6140 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Rules and Regulations 

operator has yet accomplished any of 

the requirements of this AD action, and 

that no operator would accomplish 

those actions in the future if this AD 

were not adopted. The cost impact 

figures discussed in AD rulemaking 

actions represent only the time 

necessary to perform the specific actions 

actually required by the AD. These 

figures typically do not include 

incidental costs, such as the time 

required to gain access and close up, 

planning time, or time necessitated by 

other administrative actions. 

The optional terminating 

modification, if done, will take about 16 

work hours, at an average labor rate of 

$65 per work hour. Required parts will 

cost about $365 per airplane. Based on 

these figures, we estimate the cost of the 

optional terminating modification to be 

$1,405 per airplane. 

Regulatory Impact 

The regulations adopted herein will 

not have a substantial direct effect on 

the States, on the relationship between 

the national Government and the States, 

or on the distribution of power and 

responsibilities among the various 

levels of government. Therefore, it is 

determined that this final rule does not 

have federalism implications under 

Executive Order 13132. 

For the reasons discussed above, I 

certify that this action (1) is not a 

‘‘significant regulatory action’’ under 

Executive Order 12866; (2) is not a 

‘‘significant rule’’ under DOT 

Regulatory Policies and Procedures (44 

FR 11034, February 26, 1979); and (3) 

will not have a significant economic 

impact, positive or negative, on a 

substantial number of small entities 

under the criteria of the Regulatory 

Flexibility Act. A final evaluation has 

been prepared for this action and it is 

contained in the Rules Docket. A copy 

of it may be obtained from the Rules 

Docket at the location provided under 

the caption ADDRESSES.

List of Subjects in 14 CFR Part 39

Air transportation, Aircraft, Aviation 

safety, Incorporation by reference, 

Safety.

Adoption of the Amendment

■ Accordingly, pursuant to the authority 

delegated to me by the Administrator, 

the Federal Aviation Administration 

amends part 39 of the Federal Aviation 

Regulations (14 CFR part 39) as follows:

PART 39—AIRWORTHINESS 

DIRECTIVES

■ 1. The authority citation for part 39 

continues to read as follows:

Authority: 49 U.S.C. 106(g), 40113, 44701.

§ 39.13 [Amended]

■ 2. Section 39.13 is amended by adding 

the following new airworthiness 

directive:

2004–03–14 Bombardier, Inc. (Formerly de 

Havilland, Inc.): Amendment 39–13458. 

Docket 2003–NM–154–AD.

Applicability: Model DHC–8–102, ¥103, 

¥106, ¥201, ¥202, ¥301, ¥311, and ¥315 

series airplanes; certificated in any category; 

as listed in Bombardier Service Bulletin 8–

27–83, Revision ‘‘A’’, dated February 8, 2002. 

Compliance: Required as indicated, unless 

accomplished previously. 

To find and fix damage and prevent 

subsequent failure of the rear spar fittings 

between the flex shaft of the flap secondary 

drive and the wing-to-fuselage structure, 

which could result in loss of the wing, 

accomplish the following: 

Repetitive Inspections/Corrective Action 

(a) For airplanes with rear spar fittings 

having part number (P/N) 85320053, 

85322060, or 85334180: Within 12 months 

after the effective date of this AD; do a 

detailed inspection for discrepancies 

(chafing, wear damage, cracking) of the rear 

spar fittings located between the flex shaft of 

the flap secondary drive and the wing-tofuselage structure. Do the inspection as 

defined in Parts III.A., III.B., and III.D. of the 

Accomplishment Instructions of Bombardier 

Service Bulletin 8–27–83, Revision ‘‘A’’, 

dated February 8, 2002; except where the 

service bulletin specifies to report inspection 

findings, this AD does not require such 

reporting. Do the inspection per the service 

bulletin, and repeat the inspection thereafter 

at the applicable time specified in Part I.D. 

‘‘Compliance’’ of the service bulletin. Any 

applicable corrective action (high frequency 

eddy current inspection for cracking, 

blending out wear damage, replacement of 

rear spar fittings) must be done at the 

applicable time specified in Part I.D. 

‘‘Compliance’’ of the service bulletin.

Note 1: For the purposes of this AD, a 

detailed inspection is defined as: ‘‘An 

intensive visual examination of a specific 

structural area, system, installation, or 

assembly to detect damage, failure, or 

irregularity. Available lighting is normally 

supplemented with a direct source of good 

lighting at intensity deemed appropriate by 

the inspector. Inspection aids such as mirror, 

magnifying lenses, etc., may be used. Surface 

cleaning and elaborate access procedures 

may be required.’’

Optional Terminating Modification 

(b) Modification of the flex shaft of the flap 

secondary drive per Part III.C. of the 

Accomplishment Instructions of Bombardier 

Service Bulletin 8–27–83, Revision ‘‘A’’, 

dated February 8, 2002, terminates the 

repetitive inspections required by paragraph 

(a) of this AD. 

Actions Done per Previous Issue of Service 

Bulletins 

(c) Accomplishment of the inspections or 

the modification before the effective date of 

this AD in accordance with Bombardier 

Service Bulletin 8–27–83, dated October 19, 

2001, is considered acceptable for 

compliance with the applicable actions 

specified in this AD. 

Alternative Methods of Compliance 

(d) In accordance with 14 CFR 39.19, the 

Manager, New York Aircraft Certification 

Office, FAA, is authorized to approve 

alternative methods of compliance for this 

AD. 

Incorporation by Reference 

(e) The actions shall be done in accordance 

with Bombardier Service Bulletin 8–27–83, 

Revision ‘‘A’’, dated February 8, 2002. This 

incorporation by reference was approved by 

the Director of the Federal Register in 

accordance with 5 U.S.C. 552(a) and 1 CFR 

part 51. Copies may be obtained from 

Bombardier, Inc., Bombardier Regional 

Aircraft Division, 123 Garratt Boulevard, 

Downsview, Ontario M3K 1Y5, Canada. 

Copies may be inspected at the FAA, 

Transport Airplane Directorate, 1601 Lind 

Avenue, SW., Renton, Washington; or at the 

FAA, New York Aircraft Certification Office, 

1600 Stewart Avenue, Westbury, New York; 

or at the Office of the Federal Register, 800 

North Capitol Street, NW., suite 700, 

Washington, DC.

Note 2: The subject of this AD is addressed 

in Canadian airworthiness directive CF–

2001–42, dated November 23, 2001.

Effective Date 

(f) This amendment becomes effective on 

March 16, 2004.

Issued in Renton, Washington, on January 

29, 2004. 

Kalene C. Yanamura, 

Acting Manager, Transport Airplane 

Directorate, Aircraft Certification Service.

[FR Doc. 04–2583 Filed 2–9–04; 8:45 am] 

BILLING CODE 4910–13–U

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 1

RIN 3038–AC01

Investment of Customer Funds

AGENCY: Commodity Futures Trading 

Commission.

ACTION: Final rule.

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’) is 

amending its regulations to allow 

futures commission merchants 

(‘‘FCMs’’) and derivatives clearing 

organizations (‘‘DCOs’’) to engage in 

repurchase agreements (‘‘repos’’) with 

securities deposited by customers, 

subject to certain conditions, and to 

modify the portfolio time-to-maturity 

requirements for securities deposited in 

connection with certain collateral 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Rules and Regulations 6141

1See 65 FR 77993 (Dec. 13, 2000) (publishing 

final rules); 65 FR 82270 (Dec. 28, 2000) (making 

technical corrections and accelerating effective date 

of final rules from February 12, 2001 to December 

28, 2000).

2See 68 FR 38654 (June 30, 2003). In a separate 

release, the Commission will address comments 

received on aspects of Rule 1.25 that were not 

related to textual amendments proposed in the June 

30, 2003 Federal Register release.

3The Commission is also making technical 

revisions in that the final rules consistently use the 

term ‘‘derivatives clearing organization,’’ rather 

than the terms ‘‘clearing organization’’ or 

‘‘registered clearing organization,’’ as had appeared 

in the text of the proposed rules.

4CFTC Staff Letter No. 84–24, [1984–1986 

Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 22,449 

(Dec. 5, 1984).

5See Rule 1.25(a)(2) and Rule 1.25(d).

6Lehman Brothers stated in its comment letter 

that it fully supports the views set forth in the FIA’s 

comment letter.

7The Commission believes that a customer’s 

ability to negotiate arrangements for disclosure and 

consent adequately addresses Freddie Mac’s 

concerns. It notes, however, that it is not making 

any determination as to whether the instruments 

identified in the Freddie Mac letter would satisfy 

the standards set forth under paragraph 

(a)(2)(ii)(A)–(D) (discussed below), thereby making 

them suitable for repurchase.

management programs of DCOs, 

pursuant to certain conditions.

EFFECTIVE DATE: March 11, 2004.

FOR FURTHER INFORMATION CONTACT: John 

C. Lawton, Deputy Director and Chief 

Counsel, or Phyllis P. Dietz, Special 

Counsel, Division of Clearing and 

Intermediary Oversight, Commodity 

Futures Trading Commission, Three 

Lafayette Centre, 1155 21st Street, NW, 

Washington, DC 20581. Telephone (202) 

418–5450.

SUPPLEMENTARY INFORMATION: 

I. Background 

Commission Rule 1.25 (17 CFR 1.25) 

sets forth the types of instruments in 

which FCMs and DCOs are permitted to 

invest customer segregated funds. Rule 

1.25 was substantially amended in 

December 2000 to expand the list of 

permitted investments.1 In connection 

with that expansion, the Commission 

added several provisions intended to 

minimize the credit, liquidity, and 

volatility risks associated with the 

additional investments.

On June 30, 2003, the Commission 

published for public comment proposed 

amendments to some of those 

provisions and further requested 

comment on several other provisions of 

the rule.2 The Commission received 

comment letters from the Futures 

Industry Association (‘‘FIA’’), National 

Futures Association (‘‘NFA’’), Chicago 

Mercantile Exchange (‘‘CME’’), Federal 

Home Loan Mortgage Corporation 

(‘‘Freddie Mac’’), and Lehman Brothers. 

In light of the comments received, the 

Commission has determined to adopt 

amendments to Rule 1.25 substantially 

as proposed and to further clarify 

certain provisions of the rule.3

II. Discussion of the Final Rules 

A. Repurchase Agreements Involving 

Collateral Deposited by Customers 

CFTC Staff Letter 84–24 (‘‘Letter 84–

24’’) 4 permits FCMs to enter into repos 

with collateral deposited by customers 

(‘‘customer collateral’’), subject to 

certain terms and conditions. When the 

Commission adopted the amendments 

to Rule 1.25 in December 2000, it 

included provisions governing repos 

and reverse repos involving investments 

purchased with customer funds 

(‘‘permitted investments’’), subject to 

terms and conditions that differ in a 

number of ways from those in Letter 84–

24.5 The Commission did not, however, 

specifically address Letter 84–24 at that 

time.

The Commission proposed to amend 

Rule 1.25(a)(2) to permit FCMs and 

DCOs to engage in repos of customerdeposited securities subject to certain 

terms and conditions. The proposed 

amendments did not include a 

requirement that the FCM provide 

written disclosure of the mechanics of 

the repo transaction and obtain prior 

written authorization from the 

customer. In contrast, Letter 84–24 does 

include such a requirement. The 

Commission requested public comment 

on whether it is appropriate to permit 

repos of customer collateral without 

prior written consent, and, if so, 

whether the limitations set forth in the 

proposal are appropriate. The 

Commission further requested comment 

on whether one-way notice disclosure to 

the customer should be required, or 

whether an ‘‘opt-out’’ mechanism 

should be provided. 

The Commission received three 

comments on the disclosure issue. The 

FIA pointed out that the securities used 

in the repos would have to be highly 

liquid and any loss incurred as a result 

of a counterparty default would be 

borne by the FCM. The FIA therefore 

concluded that the Commission should 

not require an FCM to provide one-way 

disclosure or obtain a customer’s 

written consent prior to engaging in a 

repo transaction with the customer’s 

securities. It further stated its view that 

all customers are presumed to be aware 

of the rules and regulations governing 

their accounts.6

The NFA observed that because the 

Commission’s proposed amendments 

exclude specifically identifiable 

property from repo transactions, it is not 

necessary to provide an opt-out 

mechanism whereby a customer could 

instruct an FCM not to subject collateral 

to a repo. The NFA expressed its belief 

that an opt-out provision would be 

costly and burdensome for FCMs that 

would have to revise their existing 

customer agreements without a 

corresponding regulatory benefit. 

Freddie Mac expressed the contrary 

view that the written disclosure and 

customer consent requirements of Letter 

84–24 are appropriate, and should be 

retained. It pointed out that, in posting 

margin to its clearing firms, Freddie 

Mac may transfer securities, which may 

include mortgage-related securities that 

are not fungible. In certain cases, it may 

be necessary to have the same security 

returned in order to achieve the 

company’s asset/liability management 

goals or for other risk management 

purposes. Freddie Mac stated that, at a 

minimum, customers and FCMs should 

be permitted to provide contractually 

for disclosure and notice.

The Commission has determined to 

amend Rule 1.25(a)(2) as proposed, 

without a requirement for written 

disclosure and customer consent. The 

Commission believes that in light of the 

stringent safeguards discussed below, it 

is appropriate to provide FCMs and 

DCOs this additional flexibility in 

performing collateral management. The 

Commission wishes to emphasize, 

however, that the absence of disclosure 

and consent requirements does not 

preclude any customer of an FCM from 

requiring on its own initiative, by 

written agreement (e.g., the customer 

agreement), that the FCM obtain the 

customer’s prior consent in order to 

engage in repo transactions with 

securities deposited by the customer. As 

in other instances where disclosure and 

customer authorization are not 

expressly required by regulation, a 

customer and its FCM are always free to 

negotiate terms and conditions of 

disclosure and consent, and to enter 

into a binding agreement accordingly.7

With respect to the criteria for 

engaging in repos with customer 

collateral under proposed paragraphs 

(a)(2)(ii)(A)–(D), the FIA expressed the 

view that those requirements, in 

combination with the requirements of 

paragraph (d), ‘‘will be more than 

sufficient to safeguard both the 

customer-owned securities specifically 

as well as the customer segregated 

account generally.’’ Similarly, the NFA 

observed that the safeguards included in 

the proposal provide ‘‘ample 

protection’’ for customer-deposited 

securities. 

6142 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Rules and Regulations 

8Under Rule 1.25(b)(1), except for interests in 

money market mutual funds, investments must be 

‘‘readily marketable’’ as defined in 17 CFR 

240.15c3–1 (the net capital rule of the Securities 

and Exchange Commission). Paragraph (c)(11)(i) of 

that rule provides that ‘‘[t]he term ready market 

shall include a recognized established securities 

market in which there exists independent bona fide 

offers to buy and sell so that a price reasonably 

related to the last sales price or current bona fide 

competitive bid and offer quotations can be 

determined for a particular security almost 

instantaneously and where payment will be 

received in settlement of a sale at such price within 

a relatively short time conforming to trade custom.’’

9Rule 1.25(d) specifies criteria for repos and 

reverse repos involving permitted investments. 

Those criteria address, among other things, 

identification of securities, permissible 

counterparties, applicability of concentration limits, 

duration of the agreement, substitution and transfer 

of securities, documentation and confirmation 

requirements, and bookkeeping requirements.

10While the FIA has suggested that the 

Commission need not consider possible tax 

consequences in its deliberations, the Commission 

wishes to make clear that adverse tax consequences 

for customers as a result of a repo counterparty 

default are the type of cost or expense that must be 

covered by the FCM. The Commission agrees that 

it is not necessary to engage in an analysis of 

specific factual situations that may give rise to 

adverse tax consequences, but it is necessary to 

point out that the Commission contemplates that 

adverse tax consequences are the type of cost or 

expense for which the customer must be 

compensated.

Proposed paragraph (a)(2)(ii)(A) 

would provide that, to be eligible for 

repurchase, securities would have to 

meet the marketability requirements of 

Rule 1.25(b)(1).8 Application of this 

standard is intended to ensure that, if a 

repo counterparty should default, the 

FCM or DCO could use the cash 

proceeds from the repo to buy the 

securities elsewhere. Both the NFA and 

FIA supported the marketability 

requirement. The Commission has 

determined to adopt paragraph 

(a)(2)(ii)(A) as proposed.

Proposed paragraph (a)(2)(ii)(B) 

would provide that securities subject to 

repos must not be ‘‘specifically 

identifiable property’’ as defined in Rule 

190.01(kk) (17 CFR 190.01(kk)). Such 

property is generally not eligible for 

repurchase. The NFA expressed the 

opinion that the exclusion of 

specifically identifiable property 

eliminates the need to require the FCM 

to replace the securities in the event of 

a counterparty default. The NFA further 

stated its belief that, in the event of a 

default, it would be acceptable for an 

FCM to make the customer whole by 

giving the customer the cash equivalent 

of the securities plus any transaction 

costs that might be incurred in replacing 

the securities. This topic is discussed in 

connection with paragraph (a)(2)(ii)(D), 

below. The Commission has determined 

to adopt paragraph (a)(2)(ii)(B) as 

proposed. 

Proposed paragraph (a)(2)(ii)(C) 

would provide that the terms and 

conditions of a repo involving customerdeposited securities must be in 

accordance with the requirements of 

Rule 1.25(d).9 As noted above, the FIA 

commented that application of the 

requirements of paragraph (d), 

combined with the additional 

requirements of proposed paragraph 

(a)(2)(ii), will more than sufficiently 

safeguard both the customer-owned 

securities and the customer segregated 

account. The Commission believes that 

these safeguards, currently applicable to 

repos for permitted investments, are 

appropriate to apply to customerdeposited securities as well. The 

Commission, therefore, has determined 

to adopt paragraph (a)(2)(ii)(C) as 

proposed.

Proposed paragraph (a)(2)(ii)(D) 

would provide that, in the unlikely 

event of a default by a counterparty to 

a repo, the FCM or DCO ‘‘must take 

steps to ensure’’ that the default does 

not result in ‘‘any cost or expense’’ to 

the customer. The Commission 

requested comment on how an FCM 

might fulfill its obligations to its 

customer in the event a repo 

counterparty fails to perform. In this 

regard, the Commission asked 

commenters to consider whether it is 

sufficient for the FCM to give the 

customer the cash equivalent of the 

securities, plus any transaction costs 

that might be incurred in replacing the 

securities, or whether the FCM should 

be required to replace the securities. 

The Commission recognized the 

possibility that cash compensation 

might be insufficient if a customer 

needed the particular securities to 

maintain the risk profile of its portfolio. 

The FIA observed that, among other 

things, because the customer-owned 

securities used for repos must be highly 

liquid, an FCM should have little 

difficulty using the cash proceeds of the 

repo held in the customer segregated 

account to buy the same securities 

elsewhere. The FIA stated its belief that 

if a counterparty fails to perform, an 

FCM should make every reasonable 

effort to replace the customer-owned 

securities that are the subject of the 

repo. The FIA added that ‘‘[o]f course, 

any loss incurred as a result of such 

difficulty would be borne by the FCM.’’

In response to the Commission’s 

specific request for comments on 

whether there are tax implications that 

should be considered in connection 

with the proposal, the FIA stated its 

understanding that the failure of a 

counterparty to return the customerowned securities could, in certain 

circumstances, have tax implications. 

Given the remoteness of counterparty 

default, the FIA said it does not believe 

the Commission should consider 

potential tax implications in adopting 

final rules. The Commission received no 

other comments on tax implications.

As noted above, the NFA stated its 

view that in the event of a counterparty 

default, it would be acceptable for an 

FCM to make the customer whole by 

giving the customer the cash equivalent 

of the securities plus any transaction 

costs that might be incurred in replacing 

the securities. It noted, however, that 

replacing the securities may be the 

preferable course of action. 

Freddie Mac, in pointing out that it 

posts margin in the form of securities 

that are not fungible, explained that in 

certain cases, it may be necessary to 

have the same security returned in order 

to achieve the company’s asset/liability 

management goals or for other risk 

management purposes. Based on this 

concern, Freddie Mac requested that the 

Commission make more explicit, and 

specifically state, that an FCM is 

responsible for losses arising from a 

customer’s inability to maintain the risk 

profile of a portfolio or otherwise 

replicate necessary positions (e.g., 

‘‘breakage’’), transactional costs, and 

similar consequential losses resulting 

from the repo transaction. 

The Commission has determined that 

in the unlikely event of a counterparty 

default involving customer-deposited 

securities, the FCM or DCO must make 

the customer economically whole and 

must do so in a timely manner. The 

FCM or DCO will not be required to 

replace the securities; rather, it may 

exercise its discretion in determining 

the means for making the customer 

whole in light of the relevant facts and 

circumstances. Making the customer 

‘‘whole’’ includes, but is not limited to 

replacing the securities that were the 

subject of the repo, paying the customer 

the cash equivalent of the securities, 

reimbursing the customer for any 

commissions or other transactional costs 

incurred by the customer in replacing 

the securities, compensating the 

customer for any adverse tax 

consequences accruing to the 

customer,10 or covering any other losses 

that arise from the counterparty’s failure 

to return the securities deposited by the 

customer.

Accordingly, the proposed language 

of 1.25(a)(2)(ii)(D), which would have 

obligated the FCM or DCO ‘‘to take steps 

to ensure’’ that the default by a repo 

counterparty does not result in ‘‘any 

cost or expense to the customer,’’ has 

been revised to read ‘‘[u]pon the default 

by a counterparty to a repurchase 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Rules and Regulations 6143

11See 65 FR at 78002 (Dec. 13, 2000) (discussion 

accompanying the Commission’s adoption of the 

concentration requirements).

12The proposed amendments to Rule 1.25(b)(5) 

were intended to address the CME’s Interest 

Earning Facility 3 program (‘‘IEF 3’’), and any 

similar programs, whereby FCMs could deposit 

certain collateral on an overnight basis to meet 

concentration margin requirements. Absent 

amendment of the rule, the deposit of such 

collateral could cause the FCM’s portfolio to exceed 

the time-to-maturity limits of Rule 1.25(b)(5).

13 Instruments given to an FCM by a customer for 

deposit in a segregated account currently are not 

subject to the time-to-maturity provisions of Rule 

1.25, and this remains the case under the final 

rules. Instruments purchased by an FCM with 

customer funds and held in a segregated account 

currently are subject to those provisions. This 

generally will remain the case under the final rules. 

The final rules provide relief with regard to 

instruments that are held by an FCM in its nonsegregated inventory and that are deposited on an 

overnight basis into a segregated account at a DCO. 

So long as an FCM has an unqualified right to 

pledge the instruments, it may include instruments 

obtained through reverse repos, or otherwise.

agreement, the futures commission 

merchant or derivatives clearing 

organization shall act promptly to 

ensure that the default does not result 

in any direct or indirect cost or expense 

to the customer.’’ This modified 

language is intended to clarify: (1) The 

FCM or DCO has an unconditional 

responsibility to make the customer 

whole; (2) the FCM or DCO must act 

promptly; and (3) making the customer 

whole includes compensation for a wide 

range of costs and expenses, both direct 

and indirect, as discussed above. 

In its proposal, the Commission 

requested comment on whether the 

terms and conditions applicable to 

DCOs engaging in repos should differ in 

any way from those applicable to FCMs. 

The Commission received no comments 

on this topic. The Commission has 

determined to apply the same rules to 

both FCMs and DCOs engaging in repo 

transactions with customer-deposited 

securities because the same economic 

risks apply to both situations. 

The Commission also requested 

comment on whether customer 

collateral that is subject to repo should 

be treated for concentration purposes 

like permitted investments under 

paragraph (b)(4)(ii) (repurchase 

agreements) or continue to be treated 

under paragraph (b)(4)(v) (treatment of 

customer-owned securities). Only the 

FIA touched on this. In footnote 3 of its 

letter, the FIA recommends that the 

concentration limit requirements in 

paragraph (b)(4)(i) (permitted 

investments) apply to all transactions. 

The Commission notes that under 

current paragraph (b)(4)(v), there is no 

concentration requirement for customerdeposited securities because changes in 

the value of such securities accrue to the 

customer, not the FCM.11 The final rules 

in no way limit or alter the fact that 

changes in the value of such securities 

accrue to the customer and not the FCM. 

As discussed above, however, if an FCM 

engaged in a repo with a customerdeposited security and the counterparty 

defaulted, the FCM would bear the cost. 

Thus, the FCM would incur price risk. 

Accordingly, consistent with the FIA 

comment, the concentration 

requirements of direct investments 

apply.

In light of the Commission’s adoption 

of amendments to Rule 1.25(a)(2), as 

discussed above, Rule 1.25, as amended, 

supersedes Letter 84–24. 

B. Time-to-Maturity Requirements for 

Certain Collateral

Rule 1.25(b)(5) establishes a time-tomaturity requirement for the portfolio of 

permitted investments. In order to 

encourage development of innovative 

collateral management programs, and 

thereby facilitate the efficient use of 

capital, the Commission proposed to 

amend Rule 1.25(b)(5) to permit certain 

instruments to be treated as if they had 

a time-to-maturity of one day, if certain 

terms and conditions were satisfied.12

The Commission proposed the 

following criteria for such treatment: 

first, under proposed paragraph 

(b)(5)(ii)(A), the instrument must be 

deposited with a DCO solely on an 

overnight basis, pursuant to the terms 

and conditions of a collateral 

management program. Second, under 

proposed paragraph (b)(5)(ii)(B), the 

instrument must be one that the FCM 

owns or has the unqualified right to 

pledge, is free of any lien, and is 

deposited by the FCM into a segregated 

account at a DCO.13 Third, under 

proposed paragraph (b)(5)(ii)(C), the 

instrument must be used only for the 

purpose of meeting concentration 

margin or other similar charges that are 

in addition to the basic margin 

requirement established by the DCO. 

Fourth, under proposed paragraph 

(b)(5)(ii)(D), the DCO must price the 

instrument each day based on the 

current mark-to-market value. Fifth, 

under proposed paragraph (b)(5)(ii)(E), 

the DCO must haircut the instrument by 

at least two percent.

The Commission requested comment 

on the appropriateness of the proposed 

terms and conditions. In particular, the 

Commission requested comment on 

whether the relief should be limited to 

instruments deposited to meet 

concentration and similar margin 

requirements, as proposed, or whether 

the modified treatment should be 

extended to apply to initial margin 

generally. If the latter, the Commission 

requested comment on whether 

alternative safeguards should be 

developed. The Commission also 

requested comment on whether the 

proposed haircut is appropriate. 

The Commission received two 

comment letters on the proposed 

amendments to Rule 1.25(b)(5). With 

respect to the permitted categories of 

margin (proposed paragraph 

(b)(5)(ii)(C)), the CME requested 

clarification that the proposed language 

would not restrict it from applying 

assets in the IEF 3 program to reserve 

and/or core performance bond 

requirements. The CME stated that it 

performs its own conservative risk 

management and stress testing functions 

on a daily basis, establishing a prudent 

and flexible program that benefits 

market participants. It asserted that by 

expanding the list of permitted margin 

categories, industry participants and 

DCOs would realize greater benefits. 

The CME stated its belief that it is 

important to have the flexibility to 

expand the IEF 3 program to satisfy 

other classes of performance bond 

requirements. 

Similarly, the FIA expressed the view 

that certain of the proposed terms and 

conditions would unnecessarily restrict 

the scope of the relief. In particular, the 

FIA stated its belief that the benefits of 

the amendment should not be limited to 

those circumstances in which the 

securities are used only for the purpose 

of meeting concentration margin or 

other similar charges. Referring to the 

IEF 3 program, the FIA noted that 

although it is limited to the deposit of 

concentration margin, ‘‘we see no 

reason why, if a clearing organization 

desired, a comparable program could 

not be designed for initial margin 

deposits generally.’’

With respect to the proposed 

minimum haircut of two percent 

(proposed paragraph (b)(5)(ii)(E)), the 

CME expressed the view that the rule 

should allow either a DCO or a qualified 

custodian to perform the pricing and 

haircutting functions. It indicated that it 

plans to use third party custodians to 

price and haircut securities that qualify 

for the one-day time-to-maturity benefit, 

but would like the ability to perform 

these functions if it obtains the 

necessary expertise. The CME did not 

object to the two percent minimum 

haircut. 

The FIA opposed the minimum 

haircut, expressing the view that the 

DCO core principles support the 

authority of DCOs to exercise discretion 

in managing risks in setting haircuts on 

6144 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Rules and Regulations 

14Rule 39.4(a) provides that DCOs may request 

Commission approval for rules and rule 

amendments under Rule 40.5, and Rule 39.4(b) 

provides that DCOs may self-certify new or 

amended rules under Rule 40.6.

15The Commission broadly defines the term 

‘‘rule’’ to include, among other things, rules, 

regulations, interpretations, and stated policies, in 

whatever form adopted, and any amendment or 

addition thereto, made or issued by a DCO. See

Rule 40.1.

16 7 U.S.C. 6d(a)(2).

17 7 U.S.C. 6(c).

18Pub. L. No. 102–546, 106 Stat. 3590 (1992).

19H.R. Conf. Rep. No. 102–978 (1992). The 

Conference Report also states that the reference in 

Section 4(c) to the ‘‘purposes of the Act’’ is 

intended to ‘‘underscore [the Conferees’] 

expectation that the Commission will assess the 

impact of a proposed exemption on the 

maintenance of the integrity and soundness of 

markets and market participants.’’ Id.

20 5 U.S.C. 601 et seq.

21 47 FR 18618 (Apr. 30, 1982).

22 Id. at 18619.

23 66 FR 45604, 45609 (Aug. 29, 2001).

24 44 U.S.C. 3507.

deposited securities. The FIA requested 

that the Commission defer to the DCO’s 

judgment in establishing such haircuts, 

until the Commission has reason to 

believe that the DCO is not complying 

with a core principle. 

The Commission has carefully 

considered the views expressed by the 

CME and FIA. The Commission has 

determined to adopt the amendments to 

Rule 1.25(b)(5), as proposed, with two 

exceptions. First, the Commission has 

decided not to adopt proposed 

paragraph (b)(5)(ii)(C), which would 

have limited the one-day time-tomaturity treatment to instruments 

deposited to meet concentration margin 

or similar charges. The Commission 

believes that the other provisions of the 

rule constitute prudent safeguards and 

that it is appropriate to give DCOs the 

flexibility to apply the rule to other 

classes of performance bond.

Second, in the final rules, the 

Commission has added language to 

proposed paragraph (b)(5)(ii)(A) to make 

clear that the DCO’s collateral 

management program must have 

become effective in accordance with the 

notice procedures of Rule 39.4.14 The 

notice procedures, which apply 

generally to DCO rules,15 provide the 

Commission with a mechanism for 

maintaining an appropriate level of 

oversight to ensure that the relief 

granted in paragraph (b)(5) is applied 

consistent with core principles and the 

Commission’s regulations. The 

Commission notes that rather than 

adopt prescriptive rules for collateral 

management programs that incorporate 

the one-day time-to-maturity treatment, 

the Commission has taken a more 

flexible approach in permitting DCOs to 

exercise discretion in developing such 

programs.

With regard to the CME’s comment on 

performance of the pricing and 

haircutting function, the Commission 

confirms that a DCO could outsource 

the daily execution of these functions to 

a third party custodian. Under the rule, 

however, the DCO would remain 

ultimately responsible for compliance. 

With regard to the FIA’s comment on 

the haircut, the Commission has 

decided to impose a minimum two 

percent haircut, as proposed. The effect 

of new paragraph (b)(5)(ii) will be to 

give relief from the time-to-maturity 

requirement of paragraph (b)(5)(i) that 

would otherwise apply. The 

Commission believes that in light of this 

relief, the two percent haircut is a 

prudent substitute safeguard. The 

Commission understands that two 

percent is the standard haircut generally 

used in the repo market. 

Finally, the FIA concluded its 

comments on (b)(5) with a request for 

the Commission to confirm that, to the 

extent the concentration limits in Rule 

1.25 apply to deposits of securities with 

DCOs under 1.25(b)(2), the applicable 

limits will be the limits for direct 

investments. The Commission hereby 

confirms this. 

III. Section 4(c) Findings 

The final rules allowing FCMs and 

DCOs to engage in repos with securities 

deposited by customers are promulgated 

under section 4d(a)(2) of the Commodity 

Exchange Act (‘‘Act’’),16 which governs 

investment of customer funds, and 

Section 4(c) of the Act,17 which grants 

the Commission broad exemptive 

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

customer funds may be invested in 

obligations of the United States, in 

general obligations of any State or of any 

political subdivision thereof, and in 

obligations fully guaranteed as to 

principal and interest by the United 

States. It further provides that such 

investments must be made in 

accordance with such rules and 

regulations and subject to such 

conditions as the Commission may 

prescribe.

Section 4(c) of the Act provides that, 

in order to promote responsible 

economic or financial innovation and 

fair competition, the Commission, by 

rule, regulation or order, may exempt 

any class of agreements, contracts or 

transactions, including any person or 

class of persons offering, entering into, 

rendering advice or rendering other 

services with respect to, the agreement, 

contract, or transaction, from the 

contract market designation requirement 

of section 4(a) of the Act, or any other 

provision of the Act other than section 

2(a)(1)(C)(ii) or (D), if the Commission 

determines that the exemption would be 

consistent with the public interest. For 

the reasons stated below, the 

Commission believes that issuing the 

exemptive relief as set forth in these 

final rules is consistent with the public 

interest. 

The Commission is expanding the 

range of instruments in which FCMs 

may invest customer funds beyond 

those listed in section 4d(a)(2) of the 

Act, to enhance the yield available to 

FCMs, DCOs, and their customers 

without compromising the safety of 

customer funds. These final rules 

should enable FCMs and DCOs to 

remain competitive globally and 

domestically, while maintaining 

safeguards against systemic risk. In light 

of the foregoing, the Commission has 

determined that the adoption of the 

final rules regarding the expansion of 

permitted instruments for the 

investment of customer funds will be 

consistent with the ‘‘public interest,’’ as 

that term is used in section 4(c) of the 

Act. When that provision was enacted, 

the Conference Report accompanying 

the Futures Trading Practices Act of 

1992 18 stated that the ‘‘public interest’’

in this context would ‘‘include the 

national public interests noted in the 

Act, the prevention of fraud and the 

preservation of the financial integrity of 

the markets, as well as the promotion of 

responsible economic or financial 

innovation and fair competition.’’ 19

IV. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’)20 requires federal agencies, in 

promulgating rules, to consider the 

impact of those rules on small 

businesses. The rule amendments 

adopted herein will affect FCMs and 

DCOs. The Commission has previously 

established certain definitions of ‘‘small 

entities’’ to be used by the Commission 

in evaluating the impact of its rules on 

small entities in accordance with the 

RFA.21 The Commission has previously 

determined that registered FCMs 22 and 

DCOs 23 are not small entities for the 

purpose of the RFA. Pursuant to 5 

U.S.C. 605(b), the Chairman, on behalf 

of the Commission, certifies that the 

final rules will not have a significant 

economic impact on a substantial 

number of small entities.

B. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 24 imposes certain 

requirements on federal agencies 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Rules and Regulations 6145

(including the Commission) in 

connection with their conducting or 

sponsoring any collection of 

information as defined by the PRA. The 

final rule amendments that have been 

adopted do not require a new collection 

of information on the part of any entities 

subject to these rules.

C. Cost-Benefit Analysis 

Section 15(a) of the Act requires that 

the Commission, before promulgating a 

regulation under the Act or issuing an 

order, consider the costs and benefits of 

its action. By its terms, section 15(a) 

does not require the Commission to 

quantify the costs and benefits of a new 

rule or determine whether the benefits 

of the rule outweigh its costs. Rather, 

section 15(a) simply requires the 

Commission to ‘‘consider the costs and 

benefits’’ of its action. 

Section 15(a) further specifies that 

costs and benefits shall be evaluated in 

light of the following considerations: (1) 

Protection of market participants and 

the public; (2) efficiency, 

competitiveness, and financial integrity 

of futures markets; (3) price discovery; 

(4) sound risk management practices; 

and (5) other public interest 

considerations. Accordingly, the 

Commission could, in its discretion, 

give greater weight to any one of the five 

considerations and could, in its 

discretion, determine that, 

notwithstanding its costs, a particular 

rule was necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or to 

accomplish any of the purposes of the 

Act. 

The Commission has evaluated the 

costs and benefits of the final rules in 

light of the specific considerations 

identified in section 15(a) of the Act, as 

follows: 

1. Protection of market participants 

and the public. The final rules facilitate 

greater capital efficiency on the part of 

FCMs and DCOs, while protecting 

customers by establishing prudent 

standards for repos with customerdeposited collateral and requirements 

for adjustment to time-to-maturity 

calculations for certain collateral 

management programs.

2. Efficiency and competition. The 

final rules provide FCMs and DCOs 

with greater flexibility in using repos to 

maximize returns on direct investment 

of customer funds. They also facilitate 

the implementation of collateral 

management programs, which can also 

serve to maximize capital efficiency. 

The rules should enable FCMs and 

DCOs to remain competitive globally 

and domestically, while maintaining 

safeguards against systemic risk. 

3. Financial integrity of futures 

markets and price discovery. The final 

rules will not affect the financial 

integrity of futures markets and price 

discovery. 

4. Sound risk management practices.

The final rules impose sound risk 

management practices for FCMs and 

DCOs that elect to invest customer 

funds under the rules. The rules 

regarding repos with customerdeposited securities make clear that 

FCMs and DCOs, not customers, will 

bear the costs of any default by a repo 

counterparty. DCOs acting pursuant to 

the one-day time-to-maturity relief must 

satisfy the requirements set forth in the 

final rules, which include a requirement 

that the governing collateral 

management program must have been 

filed with the Commission. 

5. Other public considerations. The 

final rules are expected to enhance the 

ability of FCMs and DCOs to earn 

revenue from the investment of 

customer funds, while protecting the 

safety of such funds and preserving the 

rights of customers. FCMs and DCOs are 

not obligated to enter into repos with 

customer-deposited collateral under 

Rule 1.25(a)(2), and, similarly, DCOs are 

not obligated to implement collateral 

management programs applying the 

relief granted in Rule 1.25(b)(5). 

Therefore, any costs to FCMs and DCOs 

in connection with the implementation 

of these rules are voluntarily incurred. 

With respect to customer costs, the rules 

clarify that, in the case of a default by 

a repo counterparty, the customer must 

be made whole, promptly. The 

requirements that must be satisfied in 

order for collateral to be used for a repo 

(including ready marketability) will 

make prompt replacement of the 

securities or payment of replacement 

costs readily feasible solutions.

List of Subjects in 17 CFR Part 1

Brokers, Commodity futures, 

Consumer protection, Reporting and 

recordkeeping requirements.

■ Accordingly, the Commission amends 

part 1 as follows:

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT

■ 1. The authority citation for Part 1 

continues to read as follows:

Authority: 7 U.S.C.

■ 2. Section 1.25 is amended by revising 

paragraphs (a)(2) and (b)(5) to read as 

follows:

§ 1.25 Investment of customer funds. 

(a) * * *

(2)(i) In addition, a futures 

commission merchant or derivatives 

clearing organization may buy and sell 

the permitted investments listed in 

paragraphs (a)(1)(i) through (viii) of this 

section pursuant to agreements for 

resale or repurchase of the instruments, 

in accordance with the provisions of 

paragraph (d) of this section. 

(ii) A futures commission merchant or 

a derivatives clearing organization may 

sell securities deposited by customers as 

margin pursuant to agreements to 

repurchase subject to the following: 

(A) Securities subject to such 

repurchase agreements must meet the 

marketability requirement of paragraph 

(b)(1) of this section. 

(B) Securities subject to such 

repurchase agreements must not be 

‘‘specifically identifiable property’’ as 

defined in § 190.01(kk) of this chapter. 

(C) The terms and conditions of such 

an agreement to repurchase must be in 

accordance with the provisions of 

paragraph (d) of this section. 

(D) Upon the default by a 

counterparty to a repurchase agreement, 

the futures commission merchant or 

derivatives clearing organization shall 

act promptly to ensure that the default 

does not result in any direct or indirect 

cost or expense to the customer. 

(b) * * *

(5) Time-to-maturity. (i) Except for 

investments in money market mutual 

funds, the dollar-weighted average of 

the time-to-maturity of the portfolio, as 

that average is computed pursuant to 

§ 270.2a-7 of this title, may not exceed 

24 months. 

(ii) For purposes of determining the 

time-to-maturity of the portfolio, an 

instrument that is set forth in 

paragraphs (a)(1)(i) through (vii) of this 

section may be treated as having a oneday time-to-maturity if the following 

terms and conditions are satisfied: 

(A) The instrument is deposited solely 

on an overnight basis with a derivatives 

clearing organization pursuant to the 

terms and conditions of a collateral 

management program that has become 

effective in accordance with § 39.4 of 

this chapter; 

(B) The instrument is one that the 

futures commission merchant owns or 

has an unqualified right to pledge, is not 

subject to any lien, and is deposited by 

the futures commission merchant into a 

segregated account at a derivatives 

clearing organization; 

(C) The derivatives clearing 

organization prices the instrument each 

day based on the current mark-to-market 

value; and 

(D) The derivatives clearing 

organization reduces the assigned value 

6146 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Rules and Regulations 

of the instrument each day by a haircut 

of at least 2 percent.

* * * * *

Issued in Washington, DC on February 4, 

2004, by the Commission. 

Jean A. Webb, 

Secretary of the Commission.

[FR Doc. 04–2752 Filed 2–9–04; 8:45 am] 

BILLING CODE 6351–01–P

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 147 

[CGD08–03–028] 

RIN 1625–AA76 

Safety Zone for Outer Continental 

Shelf Facility in the Gulf of Mexico for 

Green Canyon 645

AGENCY: Coast Guard, DHS.

ACTION: Final rule.

SUMMARY: The Coast Guard is 

establishing a safety zone around a 

petroleum and gas production facility in 

Green Canyon 645 of the Outer 

Continental Shelf in the Gulf of Mexico 

while the facility is being constructed 

and after the construction is completed. 

The construction site and facility need 

to be protected from vessels operating 

outside the normal shipping channels 

and fairways, and placing a safety zone 

around this area will significantly 

reduce the threat of allisions, oil spills 

and releases of natural gas. This rule 

prohibits all vessels from entering or 

remaining in the specified area around 

the facility’s location except for the 

following: an attending vessel; a vessel 

under 100 feet in length overall not 

engaged in towing; or a vessel 

authorized by the Eighth Coast Guard 

District Commander.

DATES: This final rule is effective March 

11, 2004.

ADDRESSES: Comments and material 

received from the public, as well as 

documents indicated in this preamble as 

being available in the docket, are part of 

docket (CGD08–03–028) and are 

available for inspection or copying at 

Commander, Eighth Coast Guard 

District (m), Hale Boggs Federal Bldg., 

501 Magazine Street, New Orleans, LA, 

between 8 a.m. and 3:30 p.m., Monday 

through Friday, except Federal holidays.

FOR FURTHER INFORMATION CONTACT:

Lieutenant (LT) Kevin Lynn, Project 

Manager for Eighth Coast Guard District 

Commander, Hale Boggs Federal Bldg., 

501 Magazine Street, New Orleans, LA 

70130, telephone (504) 589–6271.

SUPPLEMENTARY INFORMATION: 

Regulatory History 

On September 26, 2003, we published 

a notice of proposed rulemaking 

(NPRM) entitled ‘‘Safety Zone for Outer 

Continental Shelf Facility in the Gulf of 

Mexico for Green Canyon 645’’ in the 

Federal Register (68 FR 55557). We 

received no comments on the proposed 

rule. No public hearing was requested, 

and none was held. 

Background and Purpose 

The Coast Guard is establishing a 

safety zone around a petroleum and gas 

production facility in the Gulf of 

Mexico: Holstein, Green Canyon Block 

645 (GC 645), located at position 

27°19′17′′ N, 90°32′08′′ W. The safety 

zone will be in effect while the facility 

is being constructed and after the 

construction is completed. 

This safety zone is in the deepwater 

area of the Gulf of Mexico. For the 

purposes of this regulation it is 

considered to be in waters of 304.8 

meters (1,000 feet) or greater depth 

extending to the limits of the Exclusive 

Economic Zone (EEZ) contiguous to the 

territorial sea of the United States and 

extending to a distance up to 200 

nautical miles from the baseline from 

which the breadth of the sea is 

measured. Navigation in the area of the 

safety zone consists of large commercial 

shipping vessels, fishing vessels, cruise 

ships, tugs with tows and the occasional 

recreational vessel. The deepwater area 

of the Gulf of Mexico also includes an 

extensive system of fairways. The 

fairways nearest the safety zone include 

the East-West Gulf of Mexico Safety 

Fairway and Louisiana Offshore Oil Port 

(LOOP) Shipping Safety Fairway. 

Significant amounts of vessel traffic 

occur in or near the various fairways in 

the deepwater area.

BP Exploration & Production Inc., 

hereafter referred to as ‘‘BP’’ requested 

that the Coast Guard establish a safety 

zone in the Gulf of Mexico around the 

Holstein construction site and for the 

zone to remain in effect after 

construction is completed. 

The request for the safety zone was 

made due to the high level of shipping 

activity around the site of the facility 

and the safety concerns for construction 

personnel, the personnel on board the 

facility after it is completed, and the 

environment. BP indicated that the 

location, production level, and 

personnel levels on board the facility 

make it highly likely that any allision 

with the facility during and after 

construction would result in a 

catastrophic event. 

The Coast Guard has evaluated BP’s 

information and concerns against Eighth 

Coast Guard District criteria developed 

to determine if an Outer Continental 

Shelf facility qualifies for a safety zone. 

We concluded that the risk of allision to 

the facility and the potential for loss of 

life and damage to the environment 

resulting from such an accident during 

and following the construction of 

Holstein warrants the establishment of 

this safety zone. The regulation will 

significantly reduce the threat of 

allisions, oil spills and natural gas 

releases and increase the safety of life, 

property, and the environment in the 

Gulf of Mexico. This regulation is issued 

pursuant to 14 U.S.C. 85 and 43 U.S.C. 

1333 as set out in the authority citation 

for 33 CFR part 147. 

Discussion of Comments and Changes 

We received no comments on the 

proposed rule. Therefore, we have not 

made any change in the final rule. 

Regulatory Evaluation 

This rule is not a ‘‘significant 

regulatory action’’ under section 3(f) of 

Executive Order 12866 and does not 

require an assessment of potential costs 

and benefits under section 6(a)(3) of that 

Order. The Office of Management and 

Budget has not reviewed it under that 

Order. It is not significant under the 

regulatory policies and procedures of 

the Department of Homeland Security 

(DHS). 

We expect the economic impact of 

this rule to be so minimal that a full 

regulatory evaluation under the 

regulatory policies and procedures of 

DHS is unnecessary. 

The impacts on routine navigation are 

expected to be minimal because the 

safety zone will not overlap any of the 

safety fairways within the Gulf of 

Mexico. 

Small Entities 

Under the Regulatory Flexibility Act 

(5 U.S.C. 601–612), we have considered 

whether this rule would have a 

significant economic impact on a 

substantial number of small entities. 

The term ‘‘small entities’’ comprises 

small businesses, not-for-profit 

organizations that are independently 

owned and operated and are not 

dominant in their fields, and 

governmental jurisdictions with 

populations of less than 50,000. 

The Coast Guard certifies under 5 

U.S.C. 605(b) that this rule will not have 

a significant economic impact on a 

substantial number of small entities. 

Since the construction site for the