Segregation Model (whether Complete 

or with Recourse) and the Physical 

Segregation Model, the Commission 

notes that the operational costs for the 

Physical Segregation Model are 

substantially higher than the operational 

costs for the Legal Segregation Model 

(whether Complete or with Recourse). 

With respect to benefits, the 

Commission believes that the Physical 

Segregation Model provides only 

incremental advantages over the Legal 

Segregation Model (whether Complete 

or with Recourse) with respect to the 

mitigation of Fellow-Customer Risk. The 

Physical Segregation Model, unlike the 

Legal Segregation Model (whether 

Complete or with Recourse), does 

eliminate Investment Risk. However, the 

Commission notes that (i) it is 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 

observes that the Physical Segregation 

Model generally enhances portability to 

the same extent as the Complete Legal 

Segregation Model, and therefore would 

have similar effects on systemic risk. 

The Physical Segregation Model and the 

Legal Segregation Model (whether 

Complete or with Recourse) would 

likely enhance portfolio margining to 

the same extent. 

Consequently, after weighing the 

potential costs and benefits of the 

Physical Segregation Model, the 

Commission has decided that this 

model does not provide the best 

balance, in that it provides similar 

benefits as the Legal Segregation Model 

(whether Complete or with Recourse), 

but costs more to implement. Hence, the 

Commission has determined not to 

propose the Physical Segregation Model. 

In choosing between the Complete 

Legal Segregation Model and the Legal 

Segregation with Recourse Model, the 

Commission notes that commenters 

have argued that implementing the 

former would result in significant Risk 

Costs, whereas implementing the latter 

would result in no Risk Costs. As 

mentioned above, the Commission 

finds, at least initially, persuasive 

comments that question the 

assumptions underlying the estimates of 

Risk Costs for the Complete Legal 

Segregation Model. Nevertheless, the 

Commission recognizes that such 

assumptions form an area of divergence 

between commenters, and therefore asks 

for additional comment on the Risk 

Costs for the Complete Legal 

Segregation Model. The Commission 

observes that operational costs for the 

Complete Legal Segregation Model and 

the Legal Segregation with Recourse 

Model are approximately the same. 

With respect to benefits, the 

Commission notes that the Complete 

Legal Segregation Model would mitigate 

Fellow-Customer Risk even in extreme 

FCM defaults, unlike the Legal 

Segregation with Recourse Model. 

Further, the Complete Legal Segregation 

Model would enhance portability (and 

therefore mitigate systemic risk) to a 

significantly greater extent than the 

Legal Segregation with Recourse Model. 

Finally, the Complete Legal Segregation 

Model would have an incremental 

advantage over the Legal Segregation 

with Recourse Model with respect to 

impact on portfolio margining. 

Consequently, after weighing the 

potential costs and benefits, the 

Commission has determined that the 

Complete Legal Segregation Model 

provides the best balance, and therefore 

has determined to propose the Complete 

Legal Segregation Model. Nevertheless, 

because the Commission is still 

evaluating the costs associated with 

such model, as well as with the Legal 


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89See generally section IV(O) below. 

90 11 U.S.C. 761(h). 

91The Commission created the ‘‘account class’’ 

concept in adopting original part 190. See 46 FR 

57535 (Nov. 24, 1981). The Commission noted that 

‘‘the accounts held by a commodity broker would 

be divided into four types or classes: Futures 

accounts, foreign futures accounts, leverage 

accounts and commodity options accounts, which 

correspond to the four estates a commodity broker 

may have based upon the different types of 

transactions it handles for customers.’’ Id. at 57536. 

These classes corresponded to different definitions 

of ‘‘customer’’ found in section 761(9) of the 

Bankruptcy Code: With respect to a ‘‘futures 

commission merchant,’’ a ‘‘foreign futures 

commission merchant,’’ a ‘‘leverage transaction 

merchant,’’ and a ‘‘commodity options dealer.’’ See 

11 U.S.C. 761(9). 

In making that proposal, the Commission cited to 

text in the House Report for the 1978 Bankruptcy 

Code concerning those definitions, which noted 

that: 

It is anticipated that a debtor with multifaceted 

characteristics will have separate estates for each 

different kind of customer. Thus, a debtor that is a 

leverage transaction merchant and a commodity 

options dealer would have separate estates for the 

leverage transaction customers and for the options 

customers, and a general estate for other creditors. 

See H.R. Rep. 95–595 at 355, 1978 U.S.C.C.A.N. 

5963, 6346. 

In the release adopting part 190, the Commission 

added another ‘‘account class,’’ delivery accounts, 

for property related to the making or taking of 

physical delivery by a customer. Delivery accounts 

are not mentioned in section 761(9) of the 

Bankruptcy Code, but are, again, related to a 

‘‘different kind of customer.’’ See 48 FR 8716, 8731 

(Mar. 1, 1983). Similarly, in April of 2010, the 

Commission added another ‘‘account class,’’ for 

cleared OTC transactions. Once again, this 

represented a ‘‘separate estate’’ for a ‘‘different kind 

of customer.’’ See 75 FR 17297 (Apr. 6, 2010). 

Separating cleared swaps customers by the type of 

model the DCO adopts does not fit this tested 

rubric: The customers are all of the same ‘‘kind,’’ 

namely, all cleared swaps customers. 

92See, e.g., ICE at 12, Investment Company 

Institute at 6, LCH at 7. 

93See comment from Jerrold Salzman, available at 

http://comments.cftc.gov/PublicComments/ 

ViewComment.aspx?id=42253&SearchText= 

(discussing the legal segregation of certain customer 

accounts as a way to minimize fellow customer 

risk). 

Segregation with Recourse Model, the 

Commission is also considering the 

Legal Segregation with Recourse 

Model.89

E. The Optional Approach 

1. Rationale 

As mentioned above, a number of 

commenters urged the Commission to 

propose the Optional Approach. The 

Commission has preliminarily declined 

to propose the Optional Approach 

because it may not be compatible with 

the Bankruptcy Code and regulation 

part 190 (‘‘Part 190’’). Specifically, if 

customer collateral cannot be 

transferred, section 766(h) of the 

Bankruptcy Code 90 requires that such 

collateral be distributed on a pro rata 

basis. In implementing this section of 

the Bankruptcy Code, the Commission 

has created in Part 190 the ‘‘account 

class’’ concept, which enables customer 

collateral to be separated into different 

categories for distribution depending on 

the type of customer (i.e., futures 

customer, foreign futures customer, and 

cleared swaps customer) holding a 

claim. All customers belonging to one 

‘‘account class’’ would share pro rata in 

the collateral attributed to that ‘‘account 

class.’’ Therefore, all cleared swaps 

customers would belong to one ‘‘account 

class,’’ and would share pro rata in the 

cleared swaps collateral remaining after 

their contracts are ported or liquidated. 

If, under the Optional Approach, certain 

cleared swaps customers had chosen a 

model that provided more individual 

collateral protection while others had 

not, the former would still share in any 

shortfalls in cleared swaps customer 

collateral resulting from the choices of 

the latter. The Commission notes that 

the ‘‘account class’’ concept, which has 

been tested and upheld in prior 

bankruptcy proceedings, has never 

permitted customers transacting in the 

same type of contracts, with two 

different segregation requirements, to be 

deemed participants in separate 

‘‘account classes.’’ 91

Moreover, as a number of commenters 

have noted, optional models may cause 

legal, regulatory, operational and other 

complexities.92

2. Questions 

It may be possible for the Commission 

to resolve the incompatibility between 

(i) the Optional Approach and (ii) the 

Bankruptcy Code and Part 190, by 

permitting DCOs to require that FCMs 

establish separate legal entities, each of 

which is limited to clearing at DCOs 

that use only one of (A) the Complete 

Legal Segregation Model or (B) the Legal 

Segregation with Recourse Model. The 

Commission notes, however, that this 

approach might cause concerns with 

respect to open access and competition. 

The Commission seeks comment on the 

practicability of this approach. 

• What costs (including 

implementation, operational, and 

capital) would such DCOs and FCMs 

incur? 

• Would FCMs be willing to establish 

such separate legal entities? What 

systemic risk impacts might there be, if 

any? 

• Would such an approach create 

benefits or burdens in other contexts? 

• What would be the effect of this 

approach on competition and on 

opening FCM access to clearing 

organizations? 

In addition, the Commission seeks 

comment on whether the Optional 

Approach should be expanded to add 

the Futures Model as an option. If so, 

what would be the impact on (1) costs, 

(2) the protection of Cleared Swaps 

Customer Collateral, and (3) the 

existence of effective choice by 

customers? 

The Commission also seeks comment 

on whether to implement a model that 

permits DCOs to offer the Physical 

Segregation Model for cleared swaps 

customer collateral for some set of 

customers of their FCM members, with 

the remaining cleared swaps customer 

collateral staying in an omnibus account 

under the Futures Model. (Under this 

model, the customers in question would 

hold claims with respect to the 

collateral placed in physical segregation 

directly against the DCO rather than 

against the FCM through which the 

customers clear.) 93

• How would such a model work in 

the ordinary course of business (i.e., 

pre-FCM member default)? For example, 

how would an FCM and a DCO 

structure their respective cash flows to 

accommodate such model? To the 

extent that an FCM or DCO may 

structure their cash flows in different 

ways, what are the issues, costs, or risks 

of each way? 

• What changes to proposed Part 22 

and Part 190 should the Commission 

make to accommodate this model? 

• Who (e.g., the cleared swaps 

customer, FCM member, and DCO) 

would have what rights in cleared 

swaps customer collateral at every stage 

of clearing (including with respect to 

initial margin and variation payments 

and collections)? 

• In the event of an FCM bankruptcy, 

would such cleared swaps customer 

collateral constitute ‘‘customer property’’ 

subject to ratable distribution pursuant 

to section 766(h) of the Bankruptcy 

Code? 

Æ To what extent would the answer to 

this question depend on the manner in 

which the FCM and the DCO structured 

their respective cash flows in the 

ordinary course of business? 

Æ To the extent cleared swaps 

customer collateral is removed from 

‘‘customer property’’: 

› What vulnerabilities might that 

raise for the protection of such collateral 

in an FCM or a DCO bankruptcy? For 

example, is there a risk that, in some 

circumstances, such property might be 

deemed to be part of a bankrupt FCM’s 

or DCO’s bankruptcy estate subject to 

the claims of creditors other than the 

relevant swaps customers? 

› What changes would need to be 

made to self-regulatory organization 

audit programs to ensure protection of 


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33830 Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 

94Under 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.’’ 

95The Commission is proposing to define 

‘‘permitted depository’’ as a depository that meets 

the following conditions: 

(a) The depository must (subject to proposed 

regulation 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 FCM or the DCO must hold a written 

acknowledgment letter from the depository as 

required by proposed regulation 22.5. See also the 

discussion under section IV(D). 

96Tangible items may include, e.g., gold ingots or 

warehouse receipts, as discussed further below. 

97 Intangible items may include, e.g., wire 

transfers or dematerialized securities, as discussed 

further below. 

98 7 U.S.C. 1a(7). The Commission is working on 

regulations, along with the Securities and Exchange 

Commission, that would further define certain key 

terms of the Dodd-Frank Act, including ‘‘swaps.’’ 

See Definitions Contained in Title VII of DoddFrank Wall Street Reform and Consumer Protection 

Act, 75 FR 51429 (Aug. 20, 2010). Such regulations, 

when finalized, would automatically be 

incorporated in the definition of ‘‘cleared swap’’ 

cited herein. 

99 7 U.S.C. 6d(a). 

cleared swaps customer collateral prebankruptcy? 

• Should such a model be an option 

elected by cleared swaps customers, or 

mandatory for defined ‘‘high-risk’’ 

customers? 

Æ By whom would the definition of 

‘‘high-risk’’ be set? 

Æ What criteria should be included in 

the definition of ‘‘high risk’’? 

Æ Would the definition of ‘‘high risk’’ 

vary by asset class? 

• To the extent the model is optional 

by a cleared swaps customer, to what 

extent might there be a tendency for 

cleared swaps customers posing greater 

risk to remain in the omnibus pool? 

What policy concerns, if any, might be 

raised by the inclusion of a larger 

concentration of cleared swaps 

customers posing greater risk in the 

omnibus pool? 

Please provide a detailed quantitative 

analysis of the costs and benefits of this 

model relative to other models that are 

being considered in this NPRM, and 

relative to the existing uncleared swaps 

market. Please specify how each cost 

and benefit would be ultimately 

allocated to, or borne by, cleared swaps 

customers, FCMs and DCOs. 

Specifically, how would this type of 

model affect operational costs and Risk 

Costs? 

F. Structure of These Proposed 

Regulations 

Proposed regulation part 22 (‘‘Part 

22’’) establishes the basic architecture 

for protecting cleared swaps customer 

collateral through the promulgation of 

definitions and procedures for the 

segregation of cleared swaps pertaining 

to customers, as well as associated 

collateral. The Commission intends for 

proposed Part 22 to incorporate legal 

segregation, and to parallel, for the most 

part, the substance of corresponding 

provisions in part 1 to Title 17 (the ‘‘Part 

1 Provisions’’), in updated and clarified 

form, with respect to issues such as 

requirements for treatment of customer 

funds on a day-to-day basis, required 

amounts of collateral in customer 

accounts, and required qualifications for 

permitted depositories. While most of 

the proposed regulations in Part 22 will 

remain the same for the Complete Legal 

Segregation Model and the Legal 

Segregation with Recourse Model, 

proposed regulation 22.15 sets forth 

alternatives to take into account the fact 

that, under the Legal Segregation with 

Recourse Model, following an event of 

default a DCO would be able to access 

the collateral of non-defaulting cleared 

swaps customers after the DCO applied 

(i) its own capital to cure the default 

and (ii) the guaranty fund contributions 

of its non-defaulting FCM members. 

The infrastructure supporting legal 

segregation is established in proposed 

regulations 22.11–22.16, including (i) 

the requirement that an FCM transmit to 

its DCO daily information regarding 

customers and their swaps, (ii) tools that 

the DCO may use to manage the risk it 

incurs with respect to individual 

customers, (iii) steps the FCM is 

required to take if it fails to meet a 

cleared swaps customer margin call in 

full, and (iv) an explicit requirement 

that cleared swaps customer collateral 

be treated on an individual basis. The 

Commission requests comment on 

whether Part 22 differs in substance 

from the Part 1 Provisions, other than in 

the specific instances described in this 

NPRM. 

In addition, proposed revisions to Part 

190 of the Commission’s regulations 

generally implement changes wrought 

by the Dodd-Frank Act, including the 

inclusion of swaps cleared with a DCO 

as customer contracts for all commodity 

brokers, the inclusion of swaps 

execution facilities as a category of 

trading venue, and additional 

conforming changes to time periods. 

Additional proposed changes have been 

made to conform Part 190 to current 

market practices (e.g., providing for 

auctions of swaps portfolios in the event 

of a commodity broker insolvency). 

IV. Section by Section Analysis: 

Segregation of Cleared Swaps for 

Customers 

A. Proposed Regulation 22.1: Definitions 

Proposed regulation 22.1 establishes 

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,’’ 94

‘‘collecting futures commission 

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

‘‘depositing futures commission 

merchant,’’ ‘‘permitted depository,’’ 95

and ‘‘segregate.’’ 

1. ‘‘Segregate’’ and ‘‘Commingle’’ 

The Commission has never defined 

the terms ‘‘segregate’’ and ‘‘commingle,’’ 

although the Part 1 Provisions make 

extensive use of these terms. Regulation 

22.1 proposes definitions for these terms 

that are intended to codify the common 

meaning of such terms under 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, 

to ‘‘commingle’’ two or more items 

means to hold them in the same 

account, or to combine such items in a 

transfer between accounts. For purposes 

of these definitions, to keep items in 

separate accounts means: (i) To hold 

tangible items 96 physically separate 

within one’s own organization; (ii) to 

deposit tangible or intangible items 97

with a Permitted Depository (as 

discussed further below) in separate 

accounts; and (iii) to reflect tangible or 

intangible items in separate entries in 

books and records. To hold items in the 

same account means exactly the 

opposite—namely, (i) to hold tangible 

items physically together within one’s 

own organization; (ii) to deposit tangible 

or intangible items with a Permitted 

Depository in the same account; and (iii) 

to reflect tangible or intangible items in 

the same entries in books and records. 

2. ‘‘Cleared Swap’’ 

The term ‘‘Cleared Swap’’ has no 

analog in the Part 1 Provisions. 

Regulation 22.1 proposes a definition 

that incorporates section 1a(7) of the 

CEA,98 as added by section 721 of the 

Dodd-Frank Act. This definition then 

excludes, for purposes of Part 22 only, 

cleared swaps (and related collateral) 

that, pursuant to Commission order 

under section 4d(a) of the CEA,99 are 


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100 7 U.S.C. 6d(f). 

101For example, current regulation 190.01(a) 

states: ‘‘* * * if positions in commodity contracts 

that would otherwise belong to one account class 

(and the money, securities, and/or other property 

margining, guaranteeing, or securing such 

positions), are, pursuant to a Commission order, 

commingled with positions in commodity contracts 

of the futures account class (and the money, 

securities, and/or other property margining, 

guaranteeing, or securing such positions), then the 

former positions (and the relevant money, 

securities, and/or other property) shall be treated, 

for purposes of this part, as being held in an 

account of the futures account class.’’ 17 CFR 

190.01(a). In the notice proposing current regulation 

190.01(a), 74 FR 40794 (Aug. 13, 2009), the 

Commission stated that the regulation codified two 

previous interpretative statements: (i) The 

Interpretative Statement Regarding Funds Related 

to Cleared-Only Contracts Determined To Be 

Included in a Customer’s Net Equity, 73 FR 65514 

(Nov. 4, 2008); and (ii) the Interpretative Statement 

Regarding Funds Determined to be Held in the 

Futures Account Type of Customer Account Class, 

69 FR 69510 (Nov. 30, 2004). 

102 17 CFR 1.3. 

103 17 CFR 30.1(c). 

104The contracts (and related collateral) of such 

entity would be subject to three different 

segregation regimes. Specifically, the entity would 

be entitled to the protections of (i) the 

Corresponding Provisions with respect to its futures 

contracts (and related collateral), (ii) regulation 30.7 

with respect to its foreign futures contracts (and 

related collateral), and (iii) Part 22 with respect to 

its Cleared Swaps (and related collateral). 

105Proposed 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.’’ 

106The Commission does not intend to include in 

Part 22 a parallel to regulation 1.21, given that (i) 

regulation 22.1 proposes to broadly include 

‘‘accruals’’ in the definition of ‘‘Cleared Swaps 

Customer Collateral’’ and (ii) regulation 22.2(c) 

proposes to permit an FCM to commingle the 

‘‘Cleared Swaps Customer Collateral’’ of multiple 

‘‘Cleared Swaps Customers.’’ 

Regulation 1.21 states: ‘‘All money received 

directly or indirectly by, and all money and equities 

accruing to, a futures commission merchant from 

any clearing organization or from any clearing 

member or from any member of a contract market 

incident to or resulting from any trade, contract or 

commodity option made by or through such futures 

commission merchant on behalf of any commodity 

or option customer shall be considered as accruing 

to such commodity or option customer within the 

meaning of the Act and these regulations. Such 

money and equities shall be treated and dealt with 

as belonging to such commodity or option customer 

in accordance with the provisions of the Act and 

these regulations. Money and equities accruing in 

connection with commodity or option customers’ 

open trades, contracts, or commodity options need 

not be separately credited to individual accounts 

but may be treated and dealt with as belonging 

undivided to all commodity or option customers 

having open trades, contracts, or commodity option 

positions which if closed would result in a credit 

to such commodity or option customers.’’ 17 CFR 

1.21. 

The Commission requests comment on whether it 

should include in Part 22 a parallel to regulation 

1.21. 

107 17 CFR 1.3. 

108 In addition to these three instances, the 

proposed definition does not incorporate certain 

parallels to regulation 1.3 (exclusion from 

‘‘customer funds’’ of collateral to secure security 

futures products in a securities account) because 

such parallels are not applicable to the context of 

Cleared Swaps (and related collateral). 

109 17 CFR 1.25. 

commingled with futures contracts (and 

related collateral) in an account 

established for the futures contracts. 

The definition conversely includes, for 

purposes of Part 22 only, futures 

contracts or foreign futures contracts 

(and, in each case, related collateral) 

that, pursuant to Commission order 

under section 4d(f) of the CEA,100 are 

commingled with cleared swaps (and 

related collateral) in an account 

established for the cleared swaps. The 

rationale for such exclusion and 

inclusion is that, under Commission 

precedent,101 once cleared swaps (and 

related collateral) are commingled with 

futures contracts (and related collateral) 

in a futures account, the Part 1 

Provisions and the Bankruptcy Rules 

would apply to the cleared swaps (and 

related collateral) as if such swaps 

constituted futures contracts (and 

related collateral). Similarly, once 

futures contracts or foreign futures 

contracts (and, in each case, related 

collateral) are commingled with cleared 

swaps (and related collateral) in a 

cleared swaps account, the proposed 

definition of ‘‘Cleared Swap’’ would 

apply Part 22 and the Bankruptcy Rules 

to the former contracts as if they 

constituted cleared swaps (and related 

collateral). Therefore, the proposed 

definition of ‘‘Cleared Swap,’’ with such 

exclusion and inclusion, simply extends 

Commission precedent. 

3. ‘‘Cleared Swaps Customer’’ and 

‘‘Customer’’ 

Regulation 22.1 proposes a definition 

of ‘‘Cleared Swaps Customer’’ that has 

two elements. First, an entity holding a 

Cleared Swaps Proprietary Account (as 

discussed further below) is not a 

‘‘Cleared Swaps Customer’’ with respect 

to the Cleared Swaps (and related 

collateral) in that account. Such 

exclusion is consistent with regulation 

1.3,102 which defines ‘‘customer’’ and 

‘‘commodity customer’’ for futures 

contracts. Second, an entity is only a 

‘‘Cleared Swaps Customer’’ with respect 

to its Cleared Swaps (and related 

collateral). Additionally, the same entity 

may be a ‘‘customer’’ or ‘‘commodity 

customer’’ (as regulation 1.3 defines 

such terms) with respect to its futures 

contracts, and a ‘‘foreign futures or 

foreign options customer’’ (as regulation 

30.1(c) 103 defines such term) with 

respect to its foreign futures 

contracts.104 Because certain provisions 

of Part 22 distinguish the status of such 

entity (i) as a ‘‘Cleared Swaps Customer’’ 

and (ii) as a ‘‘customer’’ or ‘‘commodity 

customer’’ or ‘‘foreign futures or options 

customer,’’ regulation 22.1 proposes a 

definition for ‘‘Customer’’ that includes 

any customer of an FCM other than a 

‘‘Cleared Swaps Customer.’’ 

4. ‘‘Cleared Swaps Customer Collateral’’ 

Regulation 22.1 proposes to define 

‘‘Cleared Swaps Customer Collateral’’ to 

include money, securities, or other 

property that an FCM or a DCO receives, 

from, for, or on behalf of a Cleared 

Swaps Customer, which (i) is intended 

to or does margin, guarantee, or secure 

a Cleared Swap,105 or (ii) if the Cleared 

Swap is in the form or nature of an 

option, constitutes the settlement value 

of such option. Additionally, regulation 

22.1 proposes to define ‘‘Cleared Swaps 

Customer Collateral’’ to include 

‘‘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.106

In general, the proposed definition 

parallels regulation 1.3,107 which 

defines ‘‘customer funds’’ for futures 

contracts. However, the proposed 

definition differs from regulation 1.3 in 

three instances.108 First, the proposed 

definition explicitly includes a Cleared 

Swap in the form or nature of an option 

as ‘‘Cleared Swaps Customer Collateral.’’ 

The Commission believes that such 

change appropriately clarifies that a 

Cleared Swap functioning as an option, 

but not labeled as one, falls within the 

scope of the proposed definition. 

Second, the proposed definition does 

not explicitly include option premiums 

as ‘‘Cleared Swaps Customer Collateral.’’ 

The Commission believes that such 

amounts are already incorporated in the 

settlement value of the option, and that 

listing such amounts separately may 

cause unnecessary confusion. Third, the 

proposed definition explicitly includes 

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. The Commission believes 

that such inclusion is appropriate since 

proposed regulation 22.3 permits a DCO 

to invest the ‘‘Cleared Swaps Customer 

Collateral’’ that it receives from the FCM 

in accordance with regulation 1.25.109

Therefore, any increases in value 


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110 17 CFR 1.3. 

111 Id. 

112Regulation 1.20(a) states: ‘‘Under no 

circumstances shall any portion of customer funds 

be obligated to a clearing organization, any member 

of a contract market, a futures commission 

merchant, or any depository except to purchase, 

margin, guarantee, secure, transfer, adjust or settle 

trades, contracts or commodity option transactions 

of commodity or option customers.’’ 17 CFR 1.20(a). 

113Regulation 1.20(a) states: ‘‘All customer funds 

shall be separately accounted for and segregated as 

belonging to commodity or option customers.’’ Id. 

Regulation 1.26(a) states: ‘‘Each futures 

commission merchant who invests customer funds 

in instruments described in Sec. 1.25 shall 

separately account for such instruments and 

segregate such instruments as belonging to such 

commodity or option customers.’’ 17 CFR 1.26. 

114Regulation 1.20(a) does not require that an 

FCM hold ‘‘customer funds’’ in a depository. Rather, 

it applies certain requirements to the holding of 

‘‘customer funds when deposited with any bank, 

trust company, clearing organization or another 

futures commission merchant * * *’’ (emphasis 

added). In the absence of a requirement to use a 

depository, regulation 1.20(a) must implicitly 

permit the FCM to hold ‘‘customer funds’’ itself. Id. 

Regulation 1.26(a) contains similar language 

regarding the use of a depository. Id. 

resulting from the investment would 

properly belong to the Cleared Swaps 

Customer, and would constitute another 

form of ‘‘Cleared Swaps Customer 

Collateral.’’ 

5. ‘‘Cleared Swaps Customer Account’’ 

and ‘‘Cleared Swaps Proprietary 

Account’’ 

Regulation 22.1 proposes to define 

‘‘Cleared Swaps Customer Account’’ as 

(i) an account that an FCM maintains at 

a Permitted Depository (as such term is 

discussed below) 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. The proposed definition 

does not include any physical locations 

in which an FCM or a DCO may itself 

hold tangible Cleared Swaps Customer 

Collateral. As described below, 

regulations 22.2 and 22.3 propose to 

define such physical locations as the 

‘‘FCM Physical Location’’ and the ‘‘DCO 

Physical Location,’’ respectively. The 

proposed definition is consistent with 

regulation 1.3,110 which defines ‘‘futures 

account.’’ However, the proposed 

definition provides greater specificity 

than regulation 1.3 regarding (i) the 

entities maintaining the ‘‘Cleared Swaps 

Customer Account’’ (i.e., the FCM or 

DCO) and (ii) the Permitted Depositories 

for a ‘‘Cleared Swaps Customer 

Account.’’ 

Regulation 22.1 proposes a definition 

for ‘‘Cleared Swaps Proprietary 

Account’’ that is substantially similar to 

regulation 1.3, which defines 

‘‘Proprietary Account’’ for futures 

contracts.111 The proposed definition 

contains a proviso, in paragraph (b)(8), 

that states ‘‘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.’’ This 

proviso parallels paragraph viii in the 

definition of ‘‘Proprietary Account’’ in 

regulation 1.3. The Commission 

requests comment on whether this 

proviso remains relevant, and, in 

particular, with respect to Cleared 

Swaps. 

6. ‘‘Collecting Futures Commission 

Merchant’’ and ‘‘Depositing Futures 

Commission Merchant’’ 

The terms ‘‘Collecting Futures 

Commission Merchant’’ and ‘‘Depositing 

Futures Commission Merchant’’ have no 

analogs in the Part 1 Provisions. 

Regulation 22.1 proposes to define a 

‘‘Collecting Futures Commission 

Merchant’’ 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 Customer 

Collateral. In contrast, regulation 22.1 

proposes to define a ‘‘Depositing Futures 

Commission Merchant’’ as one that 

carries Cleared Swaps on behalf of its 

Cleared Swaps Customers through a 

Collecting Futures Commission 

Merchant, and, as part of doing so, 

deposits Cleared Swaps Customer 

Collateral with such Collecting Futures 

Commission Merchant. Regulation 22.7, 

as described below, proposes to employ 

the terms ‘‘Collecting Futures 

Commission Merchant’’ and ‘‘Depositing 

Futures Commission Merchant’’ to 

delineate the circumstances in which 

one FCM may serve as a Permitted 

Depository to another. 

B. Proposed Regulation 22.2—Futures 

Commission Merchants: Treatment of 

Cleared Swaps Customer Collateral 

Regulation 22.2 proposes 

requirements for an FCM’s treatment of 

Cleared Swaps Customer Collateral, as 

well as the associated Cleared Swaps. 

1. In General 

Regulation 22.2(a) proposes to require 

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. In 

other words, the FCM may not use 

Cleared Swaps Customer Collateral to 

cover or support (i) its own obligations 

or (ii) the obligations of Customers (e.g., 

entities transacting in futures or equities 

contracts). Such proposal parallels 

regulations 1.20(a) and 1.26(a), which 

apply to ‘‘customer funds,’’ and 

obligations purchased with customer 

funds, for futures contracts.112

2. Location of Collateral 

Regulation 22.2(b) proposes to require 

that an FCM segregate all Cleared Swaps 

Customer Collateral that it receives. 

Such proposal parallels regulations 

1.20(a) and 1.26(a).113 Additionally, 

regulation 22.2(b) proposes to require 

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). 

a. The First Method 

Paralleling an implicit assumption of 

regulations 1.20(a) and 1.26(a), the first 

method permits the FCM to hold 

Cleared Swaps Customer Collateral 

itself.114 Continuing such parallel, the 

first method limits the FCM to holding 

tangible collateral (e.g., gold ingots or 

warehouse receipts) because no FCM 

currently serves as a depository 

registered with domestic or foreign 

banking regulators, and because of 

uncertainty regarding the effectiveness 

of such segregation if an FCM that was 

so registered held intangible collateral 

in its own accounts. Finally, the first 

method requires the FCM, in holding 

such Cleared Swaps Customer 

Collateral, to: 

• Physically separate the collateral 

from FCM property (e.g., in a box or 

vault); 

• Clearly identify each physical 

location (an ‘‘FCM Physical Location’’) 

in which it holds such collateral as a 

‘‘Location of Cleared Swaps Customer 

Collateral’’ (e.g., by affixing a label or 

sign to the box or vault); 

• Ensure that the FCM Physical 

Location provides appropriate 

protection for such collateral (e.g., by 

confirming that the box or vault has 

locks and is fire resistant); and 

• Record in its books and records the 

amount of such collateral separately 

from FCM funds (i.e., to reflect the 

reality of physical separation in books 

and records). 


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115Regulation 1.20(a) states: ‘‘All customer funds 

shall be separately accounted for and segregated as 

belonging to commodity or option customers. Such 

customer funds when deposited with any bank, 

trust company, clearing organization or another 

futures commission merchant shall be deposited 

under an account name which clearly identifies 

them as such and shows that they are segregated as 

required by the Act and this part.’’ Id. Regulation 

1.26(a) contains similar language. Id. 

116 If an FCM chooses to accept intangible Cleared 

Swaps Customer Collateral, then the proposal 

effectively requires the FCM to maintain such 

collateral outside of itself. If the FCM accepts 

tangible Cleared Swaps Customer Collateral (e.g., a 

gold ingot) and transfers such collateral to a 

depository (e.g., a DCO), the FCM will be 

considered to be depositing such collateral rather 

than maintaining the collateral itself. 

117As 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 

proposed 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 proposed 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). 

118Regulations 1.20(a) and 1.26(a) implicitly 

(i) permit the FCM to commingle ‘‘customer funds’’ 

from multiple futures customers and (ii) prohibit 

the FCM from commingling ‘‘customer funds’’ with 

either FCM funds or funds supporting customer 

transactions in non-futures contracts. Specifically, 

regulation 1.20(a) states: ‘‘All customer funds shall 

be separately accounted for and segregated as 

belonging to commodity or option customers.’’ 

Similarly, regulation 1.26(a) states: ‘‘Each futures 

commission merchant who invests customer funds 

in instruments described in Sec. 1.25 shall 

separately account for such instruments and 

segregate such instruments as belonging to such 

commodity or option customers.’’ 17 CFR 1.20(a) 

and 1.26(a). 

Regulation 1.20(c), in contrast, first explicitly 

prohibits an FCM from commingling the ‘‘customer 

funds’’ of one futures customer with (i) ‘‘customer 

funds’’ of another futures customer, (ii) funds 

supporting customer transactions in non-futures 

contracts (e.g., the ‘‘foreign futures and options 

secured amount,’’ as defined in regulation 1.3), and 

(iii) FCM funds. Specifically, regulation 1.20(c) 

states: ‘‘Each futures commission merchant shall 

treat and deal with the customer funds of a 

commodity customer or of an option customer as 

belonging to such commodity or option customer. 

All customer funds shall be separately accounted 

for, and shall not be commingled with the money, 

securities, or property of a futures commission 

merchant or of any other person. * * *’’ 

Notwithstanding the foregoing, however, regulation 

1.20(c) then permits an FCM to commingle 

‘‘customer funds’’ of multiple futures customers for 

convenience. Specifically, regulation 1.20(c) 

contains the following proviso: ‘‘Provided, however, 

that customer funds treated as belonging to the 

commodity or option customers of a futures 

commission merchant may for convenience be 

commingled and deposited in the same account or 

accounts with any bank or trust company, with 

another person registered as a futures commission 

merchant, or with a clearing organization. * * *’’ 

Regulation 1.20(c) does not contain a similar 

exception for (i) funds supporting customer 

transactions in non-futures contracts or (ii) FCM 

funds. 17 CFR 1.20(c). 

119Regulation 1.20(c) states: ‘‘All customer funds 

shall be separately accounted for, and shall not 

* * * be used to secure or guarantee the trades, 

contracts or commodity options, or to secure or 

extend the credit, of any person other than the one 

for whom the same are held.’’ Id. 

Regulation 1.22 states: ‘‘No futures commission 

merchant shall use, or permit the use of, the 

customer funds of one commodity and/or option 

customer to purchase, margin, or settle the trades, 

contracts, or commodity options of, or to secure or 

extend the credit of, any person other than such 

customer or option customer.’’ 17 CFR 1.22. 

120As mentioned above, an entity may 

simultaneously transact (i) futures contracts, 

(ii) foreign futures contracts, and (iii) Cleared 

Swaps. Such entity would constitute a Cleared 

Swaps Customer only with respect to its Cleared 

Swaps. 

121Regulation 1.22 further states: ‘‘Customer 

funds shall not be used to carry trades or positions 

of the same commodity and/or option customer 

other than in commodities or commodity options 

traded through the facilities of a contract market.’’ 

17 CFR 1.22. 

122Regulation 1.24 states: ‘‘Money held in a 

segregated account by a futures commission 

merchant shall not include: (a) Money invested in 

obligations or stocks of any clearing organization or 

in memberships in or obligations of any contract 

market; or (b) money held by any clearing 

organization which it may use for any purpose 

other than to purchase, margin, guarantee, secure, 

transfer, adjust, or settle the contracts, trades, or 

commodity options of the commodity or option 

customers of such futures commission merchant.’’ 

17 CFR 1.24. 

b. The Second Method 

Paralleling an explicit provision of 

regulations 1.20(a) and 1.26(a),115 the 

second method permits the FCM to hold 

Cleared Swaps Customer Collateral 

outside of itself, i.e., at a depository.116

Continuing that parallel, the second 

method limits the FCM to certain 

Permitted Depositories (as further 

discussed below), and requires that the 

FCM deposit such collateral in a Cleared 

Swaps Customer Account. 

3. Commingling 

Regulation 22.2(c) proposes to permit 

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’’ for futures 

contracts (as regulation 1.3 defines such 

term) 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)).117

Proposed regulation 22.2(c) parallels 

regulations 1.20(a), 1.20(c), and 

1.26(a).118

4. Limitations on Use 

Regulation 22.2(d) proposes certain 

limitations on the use that an FCM may 

make of Cleared Swaps Customer 

Collateral. First, regulation 22.2(d)(1) 

proposes to prohibit an FCM from using, 

or permitting the use of, the Cleared 

Swaps Customer Collateral or 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. Such 

proposal parallels regulation 1.20(c) and 

1.22.119 Second, regulation 22.2(d)(2) 

proposes to prohibit an FCM from 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.120 Such proposal parallels 

regulation 1.22.121

Regulation 22.2(d)(2) proposes to 

prohibit an FCM from imposing, or 

permitting the imposition of, a lien on 

Cleared Swaps Customer Collateral, 

including on any FCM residual financial 

interest therein (as regulation 22.2(e)(3) 

discusses further). The Commission 

believes that such a prohibition, in the 

event that an FCM becomes insolvent, 

would preempt the claim of an FCM 

creditor against any portion of the 

Cleared Swaps Customer Collateral, and 

would thereby prevent the FCM creditor 

from interfering with the porting of such 

collateral to a solvent FCM. 

Regulation 22.2(d)(3) proposes to 

prohibit an FCM from claiming that any 

of the following constitutes Cleared 

Swaps Customer Collateral: 

• Money invested in the securities, 

memberships, or obligations of any 

DCO, DCM, SEF, or 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. 

Such proposal parallels regulation 

1.24.122

5. Exceptions 

Regulation 22.2(e) proposes certain 

exceptions to the abovementioned 

requirements and limitations. 

a. Permitted Investments 

Proposed regulation 22.2(e)(1) 

constitutes an exception to regulation 

22.2(d) (Limitations on Use). Regulation 

22.2(e)(1) proposes to allow an FCM to 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
33834 Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 

123One commenter, Federated Investors, Inc. 

(Freeman and Hawke), argues that limitations on 

the investment of customer collateral in money 

market mutual funds are inappropriate for futures, 

and even more inappropriate for swaps. As 

mentioned above, the Commission has proposed 

amendments to regulation 1.25. See Investment of 

Customer Funds and Funds Held in an Account for 

Foreign Futures and Foreign Options Transactions, 

75 FR 67642 (Nov. 3, 2010). With respect to 

limitations on investment of cleared swaps 

customer collateral, the Dodd-Frank Act provides, 

in newly-enacted section 4d(f)(4) of the CEA, that 

such collateral 

* * * may be invested in obligations of the 

United States, in general obligations of any State or 

of any political subdivision of a State, and in 

obligations fully guaranteed as to principal and 

interest by the United States, or in any other 

investment that the Commission may by rule or 

regulation prescribe * * *. 

Thus, with the exception of the specified 

government obligations, Congress chose not to 

mandate any specific acceptable customer 

investments. In exercising the power granted under 

section 4d(f)(4) to expand the universe of acceptable 

customer investments, the Commission is seeking 

the same goals as in regulation 1.25—namely, 

preserving principal and maintaining liquidity. See 

75 FR at 67646. Accordingly, the Commission is 

proposing to incorporate the provisions of 

regulation 1.25 (as amended from time to time) by 

reference. 

124Regulation 1.20(c) states: ‘‘* * * customer 

funds may be invested in instruments described in 

Sec. 1.25.’’ 17 CFR 1.20(c). 

125Regulation 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 infra note 127. 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. 

126See regulation 1.12(h) (requiring an FCM that 

learns of a deficiency in segregated funds to notify 

the Commission and the FCM’s designated selfregulatory organization of that deficiency). 

127Regulation 1.23 states: ‘‘The provision in 

section 4d(a)(2) of the Act and the provision in 

§ 1.20(c), which prohibit the commingling of 

customer funds with the funds of a futures 

commission merchant, shall not be * * * construed 

to prevent a futures commission merchant from 

adding to such segregated customer funds such 

amount or amounts of money, from its own funds 

or unencumbered securities from its own inventory, 

of the type set forth in § 1.25, as it may deem 

necessary to ensure any and all commodity or 

option customers’ accounts from becoming under 

segregated at any time.’’ 17 CFR 1.23. 

128Regulation 1.23 states, in addition to the text 

in note 127 supra: ‘‘The provision in section 4d(a)(2) 

of the Act and the provision in § 1.20(c), which 

prohibit the commingling of customer funds with 

the funds of a futures commission merchant, shall 

not be construed to prevent a futures commission 

merchant from having a residual financial interest 

in the customer funds, segregated as required by the 

Act and the rules in this part and set apart for the 

benefit of commodity or option customers * * * 

The books and records of a futures commission 

merchant shall at all times accurately reflect its 

interest in the segregated funds. A futures 

commission merchant may draw upon such 

segregated funds to its own order, to the extent of 

its actual interest therein, including the withdrawal 

of securities held in segregated safekeeping 

accounts held by a bank, trust company, contract 

market, clearing organization or other futures 

commission merchant. Such withdrawal shall not 

result in the funds of one commodity and/or option 

customer being used to purchase, margin or carry 

the trades, contracts or commodity options, or 

extend the credit of any other commodity customer, 

option customer or other customer.’’ Id. 

129See regulations 1.20(a) and (c) and 1.26(a). 130See regulation 1.20(c). 131See regulations 1.20(c) and 1.25. 

132Regulation 1.32 states: ‘‘Each futures 

commission merchant must compute as of the close 

of each business day, on a currency-by-currency 

basis * * * (2) the amount of such customer funds 

required by the Act and these regulations to be on 

deposit in segregated accounts on behalf of such 

commodity and option customers. * * *’’ 17 CFR 

1.32. 

133Regulation 1.20. 

invest Cleared Swaps Customer 

Collateral in accordance with regulation 

1.25, as such regulation may be 

amended from time to time. Regulation 

1.25 delineates permitted investments of 

‘‘customer funds’’ (as regulation 1.3 

defines such term) for futures 

contracts.123

By allowing certain investments of 

Cleared Swaps Customer Collateral, 

proposed regulation 22.2(e)(1) parallels 

regulation 1.20(c).124

b. Permitted Withdrawals 

Proposed regulation 22.2(e)(2) permits 

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. Regulation 22.2(e)(2) 

parallels regulation 1.20(c) and 

implements section 4d(f)(3)(A)(ii). 

c. Deposits of Own Money, Securities, 

or Other Property 

Proposed regulation 22.2(e)(3) 

constitutes an exception to regulations 

22.2(b) (Location of Cleared Swaps 

Customer Collateral) and (c) 

(Commingling). Regulation 22.2(e)(3) 

proposes to permit 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.125 As further explained below, 

proposed regulation 22.2(f) 

(Requirements as to Amount) mandates 

an FCM to use its own capital to cover 

the negative account balance of any 

Cleared Swaps Customer. To avoid the 

possibility of a deficiency,126 an FCM 

may choose to place or deposit, in 

advance, its own property in an FCM 

Physical Location or a Cleared Swaps 

Customer Account, as applicable. By 

permitting such placement or deposit, 

proposed regulation 22.2(e)(3) parallels 

regulation 1.23.127

d. Residual Financial Interest 

Proposed regulation 22.2(e)(4) 

clarifies 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. This regulation 

would permit an FCM to retain a 

residual financial interest in property in 

excess of that necessary to comport with 

proposed regulation 22.2(f) 

(Requirements as to Amount). It allows 

the FCM to make withdrawals from the 

FCM Physical Location or the Cleared 

Swaps Customer Account, as applicable, 

so long as the FCM first ascertains that 

such withdrawals do not surpass its 

residual financial interest. In general, 

proposed regulation 22.2(e)(4) parallels 

regulation 1.23.128

e. Requirements as to Amount 

i. Background 

Proposed regulation 22.2(f) sets forth 

an explicit calculation for the value of 

Cleared Swaps Customer Collateral that 

each FCM must hold, which parallels 

the implicit calculation in the Part 1 

Provisions. The Part 1 Provisions clearly 

require an FCM to segregate ‘‘customer 

funds’’ (as regulation 1.3 defines such 

term) for futures contracts.129 However, 

the Part 1 Provisions also consider 

‘‘customer funds’’ to be fungible. 

Specifically, because the Part 1 

Provisions permit FCM commingling of 

‘‘customer funds’’ from multiple futures 

customers 130 and FCM investment of 

such funds,131 the Part 1 Provisions 

implicitly allow an FCM to meet its 

obligations without maintaining the 

exact property that each futures 

customer conveys. The Part 1 Provisions 

do require an FCM to maintain, at a 

minimum, an overall amount of 

‘‘customer funds’’ in segregation.132

Nevertheless, the Part 1 Provisions do 

not set forth an explicit calculation for 

such amount. Instead, the Part 1 

Provisions imply that an FCM must 

maintain an amount in segregation that 

would prevent the FCM from using the 

‘‘customer funds’’ of one futures 

customer to ‘‘secure or guarantee the 

trades, contracts or commodity options, 

or to secure or extend the credit of any 

person other than the one for whom the 

same are held.’’ 133 Form 1–FR–FCM 

builds upon this implicit calculation. 

ii. Proposed Requirement 

Consistent with the intention of the 

Commission to incorporate updated and 

clarified versions of the Part 1 

Provisions in Part 22, the Commission 

proposes an explicit calculation for the 

amount of Cleared Swaps Customer 

Collateral that an FCM must maintain in 

segregation. As such this calculation is 

intended only to make explicit what the 

Part 1 Provisions left implicit, the 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 33835 

134Regulation 1.32(b) states: ‘‘In computing the 

amount of funds required to be in segregated 

accounts, a futures commission merchant may 

offset any net deficit in a particular customer’s 

account against the current market value of readily 

marketable securities, less applicable percentage 

deductions (i.e., ‘‘securities haircuts’’) as set forth in 

rule 15c3–1(c)(2)(vi) of the Securities and Exchange 

Commission (17 CFR 241.15c3–1(c)(2)(vi)), held for 

the same customer’s account. The futures 

commission merchant must maintain a security 

interest in the securities, including a written 

authorization to liquidate the securities at the 

futures commission merchant’s discretion, and 

must segregate the securities in a safekeeping 

account with a bank, trust company, clearing 

organization of a contract market, or another futures 

commission merchant. For purposes of this section, 

a security will be considered readily marketable if 

it is traded on a ‘‘ready market’’ as defined in rule 

15c3–1(c)(11)(i) of the Securities and Exchange 

Commission (17 CFR 240.15c3–1(c)(11)(i)).’’ 17 CFR 

1.32(b). 

135Regulation 1.32(a) states: ‘‘Each futures 

commission merchant must compute as of the close 

of each business day, on a currency-by-currency 

basis: (1) The total amount of customer funds on 

deposit in segregated accounts on behalf of 

commodity and option customers; (2) the amount 

of such customer funds required by the Act and 

these regulations to be on deposit in segregated 

accounts on behalf of such commodity and option 

customers; and (3) the amount of the futures 

commission merchant’s residual interest in such 

customer funds.’’ 17 CFR 1.32(a). 

136Regulation 1.32(c) states: ‘‘The daily 

computations required by this section must be 

completed by the futures commission merchant 

prior to noon on the next business day and must 

be kept, together with all supporting data, in 

accordance with the requirements of § 1.31.’’ 17 CFR 

1.32(c). 

137See note 112 supra. 

calculation does not materially differ in 

the Form 1–FR–FCM from the 

calculation for ‘‘customer funds’’ of 

futures customers. 

First, regulation 22.2(f) proposes to 

define ‘‘account’’ to reference FCM’s 

books and records pertaining to the 

Cleared Swaps Customer Collateral of a 

particular Cleared Swaps Customer. 

Second, regulation 22.2(f) proposes to 

require 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, 

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, regulation 22.2(f) proposes to 

categorize 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, regulation 22.2(f) proposes to 

require 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) proposes an 

exception to the exclusion of debit 

balances, which parallels regulation 

1.32(b).134 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’’ is proposed to 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). Regulation 22.2(f) proposes to 

deem 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, 

regulation 22.2(f) proposes to require 

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. 

iii. Question 

The Commission requests comment 

on the Collateral Requirement proposed 

in regulation 22.2(f). Specifically, the 

Commission requests 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. 

f. Segregated Account; Daily 

Computation and Record 

Regulation 22.2(g), paralleling 

regulation 1.32,135 proposes to require 

an FCM to compute, as of the close of 

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). 

Regulation 22.2(g), further paralleling 

regulation 1.32,136 proposes to require 

the FCM to complete the 

abovementioned computation prior to 

noon on the next business day, and to 

keep all computations, together with 

supporting data, in accordance with 

regulation 1.31. ‘‘Noon’’ refers to noon in 

the time zone where the FCM’s 

principal office is located. 

C. Proposed Regulation 22.3— 

Derivatives Clearing Organizations: 

Treatment of Cleared Swaps Customer 

Collateral 

Regulation 22.3 proposes 

requirements for DCO treatment of 

Cleared Swaps Customer Collateral from 

FCMs, as well as the associated Cleared 

Swaps. Such requirements generally 

parallel the Part 1 Provisions. 

1. In General 

Regulation 22.3(a) proposes to require 

a DCO to treat and deal with the Cleared 

Swaps Customer Collateral deposited by 

an FCM as belonging to the Cleared 

Swaps Customers of such FCM and not 

other persons, including, without 

limitation, the FCM. In other words, the 

DCO may not use Cleared Swaps 

Customer Collateral to cover or support 

(i) the obligations of the FCM depositing 

the Cleared Swaps Customer Collateral, 

(ii) the obligations of any other FCM, or 

(iii) the obligations of Customers (e.g., 

entities transacting in futures or equities 

contracts) of any FCM. Such proposal 

parallels regulation 1.20(a), which 

applies to ‘‘customer funds’’ for futures 

contracts.137

2. Location of Collateral 

Regulation 22.3(b) proposes to require 

that a DCO segregate all Cleared Swaps 

Customer Collateral that it receives from 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
33836 Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 

138Regulation 1.20(b) states: ‘‘All customer funds 

received by a clearing organization from a member 

of the clearing organization to purchase, margin, 

guarantee, secure or settle the trades, contracts or 

commodity options of the clearing member’s 

commodity or option customers and all money 

accruing to such commodity or option customers as 

the result of trades, contracts or commodity options 

so carried shall be separately accounted for and 

segregated as belonging to such commodity or 

option customers. * * *’’ 17 CFR 1.20(b). 

Regulation 1.26(b) states: ‘‘Each clearing 

organization which invests money belonging or 

accruing to commodity or option customers of its 

clearing members in instruments described in § 1.25 

shall separately account for such instruments and 

segregate such instruments as belonging to such 

commodity or option customers.’’ 17 CFR 1.26(b). 

139Regulation 1.20(b) does not require that a DCO 

hold ‘‘customer funds’’ from FCMs in a depository. 

Rather, it applies certain requirements to the 

holding of ‘‘customer funds when deposited in a 

bank or trust company * * *’’ (emphasis added). In 

the absence of a requirement to use a depository, 

regulation 1.20(b) must implicitly permit the DCO 

to hold ‘‘customer funds’’ from FCMs itself. Id. 

Regulation 1.26(b) contains similar language 

regarding the use of a depository. Id. 

140Regulation 1.20(b) states: ‘‘All customer funds 

received by a clearing organization from a member 

of the clearing organization to purchase, margin, 

guarantee, secure or settle the trades, contracts or 

commodity options of the clearing member’s 

commodity or option customers and all money 

accruing to such commodity or option customers as 

the result of trades, contracts or commodity options 

so carried shall be separately accounted for and 

segregated as belonging to such commodity or 

option customers, and a clearing organization shall 

not hold, use or dispose of such customer funds 

except as belonging to such commodity or option 

customers. Such customer funds when deposited in 

a bank or trust company shall be deposited under 

an account name which clearly shows that they are 

the customer funds of the commodity or option 

customers of clearing members, segregated as 

required by the Act and these regulations.’’ Id. 

Regulation 1.26(b) contains similar language. Id. 

141 If a DCO chooses to accept intangible Cleared 

Swaps Customer Collateral from an FCM, then the 

proposal effectively requires the DCO to maintain 

such collateral outside of itself. 

142See note 117 supra. 

143Regulations 1.20(a), 1.20(b), and 1.26(b) 

implicitly (i) permit the DCO to commingle the 

‘‘customer funds’’ that it receives from multiple 

FCMs and (ii) prohibit the DCO from commingling 

‘‘customer funds’’ with DCO funds, FCM funds, or 

funds supporting customer transactions in nonfutures contracts. Specifically, regulation 1.20(a) 

states: ‘‘All customer funds shall be separately 

accounted for and segregated as belonging to 

commodity or option customers.’’ Regulation 1.20(b) 

further develops such language, as detailed in note 

140 supra. Similarly, regulation 1.26(b) states: ‘‘Each 

clearing organization which invests money 

belonging or accruing to commodity or option 

customers of its clearing members in instruments 

described in § 1.25 shall separately account for such 

instruments and segregate such instruments as 

belonging to such commodity or option customers.’’ 

17 CFR 1.20(a), 1.20(b), and 1.26(a). 

FCMs. Such proposal parallels 

regulations 1.20(b) and 1.26(b).138

Additionally, regulation 22.2(b) 

proposes to require that a DCO adopt 

one of two methods to hold segregated 

Cleared Swaps Customer Collateral, 

which parallel either implicit 

assumptions or explicit provisions of 

regulation 1.20(b). 

a. The First Method 

Paralleling an implicit assumption of 

regulations 1.20(b) and 1.26(b), the first 

method permits the DCO to hold 

Cleared Swaps Customer Collateral 

itself.139 Continuing such parallel, the 

first method limits the DCO to holding 

tangible collateral (e.g., gold ingots or 

warehouse receipts) because no DCO 

serves as a depository for intangible 

collateral. Finally, the first method 

requires the FCM, in holding such 

Cleared Swaps Customer Collateral, to: 

• Physically separate (e.g., in a box or 

vault) such collateral from its own 

property, the property of any FCM, and 

the property of any other person that is 

not a Cleared Swaps Customer of an 

FCM; 

• Clearly identify each physical 

location (the ‘‘DCO Physical Location’’) 

in which it holds such collateral as a 

‘‘Location of Cleared Swaps Customer 

Collateral’’ (e.g., by affixing a label or 

sign to the box or vault); 

• Ensure that each such DCO Physical 

Location provides appropriate 

protection for such collateral (e.g., by 

confirming that the box or vault has 

locks and is fire resistant); and 

• Record in its books and records the 

amount of such collateral separately 

from its own funds, the funds of any 

FCM, and the funds of any other person 

that is not a Cleared Swaps Customer of 

an FCM (i.e., to reflect the reality of 

physical separation in books and 

records). 

b. The Second Method 

Paralleling explicit provisions of 

regulations 1.20(b) and 1.26(b),140 the 

second method permits the DCO to hold 

Cleared Swaps Customer Collateral from 

FCMs outside of itself.141 Continuing 

such parallel, the second method limits 

the DCO to certain Permitted 

Depositories (as further discussed 

below), and requires that the DCO 

maintain a Cleared Swaps Customer 

Account with each Permitted 

Depository. 

c. Questions 

As described above, both the first and 

second methods incorporate 

assumptions with respect to DCO 

structure that were true when 

regulations 1.20(b) and 1.26(b) were first 

adopted and remain true currently. 

However, the Commission recognizes 

that DCO structure may change after the 

Dodd-Frank Act and the regulations 

thereunder become effective. Notably, 

the Commission recognizes 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. The Commission therefore 

requests comment on what, if any, 

changes to proposed regulation 22.3 

may be appropriate to accommodate 

such possibility. Specifically, the 

Commission requests comment on 

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. What challenges might this 

arrangement pose to protection 

(including effective segregation) of 

Cleared Swaps Customer Collateral (as 

well as other forms of customer 

property)? How might these challenges 

be addressed? 

3. Commingling 

Regulation 22.3(c) proposes to permit 

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: 

• The money, securities, or other 

property belonging to the DCO; 

• The money, securities, or other 

property belonging to any FCM; or 

• Other categories of funds that it 

receives from an FCM on behalf of 

Customers, including ‘‘customer funds’’ 

for futures contracts (as regulation 1.3 

defines such term) 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)).142

Proposed regulation 22.3(c) parallels 

regulations 1.20(a), 1.20(b), and 

1.26(b).143

4. Exceptions 

Regulations 22.3(d) and (e) propose 

certain exceptions to the 

abovementioned requirements and 

limitations. 

a. FCM Deposits and Withdrawals 

Regulation 22.3(d) constitutes an 

exception to regulation 22.3(c) 

(Commingling). Regulation 22.3(d) 

proposes to allow 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 


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144See proposed regulation 22.2(d)(2). 

145See proposed regulation 22.2(d)(3). 

146While there is some ambiguity as to whether 

regulation 1.49 currently applies to DCOs given the 

provisions of current regulation 39.2, the 

Commission has proposed amendments that would 

remove regulation 39.2. See Risk Management 

Requirements for Derivatives Clearing 

Organizations, 76 FR 3698, 3714 (Jan. 20, 2011). 

Thus, if the proposed amendments are finalized as 

written, DCOs would be subject to the requirements 

set forth in regulation 1.49. In addition, 

notwithstanding regulation 39.2, the Commission 

and industry have proceeded on the basis that the 

requirements of regulation 1.49 apply to DCOs. 

147Regulations 1.20(a) and (c) imply that an FCM 

may deposit ‘‘customer funds’’ with ‘‘any bank, trust 

company, clearing organization or another futures 

commission merchant.’’ Regulation 1.20(b) implies 

than a DCO may deposit ‘‘customer funds’’ from 

FCMs with ‘‘a bank or trust company.’’ Regulations 

1.26(a) and (b) contain similar language. Regulation 

1.49(d)(2) clarifies that an FCM or DCO may deposit 

‘‘customer funds’’ in the United States only with ‘‘(i) 

A bank or trust company; (ii) A futures commission 

merchant registered as such with the Commission; 

or (iii) A derivatives clearing organization.’’ 17 CFR 

1.20, 1.26, and 1.49(d)(2). 

148See section 4d(f)(3)(A)(ii) of the CEA, as 

amended by section 724 of the Dodd-Frank Act 

(explicitly stating that Cleared Swaps Customer 

Collateral may be withdrawn to margin, guarantee, 

secure, transfer, adjust, or settle a Cleared Swap 

with a DCO, or any member of a DCO, and not 

explicitly allowing withdrawals for any other 

purpose (except for permitted investments)). 

149The function of a written acknowledgment 

letter is to ensure 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). 

150See 75 FR 47738 (Aug. 9, 2010) (proposing 

form acknowledgment letters for customer funds 

and secured amount funds). 

151Currently, with respect to an FCM, regulation 

1.20(a) states: ‘‘Each registrant shall obtain and 

retain in its files for the period provided in § 1.31 

a written acknowledgment from such bank, trust 

company, clearing organization, or futures 

commission merchant, that it was informed that the 

customer funds deposited therein are those of 

commodity or option customers and are being held 

in accordance with the provisions of the Act and 

this part: Provided, however, that an 

acknowledgment need not be obtained from a 

clearing organization that has adopted and 

submitted to the Commission rules that provide for 

the segregation as customer funds, in accordance 

with all relevant provisions of the Act and the rules 

and orders promulgated thereunder, of all funds 

held on behalf of customers.’’ 17 CFR 1.20(a). 

Currently, with respect to a DCO, regulation 

1.20(b) states: ‘‘The clearing organization shall 

obtain and retain in its files for the period provided 

by § 1.31 an acknowledgment from such bank or 

trust company that it was informed that the 

customer funds deposited therein are those of 

commodity or option customers of its clearing 

members and are being held in accordance with the 

provisions of the Act and these regulations.’’ 17 CFR 

1.20(b). 

However, as noted above, the Commission is 

currently considering a notice of proposed 

rulemaking amending regulation 1.20. See 75 FR 

47740 (Aug. 9, 2010). 

from the FCM. Regulation 22.3(d) 

further proposes to permit FCM 

withdrawals of money, securities, or 

other property from a DCO Physical 

Location or Cleared Swaps Customer 

Account. As discussed below, a DCO 

functions as a Permitted Depository for 

an FCM. Proposed regulation 22.3 

enables such function, by facilitating (i) 

FCM deposits of its own money, 

securities, or other property in its 

Cleared Swaps Customer Account at the 

DCO,144 and (ii) FCM withdrawals of its 

residual financial interest in the Cleared 

Swaps Customer Collateral.145

b. Permitted Investments 

Regulation 22.3(e) constitutes an 

exception to regulation 22.3(b)(1) 

(Location of Cleared Swaps Collateral) 

and regulation 22.15 (Treatment of 

Cleared Swaps Collateral on an 

Individual Basis). Regulation 22.3(e) 

proposes to allow a DCO to invest 

Cleared Swaps Customer Collateral in 

accordance with regulation 1.25, which 

delineates permitted investments of 

‘‘customer funds’’ (as regulation 1.3 

defines such term) for futures contracts. 

D. Proposed Regulation 22.4—Futures 

Commission Merchants and Derivatives 

Clearing Organizations: Permitted 

Depositories 

1. The Permitted Depositories 

Regulation 22.4 proposes a list of 

depositories permitted to hold Cleared 

Swaps Customer Collateral (the 

‘‘Permitted Depositories’’). 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. As discussed further 

below, regulation 22.9 incorporates 

regulation 1.49 with respect to 

Permitted Depositories located outside 

the United States.146 An FCM may also 

serve as a Permitted Depository, but 

only if it is a ‘‘Collecting Futures 

Commission Merchant’’ carrying the 

Cleared Swaps (and related Cleared 

Swaps Customer Collateral) of a 

‘‘Depositing Futures Commission 

Merchant’’ (as regulation 22.1 proposes 

to define each such term). Before an 

entity may serve as a Permitted 

Depository, the DCO or FCM seeking to 

maintain a Cleared Swaps Customer 

Account must obtain a written 

acknowledgement letter, as discussed 

further below. 

In general, proposed regulation 22.4 

parallels regulations 1.20, 1.26 and 

1.49(d)(2), with the exception of 

allowing an FCM to serve as a Permitted 

Depository only if the FCM is a 

‘‘Collecting Futures Commission 

Merchant.’’ 147 The Commission believes 

that such a limitation is appropriate, 

because the purpose for allowing an 

FCM to serve as a Permitted Depository 

is to facilitate the clearing of swaps 

carried by an FCM that is not a member 

of a particular DCO (i.e., the Depositing 

Futures Commission Merchant) through 

another FCM that is a member of that 

DCO (i.e., the Collecting Futures 

Commission Merchant).148

2. Question 

The Commission seeks public 

comment on whether the limitation that 

it is proposing for an FCM serving as a 

Permitted Depository is appropriate. 

E. Proposed Regulation 22.5—Futures 

Commission Merchants and Derivatives 

Clearing Organizations: Written 

Acknowledgement 

1. Substantive Requirements 

As mentioned above, a DCO or FCM 

must obtain a written acknowledgement 

letter from a potential Permitted 

Depository before opening a Cleared 

Swaps Customer Account.149 Regulation 

22.5 proposes substantive requirements 

for such letter. First, regulation 22.5 

proposes to mandate that the FCM or 

DCO obtain a written acknowledgement 

letter in accordance with regulations 

1.20 and 1.26, which shall apply to 

Cleared Swaps Customer Collateral as if 

such collateral constituted ‘‘customer 

funds’’ (as regulation 1.3 defines such 

term). The Commission seeks comment 

as to whether such incorporation by 

reference is the most appropriate way to 

proceed, or whether the Commission 

should publish a separate form 

acknowledgement letter for swaps. In 

what way should such separate form 

letter differ from the form letter 

previously published for futures 

customer funds? 150

Second, regulation 22.5 proposes to 

exempt the FCM or DCO from the 

requirement to obtain a written 

acknowledgement letter, if the potential 

Permitted Depository is a DCO that has 

adopted rules providing for the 

segregation of Cleared Swaps Customer 

Collateral. This proposed exemption is 

consistent with regulation 1.20.151

2. Question 

The Commission is currently 

considering a notice of proposed 

rulemaking amending regulation 1.20 

with respect to requirements for written 

acknowledgement letters from 

depositories of ‘‘customer funds’’ (as 

regulation 1.3 defines such term) for 

futures contracts. The Commission 

seeks comment on whether the 

following are appropriate: (i) The 

incorporation of regulation 1.20 (as the 

Commission may choose to amend such 


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152With respect to the responsibilities of an FCM, 

regulation 1.20(a) states: ‘‘Such customer funds 

when deposited with any bank, trust company, 

clearing organization or another futures commission 

merchant shall be deposited under an account name 

which clearly identifies them as such and shows 

that they are segregated as required by the Act and 

this part.’’ 17 CFR 1.20(a). With respect to the 

responsibilities of a DCO, regulation 1.20(b) states: 

‘‘Such customer funds when deposited in a bank or 

trust company shall be deposited under an account 

name which clearly shows that they are the 

customer funds of the commodity or option 

customers of clearing members, segregated as 

required by the Act and these regulations.’’ 17 CFR 

1.20(b). Regulations 1.26(a) and (b) contain similar 

language. 

153Section 4d(f)(6) of the CEA states: ‘‘It shall be 

unlawful for any person, including any derivatives 

clearing organization and any depository 

institution, that has received any money, securities, 

or property for deposit in a separate account or 

accounts as provided in paragraph (2) to hold, 

dispose of, or use any such money, securities, or 

property as belonging to the depositing futures 

commission merchant or any person other than the 

swaps customer of the futures commission 

merchant.’’ 7 U.S.C. 6d. 

154Regulation 1.20 states: ‘‘No person, including 

any clearing organization or any depository, that 

has received customer funds for deposit in a 

segregated account, as provided in this section, may 

hold, dispose of, or use any such funds as belonging 

to any person other than the option or commodity 

customers of the futures commission merchant 

which deposited such funds.’’ 17 CFR 1.20. 

155For example, the Commission currently 

regulates certain entities based outside of the 

United States (e.g., LCH.Clearnet Limited and ICE 

Clear Europe, each of which is based in the United 

Kingdom). 

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. 

F. Proposed Regulation 22.6—Futures 

Commission Merchants and Derivatives 

Clearing Organizations: Naming of 

Cleared Swaps Customer Accounts 

Regulation 22.6 proposes to require 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 (as final). 

Proposed regulation 22.6 parallels 

regulation 1.20(a), 1.20(b), 1.26(a), and 

1.26(b).152

G. Proposed Regulation 22.7—Permitted 

Depositories: Treatment of Cleared 

Swaps Customer Collateral 

Regulation 22.7 proposes to require a 

Permitted Depository to treat all funds 

in a Cleared Swaps Customer Account 

as Cleared Swaps Customer Collateral. 

Regulation 22.7 further proposes to 

prohibit a Permitted Depository from 

holding, disposing of, or using any 

Cleared Swaps Customer Collateral as 

belonging to any person other than (i) 

the Cleared Swaps Customers of the 

FCM maintaining such Cleared Swaps 

Customer Account or (b) the Cleared 

Swaps Customers of the FCMs for which 

the DCO maintains such Cleared Swaps 

Customer Account. In other words, no 

Permitted Depository may use Cleared 

Swaps Customer Collateral to cover or 

support the obligations of the FCM or 

DCO maintaining the Cleared Swaps 

Customer Account. Proposed regulation 

22.7 parallels section 4d(f)(6) of the 

CEA, as added by section 724 of the 

Dodd-Frank Act.153 Proposed regulation 

22.7 also parallels regulation 1.20.154

H. Proposed Regulation 22.8—Situs of 

Cleared Swaps Accounts 

1. Proposed Requirements 

Proposed regulation 22.8 has no 

analog in the Part 1 Provisions. 

Regulation 22.8 proposes to require (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. In light of increased cross-border 

activity,155 the Commission believes 

that proposed regulation 22.8 is 

appropriate, as it is intended to ensure 

that, in the event of an FCM or DCO 

insolvency, Cleared Swaps Customer 

Collateral, whether received by an FCM 

or DCO, would be treated in accordance 

with the United States Bankruptcy 

Code. The Commission does not intend 

for proposed regulation 22.8 to affect the 

actual locations in which an FCM or 

DCO may hold Cleared Swaps Customer 

Collateral. As discussed further below, 

an FCM or DCO may hold Cleared 

Swaps Customer Collateral (i) in 

denominations other than the United 

States dollar and (ii) at depositories 

within or outside of the United States. 

Additionally, the Commission does not 

intend for proposed regulation 22.8 to 

affect choice of law provisions that a 

DCO might set forth in its rules or an 

FCM might set forth in its agreement 

with a Cleared Swaps Customer. 

2. Questions 

The Commission requests comment 

on whether proposed regulation 22.8 

achieves the purpose of the 

Commission—namely, to ensure that 

Cleared Swaps Customer Collateral be 

treated in accordance with the United 

States Bankruptcy Code, to the extent 

possible. If proposed regulation 22.8 

does not achieve such purpose, what 

alternatives should the Commission 

consider to achieve such purpose? 

Additionally, the Commission requests 

comment on the benefits and costs of 

proposed regulation 22.8, as well as any 

alternatives. 

I. Proposed Regulation 22.9— 

Denomination of Cleared Swaps 

Customer Collateral and Location of 

Depositories 

Regulation 22.9 proposes to 

incorporate regulation 1.49 by reference, 

as applicable to Cleared Swaps 

Customer Collateral. Regulation 1.49 

sets forth, for futures contracts, 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). However, 

regulation 22.9 proposes to allow an 

FCM to serve as a Permitted Depository 

only if that FCM is a ‘‘Collecting Futures 

Commission Merchant’’ carrying the 

Cleared Swaps, and associated Cleared 

Swaps Customer Collateral, for the 

Cleared Swaps Customers of a 

‘‘Depositing Futures Commission 

Merchant.’’ Such proposal accords with 

proposed regulation 22.4. 

J. Proposed Regulation 22.10— 

Incorporation by Reference 

Regulation 22.10 proposes to 

incorporate by reference regulations 

1.27 (Record of investments), 1.28 

(Appraisal of obligations purchased 

with customer funds), 1.29 (Increment 

or interest resulting from investment of 

customer funds), and 1.30 (Loans by 

futures commission merchants; 

treatment of proceeds), as applicable to 

Cleared Swaps Customers and Cleared 

Swaps Customer Collateral. Regulation 

1.27 requires FCMs and DCOs investing 

‘‘customer funds’’ (as regulation 1.3 

defines such term) to maintain specified 

records concerning such investments. 

Regulation 1.28 requires FCMs investing 

‘‘customer funds’’ to record and report 

such investment at no greater than 

market value. Regulation 1.29 permits 


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FCMs and DCOs investing ‘‘customer 

funds’’ to receive and retain any 

increment or interest thereon. 

Regulation 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. Regulation 1.30 

does make clear, however, that the 

proceeds of such loans, when used to 

purchase, margin, guarantee, or secure 

futures contracts, shall be treated as 

‘‘customer funds.’’ 

K. Proposed Regulation 22.11— 

Information To Be Provided Regarding 

Customers and Their Cleared Swaps 

1. Proposed Requirements 

In order to implement the Complete 

Legal Segregation Model, regulations 

22.11 to 22.16 propose, among other 

things, requirements that ensure that 

each DCO and FCM: (i) Obtains, on a 

daily basis, information necessary for 

risk management; (ii) performs, on a 

daily basis, risk management 

calculations and records the results; (iii) 

receives on the day of default, any 

residual Cleared Swaps Customer 

Collateral; and (iv) allocates, on the day 

of default, the value of Cleared Swaps 

Customer Collateral that it owes to each 

individual customer. Regulations 22.11 

to 22.16 recognize that swaps may be 

cleared through a multi-tier system, 

with certain FCMs clearing swaps for 

customers directly with the DCO and 

other FCMs clearing swaps for 

customers indirectly through another 

FCM. Therefore, Part 22 recognizes the 

concepts of ‘‘Depositing Futures 

Commission Merchant’’ and ‘‘Collecting 

Futures Commission Merchant,’’ each of 

which is described above. Regulations 

22.11 to 22.16 extend their requirements 

through each potential tier of clearing, 

from the Depositing Futures 

Commission Merchant through the 

Collecting Futures Commission 

Merchant and finally to the DCO. 

Regulation 22.11 proposes to require 

that (i) each Depositing Futures 

Commission Merchant provide to its 

Collecting Futures Commission 

Merchant 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 on 

a daily basis. If a Depositing Futures 

Commission Merchant or FCM member 

also serves as a Collecting Futures 

Commission Merchant, then it must 

provide the specified information with 

respect to each individual Cleared 

Swaps Customer for which it acts (on 

behalf of a Depositing Futures 

Commission Merchant) as a Collecting 

Futures Commission Merchant. 

The abovementioned information 

should aid Collecting Futures 

Commission Merchants and DCOs in 

their daily risk management programs 

by (i) revealing ownership of cleared 

swaps customer contracts (in contrast to 

currently available Large Trader 

information, which is based on control 

of futures contracts) and (ii) permitting 

DCOs to aggregate the positions of 

Cleared Swaps Customers clearing 

through multiple FCMs, and Collecting 

Futures Commission Merchants to 

aggregate the contracts of Cleared Swaps 

Customers clearing through multiple 

Depositing Futures Commission 

Merchants. The abovementioned 

information will also enable Collecting 

Futures Commission Merchants and 

DCOs to conform to their obligations to 

allocate Cleared Swaps Customer 

Collateral, in the event of an FCM 

default, pursuant to proposed regulation 

22.15. 

The DCO is at the apex of the 

reporting structure that regulation 22.11 

establishes, as it receives all information 

for each individual Cleared Swaps 

Customer that FCMs, Collecting Futures 

Commission Merchants, and Depositing 

Futures Commission Merchants serve. 

Therefore, regulation 22.11 proposes to 

hold 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 Futures Commission 

Merchant, the Commission intends for 

the DCO to take ‘‘appropriate steps’’ to 

ensure that its FCM members enter into 

suitable arrangements with, e.g., a 

Depositing Futures Commission 

Merchant to verify the accuracy and 

timeliness of information. In this 

manner, the Commission intends for the 

verification requirement to be applied 

through each potential tier of clearing. 

2. Questions 

Does the proposed requirement in 

regulation 22.11 for a Depositing 

Futures Commission Merchant to 

provide a Collecting Futures 

Commission Merchant with information 

sufficient to identify its Cleared Swaps 

Customers raise any, e.g., competitive 

concerns? Could such concerns be 

resolved if the identities of such Cleared 

Swaps Customers are coded, with the 

DCO, but not the Collecting Futures 

Commission Merchant, receiving a copy 

of such code? What other methods 

would resolve such concerns? 

L. Proposed Regulation 22.12— 

Information To Be Maintained 

Regarding Cleared Swaps Customer 

Collateral 

Regulation 22.12 proposes to require 

DCOs and Collecting Futures 

Commission Merchants to use the 

information provided pursuant to 

proposed regulation 22.11 to calculate, 

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 Futures 

Commission Merchant), based on the 

portfolio of rights and obligations 

arising from its Cleared Swaps; and (ii) 

for all relevant Cleared Swaps 

Customers. It is not the responsibility of 

a DCO or a Collecting Futures 

Commission Merchant to monitor or to 

calculate the extent to which a Cleared 

Swaps Customer has, in fact, posted 

excess or insufficient collateral. In the 

latter case, the relevant FCM will have, 

in effect, made a loan to the Cleared 

Swaps Customer and will have a claim 

against that customer, outside of the 

relationship with the DCO or the 

Collecting Futures Commission 

Merchant. 

M. Proposed Regulation 22.13— 

Additions to Cleared Swaps Customer 

Collateral 

Regulation 22.13 proposes two tools 

that DCOs or Collecting Futures 

Commission Merchants may use to 

manage the risk they incur with respect 

to individual Cleared Swaps Customers. 

These tools are not intended to be 

mandatory or exclusive, and the 

Commission seeks comment on how the 

Commission may enable DCOs or 

Collecting Futures Commission 

Merchants to use other tools to manage 

such risk. 

Regulation 22.13(a) proposes to clarify 

that a DCO or Collecting Futures 

Commission Merchant may 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), in which case such higher 

amount shall be calculated and recorded 

as provided in proposed regulation 

22.12, and would (on an individual 

basis) be available in the event of a 

default by any such Cleared Swaps 

Customer. This proposed clarification is 

not intended to interfere with the right 

of any FCM to increase the collateral 

requirements with respect to any of its 

customers. The Commission requests 

comment regarding whether a DCO or a 


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Collecting Futures Commission 

Merchant may wish to increase the 

collateral required, in the manner 

described above, for any reason other 

than credit risk. 

Similarly, proposed regulation 

22.13(b) clarifies that any collateral 

deposited by an FCM out of its own 

funds pursuant to proposed regulation 

22.2(e)(3), in which the FCM has a 

residual financial interest pursuant to 

proposed regulation 22.2(e)(4), may, to 

the extent of such residual interest, be 

used by a DCO or Collecting Futures 

Commission Merchant to margin the 

cleared swaps of any or all of such 

customers. Thus, if a DCO chooses to 

require an FCM member, or if a 

Collecting Futures Commission 

Merchant chooses to require a 

Depositing Futures Commission 

Merchant, in each case, to post such 

additional collateral out of its own 

funds, the collateral would be available, 

to the extent specified above, on an 

omnibus basis, in the event of default of 

any relevant Cleared Swaps Customer. 

N. Proposed Regulation 22.14—Futures 

Commission Merchant Failure To Meet 

a Customer Margin Call in Full 

The structure of proposed regulations 

22.14(a) through (d) is intended to 

ensure that each tier of clearing receives 

the requisite transmissions of Cleared 

Swaps Customer Collateral and 

information to attribute such collateral 

on the date of an FCM default. Starting 

from the lowest tier, regulation 22.14(a) 

proposes to require a Depositing Futures 

Commission Merchant that fails to meet 

a margin call with respect to a Cleared 

Swaps Customer Account, in full, to (i) 

transmit to its Collecting Futures 

Commission Merchant, with respect to 

each Cleared Swaps Customer of the 

Depositing Futures Commission 

Merchant whose contracts contribute to 

that margin call, the lesser of the 

amount called for or the remaining 

collateral for that customer on deposit at 

such Depositing Futures Commission 

Merchant, and (ii) advise the Collecting 

Futures Commission Merchant of the 

identity of the Cleared Swaps Customer 

and the amount transmitted on behalf of 

such customer. Moving towards the 

middle tier, regulation 22.14(b) 

proposes to parallel the above 

requirement for a Depositing Futures 

Commission Merchant that also serves 

as a Collecting Futures Commission 

Merchant. Moving towards the apex, 

regulations 22.14(c) and (d) propose to 

parallel the above requirement for an 

FCM member of a DCO, including if the 

FCM member is also a Collecting 

Futures Commission Merchant. 

Regulations 22.14(e) and (f) propose 

to address a situation involving 

investment risk, the loss of value of 

collateral, despite the application of 

haircuts. Specifically, if (i) the collateral 

collected by a DCO or Collecting 

Futures Commission Merchant is 

sufficient to meet the amount of 

collateral required by regulation 22.12 

on the business day before the failure to 

meet the margin call (with sufficiency 

measured including the application of 

haircuts specified by the rules and 

procedures of the DCO or the policies 

applied by the Collecting Futures 

Commission Merchant), and (ii) as of 

the close of business on the business 

day of the failure to meet the margin 

call, the value of such collateral is, due 

to changes in market value, less than the 

amount required by regulation 22.12 on 

the business day before the failure to 

meet the margin call, then that loss of 

value will be shared among the 

customers pro rata: The amount of 

collateral attributable to each customer 

will be reduced by the percentage 

difference between the amount specified 

in regulation 22.12 on that previous 

business day and the market value of 

the collateral on the day of the failure 

to meet the margin call. The 

Commission believes that investment 

risk, unlike fellow-customer risk, should 

not be borne by the DCO. The 

Commission seeks comment on this 

allocation of investment risk. 

O. Proposed Regulation 22.15— 

Treatment of Cleared Swaps Customer 

Collateral on an Individual Basis 

Proposed regulation 22.15 sets forth 

the basic principle of individual 

collateral protection. It requires each 

DCO and each Collecting Futures 

Commission Merchant 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. That amount may not be used 

to margin, guarantee or secure the 

cleared swaps, or any other obligations, 

of an FCM, or of any other customer. 

It should be noted that what is 

protected is an amount (i.e., a value) of 

collateral, rather than any specific item 

of collateral. 

As discussed above, the Commission 

is proposing herein the Complete Legal 

Segregation Model, but is seeking 

comment as to whether the Legal 

Segregation with Recourse Model would 

be more appropriate. Under the Legal 

Segregation with Recourse Model, this 

regulation would be modified to permit 

the use of the Cleared Swaps Customer 

Collateral of non-defaulting customers 

after the exhaustion of both the DCO’s 

contribution to default resources from 

its own capital, and the guaranty fund 

contributions of clearing members. 

Specifically, an additional section 

would be added to the effect that 

a derivatives clearing organization may, if its 

rules so provide, and if the derivatives 

clearing organization has first exhausted the 

resources described in §§ 39.11(b)(1)(ii) [the 

derivatives clearing organization’s own 

capital], (iii) [Guaranty fund deposits], and 

(iv) [other financial resources deemed 

acceptable by the Commission], use the 

Cleared Swaps Customer Collateral of all 

Cleared Swaps Customers of a depositing 

futures commission merchant that has 

defaulted in a payment to the derivatives 

clearing organization with respect to its 

Cleared Swaps Customer Account. 

Under such a proposal, the 

Commission does not contemplate 

requiring the use of a DCO’s assessment 

powers before permitting the use of the 

collateral of non-defaulting customers 

under the Legal Segregation with 

Recourse Model. 

P. Proposed Regulation 22.16— 

Disclosures to Customers 

In order to make Cleared Swaps 

Customers aware of the limits of 

protection under the Complete Legal 

Segregation Model, proposed 

regulations 22.16(a) and (b) require 

FCMs to disclose to their Cleared Swaps 

Customers the governing provisions 

relating to use of customer collateral, 

transfer of Cleared Swaps and related 

collateral, neutralization of the risks of 

customer positions, or liquidation of 

cleared swaps, in each case in the event 

of a default by its FCM related to the 

Cleared Swaps Customer Account, 

either to a Collecting Futures 

Commission Merchant or directly to a 

DCO. Proposed regulation 22.16(c) 

specifies that the governing provisions 

are the rules of the DCO, or the 

provisions of the customer agreement 

between the Depositing Futures 

Commission Merchant and the 

Collecting Futures Commission 

Merchant, on or through which the 

Depositing Futures Commission 

Merchant clears swaps for Cleared 

Swaps Customers. 

The Commission is particularly 

interested in further discussion of the 

benefits and costs of each model in light 

of the proposed regulations (i.e., the 

Complete Legal Segregation Model that 

is proposed and the Legal Segregation 

with Recourse Model that is being 

considered). In particular, the 

Commission seeks comment on (1) 

Operational costs: The incremental 

activities commenters would be 

required to perform, with respect to 


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156See Account Class, 75 FR 17297 (Apr. 6, 

2010). 

157See generally 75 FR 75432, 75435 (Dec. 3, 

2010). 

cleared swaps and cleared swaps 

collateral under each model that they 

are not currently required to perform 

with respect to futures and futures 

collateral, and the initial and 

annualized costs of such activities. How 

can these costs be estimated industrywide? Please provide a detailed basis for 

these estimates; and (2) Risk 

Environment Costs: How do you see the 

industry adapting to the risk changes 

attendant to each model? What types of 

costs would you expect your institution 

to incur if the industry adapts to the 

model in the most efficient manner 

feasible? How are those costs different 

from the costs your institution incurs 

relative to futures and futures collateral? 

What is a reasonable estimate of the 

initial and annualized ongoing 

incremental costs incurred by your 

institution, and how can such costs be 

estimated industry wide? Please provide 

a detailed basis for your estimates. 

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).156 At that time, there were 

questions concerning the authority of 

the Commission to require the 

segregation of cleared OTC derivatives 

(and related collateral), or to establish 

the account class for the insolvency of 

a DCO. 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 

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. Such amendments conform 

to proposed Part 22. 

B. Definitions 

The Commission proposes certain 

technical amendments to regulation 

190.01 to remove the reference to the 

definition of ‘‘Opt-out customer’’ from 

the definition of ‘‘Non-Public 

Customer,’’ and to include or exclude 

Cleared Swaps and Cleared Swaps 

Collateral in the definitions of ‘‘Clearing 

Organization,’’ ‘‘Non-Public Customer,’’ 

and ‘‘Principal Contract,’’ as appropriate. 

The Commission also proposes 

substantive changes to the definitions of 

‘‘Account Class’’ and ‘‘Cleared Swaps.’’ 

1. Proposed Amendment to Regulation 

190.01(a)—Account Class 

The Commission proposes amending 

regulation 190.01(a) to change the 

definition of account class to include a 

class for cleared swaps accounts, 

without limiting that definition to 

commodity brokers that are FCMs (as is 

currently the case). In addition, 

commodity option accounts would be 

deleted from the definition because the 

term commodity options, as defined in 

section 1.3, includes options on futures 

(which are regulated as futures) and 

options on commodities (which under 

the Dodd-Frank Act are swaps). The 

additions of subsections (a)(2)(i) and 

(a)(2)(ii) are meant to make clear that 

options on futures and options on 

commodities should not be grouped into 

one account class; rather options on 

futures should be deemed part of the 

futures account class and options on 

commodities should deemed part of the 

cleared swaps account class. Another 

proposed amendment, subsection (a)(3), 

is intended to 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)). The proposed 

amended § 190.01(a) would clarify that 

if, pursuant to a Commission rule, 

regulation or order (or a derivatives 

clearing organization 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 

another account class, then the former 

positions and related collateral shall be 

treated as part of the latter account 

class. 

2. Proposed New Regulation 190.01(e)— 

Calendar Day 

The Commission proposes defining 

the term ‘‘calendar day’’ to include the 

time from midnight to midnight. 

3. Proposed Amendment to Regulation 

190.01(f)—Clearing Organization 

The Commission proposes 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. 

4. Proposed Amendment to Regulation 

190.01(cc)—Non-Public Customer 

The Commission proposes 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 account. 

5. Proposed Amendment to Regulation 

190.01(hh)—Principal Contract 

The Commission proposes to amend 

the definition of principal contract to 

include an exclusion for cleared swaps 

contracts. 

6. Proposed Amendment to Regulation 

190.01(ll)—Specifically Identifiable 

Property 

The Commission proposes to amend 

the definition of specifically identifiable 

property to change, in subsection 

(ll)(2)(ii), an anachronistic reference to 

section 5a(a)(12) of the CEA to a 

reference to 5c(c) of the CEA, and to 

change references to ‘‘business days’’ in 

subsections (ll)(4) and (ll)(5) to 

references to ‘‘calendar days,’’ to 

conform to other proposed changes to 

Part 190 implementing Public Law 111– 

16, the Statutory Time-Periods 

Technical Amendments Act of 2009, 

which (in relevant part) changed the 

time period in 11 U.S.C. 764(b) from 

five (business) days to seven (calendar) 

days.157 Because the pace of recent 

commodity broker bankruptcies has 

included work on weekends, references 

to four or fewer ‘‘business days’’ have 


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158Open commodity contracts traded on a 

designated contract market would continue to be 

liquidated in accordance with the rules of the 

relevant designated contract market. 

been changed to the same number of 

calendar days; while references to five 

business days have been changed to six 

calendar days. 

7. Proposed Amendment to Regulation 

190.01 (pp)—Cleared Swap 

Proposed new § 190.01(pp) replaces 

the definition of ‘‘Cleared OTC 

Derivative’’ that the Commission 

previously adopted with a definition of 

cleared swap that incorporates by 

reference the definition of that term in 

§ 22.1. 

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 is proposing certain 

technical amendments to (1) expand 

regulation 190.02 to apply to cleared 

swaps (and related collateral) and (2) 

change references to ‘‘business days’’ to 

references to ‘‘calendar days,’’ and 

require transfer instructions by the sixth 

calendar day after the order for relief 

and instructed 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 

Bankruptcy Code. Other proposed 

amendments to § 190.02(g)(1)(i) are 

intended to clarify that maintenance 

margin refers to the maintenance margin 

requirements of the applicable 

designated contract market or swap 

execution facility. Inclusion of the 

words ‘‘if any’’ reflects Commission 

recognition that there may be situations 

where there is no applicable designated 

contract market or swap execution 

facility. 

D. Proposed Amendments to Regulation 

190.03—Operation of the Debtor’s 

Estate Subsequent to the Primary 

Liquidation Date 

In addition to certain technical 

amendments to (1) expand regulation 

190.03 to apply to cleared swaps (and 

related collateral) and (2) change 

references to ‘‘business days’’ to 

references to ‘‘calendar days,’’ proposed 

amendments to § 190.03(a)(3) are 

intended to clarify that maintenance 

margin refers to the maintenance margin 

requirements of the applicable 

designated contract market or swap 

execution facility. Inclusion of the 

words ‘‘if any’’ reflects Commission 

recognition that there may be situations 

where there is no applicable designated 

contract market or swap execution 

facility. 

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 held for a 

house account or a customer account by 

or on behalf of a commodity broker that 

is a debtor to commodity contracts 

traded on swap execution facilities.158

These commodity contracts would be 

liquidated in accordance with the rules 

of the relevant swap execution facility 

or designated contract market, under a 

liquidation process that, to the extent 

possible under market conditions at the 

time of liquidation, results in 

competitive pricing. In addition, in 

order to conform to current market 

practice, the amendments would allow 

open commodity contracts that are 

liquidated by book entry to be offset 

using the settlement price as calculated 

by the relevant clearing organization 

pursuant to its rules, which rules would 

also be required to promote competitive 

pricing to the extent feasible under 

market conditions at the time of 

liquidation. Such 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). 

F. Proposed Amendments to Regulation 

190.05—Making and Taking Delivery on 

Commodity Contracts 

Proposed amendments to regulation 

190.05 are technical in nature, changing 

a reference to ‘‘contract market’’ to 

‘‘designated contract market, swap 

execution facility, or clearing 

organization,’’ and requiring the 

submission of rules for approval subject 

to section 5c(c) of the CEA. 

G. Proposed Amendments to Regulation 

190.06—Transfers 

Proposed amendments to regulation 

190.06(a) are intended to clarify that 

nothing in paragraph (a) would 

constrain the contractual right of the 

DCO to liquidate open commodity 

contracts, even those pertaining to 

customers (whether transacting in 

futures, cleared swaps, or other 

products). 

Proposed amendments to regulation 

190.06(e) would permit the trustee to 

transfer accounts with no open 

commodity contracts. In past 

commodity broker bankruptcies, the 

Commission has permitted the transfer 

of such accounts. Moreover, section 

761(9)(A)(ii)(I) and (II) of the 

Bankruptcy Code define a ‘‘customer’’ to 

include an entity that holds a claim 

against the FCM arising out of: (i) the 

liquidation of a commodity contract and 

(ii) a deposit or payment of property 

with such FCM for the purpose of 

making or margining a commodity 

contract, either of which might occur 

after or before the customer holds a 

commodity contract. Further, section 

764 of the Bankruptcy Code prohibits 

the trustee from avoiding post-petition 

transfers: (i) facilitating the liquidation 

of a commodity contract, and 

presumably claims attendant thereto, 

and (ii) of any cash, securities, or other 

property margining or securing a 

commodity contract, and presumably 

claims thereto. 

Proposed amendments to regulation 

190.06(g) would prohibit the trustee 

from avoiding pre-petition transfers 

made by a clearing organization on 

behalf of customers of the debtor of 

accounts held for or on behalf of 

customers of the debtor as long as the 

money, securities, or other property 

accompanying such transfer would not 

exceed the funded balance of such 

accounts based on information available 

as of the close of business on the 

business day immediately preceding 

such transfer minus the value on the 

date of return or transfer of any property 

previously returned or transferred 

thereto. The Commission believes that 

this change promotes portability by 

allowing clearing organizations to 

efficiently manage the customer 

accounts of the debtor in a default 

scenario. 

In light of the importance of transfers 

to swaps markets, the Commission 

observes that certain portions of 

regulation 190.06 are not being changed. 

Specifically, regulation 190.06(f)(3) 

addresses partial transfers, whether with 

respect to fewer than all customers 

(subsection (i)), or with respect to fewer 

than all contracts cleared on behalf of a 

particular customer (subsection (ii)). 

Moreover, regulation 190.06(e)(2) limits 

the amount of equity that may be 

transferred in respect of any account to 

the funded balance of that account, 

subject to certain adjustments, ‘‘based on 

available information as of the calendar 

day immediately preceding transfer’’ 

(emphasis supplied). 

While a transfer of all contracts in all 

accounts may be preferable, it may, in 

certain circumstances, be impracticable. 

If so, the regulations described above 

accommodate partial transfers. 

In addition, technical amendments 

have been made to change ‘‘business 

day’’ to ‘‘calendar day.’’ 


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159Account class means each of the following 

types of customer accounts that 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. 

160For example, when evaluating the 

creditworthiness of various FCMs, the trustee may 

conclude that it would be preferable to transfer 

portions of a customer account to several different 

non-defaulting FCMs who have high credit ratings 

instead of one non-defaulting futures commission 

merchant with lower credit quality. 

161The amendments to Part 190 appear to be selfexecuting, but commenters are invited to suggest 

why an implementation period for these 

amendments might be necessary. 

162 5 U.S.C. 601 et seq. 

163See 66 FR 45605, 45609 (Aug. 29, 2001) 

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

(FCMs). 

164 44 U.S.C. 3501 et seq. 

165 Id. 

166See generally Notice of Proposed Rulemaking, 

Privacy of Consumer Financial Information; 

Conforming Amendments Under Dodd-Frank Act, 

75 FR 66014 (Oct. 27, 2010). 

H. Proposed Amendments to Regulation 

190.07—Calculation of Allowed Net 

Equity 

Proposed amendments to regulation 

190.07(b) clarify that individual cleared 

swaps customer accounts within an 

omnibus account are to be treated 

individually. A proposed amendment to 

regulation 190.07(c) corrects a 

typographical error. Proposed 

amendments to regulation 190.07(e) 

would 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, 

provided that such rules have been 

submitted to the Commission for 

approval pursuant to section 5c(c)(4) of 

the CEA and have received such 

approval, or have been approved 

pursuant to regulation 190.10(d). This 

change is intended to conform the 

valuation of an open commodity 

contract to current market practices. 

Another proposed amendment to 

regulation 190.07(e) would change 

references to securities traded over-thecounter pursuant to the National 

Association of Securities Dealers 

Automated Quotation System to 

securities not traded on an exchange, 

again to conform to current market 

practices. 

I. Proposed Amendments to Regulation 

190.09—Member Property 

Proposed amendments to regulation 

190.09(b) have been made to include 

references to an account excluded 

pursuant to the proviso in regulation 

30.1(c) (with respect to proprietary 

foreign futures and options customers) 

and to the cleared swaps proprietary 

account. 

J. Proposed Amendments to Regulation 

190.10—General 

Proposed amendments to regulation 

190.10 (a) have been made to remove 

references to providing notice by 

telegram or ordinary postal mail and to 

require notice by e-mail and overnight 

mail. 

K. Proposed Amendments to Appendix 

A to Part 190—Bankruptcy Forms, 

Bankruptcy 

Proposed changes to appendix A, 

form 1 would remove references to 

‘‘bulk transfers’’ and replace the term 

with the word ‘‘transfers.’’ While the 

Commission believes that the trustee 

should transfer as much of a customer 

account as possible for each account 

class 159 to one non-defaulting FCM, the 

Commission recognizes that there may 

be situations where a bulk transfer may 

not be possible.160

Technical amendments also are being 

proposed for appendix A to Part 190. 

These amendments would include 

revisions to reflect the addition of 

section 4d(f) by section 724 of the DoddFrank Act. In addition, amendments 

have been made to 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. Additional technical 

amendments to appendix A to Part 190 

have been proposed to conform certain 

time periods to the proposed changes 

made by the Commission to implement 

Public Law 111–16, the Statutory TimePeriods Technical Amendments Act of 

2009. 

L. Proposed Amendments to Appendix 

B to Part 190—Special Bankruptcy 

Distributions 

Proposed amendments to appendix B 

would clarify that the cross margining 

program is intended to apply only to 

futures customers and futures customer 

funds. 

VI. Effective Date 

The Commission requests comment 

on the appropriate timing of 

effectiveness for the final rules for Part 

22.161 Specifically, is six months after 

the promulgation of final rules 

sufficient? If not, please specify a 

recommended time period, and explain 

in detail the reasons why no shorter 

period will be sufficient. 

VII. Administrative Compliance 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’)162 requires that agencies, in 

proposing rules, consider whether the 

rules they propose will have a 

significant economic impact on a 

substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis addressing the 

impact. The proposed rules will affect 

DCOs and FCMs. The Commission has 

previously determined that DCOs and 

FCMs are not small entities for purposes 

of the RFA.163

Accordingly, pursuant to section 

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

Chairman, on behalf of the Commission, 

certifies that these proposed rule 

amendments will not have a significant 

economic impact on a substantial 

number of small entities. The 

Commission invites the public to 

comment on this finding. 

B. Paperwork Reduction Act 

1. Introduction 

Provisions of proposed new Part 22 of 

the Commission’s rules include new 

information disclosure and 

recordkeeping requirements that 

constitute the collection of information 

within the meaning of the Paperwork 

Reduction Act of 1995 (‘‘PRA’’).164 The 

Commission therefore is submitting this 

proposed collection of information to 

the Office of Management and Budget 

(‘‘OMB’’) for review in accordance with 

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

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.165 The 

title for this collection of information is 

‘‘Disclosure and Retention of Certain 

Information Relating to Cleared Swaps 

Customer Collateral,’’ OMB Control 

Number 3038–NEW. 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.166

This collection of information has not 

yet been assigned an OMB control 

number. 

2. Information Provided by Reporting 

Entities 

Proposed section 22.2(g) requires each 

FCM with Cleared Swaps Customer 

Accounts to compute daily the amount 

of Cleared Swaps Customer Collateral 

on deposit in Cleared Swaps Customer 

Accounts, the amount of such collateral 


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167Proposed section 22.5(c) provides an 

exception for a DCO serving as a depository where 

such DCO has made effective rules that provide for 

the segregation of Cleared Swaps Customer 

Collateral in accordance with all relevant 

provisions of the CEA and the regulations 

thereunder. 

168This estimate is based on the following: there 

are currently approximately 125 FCMs registered 

with the Commission. However, it is expected that 

only FCMs with substantial capital will be capable 

of clearing swaps. There are approximately 75 

FCMs with adjusted net capital in excess of $25 

million, accordingly, and allowing room for growth, 

it is estimated that there will be 100 FCMs subject 

to these requirements. 

169The range of estimates of hours is influenced 

by the fact that FCMs commonly use similar or 

identical data systems produced by a small number 

of vendors, so there may be significant economies 

of scale in making the system modifications 

required for the section 22.11 disclosure. The 

estimates also are based on the assumption that half 

of the time required to modify systems will be 

expended on a one-time basis and annualized over 

five years. 

170The range of estimates of hours is influenced 

by the fact that FCMs and DCOs commonly use 

similar or identical data systems produced by a 

small number of vendors, so there may be 

significant economies of scale in making the system 

modifications required for the section 22.12 

recordkeeping. The estimates also are based on the 

assumption that half of the time required to modify 

systems will be expended on a one-time basis and 

annualized over five years. 

required to be on deposit in such 

accounts and the amount of the FCM’s 

residual financial interest in such 

accounts. The computations and 

supporting data must be kept in 

accordance with the CFTC regulation 

1.31, which establishes generally 

applicable rules for recordkeeping 

under the CEA. The purpose of this 

collection of information is to help 

ensure that FCMs’ Cleared Swaps 

Customer Accounts are in compliance at 

all times with statutory and regulatory 

requirements for such accounts. 

Proposed section 22.5(a) requires an 

FCM or DCO to obtain, from each 

depository with which it deposits 

cleared swaps customer funds,167 a 

letter acknowledging that such funds 

belong to the cleared swaps customers 

of the FCM, and not the FCM itself or 

any other person. The purpose of this 

collection of information is to confirm 

that the depository understands its 

responsibilities with respect to 

protection of cleared swaps customer 

funds. 

Proposed section 22.11 requires each 

FCM that intermediates cleared swaps 

for customers on or subject to the rules 

of a DCO, whether directly as a clearing 

member or indirectly through a 

Collecting Futures Commission 

Merchant, to provide the DCO or the 

Collecting Futures Commission 

Merchant, as appropriate, with 

information sufficient to identify each 

customer of the FCM whose swaps are 

cleared by the FCM. Section 22.11 also 

requires the FCM, at least once daily, to 

provide the DCO or the Collecting 

Futures Commission Merchant, as 

appropriate, with information sufficient 

to identify each customer’s portfolio of 

rights and obligations arising out of 

cleared swaps intermediated by the 

FCM. The purpose of this collection of 

information is to facilitate risk 

management by DCOs and Collecting 

Futures Commission Merchants, and, in 

the event of default by the FCM, to 

enable DCOs and Collecting Futures 

Commission Merchants to perform their 

duty, pursuant to section 22.15, to treat 

the collateral attributed to each 

customer of the FCM on an individual 

basis. 

Proposed section 22.12 requires that 

each Collecting Futures Commission 

Merchant and DCO, on a daily basis, 

calculate, based on information received 

pursuant to proposed section 22.11 and 

on information generated and used in 

the ordinary course of business by the 

Collecting Futures Commission 

Merchant or DCO, and record certain 

information about the amount of 

collateral required for each Cleared 

Swaps Customer and the sum of these 

amounts. 

Proposed section 22.16 requires that 

each FCM who has cleared swaps 

customers disclose to each of such 

customers the governing provisions, as 

established by DCO rules or customer 

agreements between collecting and 

depositing FCMs, relating to use of 

customer collateral, transfer, 

neutralization of the risks, or liquidation 

of cleared swaps in the event of a 

default by a depositing FCM relating to 

a cleared swaps customer account. The 

purpose of this collection of information 

is to ensure that cleared swaps 

customers are informed of the 

procedures to which accounts 

containing their swaps collateral may be 

subject in the event of a default by their 

FCM. 

The recordkeeping and disclosure 

requirements of sections 22.2(g) and 

22.11 are expected to apply to 

approximately 100 entities on a daily 

basis.168 The recordkeeping requirement 

of section 22.5 is expected to apply to 

approximately 100 entities on an 

approximately annual basis. Based on 

experience with analogous 

recordkeeping and disclosure 

requirements for FCMs in futures 

transactions, the recordkeeping and 

disclosure required by section 22.2(g) is 

expected to require about 100 hours 

annually per entity, for a total burden of 

approximately 20,000 hours. At an 

hourly rate of $25 per hour, the cost 

burden would be approximately $2500 

per entity per year for a total of 

$250,000. Also based on experience 

with analogous recordkeeping 

requirements for FCMs in futures 

transactions, the recordkeeping 

requirement of section 22.5 is expected 

to require about 5 hours per entity per 

year, for a total burden of approximately 

500 hours per year. At an hourly rate of 

$25 per hour, the cost burden would be 

approximately $125 annually per entity, 

for a total of $12,500. 

The disclosure required by section 

22.11 involves information that FCMs 

that intermediate swaps generate and 

use in the usual and customary ordinary 

course of their business. It is expected 

that the required disclosure will be 

performed using automated data 

systems that FCMs maintain and use in 

the usual and customary ordinary 

course of their business but that certain 

additional functionality will need to be 

added to these systems to perform the 

required disclosure. Because of the 

novel character of proposed section 

22.11, it is not possible to make a 

precise estimate of the paperwork 

burden. We estimate that the necessary 

modifications to, and maintenance of, 

systems may require a range of between 

20 and 40 hours of work annually at a 

salary of approximately $75 per hour.169

The total annual burden for section 

22.11 therefore is estimated at 2,000 to 

4,000 hours and $150,000 to $300,000. 

The recordkeeping required by 

proposed section 22.12 involves 

information that Collecting Futures 

Commission Merchants and DCOs will 

receive pursuant to proposed section 

22.11 or that they generate and use in 

the usual and customary ordinary 

course of their business. It is expected 

that the required recordkeeping will be 

performed using automated data 

systems that Collecting Futures 

Commission Merchants and DCOs 

maintain and use in the usual and 

customary ordinary course of their 

business but that certain additional 

functionality will need to be added to 

these systems to perform the required 

disclosure. Because of the novel 

character of proposed section 22.12, it is 

not possible to make a precise estimate 

of the paperwork burden. We estimate 

that the necessary modifications to, and 

maintenance of, systems may require a 

range of between 20 and 40 hours of 

work annually at a salary of 

approximately $75 per hour.170 It is 

expected that the required 

recordkeeping will be performed by 

approximately 100 entities. The total 

annual burden for section 22.11 


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171 7 U.S.C. 19(a). 

172According 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. 

therefore is estimated at 2,000 to 4,000 

hours and $150,000 to $300,000. 

Proposed section 22.16 would apply 

to the same estimated 100 entities as 

sections 22.2(g), 22.5(a) and 22.11. The 

required disclosure would have to be 

made once each time a swaps customer 

begins to be cleared through a particular 

DCO or collecting FCM and each time 

a DCO or collecting FCM through which 

a customer’s swaps are cleared changes 

it polices on the matters covered by the 

disclosure. It is expected that each 

disclosure would require about 0.2 

hours of staff time by staff with a salary 

level of about $25 per hour. It is 

uncertain what average number of 

swaps customers FCMs will have, and 

what average number of disclosures will 

be required for each customer annually. 

Assuming an average of 500 customers 

per FCM and two disclosures per 

customer per year, the estimated total 

annual burden would be 200 hours and 

$5000 per entity, for an overall burden 

of $500,000. 

3. Information Collection Comments 

The Commission requests comment 

on all aspects of this proposed 

mandatory collection of information and 

document retention. Specifically, the 

Commission requests comment on 

whether the Commission has provided 

sufficient clarity concerning the types of 

information that would be required to 

be disclosed and retained. 

C. Cost-Benefit Analysis 

1. Introduction 

a. Requirement Under Section 15(a) of 

the CEA 

Section 15(a) of the CEA 171 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: (i) Protection of market 

participants and the public; (ii) 

efficiency, competitiveness, and 

financial integrity of futures markets; 

(iii) price discovery; (iv) sound risk 

management practices; and (v) other 

public interest considerations. The 

Commission may in its discretion give 

greater weight to any one of the five 

enumerated areas and could in its 

discretion determine that, 

notwithstanding its costs, a particular 

rule is necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or 

accomplish any of the purposes of the 

CEA. 

b. Structure of the Analysis 

As mentioned above, the Commission 

has decided to propose the Complete 

Legal Segregation Model. A number of 

commenters to the ANPR suggested that 

the costs and benefits of the Complete 

Legal Segregation Model should be 

informed by the Futures Model. Such 

commenters provided quantitative 

estimates of such costs (but not such 

benefits). Using these quantitative 

estimates of cost, the Commission 

discusses the costs and benefits of the 

Complete Legal Segregation Model (as 

well as the Legal Segregation with 

Recourse Model) in relation to a 

common baseline—namely, the Futures 

Model. 

The Commission notes that other 

commenters suggested that the costs and 

benefits of the Complete Legal 

Segregation Model should be informed 

by the protections for collateral obtained 

by customers in the existing swaps 

markets and of the costs incurred for 

such protections. While this alternative 

is not part of the formal analysis, it can 

inform us of the costs of the various 

models. Therefore, the Commission has 

asked for additional comment on such 

protections, including quantitative 

estimates of costs, in section III(B) 

herein. 

Finally, as mentioned above, the 

Commission is considering the Legal 

Segregation with Recourse Model. The 

Commission has asked for additional 

comment on the Legal Segregation with 

Recourse Model, as well as (i) the 

Futures Model and (ii) the Optional 

Approach. 

2. Costs of the Complete Legal 

Segregation Model, the Legal 

Segregation With Recourse Model, and 

the Futures Model 

There are several kinds of costs 

associated with the Complete Legal 

Segregation and the Legal Segregation 

with Recourse Models, relative to the 

Futures Model. These can be 

categorized as operational costs, Risk 

Costs (as section II(C)(3) defines such 

term), and costs associated with 

induced changes in behavior. The 

Complete Legal Segregation, the Legal 

Segregation with Recourse, and the 

Futures Models will require different 

payments from various parties in the 

event that there is a simultaneous 

default of one or more Cleared Swaps 

Customers and their FCMs. The direct 

effect of the Complete Legal Segregation 

and the Legal Segregation with Recourse 

Models, in contrast to the Futures 

Model, would be to protect the Cleared 

Swaps Customer Collateral of nondefaulting customers against claims by 

the relevant DCO.172 In general, this 

protection of non-defaulting customers 

makes it more likely, relative to the 

Futures Model, that the financial 

resource package of the DCO (including, 

e.g., the DCO’s own capital contribution 

and the guaranty funds contributed by 

member FCMs) would need to be 

applied to the liability of the defaulting 

Cleared Swaps Customer(s). 

a. Operational Costs 

Operational costs associated with the 

Complete Legal Segregation and the 

Legal Segregation with Recourse Models 

result from a greater need, relative to the 

Futures Model, to transfer information 

about individual Cleared Swaps 

Customer Contracts between FCMs and 

DCOs, an increased amount of account 

information kept by DCOs, potential 

increases in compliance costs, and 

related kinds of costs. Some of these 

costs will be one-time set-up costs, and 

other costs will be recurring. 

Operational costs associated with the 

Complete Legal Segregation and the 

Legal Segregation with Recourse Models 

can be expected to be identical or close 

to identical because the informational 

and other operational requirements of 

both models are substantially similar— 

where the two models differ is in the 

scope of DCO’s claim to Cleared Swaps 

Customer Collateral in the event of the 

simultaneous default of one or more 

Cleared Swaps Customers and their 

FCMs. 

Precise determination of the extent of 

operational costs associated with the 

Complete Legal Segregation and the 

Legal Segregation with Recourse Models 

depends on the number of Cleared 

Swaps Customers at each FCM, the 

number and types of Cleared Swaps 

Customer Accounts held by each 

customer, and other factors. Some 

estimates of the typical FCM’s costs 

were provided by ISDA. As discussed 

above, in comments on the ANPR, ISDA 

estimates that the Complete Legal 

Segregation and the Legal Segregation 

with Recourse Models would involve a 

one-time cost increase of $0.8 million to 

$1 million per FCM, plus a recurring 


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173See note 43 supra. 

174 Implicitly then, unless there are offsetting 

changes, the resources available to the DCO to cover 

its obligations to counterparties in the event of the 

default of one or more Cleared Swaps Customers 

and their FCMs would potentially be smaller under 

the Complete Legal Segregation Model than under 

the Legal Segregation with Recourse Model, and 

hence the guarantee offered to Cleared Swaps 

counterparties by the DCO would potentially be less 

secure under the Complete Legal Segregation 

Model. Such offsetting changes, however, are 

required by proposed Commission requirements 

regarding DCO financial resource packages. See 

section II(C)(1) herein. As the following discussion 

indicates, the DCO may take steps, in terms of 

enhanced resources and use of risk-management 

tools to insure the security that it offers to Cleared 

Swaps counterparties. 

175Presumably, some of the cost to the FCMs 

would be offset by enhanced charges to customers. 

Buy-side commenters to the ANPR have indicated 

that they would be willing to bear such charges. 

176While the Legal Segregation with Recourse 

Model permits the DCO to take into account the 

omnibus customer account, as a diversified pool, in 

calculating the total resources available to cover the 

DCO’s obligations resulting from a combined 

customer/FCM default, as explained above, it 

would expose the DCO to a higher risk of having 

to use the DCO’s own capital and the guaranty fund 

contributions of non-defaulting FCM members than 

the Futures Model. 

annual cost with a median estimate of 

roughly $0.7 million.173 In addition, 

there would be costs faced by each DCO, 

which would likely be of a similar 

magnitude, unless the DCO already 

possesses the information required to 

implement the Complete Legal 

Segregation and the Legal Segregation 

with Recourse Models. A DCO with 

such information may find the 

operational costs associated with the 

Complete Legal Segregation and the 

Legal Segregation with Recourse Models 

to be negligible. 

b. Risk Costs 

Risk Costs refer to the costs associated 

with reassigning liability in the event of 

a customer default (i.e., the Complete 

Legal Segregation Model or the Legal 

Segregation with Recourse Model 

compared to the Futures Model). This 

can usefully be divided into direct and 

indirect costs (and associated benefits). 

The direct costs of the Complete Legal 

Segregation and the Legal Segregation 

with Recourse Models are the increased 

risk the DCO will face when one or 

more Cleared Swaps Customers and 

their FCMs default. Under the Complete 

Legal Segregation Model, this is equal to 

the probability of a default by a Cleared 

Swaps Customer and its FCM, times the 

expected contribution that fellow 

customers would have provided toward 

the uncovered loss. The gain to Cleared 

Swaps Customers under this model is 

the value they place on avoiding this 

same cost (i.e., owning insurance 

against Fellow-Customer Risk). The 

Legal Segregation with Recourse Model 

is fundamentally similar, except that the 

Cleared Swaps Customers may 

ultimately be responsible for some of 

that deficiency, should the capital of the 

DCO and the guaranty fund 

contributions of non-defaulting FCM 

members be exhausted.174

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. Hence, maintaining the 

same assurance of performance requires 

the DCO to raise additional financial 

resources. While the Legal Segregation 

with Recourse Model does not directly 

reduce DCO financial resources, it 

restructures them so as to likely lead a 

DCO to change its default management 

structure. The exact nature of the Risk 

Costs will depend on how each DCO 

structures its default management 

structure if the Complete Legal 

Segregation or the Legal Segregation 

with Recourse Models is chosen over 

the Futures Model. The comments sent 

to the Commission have suggested two 

possible ways by which the DCO may 

vary its default management structure: 

(i) By increasing the amount of 

collateral that each Cleared Swaps 

Customer must provide; or (ii) by 

increasing the amount of resources that 

each FCM must contribute to the 

guaranty fund. 

Focusing on (i) (an increase in the 

amount of collateral that each Cleared 

Swaps Customer must provide), 

estimates of the size of the increase 

vary, and in principle depend on 

whether the Complete Legal Segregation 

Model or the Legal Segregation with 

Recourse Model is under consideration. 

In comments on the ANPR, both CME 

and ISDA suggest that the Complete 

Legal Segregation Model would require 

an increase of approximately 70% in 

Cleared Swaps Customer Collateral, or 

an increase of roughly $500–600 billion 

in total required Cleared Swaps 

Customer Collateral relative to the 

Futures Model. The organizations had 

somewhat different views of the Legal 

Segregation with Recourse Model. ISDA 

noted that the total pool of capital 

available to a DCO under this model 

would not be changed, although there 

would be ‘‘a real wealth transfer’’ from 

the FCMs and DCO to the customers, 

while CME suggested that the increase 

would be of a similar magnitude to the 

effect of the Complete Legal Segregation 

Model. 

If instead the capital structure is 

restored though (ii) (an increase in the 

amount of resources that each FCM 

would contribute to the guaranty fund), 

what were described as ‘‘conservative’’ 

estimates suggest an increase of $50 

billion (CME) to $128 billion (ISDA) in 

guaranty funds for the Complete Legal 

Segregation Model.175 By contrast, LCH, 

in its comment, stated that there would 

be no need for additions to the guaranty 

fund under either the Complete Legal 

Segregation Model or the Legal 

Segregation with Recourse Model 

because the manner in which it 

currently calculates the size of its 

guaranty fund provides adequate 

resources against default risk under the 

Complete Legal Segregation Model and 

the Legal Segregation with Recourse 

Model and because, in the view of LCH, 

a guaranty fund of similar size would be 

required to provide adequate security 

under the Futures Model. 

The wide divergence in these figures 

is due in large part to different implicit 

assumptions about fellow customer 

behavior, and how such behavior 

should affect a DCO’s prudent design of 

its financial resources package. 

Specifically, Core Principle B for DCOs, 

section 5b(c)(2)(B) of the CEA, requires 

the sufficiency of a DCO’s financial 

resources package to be judged relative 

to the ‘‘worst’’ exposure, in a 

probabilistic sense, created by a member 

or participant in extreme but plausible 

market conditions. In the Complete 

Legal Segregation Model, such an 

approach likely requires an assessment 

of the largest stressed loss on a to-bespecified number of the largest 

customers to the given FCM since, in 

this instance, the DCO would not have 

access to the collateral of non-defaulting 

customers in such an event. By contrast, 

the Futures and the Legal Segregation 

with Recourse Models allow (to a 

degree) for the sufficiency of the DCO 

financial resources package to be judged 

relative to the ‘‘worst’’ loss that an FCM 

suffers in its omnibus customer account, 

recognizing that account as a diversified 

pool and taking advantage of the 

diversification benefit realized by the 

DCO across the customers within that 

pool. This is so because the Futures 

Model (and, at a later point, the Legal 

Segregation with Recourse Model) 

would allow the DCO to use the 

collateral of non-defaulting customers to 

cover losses the DCO would otherwise 

face as a result of a simultaneous default 

of one or more Cleared Swaps 

Customers and their FCMs.176

However, the extent of the 

diversification effect arising from the 

DCO’s access to the entire omnibus 

customer account allowed by the 

Futures Model (and, at a later point in 

the process, the Legal Segregation with 

Recourse Model) depends on how much 


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177LCH states that a methodology in which no 

diversification is assumed represents their current 

practice, and is the most ‘‘conservative’’ in terms of 

capital adequacy. It argues that it is imprudent to 

assume that any funds in the omnibus Cleared 

Swaps Customer Account will remain at the time 

of default because that default may plausibly occur 

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), 

during which time the Cleared Swaps Customers 

have time to port their Cleared Swaps Contracts and 

associated collateral away from the defaulting FCM. 

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 either the Complete Legal 

Segregation or the Legal Segregation with Recourse 

Models. 

178The LCH’s observation also impacts the 

requisite change in Cleared Swaps Customer 

Collateral. The question of how to appropriately 

evaluate the omnibus customer account is a 

question of financial resources and is beyond the 

scope of this rulemaking. We note, however, that to 

the extent that immediate history may provide some 

guidance, the aggregate amount of segregated funds 

in Lehman’s omnibus customer account dropped by 

roughly 75% during the week prior to its filing for 

bankruptcy. 

179An additional offset to this cost is the value 

that customers assign to the increased safety of their 

collateral from fellow customer risk, a point which 

is discussed further below. 

of the resources supplied by nondefaulting Cleared Swaps Customers 

(via initial margin) will be present in the 

account 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 the 

guaranty fund based on a fully 

diversified pool of customer positions. 

Conversely, if all Cleared Swaps 

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.177

More generally, the extent to which 

the Complete Legal Segregation or the 

Legal Segregation with Recourse Models 

really requires a larger guaranty fund or 

higher levels of collateral per Cleared 

Swaps Customer (relative to the Futures 

Model) depends on the extent to which 

Cleared Swaps Customer Contracts can 

be expected to remain with the 

defaulting FCM during the time period 

immediately before the default.178 Since 

the circumstances of particular FCM 

defaults will vary, DCOs, in determining 

their financial resources package, can 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. And while determining the 

appropriate assumptions regarding 

customer behavior under either the 

Futures or the Legal Segregation with 

Recourse Models is central to the issue 

of capital adequacy, it may prove less 

central to the consideration of costs and 

benefits under this rule, since both 

those costs and benefits depend on the 

extent to which Cleared Swaps 

Customers will transfer their Cleared 

Swaps Contracts. 

A distinct question in evaluating Risk 

Cost is how to translate a Cleared Swaps 

Customer Collateral or guaranty fund 

increase to a cost increase. A customer 

required to post an additional $100 of 

Cleared Swaps Customer Collateral is 

not made worse off by $100. Moreover, 

the cost to the customer is, at least in 

part, offset by the benefit to the DCO. 

The cost to the customer of a Cleared 

Swaps Customer Collateral 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 level of 

Cleared Swaps Customer Collateral 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. 

While an exact figure for this difference 

is difficult to calculate precisely, it is 

likely to be in a range of 1–4% per year 

over the life of the swap. Offsetting this 

cost is the gain to the DCO of having 

additional assets available in the event 

of the simultaneous default of one or 

more Cleared Swaps Customers and 

their FCMs, which may enable it to 

obtain a higher rate of return on some 

of its other assets.179 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 

that $100 if it were not deposited to the 

guaranty fund. 

The benefit to customers of greater 

protection for customer margin 

provided by the Complete Legal 

Segregation Model and the Legal 

Segregation with Recourse Model also 

depends, to some extent, on 

assumptions about customers’ behavior 

in advance of a fellow-customer default. 

Under the extreme assumption that all 

customers costlessly anticipate the 

default and move their positions to a 

different FCM, then neither the 

Complete Legal Segregation Model nor 

the Legal Segregation with Recourse 

Model provides any benefit to 

customers (since their Cleared Swaps 

Customer Accounts would not have 

been at risk under the benchmark). More 

generally, the greater the extent to 

which customers will move their 

positions, the lower the benefits of the 

Complete Legal Segregation Model and 

the Legal Segregation with Recourse 

Model relative to the Futures Model. Of 

course, under the Futures Model there 

exists uncertainty surrounding a 

customer’s ability to anticipate an FCM 

default, and this uncertainty is either 

wholly or mostly eliminated under the 

Complete Legal Segregation and the 

Legal Segregation with Recourse 

Models. However, this benefit afforded 

the customer needs to be balanced 

against the cost to the DCO of insuring 

against this uncertainty, a portion of 

which can be anticipated to be passed 

along to the customer. Thus, both the 

capital costs and the benefits of the 

Complete Legal Segregation and the 

Legal Segregation with Recourse 

Models, 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 move their 

positions. As a result, differing 

assumptions about customer mobility in 

advance of default are likely to have 

smaller implications for the relative 

costs and benefits of differing 

approaches than they do for Risk Cost 

considered in isolation. 

c. Induced Changes in Behavior 

Finally, in the category of costs and 

benefits associated with induced 

changes in behavior, several issues are 

worth noting. CME has argued that the 

Complete Legal Segregation and the 

Legal Segregation with Recourse Models 

could potentially reduce the incentives 

of individual customers to exercise due 

diligence when choosing an FCM. 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 liability in the 

event of fellow customer default, the 

customer will devote less effort to 

monitoring the FCM and its customers. 

While this is likely to be true, these 

liability regimes have offsetting 

increased monitoring incentives on the 

part of FCMs and the DCO. That is, 

because the Complete Legal Segregation 

and the Legal Segregation with Recourse 

Models increase the likelihood that a 

customer default would impact the 

guaranty fund, increased incentives 

exist to protect that fund through more 

careful monitoring by the suppliers of 

the guaranty fund and their agent (the 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
33848 Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 

180See note 56 supra. 

181 In the banking literature, this argument 

supports capital requirements as effective 

disincentives to excessive risk-taking. 

182See, 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). 

183See ISDA Supplemental at 2. 

184Section III(E) describes certain concerns with 

adopting the Optional Approach. 

185As noted above, this model would leave some 

residual fellow-customer risk because the DCO 

would allocate collateral between defaulting and 

non-defaulting customers based on information the 

FCM provided the day prior to default, so the 

allocation would not reflect movement in the 

cleared swaps portfolio of customers on the day of 

default. 

186See footnote 178 supra (regarding recent 

experience with Lehman). Cf. e.g., Inskeep v. 

Griffin, 440 B.R. 148, 151–52 (Beginning on 

Monday, December 21, 1998 and continuing into 

the morning of Tuesday, December 22, 1998 * * * 

Park * * * a trader who operated out of Griffin 

Trading Company’s London office, substantially 

exceeded his trading limits and suffered losses 

* * * As a result of Park’s losses, Griffin Trading 

became insolvent.’’). 

DCO). Indeed, as discussed above,180

other commenters (BlackRock, Freddie 

Mac, and Vanguard) observe that the 

availability of fellow-customer collateral 

as a buffer reduces the incentives of 

DCOs to provide vigorous oversight. 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.181 This is because there are ‘‘free 

rider’’ effects associated with diffuse 

liability; when liability is spread upon 

a large number of agents, each gains 

little from devoting resources to 

monitoring the firm.182 This effect is 

compounded by an information effect; 

even if the incentive exists, it is difficult 

for individual customers to gain access 

to information about the financial 

condition of the FCM, and even more so 

about the financial condition of their 

fellow customers. In contrast, the DCO 

will, especially under the Complete 

Legal Segregation Model and the Legal 

Segregation with Recourse Model, have 

good information about the financial 

condition of both FCMs and customers. 

d. Portability 

Another issue is the ease of moving 

Cleared Swaps Customer Contracts to 

new FCMs following an FCM default. 

Following a default by an FCM, the 

Cleared Swaps Contracts 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 prevents a 

customer from needing to reestablish a 

position, which potentially can be 

costly, especially in a stressed economic 

state.183 As discussed above, the various 

models result in different amounts of 

customer-specific information residing 

with the DCO under the various models. 

While it is difficult to quantify the 

effects of the alternatives on the cost of 

moving positions between FCMs, it 

would seem that both the Complete 

Legal Segregation and the Legal 

Segregation with Recourse models do 

not decrease portability, especially 

given the increases in capital 

requirements that many commenters 

view as a likely consequence of either 

model. In fact, ISDA emphasizes that 

the Complete Legal Segregation Model 

likely increases portability. 

e. Potential Preferences of Cleared 

Swaps Customers 

Overall, evaluating the costs and 

benefits of the Complete Legal 

Segregation Model and the Legal 

Segregation with Recourse Model 

relative to the Futures Model requires 

one to know the inherently-subjective 

valuation end-users place on the lower 

likelihood of losing their initial margin, 

as well as more precise estimates of the 

cost. Given the constraints on such 

knowledge, and the likelihood that the 

benefits to customers will, to some 

extent, vary with the cost to DCOs (that 

is, both are related to the same 

underlying factors), the best indirect 

evidence of the likely effect is the 

comments provided by the buy-side. 

While the Commission has not 

canvassed all buy-side members, most 

of those that chose to comment on the 

ANPR support the change. It is not 

knowable if these commenters fully 

internalized all of the potential costs 

outlined above (e.g., potentially higher 

margins, increased costs imposed by 

FCMs). However, these commenters 

generally told the Commission that they 

understood that more protection for 

customer collateral was likely to come 

at a cost and that they nevertheless 

favored more protective approaches. 

f. The Optional Approach 

A final option is giving DCOs the 

choice of which segregation model to 

employ. If all DCOs would adopt the 

same model when given a choice, then 

the foregoing analysis would apply. In 

contrast, if different DCOs might adopt 

different models, then the analysis of 

the system-wide costs and benefits 

would need to account for the choices 

made by the extant DCOs. The 

Commission seeks comment on the 

likely alternatives that would emerge if 

DCOs had the option of choosing their 

segregation model, and the likely costs 

and benefits of having alternative 

default models available.184

3. Summary of Benefits of Legal 

Segregation Models 

Based on the discussion in the 

previous section, the primary expected 

benefits of adopting the Complete Legal 

Segregation or the Legal Segregation 

with Recourse Models to implementing 

section 724 of the Dodd-Frank Act can 

be summarized as follows. 

a. Fellow-Customer Risk 

The primary direct benefit from either 

the Complete Legal Segregation or the 

Legal Segregation with Recourse Models 

is to reduce the risk to Cleared Swaps 

Customers of losing the value of their 

collateral in a scenario in which an FCM 

and one or more of its customers 

defaults on its obligations in connection 

with Cleared Swaps transactions. The 

Complete Legal Segregation Model 

would largely eliminate this risk.185 The 

Legal Segregation with Recourse Model 

would limit this risk to defaults in 

which the magnitude of the Cleared 

Swaps Customer component of the 

default exceeds the aggregate of the 

DCO’s own capital and the guaranty 

fund contributions of non-defaulting 

FCM members. 

As discussed in the previous section, 

the value of this reduced risk of loss to 

Cleared Swaps Customers will, to some 

degree, depend on the extent to which 

such customers are able to anticipate 

FCM defaults and voluntarily transfer 

their Cleared Swaps Contracts, and 

associated collateral, to other FCMs 

before the default occurs. In practice, 

some FCM defaults may be anticipated 

by a substantial proportion of Cleared 

Swaps Customers, while others may 

occur suddenly with few or no 

customers able to transfer their 

collateral.186 For this reason, an 

important benefit of the Legal 

Segregation Model (particularly the 

Complete Legal Segregation Model) is 

greater certainty. By providing postdefault protection against FellowCustomer Risk (as such term is defined 

above), the Legal Segregation Model 

provides Cleared Swaps Customers with 

a degree of certainty that they will not 

lose their collateral due to the actions of 

other customers regardless of whether 

they are able to anticipate an FCM 

default. Swaps customers who 

commented on the ANPR indicated that 

such certainty was critical to their 

business model. The direct benefit to 

Cleared Swaps Customers of reduced 

Fellow-Customer Risk and reduced 


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187Moreover, any reduced monitoring by 

customers would also imply a reduced monitoring 

cost. 188See ISDA Supplemental at 3. 

uncertainty may generate a variety of 

indirect benefits, for example an 

increased ability by some businesses to 

use cleared swaps as a risk management 

tool or a reduced need by Cleared 

Swaps Customers to incur costs to 

protect against the consequences of 

Fellow-Customer Risk in the event of an 

FCM default. 

b. Portability and Systemic Risk 

An additional benefit of the Complete 

Legal Segregation Model is to foster 

portability. By preserving the collateral 

of non-defaulting Cleared Swaps 

Customers, this model increases the 

likelihood that the Cleared Swaps 

Contracts of these customers can be 

successfully transferred. Fostering such 

transfer, as opposed to the liquidation of 

these Cleared Swaps Contracts, will 

carry benefits both for the Cleared 

Swaps Customers and for the financial 

system as a whole (the latter by 

reducing the likelihood that markets 

would be roiled by a mass liquidation). 

c. Induced Changes in Behavior 

Further benefits are expected to result 

from changes in behavior induced by 

the direct costs and benefits of the 

Complete Legal Segregation or Legal 

Segregation with Recourse Models. 

Because DCOs will not be able to rely 

on the collateral of non-defaulting 

Cleared Swaps Customers, they will 

have incentives to increase the extent of 

their monitoring of the risk posed by 

their FCM members and the major 

customers of those FCMs. This will have 

a tendency to reduce the incidence of 

FCM and major customer defaults. Some 

commenters on the ANPR suggested that 

the greater protection provided by the 

Legal Segregation Model (particularly 

the Complete Legal Segregation Model) 

will mean that Cleared Swaps 

Customers have less incentive to 

monitor the riskiness of their FCMs than 

under the Futures Model in which 

customers are exposed to greater risk of 

loss. However, for reasons explained in 

the previous section, DCOs are in a 

better position than Cleared Swaps 

Customers to monitor FCMs, and the 

customers thereof, so the benefits from 

increased monitoring by DCOs can be 

expected to outweigh any reduced 

monitoring by customers.187

4. Relevance to Section 15(a)(2) 

Considerations 

The costs and benefits discussed in 

the previous sections bear on a number 

of the considerations listed in section 

15(a)(2) of the CEA: 

a. Protection of market participants 

and the public. The primary benefit of 

the Complete Legal Segregation Model, 

reduction in the risk of loss of Cleared 

Swaps Customer Collateral, advances 

this interest. The Commission notes that 

the Legal Segregation with Recourse 

Model, which the Commission is 

considering, also achieves such benefit, 

but to a lesser extent. 

b. Efficiency, competitiveness, and 

financial integrity of markets. As 

mentioned above, the Complete Legal 

Segregation Model would increase the 

likelihood that, in the event of a 

simultaneous FCM and Cleared Swaps 

Customer default, the DCO would be 

able to transfer the Cleared Swaps of 

non-defaulting Cleared Swaps 

Customers. Therefore, to the extent that 

the Complete Legal Segregation Model 

would enable Cleared Swaps Customers 

to avoid liquidation of their existing 

Cleared Swaps, this model would avoid 

what one commenter described as 

‘‘major market disruption with 

significant adverse economic 

impact.’’ 188 Such avoidance would 

therefore promote the financial integrity 

of the markets. 

Additionally, behavioral responses to 

the Complete Legal Segregation Model 

discussed above may also affect the 

financial integrity of markets. To the 

extent that the Complete Legal 

Segregation Model creates incentives for 

DCOs to employ higher levels of 

monitoring of FCMs and their Cleared 

Swaps Customers, it will enhance the 

financial integrity of markets. 

The Commission notes that, in 

contrast to the Complete Legal 

Segregation Model, the Legal 

Segregation with Recourse Model 

increases the likelihood of the transfer 

of Cleared Swaps Customer Contracts to 

a lesser extent. Therefore, the Legal 

Segregation with Recourse Model does 

not enhance the financial integrity of 

markets as much as the Complete Legal 

Segregation Model. 

As mentioned above, the Complete 

Legal Segregation Model arguably 

entails greater Risk Costs, although not 

operational costs, than the Legal 

Segregation with Recourse Model. Both 

such models arguably entail greater 

operational costs than the Futures 

Model. However: 

• As discussed above, commenters 

exhibited considerable divergence in 

their estimates of Risk Costs. 

• As discussed above, ANPR 

commenters suggested that the 

incremental operational costs of the 

Complete Legal Segregation or the Legal 

Segregation with Recourse Models, as 

compared with the Futures Model, 

would be relatively modest against the 

size of the market for cleared swaps. 

• Despite the possibility of increased 

Risk Costs and operational costs, most 

buy-side commenters to the ANPR 

suggested that they valued the degree of 

certainty that they will not lose Cleared 

Swaps Customer Collateral, and several 

such commenters indicated that the 

absence of this level of certainty would 

impair their ability to use cleared swaps 

for risk management purposes. To the 

extent that these commenters 

represented the perspective of swaps 

users generally, then, notwithstanding 

the possibility of increased Risk Costs 

and operational costs, adoption of either 

the Complete Legal Segregation or the 

Legal Segregation with Recourse Models 

may increase the efficiency and 

competitiveness of markets, because 

they may encourage buy-side use of 

such markets in the management of risk. 

Because the Complete Legal 

Segregation Model would eliminate the 

ability of DCOs to access the collateral 

of non-defaulting Cleared Swaps 

Customers in the event of an FCM 

default accompanied by the default of 

one or more customers, other things 

held constant, there could potentially be 

negative effects on a DCO’s financial 

integrity. Such potential negative effects 

would not be present for the Legal 

Segregation with Recourse Model, 

because DCOs would still have the 

ability to access the collateral of nondefaulting Cleared Swaps Customers. To 

the extent that negative effects may 

exist, Core Principle B for DCOs, section 

5b(c)(2)(B) of the CEA would require a 

DCO to have available alternative 

resources to protect the DCO from the 

consequences of a major FCM default, 

such as higher margin levels or larger 

guaranty funds. Consistent with this 

requirement, commenters on the ANPR 

who considered access to the collateral 

of non-defaulting Cleared Swaps 

Customers to be important generally 

assumed that DCOs would procure 

alternative financial resources if the 

Complete Legal Segregation Model is 

adopted. As a result, any potential 

negative effect of the Complete Legal 

Segregation Model on market integrity 

will be reflected in higher capital costs 

rather than an actual reduction in 

market integrity. 

c. Price discovery. The effect of the 

Complete Legal Segregation Model (or 

the Legal Segregation with Recourse 

Model), as proposed, on price discovery 

will depend on the value that Cleared 

Swaps Customers assign to the 

additional protection that they will 


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receive for Cleared Swaps Collateral 

against the cost that they will pay for 

such protection. If the former would 

exceed the latter, as buy-side 

commenters to the ANPR suggested, 

then Cleared Swaps Customers may be 

encouraged to participate in the 

markets, which could have a positive 

impact on price discovery 

d. Sound risk management practices. 

To the extent that the Complete Legal 

Segregation Model or the Legal 

Segregation with Recourse Model 

creates incentives for higher levels of 

monitoring of FCMs and their Cleared 

Swaps Customers by DCOs, it will 

enhance sound risk management 

practices. As discussed above, some 

commenters suggested that the 

Complete Legal Segregation Model or 

the Legal Segregation with Recourse 

Model would reduce incentives for 

Cleared Swaps Customers to ‘‘risk 

manage’’ their FCMs. As noted above, 

there are significant questions about the 

ability of customers to ‘‘risk manage’’ 

their FCMs effectively. Moreover, the 

Commission expects that any such effect 

would be outweighed by enhanced risk 

management on the part of DCOs. 

e. Other public interest 

considerations. As discussed above, 

some commenters suggested that the 

Complete Legal Segregation Model 

would increase market stability in times 

of stress facilitating the prompt transfer 

of customer positions without the need 

for liquidation when an FCM defaults. 

5. Public Comment 

The Commission invites public 

comment on its cost-benefit 

considerations, including the costs and 

benefits of the Complete Segregation 

Model (as proposed), the Legal 

Segregation with Recourse Model 

(which is under consideration), the 

Futures Model, and giving DCOs a 

choice of such approaches. Commenters 

are also invited to submit any data or 

other information that they may have 

quantifying or qualifying the costs and 

benefits with their comment letters. 

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. 

VIII. Text of Proposed Rules 

For the reasons stated in this release, 

the Commission hereby proposes to 

amend Chapter 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 Accounts. 

22.9 Denomination of Cleared Swaps 

Customer Collateral and Location of 

Depositories. 

22.10 Incorporation by Reference. 

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 

(or a derivatives clearing organization 

rule approved in accordance with 

§ 39.15(b)(2) of this chapter), is (along 

with such money, securities, or other 

property) commingled with a 

commodity future or option (along with 

money, securities, or other property 

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 any 

owner or holder of a Cleared Swaps 

Proprietary Account with respect to the 

Cleared Swaps in such account. 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 


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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 (i) the Cleared Swaps of 

Cleared Swaps Customers or (ii) the 

Cleared Swaps Customer Collateral; 

(C) The keeping, on behalf of such 

partnership, of records pertaining to (i) 

the Cleared Swaps of Cleared Swaps 

Customers or (ii) 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 

(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 subparagraph (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 subparagraph 

(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 


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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, or by a 

derivatives clearing organization rule 

approved in accordance with 

§ 39.15(b)(2) of this chapter. 

(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. 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). 

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

in accordance with paragraph (e)(3) 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 

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 section 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 or losses 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 or 

chargeable 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 


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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: 

(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; Deposits and 

Withdrawals from Futures Commission 

Merchants. Notwithstanding the 

foregoing, pursuant to an instruction 

from a futures commission merchant, a 

derivatives clearing organization may 

place money, securities, or other 

property belonging to the futures 

commission merchant in a DCO 

Physical Location, or deposit such 

money, securities, or other property in 

the Cleared Swaps Customer Accounts 

that the derivatives clearing 

organization maintains. The derivatives 

clearing organization may permit the 

futures commission merchant to 

withdraw such money, securities, or 

other property from a DCO Physical 

Location or Cleared Swaps Customer 

Account. 

(e) 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. 


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(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 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) 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) 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 Incorporation by Reference. 

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;’’ 

(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 provide to 

its Collecting Futures Commission 

Merchant the following information: 

(1) The first time that the Depositing 

Futures Commission Merchant 

intermediates a Cleared Swap for a 

Cleared Swaps Customer, information 

sufficient to identify such customer; and 

(2) At least once each business day 

thereafter, information 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 provide to such 

derivatives clearing organization the 

following information: 

(1) The first time that such futures 

commission merchant intermediates a 

Cleared Swap for a Cleared Swaps 

Customer, information sufficient to 

identify such customer; and 

(2) At least once each business day 

thereafter, information 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 


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(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). 

(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). 

(f) The collateral requirement 

referenced in paragraph (a) of this 

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 section 

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) of this part, which collateral 

is identified as funds or securities in 

which such futures commission 

merchant has a residual financial 

interest pursuant to § 22.2(e)(4) of this 

part, may, to the extent of such residual 

financial interest, 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. 

§ 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 


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entity acts as a Collecting Futures 

Commission Merchant. 

(c) A futures commission merchant 

which receives a call for margin 

(whether initial or variation) 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 

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. 

§ 22.15 Treatment of Cleared Swaps 

Customer Collateral on an Individual Basis. 

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

derivatives clearing organization and 

each Collecting Futures Commission 

Merchant receiving Cleared Swaps 

Customer Collateral from a Depositing 

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 Depositing 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 Depositing Futures 

Commission Merchant or of any other 

Cleared Swaps Customer or Customer. 

§ 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. 

3. In 17 CFR Part 190: 

A. Remove the words ‘‘commodity 

account’’ and ‘‘commodity futures 

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 190.03(a)(2), 

iv. Sections 190.06(g)(1)(i), (ii), and 

(3), 

v. Sections 190.10(d)(1) and (h), 

B. Remove the words ‘‘commodity 

futures contract’’ and add, in their place, 

the words ‘‘commodity contract’’ in 

§ 190.05(a)(1) and (b)(1). 

C. Remove the words ‘‘contract 

market’’ and ‘‘board of trade’’ and add, 

in their place, the words ‘‘designated 

contract market’’ in: 

i. Sections 190.01(gg), (kk)(2)(i), (4) 

and (5), 

ii. Section 190.04(d)(1)(i), and 

iii. Section 190.07(e)(2)(ii)(B) Remove 

the words ‘‘commodity transaction’’ and 


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add, in their place, the words 

‘‘commodity contract transaction’’ in 

§ 190.02(d)(3). 

4. In § 190.01, redesignate paragraphs 

(e) through (oo) as (f) through (pp), add 

a new paragraph (e) and revise 

paragraphs (a), (f), and newly 

redesignated paragraphs (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 

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 sections 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 section 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 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), 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 


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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 

been received on or before the sixth 

calendar day after entry of the order for 

relief, 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) Open commodity contracts. All 

open commodity contracts except: 

(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 


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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 

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, remove paragraph 

(e)(1)(iv) and redesignate paragraph 

(e)(1)(v) as (e)(1)(iv), revise paragraphs 

(a), (e)(1)(iii), (e)(2), (f)(3)(i) and (g)(2), 

and 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) 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: 


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(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, redesignate paragraph 

(b)(2)(xiii) as paragraph (b)(2)(xiv), add 

a new paragraph (b)(2)(xiii), and 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 customer account class, each 

individual customer account within 

each omnibus customer account referred 

to in 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 (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 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 (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 (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 (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 Intermediary 

Oversight, 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: 


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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 

(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 (i.e., deficit accounts, 

accounts with no open positions) 

(§ 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 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 

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 house or carrying 

broker 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 business 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, 


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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 

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 

business 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 __District 

of _____In re _____, Debtor, No. _____. 

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 __District 

of _____In re _____, Debtor, No. _____. Return 

this form by _____ 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 _____. 

[If claimant is a partnership claiming 

through a member] The undersigned, who 

resides at __, is a member of _____, a 

partnership, composed of the undersigned 

and _____, of _____, and doing business at __, 

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 __ is the _____ 

of __, a corporation organized under the laws 

of __ and doing business at _____, 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 _____, is the 

agent of _____, 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 $ _____. 

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. 


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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; 

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 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; 

B. Corporation 20 percent or more of 

whose outstanding voting securities are 

directly or indirectly owned, controlled, 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; 


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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, 

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 lll, 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) 

lllllllllllllllllllll

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—Bankruptcy 

Forms 

Special Bankruptcy Distributions 

Framework 1—Special Distribution of 

Futures Customer Funds When FCM 

Participated in Cross-Margining 

The Commission has established the 

following distributional convention with 

respect to ‘‘futures customer funds’’ (as § 1.3 

of this chapter defines such term) held by a 

futures commission merchant (FCM) that 

participated in a cross-margining (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 futures customer funds 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 nonXM 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 nonXM 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 non-XM futures customer 

funds. 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. 

1. Sufficient Funds to Meet Non-XM and 

XM Customer Claims: 

Non-XM XM Total 

Funds in 4d(a) segregation ......................................................................................................... 150 150 300 

4d(a) Segregation requirement .................................................................................................... 150 150 300 

Shortfall (dollars) .......................................................................................................................... 0 0 ........................

Shortfall (percent) ........................................................................................................................ 0 0 ........................

Distribution ................................................................................................................................... 150 150 300 


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There are adequate funds available and 

both the non-XM and the XM customer 

claims will be paid in full. 

2. Shortfall in Non-XM Only: 

Non-XM XM Total 

Funds in 4d(a) segregation ......................................................................................................... 100 150 250 

4d(a) Segregation requirement .................................................................................................... 150 150 300 

Shortfall (dollars) .......................................................................................................................... 50 0 ........................

Shortfall (percent) ........................................................................................................................ 50/150 = 33.3 0 ........................

Pro rata (percent) ........................................................................................................................ 150/300 = 50 150/300 = 50 ........................

Pro rata (dollars) .......................................................................................................................... 125 125 ........................

Distribution ................................................................................................................................... 125 125 250 

Due to the non-XM account, there are 

insufficient funds available to meet both the 

non-XM and the XM customer claims in full. 

Each customer will receive his pro rata share 

of the funds available, or 50% of the $250 

available, or $125. 

3. Shortfall in XM Only: 

Non-XM XM Total 

Funds in 4d(a) segregation ......................................................................................................... 150 100 250 

4d(a) Segregation requirement .................................................................................................... 150 150 300 

Shortfall (dollars) .......................................................................................................................... 0 50 ........................

Shortfall (percent) ........................................................................................................................ 0 50/150 = 33.3 ........................

Pro rata (percent) ........................................................................................................................ 150/300 = 50 150/300 = 50 ........................

Pro rata (dollars) .......................................................................................................................... 125 125 ........................

Distribution ................................................................................................................................... 150 100 250 

Due to the XM account, there are 

insufficient funds available to meet both the 

non-XM and the XM customer claims in full. 

Accordingly, the XM funds and non-XM 

funds are treated as separate pools, and the 

non-XM customer will be paid in full, 

receiving $ 150 while the XM customer will 

receive the remaining $100. 

4. Shortfall in Both, With XM Shortfall 

Exceeding Non-XM Shortfall: 

Non-XM XM Total 

Funds in 4d(a) segregation ......................................................................................................... 125 100 225 

4d(a) Segregation requirement .................................................................................................... 150 150 300 

Shortfall (dollars) .......................................................................................................................... 25 50 ........................

Shortfall (percent) ........................................................................................................................ 25/150 = 16.7 50/150 = 33.3 ........................

Pro rata (percent) ........................................................................................................................ 150/300 = 50 150/300 = 50 ........................

Pro rata (dollars) .......................................................................................................................... 112.50 112.50 ........................

Distribution ................................................................................................................................... 125 100 225 

There are insufficient funds available to 

meet both the non-XM and the XM customer 

claims in full, and the XM shortfall exceeds 

the non-XM shortfall. The non-XM customer 

will receive the $125 available with respect 

to non-XM claims while the XM customer 

will receive the $100 available with respect 

to XM claims. 

5. Shortfall in Both, With Non-XM 

Shortfall Exceeding XM Shortfall: 

Non-XM XM Total 

Funds in 4d(a) segregation ......................................................................................................... 100 125 225 

4d(a) Segregation requirement .................................................................................................... 150 150 300 

Shortfall (dollars) .......................................................................................................................... 50 25 ........................

Shortfall (percent) ........................................................................................................................ 50/150 = 33.3 25/150 = 16.7 ........................

Pro rata (percent) ........................................................................................................................ 150/300 = 50 150/300 = 50 ........................

Pro rata (dollars) .......................................................................................................................... 112.50 112.50 ........................

Distribution ................................................................................................................................... 112.50 112.50 225 

There are insufficient funds available to 

meet both the non-XM and the XM customer 

claims in full, and the non-XM shortfall 

exceeds the XM shortfall. Each customer will 

receive 50% of the $225 available, or 

$112.50. 

6. Shortfall in Both, Non-XM Shortfall = 

XM Shortfall: 

Non-XM XM Total 

Funds in 4d(a) segregation ......................................................................................................... 100 100 200 

4d(a) Segregation requirement .................................................................................................... 150 150 300 

Shortfall (dollars) .......................................................................................................................... 50 50 ........................

Shortfall (percent) ........................................................................................................................ 50/150 = 33.3 50/150 = 33.3 ........................

Pro rata (percent) ........................................................................................................................ 150/300 = 50 150/300 = 50 ........................


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Non-XM XM Total 

Pro rata (dollars) .......................................................................................................................... 100 100 ........................

Distribution ................................................................................................................................... 100 100 200 

There are insufficient funds available to 

meet both the non-XM and the XM customer 

claims in full, and the non-XM shortfall 

equals the XM shortfall. Each customer will 

receive 50% of the $200 available, or $100. 

These examples illustrate the principle that 

pro rata distribution across both accounts is 

the preferable approach except when a 

shortfall in the XM account could harm nonXM customers. Thus, pro rata distribution 

occurs in Examples 1, 2, 5 and 6. Separate 

treatment of the XM and non-XM accounts 

occurs in Examples 3 and 4. 

Special Bankruptcy Distributions Framework 

2—Special Allocation of Shortfall to 

Customer Claims When Futures Customer 

Funds and Cleared Swaps Customer 

Collateral Are Held in a Depository Outside 

of the United States or in a Foreign Currency 

The Commission has established the 

following allocation convention with respect 

to futures customer funds (as § 1.3 of this 

chapter defines such term) and Cleared 

Swaps Customer Collateral (as § 22.1 of this 

chapter defines such term) segregated 

pursuant to the Act and Commission rules 

thereunder held by a futures commission 

merchant (‘‘FCM’’) or derivatives clearing 

organization (‘‘DCO’’) in a depository outside 

the United States (‘‘U.S.’’) or in a foreign 

currency. The maintenance of futures 

customer funds or Cleared Swaps Customer 

Collateral in a depository outside the U.S. or 

denominated in a foreign currency will 

result, in certain circumstances, in the 

reduction of customer claims for such funds. 

For purposes of this proposed bankruptcy 

convention, sovereign action of a foreign 

government or court would include, but not 

be limited to, the application or enforcement 

of statutes, rules, regulations, interpretations, 

advisories, decisions, or orders, formal or 

informal, by a Federal, state, or provincial 

executive, legislature, judiciary, or 

government agency. If an FCM enters into 

bankruptcy and maintains futures customer 

funds or Cleared Swaps Customer Collateral 

in a depository located in the U.S. in a 

currency other than U.S. dollars or in a 

depository outside the U.S., the following 

allocation procedures shall be used to 

calculate the claim of each futures customer 

or Cleared Swaps Customer (as § 22.1 of this 

chapter defines such term). The allocation 

procedures should be performed separately 

with respect to each futures customer or 

Cleared Swaps Customer. 

I. Reduction in Claims for General Shortfall 

A. Determination of Losses not Attributable 

to Sovereign Action 

1. Convert the claim of each futures 

customer or Cleared Swaps Customer in each 

currency to U.S. Dollars at the exchange rate 

in effect on the Final Net Equity 

Determination Date, as defined in § 190.01(s) 

(the ‘‘Exchange Rate’’). 

2. Determine the amount of assets available 

for distribution to futures customers or 

Cleared Swaps Customers. In making this 

calculation, include futures customer funds 

and Cleared Swaps Customer Collateral that 

would be available for distribution but for the 

sovereign action. 

3. Convert the amount of futures customer 

funds and Cleared Swaps Customer 

Collateral available for distribution to U.S. 

Dollars at the Exchange Rate. 

4. Determine the Shortfall Percentage that 

is not attributable to sovereign action, as 

follows: 

B. Allocation of Losses Not Attributable to 

Sovereign Action 

1. Reduce the claim of each futures 

customer or Cleared Swaps Customer by the 

Shortfall Percentage. 

II. Reduction in Claims for Sovereign Loss 

A. Determination of Losses Attributable to 

Sovereign Action (‘‘Sovereign Loss’’) 

1. If any portion of the claim of a futures 

customer or Cleared Swaps Customer is 

required to be kept in U.S. dollars in the U.S., 

that portion of the claim is not exposed to 

Sovereign Loss. 

2. If any portion of the claim of a futures 

customer or Cleared Swaps Customer is 

authorized to be kept in only one location 

and that location is: 

a. The U.S. or a location in which there is 

no Sovereign Loss, then that portion of the 

claim is not exposed to Sovereign Loss. 

b. A location in which there is Sovereign 

Loss, then that entire portion of the claim is 

exposed to Sovereign Loss. 

3. If any portion of the claim of a futures 

customer or Cleared Swaps Customer is 

authorized to be kept in only one currency 

and that currency is: 

a. U.S. dollars or a currency in which there 

is no Sovereign Loss, then that portion of the 

claim is not exposed to Sovereign Loss. 

b. A currency in which there is Sovereign 

Loss, then that entire portion of the claim is 

exposed to Sovereign Loss. 

4. If any portion of the claim of a futures 

customer or Cleared Swaps Customer is 

authorized to be kept in more than one 

location and: 

a. There is no Sovereign Loss in any of 

those locations, then that portion of the claim 

is not exposed to Sovereign Loss. 

b. There is Sovereign Loss in one of those 

locations, then that entire portion of the 

claim is exposed to Sovereign Loss. 

c. There is Sovereign Loss in more than 

one of those locations, then an equal share 

of that portion of the claim will be exposed 

to Sovereign Loss in each such location. 

5. If any portion of the claim of a futures 

customer or Cleared Swaps Customer is 

authorized to be kept in more than one 

currency and: 

a. There is no Sovereign Loss in any of 

those currencies, then that portion of the 

claim is not exposed to Sovereign Loss. 

b. There is Sovereign Loss in one of those 

currencies, then that entire portion of the 

claim is exposed to Sovereign Loss. 

c. There is Sovereign Loss in more than 

one of those currencies, then an equal share 

of that portion of the claim will be exposed 

to Sovereign Loss. 

B. Calculation of Sovereign Loss 

1. The total Sovereign Loss for each 

location is the difference between: 

a. The total futures customer funds or 

Cleared Swaps Customer Collateral deposited 

in depositories in that location and 

b. The amount of futures customer funds 

or Cleared Swaps Customer Collateral in that 

location that is available to be distributed to 

futures customers or Cleared Swaps 

Customers, after taking into account any 

sovereign action. 

2. The total Sovereign Loss for each 

currency is the difference between: 

a. The value, in U.S. dollars, of the futures 

customer funds or Cleared Swaps Customer 

Collateral held in that currency on the day 

before the sovereign action took place and 

b. The value, in U.S. dollars, of the futures 

customer funds or Cleared Swaps Customer 

Collateral held in that currency on the Final 

Net Equity Determination Date. 

C. Allocation of Sovereign Loss 

1. Each portion of the claim of a futures 

customer or Cleared Swaps Customer 

exposed to Sovereign Loss in a location will 

be reduced by: 


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2. Each portion of the claim of a futures 

customer or Cleared Swaps Customer 

exposed to Sovereign Loss in a currency will 

be reduced by: 

3. A portion of the claim of a futures 

customer or Cleared Swaps Customer 

exposed to Sovereign Loss in a location or 

currency will not be reduced below zero. 

(The above calculations might yield a result 

below zero where the FCM kept more futures 

customer funds or Cleared Swaps Customer 

Funds in a location or currency than it was 

authorized to keep.) 

4. Any amount of Sovereign Loss from a 

location or currency in excess of the total 

amount of futures customer funds or Cleared 

Swaps Customer Funds authorized to be kept 

in that location or currency (calculated in 

accord with section II.1 above) (‘‘Total Excess 

Sovereign Loss’’) will be divided among all 

futures customers or Cleared Swaps 

Customer who have authorized funds to be 

kept outside the U.S., or in currencies other 

than U.S. dollars, with each such futures 

customer or Cleared Swaps Customer claim 

reduced by the following amount: 

The following examples illustrate the 

operation of this convention. 

Example 1. No shortfall in any location. 

Customer Claim Location(s) customer has consented to having funds held 

A ................................................................ $50 U.S. 

B ................................................................ Ö50 U.K. 

C ............................................................... Ö50 Germany. 

D ............................................................... £300 U.K. 

Location Actual asset balance 

U.S. ....................................................................................... $50. 

U.K. ....................................................................................... £300. 

U.K. ....................................................................................... Ö50. 

Germany ............................................................................... Ö50. 

Note: Conversion Rates: £1 = $1; £1=$1.5. Convert the claim of each futures customer 

or Cleared Swaps Customer in each currency 

to U.S. Dollars: 

Customer Claim Conversion rate Claim in U.S. 

dollars 

A ......................................................................................................................... $50 1.0 $50 

B ......................................................................................................................... Ö50 1.0 50 

C ........................................................................................................................ Ö50 1.0 50 

D ........................................................................................................................ £300 1.5 450 

Total ............................................................................................................ ................................ ................................ 600 .00 

Determine assets available for distribution 

to futures customers or Cleared Swaps 

Customers, converting to U.S. dollars: 


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Location Assets Conversion 

rate 

Assets in 

U.S. dollars 

Shortfall 

due to 

sovereign 

action 

percentage 

Actual 

shortfall due 

to sovereign 

action 

Amount 

actually 

available 

U.S. .................................................................................. $50 1.0 $50 .................... .................... $50 

U.K. .................................................................................. £300 1.5 450 .................... .................... 450 

U.K. .................................................................................. Ö50 1.0 50 .................... .................... 50 

Germany .......................................................................... Ö50 1.0 50 .................... .................... 50 

Total .......................................................................... .................... .................... 600.00 .................... 0 600.00 

There are no shortfalls in funds held in any 

location. Accordingly, there will be no 

reduction of futures customer or Cleared 

Swaps Customer claims. 

Claims: 

Customer 

Claim in 

U.S. dollars 

after allocated nonsovereign 

shortfall 

Allocation of 

shortfall due 

to 

sovereign 

action 

Claim after 

all 

reductions 

A ............................................................................................................................................................. $50 $0 $50 

B ............................................................................................................................................................. 50 0 50 

C ............................................................................................................................................................ 50 0 50 

D ............................................................................................................................................................ 450 0 450 

Total ................................................................................................................................................ 600.00 0.00 600 .00 

Example 2. Shortfall in funds held in the 

U.S. 

Customer Claim Location(s) customer has consented to having funds held 

A ................................................................ $100 U.S. 

B ................................................................ Ö50 U.K. 

C ............................................................... Ö100 U.K., Germany, or Japan. 

Location Actual asset balance 

U.S. ....................................................................................... $50 

U.K. ....................................................................................... Ö100 

Germany ............................................................................... Ö50 

Note: Conversion Rates: Ö1 = $1. 

Reduction in Claims for General Shortfall 

There is a shortfall in the funds held in the 

U.S. such that only 1⁄2 of the funds are 

available. Convert the claim of each futures 

customer or Cleared Swaps Customer in each 

currency to U.S. Dollars: 

Convert each customer’s claim in each 

currency to U.S. Dollars: 

Customer Claim Conversion rate Claim in US$ 

A ......................................................................................................................... $100 1.0 $100 

B ......................................................................................................................... Ö50 1.0 50 

C ........................................................................................................................ Ö100 1.0 100 

Total ............................................................................................................ ................................ ................................ 250 .00 

Determine assets available for distribution 

to futures customers or Cleared Swaps 

Customers, converting to U.S. dollars: 

Location Assets Conversion 

rate 

Assets in 

U.S. dollars 

Shortfall 

due to sovereign action percentage 

Actual 

shortfall due 

to sovereign 

action 

Amount 

actually available 

U.S. .............................................................................. $50 1.0 $50 .00 .................... .................... $50 

U.K. .............................................................................. Ö100 1.0 100 .................... .................... 100 

Germany ...................................................................... Ö50 1.0 50 .................... .................... 50 


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Location Assets Conversion 

rate 

Assets in 

U.S. dollars 

Shortfall 

due to sovereign action percentage 

Actual 

shortfall due 

to sovereign 

action 

Amount 

actually available 

Total ...................................................................... .................... .................... 200 .00 .................... .................... 200 .00 

Determine the percentage of shortfall that 

is not attributable to sovereign action: 

Shortfall Percentage = (1¥(200/250)) = 

(1¥80%) = 20%. 

Reduce each futures customer or Cleared 

Swaps Customer claim by the Shortfall 

Percentage: 

Customer Claim in US$ Allocated shortfall 

(non-sovereign) 

Claim in U.S. dollars 

after allocated shortfall 

A ..................................................................................................................... $100 $20 .00 $80 .00 

B ..................................................................................................................... 50 10 .00 40 .00 

C .................................................................................................................... 100 20 .00 80 .00 

Total ........................................................................................................ 250 .00 50 .00 200 .00 

Reduction in Claims for Shortfall Due to 

Sovereign Action 

There is no shortfall due to sovereign 

action. Accordingly, the futures customer or 

Cleared Swaps Customer claims will not be 

further reduced. 

Claims After Reductions 

Customer 

Claim in U.S. 

dollars after allocated non-sovereign 

shortfall 

Allocation of 

shortfall due to sovereign action 

Claim after all 

reductions 

A ....................................................................................................................... $80 ................................ $80 .00 

B ....................................................................................................................... 40 ................................ 40 .00 

C ...................................................................................................................... 80 ................................ 80 .00 

Total .......................................................................................................... 200 .00 0 200 .00 

Example 3. Shortfall in funds held outside 

the U.S., or in a currency other than U.S. 

dollars, not due to sovereign action. 

Customer Claim Location(s) customer has consented to having funds held 

A ................................................................ $150 U.S. 

B ................................................................ Ö100 U.K. 

C ............................................................... Ö50 Germany. 

D ............................................................... $100 U.S. 

D ............................................................... Ö100 U.K. or Germany. 

Location Actual asset balance 

U.S. ....................................................................................... $250 

U.K. ....................................................................................... Ö50 

Germany ............................................................................... Ö100 

Note: Conversion Rates: Ö1 = $1. Reduction in Claims for General Shortfall 

Convert the claim of each futures customer 

or Cleared Swaps Customer in each currency 

to U.S. Dollars: 

Customer Claim Conversion rate Claim in US$ 

A ......................................................................................................................... $150 1.0 150 

B ......................................................................................................................... Ö100 1.0 100 

C ........................................................................................................................ Ö50 1.0 50 

D ........................................................................................................................ $100 1.0 100 

D ........................................................................................................................ Ö100 1.0 100 

Total ............................................................................................................ ................................ ................................ 500 .00 


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Determine assets available for distribution 

to futures customers or Cleared Swaps 

Customers, converting to U.S. dollars: 

Location Assets Conversion 

rate 

Assets in 

U.S. dollars 

Shortfall 

due to 

sovereign 

action 

percentage 

Actual 

shortfall due 

to sovereign 

action 

Amount 

actually 

available 

U.S. .............................................................................. $250 1.0 $250 .................... .................... $250 

U.K. .............................................................................. Ö50 1.0 50 .................... .................... 50 

Germany ...................................................................... Ö100 1.0 100 .................... .................... 100 

Total ...................................................................... .................... .................... 400 .00 .................... 0 400 .00 

Determine the percentage of shortfall that 

is not attributable to sovereign action: 

Shortfall Percentage = (1¥400/500) = 

(1¥80%) = 20%. 

Reduce each futures customer or Cleared 

Swaps Customer by the shortfall percentage: 

Customer Claim in US$ Allocated shortfall 

(non-sovereign) 

Claim in U.S. 

dollars after 

allocated shortfall 

A ......................................................................................................................... $150 $30.00 120.00 

B ......................................................................................................................... 100 20.00 80.00 

C ........................................................................................................................ 50 10.00 40.00 

D ........................................................................................................................ 200 40.00 160.00 

Total ............................................................................................................ 500 .00 100.00 400.00 

Reduction in Claims for Shortfall Due to 

Sovereign Action 

There is no shortfall due to sovereign 

action. Accordingly, the claims will not be 

further reduced. 

Claims After Reductions 

Customer 

Claim in U.S. dollars after allocated 

non-sovereign 

shortfall 

Allocation of 

shortfall due to 

sovereign action 

Claim after all 

reductions 

A ........................................................................................................................... $120.00 ................................ $120 

B ........................................................................................................................... 80.00 ................................ 80 

C .......................................................................................................................... 40.00 ................................ 40 

D .......................................................................................................................... 160.00 0 160 

Total .............................................................................................................. 400.00 0 400

Example 4. Shortfall in funds held outside 

the U.S., or in a currency other than U.S. 

dollars, due to sovereign action. 

Customer Claim Location(s) where customer has consented to have funds held 

A ................................................................ $50 U.S. 

B ................................................................ Ö50 U.K. 

C ............................................................... Ö50 Germany. 

D ............................................................... $100 U.S. 

D ............................................................... Ö100 U.K. or Germany. 

Location Actual asset balance 

U.S. ....................................................................................... $150 

U.K. ....................................................................................... 100 

Germany ............................................................................... 100 

Notice: Conversion Rates: Ö1 = $1; ¥1 = 

$0.01, £1= $1.5. 

Reduction in Claims for General Shortfall 

Convert each futures customer or Cleared 

Swaps Customer claim in each currency to 

U.S. Dollars: 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 33871 

Customer Claim Conversion rate Claim in US$ 

A ......................................................................................................................... $50 1.0 $50 

B ......................................................................................................................... Ö50 1.0 50 

C ........................................................................................................................ Ö50 1.0 50 

D ........................................................................................................................ $100 1.0 100 

D ........................................................................................................................ Ö100 1.0 100 

Total ............................................................................................................ ................................ ................................ 350 .00 

Determine assets available for distribution 

to futures customers or Cleared Swaps 

Customers, converting to U.S. dollars: 

Location Assets Conversion 

rate 

Assets in 

U.S. dollars 

Shortfall 

due to 

sovereign 

action 

percentage 

Actual shortfall due to 

sovereign action 

Amount 

actually 

available 

U.S ............................................................................. $150 1.0 $150 .................... ...................... $150 

U.K ............................................................................. Ö100 1.0 100 .................... ...................... 100 

Germany .................................................................... Ö100 1.0 100 50% 50 50 

Total .................................................................... .................... .................... 350 .00 .................... 50 .00 300 .00 

Determine the percentage of shortfall that 

is not attributable to sovereign action: 

Shortfall Percentage = (1¥350/350) = 

(1¥100%) = 0%. 

Reduce each futures customer or Cleared 

Swaps Customer claim by the shortfall 

percentage: 

Customer Claim in US$ Allocated shortfall 

(non-sovereign) 

Claim in U.S. 

dollars after 

allocated shortfall 

A ....................................................................................................................... $50 0 $50.00 

B ....................................................................................................................... 50 0 50.00 

C ...................................................................................................................... 50 0 50.00 

D ...................................................................................................................... 200 0 200.00 

Total .......................................................................................................... 350 .00 0 .00 350.00 

Reduction in Claims for Shortfall Due to 

Sovereign Action 

Due to sovereign action, only 1⁄2 of the 

funds in Germany are available. 

Customer 

Presumed location of funds 

U.S. U.K. Germany 

A ..................................................................................................................... $50 .................................. ..................................

B ..................................................................................................................... .................................. $50 ..................................

C .................................................................................................................... .................................. .................................. $50 

D .................................................................................................................... 100 .................................. 100 

Total ........................................................................................................ 150 .00 50 .00 150 .00 

Calculation of the allocation of the shortfall 

due to sovereign action—Germany ($50 

shortfall to be allocated): 

Customer Allocation share Allocation share of 

actual shortfall 

Actual shortfall 

allocated 

C .......................................................................................................................... $50/$150 33.3% of $50 $16.67 

D .......................................................................................................................... $100/$150 66.7% of $50 33.33 

Total .............................................................................................................. ................................ ................................ 50.00 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
33872 Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 

Claims After Reductions: 

Customer 

Claim in U.S. dollars 

after allocated nonsovereign shortfall 

Allocation of shortfall due to sovereign action from 

Germany 

Claim after all 

reductions 

A ....................................................................................................................... $50 ................................ $50 

B ....................................................................................................................... 50 ................................ 50 

C ...................................................................................................................... 50 $16.67 33 .33 

D ...................................................................................................................... 200 33.33 166 .67 

Total .......................................................................................................... 350 .00 50.00 300 .00 

Example 5. Shortfall in funds held outside 

the U.S., or in a currency other than U.S. 

dollars, due to sovereign action and a 

shortfall in funds held in the U.S. 

Customer Claim Location(s) customer has consented to having funds held 

A ................................................................ $100 U.S. 

B ................................................................ Ö50 U.K. 

C ............................................................... Ö150 Germany. 

D ............................................................... $100 U.S. 

D ............................................................... £300 U.K. 

D ............................................................... Ö150 U.K. or Germany. 

Location Actual asset balance 

U.S. ....................................................................................... $100 

U.K. ....................................................................................... £300 

U.K. ....................................................................................... Ö200 

Germany ............................................................................... Ö150 

Conversion Rates: Ö1 = $1; £1 = $1.5. Reduction in Claims for General Shortfall 

Convert each futures customer or Cleared 

Swaps Customer claim in each currency to 

U.S. Dollars: 

Customer Claim Conversion rate Claim in U.S.$ 

A ......................................................................................................................... $100 1.0 $100 

B ......................................................................................................................... Ö50 1.0 50 

C ........................................................................................................................ Ö150 1.0 150 

D ........................................................................................................................ $100 1.0 100 

D ........................................................................................................................ £300 1.5 450 

D ........................................................................................................................ Ö150 1.0 150 

Total ............................................................................................................ ................................ ................................ 1,000 .00 

Determine assets available for distribution 

to futures customers or Cleared Swaps. 

Customers, converting to U.S. dollars: 

Location Assets Conversion 

rate 

Assets in 

U.S. dollars 

Shortfall 

due to sovereign action percentage 

Actual shortfall due to 

sovereign action 

Amount actually available 

U.S. ............................................................................ $100 1.0 $100 .................... ...................... $100 

U.K. ............................................................................ £300 1.5 450 .................... ...................... 450 

U.K. ............................................................................ Ö200 1.0 200 .................... ...................... 200 

Germany .................................................................... Ö150 1.0 150 100% $150 0 

Total .................................................................... .................... .................... 900 .00 .................... 150 .00 750 .00 

Determine the percentage of shortfall that 

is not attributable to sovereign action: 

Shortfall Percentage = (1 ¥ 900/1000) = (1 

¥ 90%) = 10%. Reduce each futures 

customer or Cleared Swaps Customer claim 

by the shortfall percentage: 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 33873 

Customer Claim in U.S.$ Allocated shortfall 

(non-sovereign) 

Claim in U.S. dollars after allocated 

shortfall 

A ......................................................................................................................... $100 $10.00 $90.00 

B ......................................................................................................................... 50 5.00 45.00 

C ........................................................................................................................ 150 15.00 135.00 

D ........................................................................................................................ 700 70.00 63.00 

Total ............................................................................................................ 1,000 .00 100.00 900.00 

Reduction in Claims for Shortfall Due to 

Sovereign Action 

Due to sovereign action, none of the money 

in Germany is available. 

Customer 

Presumed location of funds 

U.S. U.K. Germany 

A ..................................................................................................................... $100 .................................. ..................................

B ..................................................................................................................... .................................. $50 ..................................

C .................................................................................................................... .................................. .................................. $150 

D .................................................................................................................... 100 450 150 

Total ........................................................................................................ 200 .00 500 .00 300 .00 

Calculation of the allocation of the shortfall 

due to sovereign action Germany ($150 

shortfall to be allocated): 

Customer Allocation share Allocation share of actual shortfall Actual shortfall 

allocated 

C ........................................................... $150/$300 ............................................ 50% of $150 ........................................ $75 

D ........................................................... 150/300 ................................................ 50% of $150 ........................................ 75 

Total ............................................... .............................................................. .............................................................. 150 .00 

Claims After Reductions 

Customer 

Claim in U.S. dollars 

after allocated nonsovereign shortfall 

Allocation of shortfall 

due to sovereign action from Germany 

Claim after all 

reductions 

A ..................................................................................................................... $90 .................................. $90 

B ..................................................................................................................... 45 .................................. 45 

C .................................................................................................................... 135 $75 60

D .................................................................................................................... 630 75 555

Total ........................................................................................................ 900 .00 150 .00 750 .00 

Example 6. Shortfall in funds held outside 

the U.S., or in a currency other than U.S. 

dollars, due to sovereign action, shortfall in 

funds held outside the U.S., or in a currency 

other than U.S. dollars, not due to sovereign 

action, and a shortfall in funds held in the 

U.S. 

Customer Claim Location(s) customer has consented to having funds held 

A ................................................................ $50 U.S. 

B ................................................................ Ö50 U.K. 

C ............................................................... $20 U.S. 

C ............................................................... Ö50 Germany. 

D ............................................................... $100 U.S. 

D ............................................................... £300 U.K. 

D ............................................................... Ö100 U.K., Germany, or Japan. 

E ................................................................ $80 U.S. 

E ................................................................ ¥10,000 Japan. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
33874 Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 

Customer Claim Location(s) customer has consented to having funds held 

Location Actual asset balance 

U.S. ....................................................................................... $200 

U.K. ....................................................................................... £200 

U.K. ....................................................................................... Ö100 

Germany ............................................................................... Ö50 

Japan .................................................................................... ¥10,000 

Conversion Rates: £1 = $1; ¥1=$0.01, 

£1=$1.5. 

Reduction in Claims for General Shortfall 

Convert each futures customer or Cleared 

Swaps Customer claim in each currency to 

U.S. Dollars: 

Customer Claim Conversion rate Claim in U.S.$ 

A ....................................................................................................................... $50 1 .0 $50 

B ....................................................................................................................... Ö50 1 .0 50 

C ...................................................................................................................... $20 1 .0 20 

C ...................................................................................................................... Ö50 1 .0 50 

D ...................................................................................................................... $100 1 .0 100 

D ...................................................................................................................... Ö300 1 .5 450 

D ...................................................................................................................... £100 1 .0 100 

E ....................................................................................................................... $80 1 .0 80 

E ....................................................................................................................... ¥10,000 0 .01 100 

Total .......................................................................................................... ................................ .................................. 1,000 .00 

Determine assets available for distribution 

to futures customers or Cleared Swaps 

Customers, converting to U.S. dollars: 

Location Assets Conversion rate Assets in U.S. 

dollars 

Shortfall due 

to sovereign 

action percentage 

Actual shortfall 

due to sovereign action 

Amount actually 

available 

U.S. .................................................... $200 1 .0 $200 ........................ .......................... $200 

U.K. .................................................... £200 1 .5 300 ........................ .......................... 300 

U.K. .................................................... Ö100 1 .0 100 ........................ .......................... 100 

Germany ............................................ Ö50 1 .0 50 100% $50 0 

Japan ................................................. ¥10,000 0 .01 100 50% 50 50 

Total ............................................ ........................ .......................... 750 ........................ 100 .00 650 .00 

Determine the percentage of shortfall that 

is not attributable to sovereign action: 

Shortfall Percentage = (1–750/1000) = (1– 

75%) = 25%. 

Reduce each futures customer or Cleared 

Swaps Customer claim by the shortfall 

percentage: 

Customer Claim in U.S.$ Allocated shortfall 

(non-sovereign) 

Claim in U.S. dollars after allocated 

shortfall 

A ......................................................................................................................... $50 $12.50 $37.50 

B ......................................................................................................................... 50 12.50 37.50 

C ........................................................................................................................ 70 17.50 52.50 

D ........................................................................................................................ 650 162.50 487.50 

E ......................................................................................................................... 180 45.00 135.00 

Total ............................................................................................................ 1,000 .00 250.00 750.00 

Reduction in Claims for Shortfall Due to 

Sovereign Action 

Due to sovereign action, none of the money 

in Germany and only 1⁄2 of the funds in Japan 

are available. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 33875 

Customer 

Presumed location of funds 

U.S. U.K. Germany Japan 

A ............................................................................................................... $50 .......................... .......................... ..........................

B ............................................................................................................... .......................... $50 .......................... ..........................

C .............................................................................................................. 20 .......................... $50 ..........................

D .............................................................................................................. 100 450 50 $50 

E ............................................................................................................... 80 .......................... .......................... 100 

Total .................................................................................................. 250 .00 500 .00 100 .00 150 .00 

Calculation of the allocation of the shortfall 

due to sovereign action—Germany ($50 

shortfall to be allocated): 

Customer allocation Allocation share Allocation share of 

actual shortfall 

Actual shortfall allocated 

C .......................................................................................................................... $50/$100 50% of $50 $25 

D .......................................................................................................................... 50/100 50% of 50 25 

Total .............................................................................................................. ................................ ................................ 50 

Japan ($50 shortfall to be allocated): 

Customer Allocation share Allocation share of actual shortfall Actual shortfall 

allocated 

D .............................................................. $50/$150 .................................................. 33.3% of $50 ........................................... $16.67 

E .............................................................. 100/150 .................................................... 66.6% of 50 ............................................. 33.33 

Total .................................................. .................................................................. .................................................................. 50.00 

Claims After Reductions 

Customer 

Claim in US 

dollars after allocated nonsovereign 

shortfall 

Allocation of 

shortfall due to 

sovereign action from Germany 

Allocation of 

shortfall due to 

sovereign action from 

Japan 

Claim after all 

reductions 

A ..................................................................................................................... $37.50 .......................... ........................ 37.50 

B ..................................................................................................................... 37.50 .......................... ........................ 37.50 

C .................................................................................................................... 52.50 $25 ........................ 27.50 

D .................................................................................................................... 487.50 25 16.67 445.83 

E ..................................................................................................................... 135.00 .......................... 33.33 101.67 

Total ........................................................................................................ 750.00 50 .00 50.00 650.00 

Example 7. Shortfall in funds held outside 

the U.S., or in a currency other than U.S. 

dollars, due to sovereign action, where the 

FCM kept more funds than permitted in such 

location or currency. 

Customer Claim Location(s) customer has consented to having funds held 

A ................................................................ $50 U.S. 

B ................................................................ 50 U.S. 

B ................................................................ Ö50 U.K. 

C ............................................................... Ö50 Germany. 

D ............................................................... 100 U.S. 

D ............................................................... Ö100 U.K. or Germany. 

E ................................................................ 50 U.S. 

E ................................................................ Ö50 U.K. 

Location Actual asset balance 

U.S. ....................................................................................... $250 

U.K. ....................................................................................... Ö50 

Germany ............................................................................... Ö200 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
33876 Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 

Conversion Rates: 1 = $1. Reduction in Claims for General Shortfall 

Convert each futures customer or Cleared 

Swaps Customer claim in each currency to 

U.S. dollars: 

Customer Claim Conversion 

rate 

Claim in 

U.S.$ 

A ............................................................................................................................................................. $50 1.0 50 

B ............................................................................................................................................................. 50 1.0 50 

B ............................................................................................................................................................. Ö50 1.0 50 

C ............................................................................................................................................................ Ö50 1.0 50 

D ............................................................................................................................................................ Ö100 1.0 100 

D ............................................................................................................................................................ Ö100 1.0 100 

E ............................................................................................................................................................. 50 1.0 50 

E ............................................................................................................................................................. Ö50 1.0 50 

Total ................................................................................................................................................ .................... .................... 500 .00 

Determine assets available for distribution 

to futures customers or Cleared Swaps 

Customers, converting to U.S. dollars: 

Location Assets Conversion 

rate 

Assets in 

U.S. dollars 

Shortfall 

due to 

sovereign 

action 

percentage 

Actual 

shortfall due 

to sovereign 

action 

Amount 

actually 

available 

U.S. .............................................................................. $250 1.0 $250 .................... .................... $250 

U.K. .............................................................................. Ö50 1.0 50 .................... .................... 50 

Germany ...................................................................... Ö200 1.0 200 100% 200 0 

Total ...................................................................... .................... .................... 500 .00 .................... 200 300 .00 

Determine the percentage of shortfall that 

is not attributable to sovereign action. 

Shortfall Percentage = (1 ¥ 500/500) = (1 ¥ 

100%) = 0%. 

Reduce each futures customer or Cleared 

Swaps Customer claim by the shortfall 

percentage: 

Customer Claim in U.S.$ Allocated shortfall 

(non-sovereign) 

Claim in U.S. 

dollars after 

allocated shortfall 

A ................................................................................................................................. $50 $0 $50 .00 

B ................................................................................................................................. 100 0 100 .00 

C ................................................................................................................................ 50 0 50 .00 

D ................................................................................................................................ 200 0 200 .00 

E ................................................................................................................................. 100 0 100 .00 

Total .................................................................................................................... 500 .00 0 .00 500 .00 

Reduction in Claims for Shortfall Due to 

Sovereign Action 

Due to sovereign action, none of the money 

in Germany is available. 

Customer 

Presumed location of funds 

U.S. U.K. Germany 

A ......................................................................................................................................................... $50 ...................... ......................

B ......................................................................................................................................................... 50 50 ......................

C ........................................................................................................................................................ ...................... ...................... 50 

D ........................................................................................................................................................ 100 ...................... 100 

E ......................................................................................................................................................... 50 50 ......................

Total ............................................................................................................................................ 250 .00 100 .00 150 .00 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 33877 

Calculation of the allocation of the shortfall 

due to sovereign action—Germany ($200 

shortfall to be allocated): 

Customer Allocation share Allocation share 

of actual shortfall 

Actual shortfall 

allocated 

C .................................................................................................................................... $50/$150 33.3% of $200 $66 .67 

D .................................................................................................................................... $100/$150 66.7% of $200 133 .33 

Total ........................................................................................................................ ............................ ............................ 200 .000 

This would result in the claims of 

customers C and D being reduced below zero. 

Accordingly, the claims of customer C and 

D will only be reduced to zero, or $50 for C 

and $100 for D. This results in a Total Excess 

Shortfall of $50. 

Actual shortfall 

Allocation of 

shortfall for 

customer C 

Allocation of 

shortfall for 

customer D 

Total excess 

shortfall 

$200 ................................................................................................................................. $50 $100 $50 

This shortfall will be divided among the 

remaining futures customers or Cleared 

Swaps Customers who have authorized funds 

to be held outside the U.S. or in a currency 

other than U.S. dollars. 

Customer 

Total claims of customers permitting 

funds to be held 

outside the U.S. 

Portion of claim 

required to be in 

the U.S. 

Allocation share 

(column B–C/column B Total—all 

customer claims in 

U.S.) 

Allocation share of 

actual total excess 

shortfall 

Actual total excess 

shortfall allocated 

B ......................................................... $100 $50 $50/$200 25% of $50 $12 .50 

C ........................................................ 50 0 (1) .............................. 0 

D ........................................................ 200 100 100/200 50% of $50 25 

E ......................................................... 100 50 50/100 25% of $50 12 .50 

Total ............................................ 450 .00 .............................. .............................. .............................. 50 .00 

1 Claim already reduced to $0. 

Claims After Reductions 

Customer 

Claim in U.S. dollars after allocated 

non-sovereign 

shortfall 

Allocation of shortfall due to sovereign action Germany 

Allocation of total 

excess shortfall 

Claim after all 

reductions 

A ....................................................................................... $50 ................................ ................................ $50 .00 

B ....................................................................................... 100 ................................ 12 .50 87 .50 

C ...................................................................................... 50 50 ................................ 0 

D ...................................................................................... 200 100 25 75 .00 

E ....................................................................................... 100 ................................ 12 .50 87 .50 

Total .......................................................................... 500 .00 150 .00 50 .00 300 .00 

Issued in Washington, DC, on April 27, 

2011, 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 Dunn, Chilton and O’Malia 

voted in the affirmative; Commissioner 

Sommers voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the proposed rule on protection 

of cleared swaps customer contracts and 

collateral and the associated conforming 

amendments. The proposal carries out the 

Dodd-Frank Act’s 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 an account that is 

separate from that belonging to the FCMs or 

DCOs. 

Under the Dodd-Frank Act, an FCM or 

DCO must not use the collateral of one swaps 

customer to cover the obligations of another 

swaps customer or itself. Under the proposed 

rule, in the event that an FCM defaults 

simultaneously with one or more of its 

cleared swaps customers, the DCO may 

access the collateral of the FCM’s defaulting 

cleared swaps customers to cure the default, 

but not the collateral of the FCM’s nondefaulting cleared swaps customers. The 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1
33878 Federal Register / Vol. 76, No. 111 / Thursday, June 9, 2011 / Proposed Rules 

proposal also asks a variety of questions 

regarding alternative means of implementing 

protection of customer collateral. 

This proposed rulemaking benefited from 

public input received during the CFTC staff 

roundtable on segregation and in other 

meetings and from the 32 comments received 

in response the Commission’s advanced 

notice of proposed rulemaking. I look 

forward to further hearing from the public on 

this proposed rulemaking. 

[FR Doc. 2011–10737 Filed 6–2–11; 11:15 am] 

BILLING CODE 6351–01–P 


emcdonald on DSK2BSOYB1PROD with PROPOSALS-1