Vol. 78 Thursday, 

No. 220 November 14, 2013 

Part II 

Commodity Futures Trading Commission 

17 CFR Parts 1, 3, 22, et al. 

Enhancing Protections Afforded Customers and Customer Funds Held by 

Futures Commission Merchants and Derivatives Clearing Organizations; 

Final Rule 


TKELleY on DSK3SPTVN1PROD with RULES2
68506 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1, 3, 22, 30, and 140 

RIN 3038–AD88 

Enhancing Protections Afforded 

Customers and Customer Funds Held 

by Futures Commission Merchants 

and Derivatives Clearing Organizations 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is adopting new regulations 

and amending existing regulations to 

require enhanced customer protections, 

risk management programs, internal 

monitoring and controls, capital and 

liquidity standards, customer 

disclosures, and auditing and 

examination programs for futures 

commission merchants (‘‘FCMs’’). 

The regulations also address certain 

related issues concerning derivatives 

clearing organizations (‘‘DCOs’’) and 

chief compliance officers (‘‘CCOs’’). The 

final rules will afford greater assurances 

to market participants that: Customer 

segregated funds, secured amount 

funds, and cleared swaps funds are 

protected; customers are provided with 

appropriate notice of the risks of futures 

trading and of the FCMs with which 

they may choose to do business; FCMs 

are monitoring and managing risks in a 

robust manner; the capital and liquidity 

of FCMs are strengthened to safeguard 

their continued operations; and the 

auditing and examination programs of 

the Commission and the self-regulatory 

organizations (‘‘SROs’’) are monitoring 

the activities of FCMs in a prudent and 

thorough manner. 

DATES: Effective date: January 13, 2014. 

Compliance date: The applicable 

compliance dates are discussed in the 

section of the release titled ‘‘III. 

Compliance Dates.’’ 

FOR FURTHER INFORMATION CONTACT: 

Division of Swap Dealer and 

Intermediary Oversight: Gary Barnett, 

Director, 202–418–5977, gbarnett@

cftc.gov; Thomas Smith, Deputy 

Director, 202–418–5495, tsmith@

cftc.gov;mailto: Jennifer Bauer, Special 

Counsel, 202–418–5472, jbauer@

cftc.gov; Joshua Beale, AttorneyAdvisor, 202–418–5446, jbeale@

cftc.gov, Three Lafayette Centre, 1155 

21st Street NW., Washington, DC 20581; 

Kevin Piccoli, Deputy Director, 646– 

746–9834, kpiccoli@cftc.gov, 140 

Broadway, 19th Floor, New York, NY 

10005; or Mark Bretscher, Special 

Counsel, 312–596–0529, mbretscher@

cftc.gov, 525 W. Monroe Street, Suite 

1100, Chicago, IL. 60661. Division of 

Clearing and Risk: Ananda 

Radhakrishnan, Director, 202–418– 

5188, aradhakrishnan@cftc.gov; Robert 

B. Wasserman, Chief Counsel, 202–418– 

5092, rwasserman@cftc.gov; Phyllis P. 

Dietz, Deputy Director, 202–418–5449, 

pdietz@cftc.gov; M. Laura Astrada, 

Associate Chief Counsel, 202–418–7622, 

lastrada@cftc.gov, Eileen Donovan, 

Associate Director, 202–418–5096, 

edonovan@cftc.gov; Kirsten V. K. 

Robbins, Special Counsel, 202–418– 

5313, krobbins@cftc.gov; or Shawn R. 

Durrani, Attorney-Advisor, 202–418– 

5048, sdurrani@cftc.gov, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

Office of the Chief Economist: 

Stephen Kane, Research Economist, 

skane@cftc.gov, 202–418–5911, Three 

Lafayette Centre, 1155 21st Street NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION:

Table of Contents 

I. Background 

A. General Statutory and Current 

Regulatory Structure 

B. Self-Regulatory Structure 

C. Futures Commission Merchant 

Insolvencies and Failures of Risk 

Management 

D. Recent Commission Rulemakings and 

Other Initiatives Relating to Customer 

Protection 

E. The Proposed Amendments 

II. Comments on the Notice of Proposed 

Rulemaking 

A. § 1.10: Financial Reports of Futures 

Commission Merchants and Introducing 

Brokers 

1. Amendments of the Segregation and 

Secured Amount Schedules With 

Respect to the Reporting of Residual 

Interest 

2. New Cleared Swaps Segregation 

Schedules 

3. Amendments to Form 1–FR–FCM 

4. FCM Certified Annual Report Deadline 

5. Leverage Ratio Calculation 

6. Procedural Filing Requirements 

B. § 1.11: Risk Management Program for 

Futures Commission Merchants 

1. Applicability 

2. Definitions 

3. Approval of Policies and Procedures and 

Submission to the Commission 

4. Organizational Requirements of the Risk 

Management Program 

a. Separation of Risk Management Unit 

From Business Unit 

5. Components of the Risk Management 

Program 

6. Annual Review, Distribution of Policies 

and Procedures and Recordkeeping 

7. CCO or CEO Certification 

C. § 1.12: Maintenance of Minimum 

Financial Requirements by Futures 

Commission Merchants and Introducing 

Brokers 

1. Timing of Notices 

2. Undercapitalized FCMs and IBs 

3. Insufficient Segregation of Funds of 

Cleared Swaps Customers 

4. Investment of Customer Funds in 

Contravention of Regulation 1.25 

5. Notice of Residual Interest Falling Below 

Targeted Level or Undermargined 

Amounts 

6. Events Causing Material Adverse 

Financial Impact or Material Change in 

Operations 

7. Notice of Correspondence From Other 

Regulatory Authorities 

8. Filing Process and Content 

9. Public Disclosure of Early Warning 

Notices 

D. § 1.15: Risk Assessment Reporting 

Requirement for Futures Commission 

Merchants 

E. § 1.16: Qualifications and Reports of 

Accountants 

1. Mandatory PCAOB Registration 

Requirement 

2. PCAOB Inspection Requirement 

3. Remediation of PCAOB Inspection 

Findings by the Public Accountant 

4. Auditing Standards 

5. Review of Public Accountant’s 

Qualifications by the FCM’s Governing 

Body 

6. Electronic Filing of Certified Annual 

Reports 

F. § 1.17: Minimum Financial 

Requirements for Futures Commission 

Merchants and Introducing Brokers 

1. FCM Cessation of Business and Transfer 

of Customer Accounts if Unable To 

Demonstrate Adequate Liquidity 

2. Reducing Time Period for FCMs To 

Incur a Capital Charge for 

Undermargined Accounts to One Day 

after Margin Calls Are Issued 

3. Permit an FCM that is not a BD To 

Develop Policies and Procedures To 

Determine Creditworthiness 

4. Revisions to Definitions in Regulation 

1.17(b) 

G. § 1.20: Futures Customer Funds To Be 

Segregated and Separately Accounted for 

1. Identification of Customer Funds and 

Due Diligence 

2. Permitted Depositories 

3. Limitation on the Holding of Futures 

Customer Funds Outside of the United 

States 

4. Acknowledgment Letters 

a. Background 

b. Technical Changes to the Template 

Letters 

c. Federal Reserve Banks as Depositories 

d. Foreign Depositories 

e. Release of Funds Upon Commission 

Instruction 

f. Read-Only Access and Information 

Requests 

g. Requirement To File New 

Acknowledgment Letters 

h. Standard of Liability 

i. Liens 

j. Examination of Accounts 

5. Prohibition Against Commingling 

Customer Funds 

6. Limitations on the Use of Customer 

Funds 

7. Segregation Requirements for DCOs 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68507 

1 7 U.S.C. 6d(a)(2). 

2 7 U.S.C. 1 et seq. 

3The term ‘‘futures customer’’ is defined in 

§ 1.3(iiii) of the Commission’s regulations to 

include any person who uses an FCM as an agent 

in connection with trading in any contract for the 

purchase or sale of a commodity for future delivery 

or an option on such contract (excluding any 

proprietary accounts under § 1.3(y)). The 

Commission adopted the definition of the term 

‘‘futures customer’’ on October 16, 2012 as part of 

the final rulemaking that amended existing 

Commission regulations to incorporate swaps. The 

Federal Register release adopting the final rules can 

be accessed at http://www.cftc.gov/ucm/groups/

public/@newsroom/documents/file/federal

register101612.pdf. Commission regulations can be 

found at 17 CFR Ch. 1. 

4See 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/DoddFrankAct/index.htm. 

5The term ‘‘Cleared Swap’’ is defined in section 

1a(7) of the Act as any swap that is, directly or 

indirectly, submitted to and cleared by a DCO 

registered with the Commission. The term ‘‘Cleared 

Swaps Customer’’ is defined in § 22.1 as any person 

entering into a Cleared Swap, but excludes: (1) Any 

owner or holder of a Cleared Swaps Proprietary 

Account with respect to the Cleared Swaps in such 

account; and (2) A clearing member of a DCO with 

respect to Cleared Swaps cleared on that DCO. 

8. Immediate Availability of Bank and 

Trust Company Deposits 

9. Segregated Funds Computation 

Requirement 

10. Segregation Regimes 

H. § 1.22: Use of Futures Customer Funds 

I. § 1.23: Interest of Futures Commission 

Merchant in Segregated Futures 

Customer Funds; Additions and 

Withdrawals 

J. § 1.25: Investment of Customer Funds 

1. General Comments Regarding the 

Investment of Customer Funds 

2. Reverse Repurchase Agreement 

Counterparty Concentration Limits 

K. § 1.26: Deposit of Instruments Purchased 

With Futures Customer Funds 

L. § 1.29: Increment or Interest Resulting 

From Investment of Customer Funds 

1. FCM’s Responsibility for Losses Incurred 

on the Investment of Customer Funds 

2. FCM’s Obligation in Event of Bank 

Default 

M. § 1.30: Loans by Futures Commission 

Merchants: Treatment of Proceeds 

N. § 1.32: (§ 22.2(g) for Cleared Swaps 

Customers and § 30.7(l) for Foreign 

Futures and Foreign Options Customers): 

Segregated Account: Daily Computation 

and Record 

O. § 1.52: Self-Regulatory Organization 

Adoption and Surveillance of Minimum 

Financial Requirements 

1. Swap Execution Facilities Excluded 

From the Scope of Regulation 1.52 

2. Revisions to the Current SRO 

Supervisory Program 

3. Auditing Standards Utilized in the SRO 

Supervisory Program 

4. ‘‘Examinations Expert’’ Reports 

P. § 1.55: Public disclosures by Futures 

Commission Merchants 

1. Amendments to the Risk Disclosure 

Statement 

a. Firm Specific Disclosure Document 

i. General Requirements 

ii. Specific Disclosure Information 

Required (by rule paragraph) 

2. Public Availability of FCM Financial 

Information 

Q. Part 22—Cleared Swaps 

R. Amendments to § 1.3: Definitions; and 

§ 30.7: Treatment of Foreign Futures or 

Foreign Options Secured Amount 

1. Elimination of the ‘‘Alternative Method’’ 

for Calculating the Secured Amount 

2. Funds Held in Non-U.S. Depositories 

3. Commingling of Positions in Foreign 

Futures and Foreign Options Accounts 

4. Further Harmonization With Treatment 

of Customer Segregated Funds 

5. Harmonization With Other Commission 

Proposals 

S. § 3.3: Chief Compliance Officer Annual 

Report 

III. Compliance Dates 

A. Financial Reports of FCMs: § 1.10 

B. Risk Management Program for FCMs: 

§ 1.11 

C. Qualifications and Reports of 

Accountants: § 1.16 

D. Minimum Financial Requirements for 

FCMs 

E. Written Acknowledgment Letters: 

§§ 1.20, 1.26, and 30.7 

F. Undermargined Amounts: §§ 1.22(c), 

30.7(a) 

G. SRO Minimum Financial Surveillance: 

§ 1.52 

H. Public Disclosures by FCMs: § 1.55 

IV. Cost Benefit Considerations 

V. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

Appendix 1—Table of Comment Letters 

Appendix 2—CFTC Form 1–FR–FCM 

I. Background 

A. General Statutory and Current 

Regulatory Structure 

The protection of customers—and the 

safeguarding of money, securities or 

other property deposited by customers 

with an FCM—is a fundamental 

component of the Commission’s 

disclosure and financial responsibility 

framework. Section 4d(a)(2) 1 of the 

Commodity Exchange Act (‘‘the Act’’ or 

‘‘the CEA’’) 2 requires each FCM to 

segregate from its own assets all money, 

securities, and other property deposited 

by futures customers to margin, secure, 

or guarantee futures contracts and 

options on futures contracts traded on 

designated contract markets.3 Section 

4d(a)(2) further requires an FCM to treat 

and deal with futures customer funds as 

belonging to the futures customer, and 

prohibits an FCM from using the funds 

deposited by a futures customer to 

margin or extend credit to any person 

other than the futures customer that 

deposited the funds. 

Section 4d(f) of the Act, which was 

added by section 724(a) of the DoddFrank Wall Street Reform and Consumer 

Protection Act (‘‘Dodd-Frank Act’’),4

requires each FCM to segregate from its 

own assets all money, securities, and 

other property deposited by Cleared 

Swaps Customers to margin Cleared 

Swaps.5 Section 4d(f) also provides that 

an FCM shall treat and deal with all 

money, securities, and property of any 

swaps customer received to margin, 

guarantee, or secure a swap cleared by 

or through a DCO (including money, 

securities, or property accruing to the 

swaps customer as the result of such a 

swap) as belonging to the swaps 

customer. Section 4d(f) further provides 

that an FCM shall separately account for 

and not commingle with its own funds 

any money, securities, and property of 

a swaps customer, and shall not use 

such swaps customer’s funds to margin, 

secure, or guarantee any trades or 

contracts of any swaps customer or 

person other than the person for whom 

the same are held. 

The Commission adopted §§ 1.20 

through 1.30, and § 1.32, to implement 

section 4d(a)(2) of the Act, and adopted 

part 22 to implement section 4d(f) of the 

Act. The purpose of these regulations is 

to safeguard funds deposited by futures 

customers and Cleared Swaps 

Customers, respectively. 

Regulation 1.20 requires each FCM 

and DCO to separately account for and 

to segregate from its own proprietary 

funds all money, securities, or other 

property deposited by futures customers 

for trading on designated contract 

markets. In addition, all futures 

customer funds must be separately 

accounted for, and may not be 

commingled with the money, securities 

or property of an FCM or of any other 

person, or 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. Regulation 1.20 also provides that 

an FCM or DCO may deposit futures 

customer funds only with a bank or 

trust company, and for FCMs only, a 

DCO or another FCM. The funds must 

be deposited under an account name 

that clearly identifies the funds as 

belonging to the futures customers of 

the FCM or DCO and further shows that 

the funds are segregated as required by 

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

Commission regulations. FCMs and 

DCOs also are required to obtain a 

written acknowledgment from a 

depository stating that the depository 

was informed that the funds deposited 

are customer funds being held in 

accordance with the Act. 

FCMs and DCOs also are restricted in 

their use of futures customer funds. 

Regulation 1.22 prohibits an FCM from 

using, or permitting the use of, the 


TKELleY on DSK3SPTVN1PROD with RULES2
68508 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

6The Commission approved the part 22 

regulations on January 11, 2012, with an effective 

date of April 9, 2012. Compliance with the part 22 

regulations was required by November 8, 2012. See 

Protection of Cleared Swaps Customer Contracts 

and Collateral; Conforming Amendments to the 

Commodity Broker Bankruptcy Provisions, 77 FR 

6336 (Feb. 7, 2012). 

7The term ‘‘Cleared Swaps Customer Collateral’’ 

is defined in § 22.2 to mean all money, securities, 

or other property (including accruals) received by 

an FCM or DCO from, for, or on behalf of a Cleared 

Swaps Customer to margin, guarantee, or secure a 

Cleared Swap. 

8The term ‘‘foreign futures or foreign options 

customer’’ is defined in § 30.1 to mean any person 

located in the U.S., its territories or possessions 

who trades in foreign futures or foreign options, 

with the exception of accounts that are proprietary 

accounts under § 1.3. The term ‘‘foreign futures or 

foreign option’’ is defined in § 30.1 to generally 

mean any futures and/or options transactions 

executed on a foreign board of trade. 

futures customer funds of one futures 

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 

futures customer. In addition, § 1.22 

provides that futures customer funds 

may not be used to carry trades or 

positions of the same futures customer 

other than in commodities or 

commodity options traded through the 

facilities of a contract market. Under 

§ 1.20, an FCM or DCO may, however, 

for convenience, commingle and hold 

funds deposited as margin by multiple 

futures customers in the same account 

or accounts with one of the recognized 

depositories. An FCM or DCO also may 

invest futures customer funds in certain 

permitted investments under § 1.25. 

Part 22 of the Commission’s 

regulations, which governs Cleared 

Swaps, implements section 4d(f) of the 

Act and parallels many of the provisions 

in part 1 that address the manner in 

which, and the responsibilities imposed 

upon, an FCM may hold funds for 

futures customers trading on designated 

contract markets.6 For example, § 22.2 

requires an FCM to treat and to deal 

with funds deposited by Cleared Swaps 

Customers as belonging to such Cleared 

Swaps Customers and to hold such 

funds separately from the FCM’s own 

funds. Regulation 22.4 provides that an 

FCM may deposit Cleared Swaps 

Customer Collateral with a bank, trust 

company, DCO, or another registered 

FCM.7 Regulation 22.6 requires that the 

account holding the Cleared Swaps 

Customers Collateral must clearly 

identify the account as an account for 

Cleared Swaps Customers of the FCM 

engaging in Cleared Swaps and that the 

funds maintained in the account are 

subject to the segregation provisions of 

section 4d(f) of the Act and Commission 

regulations. 

Regulation 22.2(d) also prohibits an 

FCM from using the Cleared Swaps 

Customer Collateral of one Cleared 

Swaps Customer to purchase, margin, or 

settle the Cleared Swaps or any other 

trade or contract, or to secure or extend 

credit, of any person other than such 

Cleared Swaps Customer. Further, 

§ 22.2(c) permits an FCM to commingle 

the Cleared Swaps Customer Collateral 

of multiple Cleared Swaps Customers 

into one or more accounts, and 

§ 22.2(e)(1) permits an FCM to invest 

Cleared Swaps Customer Collateral in 

accordance with § 1.25. 

In addition to holding funds for 

futures customers transacting on 

designated contract markets and for 

Cleared Swaps Customers engaging in 

Cleared Swaps, FCMs also hold funds 

for persons trading futures contracts 

listed on foreign boards of trade. Section 

4(b) of the Act provides that the 

Commission may adopt rules and 

regulations proscribing fraud and 

requiring minimum financial standards, 

the disclosure of risk, the filing of 

reports, the keeping of books and 

records, the safeguarding of the funds 

deposited by persons for trading on 

foreign markets, and registration with 

the Commission by any person located 

in the United States (‘‘U.S.’’) who 

engages in the offer or sale of any 

contract of sale of a commodity for 

future delivery that is made subject to 

the rules of a board of trade located 

outside of the U.S. Pursuant to the 

statutory authority of section 4(b), the 

Commission adopted part 30 of its 

regulations to address foreign futures 

and foreign option transactions. 

The segregation provisions for funds 

deposited by foreign futures or foreign 

options customers to margin foreign 

futures or foreign options transactions 

under part 30, however, are significantly 

different from the requirements set forth 

in § 1.20 for futures customers trading 

on designated contract markets and part 

22 for Cleared Swaps Customers 

engaging in Cleared Swaps.8 Regulation 

30.7 provides that an FCM may deposit 

the funds belonging to foreign futures or 

foreign options customers in an account 

or accounts maintained at a bank or 

trust company located in the U.S.; a 

bank or trust company located outside 

of the U.S. that has in excess of 

$1 billion of regulatory capital; an FCM 

registered with the Commission; a DCO; 

a member of a foreign board of trade; a 

foreign clearing organization; or a 

depository selected by the member of a 

foreign board of trade or foreign clearing 

organization. The account with the 

depository must be titled to clearly 

specify that the account holds funds 

belonging to the foreign futures or 

foreign options customers of the FCM 

that are trading on foreign futures 

markets. An FCM also is permitted to 

invest the funds deposited by foreign 

futures or foreign option customers in 

accordance with § 1.25. 

However, unlike § 1.20 and part 22, 

which require an FCM to hold a 

sufficient amount of funds in 

segregation to meet the total account 

equities of all of the FCM’s futures 

customers and Cleared Swaps 

Customers ‘‘at all times’’ (i.e., the ‘‘Net 

Liquidating Equity Method’’), § 30.7 

requires an FCM to maintain in separate 

accounts an amount of funds only 

sufficient to cover the margin required 

on open foreign futures contracts, plus 

or minus any unrealized gains or losses 

on such open positions, plus any funds 

representing premiums payable or 

received on foreign options (including 

any additional funds necessary to secure 

such options, plus or minus any 

unrealized gains or losses on such 

options) (i.e., the ‘‘Alternative 

Method’’). Thus, under the part 30 

Alternative Method an FCM is not 

required to maintain a sufficient amount 

of funds in such separate accounts to 

pay the full account balances of all of its 

foreign futures or foreign options 

customers at all times. 

In addition to the segregation 

requirements of sections 4d(a)(2) and 

4d(f) of the Act, and the secured amount 

requirements in part 30 of the 

Commission’s regulations, FCMs also 

are subject to minimum net capital and 

financial reporting requirements that are 

intended to ensure that such firms meet 

their financial obligations in a regulated 

marketplace, including their financial 

obligations to customers and DCOs. 

Each FCM is required to maintain a 

minimum level of ‘‘adjusted net 

capital,’’ which is generally defined 

under § 1.17 as the firm’s net equity as 

computed under generally accepted 

accounting principles, less all of the 

firm’s liabilities (except for certain 

qualifying subordinated debt) and 

further excluding all assets that are not 

liquid or readily marketable. Regulation 

1.17(c)(5) further requires an FCM to 

impose capital charges (i.e., deductions) 

on certain of its liquid assets to protect 

against possible market risks in such 

assets. 

FCMs also are subject to financial 

recordkeeping and reporting 

requirements. FCMs that carry customer 

accounts are required under § 1.32 to 

prepare a schedule each business day 

demonstrating their compliance with 

the segregation and secured amount 

requirements. Regulation 1.32 requires 

the calculation to be performed by noon 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68509 

9The term ‘‘self-regulatory organization’’ is 

defined by § 1.3 to mean a contract market, a swap 

execution facility, or a registered futures 

association. A DSRO is the SRO that is appointed 

to be primarily responsible for conducting ongoing 

financial surveillance of an FCM that is a member 

of two or more SROs under a joint audit agreement 

submitted to and approved by the Commission 

under § 1.52. 

10See Report of the Trustee’s Investigation and 

Recommendations, In re MF Global Inc., No. 11– 

2790 (MG) SIPA (Bankr. S.D.N.Y. June 4, 2012). 

each business day, reflecting the 

account balances and open positions as 

of the close of business on the previous 

business day. 

Each FCM also is required by § 1.10 

to file with the Commission and with its 

designated self-regulatory organization 

(‘‘DSRO’’) monthly unaudited financial 

statements and an annual audited 

financial report.9 Regulation 1.12 

requires an FCM to file a notice with the 

Commission and with the firm’s DSRO 

whenever, among other things, the firm: 

(1) Fails to maintain compliance with 

the Commission’s capital requirements; 

(2) fails to hold sufficient funds in 

segregated or secured amount accounts 

to meet its regulatory requirements; (3) 

fails to maintain current books and 

records; or (4) experiences a significant 

reduction in capital from the previous 

month-end. The purpose of the 

regulatory notices is to alert the 

Commission and the firm’s DSRO as 

early as possible to potential financial 

issues at the firm that may adversely 

impact the ability of the FCM to comply 

with its obligations to safeguard 

customer funds, or to meet its financial 

obligations to other FCMs or DCOs. 

The statutory mandate to segregate 

customer funds—to treat them as 

belonging to the customer and not use 

the funds inappropriately—takes on 

greater meaning in light of the 

devastating events experienced over the 

last two years. Those events, which are 

discussed in greater detail below, 

demonstrate that the risks of 

misfeasance and malfeasance, and the 

risks of an FCM failing to maintain 

sufficient excess funds in segregation: (i) 

Put customer funds at risk; and (ii) are 

exacerbated by stresses on the business 

of the FCM. Many of those risks can be 

mitigated significantly by better risk 

management systems and controls, 

along with an increase in risk-oriented 

oversight and examination of the FCMs. 

Determining what is a ‘‘sufficient’’ 

amount of excess funds in segregation 

for any particular FCM requires a full 

understanding of the business of that 

FCM, including a proper analysis of the 

factors that affect the actual amount of 

segregated funds held by the FCM 

relative to the minimum amount of 

segregated funds it is required to hold. 

Further, appropriate care must be taken 

to avoid withdrawing such excess funds 

at times of great stress to cover needs 

unrelated to the purposes for which 

excess segregated and secured funds are 

maintained. In times of stress, excess 

funds may look like an easy liquidity 

source to help cover other risks of the 

business; yet withdrawing such excess 

funds makes the funds unavailable 

when they may be most needed. The 

recent market events illustrate both the 

need to: (i) Require that care be taken 

about monitoring excess segregated and 

secured funds, and the conditions under 

and the extent to which such funds may 

be withdrawn; and (ii) place appropriate 

risk management controls around the 

other risks of the business to help 

relieve (A) the likelihood of an exigent 

event or, (B) if such an event occurs, the 

likelihood of a failure to prepare for 

such an event, which in either case 

could create pressures that result in an 

inappropriate withdrawal of customer 

funds. 

Although the Commission’s existing 

regulations provide an essential 

foundation to fostering a wellfunctioning marketplace, wherein 

customers are protected and 

institutional risks are minimized, recent 

events have demonstrated that 

additional measures are necessary to 

effectuate the fundamental purposes of 

the statutory provisions discussed 

above. Further, concurrently with the 

enhanced responsibilities for FCMs that 

were proposed by the Commission, the 

oversight and examination systems must 

be enhanced to mitigate risks and 

effectuate the statutory purposes. 

B. Self-Regulatory Structure 

The Commission’s oversight structure 

provides that SROs are the frontline 

regulators of FCMs, introducing brokers 

(‘‘IBs’’), commodity pool operators, and 

commodity trading advisors. In 2000, 

Congress affirmed the Commission’s 

reliance on SROs by amending section 

3 of the Act to state: ‘‘It is the purpose 

of this Act to serve the public interests 

through a system of effective selfregulation of trading facilities, clearing 

systems, market participants and market 

professionals under the oversight of the 

Commission.’’ 

As part of its oversight responsibility, 

an SRO is required to conduct periodic 

examinations of member FCMs’ 

compliance with Commission and SRO 

financial and related reporting 

requirements, including the FCMs’ 

holding of customer funds in segregated 

and secured accounts. The Commission 

oversees the SROs by examining them 

for the performance of their duties. The 

Commission recently has moved to 

conducting continuous reviews of the 

SROs’ FCM examination program that 

includes a process whereby the 

Commission selects a small sample of 

the SRO’s FCM work papers to review. 

In addition, the Commission also 

conducts limited-scope reviews of FCMs 

in ‘‘for cause’’ situations that are 

sometimes referred to as ‘‘audits,’’ but 

they are not full-scale audits as 

accountants commonly use that term. 

In addition, because there are 

multiple SROs who share the same 

member FCMs, to avoid subjecting 

FCMs to duplicative examinations from 

SROs, the Commission has a permissive 

system that allows the SROs to agree 

how to allocate FCMs amongst them. An 

SRO who is allocated certain FCMs for 

such examination is referred to as the 

DSRO of those FCMs. 

Under Commission regulations, FCMs 

must have their annual financial 

statements audited by an independent 

certified public accountant following 

generally accepted auditing standards as 

adopted in the U.S. (‘‘U.S. GAAS’’). As 

part of this certified annual report, the 

independent accountant also must 

conduct appropriate reviews and tests to 

identify any material inadequacies in 

systems and controls that could violate 

the Commission’s capital, segregation or 

secured amount requirements. Any such 

inadequacies are required to be reported 

to the FCM’s DSRO and to the 

Commission. 

C. Futures Commission Merchant 

Insolvencies and Failures of Risk 

Management 

The recent insolvencies of two FCMs 

demonstrate the need for revisions to 

the Commission’s customer protection 

regime. On October 31, 2011, MF 

Global, Inc. (‘‘MFGI’’), which was 

dually-registered as an FCM with the 

Commission and as a securities brokerdealer (‘‘BD’’) with the U.S. Securities 

and Exchange Commission (‘‘SEC’’), was 

placed into a liquidation proceeding 

under the Securities Investor Protection 

Act by the Securities Investor Protection 

Corporation (‘‘SIPC’’). 

The trustee appointed to oversee the 

liquidation of MFGI reported a potential 

$900 million shortfall of funds 

necessary to repay the account balances 

due to customers trading futures on 

designated contract markets, and an 

approximately $700 million shortfall in 

funds immediately available to repay 

the account balances of customers 

trading on foreign futures markets.10

The shortfall in customer segregated 

accounts was attributed by the MFGI 

Trustee to significant transfers of funds 


TKELleY on DSK3SPTVN1PROD with RULES2
68510 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

11Complaint, U.S. Commodity Futures Trading 

Commission v. Peregrine Financial Group, Inc., and 

Russell R. Wasendorf, Sr., No. 12–cv–5383 (N.D. Ill. 

July 10, 2012). A copy of the Commission’s 

complaint has been posted to the Commission’s 

Web site. 

12The Commission notes that the definition of 

‘‘customer funds’’ in § 1.3(gg) includes funds held 

for customers trading on designated contract 

markets and customers engaging in cleared swap 

transactions. However, as used in this notice, unless 

otherwise specified, the term ‘‘customer funds’’ also 

includes funds held for customers trading on 

foreign markets pursuant to part 30 of the 

Commission’s regulations. 

13See, e.g., Edward Krudy, Jed Horowitz and John 

McCrank, ‘‘Knight’s Future in Balance After 

Trading Disaster,’’ Reuters (Aug. 3, 2012), available 

at http://in.reuters.com/article/2012/08/03/

knightcapital-loss-idINL2E8J27QE20120803 (noting 

that a software issue caused the firm to incur a $440 

million trading loss, which represented much of the 

firm’s capital). 

14See Investment of Customer Funds and Funds 

Held in an Account for Foreign Futures and Foreign 

Options Transactions, 76 FR 78776 (Dec. 19, 2011). 

15See Commission Regulation 39.12(g)(8)(i) and 

Derivatives Clearing Organization General 

Provisions and Core Principles, 76 FR 69334 (Nov. 

8, 2011). 

16See 77 FR 6336 (Feb. 7, 2012). 

17The term ‘‘Cleared Swaps Customer Account’’ 

is defined in § 22.1 and generally refers to an 

account that an FCM or a DCO maintains at a 

permitted depository for the Cleared Swaps (and 

related collateral) of Cleared Swaps Customers. 

out of the customer accounts that were 

used by MFGI for various purposes 

other than to meet obligations to or on 

behalf of customers. 

In addition, the Commission filed a 

civil injunctive complaint in federal 

district court on July 10, 2012, against 

Peregrine Financial Group, Inc. 

(‘‘PFGI’’), a registered FCM and its Chief 

Executive Officer (‘‘CEO’’) and sole 

owner, Russell R. Wasendorf, Sr., 

alleging that PFGI and Wasendorf, Sr. 

committed fraud by misappropriating 

customer funds, violated customer fund 

segregation laws, and made false 

statements regarding the amount of 

funds in customer segregated accounts 

in financial statements filed with the 

Commission. The complaint states that 

in July 2012 during an NFA 

examination PFGI falsely represented 

that it held in excess of $220 million of 

customer funds when in fact it held 

approximately $5.1 million.11

Recent incidents also have 

demonstrated the value of establishing 

robust risk management systems within 

FCMs and enhanced early warning 

systems to detect and address financial 

and regulatory issues. In particular, 

problems that arise through an FCM’s 

non-futures-related business can have a 

direct and significant impact on the 

FCM’s financial condition, raising 

questions as to whether the FCM will be 

able to protect customer funds 12 and 

maintain the minimum financial 

requirements mandated by the Act and 

Commission regulations.13

These recent incidents highlighted 

weaknesses in the customer protection 

regime prescribed in the Commission’s 

regulations and through the selfregulatory system. In particular, 

questions have arisen on the 

requirements surrounding the holding 

and investment of customer funds, 

including the ability of FCMs to 

withdraw funds from futures customer 

segregated accounts and part 30 secured 

accounts. Additionally, the incidents 

have underscored the need for 

additional safeguards—such as robust 

risk management systems, strengthened 

early-warning systems surrounding 

margin and capital requirements, and 

enhanced public disclosures—to 

promote the protection of customer 

funds and to minimize the systemic risk 

posed by certain actions of market 

participants. Further questions have 

arisen on the system of audits and 

examinations of FCMs, and whether the 

system functions adequately to monitor 

FCMs’ activities, verify segregated funds 

and secured amount balances, and 

detect fraud. 

D. Recent Commission Rulemakings and 

Other Initiatives Relating to Customer 

Protection 

Since late 2011, the Commission has 

promulgated rules directly impacting 

the protection of customer funds. The 

Commission also has studied the 

current regulatory framework 

surrounding customer protection, 

particularly in light of the recent 

incidents outlined above, in order to 

identify potential enhancements to the 

systems and Commission regulations 

protecting customer funds. The 

Commission’s efforts have been 

informed, in part, by efforts undertaken 

by industry participants. The proposed 

rule amendments were informed by the 

efforts detailed below. 

In December 2011, the Commission 

adopted final rule amendments revising 

the types of investments that an FCM or 

DCO can make with customer funds 

under § 1.25, for the purpose of 

affording greater protection for such 

funds.14 Among other changes to §§ 1.25 

and 30.7, the final rule amendments 

removed from the list of permitted 

investments: (1) Corporate debt 

obligations not guaranteed by the U.S. 

Government; (2) foreign sovereign debt; 

and (3) in-house and affiliate 

transactions. 

In adopting the amendments to § 1.25, 

the Commission was mindful that 

customer segregated funds must be 

invested by FCMs and DCOs in a 

manner that minimizes their exposure 

to credit, liquidity, and market risks 

both to preserve their availability to 

customers and DCOs, and to enable 

investments to be quickly converted to 

cash at a predictable value in order to 

avoid systemic risk. The amendments 

are consistent with the general 

prudential standard contained in § 1.25, 

which provides that all permitted 

investments must be ‘‘consistent with 

the objectives of preserving principal 

and maintaining liquidity.’’ 

The Commission also approved final 

regulations that require DCOs to collect 

initial customer margin from FCMs on 

a gross basis.15 Under the final 

regulations, FCMs are no longer 

permitted to offset one customer’s 

margin requirement against another 

customer’s margin requirements and 

deposit only the net margin collateral 

with the DCO. As a result of the rule 

change, a greater portion of customer 

initial margin is posted by FCMs to the 

DCOs. 

The Commission also approved 

regulations that impose requirements on 

FCMs and DCOs regarding the treatment 

of Cleared Swaps and Cleared Swaps 

Customer Collateral.16 Under the 

traditional futures model, DCOs hold an 

FCM’s futures customers’ funds on an 

omnibus basis in a futures customer 

account. In the event of a double 

default, which is a situation where a 

futures customer defaults on its 

obligation to its clearing FCM and the 

loss is so great that the clearing FCM 

defaults on its obligation to the DCO, 

the DCO is permitted to use the funds 

held in the futures customers’ omnibus 

account to cover the loss of the 

defaulting futures customer before 

applying its own capital or the guaranty 

fund contributions of non-defaulting 

FCM members. 

The Commission approved an 

alternative model for Cleared Swaps. 

Under the ‘‘LSOC’’ (legal segregation 

with operational comingling) model, 

DCOs may hold Cleared Swaps 

Customer Collateral on an omnibus 

basis in a Cleared Swaps Customer 

Account.17 However, unlike with the 

futures model, following a double 

default the DCO would only be 

permitted to access the collateral of the 

defaulting Cleared Swaps Customers; it 

would not be permitted to use the 

collateral of non-defaulting Cleared 

Swaps Customers to cover a defaulting 

Cleared Swaps Customer’s losses. 

Pursuant to section 724(c) of the 

Dodd-Frank Act, the final rule on 

segregation for uncleared swaps, 

approved by the Commission on 

October 30, 2013, implements the 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68511 

18See Core Principles and Other Requirements for 

Designated Contract Markets, 77 FR 36612 (June 19, 

2012). 19 Id. at 36646. 20Further information on the public roundtable, 

including video recordings and transcripts of the 

discussions, have been posted to the Commission’s 

Web site. See http://www.cftc.gov/PressRoom/

Events/opaevent_cftcstaff022912 (relating to Feb. 

29, 2012); http://www.cftc.gov/PressRoom/Events/

opaevent_cftcstaff030112 (relating to Mar. 1, 2012). 

21Additional information, including documents 

submitted by meeting participants, has been posted 

to the Commission’s Web site. See http://

www.cftc.gov/PressRoom/Events/opaevent_

tac072612. 

22The FIA’s release addressing FAQs on the 

protection of customer funds is accessible on the 

FIA’s Web site at http://www.futuresindustry.org/

downloads/PCF-FAQs.PDF. 

23The FIA’s initial recommendations are 

accessible on the FIA’s Web site at http://

www.futuresindustry.org/downloads/Initial_

Recommendations_for_Customer_Funds_

Protection.pdf. 

24For more information relating to the new FCM 

financial requirements, see http://

www.nfa.futures.org/news/

newsNotice.asp?ArticleID=4072. 

requirements of section 4s(l) of the CEA 

that Swap Dealers (‘‘SDs’’) and Major 

Swap Participants (‘‘MSPs’’) notify their 

counterparties that such counterparties 

have a right to require that any initial 

margin which they post to guarantee 

uncleared swaps be segregated at an 

independent custodian. Where the 

counterparty elects segregation for its 

initial margin, the account must be held 

at a custodian that is independent of 

both the counterparty and the SD or 

MSP. 

The Commission also included 

customer protection enhancements in a 

final rulemaking for designated contract 

markets issued in June 2012. These 

enhancements codify into regulations 

staff guidance on minimum 

requirements for SROs regarding their 

financial surveillance of FCMs.18 The 

regulations require a DCM to have 

arrangements and resources for effective 

rule enforcement and trade and 

financial surveillance programs, 

including the authority to collect 

information and examine books and 

records of members and market 

participants. The regulations also 

establish minimum financial standards 

for both member FCMs and IBs and nonintermediated market participants. The 

Commission expressly noted in the 

preamble of the Federal Register release 

that ‘‘a DCM’s duty to set financial 

standards for its FCM members involves 

setting capital requirements, conducting 

surveillance of the potential future 

exposure of each FCM as compared to 

its capital, and taking appropriate action 

in light of the results of such 

surveillance.’’ 19 Further, the rules 

mandate that DCMs adopt rules for the 

protection of customer funds, including 

the segregation of customer and 

proprietary funds, the custody of 

customer funds, the investment 

standards for customer funds, 

intermediary default procedures and 

related recordkeeping. 

In addition to the rulemaking efforts 

outlined above, the Commission sought 

additional information through a series 

of roundtables and other meetings. On 

February 29 and March 1, 2012, the 

Commission solicited comments and 

held public roundtables to solicit input 

on customer protection issues from a 

broad cross-section of the futures 

industry, including market participants, 

FCMs, DCOs, SROs, securities 

regulators, foreign clearing 

organizations, and academics.20 The 

roundtable focused on issues relating to 

the advisability and practicality of 

modifying the segregation models for 

customer funds; alternative models for 

the custody of customer collateral; 

enhancing FCM controls over the 

disbursement of customer funds; 

increasing transparency surrounding an 

FCM’s holding and investment of 

customer funds; and lessons learned 

from recent commodity brokerage 

bankruptcy proceedings. 

The Commission also hosted a public 

meeting of the Technology Advisory 

Committee (‘‘TAC’’) on July 26, 2012.21

Panelists and TAC members discussed 

potential technological solutions 

directed at enhancing the protection of 

customer funds by identifying and 

exploring technological issues and 

possible solutions relating to the ability 

of the Commission, SROs and customers 

to verify the location and status of funds 

held in customer segregated accounts. 

Commission staff hosted an additional 

roundtable on August 9, 2012, to 

discuss SRO requirements for 

examinations of FCMs and Commission 

oversight of SRO examination programs. 

The roundtable also focused on the role 

of the independent public accountant in 

the FCM examination process, and 

proposals addressing various 

alternatives to the current system for 

segregating customer funds. 

The Commission also considered 

industry initiatives to enhance customer 

protections. On February 29, 2012, the 

Futures Industry Association (‘‘FIA’’) 

initiated steps to educate customers on 

the extent of the protections provided 

under the current regulatory structure. 

FIA issued a list of Frequently Asked 

Questions (‘‘FAQ’’) prepared by 

members of the FIA Law and 

Compliance Division addressing the 

basics of segregation, collateral 

management and investments, capital 

requirements and other issues for FCMs 

and joint FCM/BDs, and clearinghouse 

guaranty funds.22 The FAQ is intended 

to provide existing and potential 

customers with a better understanding 

of the risks of engaging in futures 

trading and a clear explanation of the 

extent of the protections provided to 

customers and their funds under the Act 

and Commission regulations. 

FIA also issued a series of initial 

recommendations for the protection of 

customer funds.23 The 

recommendations were prepared by the 

Financial Management Committee, 

whose members include representatives 

of FIA member firms, DCOs and 

depository institutions. The initial 

recommendations address enhanced 

disclosure on the protection of customer 

funds, reporting on segregated funds 

balances by FCMs, FCM internal 

controls surrounding the holding and 

disbursement of customer funds, and 

revisions to part 30 regulations to make 

the protections comparable to those 

provided for customers trading on 

designated contract markets. 

On July 13, 2012, the Commission 

approved new FCM financial 

requirements proposed by the National 

Futures Association (‘‘NFA’’).24 The 

NFA Financial Requirements Section 16 

and its related Interpretive Notice 

entitled ‘‘NFA Financial Requirements 

Section 16: FCM Financial Practices and 

Excess Segregated Funds/Secured 

Amount Disbursements’’ (collectively 

referred to as ‘‘the Segregated Funds 

Provisions’’) were developed in 

consultation with Commission staff. 

NFA’s Segregated Funds Provisions 

require each FCM to: (1) Maintain 

written policies and procedures 

governing the deposit of the FCM’s 

proprietary funds (i.e., excess or 

residual funds) in customer segregated 

accounts and part 30 secured accounts; 

(2) maintain a targeted amount of excess 

funds in segregate accounts and part 30 

secured accounts; (3) file on a daily 

basis the FCM’s segregation and part 30 

secured amount computations with 

NFA; (4) obtain the approval of senior 

management prior to a withdrawal that 

is not for the benefit of customers 

whenever the withdrawal equals 25 

percent or more of the excess segregated 

or part 30 secured amount funds; (5) file 

a notice with NFA of any withdrawal 

that is not for the benefit of customers 

whenever the withdrawal equals 25 

percent or more of the excess segregated 

or part 30 secured amount funds; (6) file 

detailed information regarding the 

depositories holding customer funds 

and the investments made with 

customer funds as of the 15th day (or 


TKELleY on DSK3SPTVN1PROD with RULES2
68512 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

25See NFA Financial Requirements Rules, 

Section 4. Financial Requirements and Treatment of 

Customer Property, and CME Rule 971, Segregation, 

Secured, and Cleared Swaps Customer Account 

Requirements. 26 77 FR 67866 (Nov. 14, 2012). 

27 78 FR 4093 (Jan. 18, 2013). 

28The written submissions from the public are 

available in the comment file on www.cftc.gov. 

They include, but are not limited to, those listed in 

the table in Appendix 1 to this release. In citing to 

the comments received during the discussion of the 

comments in this Section, the Commission used the 

abbreviations set forth in the table in Appendix 1. 

the next business day if the 15th is not 

a business day) and the last business 

day of each month; and (7) file 

additional monthly net capital and 

leverage information with NFA. 

Significantly, NFA’s Segregated 

Funds Provisions also require FCMs to 

compute their part 30 secured amount 

requirement and compute their targeted 

excess part 30 secured funds using the 

same Net Liquidating Equity Method 

that is required by the Act and 

Commission regulations for computing 

the segregation requirements for 

customers trading on U.S. contract 

markets under section 4d of the Act. 

FCMs are not permitted under the NFA 

rules to use the Alternative Method to 

compute the part 30 secured amount 

requirement. The failure of an FCM to 

maintain its targeted amount of excess 

part 30 funds computed using the Net 

Liquidating Equity Method may result 

in NFA initiating a Membership 

Responsibility Action against the firm. 

In addition, in setting the target 

amount of excess funds, the FCM’s 

management must perform a due 

diligence inquiry and consider various 

factors relating, as applicable, to the 

nature of the FCM’s business, including 

the type and general creditworthiness of 

the FCM’s customers, the trading 

activity of the customers, the types and 

volatility of the markets and products 

traded by the FCM’s customers, and the 

FCM’s own liquidity and capital needs. 

The FCM’s Board of Directors (or similar 

governing body), CEO or Chief Financial 

Officer (‘‘CFO’’) must approve in writing 

the FCM’s targeted residual amount, any 

changes thereto, and any material 

changes in the FCM’s written policies 

and procedures. 

The NFA and CME Group Inc. 

(‘‘CME’’) also adopted rules requiring 

FCMs to instruct each depository 

holding futures customer funds to report 

such balances on a daily basis to the 

NFA or CME, respectively.25 Initially, 

the NFA and CME retained the services 

of a third-party vendor which received 

account balance information directly 

from certain banks, custodians of 

securities, and money market funds, and 

passed such information on to the NFA 

and CME. The CME, however, took over 

the role of the third-party vendor 

effective October 29, 2013 and receives 

account information directly from all 

depositories holding futures customer 

funds. The CME also provides NFA with 

daily account balance information for 

the FCMs that NFA is the DSRO. The 

same process applies to the FCM’s 

customer secured account(s) held for 

customers trading on foreign futures 

exchanges, and for the FCM’s Cleared 

Swaps Customers engaging in Cleared 

Swaps. 

In addition, NFA and CME expanded 

their oversight of FCMs under the 

amended rules, by developing programs 

that compare the daily balances 

reported by the depositories with the 

balances reported by the FCMs in their 

daily segregation reports. An immediate 

alert is generated for any material 

discrepancies. 

E. The Proposed Amendments 

The incidents outlined above, 

coupled with the information generated 

through the recent efforts undertaken by 

the Commission and industry 

participants, demonstrate the need for 

new rules and amendments to existing 

rules. In particular, an examination of 

FCM business operations—including 

the non-futures business of FCMs—and 

the currently regulatory framework, 

evince a need for enhanced customer 

protections, risk management programs, 

disclosure requirements, and auditing 

and examination programs. To address 

these needs, the Commission issued a 

Notice of Proposed Rulemaking 

(‘‘NPRM’’) on November 14, 2012 (‘‘the 

Proposal’’) containing a series of 

amendments to enhance customer 

protections.26

The Proposal addressed six main 

issues. First, recognizing problems 

surrounding the treatment of customer 

segregated funds and foreign futures or 

foreign options secured amounts, the 

Commission proposed to amend several 

components of parts 1, 22, and 30 of the 

Commission’s regulations to provide 

greater certainty to market participants 

that the customer funds entrusted to 

FCMs will be protected. Second, to 

address shortcomings in the risk 

management of FCMs, the Commission 

proposed a new § 1.11 that establishes 

robust risk management programs. 

Third, the Commission determined that 

the current regulatory framework should 

be re-oriented to implement a more riskbased, forward-looking perspective, 

affording the Commission and SROs 

with read-only access to accounts 

holding customer funds and additional 

information on depositories and the 

customer assets held in such 

depositories. Fourth, given the 

difficulties that can arise in an FCM’s 

business, and the direct and significant 

impact on the FCM’s regulatory capital 

that can result from such difficulties, 

the Commission proposed to amend 

§ 1.17(a)(4) to ensure that an FCM’s 

capital and liquidity are sufficient to 

safeguard the continuation of operations 

at the FCM. Fifth, to effect the change 

in orientation needed in FCM 

examinations programs, as well as to 

assure quality control over program 

contents, administration and oversight, 

the Commission proposed to amend 

§ 1.52, which, among other things, 

addresses the formation of Joint Audit 

Committees and the implementation of 

Joint Audit Programs. And sixth, 

recognizing the need to increase the 

information provided to customers 

concerning the risks of futures trading 

and the FCMs with which they may 

choose to conduct business, the 

Commission proposed amendments to 

§ 1.55 that enhance the disclosures 

provided by FCMs. 

II. Comments on the Notice of Proposed 

Rulemaking 

The Proposal, aimed at: (1) Amending 

and enhancing its current customer 

protection regime; (2) imposing risk 

management requirements on FCMs; (3) 

requiring additional ‘‘early warning’’ 

notices from FCMs regarding material 

changes in their operations or financial 

condition; (4) imposing additional 

liquidity requirements for FCMs; (5) 

revising the examination process of 

FCMs by both the SROs and public 

accountants; and (6) requiring 

additional disclosures to customers 

concerning the risks of futures trading 

and the FCMs that hold customer funds. 

The Commission extended the initial 

60-day comment period for 

approximately 30 additional days at the 

request of various commenters and in 

order to provide interested parties with 

an additional opportunity to comment 

on the proposal.27 The comment period 

closed on February 15, 2013. 

During the comment period the 

Commission held two public 

roundtables to solicit input on issues 

related to the proposal from a crosssection of the futures industry, 

including market participants, FCMs, 

DCOs, SROs, securities regulators, 

foreign clearing organizations, and 

academics. The Commission received 

more than 120 written submissions on 

the proposing release from a range of 

commenters.28 Commission staff also 

met with representatives from at least 

eight of the commenters and other 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68513 

29The Commission also proposed to revise the 

title of the ‘‘Secured Amount Schedule’’ by adding 

the term ‘‘30.7 Customer’’ to specify that the 

secured amount will include both U.S.-domiciled 

and foreign-domiciled customers consistent with 

the proposed amendments to part 30 of the 

Commission Regulations discussed in Section II.R. 

below. No comments were received regarding the 

revisions to the title of the ‘‘Secured Amount 

Schedule,’’ and the Commission is adopting the 

revisions as proposed. 

30The NPRM explained that a margin deficit 

occurs when the value of the customer funds for a 

customer’s account is less than the total amount of 

collateral required by DCOs for that account’s 

contracts. As explained further in the discussion in 

sections II.G.9., II.Q., and II.R., the term 

‘‘undermargined amount,’’ as defined in 

§§ 1.22(c)(1), 22.2(f)(6)(i), and 30.7(f)(1)(ii)(A), is 

used in place of the term ‘‘margin deficit’’ in the 

final rule. 

31The NFA adopted a similar amendment to its 

rules, mandating that FCMs maintain written 

policies and procedures identifying a target amount 

that the FCM will seek to maintain as its residual 

interest in customer segregated and secured 

accounts. See NFA Notice I–12–14 (July 18, 2012), 

available at http://www.nfa.futures.org/news/

newsNotice.asp?ArticleID=4072. 

members of the public. Commenters 

represented a broad spectrum of 

industry participants, trade 

organizations, law firms, accounting 

firms and self-regulatory organizations. 

The majority of commenters supported 

the overall principles proposed by the 

Commission although many raised 

concerns or offered suggestions 

regarding certain proposal specifics. 

The Commission also held a meeting 

of the Agricultural Advisory Committee 

on July 25, 2013, and included in the 

agenda a discussion of the Proposal. The 

transcript of the Agricultural Advisory 

Committee meeting is included in the 

comment file to the Proposal, and the 

Commission has considered those 

comments in finalizing the regulations. 

The Commission has carefully 

considered the comments received and 

is adopting the Proposal herein subject 

to various amendments that address 

certain concerns raised or suggestions 

made by commenters. Each section of 

the final rules, including any relevant 

revisions to the corresponding section of 

the Proposal, is discussed in greater 

detail in the following sections. 

A. § 1.10: Financial Reports of Futures 

Commission Merchants and Introducing 

Brokers 

Regulation 1.10 requires each FCM to 

file with the Commission and with the 

firm’s DSRO an unaudited financial 

report each month. The financial report 

must be prepared using Form 1–FR– 

FCM. An FCM that is dually-registered 

as a BD, however, may file a Financial 

and Operational Combined Uniform 

Single Report under the Securities 

Exchange Act of 1934 (‘‘FOCUS 

Report’’) in lieu of the Form 1–FR–FCM. 

Each FCM also is required to file with 

the Commission and with its DSRO an 

annual financial report certified by an 

independent public accountant. 

The unaudited monthly and certified 

annual financial reports are required to 

contain basic financial statements, 

including a statement of financial 

condition, a statement of income (loss), 

and a statement of changes in 

ownership equity. The financial reports 

also are required to include additional 

schedules designed to address specific 

regulatory objectives to demonstrate that 

the FCM is in compliance with 

minimum capital and customer funds 

segregation requirements. These 

additional schedules include a 

statement of changes in liabilities 

subordinated to claims of general 

creditors, a statement of the 

computation of the minimum capital 

requirements (‘‘Capital Computation 

Schedule’’), a statement of segregation 

requirements and funds in segregation 

for customers trading on U.S. 

commodity exchanges (‘‘Segregation 

Schedule’’), and a statement of secured 

amounts and funds held in separate 

accounts for foreign futures and foreign 

options customers (‘‘Secured Amount 

Schedule’’). In addition, the certified 

annual report must contain a 

reconciliation of material differences 

between the Capital Computation 

Schedule, the Segregation Schedule, 

and the Secured Amount Schedule 

contained in the certified annual report 

and the unaudited monthly report for 

the FCM’s year-end month. 

1. Amendments to the Segregation and 

Secured Amount Schedules With 

Respect to the Reporting of Residual 

Interest 

The Segregation Schedule and the 

Secured Amount Schedule generally 

indicate, respectively, (1) The total 

amount of funds held by the FCM in 

segregated or secured accounts; (2) the 

total amount of funds that the FCM 

must hold in segregated or secured 

accounts to meet its regulatory 

obligations to futures customers and 

foreign futures or foreign options 

customers; and (3) whether the firm 

holds excess segregated or secured 

funds in the segregated or secured 

accounts as of the reporting date. FCMs 

also deposit proprietary funds into 

customer segregated and secured 

accounts to protect against becoming 

undersegregated or undersecured by 

failing to hold a sufficient amount of 

funds in such accounts to meet the 

regulatory requirements. This cushion 

of proprietary funds is referred to as the 

FCM’s ‘‘residual interest’’ in the 

customer segregated and secured 

accounts. 

The Commission proposed to amend 

§ 1.10 to require each FCM to also 

disclose in the Segregation Schedule 

and in the Secured Amount Schedule its 

targeted amount of ‘‘residual interest’’ 

that the FCM seeks to maintain in 

customer segregated accounts and 

secured accounts as computed under 

§ 1.11.29 As more fully discussed in 

section II.B. below, new 

§ 1.11(e)(3)(i)(D) requires the senior 

management of each FCM that carries 

customer funds to perform appropriate 

due diligence in setting the amount of 

the residual interest. Such due diligence 

must consider the nature of the FCM’s 

business including the type and general 

creditworthiness of its customer base, 

the types of markets and products 

traded by the firm’s customers, the 

proprietary trading activities of the 

FCM, the volatility and liquidity of the 

markets and products traded by the 

customers and by the FCM, the FCM’s 

own liquidity and capital needs, 

historical trends in customer segregation 

and secured account funds balances, 

and historical trends in customer debits 

and margin deficits (i.e., undermargined 

amounts).30 The FCM also is required to 

maintain policies and procedures 

establishing the targeted amount of 

residual interest that the FCM seeks to 

maintain as its residual interest in the 

segregated and secured accounts. The 

FCM’s due diligence and policies and 

procedures must be designed to 

reasonably ensure that the FCM 

maintains the targeted residual interest 

amount and remains in compliance with 

its segregation requirements at all 

times.31

The disclosure of the targeted amount 

of the FCM’s residual interest in 

segregated or secured accounts will 

allow the Commission and the FCM’s 

DSRO to determine whether the FCM 

actually maintains funds in segregated 

and secured accounts in amounts 

sufficient to cover the respective 

targeted residual interest amounts. If a 

firm does not maintain sufficient funds 

to cover the targeted residual interest 

amounts, the Commission and/or DSRO 

will take appropriate steps to assess 

whether the FCM is experiencing 

financial issues that may indicate 

potential threats to the overall safety of 

customer funds. The disclosure of the 

amounts of the FCM’s targeted residual 

interest also will enhance the 

Commission’s and DSROs’ surveillance 

of FCMs by providing information that 

will allow for the assessment of the size 

of the targeted residual interest relative 

to both the total funds held in 

segregation or secured accounts and to 


TKELleY on DSK3SPTVN1PROD with RULES2
68514 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

32The Commission notes, however, that it will 

receive notice under § 1.12 from an FCM if the firm 

maintains residual interest in the segregated or 

secured amount accounts that is less than the sum 

of the firm’s undermargined amount at the point in 

time the FCM is required to maintain such 

undermargined amounts under § 1.22, § 22.2, and 

§ 30.7. The notice provision will alert the 

Commission and the FCM’s DSRO to the fact that 

the undermargined amounts exceed the firm’s 

residual interest in the accounts, and the 

Commission and DSRO can monitor the firm’s 

actions to restore its residual interest to a level that 

is above the undermargined amounts, or take other 

actions as appropriate. See section II.C. below. 

33The Commission previously proposed a 

Cleared Swaps Segregation Schedule as part of its 

proposed regulations to adopt capital requirements 

for swap dealers and major swap participants. See 

Capital Requirements of Swap Dealers and Major 

Swap Participants, 76 FR 27802 (May 12, 2011). 

The Commission re-proposed the schedule as part 

of the Proposal in light of the Commission’s 

decision to revise the schedule by requiring FCMs 

to separately disclose their targeted residual interest 

in Cleared Swaps Customer Accounts and the sum 

of margin deficits (i.e., undermargined amounts) for 

such accounts. The Commission also has adopted 

new regulations requiring FCMs to hold in 

segregated accounts funds received from customers 

engaging in Cleared Swaps to margin, secure or 

guarantee their Cleared Swaps in accordance with 

section 4d(f) of the Act. See 77 FR 6336 (Feb. 7, 

2012). 

34SUNY Buffalo Comment Letter at 7 (Mar. 19, 

2013). 

35The Commission will revise the Cleared Swaps 

Segregation Schedule consistent with the revisions 

to the Segregation Schedule and Secured Amount 

Schedule discussed in section II.A.1. to remove the 

requirement for the firm to disclose the amount of 

the margin deficits as of the close of business on 

the previous business day. In addition, § 1.10(h) 

provides that a dually-registered FCM/BD may file 

a FOCUS Report in lieu of the Form 1–FR–FCM 

provided that all information that is required to be 

included in the Form 1–FR–FCM is included in the 

FOCUS Report. Currently, dual-registrant FCM/BDs 

include a Segregation Schedule and a Secured 

Amount Schedule in the FOCUS Report filings as 

supplemental schedules. Dual-registrant FCM/BDs 

that have Cleared Swaps Customers will also have 

to include a Cleared Swaps Segregation Schedule to 

their Focus Report filings. 

36 5 U.S.C. 552. 

37SUNY Buffalo Comment Letter at 8 (Mar. 19, 

2013). 

the size of the targeted residual interest 

maintained by other comparable FCMs. 

This information will assist the 

Commission and DSROs in the overall 

risk assessment of the FCMs, including 

the assessment of the potential risk that 

a firm may become undersegregated or 

undersecured. This additional 

information will further enhance the 

Commission’s and DSROs’ overall 

ability to protect customer funds. 

The Commission also proposed to 

amend the Segregation Schedule and 

the Secured Amount Schedule to 

require each FCM filing such schedules 

to disclose the sum of the outstanding 

margin deficits (i.e., undermargined 

amounts) as of the reporting date. The 

purpose of this disclosure was to 

demonstrate that the FCM’s residual 

interest in the segregated and secured 

account exceeded the respective 

customer margin deficits (i.e., 

undermargined amounts) as proposed in 

§§ 1.22 and 1.23. 

The Commission has considered the 

proposal and has determined not to 

amend the Segregation Schedule and 

Secured Amount Schedule to require 

the disclosure of the undermargined 

amounts. As further discussed in 

sections II.G.9. and II.R. below, the 

Commission is revising the proposed 

amendments to § 1.22 that would have 

required an FCM to maintain at all times 

a residual interest in segregated or 

secured accounts in excess of its 

undermargined amounts. The final 

regulations being adopted in § 1.22, 

§ 22.2, and § 30.7 will require 

computations as of different points in 

time than that of the computations 

reflected on the Segregation Schedule 

and the Secured Amount Schedule, 

which are prepared as of the close of 

business each day. The reporting of the 

undermargined amount information on 

the Segregation and Secured Amount 

Schedules would not be accurate as the 

firm’s customers may not be 

undermargined, or may be less 

undermargined, at the time the 

undermargined amount calculations are 

required to be performed due, for 

example, to customers meeting margin 

calls.32

The Commission has considered the 

comments and is adopting the 

amendments to § 1.10 as proposed, with 

the above revisions to the Segregation 

Schedule and the Secured Amount 

Schedule. 

2. New Cleared Swaps Segregation 

Schedules 

The Commission proposed to amend 

§ 1.10(d) and to revise the Form 1–FR– 

FCM to adopt a new ‘‘Statement of 

Cleared Swap Customer Segregation 

Requirements and Funds in Cleared 

Swap Customer Accounts Under 

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

Swaps Segregation Schedule’’).33 The 

Commission proposed the Cleared 

Swaps Segregation Schedule to further 

implement section 724(a) of the DoddFrank Act. Section 724(a) of the DoddFrank Act amended section 4d of the 

Act by adding a new paragraph (f) to 

require an FCM to separately account 

for and segregate from its own assets 

Cleared Swaps Customers Collateral 

deposited by Cleared Swaps Customers. 

Section 4d(f) of the Act also requires 

FCMs to treat and deal with all the 

Cleared Swaps Customer Collateral 

deposited by a Cleared Swaps Customer 

as belonging to such customer, and 

prohibits an FCM from, with certain 

exceptions, using the Cleared Swaps 

Customer Collateral to margin, secure or 

guarantee the Cleared Swaps of any 

person other than the Cleared Swaps 

Customer who deposited the Cleared 

Swaps Customer Collateral. FCMs 

currently prepare a schedule 

comparable to the Cleared Swaps 

Segregation Schedule for Cleared Swaps 

under applicable contract market or 

NFA rules, and the Commission’s 

proposal would codify existing 

practices. 

The Commission received one 

comment on the proposed Cleared 

Swaps Segregation Schedule. The 

Students at the SUNY Buffalo Law 

School supported the development of 

the Cleared Swaps Segregation 

Schedule.34 The Commission has 

considered the comment and has 

determined to adopt the Cleared Swaps 

Segregation Schedule as proposed.35

In addition, § 1.10 currently provides 

that the Commission will treat the 

monthly Form 1–FR–FCM reports, and 

monthly FOCUS Reports filed in lieu of 

the Forms 1–FR–FCM, as exempt from 

mandatory public disclosure for 

purposes of the Freedom of Information 

Act and the Government in the 

Sunshine Act.36 Regulation 1.10(g)(2) 

provides, however, that the following 

information in Forms 1–FR–FCM, and 

the same or equivalent information in 

FOCUS Reports filed in lieu of Forms 

1–FR–FCM, are publicly available: The 

amount of the FCM’s adjusted net 

capital; the amount of the FCM’s 

minimum net capital requirement under 

§ 1.17; and the amount of its adjusted 

net capital in excess of its minimum net 

capital requirement. In addition, 

§ 1.10(g)(2) further provides that the 

FCM’s Statement of Financial Condition 

in the certified annual financial report 

and the Segregation Schedule and 

Secured Amount Schedule are public 

documents. 

The Commission proposed to amend 

§ 1.10(g)(2)(ii) to add the Cleared Swaps 

Segregation Schedule to the list of 

documents that are publicly available. 

The only comment that the Commission 

received regarding making the Cleared 

Swaps Segregation Schedule public was 

received from students at the SUNY 

Buffalo Law School. The students at the 

SUNY Buffalo Law School supported 

the development and implementation of 

the Cleared Swaps Segregation Schedule 

as a regulatory tool for the Commission 

to receive additional information and to 

provide greater protection to customer 

funds.37 The students, however, also 

stated that the public disclosure of the 

Cleared Swaps Segregation Schedule 

and other financial information could 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68515 

38 Id. at 8–9. 

39 Id. 

40See 77 FR 6336 (Feb. 7, 2012). 

41 7 U.S.C. 2(c). 

42NFA Comment Letter at 9 (Feb. 15, 2013). 

43 Id. 

44See 75 FR 3282, 3290 (Jan. 20, 2010). 

cause public panic in certain 

situations.38 They cited MFGI and Bear 

Stearns as examples of how public 

panic can rapidly accelerate a 

company’s collapse by exacerbating the 

effects of financial injuries that might 

otherwise be manageable.39

The Commission notes that the 

monthly Segregation Schedules and 

Secured Amount Schedules have been 

available to the public for many years 

and provide important information that 

allows customers to monitor the 

financial condition of FCMs. As noted 

in the Proposal, the Commission 

believes that making the Cleared Swaps 

Segregation Schedule publicly available 

will benefit customers and potential 

customers by providing greater 

transparency on the status of the 

Cleared Swaps Customer Collateral held 

by FCMs. This disclosure allows 

customers and other members of the 

public to review an FCM’s compliance 

with its regulatory obligations to 

safeguard customer funds. The 

disclosure of the Cleared Swaps 

Segregation Schedule also will provide 

a certain amount of detail as to how the 

FCM holds Cleared Swaps Customer 

Collateral, which customers and 

potential customers will be able to 

assess as part of their risk management 

process. 

The disclosure of the status of an 

FCM’s compliance with its obligation to 

segregate customer funds, coupled with 

the additional firm risk disclosures that 

the Commission proposed in § 1.55 (and 

is adopting in relevant part herein as 

discussed in detail in section II.P. 

below), will provide customers with 

greater transparency regarding the risks 

of entrusting their funds and engaging 

in transactions with particular FCMs. 

The Commission believes that these 

benefits to customers outweigh any 

potential adverse market impact which, 

in any event, has not been shown to be 

an issue based on the Commission’s 

experience in making FCMs’ 

Segregation Schedules and Secured 

Amount Schedules publicly available. 

The Commission has, therefore, 

determined to adopt the amendments to 

§ 1.10(g)(2) as proposed. 

3. Amendments to Form 1–FR–FCM 

The Commission proposed to amend 

several statements in the Form 

1–FR–FCM. The Commission proposed 

to amend the Statement of Financial 

Condition by adding a new line item 

1.D. Line 1 currently separately details: 

(1) The amount of funds that the FCM 

holds in segregated accounts for 

customers trading on designated 

contract markets (Line 1.A.); (2) the 

amount of funds held in segregation for 

dealer options (Line 1.B.); and (3) the 

amount of funds held in secured 

accounts for foreign futures and foreign 

option customers (Line 1.C.). 

Proposed line item 1.D. would set 

forth the amount of funds held by the 

FCM in segregated accounts for Cleared 

Swaps Customers. This amendment is 

necessary due to the adoption of the 

part 22 regulations, which requires the 

segregation of Cleared Swaps Customer 

Collateral and the proposed adoption of 

the Cleared Swaps Segregation Schedule 

as part of the Form 1–FR–FCM.40

The Commission also proposed to 

amend the Statement of Financial 

Condition by adding a new line item 

22.F., which would require the separate 

disclosure of the FCM’s liability to 

Cleared Swaps Customers. The 

proposed amendments to disclosure the 

total amount of funds held by the FCM 

for Cleared Swaps Customers, and the 

FCM’s total obligation to Cleared Swaps 

Customers, is consistent with the 

reporting required on the Form 

1–FR–FCM for customers trading on 

designated contract markets. 

The Commission also proposed to 

revise line item 27.J. of the Statement of 

Financial Condition to require an FCM 

to disclose separately its obligation to 

retail forex customers. Currently, an 

FCM’s obligation to retail forex 

customers is included with other 

miscellaneous liabilities and reported 

under current line item 27.J. ‘‘Other.’’ 

The separate reporting of an FCM’s 

retail forex obligation will provide 

greater transparency on the Statement of 

Financial Condition regarding the firm’s 

obligations to its retail counterparties in 

off-exchange foreign currency 

transactions, and is appropriate given 

the Commission’s direct jurisdiction 

over such activities when conducted by 

an FCM under section 2(c) of the Act.41

NFA filed the only comment 

addressing the proposed amendments to 

the Statement of Financial Condition. 

NFA noted its full support of the 

proposed amendments to line item 27.J 

of the Statement of Financial Condition 

contained in Form 1–FR–FCM, and 

further requested that the Commission 

consider amending the asset section of 

the Statement of Financial Condition of 

Form 1–FR–FCM to require an FCM or 

Retail Foreign Exchange Dealer 

(‘‘RFED’’) to report the total funds on 

deposit to cover its obligations to retail 

forex customers as required by 

Commission Regulation 5.8.42 NFA 

stated that this revision would result in 

more accurate reporting and is 

consistent with the reporting for 

customer segregated funds.43

The Commission has considered the 

comment and has determined to adopt 

the amendments as proposed. The 

Commission also is revising the 

Statement of Financial Condition in the 

Form 1–FR–FCM in response to the 

NFA’s comment to include a new line 

item to require FCMs and RFEDs to 

separately disclose the assets held in 

qualifying accounts in excess of the 

firms’ obligations to retail forex 

customers as required by Commission 

Regulation 5.8. 

Regulation 5.8 requires each FCM and 

RFED offering or engaging in retail forex 

transactions to hold, at all times, assets 

of the type permissible in § 1.25 in an 

amount that exceeds the FCM’s or 

RFED’s total obligation to its retail forex 

customers at qualifying institutions set 

forth in the Regulation. The requirement 

of Regulation 5.8 is to ensure the RFED 

or FCM holds liquid assets in relation to 

the amount of liability to retail forex 

customers.44 However, such retail forex 

customer funds are not held in 

‘‘segregated accounts’’ in manner 

comparable to section 4d of the Act, 

which are provided with explicit 

protections in the event of the 

bankruptcy of the FCM. The 

Commission is revising the Statement of 

Financial Condition of the Form 1–FR– 

FCM to require each FCM or RFED to 

report on line 19.B. the aggregate 

amount of funds held in qualifying 

accounts to meet its total obligation to 

retail forex customers as required by 

§ 5.8. Such disclosure will provide 

greater transparency as to the firm’s 

compliance with Commission 

regulations. 

4. FCM Certified Annual Report 

Deadline 

The Commission proposed to amend 

§ 1.10(b)(1)(ii) to require an FCM to 

submit its certified annual report to the 

Commission and to the firm’s DSRO 

within 60 days of its year-end date. 

Currently, an FCM is required to submit 

the annual certified financial statements 

within 90 days of its year-end date, 

except for FCMs that also are registered 

with the SEC as BDs, which are require 

to submit the certified annual report 

within 60 days of the year-end date 

under both Commission and SEC 

regulations. Therefore, the proposal 

would impact only FCMs that are not 


TKELleY on DSK3SPTVN1PROD with RULES2
68516 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

45NFA Comment Letter at 9 (Feb. 15, 2013). 

46NFA Comment Letter at 7–8 (Feb. 15, 2013). 47 Id. at 7. 48 Id. at 8. 49FIA Comment Letter at 12 (Feb. 15, 2013). 50RJ O’Brien Comment Letter at 8–9 (Feb. 15, 

2013) 51 Id. 52 Id. 

53NFA is currently the only registered futures 

association. 

54WinJammer is a web-based application 

developed and maintained jointly by the Chicago 

Mercantile Exchange and the NFA. The WinJammer 

system is provided at no cost to FCMs. FCMs 

currently use WinJammer to transmit Forms 1–FR– 

FCM, FOCUS Reports, and other financial 

information and regulatory notices to the 

Commission and to the SROs. 

dually-registered as BDs and would 

align the filing deadlines for both FCMs 

and dual registrant FCMs/BDs. 

The Commission received one 

comment on the proposal. NFA 

supported the proposal noting that the 

amendment will provide both the 

Commission and DSROs with more 

timely information for monitoring the 

financial condition of an FCM.45 The 

Commission considered the comment 

received and is adopting the 

amendments to § 1.10(b)(1)(ii) as 

proposed. The Commission also is 

cognizant of the fact that public 

accountants are currently engaged in the 

audit of FCMs for the year ending 

December 31, 2013 and possible for 

other year-end dates in 2014. 

Accordingly, in order to ensure that the 

amendments do not impede 

examinations that are currently in 

process, the Commission is establishing 

a compliance date for FCM annual 

audits for years ending June 1, 2014 or 

later. This compliance date also will 

align the revised reporting deadline 

with the auditing amendments to the 

auditing standards that public 

accountants use in the audit of FCMs 

and discussed in section II.E. below. 

Compliance dates are discussed further 

in section III below. 

5. Leverage Ratio Calculation 

The Commission proposed to add a 

new requirement in § 1.10(b)(5) to 

require each FCM to file with the 

Commission on a monthly basis its 

balance sheet leverage ratio. Proposed 

§ 1.10(b)(5) defined the term ‘‘leverage’’ 

as an FCM’s total balance sheet assets, 

less any instruments guaranteed by the 

U.S. Government and held as an asset or 

to collateralize an asset (e.g., a reverse 

repurchase agreement) divided by the 

FCM’s total capital (i.e., the sum of the 

FCM’s stockholders’ equity and 

subordinated debt). FCMs currently file 

the same leverage information with NFA 

on a monthly basis using the same 

definition of the term ‘‘leverage.’’ The 

leverage ratio would provide 

information regarding the amount of 

assets supported by the FCM’s capital 

base, and would allow the Commission 

to enhance its oversight of FCMs that 

are highly leveraged relative to their 

peers or based upon the Commission’s 

understanding of the firm’s business 

model. 

The Commission received three 

comments with respect to this proposal. 

Commenters were concerned that the 

leverage metrics proposed might not 

provide meaningful information and/or 

that the Commission’s leverage 

definition was not consistent with those 

of other regulatory authorities. NFA 

noted that while the leverage definition 

proposed by the Commission is the 

same definition as that set forth in NFA 

Financial Requirement Section 16, it 

may not be the most appropriate 

measure.46 NFA noted that it has been 

studying an alternative calculation 

method and encouraged the 

Commission to defer codifying a single 

definition until it has the opportunity to 

examine NFA’s calculation results.47

NFA also suggested the Commission 

consider adopting a requirement that 

FCMs report a leverage ratio as defined 

by a registered futures association rather 

than including a specific definition in 

the Commission’s regulations.48

FIA indicated that it supported the 

proposed amendment, but stated that it 

is essential that the definition of the 

term ‘‘leverage’’ be consistent among 

regulatory authorities with supervision 

over FCMs and encouraged the 

Commission to coordinate with the SEC 

and the relevant SROs to ensure 

consistent treatment across the 

industry.49

RJ O’Brien objected to the proposal on 

the grounds that the definition of 

‘‘leverage’’ in the proposal ‘‘penalizes’’ 

FCMs that are not dually-registered as 

BDs.50 RJ O’Brien stated that an FCMonly entity’s balance sheet is primarily 

composed of funds deposited by 

customers for trading commodity 

interests, and that the leverage ratio 

computed under the proposed 

regulation does not properly reflect the 

risk of the firm’s business.51 RJ O’Brien 

recommended that the Commission 

work with NFA to develop a more 

meaningful metric and further 

recommended that the Commission not 

permit or require public disclosure of 

FCM leverage ratios under the current 

methodology because RJ O’Brien 

believes it could provide the public 

with misleading information.52

The Commission has considered the 

comments and has determined to adopt 

a final regulation requiring FCMs to 

submit to the Commission monthly 

balance sheet leverage information. As 

noted above, such information will 

enhance the Commission’s ability to 

conduct financial surveillance of FCMs. 

The final regulation, however, will 

define the term ‘‘leverage’’ by 

referencing to the rules of a registered 

futures association as suggested by NFA. 

This revision to the final regulation will 

align the Commission’s definition of 

leverage with the current NFA 

definition of leverage.53

As stated above, in proposing the 

requirement for FCMs to report their 

monthly leverage ratios, the 

Commission intended for FCMs to file 

the same leverage information that they 

currently file with the NFA. In this 

regard, the Commission proposed a 

definition of leverage that is identical to 

the current NFA definition contained in 

its Financial Requirement Section 16. 

Such an approach will enhance the 

consistency in how the Commission and 

the SROs impose leverage reporting 

requirements on FCMs and in how 

leverage is monitored by the regulators. 

Furthermore, in response to RJ O’Brien’s 

comment, the Commission intends to 

work with NFA and other regulators 

going forward on any revisions to the 

definition of ‘‘leverage’’ to maintain as 

consistent a definition as practicable. 

6. Procedural Filing Requirements 

The Commission proposed to amend 

§ 1.10(c)(2)(i) to require FCMs to 

electronically file with the Commission 

their monthly unaudited Forms 1–FR– 

FCM or FOCUS Reports and their 

certified annual financial reports. FCMs 

currently file their monthly unaudited 

financial statements with the 

Commission electronically using the 

WinJammer Online Filing System 

(‘‘WinJammer’’) and the proposed 

amendments merely codify current 

practices.54

FCM annual financial reports are filed 

in paper form with the Commission. 

Under the Commission’s proposal, an 

FCM would use the WinJammer system 

to electronically file its certified 

financial report as a ‘‘PDF’’ document. 

No comments were received on the 

proposed amendments to § 1.10(c)(2)(i). 

The Commission is adopting the 

amendments as proposed. 

The Commission also is adopting a 

proposed technical amendment to 

§ 1.10(c)(1) on which no comments were 

received. Regulation 1.10(c)(1) provides 

that any report or information required 

to be provided to the Commission by an 

IB or FCM will be considered filed 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68517 

55NFA Comment Letter at 10 (Feb. 15, 2013); FIA 

Comment Letter at 52 (Feb. 15, 2013); ICI Comment 

Letter at 7 (Jan. 14, 2013); CFA Comment Letter at 

4 (Feb. 13, 2013); Chris Barnard Comment Letter at 

2 (Dec. 18, 2012); Paul/Weiss Comment Letter at 2 

(Feb. 15, 2013). 

56Advantage Comment Letter at 2 (Feb. 15, 2013). 57Advantage Comment Letter at 2 (Feb. 15, 2013). 58See 7 U.S.C. 6d(a)(2) and 7 U.S.C. 6d(f). 

when received by the Commission 

Regional office with jurisdiction over 

the state in which the FCM has its 

principal place of business. The 

amendments to § 1.10(c)(1) sets forth the 

jurisdiction of each of the Commission’s 

three Regional offices under § 140.02, 

and is intended to ensure that FCM’s 

financial reports are filed expeditiously 

with the correct Commission Regional 

office. 

B. § 1.11: Risk Management Program for 

Futures Commission Merchants 

The Commission proposed new § 1.11 

to require each FCM that carries 

customer accounts to establish a ‘‘Risk 

Management Program,’’ as defined in 

§ 1.11(c), designed to monitor and 

manage the risks associated with the 

FCM’s activities as an FCM. Under the 

Commission’s proposal, the Risk 

Management Program must: (1) consist 

of written policies and procedures that 

have been approved by the ‘‘governing 

body’’ (defined below) of the FCM and 

furnished to the Commission; and (2) 

establish a risk management unit that is 

independent from an FCM’s ‘‘business 

unit’’ (defined below) to administer the 

Risk Management Program. 

NFA, FIA, ICI, CFA, Chris Barnard, 

and Paul/Weiss generally supported 

proposed § 1.11.55 Advantage stated 

‘‘that most aspects of proposed § 1.11 

are appropriate and unlikely to be 

burdensome as FCMs typically have 

most (if not all) of these requirements in 

place.’’ 56 Several other commenters 

raised issues with specific components 

of the proposed regulation, which are 

discussed in the sections below. The 

Commission has considered the 

comments received and is adopting 

§ 1.11 as proposed, with the following 

observations and clarifications. 

1. Applicability 

Proposed paragraph (a) of § 1.11 

provides that the regulation would only 

apply to FCMs that accept money, 

securities, or property (or extend credit 

in lieu thereof) to margin, guarantee, or 

secure any trades or contracts that result 

from soliciting or accepting orders for 

the purchase or sale of any commodity 

interest. FCMs that do not accept or 

hold customer funds to margin, 

guarantee or secure commodity interests 

are generally not operating as FCMs, 

and are not subject to § 1.11. To clarify, 

the Commission notes that it would 

expect registered FCMs that do not 

accept customer funds to establish a 

Risk Management Program that 

complies with § 1.11 and file such 

program with the Commission and with 

the FCMs’ DSROs prior to changing 

their business model to begin accepting 

customer funds. 

The Commission also requested 

comment on whether different risk 

management requirements for FCMs 

should be based upon some measurable 

criteria, such as size of the firm, and 

whether different elements of § 1.11 

should apply to smaller FCMs versus 

larger FCMs. Advantage stated that a 

one-size fits all approach is less than 

optimal, and that the Commission could 

establish minimum risk management 

standards for specific business lines/

customer type, and then require that 

FCMs engaging in those lines of 

business/clearing that type of customer 

have those programs in place.57

The Commission has considered the 

comment and has determined that § 1.11 

provides sufficient flexibility for FCMs 

to establish a risk management program 

that is appropriate to its business 

operations. To develop specific 

requirements for different business 

activities would not be appropriate in 

that each FCM may operate in a 

different manner. The Commission 

believes that each FCM can develop its 

own program to meet its business 

activities using the general framework 

established by § 1.11. 

The Commission received no 

additional comments on proposed 

§ 1.11(a) and is adopting the provision 

as proposed. 

2. Definitions 

The Commission proposed definitions 

of the terms ‘‘customer,’’ ‘‘business 

unit,’’ ‘‘governing body,’’ ‘‘segregated 

funds,’’ and ‘‘senior management’’ in 

paragraph (b) of § 1.11. These 

definitions are designed to ensure that 

there is accountability at the highest 

levels for the FCM’s key internal 

controls and processes regarding the 

FCM’s responsibility to meet its 

obligations as a futures market 

participant, including acting as an 

intermediary for customer transactions, 

and its obligation to safeguard customer 

funds. 

The term ‘‘business unit’’ was 

proposed to include generally any 

department, division, group or 

personnel of an FCM or any affiliate 

involved in soliciting orders and 

handling customer money, including 

segregation functions, and personnel 

exercising direct supervisory authority 

over the performance of such activities. 

The definition was intended to 

delineate clearly the separation of the 

risk management unit required by the 

regulation from the other personnel of 

an FCM from whom the risk 

management must be independent. 

The term ‘‘customer’’ was proposed 

broadly to include futures customers (as 

defined in § 1.3) trading futures 

contracts, or options on futures 

contracts listed on designated contract 

markets, 30.7 customers (as proposed to 

be defined in § 30.1) trading futures 

contracts or options on futures contracts 

listed on foreign contract markets, and 

Cleared Swaps Customers (as defined in 

§ 22.1) engaging in Cleared Swaps. 

The term ‘‘governing body’’ was 

proposed to be defined as the sole 

proprietor, if the FCM is a sole 

proprietorship; a general partner, if the 

FCM is a partnership; the board of 

directors, if the FCM is a corporation; 

and the chief executive officer, chief 

financial officer, the manager, the 

managing member, or those members 

vested with the management authority if 

the FCM is a limited liability company 

or limited liability partnership. The 

term ‘‘senior management’’ was 

proposed to mean any officer or officers 

specifically granted the authority and 

responsibility to fulfill the requirements 

of senior management under proposed 

§ 1.11 by the governing body. 

The term ‘‘segregated funds’’ was 

proposed to mean money, securities, or 

other property held by an FCM in 

separate accounts pursuant to § 1.20 for 

futures customers, pursuant to § 22.2 for 

Cleared Swaps Customers, and pursuant 

to § 30.7 for 30.7 customers. The 

proposed definition of ‘‘segregated 

funds’’ makes clear that the 

requirements of § 1.11 apply to all 

customer funds that may be held by an 

FCM. The Act and Commission 

regulations currently require FCMs to 

hold each type of segregated funds in 

separate accounts and to segregate such 

segregated funds from the FCM’s own 

funds and to segregate each class of 

segregated funds from each other type, 

except if otherwise permitted by 

Commission rule, regulation or order.58

The Commission did not receive any 

comments regarding the proposed 

definitions in § 1.11(b) and is adopting 

the amendments as proposed. 

3. Approval of Policies and Procedures 

and Submission to the Commission 

The Commission proposed § 1.11(c) to 

require each FCM to establish, maintain, 

and enforce a system of risk 

management policies and procedures 


TKELleY on DSK3SPTVN1PROD with RULES2
68518 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

59Because § 1.11 applies to all FCMs that accept 

money, securities, or property (or extend credit in 

lieu thereof) from customers, it necessarily applies 

to any risks generated by the FCMs customers’ 

trading activities. See, e.g., In re FCStone LLC, CFTC 

Docket 13–24, (May 29, 2013), where a customer’s 

trading activities and the FCM’s inadequate risk 

management practices caused the firm to lose over 

$127,000,000. 

60See Franklin Comment Letter at 2 (Feb. 15, 

2013); AIMA Comment Letter at 1 and 4 (Feb. 15, 

2013); TIAA–CREF Comment Letter at 3 (Feb. 15, 

2013). 

61RCG Comment Letter at 5 (Feb. 12, 2013). See 

also Phillip Futures Inc. Comment Letter at 2 (Feb. 

14, 2013). 62RCG Comment Letter at 5 (Feb. 12, 2013). See 

also Phillip Futures Inc. Comment Letter at 2 (Feb. 

14, 2013). 63Phillip Futures Inc. Comment Letter at 2 (Feb. 

14, 2013). 

64 Id. 

65 Id. 

66CHS Hedging Comment Letter at 3 (Feb. 15, 

2013). 

67RJ O’Brien Comment Letter at 9 (Feb. 15, 2013). 

68 Id. 

69 Id. 

70See 77 FR 20128 (April 3, 2012). 

designed to monitor and manage the 

risks associated with the activities of the 

FCM as an FCM.59 The policies and 

procedures are collectively referred to as 

the FCM’s Risk Management Program. 

Under proposed § 1.11, the FCM’s 

governing body is required to approve 

in writing the FCM’s Risk Management 

Program and any material changes to the 

Risk Management Program. The FCM 

also is required to provide a copy of the 

Risk Management Program to the 

Commission and to the FCM’s DSRO 

upon application for registration or 

upon request by the Commission or by 

the FCM’s DSRO. The filing of the Risk 

Management Program is intended to 

allow the Commission and the FCM’s 

DSRO to monitor the status of risk 

management practices among FCMs. 

Several commenters expressed 

general support for the requirement that 

an FCM implement a risk management 

program.60 The Commission received no 

other comments on proposed § 1.11(c) 

and is adopting the amendments as 

proposed. 

4. Organizational Requirements of the 

Risk Management Program 

a. Separation of Risk Management Unit 

from Business Unit 

The Commission proposed § 1.11(d), 

requiring an FCM to establish a risk 

management unit that is independent 

from the FCM’s business unit to 

administer the Risk Management 

Program. As part of the Risk 

Management Program, each FCM must 

establish and maintain a risk 

management unit with sufficient 

authority, qualified personnel, and 

financial, operational, and other 

resources to carry out the Risk 

Management Program. The risk 

management unit is required to report 

directly to senior management. 

Several commenters opposed the 

separation of the risk management unit 

from the business unit. RCG stated that 

requiring FCMs to separate the risk 

management function from the 

‘‘business unit’’ is unnecessary, 

counterproductive, and will likely result 

in increased risk to the FCM and its 

customers.61 RCG argued that the 

proposed requirement removes a 

valuable, mature talent pool from 

participating in risk management, and 

the proposal is counterproductive in 

that it has the potential of blocking the 

flow of historical and financial 

information about a customer from the 

business side of the FCM to the risk 

management side of the FCM, 

information that is crucial to evaluating 

risk.62

Phillip Futures Inc. stated that the 

proposed separation of the business unit 

from the risk management unit will lead 

to a decrease in the timeliness of 

decision making as decisions will have 

to be filtered through new supervisory 

employees that the proposal will 

ultimately create, which will hinder 

each FCM’s ability to assess risk.63

Phillip Futures Inc. stated that so long 

as internal controls, senior leadership, 

and training programs of a firm are 

created with the proper checks and 

balances which ensure proper 

supervision of activities conducted by 

the business unit and the risk 

management unit, the respective units 

need not be independent from each 

other.64 Phillip Futures Inc. also 

asserted that the separation of duties 

required by the regulation would 

require it to hire multiple employees 

who would have limited job 

responsibilities.65

CHS Hedging stated that it would not 

be realistic or cost effective for smaller 

FCMs to establish an entirely separate 

risk management unit, and argued that 

if supervisory risk management 

personnel report to senior management 

separately from the business side to 

avoid a conflict of interest, a standalone 

unit should not be required.66

RJ O’Brien also argued that requiring 

FCMs to create a separate risk 

management unit is not operationally or 

financially practical for all FCMs, 

particularly small to midsized FCMs, 

and needlessly increases the costs of 

compliance for most firms without 

producing significant benefits.67 RJ 

O’Brien stated that supervisors at many 

small to mid-sized FCMs have the 

knowledge and expertise that can be 

essential to maintaining a strong risk 

management program at their firm, 

however, such supervisors also may 

have a role in the business unit 

activities.68 They proposed that the 

Commission revise the proposed 

regulation such that supervisors of 

business unit personnel are permitted to 

be part of the risk management unit 

provided that such supervisors are not 

compensated in connection with 

soliciting or accepting orders for the 

purchase or sale of any commodity 

interest.69

The Commission notes that, as stated 

above, only employees involved in 

soliciting orders and handling customer 

money (including the segregation 

functions), and employees directly 

supervising such activities would fall 

within the definition of ‘‘business unit’’ 

under § 1.11(b)(1). Therefore, the 

Commission does not agree with the 

assertion that a large pool of employees 

will be barred from participating in the 

risk management unit. Further, the 

Commission observes that the 

independence of the risk management 

unit required by proposed § 1.11 does 

not require FCMs to establish 

information partitions between the risk 

management unit and members of the 

business unit, and disagrees with 

commenters that such independence 

requirement would block the flow of 

historical and financial information 

about a customer from the business side 

of the FCM to the risk management side 

of the FCM. In any event, the 

Commission believes that the freedom 

from conflicts of interests that the 

independence of the risk management 

unit provides is critically important to 

the protection of customer funds in the 

custody of the FCM. 

The FIA commented that in adopting 

the rules governing risk management 

programs for SDs and MSPs, the 

Commission clarified the interpretation 

of certain provisions, and asked that the 

Commission confirm that such 

clarifications apply equally to the 

provisions of § 1.11.70 In general, the 

FIA requested the Commission to 

confirm, subject to certain exceptions or 

requirements, that the requirements of 

§ 1.11: 

(1) Do not prescribe rigid organization 

structures; 

(2) do not require an FCM’s risk 

management unit to be a formal division 

in the FCM’s organizational structure, 

provided that the FCM will be able to 

identify all personnel responsible for 

required risk management activities 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68519 

71FIA Comment Letter at 54–55 (Feb. 15, 2013). 

72 Id. at 52. 

73 77 FR 20128 (April 3, 2012). 

74FIA Comment Letter at 55 (Feb. 15, 2013). 

75 Id. 

76The evaluation process must include 

documented criteria that any depository will be 

assessed against in order to qualify to hold funds 

belonging to customers. The criteria must address 

a depository’s capitalization, creditworthiness, 

operational reliability, and access to liquidity. The 

criteria must also address risks associated with 

concentration of customer funds in any depository 

or group of depositories, the availability of deposit 

insurance, and the regulation and supervision of 

depositories. The evaluation criteria is intended to 

ensure that the FCM adopts an evaluation process 

which reviews potential depositories against 

substantive criteria relevant to the safe custody of 

customer funds and that the FCM’s process for 

evaluating and selecting depositories can be 

reviewed by regulators and auditors. The FCM also 

must maintain a documented process addressing 

the ongoing monitoring of selected depositories, 

including a thorough due diligence review of each 

depository at least annually. 

77As required by § 1.20, such account opening 

documentation is necessary to ensure that the 

Continued 

even if such personnel fulfill other 

functions; and 

(3) Allow FCMs to establish dual 

reporting lines for risk management 

personnel performing functions in 

addition to their risk management 

duties, provided that § 1.11 would not 

permit a member of the risk 

management unit to report to any officer 

in the business unit for any non-risk 

management activity.71

The FIA further commented that the 

‘‘policies and procedures’’ approach 

provides an adequate amount of 

flexibility that will allow the FCMs to 

rely upon any existing compliance or 

risk management capabilities to meet 

the requirements of the rule.72

The Commission generally agrees 

with the FIA in that, while the 

requirements of § 1.11 represent prudent 

risk management practices, they do not 

prescribe rigid organizational structures. 

The Commission also believes that the 

‘‘policies and procedures’’ approach 

provides an adequate amount of 

flexibility that will allow FCMs to rely 

upon any existing compliance or risk 

management capabilities to meet the 

requirements of the final rule. The 

Commission further believes that 

nothing in § 1.11 would prevent FCMs 

from relying upon existing compliance 

and risk management programs to a 

significant degree. 

As the Commission confirmed in its 

final rulemaking discussing § 23.600(b) 

regarding the risk management program 

for SDs and MSPs, the Commission also 

confirms that § 1.11(d) does not require 

a registrant’s risk management unit to be 

a formal division in the registrant’s 

organizational structure, provided that 

the FCM will be able to identify all 

personnel responsible for required risk 

management activities as its ‘‘risk 

management unit’’ even if such 

personnel fulfill other functions in 

addition to their risk management 

activities; and permits FCMs to establish 

dual reporting lines for risk 

management personnel performing 

functions in addition to their risk 

management duties, but this rule would 

not permit a member of the risk 

management unit to report to any officer 

in the business unit for any non-risk 

management activity.73 Such dual 

reporting invites conflicts of interest 

and would violate § 1.11’s risk 

management unit independence 

requirement. 

The Commission notes that the formal 

independence of the risk management 

unit from the business unit does not 

relieve an FCM from the duty to resolve 

other conflicts of interest that may have 

an adverse effect on the effectiveness of 

the FCM’s risk management program. 

An FCM’s CCO is required under 

§ 3.3(d)(2) to resolve any conflicts of 

interest that may arise, in consultation 

with the FCM’s board of directors or its 

senior officer. Thus, the Commission 

would expect an FCM to recognize and 

eliminate or appropriately mitigate any 

conflict of interest between the FCM’s 

business interests and its duty to 

establish and maintain an effective risk 

management program. 

Having considered the comments 

regarding § 1.11(d), the Commission is 

adopting the provision as proposed. 

5. Components of the Risk Management 

Program 

The Commission’s proposed § 1.11(e) 

provides for a non-exclusive list of the 

elements that must be a part of the Risk 

Management Program of an FCM. Those 

elements include: (1) Identifying risks 

(including risks posed by affiliates, all 

lines of business of the FCM, and all 

other trading activity of the FCM) and 

setting of risk tolerance limits; (2) 

providing periodic risk exposure reports 

to senior management and the governing 

body; (3) operational risk controls; (4) 

capital controls; and (5) establishing a 

risk management program that takes 

into account risks associated with the 

safekeeping and segregation of customer 

funds. 

Proposed § 1.11(e)(1)(ii) requires the 

Risk Management Program to take into 

account risks posed by affiliates, all 

lines of business of the FCM, and all 

other trading activity engaged in by the 

FCM. The FIA asked the Commission to 

confirm its position that, to the extent 

that many FCMs are part of a larger 

holding company structure that may 

include affiliates that are engaged in a 

wide array of business activities, the 

Commission understands that, in some 

instances, the top level company in the 

holding company structure, which has 

the benefit of an organization-wide 

view, is in the best position to evaluate 

the risks that an affiliate of an FCM may 

pose to the FCM.74 Therefore, to the 

extent an FCM is part of a holding 

company within an integrated risk 

management program, the FCM may 

address affiliate risks and comply with 

§ 1.11 through its participation in a 

consolidated entity risk management 

program provided that such program 

does in fact assess the risks posed to the 

FCM by its affiliated entities.75

The Commission recognizes that some 

FCMs will be part of a larger holding 

company structure that may include 

affiliates that are engaged in a wide 

array of business activities. The 

Commission understands with respect 

to these entities, that in some instances, 

the top level company in the holding 

company structure is in the best 

position to evaluate the risks that an 

affiliate of an FCM may pose to the 

enterprise, as it has the benefit of an 

organization-wide view and because an 

affiliate’s business may be wholly 

unrelated to an FCM’s activities. 

Therefore, to the extent an FCM is part 

of a holding company with an integrated 

risk management program, the 

Commission would allow an FCM to 

address affiliate risks and comply with 

§ 1.11(e)(1)(ii) through its participation 

in a consolidated entity risk 

management program. 

In regard to customer funds, the 

Commission notes that FCMs are 

required by the Act and Commission 

regulations to segregate and safeguard 

funds deposited by customers for 

trading commodity interests. Recent 

events have emphasized that it is 

essential that FCMs maintain adequate 

systems of internal controls, involving 

the participation and review of the 

firm’s senior management, in order to 

properly safeguard customer funds. 

Accordingly, § 1.11(e)(3)(i) requires that 

the risk management policies and 

procedures of an FCM related to the 

risks associated with safekeeping and 

segregation of customer funds must 

include: (1) The evaluation and 

monitoring of depositories; 76 (2) 

account opening procedures that ensure 

the FCM obtains the acknowledgment 

required under § 1.20 from the 

depository and that the account is 

properly titled as belonging to the 

customers of the FCM; 77 (3) establishing 


TKELleY on DSK3SPTVN1PROD with RULES2
68520 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

depositories are aware of their obligations regarding 

the accounts and the statutory and regulatory 

protections afforded the funds held in the accounts 

due to their status as segregated funds. 

78The controls must include the conditions for 

pre-approval and the notice to the Commission for 

such withdrawals required by § 1.23, § 22.17, or 

§ 30.7, discussed below. 

79The FCM’s assessment must take into 

consideration the market, credit, counterparty, 

operational, and liquidity risks associated with the 

investments. 

80The policies and procedures must provide for 

the separation of duties among personnel that are 

responsible for customer trading activities, and 

approving and overseeing cash receipts and 

disbursements (including investment and treasury 

operations). The policies and procedures must 

further require that any movement of funds to 

affiliated companies or parties be approved and 

documented. 

81Separate from requiring the establishment of a 

target for residual interest, the Commission is 

further requiring, as discussed in more detail under 

sections II.G.9., II.H., and II.I. for §§ 1.20, 1.22, and 

1.23, respectively, that residual interest exceed the 

sum of outstanding undermargined amounts to 

provide a mechanism for ensuring compliance with 

the prohibition of the funds of one customer being 

used to margin or guarantee the positions of another 

customer under the Act and existing regulations. 

82Phillip Futures Inc. Comment Letter at 2 (Feb. 

14, 2013). 

83Chris Barnard Comment Letter at 2 (Dec. 18, 

2012). 

84The Commission further notes that it maintains 

a whistleblower program that provides for the 

anonymous reporting of violations of the Act and 

Commission regulations. See part 165 of the 

Commission’s regulations. 

and maintaining an adequate targeted 

amount of excess funds in customer 

accounts reasonably designed to ensure 

the FCM is at all times in compliance 

with the segregation requirements for 

customer funds under the Act and 

Commission regulations, as discussed 

further below; (4) controls ensuring that 

the withdrawal of cash, securities, or 

other property from accounts holding 

customer funds not for the benefit of 

customers are in compliance with the 

Act and Commission regulations; 78 (5) 

procedures for assessing the 

appropriateness of investing customer 

funds in accordance with § 1.25; 79 (6) 

the valuation, marketability, and 

liquidity of customer funds and 

permitted investments made with 

customer funds; (7) the appropriate 

separation of duties of personnel 

responsible for compliance with the Act 

and Commission regulations relating to 

the protection and financial reporting of 

customer funds; 80 (8) procedures for the 

timely recording of transactions in the 

firm’s books and records; and (9) annual 

training of personnel responsible for 

compliance with the Act and 

Commission regulations relating to the 

protection and financial reporting of 

customer funds. 

Regarding the requirement that FCMs 

establish and maintain an adequate 

targeted amount of excess funds in 

customer accounts, the Commission 

notes that FCMs currently deposit 

proprietary funds into both customer 

segregated accounts and part 30 secured 

accounts as a buffer to minimize the 

possibility of the firm being in violation 

of its segregated and secured fund 

obligations at any time. Under the final 

rule, the senior management of the FCM 

must perform appropriate due diligence 

in setting the amount of this buffer and 

must consider the nature of the FCM’s 

business including the type and general 

creditworthiness of its customer base, 

the types of markets and products 

traded by the firm’s customers, the 

proprietary trading activities of the 

FCM, the volatility and liquidity of the 

markets and products traded by the 

customers and the FCM, the FCM’s own 

liquidity and capital needs, and 

historical trends in customer segregation 

and secured account funds balances, 

customer debits, and margin deficits 

(i.e., undermargined amounts). The 

FCM also must reassess the adequacy of 

the targeted residual interest quarterly. 

The Commission believes that each 

FCM must set the amount of excess 

segregated and secured funds required 

utilizing a quantitative and qualitative 

analysis that reasonably ensures 

compliance at all times with segregated 

and secured fund obligations. Such 

analysis must take into account the 

various factors that could affect 

segregated and secured balances, and 

must be sufficiently described in writing 

to allow the DSRO of the FCM and the 

Commission to duplicate the 

calculations and test the assumptions. 

The analysis must provide a reasonable 

level of assurance that the excess is at 

an appropriate level for the FCM.81 A 

failure to adopt or maintain appropriate 

risk management policies and 

procedures or to implement, monitor 

and enforce controls required by § 1.11 

may result in a referral to the 

Commission’s Division of Enforcement 

for appropriate action. 

Proposed § 1.11(e)(3)(i)(G) requires 

the appropriate separation of duties 

among individuals responsible for 

compliance with the Act and 

Commission regulations relating to the 

protection and financial reporting of 

segregated funds, including the 

separation of duties among personnel 

that are responsible for advising 

customers on trading activities, 

approving or overseeing cash receipts 

and disbursements (including 

investment operations), and recording 

and reporting financial transactions. 

Phillip Futures Inc. stated that such a 

separation of duties would require it to 

hire multiple employees that would 

have limited job responsibilities, and 

suggested that as long as internal 

controls are adequate and supervisory 

personnel are properly registered with 

the Commission and NFA, the 

separation of duties is not necessary.82

Regulation 1.11(e)(3)(i)(I) requires that 

the written policies and procedures 

include procedures for the reporting of 

suspected breaches of the policies and 

procedures to the CCO, without fear of 

retaliation, and the consequences of 

failing to comply with the segregation 

requirements of the Act and regulations. 

Chris Barnard recommended that the 

procedures for reporting breaches 

should allow and stress the complete 

anonymity of the reporting party 

(whistleblower).83 The Commission 

takes note of Mr. Barnard’s comments 

related to whistleblowers as sound 

practices. The Commission notes, 

however, that such additional 

requirements were not proposed and, in 

any event, are outside the scope of this 

rulemaking.84

Also, to ensure the effectiveness of a 

Risk Management Program, § 1.11(e)(4) 

requires that the Risk Management 

Program include a supervisory system 

that is reasonably designed to ensure 

that the risk management policies and 

procedures are diligently followed. 

The Commission has considered the 

comments received on the proposal and, 

for the reasons stated above, is adopting 

§ 1.11(e) as proposed. 

6. Annual Review, Distribution of 

Policies and Procedures and 

Recordkeeping 

The Commission’s proposal also 

includes: (1) § 1.11(f) which requires an 

annual review and testing of the 

adequacy of each FCM’s Risk 

Management Program by internal audit 

staff or a qualified external, third party 

service; (2) § 1.11(g) which requires the 

timely distribution of written risk 

management policies and procedures to 

relevant supervisory personnel; and (3) 

§ 1.11(h) which discusses recordkeeping 

and availability of records. The 

Commission received no comments on 

paragraphs (f), (g), and (h) of § 1.11 and 

is adopting the paragraphs as proposed. 

7. CCO or CEO Certification 

Regulation 3.3 requires the CCO or 

CEO of an FCM to provide an annual 

report to the Commission that must 

review each applicable requirement 

under the Act and Commission 

regulations, and with respect to each 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68521 

85Such report is mandated by § 3.3 of the 

Commission’s regulations; See Swap Dealer and 

Major Swap Participant Recordkeeping, Reporting, 

and Duties Rules; Futures Commission Merchant 

and Introducing Broker Conflicts of Interest Rules; 

and Chief Compliance Officer Rules for Swap 

Dealers, Major Swap Participants, and Futures 

Commission Merchants, 77 FR 20128, Apr. 3, 2012 

(promulgating final rules concerning the CCOs of 

FCMs, swap dealers, and major swap participants); 

see also § 4d(d) of the Act, 7 U.S.C. 6d(d). 

86FIA Comment Letter at 11 (Feb. 15, 2013); NFA 

Comment Letter at 10 (Feb. 15, 2013). 

87NFA Comment Letter at 10 (Feb. 15, 2013). 

88Newedge Comment Letter at 3 (Feb. 15, 2013). 

89 Id. 

90FIA Comment Letter at 37–38 (Feb. 15, 2013). 91 Id. 

applicable requirement, identify the 

policies and procedures that are 

reasonably designed to ensure 

compliance with the requirement, and 

provide an assessment of the 

effectiveness of the policies and 

procedures.85 The annual report also 

must include a certification by the CCO 

or CEO that, to the best of his or her 

knowledge and reasonable belief, and 

under penalty of law, the information 

contained in the annual report is 

accurate and complete. 

The Commission requested comment 

on whether the standard for the CCO’s 

or CEO’s certification in the annual 

report (i.e., based on the CCO’s or CEO’s 

knowledge and reasonable belief) 

required under § 3.3 is adequate for a 

certification of the FCM’s compliance 

with policies and procedures for the 

safeguarding of customer funds. 

Specifically, the Commission requested 

comment on whether § 1.11 should 

contain a separate CCO or CEO 

certification requirement that would 

impose a higher duty of strict liability 

or some other higher obligation on a 

CCO or CEO. 

The Commission received three 

comments in this regard. NFA and FIA 

believed that the ‘‘knowledge and 

reasonable belief’’ standard in § 3.3 

remains appropriate for a CCO’s/CEO’s 

certification regarding an FCM’s 

customer funds safeguards.86 That is, 

the CCO or CEO should not be liable for 

matters that are beyond the CCO’s/

CEO’s knowledge and reasonable belief. 

Further, NFA stated that the 

Commission should reconsider whether 

the CCO’s/CEO’s annual report should 

contain a separate certification (with the 

‘‘knowledge and reasonable belief 

language’’) executed by the FCM’s CEO 

or CFO regarding the adequacy of the 

FCM’s customer funds safeguards.87

Newedge opposed the imposition of a 

strict liability standard on a CCO/CEO 

for the annual certifications because the 

CCO/CEO is relying on internal 

representations from other FCM 

employees that are far more expert 

regarding these matters.88 Newedge 

stated that such a standard would make 

it difficult to recruit qualified persons to 

serve as a CCO/CEO.89

In response to these comments, the 

Commission is not requiring a separate 

CCO/CEO certification requirement 

imposing a higher duty of strict liability 

or other standard for the segregation of 

customer funds. The Commission also is 

not imposing a separate certification by 

the FCM’s CEO or CFO at this time. 

Commission staff will monitor the role 

of the CCO/CEO as the regulation is 

implemented and propose to the 

Commission any amendments to the 

CCO’s/CEO’s standard for certifying 

compliance as deemed appropriate 

based upon staff’s experiences. 

C. § 1.12: Maintenance of Minimum 

Financial Requirements by Futures 

Commission Merchants and Introducing 

Brokers 

The regulatory notices required under 

§ 1.12 are intended to provide the 

Commission and SROs with prompt 

notice of potential adverse conditions at 

FCMs that may indicate a possible 

threat to the financial condition of the 

firm or to the safety of customer funds 

held by the FCM. Regulation 1.12 

currently obligates FCMs to provide 

notice to the Commission and to the 

respective DSROs if certain specified 

reportable events occur. Reportable 

events include: Failing to maintain the 

minimum level of required regulatory 

capital (§ 1.12 (a)); failing to maintain 

current books and records (§ 1.12(c)); 

and failing to comply with the 

requirements to properly segregate 

customer funds (§ 1.12(h)). As discussed 

further below, the Commission 

proposed to amend § 1.12 to include 

several additional reportable events and 

to revise the process for submitting 

reportable events to the Commission 

and DSROs. 

1. Timing of Notices 

The proposed new reportable events, 

discussed individually below, will 

require immediate notice to the 

Commission and the firm’s DSRO upon 

the occurrence of the relevant event. 

FIA commented that while it is not 

opposed to a requirement for FCMs to 

provide prompt notice of a reportable 

event, it questioned the need for 

‘‘immediate’’ notice as proposed by the 

Commission.90 FIA recommended that 

if the Commission determined to adopt 

the proposed early warning notices that 

it allow 24 hours if the event is financial 

in nature and 48 hours for businessrelated events in order to afford FCMs 

time to determine the cause of the event 

and take an appropriate corrective 

action.91

The purpose of the ‘‘early warning’’ 

notice system established under § 1.12 

is to provide the Commission and an 

FCM’s DSRO with adequate and prompt 

notice of a reportable event in order to 

allow Commission staff to assess the 

situation and to consult with the 

registrant and the SROs to determine if 

further action is necessary in order to 

protect customer funds or to determine 

if the FCM can continue to meet its 

obligations to the marketplace and 

clearing process. The filing of a notice 

is often the first step where the 

Commission staff is alerted to a 

potential issue at a firm. The 

Commission also initiates a dialogue 

with the firm and the firm’s DSRO, as 

necessary, upon receipt of a § 1.12 

notice. 

Given the critical role that notices 

play in the Commission’s and DSRO’s 

surveillance of FCMs, the Commission 

believes that immediate notice is 

necessary when a reportable event is 

financial in nature (e.g., the FCM is not 

in compliance with the Commission’s 

capital or segregation requirements). In 

such situations, the firm should file 

immediate notice with the Commission. 

If a firm needs additional time to assess 

the cause of the reportable event, or if 

additional time is needed to document 

what steps the FCM will take to remedy 

the situation causing the reportable 

event, it may file an amendment to its 

initial notice with the Commission. In 

addition, in a situation where the 

registrant is reporting that it is 

undercapitalized or undersegregated, 

the Commission and DSRO will have 

initiated an ongoing dialogue whereby 

the Commission and the DSRO will be 

in frequent communication with the 

registrant and will receive updated 

information as the registrant becomes 

aware of the facts. 

Reportable events that are not related 

to an FCM’s ability to meet its financial 

obligations or not directly related to the 

protection of customer funds may not be 

subject to the same sense of immediacy 

and the Commission is revising its 

proposed regulations accordingly. The 

revisions to the proposed amendments 

are discussed in the appropriate 

sections below with the comments 

received on the proposed new notice 

provisions. 

2. Undercapitalized FCMs and IBs 

Regulation 1.12(a) requires an FCM or 

IB that fails to maintain the minimum 

level of adjusted net capital required by 

§ 1.17 to provide immediate notice to 


TKELleY on DSK3SPTVN1PROD with RULES2
68522 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

92NFA Comment Letter at 10 (Feb. 15, 2013). 

93Commencing November 13, 2012, the 

compliance date for certain Commission part 22 

regulations, FCMs are required under § 22.2 to hold 

a sufficient amount of funds in Cleared Swaps 

Customer Accounts to meet the Net Liquidating 

Equity of each Cleared Swaps Customer. 77 FR 6336 

(Feb. 7, 2012). 

94FIA Comment Letter at 38 (Feb. 15, 2013). The 

Commission is proposing to require each FCM to 

file with the Commission and with the firm’s DSRO 

a daily: (1) Segregation Schedule (§ 1.32); (2) 

Secured Amount Schedule (§ 30.7); and, (3) Cleared 

Swaps Segregation Schedule (§ 22.2)). The 

Commission proposed to include information 

disclosing the FCM’s targeted residual interest and 

whether the amount of the actual residual interest 

exceeds the targeted residual interest and the total 

amount of the FCM’s margin deficiencies in the 

Segregation Schedule, Secured Amount Schedule, 

and the Cleared Swaps Segregation Schedule. 

95 Id. 

the Commission and to the entity’s 

DSRO. The notice must include 

additional information to adequately 

reflect the FCM’s or IB’s current capital 

condition as of any date that the entity 

is undercapitalized. 

The Commission proposed to amend 

§ 1.12(a) to clarify that if the FCM or IB 

cannot compute or document its actual 

capital at the time it knows that it is 

undercapitalized, it must still provide 

the written notice required by § 1.12(a) 

immediately and may not delay filing 

the notice until it has adequate 

information to compute its actual level 

of adjusted net capital. 

NFA commented in support of the 

Commission’s proposal noting that in 

situations where an FCM is in potential 

distress, it may be even more important 

for the Commission and the firm’s 

DSRO to become immediately aware of 

the situation so that the Commission 

and DSRO staff can assist in 

determining the firm’s current, accurate 

financial condition.92 The Commission 

agrees that it is imperative that an FCM 

or IB provide immediate notice if the 

firm is undercapitalized and, 

accordingly is adopting the amendment 

as proposed. 

3. Insufficient Segregation of Funds of 

Cleared Swaps Customers 

Regulation 1.12(h) currently requires 

an FCM that fails to hold sufficient 

funds in segregated accounts to meet its 

obligations to futures customers, or that 

fails to hold sufficient funds in separate 

accounts for foreign futures or foreign 

options customers, to provide 

immediate notice to the Commission 

and to the FCM’s DSRO. The 

Commission proposed to amend 

paragraph (h) to include an explicit 

requirement that an FCM provide 

immediate notice to the Commission 

and to its DSRO if the FCM fails to hold 

sufficient funds in segregated accounts 

for Cleared Swaps Customers to meet its 

obligation to such customers.93 The 

amendment will ensure immediate 

notification of a failure to hold 

sufficient funds in segregation for 

Cleared Swaps Customers so that the 

Commission and the firm’s DSRO can 

promptly assess the financial condition 

of an FCM and determine if there are 

threats to the safety of the Cleared 

Swaps Customers Collateral held by the 

FCM. The amendment also harmonizes 

the notice requirements whenever an 

FCM fails to hold in proper segregated 

or secured accounts sufficient funds to 

meet its total obligations to futures 

customers, 30.7 customers, and Cleared 

Swaps Customers. 

The Commission did not receive any 

comments on proposed § 1.12(h). The 

Commission is adopting the 

amendments to paragraph (h) as 

proposed. 

4. Investment of Customer Funds in 

Contravention of Regulation 1.25 

The Commission also proposed to 

amend § 1.12 by adding new paragraph 

(i) to require an FCM to provide 

immediate notice whenever it discovers 

or is informed that it has invested funds 

held for customers in investments that 

are not permitted investments under 

§ 1.25, or if the FCM holds permitted 

investments in a manner that is not in 

compliance with the provisions of 

§ 1.25, such as the investment 

concentration limitations contained in 

§ 1.25(b)(3). The proposal applies to 

funds held for futures customers, 30.7 

customers, and Cleared Swaps 

Customers. 

The Commission received no 

comments on the proposed amendments 

to § 1.12(i). The Commission is adopting 

paragraph (i) as proposed. 

5. Notice of Residual Interest Falling 

Below Targeted Level or Undermargined 

Amounts 

The Commission proposed to amend 

§ 1.12 to provide a new paragraph (j) to 

require an FCM to provide immediate 

notice to the Commission and to the 

firm’s DSRO if the FCM does not hold 

an amount of funds in segregated 

accounts for futures customers or for 

Cleared Swaps Customers, or if the FCM 

does not hold sufficient funds in 

secured accounts for 30.7 customers, 

sufficient to meet the firm’s targeted 

residual interest in one or more of these 

accounts as computed under proposed 

§ 1.11, which is being adopted herein, or 

if its residual interest in one or more of 

these accounts is less than the sum of 

outstanding margin deficits (i.e., 

undermargined amounts) for such 

accounts. Regulation 1.11, as adopted 

herein, also requires each FCM that 

carries customer funds to calculate an 

appropriate amount of excess funds (i.e., 

proprietary funds) to hold in segregated 

or secured accounts to mitigate the 

possibility of the FCM being 

undersegregated or undersecured due to 

a withdrawal of proprietary funds from 

a segregated or secured account. 

FIA questioned the necessity of the 

proposed provision noting that under 

the proposed amendments to § 1.32 each 

FCM holding customer funds is required 

to file a report with the Commission on 

a daily basis that will disclose if the 

FCM’s residual interest has fallen below 

the FCM’s targeted amount or if the 

residual amount is less than the sum of 

the customers’ margin deficits.94 FIA 

also noted that under current 

regulations an FCM’s residual interest 

will frequently fall below its targeted 

amount and that if the Commission 

adopts its proposed amendments to 

§§ 1.20, 22.2 and 30.7 to require an FCM 

to use proprietary funds to cover margin 

deficits, withdrawals in excess of 25 

percent of the firm’s residual interest 

will likely be a daily event requiring 

daily notices to be filed with the 

Commission and with the FCM’s 

DSRO.95

One of the primary objectives of the 

proposed amendments to § 1.12 is to 

ensure that the Commission and DSROs 

receive notice of potential financial or 

operational issues at an FCM, or of rule 

violations by an FCM, in as timely a 

manner as possible such that the 

Commission and the FCM’s DSRO will 

be in a position to assess the issues and 

the potential impact on the FCM’s 

ability to meet its regulatory obligations 

and its ability to safeguard customer 

funds. While the proposed amendments 

to § 1.32 do require each FCM holding 

customer funds to file on a daily basis 

a Segregation Schedule, Secured 

Amount Schedule, and Cleared Swaps 

Segregation Schedule (as appropriate) 

that includes information concerning 

the amount of the firm’s actual and 

targeted residual interests, the notice 

required by § 1.12(j) requires the firm to 

include a discussion of the cause of the 

event, and what steps the firm will take 

to increase the residual interest. The 

notice will assist the Commission and 

the DSROs in determining what, if any, 

additional steps may be necessary in 

order to mitigate potential market 

disruptions if the FCM cannot meet its 

regulatory obligations, and will enhance 

the overall safety of customer funds. In 

addition, the Commission believes that 

the filing of a notice by an FCM will 

focus greater attention by management 

at the firm on the fact that the firm’s 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68523 

96 Id. 

97RJ O’Brien Comment Letter at 10 (Feb. 15, 

2013). 

98FIA Comment Letter at 38 (Feb. 15, 2013). 

99 Id. 

100Regulation 1.12(k) and (l) both require an FCM 

to report a material change in the firm’s 

creditworthiness or its ability to fund its 

obligations. Accordingly, the Commission is 

removing the reference to the FCM’s credit 

arrangements in § 1.12(l). 

actual residual interest is below its 

targeted residual interest, which should 

result in further reflection by 

management on the adequacy of the 

target amount and/or any changes in 

operations that may be appropriate, 

including increasing the firm’s residual 

interest or using other sources of 

liquidity. 

The Commission also notes that an 

FCM’s obligation under § 1.12(j) to file 

a notice when the firm’s residual 

interest is less than the sum of the 

undermargined amounts in its customer 

accounts is determined at the point in 

time that the firm is required to 

maintain as residual interest the 

undermargined amounts under § 1.22, 

§ 22.2, and § 30.7. In addition, the 

Commission further notes that the 

obligation to file a notice under § 1.12(j) 

when the firm’s residual interest is less 

than the sum of the undermargined 

amounts in its customer accounts 

commences as of the respective 

compliance dates for § 1.22, § 22.2, and 

§ 30.7 established by the Commission 

and discussed further in section III 

below. 

The Commission has considered the 

comments and has determined to adopt 

new paragraph 1.12(j) as proposed and 

as clarified above. 

6. Events Causing Material Adverse 

Financial Impact or Material Change in 

Operations 

The Commission proposed new 

paragraphs (k) and (l) to § 1.12. 

Proposed paragraphs (k) and (l) will 

require an FCM to provide notice to the 

Commission and to the firm’s DSRO in 

the event of a material adverse impact 

in the financial condition of the firm or 

a material change in the firm’s 

operations. Proposed paragraph (k) will 

require an FCM to provide immediate 

notice if the FCM, its parent, or a 

material affiliate, experiences a material 

adverse impact to its creditworthiness 

or its ability to fund its obligations. 

Indications of a material adverse impact 

of an FCM’s creditworthiness may 

include a bank or other financing entity 

withdrawing credit facilities, a credit 

rating downgrade, or the FCM being 

placed on ‘‘credit watch’’ by a credit 

rating agency. 

Proposed paragraph (l) will require an 

FCM to provide immediate notice of 

material changes in the operations of the 

firm, including: A change in senior 

management; the establishment or 

termination of a material line of 

business; a material change in the 

FCM’s clearing arrangements; or a 

material change in the FCM’s credit 

arrangements. Paragraph (l) is intended 

to provide the Commission with notice 

of material events, such as the departure 

of the FCM’s CCO, CFO, or CEO. 

Two comments were received on the 

proposal. FIA stated that the proposed 

amendments do not provide an FCM 

sufficient guidance on the 

circumstances that would require notice 

and requested that the Commission 

define more precisely the events that 

would require notice.96 RJ O’Brien 

similarly stated its concern that the term 

‘‘creditworthiness’’ as used in proposed 

Regulation 1.12(k) is ambiguous and 

subjective and requires a clearer 

definition to afford FCMs the ability to 

reasonably ascertain their reporting 

duties and obligations.97

FIA also recommended that the 

Commission coordinate with the SEC 

and the banking regulators to establish 

a uniform standard identifying 

‘‘material adverse’’ changes or 

impacts.98 Finally, FIA noted that it 

does not believe that a change in senior 

management at an FCM should require 

an early warning notice of any kind 

because such notice is already provided 

to NFA in the ordinary course.99

The Commission has considered the 

comments and has determined to adopt 

the amendments to § 1.12(k) and (l) as 

proposed, with the revision that the 

notices required by § 1.12(l) must be 

filed promptly, but not later than 24 

hours after the event, instead of 

immediately. By adopting this revision, 

the Commission acknowledges that 

immediate notice is not necessary in all 

situations. 

An FCM should report § 1.12(l) 

notices in a punctual or prompt manner, 

but may do so without the expediency 

required by an immediate notice 

provision that is required, for example, 

when a firm is undercapitalized or 

undersegregated, which may indicate 

that immediate Commission or DSRO 

action is required to assess the financial 

condition of the FCM or the safety of 

customer funds. This revision provides 

the appropriate balance between the 

receipt of timely notices and the ability 

of the FCM to document an explanation 

of the events that trigger the notice. 

As noted above, the Commission 

proposed additional notice provisions 

under § 1.12 in order to ensure that the 

Commission and DSROs receive timely 

information regarding certain events 

that should be assessed by the 

Commission and the DSROs as part of 

the overall oversight and risk 

assessment of FCMs. Regulation 1.12(k) 

will require an FCM to provide notice 

if the FCM or its parent or material 

affiliate experiences a material adverse 

impact to its creditworthiness or its 

ability to fund its obligations. 

Regulation 1.12(l) will require an FCM 

to provide notice if there is a material 

change in the firm’s operations, senior 

management, clearing arrangements, or 

a material line of business.100 The 

purpose of paragraphs (k) and (l) is to 

provide the Commission and the 

relevant DSRO with an opportunity to 

initiate a dialogue with the firm 

regarding any potential adverse impact 

that such a material change may have on 

the ability of the FCM to meet its 

obligations as a market intermediary 

and on the protection of the customer 

funds held by the FCM. 

The Commission is cognizant of the 

commenters’ desire for more precise 

guidance on when notices must be filed 

under § 1.12(k) and (l). However, FCMs 

represent a broad range of entities, with 

diverse business models. In this regard, 

some FCMs are small operations with a 

minimum level of capital, and others are 

highly capitalized entities with more 

sophisticated operations. Some FCMs 

focus on retail and/or agricultural 

clients, and others focus exclusively on 

institutional clients. Some FCMs are 

standalone entities that do not engage in 

proprietary or securities trading, and 

others are dually-registered with the 

SEC as BDs and engage in a significant 

amount of securities transactions for 

both their proprietary and customer 

accounts. 

With FCMs covering such a broad and 

diverse spectrum of business 

organizations and models, the 

Commission does not believe that it 

would be appropriate to define by 

regulation the scenarios that are 

material to an FCM and would 

automatically require the filing of a 

regulatory notice. Instead, the regulation 

has been developed to allow each FCM 

to assess whether any particular or 

unique event is material to the specific 

firm. In making this determination, each 

FCM should assess the potential impact 

that an event may have on the FCM. 

This would include whether new lines 

of business would result in a significant 

increase in the firm’s capital 

requirement or otherwise result in a 

significant additional financial or 

operational risk to the FCM’s existing 

business, or whether the change in 

credit terms will significantly impact 


TKELleY on DSK3SPTVN1PROD with RULES2
68524 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

101FIA Comment Letter at 39 (Feb. 15, 2013); TD 

Ameritrade Comment Letter at 3 (Feb. 15, 2013); 

RCG Comment Letter at 7 (Feb. 12, 2013); CHS 

Hedging Comment Letter at 3 (Feb. 15, 2013). 

102FIA Comment Letter at 39 (Feb. 15, 2013). 

103NFA Comment Letter at 10 (Feb. 15, 2013). 

104 Id. at 11. 

105 Id. 

106TD Ameritrade Comment Letter at 3 (Feb. 15, 

2013). 

107The Commission’s proposed amendment to 

require the electronic filing of reports applies to 

both registered FCMs and applicants for registration 

as FCMs. Applicants for FCM registration currently 

file regulatory notices with NFA using WinJammer. 

108CHS Hedging Comment Letter at 3 (Feb. 15, 

2013). 

109 Id. 

the liquidity resources available to the 

FCM. 

The Commission also considered the 

comment that FCMs should not be 

required to report to the Commission 

changes in senior management as such 

information is reported to NFA. The 

Commission does not agree with this 

comment. As previously noted, the 

§ 1.12 notice provisions are intended to 

provide the Commission and DSROs 

with prompt notice of material events at 

FCMs that will allow the Commission 

and DSROs to monitor the impact of 

such material events on FCMs and to 

factor such events into the risk 

assessment of the firm as part of their 

respective surveillance programs. The 

resignation or appointment of a new 

chief executive officer or chief risk 

officer at an FCM is a material change 

at an FCM and is information that 

should be reported to enhance the 

Commission’s and DSRO’s 

understanding of the firm’s operations 

and the assessment of risk at the FCM. 

7. Notice of Correspondence From Other 

Regulatory Authorities 

The Commission proposed to add a 

new paragraph (m) to § 1.12 to require 

an FCM that receives a notice, 

examination report, or any other 

correspondence from a DSRO, the SEC, 

or a securities self-regulatory 

organization to immediately file a copy 

of such notice, examination report, or 

correspondence with the Commission. 

The Commission stated in proposing 

§ 1.12(m) that the receipt of such 

notices, examination reports, or 

correspondence is necessary for the 

Commission to conduct appropriate 

oversight of FCMs. 

The Commission received several 

comments that expressed a general 

concern that the language of the 

proposal is overbroad.101 FIA noted that 

FCMs receive regular, and often routine, 

correspondence from their DSROs and 

that the amount of correspondence is 

multiplied for FCMs that are also 

registered as BDs and receive similar 

correspondence from their securities 

SROs and the SEC.102 NFA agreed with 

the Commission that notices of material 

regulatory actions would provide the 

Commission and the DSROs with 

important information to carry out their 

oversight responsibilities, but also 

encouraged the Commission to 

reconsider the breadth of the 

proposal.103 NFA noted that with 

respect to futures examinations reports, 

it already files such reports with the 

Commission’s Division of Swap Dealer 

and Intermediary Oversight.104 NFA 

also requested that the Commission 

clarify that FCMs would not have to file 

notices of public regulatory actions 

taken by futures SROs against an FCM 

because NFA already provides the 

complaint associated with these actions 

to the Commission and makes the action 

available on NFA’s BASIC system.105

TD Ameritrade recommended that the 

Commission limit notification to items 

that pertain to financial responsibility 

rules.106

The Commission notes that it was not 

its intention to require an FCM to file 

with the Commission routine or nonmaterial correspondence from regulators 

or SROs. Regulation 1.12 in general is 

intended to provide the Commission 

with information regarding an FCM’s 

interaction with its other regulators 

regarding the regulators’ examinations 

and other material communications 

with FCMs. The Commission would use 

such information to enhance its 

understanding of the firm and its 

compliance with regulatory 

requirements to assess the operations of 

the firm and learn of events that may 

present a potential adverse impact on 

the firm, including its ability to properly 

operate in a regulated environment or 

otherwise safeguard customer funds. 

The Commission is revising final 

§ 1.12(m) to require an FCM to file 

notice with the Commission: (1) if the 

FCM is informed by the SEC or a SRO 

that it is the subject of a formal 

investigation; (2) if the FCM is provided 

with an examination report issued by 

the SEC or a SRO, and the FCM is 

required to file a copy of such 

examination report with the 

Commission; and (3) if the FCM receives 

notice of any correspondence from the 

SEC or a securities SRO that raises 

issues with the adequacy of the FCM’s 

capital position, liquidity to meet its 

obligations or otherwise operate its 

business, or internal controls. The 

Commission believes that the revised 

regulation will provide the Commission 

with information necessary for the 

effective oversight of FCMs and will 

minimize the notices that dualregistrant FCMs/BDs will have to file 

with the Commission. 

8. Filing Process and Content 

The Commission proposed to amend 

the process that an FCM uses to file the 

notices required by § 1.12. Currently, 

§ 1.12 requires an FCM to provide the 

Commission and DSROs with 

telephonic and facsimile notice in some 

situations, and to provide written notice 

by mail in other situations. An FCM also 

is permitted, but not required, to file 

notices and written reports with the 

Commission and with its DSRO using 

an electronic filing system in 

accordance with instructions issued by, 

or approved by, the Commission. 

The Commission proposed to amend 

§ 1.12(n) to require that all notices and 

reports filed by an FCM with the 

Commission or with the FCM’s DSRO 

must be in writing and submitted using 

an electronic filing system.107 Each FCM 

currently uses WinJammer to file 

regulatory notices with the Commission 

and with the firm’s DSRO. The 

proposed regulation further provides 

that if the FCM cannot file a notice due 

to the electronic system being 

inoperable, or for any other reason, it 

must contact the Commission’s Regional 

office with jurisdiction over the firm 

and make arrangements for the filing of 

the regulatory notices with the 

Commission via electronic mail at a 

specially designated email address 

established by the Commission; 

fcmnotices@cftc.gov. The Commission 

also proposed to amend § 1.12(n) to 

require that each notice filed by an 

FCM, IB, or SRO under § 1.12 include a 

discussion of what caused the 

reportable event, and what steps have 

been, or are being taken, to address the 

reportable event. Additional 

amendments to § 1.12(b), (d), (e), (f) and 

(g) were proposed that were necessary 

and technical in nature, and primarily 

revise internal cross-references to the 

filing requirements in § 1.12(n). 

The Commission received one 

comment on the proposed amendments 

to Regulation 1.12(n), specifically with 

respect to the requirement that notices 

under the regulation include a 

discussion of what caused the 

reportable event and what steps have 

been or will be taken to address the 

event.108 CHS Hedging stated its 

concern that requiring such a discussion 

in the notice is at odds with the 

requirement that notices be filed 

immediately.109

The Commission has determined to 

adopt the amendments to § 1.12(n) and 

the technical and related amendments 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68525 

110FHLB Comment Letter at 10 (Feb. 15, 2013); 

ICI Comment Letter at 7–8 (Jan. 14, 2013); ACLI 

Comment Letter at 4 (Feb. 15, 2013); BlackRock 

Letter at 3 (Feb. 15, 2013); and SIFMA Comment 

Letter at 2 (Feb. 21, 2013). 

111NFA Comment Letter at 11 (Feb. 15, 2013); 

FIA Comment Letter at 38 (Feb. 15, 2013). 

112NFA Comment Letter at 11 (Feb. 15, 2013). 

113FIA Comment Letter at 38 (Feb. 15, 2013). 

in § 1.12(b), (d), (e), (f) and (g) as 

proposed. In the Commission’s 

experience, in many cases an FCM has 

sufficient information to provide a 

notice of reportable event and the 

remedial steps that can be taken to 

mitigate future issues upon learning of 

the reportable event or very shortly 

thereafter. The Commission does not 

believe that the requirement to provide 

such information is at odds with the 

need to provide the information 

immediately. In the event that an FCM 

does not possess complete information 

on what caused the event, or the steps 

that have been taken or are being taken 

to address the event, it may revise its 

notice at a later date when it has more 

complete or accurate information. It is 

essential, however, that the Commission 

receives timely notice of early warning 

events, and compliance with the 

relevant notice time period should be an 

FCM’s first priority. Accordingly, as 

noted in the Proposal, even if such 

information is not immediately readily 

available, the reporting entity may not 

delay the reporting of a reportable event. 

9. Public Disclosure of Early Warning 

Notices 

The Commission requested comment 

as to whether reportable events should 

be made public by the Commission, 

SROs, or FCMs and what the benefits 

and/or negative impact from public 

disclosure of such events would be. The 

Commission received several comments 

regarding the public disclosure of 

reportable events. Several commenters, 

including FHLB, the ICI, ACLI, 

BlackRock, and SIFMA believed that the 

Commission should mandate public 

disclosure of such information.110 Two 

commenters, FIA and NFA, believed 

that such events should not be made 

public.111 NFA did not believe any of 

the filings should be public, but 

emphasized that those events that are 

not subject to a formal public action 

particularly should not be subject to 

public disclosure.112 FIA was concerned 

that without context, public disclosure 

of the notices would be subject to 

misinterpretation and could create an 

adverse market event.113

The Commission has considered the 

comments and has determined that 

regulatory notices filed under § 1.12 

should not be made publicly available. 

The notices required under § 1.12 

provide a mechanism whereby 

Commission and SRO staff are alerted to 

potential issues at an FCM. In order to 

fully assess the potential impact of a 

reportable event, Commission and SRO 

staff generally must contact the firm to 

obtain additional information, including 

up to date information on how the firm 

is addressing the matter that caused the 

reportable event to develop. If 

reportable events were disclosed to the 

public, they may not provide complete 

or current information. For example, an 

FCM may be required to file immediate 

notice that it was undersegregated at a 

point in time, but the notice may not 

contain information that the FCM has 

taken corrective action and is no longer 

in violation of the segregation 

requirements. The Commission also 

recognizes that many of the § 1.12 

notices are required to be filed as a 

result of one-off processing errors or 

timing differences that trigger a 

reportable event but are immediately 

rectified by the FCM and do not indicate 

a failure of the FCM’s control system 

nor the firm’s ability to effectively 

operate as an FCM. 

In addition, under § 1.12 FCMs that 

are dually registered BDs with the SEC 

are required to file with the Commission 

copies of certain regulatory notices that 

they are required to file with the SEC. 

The SEC, however, does not make such 

notices public. The Commission 

believes it is important to ensure 

consistency such that information that a 

firm must file with the SEC and that is 

otherwise not publicly disclosed is not 

made public by the Commission as a 

result of the firm also being required to 

file a notice with the Commission under 

§ 1.12. 

D. § 1.15: Risk Assessment Reporting 

Requirement for Futures Commission 

Merchants 

Regulation 1.15 currently requires 

each FCM subject to the risk assessment 

reporting requirements to file certain 

financial reports with the Commission 

within 120 days of the firm’s year end. 

The risk assessment filings include FCM 

organizational charts; financial, 

operational, and risk management 

policies, procedures, and systems 

maintained by the FCM; and, fiscal yearend consolidated and consolidating 

financial information for the FCM and 

its highest level material affiliate. 

The Commission proposed to amend 

§ 1.15 to require the financial 

information to be filed in electronic 

format. The Commission received no 

comments on the proposed amendments 

to § 1.15. The Commission is adopting 

the amendments as proposed. The 

Commission also has revised the final 

regulation to provide that the risk 

assessment filings should be filed via 

transmission using a form of user 

authentication assigned in accordance 

with procedures established by or 

approved by the Commission, and 

otherwise in accordance with 

instructions issued by or approved by 

the Commission. The Commission will 

provide direction regarding how FCMs 

should file the risk assessment reports 

in a secure manner with the 

Commission prior to the effective date 

of the regulation. 

E. § 1.16: Qualifications and Reports of 

Accountants 

Regulation 1.16 addresses the 

minimum requirements a public 

accountant must meet in order to be 

recognized by the Commission as 

qualified to conduct an examination for 

the purpose of expressing an opinion on 

the financial statements of an FCM. 

Regulation 1.16(b) currently provides 

that the Commission will recognize a 

person as qualified if such person is 

duly registered and in good standing as 

a public accountant under the laws of 

the place of the accountant’s principal 

office or principal residence. 

The Commission proposed several 

amendments to enhance the 

qualifications that a public accountant 

must meet in order to conduct an 

examination of an FCM. Specifically, 

the Commission proposed to require 

that the public accountant must: (1) Be 

registered with the Public Company 

Accounting Oversight Board 

(‘‘PCAOB’’); (2) have undergone an 

examination by the PCAOB; and, (3) 

have remediated to the satisfaction of 

the PCAOB any deficiencies identified 

during the examination within three 

years of the PCAOB issuing its report. 

The Commission also sought to 

enhance the quality of the public 

accountant’s examination of an FCM by 

proposing to require that the 

examination be conducted in 

accordance with U.S. GAAS after full 

consideration of the auditing standards 

issued by the PCAOB. The Commission 

further sought to ensure that the FCM’s 

governing body took an active role in 

the assessment and appointment of the 

public accountant by imposing an 

obligation on the governing body to 

evaluate, among other things, the 

accountant’s experience auditing FCMs; 

the adequacy of the accountant’s 

knowledge of the Act and Commission 

regulations; the depth of the 

accountant’s staff; and, the 

independence of the accountant. 

Additionally, the Commission 

proposed technical amendments to 


TKELleY on DSK3SPTVN1PROD with RULES2
68526 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

114Public Law 107–204, 116 Stat. 745 (July 30, 

2002). See also section 101 of SOX. 

115Sections 107 and 109 of SOX. 

116Section 104(b)(1)(A) of SOX. 

117Section 104(b)(1)(B) of SOX. 

118Section 982 of the Dodd-Frank Act. 

119See Public Company Oversight Board; Order 

Approving Proposed Temporary Rule for an Interim 

Program of Inspection Related to Audits of Brokers 

and Dealers, 76 FR 52996 (Aug. 24, 2011). 

120Section 104 of SOX requires the PCAOB to 

conduct a continuing program of inspections to 

assess the degree of compliance of each registered 

public accounting firm and associated persons of 

that firm with the provisions of the SOX, the rules 

of the PCAOB, the rules of the SEC, or professional 

standards, in connection with its performance of 

audits, issuance of audit reports, and related 

matters involving public issuers. 

121Center for Audit Quality Comment Letter at 2 

(Jan. 14, 2013); Deloitte Comment Letter at 2 (Jan. 

14, 2013); Ernst & Young Comment Letter at 2 (Jan. 

14, 2013). 

122 Id. 

123Center for Audit Quality Comment Letter at 2 

(Jan. 14, 2013); Deloitte Comment Letter at 2 (Jan 

14, 2013). 

124AICPA Comment Letter at 2 (Feb. 11, 2013). 

125 KPMG Comment Letter at 2 (Jan. 11, 2013). 

126 Id. 

127AICPA Comment Letter at 3 (Feb 11, 2013). 

128 Id. 

129NFA Comment Letter at 11 (Feb. 15, 2013). 

§ 1.16. The Commission proposed to 

amend § 1.16(f)(1)(i)(C) to require each 

FCM to submit its certified annual 

report to the Commission in an 

electronic format. The Commission also 

proposed to amend § 1.16(c)(2) to 

remove the requirement that the 

accountant manually sign the 

accountant’s report, which would 

facilitate the electronic filing of the 

FCM’s certified annual report with the 

Commission. 

The proposed amendments to § 1.16, 

including a discussion of the comments 

received, are discussed below. 

1. Mandatory PCAOB Registration 

Requirement 

Regulation 1.16(b)(1) would continue 

to require a public accountant to be 

registered and in good standing under 

the laws of the place of the accountant’s 

principal office or principal residence in 

order to be qualified to conduct 

examinations of FCMs. The Commission 

proposed to enhance the qualifications 

of public accountants by further 

requiring the public accountant to be 

registered with the PCAOB. 

The PCAOB is a nonprofit corporation 

established by Congress under the 

Sarbanes-Oxley Act of 2002 (‘‘SOX’’) to 

oversee the audits of public companies 

and BDs of securities registered with the 

SEC in order to protect investors and the 

public interest by promoting 

informative, accurate, and independent 

audit reports.114 The SEC has oversight 

authority over the PCAOB, including 

the approval of the PCAOB’s rules, 

auditing and other standards, and 

budget.115

The Commission received several 

comments on the proposed amendments 

to Regulation 1.16, which are discussed 

below. The commenters, however, did 

not oppose the proposed PCAOB 

registration requirement. In addition, 

the Commission does not anticipate that 

the PCAOB registration requirement 

will present a significant issue to FCMs 

or public accountants. In this regard, 

only one public accountant that 

currently conducts examinations of 

FCMs is not registered with the PCAOB. 

PCAOB-registered public accountants 

conducted the examinations of 103 of 

the 104 registered FCMs based upon a 

review of the most current annual 

reports submitted by FCMs to the 

Commission. Accordingly, after 

considering the comments, the 

Commission is adopting the PCAOB 

registration requirement as proposed. 

2. PCAOB Inspection Requirement 

The Commission proposed to amend 

§ 1.16(b)(1) to require that a public 

accountant must have undergone a 

PCAOB examination in order to be 

qualified to conduct examinations of 

FCMs. Section 104 of SOX requires the 

PCAOB to conduct an annual inspection 

of each registered public accountant that 

regularly provides audit reports for 

more than 100 public issuers each 

year.116 Section 104 further requires 

public accountants that provide audit 

reports for 100 or fewer issuers to be 

inspected by the PCAOB no less 

frequently than once every three 

years.117

In addition, the Dodd-Frank Act 

amended SOX and vested the PCAOB 

with new oversight authority over the 

audits of BDs registered with the 

SEC.118 The PCAOB was provided with 

the authority, subject to SEC approval, 

to determine the scope and frequency of 

the inspection of public accountants of 

BDs. The SEC also approved a PCAOB 

temporary rule implementing an 

inspection program for BDs.119

Several commenters raised issues 

with, or objected to, the proposal. Ernst 

& Young requested clarification that the 

term ‘‘examination’’ in proposed 

§ 1.16(b)(1) referred to the ‘‘inspections’’ 

that are required under section 104 of 

SOX.120 The Commission confirms that 

the term ‘‘examination’’ in proposed 

§ 1.16 was intended to refer to the 

‘‘inspections’’ required under section 

104 of the SOX, and has revised the 

regulation accordingly. 

Several commenters stated that the 

proposed inspection requirement would 

disqualify public accountants that were 

registered with the PCAOB, but had not 

yet undergone an inspection.121 These 

commenters stated that the proposal 

would disqualify accounting firms that 

recently registered with the PCAOB, but 

due to the triennial inspections 

schedule may not be subject to a PCAOB 

inspection for almost three years.122

Commenters also noted that certain 

PCAOB registered accounting firms may 

audit non-issuer BDs and may be subject 

to inspection under the PCAOB’s 

temporary or permanent inspection 

program, but may not have been 

selected yet for inspection by the 

PCAOB.123 The AICPA stated that, 

while any public accounting firm can 

register with the PCAOB, by law only 

accountants that audit public issuers or 

audit certain non-issuer BDs may be 

inspected by the PCAOB.124 KPMG also 

stated that the requirement that 

accounting firms auditing an FCM must 

have undergone an inspection makes 

the rules governing the audits of FCMs 

more restrictive than the SEC rules 

governing the audits of BDs.125 KPMG 

suggests that the Commission align the 

standards required of auditors of FCMs 

and BDs.126

The AICPA also stated that the 

Commission should permit a practice 

monitoring program (such as the AICPA 

peer review program) that evaluates and 

opines on an accounting firm’s system 

of quality control relevant to the firm’s 

non-issuer accounting and auditing 

practice as an alternative to the PCAOB 

inspection requirement.127 The AICPA 

also stated that a robust process, such as 

the AICPA’s peer review program, 

whereby a team of certified public 

accountants conducts a comprehensive 

evaluation of a public accountant’s 

system of quality control and whose 

work is subject to the oversight and 

approval by a separate group of certified 

public accountants should be required 

rather than having one certified public 

accountant review another.128

The NFA also supported a temporary 

alternative to the PCAOB inspection 

requirement in order to ensure that 

public accountants that are unable to 

obtain a PCAOB inspection within the 

time period required by the Commission 

will not automatically be prohibited 

from conducting FCM examinations.129

NFA recommended that the 

Commission specifically designate the 

AICPA’s peer review program as the 

only peer review program that will be 

acceptable to alleviate any uncertainty 

as to whether a certified public 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68527 

130 Id. 

131The customer funds information is based upon 

the 1–FR–FCM reports and FOCUS Reports filed by 

FCMs for the month ending April 30, 2013. 

132 KPMG Comment Letter at 2–3 (Jan. 11, 2013); 

Center for Audit Quality Comment Letter at 2–3 

(Jan. 14, 2013); Deloitte Comment Letter at 2–3 (Jan. 

14, 2013); AICPA Comment Letter at 2 (Feb. 11, 

2013); PWC Comment Letter at 2 (Jan. 15, 2013). 

133 KPMG Comment Letter at 2 (Jan. 11, 2013). 

134See PWC Comment Letter at 2 (Jan. 15, 2013). 

135 Id. 

136 Id. 

accountant is ‘‘qualified’’ to conduct the 

peer review.130

As noted in the proposal, FCMs are 

sophisticated financial market 

participants that are entrusted with 

more than $182 billion of customers’ 

funds.131 FCMs intermediate futures 

customers activities and guarantee 

customers’ financial performance to 

DCOs, other FCMs, and foreign brokers. 

In addition, FCMs are anticipated to 

hold significant amounts of Cleared 

Swaps Customer Collateral deposited to 

margin, secure or guarantee Cleared 

Swaps as more provisions of the DoddFrank Act are implemented. FCMs also 

may conduct proprietary futures and 

securities transactions, and handle 

business for securities customers in 

addition to futures customers. The 

sophistication of the futures markets 

and the Commission’s regulations, 

coupled with the critical role played by 

FCMs in the futures market (and in the 

case of many of the largest FCMs, the 

securities markets) necessitates the 

engagement of competent and 

experienced accountants to conduct the 

examinations of FCMs. 

The Commission believes that 

registration with the PCAOB and being 

subject to the PCAOB inspection 

program will help to ensure that 

accounting firms engaged to conduct 

audits of FCMs remain competent and 

qualified. The PCAOB inspection 

program involves the review of the 

accounting firm’s compliance with 

PCAOB issued audit, quality control, 

independence and ethics standards. 

In addition, the purpose of the 

PCAOB registration and inspection 

requirement in the final rule is not to 

ensure that the accounting firm’s audits 

of FCMs are subject to inspection by the 

PCAOB. The Commission acknowledges 

that the PCAOB’s primary jurisdiction 

and inspections are directed toward the 

audits of public issuers and BDs. 

However, the Commission’s objective is 

to reasonably ensure the quality and 

competence of the public accountants 

engaged in the audits of FCMs. The 

Commission believes that such quality 

and competence may be assessed by the 

PCAOB inspecting the accounting firms’ 

audit process for issuers and BDs, and 

is not dependent solely upon the 

inspection of the accounting firms’ 

audits of FCMs. 

The Commission further believes that 

its proposed PCAOB inspection 

requirement is consistent with the SEC’s 

audit requirements for BDs. Any auditor 

of an SEC-registered BD must register 

with the PCAOB and will be subject to 

the PCAOB inspection program. 

Moreover, the Commission believes 

that the imposition of a PCAOB 

inspection requirement provides several 

benefits over a peer review program. 

The PCAOB is an entity that was created 

by Congress and charged with 

improving audit quality, reducing the 

risks of audit failures in the U.S. public 

securities markets and promoting public 

trust. As previously noted, the PCAOB 

is subject to oversight by the SEC, which 

approves the PCAOB’s rules, auditing 

and other standards, and budget. A peer 

review program, while providing many 

benefits in the oversight of the 

accounting profession, is overseen by 

the accounting industry and is not 

subject to oversight by a federal 

regulator, which the Commission 

believes is a key advantage of the 

PCAOB in the furtherance of the 

protection of customer funds. 

The Commission also does not 

anticipate a significant impact on 

existing FCMs from the imposition of 

the PCAOB inspection requirement on 

public accountants. As noted above, 103 

of the 104 FCMs currently are subject to 

examination by public accountants that 

are registered with the PCAOB. In 

addition, only six of the PCAOBregistered public accountants that 

conduct examinations of fourteen FCMs 

have not been subject to a PCAOB 

inspection at this time. However, all six 

of these firms have indicated in their 

PCAOB filings that they conduct audits 

of BDs and, therefore, will be subject at 

a future date to the PCAOB inspection 

program for the inspection of 

accountants that conduct audits of BDs. 

The Commission, based upon the 

analysis above and further consideration 

of the comments, has determined to 

adopt the regulation as proposed. The 

Commission recognizes, however, that 

the audits of many FCMs with a yearend date of December 31, 2013 or later 

have already been initiated. 

Accordingly, the Commission has 

determined that the PCAOB registration 

requirement will apply for audit reports 

issued for the year ending June 1, 2014 

or later so as not to unnecessarily 

interrupt the examinations that 

currently are in progress. The 

Commission also is adopting a 

December 31, 2015 compliance date for 

a PCAOB inspection. The deferred 

compliance date will provide public 

accountants with additional time to 

register with, and to be inspected by, the 

PCAOB. The compliance dates are 

discussed further in section III below. 

3. Remediation of PCAOB Inspection 

Findings by the Public Accountant 

The Commission proposed in 

§ 1.16(b)(1) that any deficiencies noted 

during a PCAOB inspection must be 

successfully remediated to the 

satisfaction of the PCAOB within three 

years. 

KPMG, the Center for Audit Quality, 

Deloitte, the AICPA, and PWC generally 

argued that it is not clear how the 

requirement that any deficiencies noted 

during the PCAOB exam must have 

been remediated to the satisfaction of 

the PCAOB would work or what it 

means.132 The commenters also noted 

that the Commission’s proposed 

requirement that the public accountant 

remediate any deficiencies noted in a 

PCAOB inspection report is more 

stringent than the SEC’s requirements 

for auditors of BDs and public issuers. 

KPMG also asked who would make a 

determination of remediation as there is 

no procedure for the PCAOB to 

communicate such determinations to 

the public accountant or the public.133

PWC also stated that reliance on the 

PCAOB inspection results was 

misplaced and that the PCAOB 

inspection comments are issued in the 

context of a constructive dialogue to 

encourage Certified Public Account 

(‘‘CPA’’) firms to improve their practices 

and procedures.134 PWC further noted 

that disciplinary sanctions such as 

revocation of the firm’s right to audit a 

public company or BD can only be made 

in the context of an adjudicative process 

in which the firm is afforded procedural 

rights.135 Lastly, PWC asserted that the 

Commission’s proposal would 

disqualify a firm without providing any 

of the procedural rights or safeguards 

established by SOX.136

The Commission has considered the 

comments and recognizes that the 

PCAOB inspection process does not 

involve a formal process for 

communicating that a public accountant 

has adequately remediated deficiencies 

identified during the PCAOB’s last 

inspection. In addition, the Commission 

understands that the PCAOB may not 

always issue a report at the conclusion 

of an inspection, or that the report may 

contain both public and non-public 

sections. 

In light of these comments, the 

Commission has determined to revise 


TKELleY on DSK3SPTVN1PROD with RULES2
68528 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

137Ernst & Young Comment Letter at 3 (Jan. 14, 

2013); Deloitte Comment Letter at 1 (Jan. 14, 2013); 

PWC Comment Letter at 3 (Jan. 15, 2013); AICPA 

Comment Letter at 2 (Feb. 11, 2013); and KPMG 

Comment Letter at 3 (Jan. 11, 2013). 

138 Deloitte Comment Letter at 1 (Jan. 14, 2013). 

139Broker Dealer Reports, 78 FR 51910 (Aug. 21, 

2013). 

140 Id. 141PWC Comment Letter at 3 (Jan. 15, 2013). 

the final regulation by removing the 

requirement that a public accountant 

must remediate any deficiencies 

identified during a PCAOB inspection to 

the satisfaction of the PCAOB within 

three years of the inspection. The 

Commission is further revising 

§ 1.16(b)(1) to provide that a public 

accountant that, as a result of the 

PCAOB disciplinary process, is subject 

to a sanction that would permanently or 

temporarily bar the public accountant 

from engaging in the examination of a 

public issuer or BD may not conduct the 

examination of an FCM. The 

Commission notes that the PCAOB has 

the authority to initiate a disciplinary 

action against a firm and its associated 

persons for failing to adequately address 

inspection findings or for other 

transgressions. 

The Commission also is revising 

§ 1.16(b)(4) to require the governing 

body of the FCM to review and consider 

the PCAOB’s inspection reports of the 

public accountant as part of the 

governing body’s assessment of the 

qualifications of the public accountant 

to perform an audit of the FCM. The 

governing body is in a position to 

request information from the public 

accountant regarding the PCAOB 

inspections and general oversight of the 

public accountant and should use such 

information in assessing the 

competency of the accountant to 

conduct an examination of the FCM. An 

FCM’s governing body should be 

concerned if the PCAOB inspection 

reports indicate that the public 

accountant has significant deficiencies 

and should take such information into 

consideration in assessing the 

qualifications of the public accountant. 

4. Auditing Standards 

The Commission proposed to amend 

§ 1.16(c)(2) to require that the public 

accountant’s report of its examination of 

an FCM must state whether the 

examination was done in accordance 

with generally accepted auditing 

standards promulgated by the Auditing 

Standards Board of the AICPA (i.e., U.S. 

GAAS), after giving full consideration to 

the auditing standards issued by the 

PCAOB. Commenters raised issues with 

the proposal noting that there is no 

existing reporting framework that 

requires the application of one set of 

auditing standards and the 

consideration of another set of auditing 

standards.137 Deloitte noted that public 

accountants may be specifically engaged 

to conduct an audit of an entity under 

both PCAOB auditing standards and 

U.S. GAAS, but that there is no 

reporting framework for an audit under 

one set of auditing standards, after 

giving ‘‘full consideration’’ to a separate 

set of auditing standards.138

The Commission has reviewed the 

comments and has determined to revise 

the final regulation to provide that the 

accountant’s report must state whether 

the examination of the FCM was 

conducted in accordance with the 

auditing standards issued by the 

PCAOB. The Commission acknowledges 

the fact that there is no reporting 

framework for public accountants to 

report on one set of auditing standards 

after giving full consideration to another 

set of auditing standards. Also, the 

Commission recognizes that the SEC has 

recently adopted final regulations to its 

Rule 17a–5 to require public 

accountants to use PCAOB standards in 

the examination of the financial 

statements of BDs.139 Therefore, the 

Commission’s amendments to 

§ 1.16(c)(2) to require public 

accountants to use PCAOB standards in 

conducting the examination of the 

financial statements of an FCM is 

consistent with the SEC’s revisions to its 

Rule 17a–5. The Commission also is 

setting a compliance date for public 

accountants to use PCAOB auditing 

standards for all FCM examinations 

with a year-end date of June 1, 2014 or 

later. The extended compliance date 

allows FCMs currently subject to an 

examination by a public accountant to 

complete the examination cycle without 

having the public accountant adjust the 

examination for the new PCAOB 

standards requirement. The June 1, 2014 

compliance date also is consistent with 

the SEC’s compliance date for revisions 

to Rule 17a-5 and, therefore, will allow 

FCMs that are dually-registered as 

FCMs/BDs to be subject to uniform 

CFTC and SEC requirements.140

Compliance dates are discussed further 

in section III below. 

5. Review of Public Accountant’s 

Qualifications by the FCM’s Governing 

Body 

The Commission proposed to amend 

§ 1.16(b) by adding new paragraph (4) 

which would require the FCM’s 

governing body to ensure that a public 

accountant engaged to conduct an 

examination of the FCM is duly 

qualified to perform the audit. The 

proposed new paragraph further 

provided that the evaluation should 

include, among other things, the public 

accountant’s experience in auditing 

FCMs, the public accountant’s 

knowledge of the Act and Commission 

regulations, the depth of the public 

accountant’s staff, and the public 

accountant’s size and geographical 

location. The proposed requirements are 

intended to ensure that the FCM’s 

governing body takes an active role in 

the assessment and appointment of the 

public accountant. 

PWC requested clarification of the 

Commission’s expectations for the 

criteria that would be expected to be 

used by the FCM’s governing body for 

determining qualification. PWC stated 

that such clarification may be helpful so 

that a consistent framework for 

determining the qualifications is used 

across the industry and FCM governing 

bodies.141

The Commission has considered the 

comments and has determined to adopt 

the amendments as proposed. FCMs 

represent a diverse group of entities and 

business models. Some FCMs focus 

primarily on institutional clients and 

engage in securities transactions as their 

primary business. Other FCMs focus on 

retail customers and engage in no 

proprietary or securities transactions. 

With such a wide range of business 

models, the Commission believes that it 

is not practical to provide a uniform set 

of criteria that each governing body of 

each FCM should use to assess the 

qualifications of a public accountant. In 

fact, such a standard list would go 

against the Commission’s objective of 

ensuring that the governing body is 

actively reviewing the qualifications of 

the public accountant relative to the 

FCM’s particular business model. The 

requirement is not intended to exclude 

regional or smaller public accountants 

from being qualified to conduct 

examinations, provided that the 

governing body is satisfied that the 

public accountant has the appropriate 

skill, knowledge, and other resources to 

effectively conduct an examination, and 

is otherwise in compliance with the 

qualification requirements in § 1.16. 

The Commission also is revising final 

§ 1.16(b)(4) in response to the comments 

received on proposed § 1.16(b)(1) that 

would have required that a public 

accountant remediate any findings 

issued by the PCAOB in its inspection 

report within 3 years of the issuance of 

the inspection report. As stated above, 

commenters noted that there is no 

formal mechanism to assess whether a 

public accountant has remediated any 

inspection findings to the satisfaction of 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68529 

142FIA Comment Letter at 8 (Feb. 15, 2013). 

143FCStone Comment Letter at 4 (Feb. 15, 2013). 

144Noncustomers are defined in § 1.17(b)(4) as 

accounts carried by the FCM that are not customer 

accounts or proprietary accounts. Noncustomer 

accounts are generally accounts carried by an FCM 

for affiliates and certain employees of the FCM. 

145For purposes of these Commission regulations, 

a margin call is presumed to be issued by the FCM 

the day after an account becomes undermargined. 

146 Vanguard Comment Letter at 7 (Feb. 22, 2013). 

the PCAOB. Accordingly, the 

Commission is revising § 1.16(b)(4) to 

provide that the governing body of the 

FCM should review the inspection 

report of the public accountant and 

discuss inspection findings as 

appropriate with the public accountant. 

Such reviews and discussions will 

provide additional information to the 

governing body that will allow it to 

better assess the qualifications of the 

public accountant to conduct an audit of 

the FCM. 

6. Electronic Filing of Certified Annual 

Reports 

The Commission proposed to amend 

§ 1.16(f)(1)(i)(C) to require each FCM to 

submit its certified annual report to the 

Commission in an electronic format. 

The Commission also proposed to 

amend § 1.16(c)(2) to remove the 

requirement that the accountant 

manually sign the account’s report, 

which will facilitate the electronic filing 

of the FCM’s certified annual report 

with the Commission. The Commission 

received no comments on the above 

amendments and is adopting the 

amendments as proposed. 

F. § 1.17: Minimum Financial 

Requirements for Futures Commission 

Merchants and Introducing Brokers 

1. FCM Cessation of Business and 

Transfer of Customer Accounts if 

Unable To Demonstrate Adequate 

Liquidity 

Section 4f(b) of the Act provides that 

no person may be registered as an FCM 

unless it meets the minimum financial 

requirements that the Commission has 

established as necessary to ensure that 

the FCM meets its obligations as a 

registrant at all times, which would 

include its obligations to customers and 

to market participants, including DCOs. 

The Commission’s minimum capital 

requirements for FCMs are set forth in 

§ 1.17 which, among other things, 

currently provides that an FCM must 

cease operating as an FCM and transfer 

its customers’ positions to another FCM 

if the FCM is not in compliance or is not 

able to demonstrate its compliance with 

the minimum capital requirements. 

The proposed amendments to § 1.17 

authorize the Commission to request 

certification in writing from an FCM 

that it has sufficient liquidity to 

continue operating as a going concern. 

If an FCM is not able to immediately 

provide the written certification, or is 

not able to demonstrate adequate access 

to liquidity with verifiable evidence, the 

FCM must transfer all customer 

accounts and immediately cease doing 

business as an FCM. 

The FIA stated that it agreed with the 

regulatory purpose underlying this 

proposed amendment, but stated that 

the Commission should not adopt the 

rule before it clearly articulates the 

objective standards by which it will 

determine that an FCM has ‘‘sufficient 

liquidity.’’ 142 Similarly, FCStone 

requested clarity with respect to the 

exigent circumstances that would give 

the Commission authority to require an 

FCM to cease operating.143

The Commission understands the 

concerns of commenters regarding the 

process by which the Commission, or 

the Director of the Division of Swap 

Dealer and Intermediary Oversight 

acting pursuant to delegated authority 

under § 140.91(6), could require 

immediate cessation of business as an 

FCM and the transfer of customer 

accounts; however, that same authority 

currently exists should a firm fail to 

meet its minimum capital requirement. 

The Commission believes the ability to 

certify, and if requested, demonstrate 

with verifiable evidence, access to 

sufficient liquidity to operate as a going 

concern to meet immediate financial 

obligations is a minimum financial 

requirement necessary to ensure an 

FCM will continue to meet its 

obligations as a registrant as set forth 

under section 4f(b) of the Act. Further, 

the Commission notes that the ‘‘going 

concern’’ standard is well defined in 

accounting literature and practice, and 

generally means an ability to continue 

operating in the near term. 

The proposed liquidity provision is 

intended to cover circumstances that 

require immediate attention and would 

provide the Commission with a means 

of addressing exigent circumstances by 

requiring an FCM to produce a written 

analysis showing the sources and uses 

of funds over a short period of time not 

to exceed one week. The purpose of the 

provision is to address situations where 

an FCM may currently be in compliance 

with minimum financial requirements, 

but lacks liquidity to meet pending, 

non-discretionary obligations such that 

the firm’s ability to continue operating 

in the near term is in serious jeopardy. 

In such a situation, it is expected that 

the Commission and the FCM’s DSRO 

and applicable DCOs would be in 

frequent communication with the firm 

to review the FCM’s options and plans 

to continue operating as a going concern 

and to assess what actions were 

necessary to ensure the firm continues 

to meet its obligations as a market 

intermediary and to protect customer 

funds. If an FCM’s management cannot 

in good faith certify that the FCM has 

sufficient liquidity to permit it to 

operate throughout the following week, 

then the FCM has failed to meet its 

minimum financial requirements 

necessary to ensure that the firm will 

continue to meet its obligations as a 

registrant and the Commission would 

have to determine how to minimize the 

impact of a potential FCM insolvency or 

default. 

The Commission has considered the 

comments and has determined to adopt 

the amendments as proposed. 

2. Reducing Time Period for FCMs To 

Incur a Capital Charge for 

Undermargined Accounts to One Day 

After Margin Calls Are Issued 

Regulation 1.17 requires an FCM to 

incur a charge to capital for customer 

and noncustomer accounts that are 

undermargined beyond a specified 

period of time.144 Regulation 

1.17(c)(5)(viii) currently requires an 

FCM to reduce its capital (i.e., take a 

capital charge) if a customer account is 

undermargined for three business days 

after the margin call is issued.145

Regulation 1.17(c)(5)(ix) requires an 

FCM to take a capital charge for 

noncustomer and omnibus accounts that 

are undermargined for two business 

days after the margin call is issued. 

The Commission proposed to amend 

§ 1.17(c)(5)(viii) and (ix) to require an 

FCM to take capital charges for 

undermargined customer, noncustomer, 

and omnibus accounts that are 

undermargined for more than one 

business day after a margin call is 

issued. Thus, for example, under the 

proposal, if an account carried by an 

FCM became undermargined on 

Monday, the operation of the regulation 

assumes that the FCM would issue a 

margin call on Tuesday, and the FCM 

would have to incur a capital charge at 

the close of business on Wednesday if 

the margin call was still outstanding. 

Vanguard commented that it 

supported the Commission’s proposal, 

stating that the accelerated timetable 

makes sense given modern trading and 

asset transfer timing.146 Vanguard 

further stated that each customer must 

stand up for its trades and promptly 

post margin, and it further stated that it 

believes the overall market may be 

weakened to the extent an FCM is 


TKELleY on DSK3SPTVN1PROD with RULES2
68530 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

147 Id. 

148MFA Comment Letter at 7 (Feb. 15, 2013). 

149 Id. 

150NCBA Comment Letter at 2 (Feb. 15, 2013). 

151 Id. 

152 Id. See also JSA Comment Letter at 2 (Feb. 15, 

2013) and ICA Comment Letter at 1–2 (Feb. 15, 

2013). 

153 JSA Comment Letter at 2 (Feb. 15, 2013). See 

also Frontier Futures Comment Letter at 2–3 (Feb. 

14, 2013). 

154 Id. 

155FIA Comment Letter at 26 (Feb. 15, 2013). 

156 Id. 

157RJ O’Brien Comment Letter at 3–4 (Feb. 15, 

2013). 

158 Id. See also RCG Comment Letter at 5 (Feb. 12, 

2013). RCG also recommended that the Commission 

implement a pilot program that requires FCMs to 

provide the Commission with daily undermargined 

reports. The Commission does not believe that a 

pilot program is necessary for gathering additional 

information. 

159 Id. 

160 Id. 

161 Id. 

162TD Ameritrade Comment Letter at 3–4 (Feb. 

15, 2013). 

163 Id. 

164 Id. 

165NPPC Comment Letter at 2 (Feb. 14, 2013); 

RCG Comment Letter at 4–5 (Feb. 12, 2013); NGFA 

Comment Letter at 3 (Feb. 15, 2013); NEFI/PMAA 

Comment Letter at 3 (Jan. 14, 2013); AIM Comment 

Letter at 15 (Jan. 24, 2013); Amarillo Comment 

Letter at 1 (Feb. 14, 2013); NCFC Comment Letter 

at 1 (Feb. 15,2013); NFA Comment Letter at 12–13 

(Feb. 15, 2013); FCStone Comment Letter at 3 (Feb. 

15, 2013); Advantage Comment Letter at 1–2 (Feb. 

15, 2013); AFBF Comment Letter at 2 (Feb. 15, 

2013); CCC Comment Letter at 2 (Feb. 15, 2013); 

Steve Jones Comment Letter at 1 (Feb. 14, 2013); 

ICA Comment letter at 1–2 (Feb. 15, 2013);TCFA 

Comment Letter at 1–2 (Feb. 15, 2013); CME 

Comment Letter at 5 (Feb. 15, 2013). AIM 

resubmitted the comment letters of Premier Metal 

Services, NEFI/PMAA, and the ISRI and indicated 

its support for the recommendations therein (Jan. 

14, 2013). 

166 Id. 

extending significant amounts of credit 

over an extended period to cover a 

customer’s margin deficit.147

MFA objected to the proposal noting 

that, while in the ordinary course of 

business, few margin calls remain 

outstanding for more than two business 

days, the proposal does recognize the 

practical reasons why a margin call may 

be outstanding more than 2 business 

days after the call issued.148 MFA cited 

disputes between an FCM and its 

customer as to the appropriate level of 

margin, and good faith errors that may 

cause a delay beyond 2 days for a 

margin call to be met.149 MFA also 

stated that an increase in costs resulting 

from the regulation will ultimately be 

passed on the customers. 

The NCBA stated that the proposal 

may require market participants to use 

wire transfers in lieu of checks, which 

will increase the costs and impose a 

significant financial burden to the cattle 

industry.150 The NCBA also stated that 

the proposal will cause customers to 

prefund their accounts for anticipated 

margin requirements, which will reduce 

customers’ capital and impede their 

other business operations.151 The NCBA 

further noted that the proposal is not 

related to the MFGI and PFGI failures, 

which were not caused by customers 

failing to meet margin calls.152

JSA stated that an effective increase in 

a capital charge for undermargined 

customer accounts could cause an 

increase in requirements for customers 

to prefund their accounts, which would 

be punitive in a highly competitive 

environment that already places 

midsized FCMs and FCMs that are not 

affiliated with a banking institution at a 

disadvantage to larger, more highly 

capitalized firms, or FCMs that are 

affiliated with banking institutions.153

JSA also stated that if smaller FCMs are 

forced out of the market, larger FCMs or 

FCMs affiliated with banks may not be 

willing to service customers that are 

farmers, ranchers, retail, or introduced 

brokerage accounts, for which they have 

historically shown little interest.154

FIA stated that while institutional and 

many commercial market participants 

generally meet margin calls by means of 

wire transfers, the proposal, creates 

operational problems because it does 

not consider delays arising from 

accounts located in other time zones 

that cannot settle same day, or ACH 

settlements, or the requirement to settle 

or convert certain non-U.S. dollar 

currencies.155 FIA also stated that a 

substantial number of customers that do 

not have the resources of large 

institutional customers (in particular 

members of the agricultural community) 

depend on financing from banks to fund 

margin requirements, which may 

require more than one day to obtain.156

RJ O’Brien stated that it recognized 

that the collection of margin is a critical 

component of an FCM’s risk 

management program, however, it 

objected to the proposed amendment.157

RJ O’Brien stated that as the largest 

independent FCM serving a client base 

that includes a great number of farmers 

and ranchers, it is well aware that many 

customers that use the markets to hedge 

commercial risk still meet margin calls 

by check or ACH because of the 

impracticality and costliness of wire 

transfers in their circumstances.158 RJ 

O’Brien stated that in many cases, the 

costs of a wire transfer would exceed 

the transaction costs paid by the client 

to its FCMs, and additionally, that some 

customers in the farming and ranching 

community finance their margin calls, 

which can require additional time to 

arrange for delivery of margin call funds 

due to routine banking procedures.159

RJ O’Brien also stated that if the 

proposal is adopted, FCMs that service 

non-institutional clients will struggle to 

remain competitive and the proposal 

may result in fewer clearing FCMs and 

greater systemic risk to the 

marketplace.160 RJ O’Brien further 

stated that many of the larger FCM/BDs 

likely have little interest in servicing 

smaller rancher and farmer clients, as 

was evidenced in the wake of MFGI’s 

failure, and that a loss of such smaller 

FCMs will result in fewer options 

available to these ranchers, farmers and 

other commercial market participants 

that wish to hedge their commercial 

risks.161

TD Ameritrade stated that it did not 

support the proposed amendments to 

§ 1.17(c)(5)(viii) and (ix) as it would 

impose financial hardships on 

customers that the Proposal was 

intended to protect.162 TD Ameritrade 

stated that a large number of retail 

customers do not currently use wire 

transfers to meet a margin requirement 

in one business day.163 TD Ameritrade 

also noted that non-U.S. customer 

accounts are faced with time zone 

differences and inherent delays in 

meeting margin calls.164

Other commenters expressed the 

general concern that the proposal will 

harm the customers it is meant to 

protect by requiring more capital to be 

kept in customer accounts, possibly 

forcing users to hold funds at FCMs well 

in excess of their margin requirements, 

or resulting in certain segments of the 

market to forego the futures markets to 

hedge their commercial operations.165

Those commenters argued that such prefunding could add significant financial 

burdens to trading as customers find 

themselves having to provide excess 

funds to their brokers which could 

increase their risk with regard to the 

magnitude of funds potentially at risk in 

the event of future FCM insolvencies.166

The commenters general expressed 

significant concerns that reducing 

margin calls to one day will harm many 

customers as: (1) Many small 

businesses, farmers, cattle producers 

and feedlot operators routinely pay by 

check and forcing them to use wire 

transfers increases their cost of doing 

business; (2) clients who make margin 

calls by ACH payments instead of wire 

transfers because ACH is cheaper, 

would no longer be able to do so 

because there is a one-day lag in 

availability of funds; and (3) foreign 

customers would not be able to make 

margin calls due to time zone 

differences, the time required to convert 

certain non-USD currencies, and for 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68531 

167 Id. 168CCC Comment Letter at 2–3 (Feb. 15, 2013). 169 Id. 170FIA Comment Letter at 27 (Feb. 27, 2013); RJ 

O’Brien Comment Letter at 4 (Feb. 15, 2013). 171FIA Comment Letter at 27 (Feb. 15, 2013). 172NFA Comment Letter at 13 (Feb. 15, 2013); 

FIA Comment Letter at 26 (Feb. 15, 2013); MFA 

Comment Letter at 6–7 (Feb. 15, 2013); and AIMA 

Comment Letter at 3 (Feb. 15, 2013). 

173RJ O’Brien Comment Letter at 4 (Feb. 15, 

2013). 

174 Id. 

175 Id. 

176See, e.g., NCBA Comment Letter at 2 (Feb. 15, 

2013); NGFA Comment Letter at 3–4 (Feb. 15, 

2013). 

whom banking holidays fall on different 

days.167

The CCC stated that the proposed 

amendment to the capital rule places an 

undue burden on the FCMs, which will 

likely result in FCMs demanding that 

customers prefund trades to prevent 

market calls and potential capital 

charges.168 The CCC also stated that the 

proposal could result in forced 

liquidations of customer positions to 

ensure that the FCM does not incur a 

capital charge.169

FIA and RJ O’Brien provided 

alternatives to the Commission’s 

proposal. Both FIA and RJ O’Brien 

offered that an FCM be required to take 

a capital charge for any customer margin 

deficit exceeding $500,000 that is 

outstanding for more than one business 

day.170 FIA further suggested that if the 

customer’s margin deficit is $500,000 or 

less, the FCM should take a capital 

charge if the margin call is outstanding 

two business days or more after the 

margin call is issued.171 RJ O’Brien’s 

comment letter does not address the 

timing of the capital charge for accounts 

with a margin deficit of $500,000 or 

less. 

NFA, FIA, MFA and AIMA stated that 

if the Commission adopts the 

amendments regarding residual interest 

as proposed, then the Commission 

should consider whether a capital 

charge for undermargined accounts 

remains necessary at all because the 

FCM will have already accounted for an 

undermargined account by maintaining 

a residual interest sufficient at all times 

to exceed the sum of all margin deficits; 

hence the capital charges related to an 

undermargined account appear to 

impose an additional financial burden 

without any necessary financial 

protection.172

RJ O’Brien also stated that the 

Commission should provide at least a 

one-year period of time for any changes 

to the timeframe for taking a capital 

charge for undermargined accounts to 

be effective.173 RJ O’Brien stated that 

FCMs will need to educate and develop 

systems to assist their clients in meeting 

margin calls in an expedited 

timeframe.174 Lastly, RJ O’Brien stated 

that the Commission should require 

futures exchanges to increase their 

margin requirements to 135% of 

maintenance margin to reduce the 

number and frequency of margin 

calls.175

With respect to the reduction of the 

timeframe in § 1.17(c)(5)(viii) for an 

FCM to incur a capital charge for 

undermargined customer accounts, the 

Commission has considered the 

comments and has determined to adopt 

the amendments as proposed. The 

timely collection of margin is a critical 

component of an FCM’s risk 

management program and is intended to 

ensure that an FCM holds sufficient 

funds deposited by customers to meet 

their potential obligations to a DCO. As 

guarantor of the financial performance 

of the customer accounts that it carries, 

the FCM is financially responsible if the 

owner of an account cannot meet its 

margin obligations to the FCM and 

ultimately to a DCO. 

The timeframe for meeting margin 

calls currently provided in 

§ 1.17(c)(5)(viii) was established in the 

1970s when the use of checks and the 

mail system were more prevalent for 

depositing margin with an FCM. 

However, in today’s markets, with the 

increasing use of technology, 24-hour-aday trading, and the use of wire 

transfers to meet margin obligations, the 

Commission believes that the timeframe 

for taking a capital charge should be 

reduced both to give an incentive to 

FCMs to exercise prudent risk 

management and to strengthen the 

financial protections of FCMs, and to 

enhance the safety of the clearing 

systems and other customers by 

requiring FCMs to reserve capital for 

undermargined customer accounts that 

fail to meet a margin call on a timely 

basis. 

Several commenters have stated that 

the proposal would harm customers by 

increasing costs to customers or by 

exposing more of the customers’ funds 

to the FCM.176 The Commission notes 

that the final regulation provides for at 

least two full days from the point in 

time that a customer’s account is 

undermargined to the time the FCM is 

required to incur a capital charge for the 

undermargined account. Under the 

regulation, if a customer’s account 

becomes undermargined at some point 

before close of business on Monday, the 

FCM will have until the close of 

business on Wednesday before it is 

required to take a capital charge. 

Customers are responsible for 

monitoring the activity in their account 

and should have information that would 

allow them to determine that their 

trading account is undermargined prior 

to the close of business on Monday. 

The alternative proposed by FIA and 

RJ O’Brien is premised on their belief 

that the regulation would not provide an 

adequate amount of time for a customer 

to meet a margin call before the FCM 

would have to take a capital charge for 

an undermargined account. As noted 

above, the Commission believes that the 

regulation, which provides at least two 

full business days for a customer to fund 

its undermargined account, does 

provide an adequate period of time for 

margin calls to be met. In situations 

involving customers located in foreign 

jurisdictions and the associated issues 

of time zone differences and differences 

in banking holidays, the Commission 

believes that the FCM should include 

such factors in its risk management 

program and operating procedures with 

such customers in an effort to ensure 

compliance with the regulations. 

The Commission believes that the 

time period provided in § 1.17(c)(5)(viii) 

is adequate in most situations for a 

customer to receive and fund a margin 

call. The intent of margin is to ensure 

that a customer maintains a sufficient 

amount of funds in its account to cover 

99 percent of the observed market 

moves of its portfolio of positions over 

a specified period of time. Customers 

that maintain fully margined accounts 

are exposed to greater risk to the safety 

of their funds if other customer accounts 

carried by the FCM are undermargined. 

In order to provide greater protection to 

the customers that are fully margined or 

maintain excess margin on deposit, and 

to provide greater assurance that the 

FCM can continue to meet its financial 

obligations to DCOs, the Commission 

believes that the FCM should maintain 

a sufficient amount of capital to cover 

the potential shortfall in undermargined 

customers’ accounts. 

The Commission also has considered 

the comments on the proposed 

amendments to § 1.17(c)(5)(ix), which 

reduce the timeframe for an FCM to 

incur a capital charge on an 

undermargined noncustomer or 

omnibus account from two days after 

the call was issued to one day after the 

call was issued. The Commission notes 

that the majority of the comments 

addressed the undermargined charge on 

customer accounts, but considered the 

comments generally in reviewing the 

proposed amendments to 

§ 1.17(c)(5)(ix). 

The Commission has considered the 

proposal and is adopting the 

amendments to § 1.17(c)(5)(ix) as 


TKELleY on DSK3SPTVN1PROD with RULES2
68532 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

177The SEC has proposed rule amendments to 

implement the Dodd-Frank Act requirement to 

remove references to credit ratings in its regulations 

and substitute a standard for creditworthiness 

deemed appropriate. See 76 FR 26550 (May 6, 

2011). 178CFA Comment Letter at 4–5 (Feb. 13, 2013). 

179 Id. 

180 Id. 

181 Id. 

proposed. As noted above, 

§ 1.17(c)(5)(ix) applies to noncustomers 

and omnibus accounts carried by an 

FCM. Many of the concerns raised by 

the comments regarding the ability to 

fund a margin call under 

§ 1.17(c)(5)(viii) do not apply to 

accounts held by an affiliate or an 

omnibus accounts. Such accounts 

should pay margin calls promptly and 

by wire transfer to reduce the potential 

exposure to the FCM resulting from 

undermargined accounts. 

The Commission also believes that the 

amendments to § 1.17(c)(5)(viii) and (ix) 

are appropriate even if the Commission 

amends its regulations to require an 

FCM to maintain residual interest in 

segregated accounts in excess of the 

undermargined amount of customer 

accounts. The purpose of the capital 

rule is to ensure that an FCM maintains 

sufficient liquid assets to meet its 

obligations as a going concern. 

Proprietary funds held in segregated 

accounts that exceed the total obligation 

to customers are included in an FCM’s 

capital computation. However, in 

situations where the FCM’s residual 

interest in segregated accounts is 

covering an undermargined customer 

account, a capital charge is appropriate 

because the FCM’s residual interest is 

necessary to cover potential market 

losses on the undermargined accounts. 

3. Permit an FCM That Is Not a BD To 

Develop Policies and Procedures To 

Determine Creditworthiness 

The Commissions proposed to amend 

§ 1.17(c)(v) to permit an FCM that is not 

a BD to develop a framework to 

establish, maintain and enforce written 

policies and procedures for determining 

creditworthiness of commercial paper, 

convertible debt, and nonconvertible 

debt instruments that are readily 

marketable. In recommending the 

proposal, the Commission noted that the 

SEC proposed to permit a BD to 

establish written policies and 

procedures to assess the credit risk of 

commercial paper, convertible debt, and 

nonconvertible debt instruments that 

are readily marketable.177

Under both the Commission’s 

proposal and the SEC’s proposal, an 

FCM or BD would assess the security’s 

credit risk using the following factors, to 

the extent appropriate: 

• Credit spreads (i.e., whether it is 

possible to demonstrate that a position 

in commercial paper, nonconvertible 

debt, and preferred stock is subject to a 

minimal amount of credit risk based on 

the spread between the security’s yield 

and the yield of Treasury or other 

securities, or based on credit default 

swap spreads that reference the 

security); 

• Securities-related research (i.e., 

whether providers of securities-related 

research believe the issuer of the 

security will be able to meet its financial 

commitments, generally, or specifically, 

with respect to securities held by the 

FCM or BD); 

• Internal or external credit risk 

assessments (i.e., whether credit 

assessments developed internally by the 

FCM or BD or externally by a credit 

rating agency, irrespective of its status 

as an NRSRO, express a view as to the 

credit risk associated with a particular 

security); 

• Default statistics (i.e., whether 

providers of credit information relating 

to securities express a view that specific 

securities have a probability of default 

consistent with other securities with a 

minimal amount of credit risk); 

• Inclusion on an index (i.e., whether 

a security, or issuer of the security, is 

included as a component of a 

recognized index of instruments that are 

subject to a minimal amount of credit 

risk); 

• Priorities and enhancements (i.e., 

the extent to which a security is covered 

by credit enhancements, such as 

overcollateralization and reserve 

accounts, or has priority under 

applicable bankruptcy or creditors’ 

rights provisions); 

• Price, yield and/or volume (i.e., 

whether the price and yield of a security 

or a credit default swap that references 

the security are consistent with other 

securities that the FCM or BD has 

determined are subject to a minimal 

amount of credit risk and whether the 

price resulted from active trading); and 

• Asset class-specific factors (e.g., in 

the case of structured finance products, 

the quality of the underlying assets). 

An FCM that maintains written 

policies and procedures and determines 

that the credit risk of a security is 

minimal is permitted under the 

proposal to apply the lesser haircut 

requirement currently specified in the 

SEC capital rule for commercial paper 

(i.e., between zero and 1⁄2 of 1 percent), 

nonconvertible debt (i.e., between 2 

percent and 9 percent), and preferred 

stock (i.e., 10 percent). 

The CFA does not believe it is 

appropriate for FCMs to use internal 

models to determine minimum required 

capital.178 The CFA believes that capital 

models should be established by the 

relevant regulatory agencies for use by 

FCMs or BDs.179 It has serious concerns 

that internal models used for calculating 

minimum capital requirements are 

prone to failure in a crisis.180 The CFA 

states that the regulatory agency should 

provide an objective and clear minimum 

risk-based capital baseline.181

As noted above, the SEC has proposed 

amendments to its net capital rule to 

allow BDs to take a lower net capital 

charge on certain securities based on the 

BDs’ own determinations that certain 

securities have minimal credit risk, 

pursuant to the BDs having protocols for 

assessing the credit risk and 

maintaining appropriate 

documentations. If the SEC approves the 

proposal, the SEC capital charges would 

apply to an FCM that is duallyregistered as an FCM/BD. In the absence 

of the Commission adopting a similar 

provision, certificates of deposit, 

bankers acceptances, commercial paper 

and nonconvertible debt securities held 

by standalone FCMs that have very low 

credit and market risk securities would 

be subject to the minimum default 

securities haircut of 15 percent. 

The Commission proposed that 

standalone FCMs be permitted the same 

flexibility as FCM/BDs with respect to 

taking a lower capital charges for certain 

securities that may be determined to 

have minimal credit risk. The 

Commission also notes that based upon 

a review of Forms 1–FR–FCM filed with 

the Commission, standalone FCMs 

generally have limited investments in 

the types of securities that would be 

subject to the internal models, and such 

haircuts are not material to most 

standalone FCM’s adjusted net capital. 

The Commission has considered the 

proposal and is adopting the 

amendments as proposed. 

4. Revisions to Definitions in Regulation 

1.17(b) 

The Commission proposed technical 

amendments to certain definitions in 

§ 1.17(b)(2) and (7) to reflect proposed 

changes the term ‘‘30.7 customer’’ and 

to remove surplus language due to other 

revisions to the regulations. No 

comments were received on these 

proposed changes and the Commission 

is adopting the proposal as final. 

Regulation 1.17(a) requires each FCM, 

in computing its minimum capital 

requirement, to include 8 percent of the 

risk margin required on futures and over 

the counter derivative instruments that 

the FCM carries in customer and nonVerDate Mar<15>2010 19:24 Nov 13, 2013 Jkt 232001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\14NOR2.SGM 14NOR2

TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68533 

182FIA Comment Letter at 2 (Jun 20, 2013). In 

addition, FIA expressed its agreement with the 

existing requirement for an FCM to maintain 

sufficient funds in segregation at all times to cover 

its total obligation to its customers. 183 Id. (citing 63 FR 2188, 2190 (Jan. 14, 1998)). 

customer accounts. Regulation 

1.17(b)(9) defines the term ‘‘over the 

counter derivative instruments’’ as those 

instruments set forth in 12 U.S.C. 4421. 

Section 740 of the Dodd-Frank Act, 

however, repealed 12 U.S.C. 4421. 

The Commission, however, has not 

revised its capital requirements and 

continues to require FCMs to include 

over the counter derivative instruments 

that it carries in customer and noncustomer accounts in their minimum 

capital computations. The Commission 

interprets § 1.17(b)(9) to require an FCM 

to include the types of derivative 

transactions or instruments that were 

previously set forth in 12 U.S.C. 4421 in 

its computation of its minimum capital 

requirement. The Commission also has 

directed staff to develop a rulemaking to 

amend Regulation 1.17(b)(9) to account 

for the repeal of 12 U.S.C. 4421. 

G. § 1.20: Futures Customer Funds To 

Be Segregated and Separately 

Accounted for 

Regulation 1.20 imposes obligations 

on FCMs, DCOs, and other depositories 

regarding the holding, and accounting 

for, customer funds. The Commission 

proposed to reorganize the structure of 

§ 1.20 by providing additional 

subparagraphs to the existing specific 

requirements, and by applying headings 

to the regulation to assist in the reading 

and understanding of the regulation. 

The Commission also proposed new 

provisions discussed below to enhance 

the protection of customer funds. 

1. Identification of Customer Funds and 

Due Diligence 

The Commission proposed to amend 

§ 1.20(a) to more clearly define the 

requirements regarding how FCMs must 

hold customer funds. Proposed 

paragraph (a) of § 1.20 requires an FCM 

to separately account for all futures 

customer funds and to segregate futures 

customer funds from its own funds. The 

proposed amendments further provide 

that an FCM shall deposit customer 

funds with a depository under an 

account name that clearly identifies the 

funds as futures customer funds and 

shows that the funds are segregated as 

required by the Act and Commission 

regulations. Proposed paragraph (a) also 

provides that an FCM must perform due 

diligence of each depository holding 

customer segregated funds (including 

depositories affiliated with the FCM), as 

required by new § 1.11, and to update 

its due diligence on at least an annual 

basis. 

Proposed paragraph (a) also provides 

that an FCM must maintain at all times 

in the separate account or accounts 

funds in an amount at least sufficient in 

the aggregate to cover its total 

obligations to all futures customers. 

Proposed paragraph (a) further provides 

that an FCM computes its ‘‘total 

obligations’’ to futures customers as the 

aggregate amount of funds necessary to 

cover the Net Liquidating Equities of all 

futures customers as set forth in 

paragraph § 1.20(i). 

The Commission stated in the 

Proposal that it is not sufficient for an 

FCM to be in compliance with its 

segregation requirement at the end of a 

business day, but fail to hold sufficient 

funds in segregation to meet the Net 

Liquidating Equities of each of its 

customers on an intra-day basis. This 

provision explicitly clarifies the 

Commission’s long-standing 

interpretation of existing statutory and 

regulatory requirements on how FCMs 

must hold customer funds. Section 

4d(a)(2) of the Act requires an FCM to 

treat and deal with all money, 

securities, and property received by the 

FCM to margin, guarantee, or secure the 

trades or contracts of any customer of 

the FCM, or accruing to such customer 

as the result of such trades or contracts, 

as belonging to such customer. Section 

4d(a)(2) further provides that funds 

belonging to a customer must be 

separately accounted for by the FCM 

and may not be commingled with the 

funds of the FCM or be used to margin 

or guarantee the trades or contracts, or 

extend the credit, of any customer or 

person other than the customer for 

whom the FCM holds the funds. The 

separate treatment of customer funds is 

further set forth in § 1.22 which 

provides that no FCM shall use, or 

permit the use of, the funds of one 

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. Therefore, the current 

statutory and regulatory regime requires 

an FCM to maintain at all times a 

sufficient amount of funds in 

segregation to cover the full amount of 

the firm’s obligations to its customers 

(i.e., the aggregate Net Liquidating 

Equity of each customer) to prevent the 

FCM from using the funds of one 

customer to margin or guarantee the 

commodity interests of other customers, 

or to extend credit to other customers. 

In its letter, the FIA stated that ‘‘[t]he 

Commission has stated, and [FIA] 

agrees, that FCMs are required to 

comply with the segregation provisions 

of the Act at all times.’’ 182 FIA further 

cited to a Commission 1998 rulemaking 

where the Commission stated the 

segregation rules require compliance at 

all times.183 If an FCM is not in 

compliance with its obligation to 

maintain a sufficient amount of funds in 

segregation to meet the Net Liquidating 

Equities of all of its customer on an 

intra-day basis, the FCM would be using 

the funds of one customer to margin 

positions of another customer, or to 

cover the losses of another customer in 

violation of section 4d of the Act and 

Commission regulations. 

The Commission did not receive any 

comments on revised paragraph (a) and 

is adopting the amendments as 

proposed. 

2. Permitted Depositories 

Proposed paragraph (b) of § 1.20 lists 

the permitted depositories for futures 

customer funds as any bank, trust 

company, DCO, or another FCM, subject 

to compliance with the FCM’s risk 

management policies and procedures 

required in new § 1.11. The Commission 

did not propose changes to the list of 

permitted depositories for FCMs. The 

Commission did not receive any 

comments on paragraph (b) and is 

adopting the amendments as proposed. 

3. Limitation on the Holding of Futures 

Customer Funds Outside of the United 

States 

Proposed paragraph (c) of § 1.20 

provides that an FCM may hold futures 

customer funds in depositories outside 

of the U.S. only in accordance with the 

current provisions of § 1.49. The 

Commission received no comments on 

paragraph (c) and is adopting the 

amendments as proposed. 

4. Acknowledgment Letters 

a. Background 

Proposed paragraph (d) of § 1.20 

would require an FCM to obtain a 

written acknowledgment from each 

bank, trust company, DCO, or FCM with 

which the FCM opens an account to 

hold futures customer funds, with the 

exception of a DCO that has 

Commission-approved rules providing 

for the segregation of such funds. 

Similarly, proposed § 1.20(g)(4) would 

require a DCO to obtain a written 

acknowledgment from each depository 

prior to or contemporaneously with the 

opening of a futures customer funds 

account. Paragraphs (d) and (g) further 

enumerate requirements for 

acknowledgment letters, expanding 

upon the requirements set forth in 

current § 1.20. Proposed § 1.26, which 

would require an FCM or DCO that 


TKELleY on DSK3SPTVN1PROD with RULES2
68534 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

184Section 22.5 applies the written 

acknowledgment requirements of §§ 1.20 and 1.26 

to FCMs and DCOs in connection with depositing 

Cleared Swaps Customer Collateral in an account at 

a permitted depository. 

185 74 FR 7838 (Feb. 20, 2009). 

186 75 FR 47738 (Aug. 9, 2010). 

187 77 FR 67866 (Nov. 14, 2012). 

188Letters were submitted by Schwartz & Ballen, 

FIA, LCH.Clearnet, MGEX, the Federal Reserve 

Banks, NYPC, CME, the Depository Bank Group, 

Eurex, RJ O’Brien, RCG, NFA, FCStone, ICI, and 

Katten-FIA. 

189 Depository Bank Group Comment Letter at 2 

(Feb. 15, 2013). 

190Eurex Comment Letter at 1 (Aug. 1, 2013). 

191CME Comment Letter at 7 (Feb. 15, 2013). 

192FCStone Comment Letter at 5 (Feb. 15, 2013). 

193MGEX Comment Letter at 3 (Feb. 18, 2013). 

194RCG Comment Letter at 7 (Feb. 12, 2013). 

195See Financial Conduct Authority, ‘‘Review of 

the client assets regime for investment business,’’ 

Consultation Paper CP13/5 (July 2013). 

invests customer funds in instruments 

described in § 1.25 to obtain an 

acknowledgment letter from the 

depository holding such instruments,184

and proposed § 30.7(c)(2), which would 

require an FCM to obtain an 

acknowledgment letter from each 

depository with which it opens an 

account to hold funds on behalf of its 

foreign futures and foreign options 

customers, are consistent with proposed 

§ 1.20(a) and (g)(4). The Commission 

proposed to repeal and replace 

§ 30.7(c)(2), but retain the requirement 

to obtain an acknowledgment letter in 

proposed § 30.7(d). 

The Commission has proposed 

amendments to the acknowledgment 

letter requirements in §§ 1.20, 1.26, and 

30.7 in three separate notices of 

proposed rulemaking, the first being 

published on February 20, 2009 (the 

‘‘Original Proposal’’).185 The Original 

Proposal set out specific representations 

that would have been required to be 

included in all acknowledgment letters 

in order to reaffirm and to clarify the 

obligations that depositories incur when 

accepting customer funds. 

In light of the comments on the 

Original Proposal, in 2010 the 

Commission re-proposed the 

amendments with several changes made 

in response to comments (the ‘‘First 

Revised Proposal’’).186 As part of the 

First Revised Proposal, the Commission 

proposed the required use of standard 

template acknowledgment letters, which 

were included as Appendix A to each of 

§§ 1.20 and 1.26, and Appendix E to 

part 30 of the Commission’s regulations 

(referred to herein as the ‘‘Template 

Letters’’). 

The Commission received nine 

comment letters on the First Revised 

Proposal. In general, the commenters 

were supportive of the First Revised 

Proposal and, in particular, were very 

supportive of requiring the use of 

Template Letters. It was noted by 

certain commenters that use of a 

standard letter would simplify the 

process of obtaining an 

acknowledgment letter. In addition, 

commenters were in agreement that 

uniformity of acknowledgment letters 

would provide consistency and greater 

legal certainty across the commodities 

and banking industries. 

The Commission proposed further 

refinements to the acknowledgment 

letter requirements in 2012 to address 

several issues that had arisen in the 

context of the MFGI and PFGI failures 

and their adverse impact on customers 

of those FCMs (‘‘Second Revised 

Proposal’’).187 In the Second Revised 

Proposal, the Commission also 

addressed comments it had received in 

response to the First Revised Proposal 

and incorporated related changes to the 

Template Letters. 

The Commission received 15 

comment letters related to the Template 

Letters in response to the Second 

Revised Proposal.188 Again, the 

commenters were generally supportive 

of the Commission’s proposal and, in 

particular, were supportive of the 

mandatory use of Template Letters. The 

Depository Bank Group commented that 

the Template Letters will help 

‘‘facilitate a more efficient process for 

the establishment and maintenance of 

customer segregated accounts’’ and 

clarify the rights and responsibilities of 

depositories.189 Eurex noted that it 

appreciated the ‘‘potential convenience’’ 

and increased certainty and 

transparency afforded by the Template 

Letters.190 CME supported the 

Commission’s efforts to ‘‘strengthen and 

standardize’’ the Template Letters.191

While many of the comments were 

supportive of the Template Letters, 

FCStone expressed the view that 

‘‘prescriptive rules’’ could drive 

participants out of the futures 

industry.192 MGEX commented that the 

required use of a Template Letter 

appeared to be a ‘‘dramatic shift’’ from 

the current requirements and 

questioned whether depositories would 

be willing to sign the Template Letter 

due to the ‘‘access and timing 

information requirements.’’ 193 RCG 

stated that early indications were that 

many depositories ‘‘with extensive 

experience servicing FCMs’’ are 

unwilling to sign the Template Letter 

and expressed concern that if such 

depositories refuse to sign, customer 

funds will become concentrated with 

depositories ‘‘less experienced in 

carrying FCM accounts.’’ 194

Regulation 1.20 in its current form 

already requires FCMs and DCOs to 

obtain acknowledgment letters, and the 

Commission believes that use of a 

standardized Template Letter will 

reduce negotiation costs, create 

efficiencies for Commission registrants 

as well as non-registrant depositories, 

provide greater legal certainty as to the 

rights and obligations of parties under 

the Act and CFTC regulations, and 

facilitate consistent treatment of 

customer funds across FCMs, DCOs, and 

depositories. In addition, the use of a 

standardized letter is the approach that 

has been proposed by the Financial 

Conduct Authority (‘‘FCA’’) in the 

United Kingdom (‘‘U.K.’’).195

The Commission has taken into 

consideration the comments and 

recommendations provided by FCMs, 

DCOs, and depositories, and it believes 

the final rules and Template Letters 

largely address the concerns they have 

expressed. The Commission’s response 

to comments on the major issues raised 

by commenters is discussed by subject 

matter, below. 

b. Technical Changes to the Template 

Letters 

Proposed paragraphs (d)(2) and 

(g)(4)(ii) of § 1.20 would require FCMs 

and DCOs, respectively, to use the 

Template Letter set forth in Appendix A 

to § 1.20 when opening a customer 

segregated account with a depository. In 

response to the comments, and in 

recognition of the different functions 

FCMs and DCOs perform in relation to 

customer funds, the Commission has 

determined to finalize different versions 

of the Template Letters for FCMs and 

DCOs. The Template Letter specific to 

FCMs is being adopted as Appendix A 

to § 1.20, and the Template Letter for 

DCOs is being adopted as Appendix B 

to § 1.20. Paragraph (g)(4)(ii) has been 

revised to require DCOs to use the 

Template Letter in Appendix B. 

Another change concerns the full 

account name as it appears in the 

Template Letter. Proposed § 1.20(a) and 

(g)(1) provides in part that customer 

funds shall be deposited ‘‘under an 

account name that clearly identifies 

them as futures customer funds and 

shows that such funds are segregated as 

required by sections 4d(a) and 4d(b) of 

the Act and [part 1 of the Commission’s 

regulations].’’ Schwartz & Ballen noted 

that operational constraints limit the 

number of characters available for 

account names, and requested 

additional flexibility with regard to 

account titles ‘‘so long as the accounts 

are clearly identified as custodial 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68535 

196Schwartz & Ballen Comment Letter at 8 (Feb. 

15, 2013). 

197Section 806(a) of the Dodd-Frank Act; see also 

Federal Reserve Banks Comment Letter at 1 (Feb. 

22, 2013). 

198Federal Reserve Banks Comment Letter at 2 

(Feb. 22, 2013). 

199 Id. at 1. 

200 Id. at 2. 

201For example, The Options Clearing 

Corporation is a registered DCO that has been 

designated as ‘‘systemically important’’ but is not 

a SIDCO as defined in § 39.2 of the Commission’s 

regulations. A Federal Reserve Bank would be 

required to segregate customer funds and provide 

an acknowledgment letter under § 1.20 with respect 

Continued 

accounts held for the benefit of the 

FCM’s customers.’’ 196

The Commission has modified the 

Template Letters to accommodate a 

depository’s account titling 

conventions. The Commission will 

permit a depository to abbreviate the 

account name when the full name as set 

forth in the Template Letter is too long 

for a depository’s operational system to 

include all characters, provided that (i) 

the Template Letter includes both the 

full and abbreviated account name(s) 

and (ii) the abbreviated account name 

clearly identifies the account as a 

Commission-regulated segregated/

secured account that holds customer 

funds (e.g., ‘‘segregated’’ may be 

shortened to ‘‘seg;’’ ‘‘customer’’ may be 

shortened to ‘‘cust;’’ ‘‘account’’ to 

‘‘acct;’’ etc.). 

FIA recommended several 

modifications to the Template Letters, 

including the addition of a clause to 

address banking practices used to 

provide third-party access to account 

information. As a result, the 

Commission has added the following 

language to the FCM Template Letter 

(and similar language to the other 

Template Letters): ‘‘The parties agree 

that all actions on your part to respond 

to the above information and access 

requests will be made in accordance 

with, and subject to, such usual and 

customary authorization verification 

and authentication policies and 

procedures as may be employed by you 

to verify the authority of, and 

authenticate the identity of, the 

individual making any such information 

or access request, in order to provide for 

the secure transmission and delivery of 

the requested information or access to 

the appropriate recipient(s).’’ 

In addition, the proposed Template 

Letters, as well as proposed §§ 1.20(d)(4) 

and (g)(4)(iv) and 30.7(d)(4), would 

require the depository to agree to 

provide a copy of the executed 

acknowledgment letter to the 

Commission at a specific email address. 

The email address has been deleted 

from the Template Letters, and the 

depository is now required to provide a 

copy to the Commission via electronic 

means in a format and manner 

determined by the Commission. The 

rule text has been revised accordingly 

(and § 1.20(g)(4)(iv) has been 

renumbered as § 1.20(g)(4)(iii)). 

Finally, the Commission has made 

minor technical revisions to the 

Template Letters in the form of 

grammatical and stylistic changes to 

clarify meaning and provide consistency 

among the letters. 

c. Federal Reserve Banks as Depositories 

Pursuant to § 806(a) of the DoddFrank Act, the Board of Governors of the 

Federal Reserve System (the ‘‘Board’’) 

may authorize a Federal Reserve Bank to 

establish and maintain an account for 

systemically important DCOs 

(‘‘SIDCOs’’) that have been designated 

by the Financial Stability Oversight 

Council (‘‘FSOC’’) as systemically 

important financial market utilities 

(‘‘Designated FMUs’’).197 In their 

comment letter, the Federal Reserve 

Banks stated: ‘‘Absent clarification, the 

[Federal] Reserve Banks must assume 

that we would be treated as depository 

institutions under the proposed rules if 

we were to hold Designated FMU 

customer funds.’’ The Federal Reserve 

Banks commented that they do not 

believe that they can accept all of the 

terms of the Template Letters given the 

‘‘unique nature of the [Federal] Reserve 

Banks and of Designated FMUs.’’ 198

The Federal Reserve Banks raised 

specific concerns with two terms of the 

Template Letters: (1) The provision 

authorizing the Commission to order the 

immediate release of customer funds; 

and (2) the provision that allows a 

depository to presume legality for any 

withdrawal of customer funds, provided 

the depository has no knowledge of, or 

could not reasonably know of, any 

violation of the law. The Federal 

Reserve Banks suggested that under 

‘‘exceptional circumstances, such as a 

prospective insolvency of the SIDCO 

that threatens customer funds,’’ a 

Commission-authorized withdrawal 

would need to be considered in the 

context of a larger coordinated effort, 

which would include FSOC.199 The 

Federal Reserve Banks further asserted 

that, due to their dual roles as both 

supervisory bodies and providers of 

financial services, coupled with the 

Board prohibition on sharing 

supervisory information with personnel 

performing financial services, the 

standard of liability leaves them in the 

‘‘untenable position of not being able to 

rely on the presumption of legality.’’ 200

The Commission is adopting, as 

proposed, § 1.20(g)(2), which confirms 

that the Federal Reserve Banks are 

depositories for purposes of section 4d 

of the Act and Commission regulations 

thereunder. Accordingly, a Federal 

Reserve Bank would be required to 

execute a written acknowledgment 

when it accepts customer funds from a 

SIDCO or other DCO for which it holds 

customer funds. However, the 

Commission recognizes the unique role 

of the Federal Reserve Bank and is 

therefore modifying proposed 

§ 1.20(g)(4)(ii) to provide an exception 

for Federal Reserve Banks from the 

requirement that depositories accepting 

customer funds from DCOs execute the 

Template Letter in Appendix B to 

§ 1.20. Rather, a Federal Reserve Bank 

will be required only to execute a 

written acknowledgment that: (1) It was 

informed that the customer funds 

deposited therein are those of customers 

who trade commodities, options, swaps, 

and other products and are being held 

in accordance with the provisions of 

section 4d of the Act and Commission 

regulations thereunder; and (2) it agrees 

to reply promptly and directly to any 

request from the director of the Division 

of Clearing and Risk or the director of 

the Division of Swap Dealer and 

Intermediary Oversight, or any 

successor divisions, or such directors’ 

designees, for confirmation of account 

balances or provision of any other 

information regarding or related to an 

account. 

The Commission is modifying 

proposed § 1.20(g)(2) from ‘‘A [DCO] 

may deposit futures customer funds 

with a bank or trust company, which 

shall include a Federal Reserve Bank 

with respect to deposits of a 

systemically important [DCO]’’ to ‘‘A 

[DCO] may deposit futures customer 

funds with a bank or trust company, 

which may include a Federal Reserve 

Bank with respect to deposits of a [DCO] 

that is designated by the Financial 

Stability Oversight Council to be 

systemically important.’’ Changing the 

phrase ‘‘which shall include a Federal 

Reserve Bank’’ to ‘‘which may include 

a Federal Reserve Bank,’’ avoids 

possible ambiguity as to whether the 

DCO is required to deposit futures 

customer funds with a Federal Reserve 

Bank. By revising the description of the 

DCO, the Commission has effectively 

captured any DCO, such as one that is 

also registered with the SEC as a 

clearing agency and has been designated 

to be systemically important in that 

capacity, which could hold customer 

funds at a Federal Reserve Bank.201


TKELleY on DSK3SPTVN1PROD with RULES2
68536 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

to any customer account subject to section 4d of the 

Act and opened by The Options Clearing 

Corporation in its capacity as a DCO. 

202Eurex Comment Letter at 1 (Aug. 1, 2013). 

203 Id. at 2. 

204 Id. 

205FIA Comment Letter at 40 (Feb. 15, 2013). 

206 Depository Bank Group Comment Letter at 10. 

207 Id. at 11; Schwartz & Ballen Comment Letter 

at 2 (Feb. 15, 2013); Katten-FIA Comment Letter at 

2 (Aug. 2, 2013). 

208NYPC Comment Letter at 2 (Feb. 15, 2013). 

209 Depository Bank Group Comment Letter at 10 

(Feb. 15, 2013). 

210Federal Reserve Banks Comment Letter at 1 

(Feb. 22, 2013). 

211 Id. at 11; Katten-FIA Comment Letter at 2 

(Aug. 2, 2013); and Schwartz & Ballen Comment 

Letter at 5 (Feb. 15, 2013). 

212CME Comment Letter at 7 (Feb. 15, 2013). 

213FIA Comment Letter at 40 (Feb. 15, 2013). 

214Schwartz & Ballen Comment Letter at 4 (Feb. 

15, 2013). 

215 Depository Bank Group Comment Letter at 13 

(Feb. 15, 2013); Katten-FIA Comment Letter at 2 

(Aug. 2, 2013). 

216 Depository Bank Group Comment Letter at 13 

(Feb. 15, 2013). 

217RJ O’Brien Comment Letter at 11 (Feb. 15, 

2013). 

d. Foreign Depositories 

In its comment letter, Eurex 

questioned whether foreign depositories 

could fully comply with the proposed 

regulations and execute the Template 

Letters, noting the probability of ‘‘strong 

resistance’’ by foreign depositories to 

providing the Commission with readonly electronic access to account 

information.202 Eurex pointed to the 

‘‘detailed nature of the representations’’ 

in the Template Letters and further 

expressed its belief that foreign 

depositories would not be permitted to 

legally execute the Template Letters.203

Eurex recommended that the 

Commission consider alternative 

methods for achieving the goal of the 

Template Letters, such as authorizing 

Commission staff to ‘‘accept alternate 

language’’ from foreign depositories.204

FIA commented that it had not 

discussed the Template Letters with 

foreign depositories and thus did not 

know whether the Template Letters 

would ‘‘cause concern’’ under a foreign 

jurisdiction’s laws.205

The Commission appreciates these 

perspectives related to foreign 

depositories, but notes that the 

comments are of a general nature and do 

not provide any specific examples to 

support the commenters’ assertions. The 

Commission did not receive a comment 

letter from any foreign depository 

holding customer funds. 

As noted above, the FCA recently 

proposed the use of template 

acknowledgment letters for purposes of 

satisfying FCA acknowledgment letter 

requirements. The proposed letters are 

similar in many respects to the 

Template Letters the Commission is 

adopting herein, and FCA regulations 

would require both U.K. and non-U.K. 

depositories to execute the template 

acknowledgment letters. 

The Commission recognizes that there 

may be valid reasons why some foreign 

depositories would require 

modifications to the Template Letters. 

In such circumstances, the Commission 

would consider alternative approaches, 

including no-action relief, on a case-bycase basis. 

e. Release of Funds Upon Commission 

Instruction 

As proposed, the Template Letters 

would require a depository to release 

funds immediately upon instruction 

from the director of the Division of 

Clearing and Risk, the director of the 

Division of Swap Dealer and 

Intermediary Oversight, or any 

successor divisions, or such directors’ 

designees. The purpose of this provision 

was to enable the Commission to 

expeditiously carry out measures to 

protect customer funds in exceptional 

circumstances, such as the imminent 

bankruptcy of an FCM. Commenters 

expressed concerns about this 

requirement, citing liability that might 

arise from a depository acting or failing 

to act ‘‘immediately,’’ 206 and the need 

for the depository to implement proper 

security and authorization procedures 

in connection with acting upon 

instructions from the Commission rather 

than the account holder.207

With respect to DCOs in particular, 

NYPC pointed out that a DCO normally 

holds customer funds in a segregated 

account without further subdivision by 

customer or clearing member and, as a 

result, a DCO would effectuate a transfer 

of customer funds from a defaulting 

clearing member to a non-defaulting 

clearing member by book entry on the 

DCO’s books and records.208 NYPC 

noted that no transfer of funds may be 

required if the DCO holds the funds at 

the same depository. 

The Depository Bank Group 

commented that the term 

‘‘immediately’’ may subject a depository 

to potential claims by FCMs, DCOs or 

the Commission in the event of a delay 

in the transfer of customer funds, even 

if such delay is the result of reasonable 

actions or events beyond the control of 

the depository.209 As previously noted, 

the Federal Reserve Banks commented 

that during such ‘‘exceptional 

circumstances’’ in which instructions to 

transfer funds from a SIDCO’s account 

would likely be made, the FSOC would 

be involved.210 The Depository Bank 

Group, FIA, and Schwartz & Ballen all 

commented that the proposal is 

‘‘inconsistent’’ with a depository’s 

security policies and procedures.211

CME requested that the Commission 

clarify the exceptional circumstances 

that would give rise to the 

Commission’s request for an immediate 

release of customer funds and the 

impact such an instruction could have 

on the timely payment of obligations to 

a DCO.212

After considering the concerns raised 

by the commenters, the Commission has 

determined not to require depositories 

to agree to release or transfer customer 

funds upon its instruction. The 

Commission notes that in exceptional 

circumstances such as the imminent 

bankruptcy of an FCM, Commission 

staff would be in regular 

communication with the FCM, its 

DSRO, DCOs, and depositories in an 

effort to protect customer funds. 

f. Read-Only Access and Information 

Requests 

Proposed paragraphs (d)(3) and 

(g)(4)(iii) of § 1.20, proposed 

§ 30.7(d)(3), and the proposed Template 

Letters, including the Template Letters 

for § 1.26 investments in money market 

mutual funds, would require 

depositories to provide the Commission 

with 24-hour, read-only electronic 

access to accounts holding customer 

funds. The Commission received eight 

comment letters on this requirement. 

As a preliminary matter, FIA noted 

that significant time for development 

would be necessary to implement such 

a requirement.213 Schwartz & Ballen 

observed that the read-only access 

approach conflicts with bank 

procedures used to provide account 

information to third parties, which 

typically involve allowing the customer 

to grant access to a third party, rather 

than the bank doing so.214 The 

Depository Bank Group and FIA also 

pointed out that Commission staff 

would be required to comply with the 

depository’s security policies and 

procedures.215 The Depository Bank 

Group recommended that the Template 

Letters expressly authorize the 

depository to provide access to the 

Commission and suggested language 

that could be incorporated into the 

Template Letters.216 RJ O’Brien agreed 

with the Depository Bank Group’s 

position on read-only access.217

FCStone noted that time differences 

and geographic locations may make it 

difficult for foreign commodity brokers 

to satisfy the 24-hour-a-day requirement 

and respond promptly to requests made 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68537 

218FCStone Comment Letter at 5 (Feb. 15, 2013). 

219 Depository Bank Group Comment Letter at 13 

(Feb. 15, 2013). 

220NYPC Comment Letter at 2 (Feb. 15, 2013). 

221Schwartz & Ballen Comment Letter at 4 (Feb. 

15, 2013). 

222LCH.Clearnet Comment Letter at 3 (Jan. 25, 

2013). 

223NFA Comment Letter at 6 (Feb. 15, 2013). 

224 Id. 

225 Id. at 7. 

226Proposed §§ 1.20(d)(5) and (g)(4)(v) and 

30.7(d)(5) would require the depository to reply 

promptly and directly to ‘‘the Commission’s’’ 

requests, and the authority to make such requests 

was delegated to the director of the Division of 

Swap Dealer and Intermediary Oversight and the 

director of the Division of Clearing and Risk under 

proposed § 140.91(a)(7) and (11). The proposed 

Template Letters would require the depository to 

agree ‘‘to respond promptly and directly to requests 

for confirmation of account balances and other 

account information from an appropriate officer, 

agent, or employee of the CFTC’’ and ‘‘immediately 

upon instruction by the director of the Division of 

Swap Dealer and Intermediary Oversight of the 

CFTC or the director of the Division of Clearing and 

Risk of the CFTC, or any successor divisions, or 

such directors’ designees . . . provide any and all 

information regarding or related to the Funds or the 

Accounts as shall be specified in such instruction 

and as directed in such instruction.’’ The 

Commission is revising the rule text and the 

Template Letters so that all such requests will come 

from the director of the Division of Swap Dealer 

and Intermediary Oversight or the director of the 

Division of Clearing and Risk, or any successor 

divisions, or such directors’ designees. 

227To assist a depository in verifying authority 

and authenticating identity in connection with a 

request for information or electronic access, the 

Commission intends to post on its Web site an upto-date list of names (including title and contact 

information) of the directors of the Division of 

Swap Dealer and Intermediary Oversight and the 

Division of Clearing and Risk, or any successor 

divisions, and the directors’ designees, if any, for 

the relevant purpose. 

by the Commission.218 The Depository 

Bank Group commented that often a 

bank denies access during routine 

maintenance to technology systems, and 

asked that the Commission remove the 

‘‘24-hour’’ requirement.219

NYPC commented that, because DCOs 

hold customer funds on behalf of all 

their clearing members in omnibus 

accounts that are not further subdivided 

by each customer, the account 

information to which the Commission 

would have access at a DCO’s 

depository ‘‘would not provide the level 

of detail that would permit 

reconciliation between either the DCO’s 

FCM clearing members or those clearing 

members’ underlying customers.’’ 220 In 

addition, Schwartz & Ballen contended 

that the requirement would not achieve 

the Commission’s goal of quickly 

identifying discrepancies between FCMreported balances and balances at a 

depository because the depository 

typically posts all credits and debits 

after the close of business.221

LCH.Clearnet recommended that the 

Commission consider ‘‘alternative 

approaches’’ for routine access to 

account balance information at 

depositories holding customer funds. 

For central banks, LCH.Clearnet 

suggested that the Commission should 

accept confirmation of balance 

information directly from the central 

bank in a form acceptable to the central 

bank, but it did not explain why central 

banks should be treated differently than 

other depositories. For other 

depositories, LCH.Clearnet believes the 

Commission should consider ‘‘following 

the lead of the [NFA].’’ 222

NFA pointed out that its board of 

directors had adopted a financial 

requirements rule in August 2012.223

NFA explained that instead of adopting 

a read-only access provision of its own 

in this rule, it instead chose to use, in 

conjunction with CME, an automated 

daily segregation confirmation system to 

monitor customer segregated and 

secured amount accounts and their 

balances.224 NFA requested that the 

Commission rescind its proposed readonly access requirement.225

With the goal of achieving the highest 

degree of customer protection, the 

Commission has determined to adopt, 

with certain modifications, the 

requirement that a depository agree to 

provide the Commission with read-only 

access to accounts maintained by an 

FCM. Regulations 1.20(d)(3) and 

30.7(d)(3) require the depository to 

agree to provide the Commission with 

‘‘the technological connectivity, which 

may include provision of hardware, 

software, and related technology and 

protocol support, to facilitate direct, 

read-only electronic access to 

transaction and account balance 

information.’’ In the Template Letters, 

the parties further acknowledge and 

agree that the connectivity has either 

been provided (in the case of a new 

letter that covers existing accounts) or 

will be provided promptly following the 

opening of the account(s) (with respect 

to new accounts). However, the 

Commission is not requiring read-only 

electronic access for an FCM’s DSRO, as 

proposed. The Commission was advised 

by the DSROs that they intend to rely 

on the NFA and CME automated daily 

segregation confirmation system. 

The Commission does not anticipate 

that its staff would access FCM accounts 

on a regular basis to monitor account 

activity; rather, staff would make use of 

the read-only access only when 

necessary to obtain account balances 

and other information that staff could 

not obtain via the NFA and CME 

automated daily segregation 

confirmation system, or otherwise 

directly from the depositories, as 

discussed below. In this regard, the 

CME and NFA will provide the 

Commission on a daily basis with the 

account balances reported to them by 

each depository holding customer 

funds, under the CME and NFA’s daily 

confirmation process. In addition, as 

discussed in section N below, each FCM 

that completes a daily Segregation 

Schedule, Secured Amount Schedule, 

and/or Cleared Swaps Segregation 

Schedule will be required to file such 

schedules with the Commission on a 

daily basis. The Commission anticipates 

that the combination of receipt of daily 

account balances reported by 

depositories and the Commission’s 

ability to confirm account balances and 

transactions directly with depositories 

will diminish the need to rely upon 

direct electronic access to account 

information at depositories. 

With respect to depositories holding 

customer funds in accounts maintained 

by a DCO, the Commission has decided 

not to adopt the electronic access 

requirement. Given that DCOs hold 

omnibus customer accounts that are not 

subdivided by clearing member or 

individual customer, read-only access to 

a DCO’s customer account would not 

provide the kind of information that 

would identify inaccuracies in FCM 

reporting. Accordingly, proposed 

§ 1.20(g)(4)(iii), which would require a 

DCO to deposit futures customer funds 

only with a depository that provides 

read-only access to the Commission, is 

not being adopted, and the remaining 

subparagraphs of § 1.20(g)(4) are 

renumbered accordingly. 

The Commission also is adopting 

§§ 1.20(d)(6), 1.20(g)(4)(iv), and 

30.7(d)(6), which require an FCM or 

DCO to deposit customer funds only 

with a depository that agrees to reply 

promptly and directly to any request 

from the director of the Division of 

Swap Dealer and Intermediary 

Oversight, the director of the Division of 

Clearing and Risk, or any successor 

divisions, or such directors’ 

designees,226 (or, in the case of an FCM, 

an appropriate officer, agent or 

employee of the FCM’s DSRO), for 

confirmation of account balances or 

provision of any other information 

regarding or related to an account, 

without further notice to or consent 

from the FCM or DCO.227 For DCOs, the 

Commission believes that this ability, in 

addition to the daily reporting of 

various accounts by customer origin 

pursuant to § 39.19(c)(1), will enable it 

to verify DCO account balances with a 

depository as necessary. 


TKELleY on DSK3SPTVN1PROD with RULES2
68538 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

228Schwartz & Ballen Comment Letter at 7 (Feb. 

15, 2013). 

229LCH.Clearnet Comment Letter at 4 (Jan. 25, 

2013). 

230NYPC Comment Letter at 4 (Feb. 15, 2013). 

231The acknowledgment letter must be executed 

upon the opening of the account, regardless of 

when customer funds are deposited in the account. 

232 Depository Bank Group Comment Letter at 3 

(Feb. 15, 2013). See also RJ O’Brien Comment Letter 

at 11 (Feb. 15, 2013). 

233 Depository Bank Group Comment Letter at 5 

(Feb. 15, 2013). See also Katten-FIA Comment 

Letter at 2 (Aug. 2, 2013); Schwartz & Ballen 

Comment Letter at 6 (Feb. 15, 2013); and CME 

Comment Letter at 7 (Feb. 15, 2013). 

234 Depository Bank Group Comment Letter at 3 

(Feb. 15, 2013). 

235 Id. at 5. 

236FIA Comment Letter at 40 (Feb. 15, 2013). 

237Schwartz & Ballen Comment Letter at 6 (Feb. 

15, 2013). 

g. Requirement To File New 

Acknowledgment Letters 

Proposed paragraphs (d)(7) and 

(g)(4)(vii) of § 1.20 and proposed 

§ 30.7(d)(7) would require FCMs and 

DCOs to file amended acknowledgment 

letters with the Commission upon a 

change to a depository’s name or other 

information specified in the regulation. 

The Commission received three 

comments on this requirement. 

Schwartz & Ballen recommended that 

the Commission remove this 

requirement from the Template Letters 

and instead include ‘‘binding effect’’ 

language to ensure that the 

counterparties remain subject to the 

terms of the acknowledgment letter even 

if a party’s name has changed.228

LCH.Clearnet recommended a sixmonth timeframe after the publication 

of these rules by which DCOs and FCMs 

must obtain acknowledgment letters.229

NYPC commented that the proposed 

requirements impose ‘‘an onerous 

periodic validation process with 

depositories’’ and, given this, it 

suggested that depositories provide 

written notice to a DCO of a name or 

address change no later than 30 days 

after any such change in order to permit 

a DCO to execute a new Template 

Letter.230

The Commission believes that 

acknowledgment letters should be as 

current and up-to-date as possible in 

order to maintain the clear legal status 

of the customer account, which will 

better protect customers in the event of 

an FCM failure. Accordingly, the 

Commission is adopting (renumbered) 

§§ 1.20(d)(8) and (g)(4)(vi) and 30.7(d)(8) 

as proposed, except that instead of 

providing for an ‘‘amended’’ letter, the 

regulation requires that a ‘‘new’’ letter 

be executed. The purpose of this 

technical change is to avoid problems in 

locating the accounts covered by a 

single letter that has been amended 

multiple times to reflect various 

changes. The Commission expects that a 

depository would notify account 

holders of a name change as a matter of 

practice and does not believe that it is 

too burdensome to expect a DCO or 

FCM to be aware of such changes. Any 

new acknowledgment letter reflecting a 

change enumerated in the regulation 

must be executed within 120 days of 

such changes, and then filed with the 

Commission within three business days 

of executing the new letter. 

The Commission also is adopting 

(renumbered) §§ 1.20(d)(7) and (g)(4)(v) 

and 30.7(d)(7), which require an FCM or 

DCO to submit a copy of the 

acknowledgment letter to the 

Commission within three business days 

of the opening of an account or 

obtaining a new acknowledgment letter 

for an existing account; and 

§§ 1.20(d)(4) and (g)(4)(iii) and 

30.7(d)(4), which require an FCM or 

DCO to deposit customer funds only 

with a depository that agrees to provide 

a copy of the acknowledgment letter to 

the Commission (and, in the case of an 

FCM, the FCM’s DSRO) within the same 

time frame.231 The Commission is, 

however, giving FCMs, DCOs, and 

depositories 180 days from the effective 

date of the final rules to replace existing 

acknowledgment letters with new ones 

that conform to the Template Letters. 

As an additional matter, the 

Commission advises that it expects an 

FCM or DCO to follow customary 

authorization verification and signature 

authentication policies and procedures 

to ensure that an acknowledgment letter 

is executed by an individual authorized 

to bind the depository to the terms of 

the letter, and that the signature that 

appears on the letter is authentic. For 

example, an FCM or DCO may request 

from the depository a list of authorized 

signatories, a duly executed power of 

attorney, or other such documentation. 

h. Standard of Liability 

The proposed Template Letters would 

provide that a depository ‘‘may 

conclusively presume that any 

withdrawal from the Account(s) and the 

balances maintained therein are in 

conformity with the Act and CFTC 

regulations without any further inquiry, 

provided that [the depository has] no 

notice of or actual knowledge of, or 

could not reasonably know of, a 

violation of the Act or other provision 

of law by [the FCM or DCO]; and [the 

depository] shall not in any manner not 

expressly agreed to [in the letter] be 

responsible for ensuring compliance by 

[the FCM or DCO] with the provisions 

of the Act and CFTC regulations.’’ 

The Depository Bank Group 

commented that this ‘‘standard of 

liability’’ provision would impose a 

burden beyond that currently expected 

of depository institutions.232 In this 

regard, the Depository Bank Group 

asserted that the phrase ‘‘violation of the 

Act or other provision of law’’ 

encompasses much more than section 

4d of the Act and would effectively 

require that the depository monitor and 

ensure the FCM’s or DCO’s compliance 

with all other laws, even those 

unrelated to the deposit of customer 

funds.233 The Depository Bank Group 

further contended that the proposed 

standard, ‘‘could not reasonably know 

of a violation’’ would likely be read to 

require depositories to ‘‘perform some 

undefined level of diligence’’ which 

would be highly problematic.234 The 

Depository Bank Group also stated that 

this requirement would likely delay 

transfers or withdrawals, and result in 

depositories passing on related costs to 

FCMs and DCOs and, in turn, to their 

clients, although the Depository Bank 

Group did not quantify the costs.235 FIA 

similarly expressed concern that the 

requirement could cause delays and 

increased costs, again, without 

providing specific details and 

quantifying costs.236

Schwartz & Ballen asserted that banks 

have no ability to determine what uses 

an FCM is making of funds it withdraws 

from the account.237 As noted above, the 

Federal Reserve Banks, which may act 

as depositories for Designated FMUs, 

commented that the ‘‘actual knowledge’’ 

standard, which typically imputes 

knowledge to a legal person as a whole, 

is not feasible for them because of the 

Board policy to not share supervisory 

information with Federal Reserve Bank 

personnel performing financial services. 

In response to concerns expressed by 

commenters, the Commission clarifies 

that it does not intend to use the 

Template Letters as means to expand 

the scope of a depository’s liability to 

FCM or DCO account holders, or to alter 

the responsibility that an FCM or DCO 

bears for its own compliance with the 

customer funds segregation 

requirements under the Act and 

Commission regulations. The use of 

standardized acknowledgment letters is 

intended to promote a uniform 

understanding among FCMs, DCOs, and 

depositories as to their obligations 

under the Act and Commission 

regulations with respect to the proper 

treatment of customer funds. In light of 

the public comments, the Commission 

is revising the language in the Template 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68539 

238Section 4d(b) of the Act explicitly provides 

that it is unlawful for any clearing agency of a 

contract market and any depository that has 

received customer funds to hold, dispose of, or use 

any such funds as belonging to the depositing FCM 

or any person other than the customers of such 

FCM. See also section 4d(f)(6) of the Act (applying 

the same requirement to Cleared Swaps Customer 

Collateral). 

239See, e.g., CFTC Interpretative Ltr. No. 79–1, 

[1977–1980 Transfer Binder] Comm. Fut. L. Rep. 

(CCH) ¶20,835 (May 29, 1979) at page 2. As long 

ago as 1979, the Commission found that ‘‘if a bank, 

with prior notice, permits or acquiesces in the 

withdraw [sic] or use of customers’ funds by a 

futures commission merchant for an unlawful 

purpose, the bank would violate or be aiding and 

abetting a violation of the Act.’’ 

240See CFTC Interpretative Ltr. No. 86–9, [1986– 

1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) 

¶23,015 (April 21, 1986) (limiting a bank’s 

treatment of customer margin funds ‘‘in particular 

circumstances by reason of what it knows or 

reasonably should know of a violation of the Act 

or other provision of law that would preclude it 

from obtaining rights to such funds superior to 

those of one or more customers of the defaulting 

FCM.’’). 

241 Id. See also CFTC Interpretative Statement. 

No. 85–3 [1984–1986 Transfer Binder] Comm. Fut. 

L. Rep. (CCH) ¶22,703 (Aug. 12, 1985). A DCO’s 

rights with respect to the use of customer margin 

funds may be limited in particular circumstances by 

reason of the clearing organization’s knowledge of 

or participation in a violation of the Act or other 

provision of law that precludes it from obtaining 

rights to such funds superior to those of one or 

more customers of the defaulting clearing member. 

The letter provides that a DCO could be subject to 

aiding and abetting liability under section 13(a) of 

the Act if the DCO knowingly participates in a 

violation of the Act. 

242See CFTC Interpretative Ltr. No. 79–1 (stating 

‘‘if a bank subsequently becomes aware of an 

unauthorized withdrawal or use of customers’ 

funds by an FCM, we would expect the bank to 

notify the Commission immediately’’). 

Letters to more precisely articulate the 

intended scope of the depository’s 

responsibility. 

The provision, as adopted, reads as 

follows: ‘‘You [the depository] may 

conclusively presume that any 

withdrawal from the Account(s) and the 

balances maintained therein are in 

conformity with the Act and CFTC 

regulations without any further inquiry, 

provided that, in the ordinary course of 

your business as a depository, you have 

no notice of or actual knowledge of a 

potential violation by us of any 

provision of the Act or CFTC regulations 

that relates to the segregation of 

customer funds; and you shall not in 

any manner not expressly agreed to [in 

the letter] be responsible to us [the FCM 

or DCO] for ensuring compliance by us 

with the provisions of the Act and CFTC 

regulations; however, the 

aforementioned presumption does not 

affect any obligation you may otherwise 

have under the Act or CFTC 

regulations.’’ Changes from the 

proposed language are discussed below. 

The Depository Bank Group 

recommended inserting the phrase ‘‘in 

the ordinary course of your business as 

a depository,’’ and the Commission has 

accepted this recommendation to clarify 

the context in which the presumption of 

the FCM’s or DCO’s compliance is 

effective. As proposed, the presumption 

would be effective so long as the 

depository has ‘‘no notice of or actual 

knowledge of, or could not reasonably 

know of, a violation.’’ Given the 

concerns expressed by commenters as to 

the implications of the ‘‘reasonably 

know’’ standard, the Commission has 

determined to eliminate that clause in 

the final Template Letters. 

In considering the various 

circumstances in which the conclusive 

presumptions would no longer be 

effective, the Commission has 

determined that the proposed reference 

to notice or actual knowledge of a 

‘‘violation,’’ does not adequately capture 

all of the relevant circumstances. This is 

because the depository might receive 

information that calls into question the 

conduct of the FCM or DCO account 

holder, but it might not be apparent 

whether or not the activity rises to the 

level of being an actual violation of the 

law. Indeed, some actions will not be 

deemed to be ‘‘violations’’ until a 

judicial decision is rendered. As a 

result, the Commission has revised the 

language to refer to a ‘‘potential 

violation’’ so as not to inadvertently 

exclude circumstances which would 

warrant further inquiry by a depository. 

The Commission agrees that the broad 

reference to ‘‘the Act and CFTC 

regulations’’ should be narrowed with 

respect to the description of the 

potential violation. Therefore, the 

Commission is adopting the Depository 

Bank Group’s suggestions that the 

reference to the violation specify that it 

is limited to ‘‘any provision of the Act 

or the CFTC regulations that relates to 

the segregation of customer funds.’’ The 

Commission has made a similar change 

in the 30.7 Template Letters, referring to 

‘‘any provision of the Act or Part 30 of 

the CFTC regulations that relates to the 

holding of customer funds.’’ This more 

precisely identifies the legal 

requirements that are the subject of the 

parties’ obligations and the 

acknowledgment letter as a whole. 

As an additional matter, the 

Commission has added to the standard 

of liability provision the following 

proviso: ‘‘however, the aforementioned 

presumption does not affect any 

obligation you may otherwise have 

under the Act or CFTC regulations.’’ 

This statement affirms the depository’s 

understanding that its statutory and 

regulatory obligations with respect to 

the customer funds on deposit are not 

limited by the presumption upon which 

it relies in its dealings with FCM or 

DCO account holders. 

The Commission notes that a 

depository’s obligation to comply with 

the segregation requirements under 

section 4d of the Act is explicitly 

imposed upon depositories by section 

4d(b) of the Act,238 and legal precedent 

has established a standard of liability to 

which the Commission holds 

depositories and which is not 

dependent upon affirmation in the 

Template Letters. The Commission 

reaffirms its long-held position that the 

depository will be held liable for the 

improper transfers of customer funds by 

an FCM or DCO if it knew or should 

have known that the transfer was 

improper.239

The Commission recognizes that a 

depository’s treatment of customer 

funds may be limited in particular 

circumstances on the basis of what it 

knows or reasonably should know of a 

violation of the Act that would preclude 

it from obtaining rights to such funds 

superior to those of one or more 

customers of the defaulting FCM.240

Such a violation could occur, for 

example, in circumstances in which the 

depository received particular margin 

funds with actual knowledge, or in 

circumstances in which it is reasonable 

to conclude that the depository should 

have known, that the depositing FCM or 

DCO has breached its duty under 

section 4d. The depository’s 

participation in such use of customer 

funds could subject it to liability for 

violating section 4d or aiding and 

abetting a violation of the Act under 

section 13(a) of the Act (7 U.S.C. 

13c).241

The Commission emphasizes that 

while the depository has no affirmative 

obligation to police or monitor an FCM 

or DCO account holder’s compliance 

with the Act or Commission regulations, 

the depository cannot ignore signs of 

wrongdoing. Should a depository know 

or suspect that funds held in a customer 

account have been improperly 

withdrawn or otherwise improperly 

used in violation of section 4d of the 

Act or the Commission’s regulations 

related to segregation of customer funds, 

the Commission expects the depository 

to immediately report its concern to the 

Division of Swap Dealer and 

Intermediary Oversight, the Division of 

Clearing and Risk, the Division of 

Enforcement, or the Commission’s 

Whistleblower Office.242

i. Liens 

The proposed Template Letters would 

include the following language: 

‘‘Furthermore, [the depository] 


TKELleY on DSK3SPTVN1PROD with RULES2
68540 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

243Schwartz & Ballen Comment Letter at 6–7 

(Feb. 15, 2013). 

244 Id. 

245FCStone Comment Letter at 4. 

246 Id. 

247 Id. at 5. 

248 Id. 

249 Depository Bank Group Comment Letter at 7 

(Feb. 15, 2013). 

250 Id. 

251 Id. 

252Comment letter from David A. Marshall, 

Federal Reserve Bank of Chicago, dated September 

8, 2010. 

253 Katten-FIA Comment Letter at 2 (Aug. 2, 

2013). 

254 Id. 

255NYPC Comment Letter at 3 (Feb. 15, 2013). 

acknowledge[s] and agree[s] that such 

Funds may not be used by [the 

depository] or by [the FCM or DCO] to 

secure or guarantee any obligations that 

[the FCM or DCO] might owe to [the 

depository], nor may they be used by 

[the FCM or DCO] to secure credit from 

[the depository]. [The depository] 

further acknowledge[s] and agree[s] that 

the Funds in the Account(s) shall not be 

subject to any right of offset or lien for 

or on account of any indebtedness, 

obligations or liabilities [the FCM or 

DCO] may now or in the future have 

owing to [the depository]. This 

prohibition does not affect [the 

depository’s] right to recover funds 

advanced in the form of cash transfers 

[the depository] make[s] in lieu of 

liquidating non-cash assets held in the 

Account(s) for purposes of variation 

settlement or posting initial (original) 

margin.’’ This language is consistent 

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

states: ‘‘It shall be unlawful for any 

person, including but not limited to . . . 

any depository, that has received any 

money, securities, or property for 

deposit in a separate account as 

provided in [section 4d(a)(2) of the Act], 

to hold, dispose of, or use any such 

money, securities, or property as 

belonging to the depositing [FCM] or 

any person other than the customers of 

such [FCM].’’ 

Schwartz & Ballen asserted that 

because many FCMs hold only cash 

assets in the accounts, the language in 

the letter should be expanded to permit 

banks to recover funds they advance 

that result in overdrafts in the 

accounts.243 Schwartz & Ballen further 

stated that the failure to permit banks to 

recover such advances whether or not 

there are non-cash assets in the account 

will likely lead to banks incurring 

losses.244 FCStone elaborated on this 

issue, explaining that a customer 

receives a margin call through an 

account statement, which is transmitted 

overnight, and the customer wires funds 

the following day.245 The DCO, 

however, automatically drafts the funds 

from the FCM’s account at 9:00 a.m. on 

the basis of a depository’s intraday 

daylight overdraft.246 Without granting a 

depository a lien on customer funds, 

FCStone stated that an FCM would be 

required to ‘‘front’’ all funds for 

customers until the customer has wired 

funds to the FCM.247 FCStone 

contended that a change of this sort 

could ‘‘threaten the continued 

operations of small to mid-sized FCMs 

not affiliated with banks’’ and cause a 

substantial liquidity strain.248 The 

Depository Bank Group additionally 

warned that a depository may not be 

willing to provide intraday advances to 

the customer segregated account 

without the right to take a lien on the 

account or the right to set off between 

multiple customer segregated accounts 

and would, therefore, not be in a 

position to provide liquidity.249 As a 

result, an FCM or DCO would likely 

need to maintain a buffer of its own 

funds in the segregated customer 

accounts to fully pre-fund transactions 

related to such accounts.250 The 

Depository Bank Group contended that 

the impact on small- to mid-sized FCMs 

would be that of a lesser ability to enter 

into ‘‘everyday transactions’’ for the 

customer segregated account, which 

could result in exclusion from the 

industry.251 The Depository Bank Group 

cited as support a comment letter that 

staff of the Federal Reserve Bank of 

Chicago submitted in 2010.252

The Commission recognizes that a 

depository may not want to provide 

unsecured overdraft coverage. However, 

a depository taking a lien on a customer 

account to facilitate intraday payments 

presents a serious problem if an FCM’s 

customer does not satisfy a margin call 

and the FCM, in turn, cannot cover the 

call and becomes insolvent before the 

depository can be repaid. 

The Commission interprets the 

requirements of section 4d of the Act to 

prohibit a lien on customer funds to 

satisfy an intraday extension of credit to 

an FCM to meet margin requirements at 

a DCO. As an alternative to taking a lien 

on the customer account, the depository 

could take a lien on a proprietary 

account held by the FCM at the 

depository, or the FCM could add its 

own funds to the segregated account or 

collect more margin from its customers 

in order to provide a more substantial 

financial cushion. It is not the 

Commission’s intention to disadvantage 

mid-size and smaller FCMs in applying 

this standard across all FCMs, regardless 

of size. 

The Commission notes that no 

commenter has proffered information or 

data that would indicate intraday 

advances are a commonplace, routine 

occurrence. Indeed, it may be cause for 

concern if a large number of FCMs 

cannot meet intraday margin calls for 

customer accounts on a regular basis. 

Without expressing a view of the 

Commission’s position concerning 

section 4d of the Act, FIA recommended 

expanding the circumstances in which a 

depository could impose a lien with 

respect to customer funds.253 FIA 

recommended revising the language to 

read: ‘‘You further acknowledge and 

agree that the Funds in the Account(s) 

shall not be subject to any right of offset 

or lien for or on account of any 

indebtedness, obligations or liabilities 

we may now or in the future have owing 

to you except to recover from the 

Account(s) (or from any other CFTC 

Regulation 1.20 Customer Segregated 

Account(s) we have with you), Funds 

you may advance from time to time to 

facilitate transactions by or on behalf of, 

or on account of, or otherwise for the 

benefit of, the Account(s) or our 

customers whose Funds are held in the 

Account(s).’’ 254 The Commission 

confirms that a depository can possess 

a lien across multiple accounts of the 

same FCM as long as the accounts are 

of the same account class (i.e., 4d(a) 

cash and custodial accounts). However, 

the Commission believes FIA’s 

suggested modification is overbroad and 

has the potential to be interpreted to 

permit a depository’s imposition of a 

lien in a greater number of 

circumstances than section 4d of the Act 

allows. 

NYPC urged the Commission to 

clarify that DCOs have the right to 

transform non-cash customer funds into 

cash to satisfy liquidity needs related to 

the customer account of a defaulting 

FCM clearing member not only through 

the sale of such assets, but also through 

the use of liquidity arrangements, such 

as lines of credit and repurchase 

agreements.255 NYPC recommended 

that the Commission modify the last 

sentence in the ‘‘lien’’ paragraph as 

follows: ‘‘The prohibitions contained in 

this paragraph do not affect your right 

to recover funds advanced by you in the 

form of cash transfers, lines of credit, 

repurchase agreements or other similar 

liquidity arrangements in lieu of the 

liquidation of non-cash assets held in 

the Account(s) for purposes of variation 

settlement or posting initial (original) 

margin with respect to the Account(s).’’ 

The Commission recognizes that 

liquidity arrangements are an important 

aspect of a DCO’s default management 

plan and agrees that the use of lines of 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68541 

256See CFTC Interpretative Ltr. No. 86–9, [1986– 

1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) 

¶23,015 (April 21, 1986) (limiting a bank’s 

treatment of customer margin funds ‘‘in particular 

circumstances by reason of what it knows or 

reasonably should know of a violation of the Act 

or other provision of law that would preclude it 

from obtaining rights to such funds superior to 

those of one or more customers of the defaulting 

FCM.’’). 

257 Id. 

258 Id. at 8. 

259Schwartz & Ballen Comment Letter at 7 (Feb. 

15, 2013). 

credit or repurchase agreements are 

acceptable alternatives to the 

liquidation of non-cash assets held in a 

customer account. As a result, the 

Commission has determined to modify 

the sentence in a manner similar to that 

recommended by NYPC. 

In response to the other comments, 

the Commission notes that it has always 

interpreted and applied section 4d of 

the Act in a manner consistent with the 

language in the proposed Template 

Letters. With respect to a depository’s 

right of setoff against a customer 

account, the Commission has long 

recognized only one very limited 

circumstance. CFTC Interpretative 

Letter No. 86–9 allows, with certain 

limitations,256 a bank’s right of setoff 

against a customer cash account that 

does not have sufficient available 

balances to meet a margin call, where 

there exists an affiliated custodial 

account that contains securities 

purchased with funds from the 

customer cash account.257 In this case, 

there is no extension of credit because 

the accounts, when aggregated, have 

enough assets to support the cash 

advance. 

The Depository Bank Group raised a 

question about similar circumstances in 

which a depository might set off 

amounts owed to a customer segregated 

account holding U.S. dollars, with 

amounts held in foreign currency in 

another customer segregated account.258

To the extent that a depository advances 

cash in lieu of exchanging foreign 

currency held in a related 4d account, 

the same rationale that serves as the 

basis for CFTC Interpretative Letter No. 

86–9 would apply, i.e., the advancement 

of funds does not represent an extension 

of credit secured by customer funds. 

The Commission confirms that a 

depository holding customer funds in 

one segregated account may set off 

amounts withdrawn from another 

account in cases where the depository 

advances funds in lieu of converting 

cash in one currency to cash in a 

different currency. 

The Template Letters provide for a 

depository’s right of setoff against the 

customer account consistent with 

Interpretative Letter No. 86–9. The 

Commission believes that expanding the 

scope of a depository’s right of setoff to 

support extensions of credit to an FCM 

would violate the requirements of 

section 4d of the Act and notes that 

none of the commenters provided a 

legal analysis that would refute this 

position. 

The Commission recognizes, however, 

that there may be situations similar to 

those specifically enumerated in the 

proposed Template Letters for which an 

advancement of cash and the related 

imposition of a lien in lieu of 

liquidating non-cash assets or 

converting cash in one currency to cash 

in a different currency may be 

permissible. To accommodate this, the 

Commission is revising the language to 

remove the concluding clause, ‘‘for the 

purposes of variation settlement or 

posting initial (original) margin.’’ This 

change preserves the intended meaning 

and purpose of the provision without 

unintentionally limiting its application 

in other similar circumstances. 

Accordingly, the Commission is 

adopting the proposed ‘‘lien’’ language 

of the Template Letters, modified to 

include a reference to the depository’s 

right to recover funds related to certain 

liquidity arrangements and to eliminate 

specific examples of circumstances in 

which imposition of a lien would be 

permissible. FCMs, DCOs, and 

depositories are reminded that any 

permissible advancement of cash and 

related imposition of a lien on a 

customer account must be properly 

documented and recorded in 

compliance with all applicable 

recordkeeping requirements. 

j. Examination of Accounts 

As proposed, the Template Letters for 

both FCMs and DCOs would require a 

depository to agree that accounts 

holding customer segregated funds 

could be ‘‘examined at any reasonable 

time’’ by the Commission or, as 

applicable, an FCM’s DSRO, and they 

further provide that the 

acknowledgment letter ‘‘constitutes the 

authorization and direction of the 

undersigned to permit any such 

examination or audit to take place.’’ 

Schwartz & Ballen commented that the 

provision should also provide for the 

Commission or DSRO to give the 

depository advance notice before being 

permitted to examine FCM accounts.259

The Commission is not including this 

recommended precondition because an 

examination of this type is likely to be 

conducted only in response to exigent 

circumstances and the ‘‘reasonable 

time’’ provision is sufficient evidence of 

the Commission’s intent to proceed in a 

commercially reasonable manner under 

the particular circumstances. 

The Commission is retaining the 

examination provision in the FCM 

Template Letters but is not including it 

in the DCO Template Letters. Consistent 

with the Commission’s determination 

regarding electronic access to DCO 

account information, the Commission 

believes that authorization to examine a 

DCO’s customer segregated account at a 

depository is not necessary because of 

the Commission’s ability to obtain 

account information directly from the 

depository upon request, and directly 

from the DCO through daily reporting 

under § 39.19(c)(1). 

As a technical matter, the 

Commission is eliminating use of the 

term ‘‘audit’’ to clarify that the 

examination will be targeted and is not 

intended to be an audit, as that term is 

used in the field of accounting. 

5. Prohibition against Commingling 

Customer Funds 

The Commission proposed to amend 

§ 1.20(e) to explicitly address the 

commingling of customer funds. 

Proposed § 1.20(e)(1) provides that an 

FCM may, for convenience, commingle 

the funds that it receives from, or on 

behalf of, multiple futures customers in 

a single account or multiple accounts 

with one or more of the permitted 

depositories set forth in § 1.20(b). 

Proposed § 1.20(e)(2) prohibits an 

FCM from commingling futures 

customers funds with any proprietary 

funds of the FCM, or with any 

proprietary account of the FCM. 

Proposed § 1.20(e)(2), however, provides 

that the prohibition on the commingling 

of futures customer funds and the 

FCM’s proprietary funds does not 

prohibit an FCM from depositing 

proprietary funds into segregated 

accounts in accordance with proposed 

§ 1.23 as a buffer to prevent the firm 

from becoming undersegregated due to 

normal business activities, such as daily 

margin payments by the FCM to a DCO. 

Proposed § 1.20(e)(3) further prohibits 

an FCM from commingling futures 

customer funds with funds deposited by 

30.7 customers for trading foreign 

futures or foreign option positions in 

accordance with part 30 of the 

Commission’s regulations, or with 

Cleared Swaps Customer Collateral 

deposited by Cleared Swaps Customers 

for Cleared Swaps under part 22 of the 

Commission’s regulations. Proposed 

§ 1.20(e)(3) permits, however, the 

commingling of futures customer funds 

with 30.7 customer funds and/or 

Cleared Swaps Customer funds if 

expressly permitted by a Commission 


TKELleY on DSK3SPTVN1PROD with RULES2
68542 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

260Regulation 22.2(c)(2) regarding cleared swaps 

customer accounts already prohibits commingling. 

261Proposed § 30.7(e)(3). 

262FIA Comment Letter at 36 (Feb. 15, 2013). 

263 Id. 

264 Id. 

265Previous guidance permitted a branch office of 

an FCM to deposit customer funds into an 

unsegregated bank account if the main office of the 

FCM on the same day deposited the same amount 

of its funds into a segregated bank account, and 

kept records fully explaining the transactions. See 

Commodity Exchange Authority Administrative 

Determination No. 203 (December 1, 1966). See also 

CFTC Interpretative Letter No. 90–7 (Secured 

Amount Account for Foreign Futures and Options, 

May 1, 1990). This practice is now prohibited. 

266FIA Comment Letter at 2 (June 20, 2013). See 

also section II.G.1. above for a further discussion of 

an FCM’s obligation to be in compliance with its 

segregation obligation at all times. 

267Accordingly, relevant prior Commission 

orders and guidance will continue to apply to 

§ 1.20(f). For example, in In re JPMorgan Chase 

Bank CFTC 12–17 (April 4, 2012), the Commission 

simultaneously initiated and settled an action 

against a depository for violating § 1.20(a) and (c) 

because it unlawfully used customer funds as 

belonging to someone other than the customers of 

an FCM. Specifically, the Commission found that a 

depository’s intra-day extension of credit to an FCM 

(Lehman Brothers) based upon customer funds the 

FCM had deposited with a bank (JPMorgan Chase) 

violated § 1.20(a) and (c). Regulation 1.20(f) would 

continue to prohibit such use of customer funds, as 

well as any other type of disposal, holding or use 

the Commission has previously identified as 

unlawful. 

regulation or order, or by a DCO rule 

approved in accordance with 

§ 39.15(b)(2) of the regulations.260

Similarly, a proposed amendment to 

§ 30.7 would prohibit an FCM from 

commingling funds required to be 

deposited in a foreign futures and 

foreign options secured amount account 

with funds required to be deposited in 

a customer segregated account or 

cleared swaps customer account.261

The Commission received one 

comment on the proposed amendments 

to § 1.20(e). FIA stated that it fully 

supported the proposed amendments, 

which implement the segregation 

provisions of section 4d(a) and 4d(f) of 

the Act.262

FIA further requested that the 

Commission confirm that the proposed 

amendments would not prohibit a 

customer that engages in futures 

transactions on a designated contract 

market, foreign futures or options 

transactions on foreign boards of trade, 

and Cleared Swaps through a single 

FCM, from meeting its margin 

obligations for the three different 

segregation accounts by making a single 

payment to the FCM.263 FIA states that 

such practice is common in the industry 

today, reduces the FCM’s credit risk, is 

operationally more efficient for both the 

FCM and its customers, and indirectly 

reduces customer settlement risk.264

The Commission confirms, subject to 

the following conditions, that a receipt 

of funds from a customer that wishes to 

meet its multiple margin obligations by 

making a single deposit payment to the 

FCM is not prohibited by § 1.20. The 

FCM, however, must initially receive 

the customer’s funds into the customer’s 

section 4d(a)(2) segregation account. 

The funds may not be directly deposited 

into the customer’s § 30.7 secured 

account or Cleared Swaps Segregation 

Account, as such accounts may present 

different risks than the section 4d(a)(2) 

account, and the Commission would 

like to standardize operationally the 

practice of how customer funds are 

received by FCMs by authorizing one 

approach that would be applicable to all 

customers to minimize the possibility of 

transactional errors. 

In addition, the FCM must 

simultaneously record the book entry 

credit to the customer’s § 30.7 secured 

account and the customer’s Cleared 

Swaps Account (as applicable) as 

directed by the customer upon the 

receipt and recording of the cash into 

the customer’s 4d(a)(2) segregation 

account. Also, the FCM must ensure at 

the time the book entry credit is made 

to the customer’s account, that the 

credit does not result in the FCM having 

obligations to 30.7 customers or Cleared 

Swaps Customers that are in excess of 

the total assets held in such accounts for 

such customers. Failure of the FCM to 

hold a sufficient amount of excess funds 

in the 30.7 customer accounts and 

Cleared Swaps Customer Accounts at 

any time to meet its obligations to such 

customers would be a violation of the 

Act and the Commission’s regulations. 

Furthermore, if the FCM permits 

customers to use one wire transfer to 

fund more than one account class, the 

FCM’s policy and procedures for 

assessing the appropriate amount of 

targeted residual interest required under 

§ 1.11 must take this practice into 

consideration and should include 

appropriate adjustments and estimates 

to reflect this practice. Finally, the 

Commission hereby clarifies that all 

prior guidance concerning the receipt of 

customer deposits at branch locations or 

otherwise deposited into the FCM’s 

proprietary accounts, regardless of 

excess funds held in segregation, is 

repealed and withdrawn and such 

practice is not permitted under § 1.20 as 

adopted.265

The Commission adopts the 

amendment as proposed. 

6. Limitations on the Use of Customer 

Funds 

Proposed § 1.20(f) requires FCMs to 

treat and deal with the funds of a 

futures customer as belonging to such 

futures customer. In addition, the 

Commission proposed to prohibit an 

FCM from using, or permitting the use 

of, the funds of futures customer for any 

person other than for futures customers, 

subject to certain limited exceptions. 

Proposed § 1.20(f) also states that an 

FCM may obligate futures customers’ 

funds to a DCO or another FCM solely 

to purchase, margin, or guarantee 

futures and options positions of futures 

customers, and that no person, 

including any DCO or any depository, 

that has received futures customer funds 

for deposit in a segregated account, may 

hold, dispose of, or use any such funds 

as belonging to any person other than 

the futures customers of the FCM that 

deposited such funds. 

The Commission did not receive any 

comments regarding proposed § 1.20(f). 

However, as discussed above, the FIA 

stated that it agrees that FCMs are 

required to comply with the segregation 

provisions of the Act at all times, and 

expressed general support for the 

Commissions efforts to implement the 

Act’s segregation provision.266 The 

Commission notes that the language in 

proposed § 1.20(f) largely mirrors the 

language set forth in current § 1.20, 

which language was, and continues to 

be, intended to further implement the 

segregation provisions of the Act.267

Thus, the Commission is adopting the 

provision as proposed. 

7. Segregation Requirements for DCOs 

Proposed § 1.20(g) provides 

segregation requirements applicable to 

DCOs, as opposed to FCMs. Proposed 

paragraph (g)(2) lists the permitted 

depositories for futures funds received 

by a DCO as any bank or trust company, 

and clarifies that the term ‘‘bank’’ 

includes a Federal Reserve Bank. The 

necessity for this proposed amendment 

is highlighted by section 806(a) of the 

Dodd-Frank Act, which provides that a 

Federal Reserve Bank may establish and 

maintain a deposit account for a 

‘‘financial market utility’’ (in the present 

case, a DCO) that has been designated as 

systemically important by the Financial 

Stability Oversight Council. Proposed 

paragraph (g)(3) requires DCOs to 

comply with the provisions of § 1.49 

with respect to holding segregated funds 

outside the U.S. Regulation 1.20(g)(5) 

prohibits a DCO from commingling 

futures customer funds with the DCO’s 

proprietary funds or with any 

proprietary account of any of its clearing 

members, and prohibits the DCO from 

commingling funds held for futures 

customers with funds deposited by 

clearing members on behalf of their 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68543 

268See Administrative Determination No. 29 of 

the Commodity Exchange Authority dated Sept. 28, 

1937 stating, ‘‘the deposits, by a futures commission 

merchant, of customers’ funds * * * under 

conditions whereby such funds would not be 

subject to withdrawal upon demand would be 

repugnant to the spirit and purposes of the 

Commodity Exchange Act. All funds deposited in 

a bank should in all cases be subject to withdrawal 

on demand.’’ 

269CIEBA noted it is comment letter that industry 

groups are involved in various initiatives to provide 

customers with the option for full physical 

segregation of margin collateral, and requested 

confirmation that § 1.20(h) would not prohibit the 

use of a full segregation model if developed. See 

CIEBA Comment Letter at 4 (Feb. 20, 2013). The 

Commission encourages industry groups to 

continue to assess alternatives to the current 

segregation structure in an effort to provide greater 

protection of customer funds and to ensure the 

effective operation of the clearing and settlement 

functions. Regulation 1.20(h) is intended to prohibit 

situations where an FCM or DCO deposits customer 

funds into an account that by law or operation 

limits or potentially limits the FCM’s or DCO’s 

ability to withdraw the funds from the account for 

the use intended (i.e., as performance bond). The 

Commission would consider any future 

amendments to § 1.20(h) based upon the 

developments of alternative segregation modes. 

270See discussion in note 30 above. Therefore, 

under the Proposed Residual Interest Requirement 

an FCM would have to maintain at all times in 

segregated account a sufficient amount of funds to 

cover the Net Liquidating Equities of each customer 

and a sufficient amount of residual interest to cover 

the undermargined amounts of each customer. 

271 77 FR 67886. 

272See, e.g., 13 FR, 7820, 7837 (Dec. 18, 1948). 

273 17 CFR 1.22. 

274 46 FR 11668, 11669 (Feb. 10, 1981). 

275 17 CFR 1.22. 

276 77 FR 67886. 

277 Id. 

278See 77 FR 67882, 67916. The Commission also 

specifically requested comments on the following: 

Whether the Proposed Residual Interest 

Requirement would serve to increase the 

protections to customer funds in the event of an 

FCM bankruptcy? To what extent would the 

Proposed Residual Interest Requirement increase 

costs to FCMs and/or futures customers? To what 

extent would the Proposed Residual Interest 

Requirement benefit futures customers and/or 

FCMs? To what extent would the Proposed 

Residual Interest Requirement increase or mitigated 

market risk? To what extent would the Proposed 

Residual Interest Requirement lead to FCMs 

requiring customers to provide margin for their 

trades before placing them? To what extent is the 

Proposed Residual Interest Requirement likely to 

lead to a re-allocation of costs from customers with 

excess margin to undermargined customers? For 

purposes of margin deficit calculations, whether the 

Commission should address issues surrounding the 

timing of when an FCM must have sufficient funds 

in the futures customer account to cover all margin 

deficits? If so, how should the Commission address 

such issues? See 77 FR at 67882. 

With regards to the costs and benefits, the 

Commission asked the following questions: 

Whether FCMs typically maintain residual interest 

in their customer segregated account that is greater 

than the sum of their customer margin deficits, and 

data from which the Commission may quantify the 

average difference between the amount of residual 

interest an FCM maintains in customer segregated 

accounts and the sum of customer margin deficit. 

How much additional residual interest would FCMs 

need to hold in their customer segregated accounts 

in order to comply with the Proposed Residual 

Interest Requirement? What is the opportunity cost 

to FCMs associated with increasing the amount of 

capital FCMs place in residual interest, and data 

that would allow the Commission to replicate and 

verify the calculated estimates provided. 

Information regarding the additional amount of 

capital that FCMs would likely maintain in their 

customer segregated accounts, if any, to comply 

with the Proposed Residual Interest Requirement. 

What is the average cost of capital for an FCM? See 

77 FR at 67916. 

The Commission also specifically requested that 

commenters provide data and calculations that 

would allow the Commission to replicate and verify 

the cost of capital that commenters estimate. See id. 

Cleared Swaps Customers. DCOs would 

be permitted to commingle the funds of 

multiple futures customers in a single 

account or accounts for operational 

convenience. The Commission adopts 

the amendment as proposed. 

8. Immediate Availability of Bank and 

Trust Company Deposits 

The Commission proposed a 

paragraph (h) to § 1.20 to require that all 

futures customer funds deposited with a 

bank or trust company must be 

deposited in accounts that do not 

impose any restrictions on the ability of 

the FCM or DCO to withdraw such 

funds upon demand. An FCM or DCO 

may not deposit customer funds in any 

account with a bank or trust company 

that does not, by the terms of the 

account or operation of banking law, 

provide for the immediate availability of 

such deposits upon the demand of the 

FCM or DCO. 

Paragraph (h) codifies a long-standing 

interpretation of the Commission’s 

Division of Swap Dealer and 

Intermediary Oversight and predecessor 

divisions derived from an 

Administration Determination by the 

Commission’s predecessor, the 

Commodity Exchange Authority of the 

U.S. Department of Agriculture.268 The 

requirement, as proposed, is a practical 

necessity to the effective functioning of 

FCMs and futures markets. In this 

regard, customer funds deposited with a 

bank must be maintained in accounts 

that allow for the immediate availability 

of the funds in order for the FCM to be 

assured of meeting its obligation to 

make any necessary transfers of 

customer funds to a DCO or to return 

funds to customers upon their request. 

The Commission is adopting paragraph 

(h) as proposed.269

9. Segregated Funds Computation 

Requirement 

The Commission proposed to add a 

new paragraph (i), which mirrored the 

requirements recently adopted in part 

22 for Cleared Swaps Customers. 

Proposed paragraph (i) was designed to 

implement, with increased detail, the 

Net Liquidating Equity Method of 

calculating segregation requirements. A 

customer may have positive Net 

Liquidating Equity (i.e., a credit 

balance) in his or her account, requiring 

segregation of his or her funds, but may 

have insufficient Net Liquidating Equity 

to cover the margin required for that 

customer’s open positions. 

Accordingly, the Commission 

proposed to require an FCM to record in 

the accounts of its futures customers the 

amount of margin required for each 

customers’ open positions, and to 

calculate margin deficits (i.e., 

undermargined amounts) for each of its 

customers. Moreover, the Commission 

proposed to require that an FCM 

maintain residual interest in segregated 

accounts in an amount that exceeds the 

sum of all futures customers’ margin 

deficits (‘‘the Proposed Residual Interest 

Requirement’’).270

In addition, the Commission proposed 

an amendment to § 1.22.271 Regulation 

1.22 is a longstanding regulation272 and 

currently provides that an FCM may not 

use the cash, securities or other property 

deposited by one futures customer to 

purchase, margin or settle the trades, 

contracts, or other positions of another 

futures customer, or to extend credit to 

any other person.273 This ‘‘requirement 

is designed not only to prevent 

disparate treatment of customers by an 

FCM, but also to insure that there will 

be sufficient money in segregation to 

pay all customer claims if the FCM 

becomes insolvent.’’ 274 Regulation 1.22 

further provides that an FCM may not 

use the funds deposited by a futures 

customer to carry trades or positions, 

unless the trades or positions are traded 

through a DCM.275

The Commission proposed an 

amendment to § 1.22 to clarify that it is 

not permissible for an FCM to be 

undersegregated at any point in time 

during the day. As stated in the 

Proposal, section 4d(a)(2) expressly 

requires an FCM to segregate futures 

customers’ funds from its own funds, 

and prohibits an FCM from using the 

funds of one customer to margin or 

extend credit to any other futures 

customer or person.276 Moreover, to 

review compliance with these proposed 

requirements, the Commission proposed 

that the sum of all margin deficits (i.e., 

undermargined amounts) be reported on 

the Segregation Schedule (as discussed 

previously in section II.A. with respect 

to amendments to § 1.10) and on the 

daily segregation calculation.277

The Commission requested comment 

on all aspects of the Proposed Residual 

Interest Requirement, including the 

costs and benefits of this proposed 

regulation.278


TKELleY on DSK3SPTVN1PROD with RULES2
68544 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

279CIEBA Comment Letter at 2 (Feb. 20, 2013). 

280 Id. 

281 Id. at 3. On this point, CIEBA further noted 

that allowing an FCM to use customer excess to 

support other customer’s positions could lead to 

improper or complex recordkeeping, which can, in 

turn, jeopardize the ability of a trustee to facilitate 

the return of customer funds and the porting of 

positions to a solvent FCM. 

282 ICI Comment Letter at 3 (Jan. 14, 2013). See 

also Franklin Comment Letter at 2 (Feb. 15, 2013) 

(writing in support of the positions taken in the ICI 

Comment Letter). 

283SIFMA Comment Letter at 2 (Feb. 21, 2013). 

284 Id. 

285Paul/Weiss Comment Letter at 3 (Feb. 15, 

2013). 

286 Vanguard Comment Letter at 7 (Feb. 22, 2013). 

287 Id. 

288 Id. 

289 Id. 

290 Id. at 7–8. 

291CFA Comment Letter at 5–6 (Feb. 13, 2013). 

292See, e.g., CHS Hedging Comment Letter at 1 

(Feb. 15, 2013); NFA Comment Letter at 12 (Feb. 15, 

2013); JSA Comment Letter at 2 (Feb. 15, 2013); 

Paragon Comment Letter at 1 (Feb. 15, 2013); NIBA 

Comment Letter at 2 (Feb. 15, 2013); ICA Comment 

Letter at 1 (Feb. 15, 2013). 

293See, e.g., FIA Comment Letter at 18–21 (Feb. 

15, 2013). See also FIA Comment Letter at 2–5 (June 

20, 2013). 

294RCG Comment Letter at 3 (Feb. 12, 2013). 

295See MGEX Comment Letter at 2 (Feb. 18, 

2013). See also NPPC Comment Letter at 2 (Feb. 15, 

2013) (stating that the ‘‘at all times’’ portion of the 

Proposed Residual Interest Requirement is 

‘‘burdensome’’, and that changing margin 

procedures ‘‘to anticipate future market movements, 

pre-fund margin calls, [or] make margin call 

deposits throughout the day based on current 

market movements is impractical.’’). 

296TD Ameritrade Comment Letter at 4–5 (Feb. 

15, 2013). 

297See CME Comment Letter at 5 (Feb. 15, 2013). 

The Commission has received and has 

considered a wide variety of public 

comments regarding the Proposed 

Residual Interest Requirement, 

including comments from panelists 

made during public roundtables and 

written submissions from commenters. 

Several commenters supported the 

Commission’s Proposed Residual 

Interest Requirement. CIEBA stated that 

it strongly supported the Proposed 

Residual Interest Requirement, arguing 

that the proposed regulations are 

consistent with Congressional intent 

and the Commission’s historical 

interpretations of the Act and sound 

economic and systemic risk policy. 

Highlighting section 4d(a)(2) of the Act 

and its directive that FCMs ‘‘keep 

collateral and funds of each individual 

customer distinct from that of customers 

and the FCM,’’ CIEBA argued that 

‘‘permitting FCMs to use customer 

funds to cover margin deficits of a 

different customer and thereby 

subsidize the FCM’s obligations would’’ 

contravene well established statutory 

policy.279 In addition, CIEBA noted that 

the Dodd-Frank Act was adopted to 

increase regulatory protections for 

customers.280 CIEBA also noted several 

benefits resulting from the Proposed 

Residual Interest Requirement, 

including the reduction of systemic risk, 

competitive benefits for those FCMs that 

do not use customer excess to meet the 

obligations of other clients, and the 

enhancement of customer protection in 

the event of an FCM bankruptcy.281 ICI 

also stated that it supported the 

Proposed Residual Interest Requirement 

on the basis that it would provide 

additional protections to customer 

funds.282 SIFMA asserted that it 

strongly supported the Proposed 

Residual Interest Requirement because 

it preserves the sanctity of each 

customer’s margin account by 

maintaining segregation between 

customer margin accounts through the 

incorporation of appropriate safeguards 

to protect customer funds.283 SIFMA 

stated that the proposal, ‘‘in effect, shifts 

the costs and burdens of a margin 

shortfall from customers with excess 

margin to customers with deficits, 

where it properly belongs.’’ 284 Paul/

Weiss supported the Proposed Residual 

Interest Requirement ‘‘[i]n 

principle.’’ 285 Vanguard stated that it 

was ‘‘particularly supportive’’ of the 

Proposed Residual Interest 

Requirement.286 Noting that while an 

FCM would either have to have its 

customers pre-fund margin 

requirements for pending trades or 

‘‘lend’’ such customers margin ahead of 

a margin transfer, Vanguard argued that 

the ‘‘proposed changes correctly shift 

the risk to customers in deficit and away 

from any excess margin transferred by 

other customers.’’ 287 Vanguard also 

argued that, in its opinion, comments at 

the public roundtable that ‘‘suggested 

same-day margin transfers were overly 

complicated to achieve and the 

accelerated capital charge would 

therefore impose significant added costs 

to an FCM and, by extension, to its 

customers,’’ seem overstated 

particularly because same-day margin 

transfer is ‘‘the norm in the OTC swap 

market.’’ 288 In fact, Vanguard stated that 

‘‘same-day margin transfer is required in 

Vanguard’s futures and options 

agreements, consistent with the longstanding market practice.’’ 289 Vanguard 

encouraged the Commission to avoid 

weakening customer protection, ‘‘at 

least a weakening beyond the need to 

maintain segregation on no less than a 

once-a-day basis, with the possibility for 

clearing house initiated intra-day calls 

(and corresponding segregation 

maintenance) as needed in periods of 

market stress.’’ 290 CFA also supported 

the Proposed Residual Interest 

Requirement, asserting its belief ‘‘that 

no futures customer should be undersegregated at any time during the day 

for any reason.’’ 291

A number of commenters opposed the 

Proposed Residual Interest Requirement 

on the basis that the requirement 

appeared wholly unrelated to the MFGI 

and PFGI bankruptcies,292 with other 

commenters observing that the Proposed 

Residual Interest Requirement is 

unnecessary to achieve the regulatory 

goals, including assuring compliance 

with section 4d of the Act, in light of 

other Commission regulations.293

In addition, several commenters 

commented on the lack of feasibility of 

the proposal, interpreting the ‘‘at all 

times’’ language to require FCMs to 

continuously calculate the sum of their 

customers’ margin deficits, and to 

continuously act on those calculations. 

For example, RCG stated that it would 

be virtually impossible for FCMs to 

satisfy the Proposed Residual Interest 

Requirement because an accurate 

assessment of aggregate customer 

margin deficiencies would be difficult 

given that (1) ‘‘the underlying markets 

operate on a 24-hour basis and customer 

fund transfers occur repeatedly 

throughout each business day,’’ and (2) 

‘‘omnibus account offsets are not 

provided to clearing FCMs until the end 

of the trading day or, in some instances, 

the next business day.’’ 294 MGEX also 

argued that ‘‘at all times’’ requirement 

in the Proposed Residual Interest 

Requirement may be impracticable as it 

is a constantly moving target,295 and TD 

Ameritrade argued that because the firm 

calculates margin calls after it receives 

its nightly downloads, ‘‘it would be 

difficult, if not impossible, to assess 

customer margin deficiencies at any 

moment in time, because the markets 

have not closed and the margin 

requirements are not always known.’’ 296

In addition, CME stated that there does 

not appear to be a system that currently 

exists or that could be constructed in 

the near future that will permit FCMs to 

accurately calculate customer margin 

deficiencies, at all times.297 CMC 

asserted that the ‘‘at all times’’ portion 

of the Proposed Residual Interest 

Requirement would ‘‘create liquidity 

issues and increase costs for FCMs and 

end users,’’ possibly ‘‘limit the number 

and type of transactions FCMs clear, the 

number of customers they service and 

the amount of financing they provide,’’ 

and ‘‘require executing FCMs to collect 

collateral for give-ups so that customer 

positions are fully margined in the event 

a trade is rejected by a clearing 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68545 

298CMC Comment Letter at 2 (Feb. 15, 2013). 

299 Id. 

300Advantage Comment Letter at 8 (Feb. 15, 

2013). 

301See id. at 7–8. 

302See id. at 7. 

303See FIA Comment Letter at 4–5, 12–26 (Feb. 

15, 2013); LCH.Clearnet Comment Letter at 4–5 (Jan. 

25, 2013). 

304See FIA Comment Letter at 17 (Feb. 15, 2013). 

305See id. at 4, 17. 

306 Id. at 4. See also id. at 13. 

307FIA Comment Letter at 2 (June 20, 2013). 

308 Id. 

309See, e.g., AIMA Comment Letter at 3 (Feb. 15, 

2013); CCC Comment Letter at 2–3 (Feb. 15, 2013); 

CHS Hedging Comment Letter at 2–3 (Feb. 15, 

2013); CME Comment at 5–7 (Feb. 15, 2013); AFBF 

Comment Letter at 2 (Feb. 15, 2013); Jefferies 

Comment Letter at 9 (Feb. 15, 2013); JSA Comment 

Letter at 1–2 (Feb. 15, 2013); NCBA Comment Letter 

at 2 (Feb. 15, 2013); NGFA Comment Letter at 5 

(Feb. 15, 2013); NIBA Comment Letter at 1–2 (Feb. 

15, 2013); TCFA Comment Letter at 2 (Feb. 15, 

2013); AFMP Group Comment Letter at 1–2 (Sept. 

18, 2013). 

310See, e.g., MGEX Comment Letter at 2 (Feb. 18, 

2013); AIMA Comment Letter at 2 (Feb. 15, 2013); 

CMC Comment Letter at 2 (Feb. 15, 2013); AFMP 

Group Comment Letter at 1–2 (Sept. 18, 2013); Rice 

Dairy LLC Comment Letter at 1 (Feb. 13, 2013). 

311Congressional Committees Comment Letter at 

1 (Sept. 25, 2013). 

312FIA Comment Letter at 17 (Feb. 15, 2013). 

313 Id. at 17. See also AFMP Group Comment 

Letter at 1 (Sept. 18, 2013) (arguing that ‘‘[m]uch 

more customer money—maybe twice as much—will 

be at risk in the event of another FCM 

insolvency.’’). 

314FIA Comment Letter at 16 (Feb. 15, 2013). 

315MFA Comment Letter at 8 (Feb. 15, 2013). 

316FHLB Comment Letter at 3–4 (Feb. 15, 2013). 

317 Id. at 4 n.5. 

318 Jefferies Comment Letter at 7 (Feb. 15, 2013). 

See also CCC Comment Letter at 2 (Feb. 15, 2013) 

(arguing that ‘‘the practical effect’’ of the Proposed 

Residual Interest Requirement ‘‘is that FCMs would 

require commodity customers to contribute 

significantly more property to their FCM in order 

to meet new margin requirements far in excess of 

exchange margin requirements,’’ and expressing 

concern over any requirement that would require 

customers ‘‘to contribute even more capital to a 

system [CCC] believe[s] is flawed.’’) 

FCM,’’ 298 which ‘‘may force many end 

users to decrease or discontinue hedging 

and risk management practices.’’ 299

Advantage opposed the Proposed 

Residual Interest Requirement asserting 

that it was ‘‘extremely prejudicial to 

small and midsize firms and their 

customers.’’ 300 Advantage also stated 

that the Proposed Residual Interest 

Requirement would result in FCMs 

more quickly liquidating customer 

positions during extreme market moves, 

which would make markets more 

volatile.301 Advantage also maintained 

that calculations of margin for omnibus 

accounts cannot be determined prior to 

the receipt of offsets, which may not be 

obtained until late in the day, thereby 

adversely impacting an FCM’s ability to 

assess customer margin deficiencies.302

FIA and LCH.Clearnet opposed the 

Proposed Residual Interest 

Requirement, and focused particularly 

on the ‘‘at all times’’ portion of the 

requirement.303 FIA stated that the 

Proposed Residual Interest Requirement 

may force a number of small to midsized FCMs out of the market, which 

will decrease access to the futures 

markets and increase costs for IBs, 

hedgers, and small traders.304 In 

addition, FIA argued that the Proposed 

Residual Interest Requirement would 

significantly impair the price discovery 

and risk management purposes of the 

market.305 Moreover, FIA stated that the 

Proposed Residual Interest Requirement 

‘‘would impose a tremendous 

operational and financial burden on the 

industry, requiring the development and 

implementation of entirely new systems 

to assure compliance’’ with the ‘‘at all 

times’’ portion of the requirement.306

FIA also averred that the ‘‘provisions of 

section 4d of the Act prohibiting an 

FCM from using the fund of one 

customer ‘to margin or guarantee the 

trades or contracts, or to secure or 

extend the credit, of any customer or 

person other than the one for whom the 

same are held,’ has been the lynchpin of 

customer funds protection since the 

Commodity Exchange Act was enacted 

in 1936.’’ 307 In addition, FIA stated that 

they were not aware that the 

Commission has interpreted the statute 

to require the real time calculation of 

margin deficits.308

Several commenters requested that 

the Commission refrain from adopting 

the Proposed Residual Interest 

Requirement until it conducted further 

analysis with the industry regarding the 

costs and benefits of such proposal,309

with others stating that the Proposed 

Residual Interest Requirement would 

mark a significant departure from 

current market practice and could have 

a material adverse impact on the 

liquidity and smooth functioning of the 

futures and swaps markets.310

In addition, the Commission received 

several specific comments on the 

potential costs and benefits of the 

Proposed Residual Interest 

Requirement. The Congressional 

Committees requested that the 

Commission consider the benefits in 

light of ‘‘both the costs to America’s 

farmers and ranchers and the potential 

impact on consolidation in the FCM 

industry,’’ and in particular the 

‘‘consequences of changing the manner 

or frequency in which ‘residual 

interest’—the capital an FCM must hold 

to cover customer positions—is 

calculated.’’ 311

FIA noted that FCMs would look to 

avoid the need to use their own 

resources by seeking to make sure that 

their customers would not be 

undermargined, and that this process 

would involve the FCM collecting 

greater amounts of collateral from each 

customer.312 FIA averred that collecting 

greater amounts of collateral from 

customers would be contrary to the 

desire of the market to reduce the 

amount of funds maintained with FCMs 

following the failures of MFGI and 

PFGI.313 Moreover, FIA estimated that 

compliance with the Proposed Residual 

Interest Requirement would require 

FCMs or their customers to contribute 

significantly in excess of $100 billion 

into customer funds accounts beyond 

the sum required to meet initial margin 

requirements, and that the annual 

financing costs for these increases will 

range from $810 million to $8.125 

billion.314

MFA asserted that applying the 

Proposed Residual Interest Requirement 

continuously to FCMs ‘‘could 

significantly increase the operational 

burdens and costs on FCMs and their 

customers,’’ and that ‘‘any pre-funding 

obligation is an unacceptable imposition 

on customers’’ because ‘‘[i]t would 

create margin inefficiencies by causing 

customers to reserve assets to pre-fund 

their obligations . . . , and thus, reduce 

the amount of assets that customers 

have to use for investment or other 

purposes.’’ 315 FHLB cautioned that 

‘‘[w]hile it cannot be disputed that a 

residual interest buffer should lower the 

risk that an FCM will fall out of 

compliance with its segregation 

requirements, there will likely be a real 

economic cost associated with 

maintaining whatever residual interest 

buffers is established by an FCM’’ and 

that ‘‘the prospects of funding an 

additional residual interest buffer may 

discourage FCMs from appropriately 

demanding collateral from customers in 

excess of DCO requirements.’’ 316 FHLB 

further noted that the ‘‘funds 

maintained by an FCM as residual 

interest can reasonably be expected to 

earn less than the FCM’s unrestricted 

funds,’’ thus, the proposal ‘‘represents a 

real cost to FCMs’’ that will be passed 

on to customers.317 Jefferies stated that 

the Proposed Residual Interest 

Requirement will result in more assets 

being held at FCMs’ custodial facilities 

at a time when ‘‘the Commission has 

been enacting changes that have been 

shifting capital away from FCMs 

towards DCO facilities. . . .’’ 318

Newedge also stated that the Proposed 

Residual Interest Requirement ‘‘will 

result in many FCMs requiring 

customers to pre-fund and over-margin 

their positions, which will increase 


TKELleY on DSK3SPTVN1PROD with RULES2
68546 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

319Newedge Comment Letter at 2 (Feb. 15, 2013). 

320Steve Jones Comment Letter at 1 (Feb. 15, 

2013). 

321 Jefferies Comment Letter at 7 (Feb. 15, 2013). 

322 Id. at 8. 

323 Id. 

324 ISDA Comment Letter at 3 (Feb. 15, 2013). See 

also ISDA Comment Letter at 2–3 (May 8, 2013). 

325 ISDA Comment Letter at 4–5 (Feb. 15, 2013). 

326CHS Hedging Comment Letter at 2 (Feb. 15, 

2013). 

327 Id. 

328 Id. 

329 Id. 

330TCFA Comment Letter at 2 (Feb. 15, 2013); 

NCBA Comment Letter at 2 (Feb. 15, 2013); FCStone 

Comment Letter at 3 (Feb. 15, 2013); Randy Fritsche 

Comment Letter at 1 (Feb. 15, 2013); Global 

Commodity Comment Letter at 1 (Feb. 13, 2013); 

AFMP Group Comment Letter at 1–2 (Sept. 18, 

2013). 

331TCFA Comment Letter at 1 (Feb. 15, 2013); 

NCBA Comment Letter at 1 (Feb. 15, 2013). 

332NCFC Comment Letter at 2 (Feb. 15, 2013). 

333 Id. 

334NIBA Comment Letter at 1 (Feb. 15, 2013). 

335 Id. at 1–2. NIBA also asserted that 

‘‘[t]ransferring accounts between brokerage houses 

would become very difficult to accomplish’’ 

because open positions would ‘‘need to be 

margined at the receiving house as well as the 

transferring one,’’ thereby restraining Brokers ‘‘to 

remain with one FCM, or completely close 

customers’ positions in order to start up again with 

a different FCM.’’ Id. at 2. 

336 JSA Comment Letter at 1 (Feb. 15, 2013). 

337 Id. at 1–2. 

338 Id. at 2. 

339CME Comment Letter at 5–6 (Feb. 15, 2013). 

340 Id. at 6. 

341 Id. 

342 Id. (emphasis in original). CME also 

maintained that ‘‘those customers who qualify as 

[ECPs] can move to the uncleared and less regulated 

swaps space and decline to use centralized 

clearing.’’ Id. at 6–7. 

343Frontier Futures Comment Letter at 3 (Feb. 15, 

2013). 

their exposure to FCMs’’ and ‘‘have a 

significant impact on customers’ own 

liquidity.’’ 319

Steve Jones expressed the view that 

‘‘[w]ith more funds on deposit, a corrupt 

FCM CEO (or other staff with access to 

the funds) will simply be more tempted 

to ‘misappropriate’ the funds.320 In 

addition, Jefferies stated that requiring 

an FCM to maintain this level of 

residual interest ‘‘at all times’’ ‘‘would 

impose tremendous financial and 

operational difficulties’’ on FCMs, 

which would result in tremendous 

increases to necessary liquidity, and 

‘‘negatively impact competitiveness 

within the industry. . . .’’ 321 Jefferies 

further stated that the Proposed 

Residual Interest Requirement would 

impose heavy costs, and that, under the 

proposal, Jefferies would be required to 

increase its residual interest by $15 

million (non-peak) or $30 million 

(peak), respectively.322 Jefferies also 

stated that the industry would be 

required to increase its residual interest 

by $49 billion (non-peak) or $83 billion 

(peak) at a cost of approximately $2 

billion (non-peak) or $5 billion (peak), 

respectively.323

ISDA asserted that the Proposed 

Residual Interest Requirement will 

make customers ‘‘self-guaranteeing’’ and 

diminish reliance on the FCM, and that, 

while this would diminish overall risk 

of FCM default, it comes at a very 

significant cost to market participants, 

market volumes and liquidity.324 ISDA 

estimated the funding needed to comply 

with ‘‘at all times’’ portion of the 

Proposed Residual Interest Requirement 

to be $73.2 billion, with a long term 

impact of $335 billion.325 CHS Hedging 

argued that the Proposed Residual 

Interest Requirement ‘‘would 

substantially increase the amount of 

capital an FCM would need on hand at 

all times.’’ 326 Further, CHS Hedging 

stated that ‘‘[i]n the current economic 

environment, the difference between the 

cost of capital and the return an FCM 

could reasonably expect through 

investment of funds in a compliant and 

prudent manner would result in a 

material effect on the business of all 

FCMs.’’ 327 CHS Hedging also stated that 

FCMs ‘‘could require that customers 

pre-fund their accounts in anticipation 

of adverse market movement,’’ which 

‘‘would likely result in hardship with 

regard to working capital and may 

encourage customers to seek alternative 

methods to hedge their risk. . . .’’ 328

CHS Hedging is also of the view that 

‘‘pre-funding accounts concentrates 

additional funds at FCMs, which seems 

to contradict the spirit of the’’ customer 

protection rules.329

Other commenters argued that the 

Proposed Residual Interest Requirement 

would be more burdensome on smaller 

FCMs and customers. Some commenters 

stated that forcing FCMs to ask 

customers to pre-fund positions will 

cause many futures industry 

participants, including agricultural 

producers and other customers to suffer 

a financial burden by tying up capital 

that is better used in other areas, such 

as the operation of the feedlot, stocker 

operation or cow/calf operation,330 with 

two commenters asserting that increased 

costs associated with the use of wire 

transfers, rather than checks, would 

have a similar impact.331 Moreover, 

NCFC stated that in addition to 

increased costs for hedgers, the 

Proposed Residual Interest Requirement 

‘‘would be more burdensome to firms 

like farmer cooperative-owned FCMs’’ 

because they ‘‘are largely homogenous, 

with virtually all of their commercial 

customers going deficit at the same 

time.’’ 332 NCFC also asserted that ‘‘[t]o 

require all deficits to be covered 

immediately would be overly stringent 

on these FCMs given the low-risk profile 

of their customers as hedgers,’’ 333 while 

NIBA noted that the Proposed Residual 

Interest Requirement ‘‘will actually 

limit or deny market access to many 

customers’’ (such as farmers, ranchers 

and other agricultural organizations) 

‘‘who use the markets to hedge their 

financial and commercial risks’’ because 

the proposal ‘‘could raise the cost of 

hedging product to prohibitive 

levels.’’ 334 NIBA also stated that if small 

to mid-sized FCMs are forced out of 

business, market access ‘‘will become 

limited and more expensive for IBs and 

their smaller hedge and speculative 

clients.’’ 335 JSA argued that the 

Proposed Residual Interest Requirement 

would be ‘‘punitive in a highly 

competitive environment that already 

places the midsize operator at a 

disadvantage to his better capitalized 

multinational competitors.’’ 336 JSA also 

asserted that the resulting consolidation 

would cause ‘‘the loss of competitive 

forces, [the] loss of significant numbers 

of jobs, and the loss of transparency and 

liquidity required for a highly 

functioning hedging environment.’’ 337

Moreover, JSA stated that the cost of the 

Proposed Residual Interest Requirement 

would result in a higher cost of hedging, 

which would be become prohibitive and 

prompt agricultural users to walk away 

from the futures market.338 CME averred 

that mid-sized and smaller FCMs will 

not have the capital required by the 

Proposed Residual Interest Requirement 

and that customers will be required to 

pre-fund potential margin 

obligations.339 CME asserted that, given 

this increase in cost, some customers 

may transfer their accounts to the larger, 

better-capitalized FCMs to reduce the 

cost of trading,340 but that agricultural 

customers ‘‘likely will not be able to 

transfer to the larger FCMs because they 

do not fit their customer profile,’’ 

thereby making these customers bear 

more of the cost burden.341 CME also 

stated that the Proposed Residual 

Interest Requirement will lead to 

consolidation among FCMs, which will 

‘‘actually increase[] systemic risk by 

concentrating risk among fewer market 

participants.’’ 342 Frontier Futures 

argued that the Proposed Residual 

Interest Requirement does not give an 

FCM time to collect margin from 

customers if the market moves against a 

customer’s position.343 Because many 

small customers, including most 

farmers, do not watch markets 

constantly, it would be difficult for 

them to meet margin calls on a 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68547 

344 Id. 

345 Id. 

346RJ O’Brien Comment Letter at 3 (Feb. 15, 

2013). See also ICA Comment Letter at 1–2 (Feb. 15, 

2013). 

347Newedge Comment Letter at 3 (Feb. 15, 2013). 

See also RJ O’Brien Comment Letter at 5 (Feb. 15, 

2013). Cf. Frontier Futures Comment Letter at 3 

(Feb. 15, 2013) (suggesting further that firm 

firewalls be put in place between customer funds 

and an FCM’s proprietary funds in the form of 

approval by an independent agency for an FCM to 

transfer customer funds and that FCMs ‘‘do their 

proprietary trading through another FCM thereby 

engaging the risk management of a third party.’’) 

348See, e.g., Newedge Comment Letter at 3 (Feb. 

15, 2013). 

349See, e.g., LCH.Clearnet Comment Letter at 5 

(Feb. 15, 2013); ISDA Comment Letter at 6 (Feb. 15, 

2013); RJ O’Brien Comment Letter at 5 (Feb. 15, 

2013). 

350See ISDA Comment Letter at 6 (Feb. 15, 2013); 

FIA Comment Letter at 23–25 (Feb. 15, 2013). 

351 ISDA Comment Letter at 6 (Feb. 15, 2013). 

352 ISDA Comment Letter at 2 (May 8, 2013). 

353 Id. ISDA further recommended that because 

many FCM customers use custodians across the 

world, ‘‘many customers cannot assure payment of 

their morning FCM call before the end of the New 

York day,’’ and therefore recommended that 

Commission study the feasibility of reducing the 

time in which customers have to meet margin calls, 

if that is ‘‘imperative.’’ Id. at 3. 

354FIA Comment Letter at 23 (Feb. 15, 2013). See 

also ISDA Comment Letter at 4 (May 8, 2013). 

355LCH.Clearnet Comment Letter at 5 (Feb. 15, 

2013). 

356 ISDA Comment Letter at 1–2 (May 8, 2013); 

FIA Comment Letter at 8–10 (June 20, 2013). 

357 Id. at 3. 

358 ISDA Comment Letter at 3–4 (May 8, 2013). 

359 Id. at 4. 

360See FIA Comment Letter at 8–10 (June 20, 

2013). While the rates used by FIA in this exercise 

may be conservative, and thus the Commission does 

not purport to opine on the precise estimates 

reached, the exercise is nevertheless illustrative and 

useful for the purpose of comparing the costs of the 

Residual Interest Proposal, the alternate proposal, 

and the final rule. 

361 Id. at 9. 

362RJ O’Brien Comment Letter at 5 (Feb. 15, 

2013). 

363 Id. 

364MFA Comment Letter at 8–9 (Feb. 15, 2013). 

365 Id. 

366Paul/Weiss Comment Letter at 4 (Feb. 15, 

2013). 

moment’s notice, thereby causing FCMs 

to require significantly higher margins 

or to liquidate customer positions where 

margin calls cannot be immediately 

met.344 Frontier Futures also asserted 

that the proposal ‘‘may force a number 

of small to mid-sized FCMs out of the 

market,’’ making it more expensive, if 

not impossible, for IBs and small 

members to clear their business, 

removing ‘‘significant capital from the 

futures industry,’’ and ‘‘reducing 

stability to the markets as a whole.’’ 345

RJ O’Brien stated that the Proposed 

Residual Interest Requirement is 

impractical because many farmers and 

agricultural clients still use checks and 

ACH to meet margin calls.346

Several commenters presented 

alternative proposals for the 

Commission’s consideration. For 

example, two commenters argued that 

the Commission should consider less 

costly alternatives to the current 

residual interest proposal, such as 

allowing the FCM ‘‘to count guaranty 

fund deposits with [DCOs] as part of 

their residual interest,’’ 347 with others 

stating that the residual interest amount 

that an FCM must carry should only 

apply to a limited number of its largest 

customers.348

Moreover, and as discussed more 

fully below, other commenters urged the 

Commission to conform the final 

version of proposed Rules 1.20(i)(4), 

22.2(f)(6), and 30.7(a) to the current 

method of calculating residual interest 

buffer for Cleared Swaps by dropping 

the words ‘‘at all times.’’ 349 For 

example, ISDA and FIA further urged 

consideration of an alternative under 

which the residual interest calculations 

would be made once a day and that, by 

the end of a business day, an FCM 

would be required to maintain a 

residual interest in its customer funds 

accounts at least equal to its customers’ 

aggregate margin deficits for the prior 

trade date.350 ISDA stated this 

alternative ‘‘would rationally reduce’’ 

FCMs cost of compliance351 and that 

‘‘[f]or an FCM with robust credit risk 

management systems, covering end-ofday customer deficits should not be a 

significant cost.’’ 352 ISDA also noted 

that at the end of the day ‘‘typically, all 

customer calls have been met, and all 

customer gains have been paid out; all 

achieved without the FCM having 

recourse to its own funding 

resources.’’ 353 FIA asserted that it 

would ‘‘achieve the Commission’s 

regulatory goals without imposing the 

damaging financial and operational 

burdens on FCMs, and the resulting 

financial burdens on customers.’’ 354

LCH.Clearnet argued that customer 

collateral can be protected by 

performing the ‘‘LSOC Compliance 

Calculation’’ once per day, prior to 

settlement at a DCO, because ‘‘prior to 

meeting a call for an increased 

requirement, a customer may be under 

collateralized, but is not collateralized 

by another customer.’’ 355 ISDA and FIA 

evaluated the costs associated with 

requiring FCMs to perform the residual 

interest calculation once each day at the 

close of business on the first business 

day following the trade date.356 ISDA 

estimated that ‘‘removing the predictive 

element of FCM funding requirements’’ 

of the ‘‘at all times’’ method in favor of 

the alternative approach would permit 

markets to ‘‘reap the efficiencies of endof-day accounting,’’ 357 thereby 

significantly reducing the overall cost of 

compliance with the regulation. ISDA 

estimated that for futures, the costs 

associated with the would be the cost of 

covering the out-standing margin 

deficits of between 2 and 5% of its 

futures customers, and thus would 

impose only ‘‘incremental funding 

requirements’’ on FCMs.358 ISDA 

estimated that the costs of the alternate 

proposal would be even smaller for 

cleared swaps, due to the ‘‘more 

professional’’ nature of the market.359

FIA estimated the financing costs to 

FCMs of complying with FIA’s proposed 

alternative and concluded that the costs 

associated with the Proposed Residual 

Interest Requirement would be 

approximately ten times the costs 

associated with the FIA proposal.360 FIA 

also concluded that their proposal 

would not ‘‘impos[e] damaging financial 

and operational burdens on FCMs . . . 

and the resulting financial burdens on 

customers.’’361

RJ O’Brien also recommended that the 

Commission drop the ‘‘at all times’’ 

requirement and that the residual 

interest calculation be done once each 

day at the close of business on the first 

business day following the trade date.362

RJ O’Brien asserted that ‘‘this alternative 

will reduce the substantial financial 

burdens’’ on customers ‘‘while further 

enhancing the protection of customer 

funds.’’ 363

MFA stated that the Commission 

should modify the proposed FCM 

residual interest requirement in 

§ 1.20(i)(4) so that it is a ‘‘point of time’’ 

obligation that requires FCMs to ensure 

they maintain sufficient residual 

interest ‘‘as of the close of business EST 

on the business day after the FCM issues 

a customer’s margin call.’’ 364 MFA 

argued that this alternative would 

‘‘reduce the stress on the market’’ and 

‘‘eliminate[] the need for customer prefunding or intraday margin calls, while 

also ensuring that * * * FCMs will hold 

sufficient funds to protect against 

customer shortfalls.’’ 365

Paul/Weiss stated that the 

Commission should clarify that the 

residual interest amount an FCM is 

required to maintain must be 

determined ‘‘at the time of any end-ofday, intra-day or special call payment 

by an FCM to derivatives clearing 

organization (or other clearing house or 

clearing intermediary). . . .’’366 Paul/

Weiss argued that these payments are 

‘‘the relevant points in time at which 


TKELleY on DSK3SPTVN1PROD with RULES2
68548 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

367 Id. 368The Commission further notes that current 

Commission regulations also include such 

prohibitions. Namely, § 1.22 states that ‘‘No futures 

commission merchant shall use, or permit the use 

of, the futures customer funds of one futures 

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 

futures customer,’’ and § 22.2(d)(1) states that ‘‘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.’’ 

369See 80 Cong. Rec. 6159, 6162 (1936) 

(statement of Sen. James. P. Pope) (‘‘It further 

appears that certain favored dealers have not been 

required actually to put up the money for margins, 

and have been extended credit in that respect. This 

gives these favored dealers an advantage. In some 

instances, large commission firms have become 

bankrupt and the funds placed with them by a large 

number of dealers were lost.’’); ‘‘Regulation of Grain 

Exchanges: Before the H. Comm. on Agriculture,’’ 

73 Cong. 31 (1934) (statement of Dr. J. W. T. Duvel, 

Chief Grain Futures Admin. Dept. of Agriculture) 

(‘‘On the commodities exchanges certain classes of 

speculators and others are able to secure credit but 

in many cases the credit so extended represents 

margin money taken from one class of customers 

and used to extend credit on [sic] margin the trades 

of others. Our aim is to protect the customers’ 

margin money and thereby protect the market as a 

whole.’’). 

370As some commenters report, institutional 

customers in particular are typically 

undermargined. This could mean that institutional 

customers are being favored over individual 

customers. See, e.g., FIA Comment Letter at 15 (Feb. 

15, 2013). 371As recognized by the Commission previously, 

the obligation to ensure that one customer’s 

property is not used to margin or settle the trades 

or contracts of another customer rests with the 

FCM. See 46 FR 11668, 11669. (stating that ‘‘section 

[4d(a)(2)] of the Act and §§ 1.20 and 1.22 of the 

Commission’s regulations require an FCM to add its 

own money into segregation in an amount equal to 

the sum of all customer deficits.’’). See also CFTC 

Letter 00–106 (Nov. 22, 2000) (stating that ‘‘each 

FCM must segregate sufficient funds to cover any 

amounts it owes to its customers in connection with 

commodity interest transactions. The funds of 

multiple customers may be commingled in a single 

account for the benefit of the customers as a group. 

If, however, the balance of any one of those 

customers falls into a deficit, the FCM is obligated 

to restore the amount of such deficit out of its own 

funds or property in order to avoid the use of the 

funds or property or any other customer to meet the 

obligations of the customer in deficit. The 

Commission requires FCM’s [sic] to maintain 

minimum levels of capital to help assure that, 

among other things, they are able to meet such 

obligations.’’). 

372See Jefferies Comment Letter at 8–9 (Feb. 15, 

2013). Jefferies states that the proposal would 

require them to increase residual interest by $15 

million (non-peak) to $30 million (peak). 

373See ISDA Comment Letter at 4–5 (Feb. 15, 

2013). ISDA argued that the long term impact of the 

‘‘at all times’’ portion of the proposal could be as 

high as $335 billion. 

374See FIA Comment Letter at 15–17 (Feb. 15, 

2013). FIA also estimated that the annual financing 

costs associated with the $100 billion cost could 

range from $810 million to $8.125 billion. 

375See Transcript, U.S. Commodity Futures 

Trading Commission Agricultural Advisory 

Committee Meeting held on July 25, 2013, available 

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

newsroom/documents/file/aac_

transcript072513.pdf. 

376See, e.g., Advantage Comment Letter at 8 (Feb. 

15, 2013); CMC Comment Letter at 2 (Feb. 15, 2013); 

CME Comment Letter at 5–6 (Feb. 15, 2013); FIA 

Comment Letter at 4–5 (Feb. 15, 2013); 

LCH.Clearnet Comment Letter at 4–5 (Jan. 25, 2013); 

MGEX Comment Letter at 2 (Feb. 18, 2013); NPPC 

Comment Letter at 2 (Feb. 15, 2013); RCG Comment 

Letter at 3 (Feb. 12, 2013); RJ O’Brien Comment 

Letter at 5 (Feb. 15, 2013); TD Ameritrade Comment 

Letter at 4–5 (Feb. 15, 2013). 

the FCM is obligated to transfer’’ 

customer margin.367

As a threshold matter, and as noted 

above, the Commission reiterates that 

the Act expressly prohibits an FCM from 

using the collateral of one customer to 

margin, secure, or guarantee the trades 

or contracts of other customers.368

Congress specifically added this 

prohibition in response to concerns that 

certain customers were carrying the 

risks and obligations of other favored 

customers.369 By this token, any 

customer that is undermargined is being 

favored over the customers with excess 

margin, in contravention of section 

4d(a)(2) when other customers’ funds 

are being used to cover the 

undermargined amounts.370

Moreover, there is an inescapable 

mathematical fact: When an FCM meets 

the DCO’s margin requirements, the 

property used to meet those 

requirements can only come from one of 

three sources: the responsible customer, 

the FCM, or other customers. If the 

property does not come from the 

customer whose positions generated the 

margin requirement or loss, or the FCM 

itself (that is, the FCM’s residual 

interest), then it must, of necessity, 

come from other customers.371 In 

reviewing the Commission’s customer 

protection rules in light of MFGI and 

PFGI, staff identified market practices 

that were in tension with the plain 

language of the Act, and, as such, the 

Commission attempted to clarify 

acceptable practices with respect to 

these existing statutory requirements 

with the Proposed Residual Interest 

Requirement. 

As noted above, several commenters 

strongly supported the Proposed 

Residual Interest Requirement, noting it 

is consistent with Congressional intent 

and the Commission’s historical 

interpretations of the Act. In general, 

these commenters argued that the 

proposal correctly shifts the risk of loss 

to customers with margin deficiencies 

and away from customers with excess 

margin. Some of these commenters 

questioned market cost estimates and 

statements regarding the technical 

challenges associated with same-day 

margin transfers, and urged the 

Commission to avoid unnecessarily 

weakening customer protection. 

On the other hand, many commenters 

expressed concern regarding the costs 

associated with the Proposed Residual 

Interest Requirement. In particular, 

commenters stated that requiring the 

FCM to be in compliance with residual 

interest requirements ‘‘at all times’’ 

would disparately impact agricultural 

producers, small and mid-size FCMs, 

and hedgers; decrease market liquidity; 

cause market consolidation; and 

increase systemic risk. Moreover, the 

Commission notes that many of the 

estimates of the amount of additional 

capital required as a result of the 

Proposed Residual Interest Requirement 

seem to result from a particular 

interpretation of the meaning of the ‘‘at 

all times’’ portion of the proposal, and 

seemed to range from $49 billion (nonpeak) and $83 billion (peak),372 to $73.2 

billion,373 to upwards of $100 billion.374

Further, commenters asserted that the 

‘‘at all times’’ portion of the Proposed 

Residual Interest Requirement would be 

operationally unachievable, and argued 

that the Proposed Residual Interest 

Requirement would curtail competition, 

concentrate capital in FCMs at a time 

when the market would like to reduce 

the amount of customer collateral held 

at the FCM, and reduce the number of 

viable FCMs, thereby negatively 

impacting overall market risk and 

market access for smaller customers and 

agricultural hedgers. Commenters also 

argued that the Proposed Residual 

Interest Requirement is unnecessary 

because in their view, customer funds 

are not at risk when fellow customer 

accounts are undermargined.375

Many of the commenters interpreted 

the proposal to require FCMs to 

continuously calculate and monitor the 

margin deficits of their customers. In the 

final rulemaking, the Commission is, in 

general, following the concept advanced 

by Paul/Weiss and LCH.Clearnet—that 

is, what is required is that the FCM not 

‘‘use’’ one customer’s property to 

margin another customer’s positions. 

For an interim phase-in period, the 

Commission is adopting the alternative 

proposal recommended by several 

commenters, including FIA. Thus, for 

the reasons set forth below, by the 

Residual Interest Deadline, which is 

defined in § 1.22(c)(5), an FCM would 

be required to maintain a residual 

interest in its customer funds accounts 

at least equal to its customers’ aggregate 

margin deficits for the prior trade 

date.376 The commenters asserted, and 

the Commission agrees that this 

alternative would significantly and 

materially reduce the financial burdens 

that would otherwise be imposed on 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68549 

377The Commission notes that representatives 

from FIA, ISDA, and ADM Investor Services have 

all indicated in meetings with Commission staff 

that such an alternative would better protect 

customers, benefit FCMs risk management 

practices, and materially reduce many costs 

associated with the Commission’s original proposal. 

378See ISDA Comment Letter at 3 (May 8, 2013) 

(noting that a substantial majority of customer 

margin calls are met by 5:00 p.m. on the day the 

calls are issued and therefore the this approach 

would not impose the costs and cause the problems 

associated with the Proposed Residual Interest 

Requirement); FIA Comment Letter at 9 (June 20, 

2013) (estimating that the alternative approach 

would be 10 times less costly for FCMs to finance). 

See also MFA Comment Letter at 8–9 (Feb. 15, 

2013); RJ O’Brien Comment Letter at 5 (Feb. 15, 

2013). 

379See also section 4d(f)(2) of the Commodity 

Exchange Act, as well as § 1.22 of this section and 

§ 22.2(d)(1) of this chapter. 

380 2 FR 1223, 1225 (July 16, 1937). 

381 Id. at 1225 (emphasis supplied). 

382See 46 FR 54500 (Nov. 3, 1981). 

383See id. at 54508 (Final Release) (stating that 

because the Commission did not receive any 

comments on its proposed regulations relating to 

segregation of customer funds, it was adopting the 

amendments essentially as proposed). In addition, 

in stating that ‘‘the Commission is now proposing 

that the option segregation requirements be 

combined with the existing segregation 

requirements for futures,’’ the proposing release 

noted that certain definitions ‘‘have also been 

added or modified to permit defined terms to be 

used in the sections, as amended, and thereby 

simplify the regulations.’’ See 46 FR 33293–01, 

33298 (June 29, 1981). 

384See, e.g., Advantage Comment Letter at 8 (Feb. 

15, 2013); CMC Comment Letter at 2 (Feb. 15, 2013); 

CME Comment Letter at 5–6 (Feb. 15, 2013); FIA 

Comment Letter at 4–5 (Feb. 15, 2013); 

LCH.Clearnet Comment Letter at 4–5 (Jan. 25, 2013); 

MGEX Comment Letter at 2 (Feb. 18, 2013); NPPC 

Comment Letter at 2 (Feb. 15, 2013); RCG Comment 

Letter at 3 (Feb. 12, 2013); RJ O’Brien Comment 

Letter at 5 (Feb. 15, 2013); TD Ameritrade Comment 

Letter at 4–5 (Feb. 15, 2013). 

385See, e.g., CMC Comment Letter at 2 (Feb. 15, 

2013); CME Comment Letter at 5 (Feb. 15, 2013); 

MGEX Comment Letter at 2 (Feb. 18, 2013); NPPC 

Comment Letter at 2 (Feb. 15, 2013); RJ O’Brien 

Comment Letter at 4 (Feb. 15, 2013). 

customers and FCMs alike under the 

Commission’s Proposed Residual 

Interest Requirement 377 because, among 

other things, this alternate approach 

would not cause an extreme drain on 

market liquidity, market consolidation, 

increase in systemic risk, and 

detrimental effect on agricultural 

producers, small and mid-size FCMs, 

and hedgers.378

After careful consideration of the 

comments and the applicable statutory 

provisions, the Commission has decided 

to adopt the Proposed Residual Interest 

Requirement with modifications. 

Section 4d(a)(2) of the Act expressly 

states that the money, securities, and 

property received by an FCM from a 

customer to margin, guarantee, or secure 

the trades or contracts of that customer 

shall be separately accounted for and 

shall not be commingled with the funds 

of such commission merchant or be 

used to margin or guarantee the trades 

or contracts, or to secure or extend the 

credit, of any customer or person other 

than the one for whom the same are 

held.379 Moreover, the Commission 

notes that when section 22 of the rules 

and regulations of the Secretary of 

Agriculture under the Act (the 

predecessor of § 1.22) was adopted in 

1937,380 the year after adoption of the 

Act, it expressly stated that ‘‘No futures 

commission merchant shall use, or 

permit the use of, the money, securities, 

or property of one customer to margin 

or settle the trades or contracts, or to 

secure or extend the credit, of any 

person other than such customer. The 

net equity of one customer shall not be 

used to carry the trades or contracts or 

to offset the net deficit of any other 

customer or person or to carry the trades 

or offset the net deficit of the same 

customer in goods or property not 

included in the term ‘commodity’ as 

defined herein.’’ 381 This language 

addresses, by its terms, more than net 

deficits, and appears to have remained 

substantively unchanged for the next 

four decades. 

In 1981, in its Regulation of Domestic 

Exchange-Traded Commodity Options, 

the Commission revised § 1.22 to 

combine segregation requirements for 

options with existing segregation 

requirements for futures.382 In doing so, 

the Commission generalized the 

regulatory language and deleted specific 

references to ‘‘net equity.’’ However, 

neither the adopting release nor the 

proposing release for the ‘‘Regulation of 

Domestic Exchange-Traded Commodity 

Options’’ rulemaking indicated an 

intent to alter or modify the existing 

segregation requirements for futures.383

The current version of § 1.22 states 

that ‘‘[n]o futures commission merchant 

shall use, or permit the use of, the 

futures customer funds of one futures 

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 

futures customer.’’ 

The Commission’s Proposed Residual 

Interest Requirement was intended to 

ensure compliance with section 4d(a)(2) 

and § 1.22 by shifting the risk of loss in 

the event of a double default back to the 

customer whose positions incurred the 

loss and away from those customers 

with excess margin at the FCM. 

Contrary to the assertion of certain 

commenters, whenever an FCM uses the 

funds of customers with excess margin 

to collateralize the positions of 

undermargined customers, the 

customers with excess funds are subject 

to heightened risk, and diminished 

availability of those excess funds for 

transfer in the event the FCM is in 

financial distress. 

Nonetheless, commenters asserted 

that there is ambiguity regarding (1) the 

point at which an FCM has ‘‘used’’ or 

‘‘permitted the use’’ of the futures 

customer funds of one futures customer 

to purchase, margin, or settle the trades, 

contracts, or commodity options of, or 

to secure or extend the credit of, another 

futures customer, and (2) what an FCM 

is required to do to comply with this 

requirement. Accordingly, the 

Commission is adopting proposed 

§§ 1.20(i) and 1.22 with certain 

modifications. 

First, the Commission is revising 

proposed § 1.20(i) by removing the 

Proposed Residual Interest Requirement 

from paragraph (i)(4). In addition, the 

Commission is revising the language in 

§ 1.22 to add an amended residual 

interest requirement and additional 

technical corrections to § 1.20(i) as 

described further below. Moreover, the 

Commission is reorganizing proposed 

§ 1.22 as follows: (1) The sentence that 

reads ‘‘No futures commission merchant 

shall use, or permit the use of, the 

futures customer funds of one futures 

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 

futures customer.’’ will be in paragraph 

(a); (2) the remaining language in 

proposed paragraph (a) will be deleted; 

(3) the sentence that reads ‘‘Futures 

customer funds shall not be used to 

carry trades or positions of the same 

futures customer other than in contracts 

for the purchase of sale of any 

commodity for future delivery or for 

options thereon traded through the 

facilities of a designated contract 

market.’’ will remain in paragraph (b); 

and (4) as discussed below, a new 

paragraph (c) will be added to address 

the revised residual interest 

requirements. 

As highlighted above, several 

commenters questioned the ability of 

FCMs to measure compliance on a 

continuous and real-time basis,384 and 

argued that the potential cost associated 

with a continuous residual interest 

requirement would have an adverse 

impact on the market.385 The 

Commission is persuaded that 

continuous calculation and monitoring 

requirements are not technologically 

feasible at this time. The Commission is 

also persuaded that it would not be 

practical to make such calculations in 

the futures markets based on intra-day 


TKELleY on DSK3SPTVN1PROD with RULES2
68550 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

386See, e.g., Advantage Comment Letter at 7 (Feb. 

15, 2013); CME Comment Letter at 5 (Feb. 15, 2013); 

FIA Comment Letter at 4, 15, 21–22 (Feb. 15, 2013); 

MFA Comment Letter at 8 (Feb. 15, 2013); NPPC 

Comment Letter at 2 (Feb. 15, 2013); RCG Comment 

Letter at 3 (Feb. 12, 2013); TD Ameritrade at 4–5 

(Feb. 15, 2013). Cf. ISDA Comment Letter at 1–2 

(Aug. 27, 2013). 

387See ISDA Comment Letter at 6 (Feb. 15, 2013); 

FIA Comment Letter at 23–25 (Feb. 15, 2013); 

LCH.Clearnet comment Letter at 5 (Feb. 15, 2013); 

Paul/Weiss Comment Letter at 4–5 (Feb. 15, 2013); 

RJ O’Brien Comment Letter at 5 (Feb. 15, 2013). 

388Paul/Weiss Comment Letter at 4 (Feb. 15, 

2013). 

389See generally id.; FIA Comment Letter at 23 

(Feb. 15, 2013); ISDA Comment Letter at 4 (May 8, 

2013). 

390 Joint Audit Committee Regulatory Update # 

12–03, Part 22 of CFTC Regulations—Treatment of 

Cleared Swaps Customer Collateral—Legally 

Segregated Operationally Commingled (‘‘LSOC’’) 

Compliance Calculation (Oct. 18, 2012). 

391For purposes of this calculation, the FCM 

should include as ‘‘positions’’ any trade or contract 

that (i) would be required to be segregated pursuant 

to 4d(f) 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 contract for the 

purchase or sale of a commodity for future delivery 

and any options on such contracts in an account 

segregated pursuant to section 4d(a) of the Act and 

should exclude as ‘‘positions’’ any trade or contract 

that, pursuant to a Commission rule, regulation, or 

order, is segregated pursuant to section 4d(f) of the 

Act. This requirement is intended to be analogous 

to the definition of Cleared Swap in § 22.1 of this 

chapter. 

392An FCM is not expected to account for 

changes in circumstances that occur after the close 

of business and prior to the next business day’s 

settlement, outside of normal end-of-day 

reconciliation processes. In other words, an FCM 

may use the information (such as position and 

value information) available to it at the close of 

each business day for this calculation. 393This subtraction is intended to address the 

potential double-counting of deficit balances that 

was pointed out in a number of comments. See, e.g., 

Vanguard Comment Letter at 8 (Feb. 22, 2013). 

394As noted in the preamble to the proposal, the 

purpose of the amendments to 1.20(i) is to 

‘‘provid[e] more detail implementing the Net 

Liquidating Method of calculating segregation 

requirements.’’ 77 FR at 67882. 

395Following the completion of the phase-in 

period, when the Residual Interest Deadline moves 

to the time of settlement, an FCM may be subject 

to multiple Residual Interest Deadlines, in which 

case the FCM must maintain residual interest prior 

to the Residual Interest Deadline in an amount that 

is at least equal to the portion of the computation 

set forth in § 1.22(c)(2) attributable to the clearing 

initial margin required by the DCO making such 

settlement. Thus, where an FCM is a member of 

more than one DCO and the DCOs conduct their 

daily settlement cycles at different times, an FCM 

would be required, at the time of the daily 

settlement for each DCO, to maintain the 

proportionate share of residual interest in the 

futures customer account. 

changes.386 However, as discussed in 

more detail below, the Commission is 

persuaded that the calculations required 

by the residual interest requirement are 

feasible using a point in time approach. 

As noted above, the Commission is 

moving the Proposed Residual Interest 

Requirement from proposed § 1.20(i) to 

new paragraph (c) in § 1.22. Moreover, 

and as suggested by commenters,387 the 

Commission agrees that a point in time 

approach to the determination of the 

adequate size of the residual interest 

amount would ‘‘ensure that an FCM has 

appropriately sized the residual interest 

buffer to cover the aggregated gross 

margin deficiencies in respect of 

customer transactions in the relevant 

origin.’’ 388 Further, the Commission 

agrees that this approach is consistent 

with the Act and Commission 

regulations, and would help ensure that 

the collateral of one customer is never 

used to margin the positions of another 

customer.389 Moreover, the Commission 

notes that a point in time approach is 

consistent with the current practice 

with respect to residual interest buffer 

calculations for Cleared Swaps and with 

the approach set forth in JAC Update 

12–03.390

Accordingly, the Commission is 

revising the Proposed Residual Interest 

Requirement as follows. Regulation 1.22 

(c)(1) defines the undermargined 

amount for a futures customer’s account 

as the amount, if any (i.e., the amount 

must be greater than or equal to zero), 

by which (i) the total amount of 

collateral required for that futures 

customer’s positions 391 in that account, 

at the time or times referred to in 

§ 1.22(c)(2), exceeds (ii) the value of the 

net liquidating equity for that account, 

as calculated in § 1.20(i)(2). An FCM is 

required to perform the calculation set 

forth in § 1.22(c)(1) on a customer by 

customer basis. Regulation 1.22(c)(2) 

requires an FCM to perform a residual 

interest buffer calculation, at the close 

of each business day, based on the 

information available to the FCM at that 

time,392 by calculating (i) the 

undermargined amounts, based on the 

clearing initial margin that will be 

required to be maintained by that FCM 

for its futures customers, at each DCO of 

which the FCM is a member, at the 

point of the daily settlement (as 

described in § 39.14) that will complete 

during the following business day for 

each such DCO less (ii) any debit 

balances referred to in § 1.20(i)(4) 

included in such undermargined 

amounts.393

An FCM is required to perform the 

calculation in § 1.22(c)(2) once per day, 

based on the information at the close of 

business on that day, so that it can 

determine the amount of customer 

funds which will be needed to avoid 

using the funds of one customer to 

margin, guarantee, or secure the 

positions of another customer. 

Consistent with this revised residual 

interest requirement, § 1.20(i)(4) is being 

amended to state that the amount of 

funds an FCM is holding in segregation 

may not be reduced by any debit 

balances that the futures customers of 

the FCM have in their accounts. In 

addition, § 1.20(i)(2)(ii) is being 

removed because this requirement is 

now set forth in § 1.22(c). Consistent 

with Federal Register requirements, 

§ 1.20(i)(2) is being renumbered and, for 

clarity, the first sentence will be revised 

to read as follows ‘‘The futures 

commission merchant must reflect in 

the account that it maintains for each 

futures customer the net liquidating 

equity for each such customer, 

calculated as follows: the market value 

of any futures customer funds that it 

receives from such customer, as 

adjusted by: . . . .’’ 394 Further, under 

§ 1.22(c)(3), an FCM is required, prior to 

the Residual Interest Deadline, as 

defined in § 1.22(c)(5), to have residual 

interest in the segregated account in an 

amount that is at least equal to the 

computation set forth in § 1.22(c)(2).395

However, the amount of residual 

interest that an FCM must maintain may 

be reduced to account for payments 

received from or on behalf of (net of 

disbursements made to or on behalf of) 

undermargined futures customers 

between the close of the previous 

business day and the Residual Interest 

Deadline. 

Regulation 1.22(c)(4) provides that for 

purposes of § 1.22(c)(2), an FCM should 

include, as ‘‘clearing initial margin,’’ 

customer initial margin that the FCM 

will be required to maintain, for that 

FCM’s futures customers, at another 

FCM, and, for purposes of § 1.22(c)(3), 

must do so prior to the Residual Interest 

Deadline. In other words, § 1.22(c)(4) is 

intended to make clear that the 

requirements with respect to futures 

customer funds used by an FCM that 

clears through another FCM are parallel 

to the requirements applied with respect 

to futures customer funds used when an 

FCM clears through a DCO. 

Regulation 1.22(c)(5) defines the 

Residual Interest Deadline. Paragraph 

(c)(5)(i) sets forth that except during the 

phase-in period defined in paragraph 

(c)(5)(ii), the Residual Interest Deadline 

shall be the time of the settlement 

referenced in paragraph (c)(2)(i), or, as 

appropriate, (c)(4). However, in 

response to the comments that urge that 

achieving compliance with these 

requirements may take time, and in 

order to mitigate some of the cost 

concerns raised by commenters, 

paragraph (c)(5)(ii) provides that the 

Residual Interest Deadline during the 

phase-in period shall be 6:00 p.m. 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68551 

396For further discussion regarding the phase-in 

schedule for the requirements in § 1.22(c), see 

section III.F. 

397See, e.g., AIMA Comment Letter at 3 (Feb. 15, 

2013); CCC Comment Letter at 2–3 (Feb. 15, 2013); 

CHS Hedging Comment Letter at 2–3 (Feb. 15, 

2013); CME Comment at 5–7 (Feb. 15, 2013); AFBF 

Comment Letter at 2 (Feb. 15, 2013); Jefferies 

Comment Letter at 9 (Feb. 15, 2013); JSA Comment 

Letter at 1–2 (Feb. 15, 2013); NCBA Comment Letter 

at 2 (Feb. 15, 2013); NGFA Comment Letter at 5 

(Feb. 15, 2013); NIBA Comment Letter at 1–2 (Feb. 

15, 2013); TCFA Comment Letter at 2 (Feb. 15, 

2013); AFMP Group Comment Letter at 1–2 (Sept. 

18, 2013). 

398See, e.g., Newedge Comment Letter at 3 (Feb. 

15, 2013); RJ O’Brien Comment Letter at 5 (Feb. 15, 

2013). 

399CIEBA Comment Letter at 3 (Feb. 15, 2013). 

400 Id. 

401See AIMA Comment Letter at 3 (Feb. 15, 

2013). 

402See section II.F. above. 

403See section II.F. above regarding the 

requirement set forth § 1.17(c)(5). 

404Paul/Weiss Comment Letter at 6 (Feb. 15, 

2013). 

405This update provides that, for purposes of 

meeting any margin deficiency in the cleared swaps 

customer account with a deposit of additional funds 

prior to payment to any DCO, the requirements of 

Commission § 1.49 with respect to denomination or 

jurisdiction will not apply. 

406Paul/Weiss Comment Letter at 5–6 (Feb. 15, 

2013). 

407Paul/Weiss Comment Letter at 5–6 (Feb. 15, 

2013). 

408FCStone Comment Letter at 6 (Feb. 15, 2013). 

409NPPC Comment Letter at 2 (Feb. 15, 2013). 

Eastern Time on the date of the 

settlement referenced in paragraph 

(c)(2)(i) or, as appropriate, (c)(4). The 

phased compliance schedule for 

§ 1.22(c) is set forth in § 1.22(c)(5)(iii). 

However, the Residual Interest Deadline 

of 6:00 p.m. Eastern Time in 

§ 1.22(c)(5)(ii) shall begin one year 

following the publication of this rule in 

the Federal Register.396

Additionally, in further response to 

the commenters’ request for additional 

study,397 in paragraph (c)(5)(iii)(A), the 

Commission is directing staff to 

complete and publish for public 

comment a report (‘‘the Report’’), no 

later than 30 months following the date 

of publication of this release, 

addressing, to the extent information is 

practically available, the practicability 

(for both FCMs and customers) of 

moving the Residual Interest Deadline 

from 6:00 p.m. Eastern Time on the date 

of the settlement referenced in 

§ 1.22(c)(2)(i) to the time of that 

settlement (or to some other time of 

day), including whether and on what 

schedule it would be feasible to do so. 

The Report is also expected to address 

cost and benefit considerations of such 

potential alternatives. Moreover, staff 

shall, using the Commission’s Web site, 

solicit public comment and shall 

conduct a public roundtable regarding 

specific issues to be covered by the 

Report. Paragraph (c)(5)(iii)(B) sets forth 

that within nine months after the 

publication of the Report, the 

Commission may (but shall not be 

required to) do either of the following: 

(1) terminate the phase-in period, in 

which case the phase-in shall end as of 

a date established by order published in 

the Federal Register, which date shall 

be no less than one year after the date 

such order is published, or (2) 

determine that it is necessary or 

appropriate in the public interest to 

propose through rulemaking a different 

Residual Interest Deadline, in which 

event, the Commission shall establish, 

by order published in the Federal 

Register, a phase-in schedule. Finally, 

paragraph (c)(5)(iii)(C) provides that if 

the phase-in schedule has not been 

amended pursuant to § 1.22(c)(5)(iii)(B), 

then the phase-in period shall end on 

December 31, 2018. 

With respect to the suggestion that a 

portion (i.e., that portion attributable to 

customer business) of the funds 

contributed to an exchange’s guaranty 

fund by an FCM should be considered 

in that FCM’s residual interest 

calculations,398 the Commission notes 

that contributions to a guarantee fund 

are not segregated for the benefit of 

customers. Rather, they are, by design, 

available to meet the defaults of other 

clearing members, and thus cannot be 

counted as customer segregated funds. 

As such, the Commission declines to 

adopt this suggestion. 

The Commission also received several 

requests for clarifications. CIEBA stated 

that ‘‘while futures market participants 

may be familiar with terms such as 

‘residual interest’ and the technical 

features of the proposed rule, other 

market participants may not appreciate 

the full scope of the rule and the 

additional protections provided without 

further explanation.’’ 399 CIEBA 

requested that the Commission clarify 

‘‘how this requirement is intended to 

work with examples of its application so 

as to more broadly communicate the 

Commission’s intent to bolster the depth 

of customer protections to minimize 

customer risk and promote confidence 

in the markets.’’ 400 The Commission 

recognizes CIEBA’s concern and, as 

discussed above, has provided 

clarification in this release regarding the 

mechanism by which FCMs measure 

compliance with the statutory 

requirement of 4d(a)(2). However, the 

Commission also recognizes that FCMs 

engage in a broad range of acceptable 

business practices and should be given 

flexibility in how best to tailor their 

businesses to comply with such 

requirement. 

AIMA requested clarification that 

§§ 1.17(c)(5) and 1.20(i)(4) are not 

duplicative and therefore does not 

require FCMs to ‘‘double count’’ 

residual interest.401 The Commission 

reiterates that § 1.17(c)(5) and the 

residual interest requirement now set 

forth in 1.22(c)(2) are two separate 

requirements. As discussed above, 

§ 1.17 sets forth the Commission’s 

minimum capital requirements for 

FCMs and requires, among other things, 

an FCM to incur a charge to capital for 

customer and noncustomer accounts 

that are undermargined beyond a 

specified period of time.402 The residual 

interest requirements, on the other 

hand, are intended to help make sure 

that the collateral of one customer is 

never used to margin the positions of 

another customer. These requirements 

are, therefore, not duplicative, and the 

Final Rule does not actually require an 

FCM to double count the residual 

interest amount.403

Paul/Weiss requested that the 

Commission confirm that the 

requirements of jurisdiction and 

denomination in § 1.49 do not apply to 

an FCM’s cash management procedures 

for meeting its residual interest 

obligation.404 Paul/Weiss noted that JAC 

Update 12–03,405 provides that the 

denomination and jurisdiction 

requirements set forth in § 1.49 do not 

apply to the extent that an FCM deposits 

additional funds in order to cover 

margin deficiencies in the Cleared 

Swaps Customer Account prior to a 406

DCO’s settlement.407 The Commission 

agrees that, for purposes of meeting any 

undermargined amount in a customer 

account with a deposit of additional 

funds prior to payment to any DCO, the 

requirements of Commission § 1.49 with 

respect to denomination or jurisdiction 

should not apply, and accordingly, they 

will not. 

FCStone asked the Commission to set 

price limits at levels equal to or below 

the margin requirement in all 

commodities to mitigate the potential 

for under margined customer 

positions.408 NPPC requested that the 

Commission give ‘‘customers the 

opportunity to ‘opt out’ of allowing 

segregated funds to be used outside of 

the customer accounts,’’ so that 

‘‘customers can proactively protect their 

funds from being used for potentially 

fraudulent purposes’’ and when 

‘‘coupled with higher fees to help 

balance the trade off, customers could 

determine the level of risk to which they 

are comfortable subjecting their 

funds.’’ 409 The Commission notes that 


TKELleY on DSK3SPTVN1PROD with RULES2
68552 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

410FCStone Comment Letter at 4 (Feb. 15, 2013). 

411See Premier Metal Services Comment Letter at 

2–3 (Jan. 1, 2013) and ISRI Comment Letter at 4– 

5 (Dec. 4, 2012), which letters were cited and 

supported by several other commenters. See also 

Pilot Flying J Comment Letter at 2 (Feb. 14, 2013), 

which stated that FCMs should not be permitted to 

use customer funds for outside investments, 

capitalization or collateralization. 

412See, e.g., ISRI Comment Letter at 6 (Dec. 4, 

2013); AIM Comment Letter at 2–7 (Jan. 24, 2013); 

MFA Comment Letter at 9 (Feb. 15, 2013); State 

Street Comment Letter at 2 (Jan. 16, 2013). 

413 77 FR 6336, 6343 (Feb. 7, 2012). 

414 Id. 

these comments are outside the scope of 

this rulemaking. 

FCStone objected to proposed 

§ 1.20(i), believing that the Commission 

was mandating changing a customer’s 

account balance to record margin 

deficits, which they believe would 

impact the tax treatment of customers’ 

accounts.410 The Commission clarifies 

that the proposed amendments were not 

intended to require any additional 

charges to individual customer 

accounts, but to ensure that the FCM 

separately tracked the sum of such 

amounts to ensure it was holding 

residual interest in its segregated 

accounts greater than the gross total of 

such undermargined amounts. 

10. Segregation Regimes 

Several commenters proposed that 

language contained in customer account 

agreements used by certain FCMs 

should be restricted by the Commission. 

These commenters referred to clauses 

permitting customer collateral to be 

pledged, liquidated or transferred by the 

FCM and asked that the account 

agreements be viewed as contracts of 

adhesion due to the necessity to agree 

to such clauses in order to open a 

commodity futures trading account.411

These commenters, among other issues, 

requested that the Commission limit the 

ability of FCMs to require such 

contractual language. 

The Commission notes that any such 

contractual language does not limit the 

applicability of the Act and Commission 

regulations with respect to the treatment 

of customer property by FCMs. The 

customer protection regime applies to 

all segregated customer funds regardless 

of any broader contractual terms. 

The specific ability of an FCM to 

pledge, liquidate or transfer customer 

collateral is constrained by the Act and 

Commission regulations regardless of 

any reference in a customer agreement 

to such applicable law, or a lack of 

reference thereto. Section 4d is the 

relevant provision of the Act that 

addresses how FCMs must hold 

customer funds. Section 4d(a)(2) of the 

Act provides that each FCM must treat 

and deal with all money, securities, and 

property received by the FCM to margin, 

guarantee, or secure the trades or 

contracts of any customer of the FCM, 

or accruing to such customer as the 

result of such trades or contracts, as 

belonging to the customer. Section 

4d(a)(2) further provides that customer 

funds must be separately accounted for 

and may not be commingled with the 

funds of the FCM, or be used to margin 

or guarantee the trades or contracts, or 

to secure or extend credit, of any 

customer or person other than the 

customer that deposited the funds. 

Commission regulations also set 

requirements on how customer funds 

may be held. Regulation 1.20(a) 

provides that all customer funds must 

be separately accounted for by the FCM 

and segregated as belonging to 

commodity or option customers. The 

funds, when deposited with a bank, 

trust company, clearing organization, or 

another FCM must be deposited under 

an account name that clearly identifies 

the funds as belonging to customers and 

shows that the funds are segregated 

from the FCM’s own funds as required 

by Section 4d(a)(2) of the Act. 

Regulation 1.20(c) provides that each 

FCM must treat and deal with the 

customer funds of a customer as 

belonging to the customer. The FCM 

must separately accounted for customer 

funds and may not commingle the funds 

with the FCM’s own funds, or use the 

funds to margin, guarantee, or secure 

futures positions of any person, or 

extend credit to any person, other than 

the customer that owns the funds. 

Regulation 1.25 sets forth 

requirements on how FCMs may invest 

customer funds. Pursuant to § 1.25, an 

FCM is permitted to use customer funds 

to purchase permitted investments. The 

investments, however, are required to be 

separately accounted for by the FCM 

under § 1.26, and segregated from the 

FCM’s own assets in accounts that 

designate the funds as belonging to 

customers of the FCM and held in 

segregation as required by the Act and 

Commission regulations. 

FCMs also may sell customer 

deposited securities under agreements 

to repurchase the securities pursuant to 

§ 1.25(a)(2)(ii). Regulation 1.25(d)(9) 

provides that the cash transferred to the 

segregation account for customer-owned 

securities sold under a repurchase 

agreement must be on a payment versus 

delivery basis, and the customer 

segregated funds account must receive 

same-day funds credited to the 

segregated account simultaneously with 

the delivery or transfer of the securities 

from the customer segregated accounts. 

A customer, however, may condition its 

deposits of securities with an FCM by 

requiring that that FCM not engage in 

reverse repurchase transactions with the 

customer’s collateral. 

Accordingly, FCMs do not have an 

unfettered ability to pledge, 

rehypothecate, or otherwise use 

customer funds (including customer 

deposited securities) for their own 

benefit or purposes. However, FCMs 

also have the ability, as limited by all 

such applicable law and regulation for 

the benefit of customers, to liquidate 

customer securities if the customer that 

deposited the securities fails to meet a 

margin call. FCMs also may pledge 

customer deposited securities to DCOs 

as margin for the customer accounts 

carried by the FCM. The customer 

collateral pledged to a DCO, however, 

also must be held in customer 

segregated accounts. 

Even if transformed as permissible 

under the Act and regulations and 

contemplated by customer agreements, 

such collateral maintains its character as 

segregated customer property and 

remains subject to the customer 

protection regime. Commission staff has 

further confirmed that there is 

variability in the FCM community 

regarding the specific language included 

in customer account agreements and 

that not all agreements include broad 

authorities to the FCM for the use of 

customer collateral. However, as noted 

above, the contractual terms and 

conditions could not result in an FCM 

holding or using customer funds in a 

manner that was not in conformity with 

the Act and Commission regulations. 

Several commenters also requested 

that the Commission provide 

alternatives to the current segregation 

regime, including individual 

segregation, the ability to use third-party 

custodial accounts, or the ability to optout of segregation.412 While these issues 

are beyond the scope of the Proposal, 

the Commission notes that in adopting 

the final regulations for the protection of 

Cleared Swaps Customer Collateral in 

February 2012, it stated that the issue of 

alternative segregation regimes raise 

important risk management and cost 

externality issues, particularly in 

ensuring that deposited collateral is 

immediately available to the FCM or 

DCO in the event of the default of the 

customer or FCM.413 The Commission 

directed staff to continue to analyze 

different proposals with the goal of 

developing a proposal to provide 

additional or enhanced customer 

protection.414 In this regard, staff is 

continuing to review and meet with 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68553 

415See forex form letter group: Michael Krall; 

David Kennedy; Robert Smith; Michael Carmichael; 

Andrew Jackson; Donald Blais; Suzanne Slade; 

Patricia Horter; JoDan Traders; Jeff Schlink; Sam 

Jelovich; Matthew Bauman; Mark Phillips; Deborah 

Stone; Po Huang; Aaryn Krall; Vael Asset 

Management; Kos Capital; James Lowe; Tracy 

Burns; Treasure Island Coins; Clare Colreavy, 

Brandon Shoemaker. 

416RCG Comment Letter at 7 (Feb. 12, 2013). 

industry representatives regarding 

alternative segregation regimes. 

In addition, the Commission noted 

that customer funds held in third-party 

custodial accounts constitute customer 

property within the meaning of the 

Bankruptcy Code. As such, positions 

and collateral held in third-party 

accounts are subject to the U.S. 

Bankruptcy Code and applicable 

provisions of the Act, which provide for 

the pro rata share of available customer 

property. The Commission also received 

several comments requesting specific 

and defined protections for funds 

provided to an FCM by retail 

counterparties engaged in off-exchange 

foreign currency transactions.415 The 

Proposal, however, focused on customer 

protection issues in the futures market, 

and the issue of the protection of funds 

held by an FCM for retail foreign 

currency counterparties is beyond the 

scope of the Proposal. 

H. § 1.22: Use of Futures Customer 

Funds 

RCG commented that the proposed 

amendments to §§ 1.22, 1.23, 30.7(f) and 

30.7(g) are inconsistent as to when an 

FCM should use its own funds to cover 

margin deficits with § 1.30, which 

provides that an FCM cannot make an 

unsecured loan to a customer.416 The 

Commission does not believe that the 

regulations are inconsistent. Regulation 

§ 1.30 provides that an FCM may not 

make a loan to a customer, unless such 

loan is done a fully secured basis. 

Regulations 1.22 and 30.7(f) provide 

that an FCM cannot use the funds of one 

customer to secure or extend credit to 

another customer. Regulations 1.23 and 

30.7(g) impose conditions upon when 

an FCM may withdraw proprietary 

funds from segregated accounts. 

As discussed in greater detail in 

section II.G.9. above, the Commission 

has considered the comments and has 

revised and reorganized § 1.22. 

I. § 1.23: Interest of Futures Commission 

Merchant in Segregated Futures 

Customer Funds; Additions and 

Withdrawals 

The Commission proposed amending 

§ 1.23 to require additional safeguards 

with respect to an FCM withdrawing 

futures customer funds from segregated 

accounts that are part of the FCM’s 

residual interest in such accounts. 

Proposed § 1.23(a) provides that an 

FCM may deposit unencumbered 

proprietary funds, including securities 

from its own inventory that qualify as 

permitted investments under § 1.25, into 

segregated futures customer accounts in 

order to provide a buffer or cushion of 

funds to protect against the firm failing 

to maintain sufficient funds in such 

accounts to meet its total obligations to 

futures customers. 

Under proposed § 1.23(a), an FCM has 

access to its own funds deposited into 

futures customer accounts to the extent 

of the FCM’s residual interest in such 

funds, subject to the restriction on 

withdrawal of residual interest required 

to cover undermargined amounts. 

However, proposed § 1.23(b) prohibits 

an FCM from withdrawing its residual 

interest or excess funds from futures 

customer accounts (any withdrawal not 

made to or for the benefit of futures 

customers would be considered a 

withdrawal of the FCM’s residual 

interest) on any given business day 

unless the FCM had completed the daily 

calculation of funds in segregation 

pursuant to § 1.32 as of the close of the 

previous business day, and the 

calculation showed that the FCM 

maintained excess segregated funds in 

the futures customer accounts as of the 

close of business on the previous 

business day. Proposed § 1.23(b) further 

requires that the FCM adjust the excess 

segregated funds reported on the daily 

segregation calculation to reflect other 

factors, such as overnight and current 

day market activity and the extent of 

current customer undermargined or 

debit balances, to develop a reasonable 

basis to estimate the amount of excess 

funds that remain on deposit since the 

close of business on the previous day 

prior to initiating a withdrawal. 

The Commission proposed additional 

required layers of authorization and 

documentation if the withdrawal 

exceeds, individually or in the aggregate 

with other such withdrawals, 25 percent 

or more of the FCM’s residual interest 

computed as of the close of business on 

the prior business day. Proposed 

§ 1.23(c) prohibits an FCM from 

withdrawing more than 25 percent of its 

residual interest in futures customer 

accounts unless the FCM’s CEO, CFO, or 

other senior official that is listed as a 

principal on the firm’s Form 7–R 

registration statement and is 

knowledgeable about the FCM’s 

financial requirements (‘‘Financial 

Principal’’) pre-approves the withdrawal 

in writing. 

Regulation 1.23(c) requires the FCM 

to immediately file a written notice with 

the Commission and with the firm’s 

DSRO of any withdrawal that exceeds 

25 percent of its residual interest. The 

written notice must be signed by the 

CEO, CFO, or Financial Principal that 

pre-approved the withdrawal, 

specifying the amount of the 

withdrawal, its purpose, its recipient(s), 

and contain an estimate of the residual 

interest after the withdrawal. The 

written notice also must contain a 

representation from the person that preapproved the withdrawal that to such 

person’s knowledge and reasonable 

belief, the FCM remains in compliance 

with its segregation obligations. 

Regulation 1.23 further requires that the 

official, in making this representation, 

specifically consider any other factors 

that may cause a material change in the 

FCM’s residual interest since the close 

of business on the previous business 

day, including known unsecured futures 

customer debits or deficits, current day 

market activity, and any other 

withdrawals. The written notice would 

be required to be filed with the 

Commission and with the FCM’s DSRO 

electronically. 

Proposed § 1.23(d) requires an FCM to 

deposit proprietary funds sufficient to 

restore the residual interest targeted 

amount when a withdrawal of funds 

from segregated futures customer 

accounts, not for the benefit of the firm’s 

customers, causes the firm to fall below 

its targeted residual interest in such 

accounts. The FCM must deposit the 

proprietary funds into such segregated 

accounts prior to the close of the next 

business day. Alternatively, the FCM 

may revise its targeted residual interest 

amount, if appropriate, in accordance 

with its written policies and procedures 

for establishing, documenting, and 

maintaining its target residual interest, 

in accordance with the requirements of 

proposed § 1.11. Proposed § 1.23 also 

stated that should an FCM’s residual 

interest, however, be exceeded by the 

sum of the FCM’s futures customers’ 

margin deficits (i.e., undermargined 

amounts), an amount necessary to 

restore residual interest to that sum 

must be deposited immediately. 

Identical requirements with respect to 

procedures required for withdrawals of 

residual interest in Cleared Swaps 

Customer Collateral Accounts and 30.7 

secured accounts were proposed in 

§§ 22.17(c) and 30.7(g), respectively. 

NFA commented recommending that 

the Commission revise the language in 

§ 1.23 to keep it consistent with the 

language in NFA Financial 

Requirements Section 16 (prohibiting 

withdrawals that are made ‘‘not for the 

benefit of commodity and option 

customers and foreign futures and 


TKELleY on DSK3SPTVN1PROD with RULES2
68554 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

417NFA Comment Letter at 14 (Feb. 15, 2013). 418 Id. 419 Id. 420The Commission also is making comparable 

revisions to §§ 22.17(c) and 30.7(g) in light of NFA’s 

comments. 421 Id. 

422 Jefferies Comment Letter at 4–6 (Feb. 15, 

2013). 

423 Id. 

424LCH.Clearnet Comment Letter at 7 (Jan. 25, 

2013); FIA Comment Letter at 6 (Feb. 15, 2013). 

425See NFA Comment Letter at 14 (Feb. 15, 2013). 

426Schippers Comment Letter (Dec. 10, 2013), 

Randy Fritsche Comment Letter (Feb. 14, 2013), 

NPPC Comment Letter at 2 (Feb. 14, 2013), Strelitz/ 

California Metal X Comment (Jan. 15, 2013), 

Premier Metal Services Comment Letter at 4 (Jan. 

3, 2013), ISRI Comment Letter at 5–7 (Dec. 4, 2012), 

AIM Comment Letter at 4 (Jan. 24, 2013), Kripke 

Enterprises Comment Letter (Dec. 12, 2012), 

Manitoba Comment Letter (Dec. 13, 2012), Solomon 

Metals Corp. Comment Letter (Jan. 15, 2013), 

Michael Krall Comment Letter (Dec. 17, 2012), 

David Kennedy Comment Letter (Dec. 17, 2012), 

Robert Smith Comment Letter (Dec. 17, 2012), 

Michael Carmichael Comment Letter (Dec. 17, 

2012), Andrew Jackson Comment Letter (Dec. 17, 

2012), Donald Blais Comment Letter (Dec. 17, 

2012), Suzanne Slade Comment Letter (Dec. 17, 

2012), Patricia Horter Comment Letter (Dec. 17, 

2012), JoDan Traders Comment Letter (Dec. 17, 

2012), Jeff Schlink Comment (Dec. 18, 2012), Sam 

Jelovich Comment Letter (Dec. 18, 2012), Matthew 

Bauman Comment Letter (Dec. 20, 2012), Mark 

Phillips Comment Letter (Dec. 22, 2012), Deborah 

Stone Comment Letter (Dec. 24, 2012), Po Huang 

Comment Letter (Dec. 24, 2012), Aarynn Krall 

Comment Letter (Jan. 8, 2013), Vael Asset 

Management Comment Letter (Jan. 10, 2013), Kos 

Capital Comment Letter (Jan. 11, 2013), James Lowe 

Comment Letter (Jan. 13, 2013), Tracy Burns 

Comment Letter (Jan. 14, 2013), Treasure Island 

Coins Comment Letter (Jan. 14, 2013), and Clare 

Colreavy Comment Letter (Jan. 9, 2013). 

427NPPC Comment Letter at 2 (Feb. 14, 2013), 

Premier Metal Services Comment Letter at 4 (Jan. 

3, 2013), ISRI Comment Letter at 5–7 (Dec. 4, 2012), 

AIM Comment Letter at 4 (Jan. 24, 2013), Kripke 

Enterprises Comment Letter (Dec. 12, 2012), 

Manitoba Comment Letter (Dec. 13, 2012), Solomon 

Metals Corp. Comment Letter (Jan. 15, 2013), 

Michael Krall Comment Letter (Dec. 17, 2012), 

David Kennedy Comment Letter (Dec. 17, 2012), 

Robert Smith Comment Letter (Dec. 17, 2012), 

Michael Carmichael Comment Letter (Dec. 17, 

2012), Andrew Jackson Comment Letter (Dec. 17, 

2012), Donald Blais Comment Letter (Dec. 17, 

2012), Suzanne Slade Comment Letter (Dec. 17, 

2012), Patricia Horter Comment Letter (Dec. 17, 

2012), JoDan Traders Comment Letter (Dec. 17, 

2012), Jeff Schlink Comment Letter (Dec. 18, 2012), 

Sam Jelovich Comment Letter (Dec. 18, 2012), 

Matthew Bauman Comment Letter (Dec. 20, 2012), 

Mark Phillips Comment Letter (Dec. 22, 2012), 

Deborah Stone Comment Letter (Dec. 24, 2012), Po 

Huang Comment Letter (Dec. 24, 2012), Aarynn 

foreign options customers’’).417 NFA 

commented that without a definition of 

‘‘proprietary use’’ a withdrawal that 

may not be for an FCM’s own 

proprietary use may still be a 

withdrawal that is not for the benefit of 

customers and, therefore, would trigger 

NFA’s approval and notice requirements 

pursuant to NFA Financial 

Requirements Section 16, but not the 

Commission’s approval and notice 

requirements pursuant to § 1.23.418 NFA 

also commented that the Commission 

should remove proposed § 1.23(d)’s 

reference to ‘‘business days’’ in order to 

ensure that FCMs understand that the 

requirements related to withdrawals of 

25 percent or more apply at all times.419

The Commission has considered 

NFA’s comment and is revising § 1.23 to 

remove the term ‘‘proprietary use’’ and 

is replacing it with the concept of 

withdrawals that are not made to or for 

the benefit of customers. The 

Commission also is revising § 1.23 to 

remove the reference to ‘‘business 

days.’’ The revisions will more closely 

align the Commission’s and NFA’s 

regulations governing an FCM’s 

withdrawal of proprietary funds from a 

segregated account by making the 

language and conditions more 

consistent. This consistency of the 

Commission and NFA requirements is 

appropriate as it will allow FCMs to 

operate under one set of conditions, 

while also retaining the overall policy 

goals of the Commission to limit an 

FCM’s ability to withdraw funds from 

segregated accounts until the FCM can 

be reasonably assured that the funds are 

excess, proprietary funds.420

NFA further requested the 

Commission to clarify that pre-approval 

of a series of transactions that in the 

aggregate exceeded the 25 percent 

threshold would not require after the 

fact approvals of the first transactions of 

the series, but only approvals of the 

transactions resulting in the 25 percent 

threshold being exceeded.421 The 

Commission confirms that an FCM 

would need to obtain the necessary 

approvals only for the transaction that 

caused the withdrawals to exceed the 25 

percent threshold. 

Jefferies commented that it generally 

supported proposed amendments to 

§ 1.23, but stated that requiring FCMs to 

report when they draw down more than 

25 percent of their residual interest will 

discourage an FCM from voluntarily 

adding to its residual interest.422

Jefferies commented that FCMs should 

be permitted to withdraw any residual 

interest amount in excess of their target 

level and to withdraw up to 25 percent 

of the target level before providing 

notice, or if the last calculated residual 

interest was below the target level, the 

calculation should be 25 percent of the 

lower amount.423 LCH.Clearnet and the 

FIA also recommended revising 

§§ 1.23(d) and 22.17(c) to apply only to 

withdrawal of FCM funds in excess of 

25 percent of the FCM’s targeted 

residual interest, rather than on 25 

percent of the total residual interest in 

the customer segregated account, 

specifically to ensure that FCMs have no 

disincentive to maintain significant 

excess funds above the targeted residual 

interest segregation at DCOs for swaps 

clearing.424

The Commission does not believe that 

substituting the targeted residual 

amount for the actual residual interest 

amount would appropriately focus 

management attention on significant 

withdrawals relative to the actual, not 

just target, excess, as well as clearly 

establish a chain of responsibility for 

such withdrawals, as is the intended 

purpose of the proposed regulation. The 

Commission clarifies that pre-approval 

would be required, with respect to a 

series of transactions, for the 

transactions which would result in the 

threshold being exceeded and not 

earlier transactions in the series. 

Accordingly, the Commission is 

adopting § 1.23 and the conforming 

provisions in §§ 22.17 and 30.7(g), with 

changes as recommended by NFA 

substituting language ‘‘not for the 

benefit of customers’’ (with description 

of customer as applicable to each such 

provision) for ‘‘proprietary use’’ and 

eliminating the reference to business 

days.425

In addition, and in light of the 

changes discussed herein with respect 

to the residual interest requirements set 

forth in §§ 1.22, 22.2, and 30.7, the 

Commission is amending § 1.23 and the 

conforming provisions in §§ 22.17 and 

30.7(g) to make clear that if an FCM’s 

residual interest is less than the 

amounts required to be maintained in 

§ 1.22, 22.2(f)(6), or 30.7(f), as 

applicable, at any particular point in 

time, the FCM must immediately restore 

the residual interest to exceed the sum 

of such amounts. 

J. § 1.25: Investment of Customer Funds 

1. General Comments Regarding the 

Investment of Customer Funds 

Regulation 1.25 sets forth the 

financial investments that an FCM or 

DCO may make with customer funds. 

The Commission received 32 comment 

letters regarding the investment and 

handling of customer funds by FCMs 

and DCOs.426 In general, all of the 

commenters supported the position that 

FCMs and DCOs only be allowed to 

make safe/non-speculative investments 

of customer funds and not be allowed to 

add risk that customers are unaware of 

or do not sanction. More specifically, 29 

of the commenters proposed that the 

Commission amend its regulations to 

provide commodity customers with the 

ability to ‘‘opt out’’ of granting FCMs 

permission to invest their funds 

(including hypothecation and 

rehypothecation).427 Additionally, 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68555 

Krall Comment Letter (Jan. 8, 2013), Vael Asset 

Management Comment Letter (Jan. 10, 2013), Kos 

Capital Comment Letter (Jan. 11, 2013), James Lowe 

Comment Letter (Jan. 13, 2013), Tracy Burns 

Comment Letter (Jan. 14, 2013), Treasure Island 

Coins Comment Letter (Jan. 14, 2013), and Clare 

Colreavy Comment Letter (Jan. 9, 2013). 

428NPPC Comment Letter at 2 (Feb. 14, 2013); 

Premier Metal Services Comment Letter at 4 (Jan. 

3, 2013); ISRI Comment Letter at 6 (Dec. 4, 2012); 

AIM Comment Letter at 6 (Jan. 24, 2013); Kripke 

Enterprises Comment Letter (Dec. 10, 2012); 

Manitoba Comment Letter (Dec. 13, 2012); and 

Solomon Metals Corp Comment Letter (Jan, 15, 

2013). 

429 11 U.S.C. 766. 

430LCH.Clearnet Comment Letter at 4 (Jan. 25, 

2013); CFA Comment Letter at 6 (Feb. 13, 2013). 

431 ICI Comment Letter at 4–5 (Jan. 14, 2013). 

432 Id. at 5. 

433 Id. at 4–6 (Jan.14, 2013). 

seven of the 29 commenters requested 

that the Commission also mandate that 

an FCM cannot prevent a customer who 

so ‘‘opts out’’ from continuing to trade 

through that FCM merely because the 

customer elected to ‘‘opt out.’’ 428

The Commission did not propose to 

amend the list of permitted investments 

set forth in § 1.25, and believes that the 

current investments and regulatory 

requirements establish an appropriate 

balance between providing investment 

opportunities for FCMs with the overall 

objective of protecting customer funds. 

As further discussed in section II.L. 

below, the Commission also is 

amending § 1.29 to explicitly provide 

that an FCM is responsible for any 

losses resulting from the investment of 

customer funds under § 1.25. 

The Commission further notes that 

the current regulatory structure does not 

provide for a system whereby customers 

can elect to ‘‘opt-out’’ of segregation or 

§ 1.25. In the event of the insolvency of 

an FCM, where there also was a shortfall 

in customer funds, customers would be 

entitled to a pro-rata distribution of 

customer property under section 766 of 

the U.S. bankruptcy code.429 Therefore, 

even if a customer was permitted by the 

FCM to ‘‘opt-out’’ of segregation, the 

funds held by the FCM would be pooled 

with other customer funds and 

distributed on a pro-rata basis to all 

customers participating in that account 

class. 

2. Reverse Repurchase Agreement 

Counterparty Concentration Limits 

Regulation 1.25 provides that FCMs 

and DCOs may use customer funds to 

purchase securities from a counterparty 

under an agreement for the resale of the 

securities back to the counterparty 

(‘‘reverse repurchase agreements’’). 

Regulation 1.25 places conditions on 

reverse repurchase agreements, 

including, limiting counterparties to 

certain banks and government securities 

brokers or dealers, and prohibiting an 

FCM or DCO from entering into such 

agreements with an affiliate. Regulation 

1.25(b)(3)(v) also imposes a 

counterparty concentration limit on 

reverse repurchase agreements that 

prohibits an FCM or DCO from 

purchasing securities from a single 

counterparty that exceeds 25 percent of 

the total assets held in segregation by 

the FCM or DCO. 

The Commission proposed to amend 

§ 1.25(b)(3)(v) to require an FCM or DCO 

to aggregate the value of the securities 

purchased under reverse repurchase 

agreements if the counterparties are 

under common control or ownership. 

The aggregate value of the securities 

purchased under a reverse repurchase 

agreement from the counterparties 

under common ownership or control 

could not exceed 25 percent of the total 

assets held in segregation by the FCM or 

DCO. The Commission proposed the 

amendment as it believed that the 

expansion of the counterparty 

concentration limitation to 

counterparties under common 

ownership or control is consistent with 

the original intent of the regulation, and 

to minimize potential losses or 

disruptions due to the default of a 

counterparty. 

The Commission received comments 

from LCH.Clearnet and CFA in support 

of the proposed amendments.430 No 

other comments were received. The 

Commission is adopting the 

amendments as proposed. 

K. § 1.26: Deposit of Instruments 

Purchased With Futures Customer 

Funds 

Regulation 1.26 requires each FCM or 

DCO that invests customer funds in 

instruments listed under § 1.25 to 

separately account for such instruments 

and to segregate the instruments from its 

own funds. An FCM or DCO also must 

deposit the instruments under an 

account name which clearly shows that 

they belong to futures customers and 

that the instruments are segregated as 

required by the Act and Commission 

regulations. The FCM or DCO also must 

obtain and retain in its files a written 

acknowledgment from the depository 

holding the instruments stating that the 

depository was informed that the 

instruments belong to futures customers 

and that the instruments are being held 

in accordance with the provisions of the 

Act and Commission regulations. 

The Commission proposed amending 

§ 1.26 to specify how direct investments 

by FCMs and DCOs in money market 

mutual funds (‘‘MMMFs’’) that qualify 

as permitted investments under § 1.25 

must be held, and to adopt a Template 

Letter to be used with respect to direct 

investments in qualifying MMMFs. Like 

the proposed Template Letters for 

§§ 1.20 and 30.7, the proposed Template 

Letter for § 1.26 contained provisions 

providing for read-only access and 

release of shares upon instruction from 

the director of the Division of Clearing 

and Risk, the director of the Division of 

Swap Dealer and Intermediary 

Oversight, or any successor divisions, or 

such directors’ designees. 

With respect to the Template Letter 

for MMMFs, ICI noted that costs to 

create electronic access to FCM 

accounts at an MMMF would be ‘‘borne 

by all investors and not just by FCMs,’’ 

which likely only constitute a small 

percentage of an MMMF’s investors.431

As an alternative, ICI proposed that the 

Template Letter be amended to require 

the MMMF to provide FCM account 

data promptly (i.e., within 48 hours) 

upon request.432 ICI also commented 

that the Commission should confirm: (1) 

The ‘‘examination or audit’’ of the 

accounts authorized by the 

acknowledgment letter is limited to 

verification of account balances and that 

further inspection of an MMMF itself 

would be referred to the SEC as primary 

regulator; and (2) the proposal would 

require only those MMMFs in which 

FCMs directly invest customer funds (as 

opposed to those held through 

intermediated positions like omnibus 

accounts or intermediary-controlled 

accounts) to agree to provide FCM 

account information.433

The Commission originally proposed 

one Template Letter, Appendix A to 

§ 1.26, to be used by both FCMs and 

DCOs when investing customer funds in 

an MMMF. However, as noted above in 

the discussion of the § 1.20 Template 

Letters, the Commission has determined 

to eliminate the read-only access 

requirement for DCOs. Therefore, the 

Commission is adopting different 

Template Letters for FCMs and DCOs in 

§ 1.26. The Template Letter specific to 

FCMs is now set forth in Appendix A 

to § 1.26, and the Template Letter for 

DCOs is set forth in Appendix B to 

§ 1.26. The Commission has made other 

modifications to the § 1.26 Template 

Letters consistent with the 

modifications to the § 1.20 Template 

Letters. 

The Commission also confirms that 

examination of accounts authorized by 

the acknowledgment letter would not 

involve regulation or examination of the 

MMMF itself, over which the 

Commission does not have supervisory 

or regulatory authority. The 

examination would be limited to 


TKELleY on DSK3SPTVN1PROD with RULES2
68556 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

434 77 FR 67866, 67888. 

435FIA Comment Letter at 30–31 (Feb. 15, 2013); 

CFA Comment Letter at 6 (Feb. 13, 2013). 

436CFA Comment Letter at 6 (Feb. 13, 2013). 

437FIA Comment Letter at 32–33 (Feb. 15, 2013). 

The Administrative Determination applies to both 

FCM and DCO deposits at banks, and provides as 

follows: 

To: Associate Administrator 

Division Directors 

Regional Directors 

If a futures commission merchant or a clearing 

association deposits regulated commodity 

customers’ funds in a bank and the bank is later 

closed and unable to repay the funds, the liability 

of the futures commission merchant or clearing 

association would depend upon the manner in 

which the account was handled. It would not be 

liable if it had used due care in selecting the bank, 

had not otherwise breached its fiduciary 

responsibilities toward the customers, and had fully 

complied with the requirements of the Commodity 

Exchange Act and the regulations thereunder 

relating to the handling of customers’ funds. If two 

banks were available in a particular city only one 

of which was a member of FDIC and the futures 

commission merchant or clearing association 

without a compelling reason elected to use the 

nonmember bank, we would contend that it had not 

used due care in its selection. 

Administrative Determination No. 230 issued by 

Alex Caldwell, Administrator, Commodity 

Exchange Authority (Nov. 23, 1971). 

438FIA Comment Letter at 32–33 (Feb. 13, 2013). 

439 Id. 

440 Id. 

441Advantage Comment Letter at 3 (Feb. 15, 

2013). 

442By a parity of reasoning, this would also apply 

to relationships between DCOs and FCMs. Indeed, 

it would be difficult to see how a DCO would be 

liable for such losses, but an FCM would not. 

verification of the account shares of the 

FCM or DCO, and the Template Letters 

required under § 1.26 are solely 

applicable to directly-held investments 

in MMMFs. For the purpose of 

clarification, an FCM or DCO that holds 

shares of an MMMF in a custodial 

account at a depository (not directly 

with the MMMF or its affiliate) is 

required to execute the Template Letter 

set forth in Appendix A or B of 

Regulation 1.20, as applicable. In 

addition, a MMMF would be required to 

provide the Commission with read-only 

access to accounts holding customer 

funds only if the FCM directly deposits 

customer funds with the MMMF. 

Proposed paragraph (b) of § 1.26 has 

been modified to include a reference to 

Appendix B to § 1.20. Otherwise, the 

Commission is adopting § 1.26 as 

proposed. 

L. § 1.29: Increment or Interest Resulting 

From Investment of Customer Funds 

1. FCM’s Responsibility for Losses 

Incurred on the Investment of Customer 

Funds 

Regulation 1.29 currently provides 

that an FCM or DCO is not required to 

pass the earnings from the investment of 

futures customer funds to the futures 

customers. An FCM or DCO may retain 

any interest or other earnings from the 

investment of futures customer funds. 

The Commission proposed to amend 

§ 1.29 to explicitly provide that an FCM 

or DCO is responsible for any losses 

incurred on the investment of customer 

funds. Investment losses cannot be 

passed on to futures customers. As the 

Commission noted in the Proposal, an 

FCM may not charge or otherwise 

allocate investment losses to the 

accounts of the FCM’s customers. To 

allocate losses on the investment of 

customer funds would result in the use 

of customer funds in a manner that is 

not consistent with section 4d(a)(2) and 

§ 1.20, which provides that customer 

funds can only be used for the benefit 

of futures customers and limits 

withdrawals from futures customer 

accounts, other than for the purpose of 

engaging in trading, to certain 

commissions, brokerage, interest, taxes, 

storage or other fees or charges lawfully 

accruing in connection with futures 

trading.434 Section 4d(b) of the Act also 

provides that it is unlawful for a DCO 

to use customer funds as belonging to 

any person other than the customers of 

the FCM that deposited the funds with 

the DCO. Accordingly, such investment 

losses are the responsibility of the FCM 

or DCO, as applicable. Similar 

regulations were proposed for Cleared 

Swaps Customer Collateral under part 

22 (§ 22.2(e)(1)), and for 30.7 customer 

funds under part 30 (§ 30.7(i)). 

FIA and CFA supported the proposed 

amendments to § 1.29.435 No other 

comments were received. The 

Commission adopts the amendments to 

§§ 1.29, 22.2(e)(1), and 30.7(i) as 

proposed. 

2. FCM’s Obligation in Event of Bank 

Default 

The Commission requested comment 

on the extent of an FCM’s responsibility 

to cover losses in the event of a default 

of by a bank holding customer funds. 

The CFA commented that FCM’s should 

be responsible as such an obligation will 

require that FCMs conduct adequate due 

diligence on the banks in which they 

place customers’ funds, a factor that 

should limit the effect of a related future 

bank failure.436

The FIA noted that the Commodity 

Exchange Authority issued an 

Administrative Determination in 1971 

setting out the appropriate standard of 

liability for an FCM in the event of a 

bank default.437 The FIA also stated that 

the deposit of customer funds in a bank 

or trust company is not an investment 

of customer funds under § 1.25, but is a 

requirement by the Act and Commission 

regulations.438 The FIA stated that 

FCMs should not be strictly liable for a 

bank’s failure, and that to hold FCMs to 

such a standard would presume that 

FCMs have the ability to know more 

about a bank than the regulatory 

authorities responsible for overseeing 

the banks.439

The FIA further stated that the 

Commission’s new § 1.11 will require 

each FCM to establish and enforce 

written policies and procedures 

reasonably designed to assure 

compliance with the segregation 

requirements. The policies and 

procedures also must include a process 

for the evaluation of depositories, and a 

program to monitor a depository on an 

ongoing basis, including a thorough due 

diligence review of each depository at 

least annually. FIA notes that the 

policies and procedures will be subject 

to Commission and DSRO review, and 

that either the Commission or DSRO can 

direct the FCM to make any changes to 

address identified weaknesses in the 

policies or procedures, or in their 

enforcement.440

Advantage stated that the deposit of 

customer funds into a bank is not an 

investment of the funds, and FCMs 

should be able to assume that banks are 

properly vetted by the relevant banking 

and futures regulatory authorities.441

The Commission has considered the 

issue and believes the issue of 

depository risk raises important legal 

and policy issues that were not 

addressed in the Administrative 

Determination. There are considerable 

reasons to question whether the 

Administrative Determination is 

consistent with the CEA and the 

Commission’s regulations thereunder. 

Customers entrust their funds to FCMs, 

who are required by the Act and 

Commission regulations to treat the 

funds as belonging to the customers, to 

segregate the funds from the FCM’s own 

funds, and to hold such funds in 

specially designated accounts that 

clearly state that the funds belong to 

commodity customers of the FCM and 

are being held as required by the Act 

and Commission regulations. Customers 

do not select the depositories to hold 

these funds; FCMs do. FCMs are 

responsible for conducting the initial 

due diligence and ongoing monitoring 

of depositories holding customer funds. 

Moreover, as a practical matter, FCMs 

are in a better position than customers 

to perform these functions, as well as in 

a better position than the customers 

individually to make claim in the 

insolvency proceeding for the 

depository.442


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68557 

443This discussion does not apply to funds that 

have been deposited with a third-party depository 

selected by a customer. 

444See CME rulebook at www.cmegroup.com/

rulebook/CME/I/9/9.pdf. 

445RCG Comment Letter at 4 (Feb. 12, 2013). 

446Newedge Comment Letter at 5 (Feb. 15, 2013). 

447The Commission also proposed amendments 

to § 22.2(g) and § 30.7(l) to impose requirements for 

Cleared Swaps and foreign futures and foreign 

options transactions, respectively, that correspond 

to the proposed amendments for § 1.32. The 

comments for §§ 1.32, 22.2(g), and 30.7(l) are 

addressed in this section. 

Importantly, the AD fails to address 

the question of precisely which 

customers are exposed to depository 

losses, and how much should be 

allocated to each such customer. This 

question is particularly important in the 

context of omnibus customer accounts 

permitted in the futures industry. 

Would losses be allocated to persons 

who are customers at the point the 

depository becomes insolvent, to 

persons who were customers at any 

point the FCM maintained funds at the 

depository, or to persons who were 

customers at the point the losses were 

crystalized? Would losses be allocated 

to all customers, or could certain 

favored customers avoid such exposure 

by negotiation? If the depository lost 

only securities, would customers who 

deposited only cash share in the loss? If 

the depository lost only cash, would 

customers who deposited only 

securities share in the loss? Would 

customers whose margin was all used to 

cover requirements at the DCO share in 

losses of funds at a depository other 

than a DCO? Moreover, would 

customers to whom losses were 

allocated share in dividends recovered 

from the estate of the defaulting 

depository? How would such customers 

have the practical opportunity to 

demonstrate their claims in such a 

proceeding? How and when would such 

recoveries be distributed to such 

customers? These practical questions, 

none of which was answered in the 

Administrative Determination, call its 

wisdom into question.443

Accordingly, the Commission has 

directed staff to inquire into these 

issues, and to develop an appropriate 

proposed rulemaking. 

M. § 1.30: Loans by Futures Commission 

Merchants: Treatment of Proceeds 

Regulation 1.30 provides that an FCM 

may lend its own funds to customers on 

securities and property pledged by such 

customers, and may repledge or sell 

such securities and property pursuant to 

specific written agreement with such 

customers. This provision generally 

allows customers to deposit non-cash 

collateral as initial and variation 

margin. Absent the provision, an FCM 

may be required to liquidate the noncash collateral if the customer was 

subject to a margin call that could not 

be met with other assets in the 

customer’s account. Regulation 1.30 

further provides that the proceeds of 

loans used to margin the trades of 

customers shall be treated and dealt 

with by an FCM as belonging to such 

customers, in accordance with and 

subject to the provisions of the Act and 

regulations. 

The Commission proposed to amend 

§ 1.30 by adding that an FCM may not 

lend funds to a customer for margin 

purposes on an unsecured basis, or 

secured by the customer’s trading 

account. The Commission stated in the 

Proposal that it did not believe that 

FCMs extended unsecured credit as a 

common practice, as the FCM would be 

required to take a 100 percent charge to 

capital for the value of the unsecured 

loan under § 1.17. The Commission also 

noted that a trading account did not 

qualify as collateral for the loan under 

§ 1.17 and the FCM would have to take 

a charge to capital for the full value of 

the unsecured loan. The Commission 

further noted that the proposed 

amendment to § 1.30 was consistent 

with CME Rule 930.G, which provides 

that a clearing member may not make 

loans to account holders to satisfy their 

performance bond requirements unless 

such loans are secured by readily 

marketable collateral that is otherwise 

unencumbered and which can be 

readily converted into cash.444

RCG commented that it believes that 

the proposal prohibiting an FCM from 

making unsecured loans to customers 

contradicts proposed § 1.22 as it applies 

to funding customers’ margin 

deficits.445 The Commission notes that 

the requirement in § 1.22 for an FCM to 

cover an undermargined account with 

its own funds is intended to ensure that 

the FCM complies with section 4d of the 

Act by not using the funds of one 

futures customer to margin or guarantee 

the commodity interests of another 

customer. The FCM is obligated under 

section 4d to maintain sufficient funds 

in segregation to cover undermargined 

accounts. The FCM, however, is not 

loaning funds to a particular customer 

as performance bond is contemplated by 

§ 1.30. When the FCM deposits 

proprietary funds into segregated 

accounts under § 1.22, the FCM is not 

loaning any particular customer funds, 

and the customers with an 

undermargined account are not credited 

with an increase in their cash balance. 

Newedge also requested confirmation 

the proposed prohibition in § 1.30 

preventing an FCM from loaning 

unsecured funds to a customer to 

finance such customer’s trading would 

not prohibit an FCM, when computing 

a customer’s margin requirement, from 

giving credit for the customer’s long 

option value. The Commission confirms 

that an FCM may continue to consider 

a customer’s long option value when 

computing such customer’s overall 

account value and margin 

requirements.446

The Commission is adopting the 

amendments to § 1.30 as proposed. 

N. § 1.32: (§ 22.2(g) for Cleared Swaps 

Customers and § 30.7(l) for Foreign 

Futures and Foreign Options 

Customers): Segregated Account: Daily 

Computation and Record 

The Commission proposed to amend 

§ 1.32 to require additional safeguards 

with respect to futures customer funds 

on deposit in segregated accounts, and 

to require FCMs to provide twice each 

month a detailed listing to the 

Commission of depositories holding 

customer funds.447

Regulation 1.32 requires an FCM to 

prepare a daily record as of the close of 

business each day detailing the amount 

of funds the firm holds in segregated 

accounts for futures customers trading 

on designated contract markets, the 

amount of the firm’s total obligation to 

such customers computed under the Net 

Liquidating Equity Method, and the 

amount of the FCM’s residual interest in 

the futures customer segregated 

accounts. In performing the calculation, 

an FCM is permitted to offset any 

futures customer’s debit balance by the 

market value (less haircuts) of any 

readily marketable securities deposited 

by the particular customer with the 

debit balance as margin for the account. 

The amount of the securities haircuts 

are as set forth in SEC Rule 15c3– 

1(c)(vi). 

FCMs are required to perform the 

segregation calculation prior to noon on 

the next business day, and to retain a 

record of the calculation in accordance 

with § 1.31. Both the CME and NFA 

require their respective member FCMs 

to file the segregation calculations with 

the CME and NFA, as appropriate, each 

business day. FCMs, however, are only 

required to file a segregation calculation 

with the Commission at month end as 

part of the Form 1–FR–FCM (or FOCUS 

Reports for dual-registrant FCM/BDs). 

Regulation 1.12, as discussed in section 

II.C. above, requires the FCM to provide 

immediate notice to the Commission 

and to the firm’s DSRO if the FCM is 

undersegregated at any time. 


TKELleY on DSK3SPTVN1PROD with RULES2
68558 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

448Each FCM currently already submits a daily 

Segregation Schedule to its DSRO pursuant to rules 

of the CME and NFA. Therefore, the Commission’s 

amendments are codifying current regulatory 

practices for each FCM. 

449 In fact, since FCMs file the Segregation 

Schedules with the CME and NFA via WinJammer, 

the Commission already has access to the filings, 

and the amendment will not require an FCM to 

change any of its operating procedures. 

450Each Form 1–FR–FCM and FOCUS Report is 

received by the Commission via WinJammer. The 

financial forms are automatically electronically 

reviewed within several minutes of being received 

by the Commission and if a firm is undersegregated 

an alert is immediately issued to Commission staff 

members via an email notice. 451FIA Comment Letter at 30 (Feb. 15, 2013). 

452 Id. at 31. 

453 Jefferies Comment Letter at 4 (Feb. 15, 2013). 

454MFA Comment Letter at 3 (Feb. 15, 2013). 

The Commission proposed to amend 

§ 1.32 to require each FCM to file its 

segregation calculation with the 

Commission and with its DSRO each 

business day. The Commission also 

proposed to amend § 1.32 to require 

FCMs to use the Segregation Schedule 

contained in the Form 1–FR–FCM (or 

FOCUS Report for dual-registrant FCM/ 

BDs) to document its daily segregation 

calculation.448

As previously noted, the CME and 

NFA require their respective member 

FCMs to file their segregation 

calculations with them on a daily basis. 

The CME and NFA also require the 

FCMs to document their segregation 

calculation using the Segregation 

Schedule contained in the Form 1–FR– 

FCM. Therefore, the additional 

requirement of filing a Segregation 

Schedule with the Commission is not a 

material change to the regulation and is 

consistent with current practices.449

The Commission stated in the 

Proposal that the filing of daily 

Segregation Schedules by FCMs will 

enhance its ability to monitor and 

protect customer funds as the 

Commission will be able to determine 

almost immediately upon receipt of the 

Segregation Schedule whether a firm is 

undersegregated and immediately take 

steps to determine if the firm is 

experiencing financial difficulty or if 

customer funds are at risk.450

The Commission also proposed to 

require an FCM to file its Segregation 

Schedule with the Commission and 

with the FCM’s DSRO electronically 

using a form of user authentication 

assigned in accordance with procedures 

established or approved by the 

Commission. The Commission currently 

receives the Segregation Schedule 

electronically via the WinJammer filing 

system and the proposal would 

continue to require FCMs to submit the 

forms using WinJammer. 

The Commission also proposed to 

amend § 1.32(b) to provide that in 

determining the haircuts for commercial 

paper, convertible debt instruments, and 

nonconvertible debt instruments 

deposited by customers as margin, the 

FCM may develop written policies and 

procedures to assess the credit risk of 

the securities as proposed by the SEC 

and discussed more fully in section II.F. 

above. If the FCM’s assessment of the 

credit risk is that it is minimal, the FCM 

may apply haircut percentages that are 

lower than the 15 percent default 

percentage under SEC Rule 15c3– 

1(c)(2)(vi). 

The Commission also proposed to 

amend § 1.32 by requiring each FCM to 

file detailed information regarding 

depositories and the substance of the 

investment of customer funds under 

§ 1.25. Proposed paragraphs (f) and (j) of 

§ 1.32 require each FCM to submit to the 

Commission and to the firm’s DSRO a 

listing of every bank, trust company, 

DCO, other FCM, or other depository or 

custodian holding customer funds. The 

listing must specify separately for each 

depository the total amount of cash and 

§ 1.25 permitted investments held by 

the depository for the benefit of the 

FCM’s customers. Specifically, each 

FCM must list the total amount of cash, 

U.S. government securities, U.S. agency 

obligations, municipal securities, 

certificates of deposit, money market 

mutual funds, commercial paper, and 

corporate notes held by each depository, 

computed at current market values. The 

listing also must specify: (1) If any of the 

depositories are affiliated with the FCM; 

(2) if any of the securities are held 

pursuant to an agreement to resell the 

securities to a counterparty (reverse 

repurchase agreement) and if so, how 

much; and (3) the depositories holding 

customer-owned securities and the total 

amount of customer-owned securities 

held by each of the depositories. 

Each FCM is required to submit the 

listing of the detailed investments to the 

Commission and to the firm’s DSRO 

twice each month. The filings must be 

made as of the 15th day of each month 

(or the next business day, if the 15th day 

of the month is not a business day) and 

the last business day of the month. The 

filings are due to the Commission and 

to the firm’s DSRO by 11:59 p.m. on the 

next business day. 

Proposed paragraph (k) of § 1.32 

requires each FCM to retain the 

Segregation Statement prepared each 

business day and the detailed 

investment information, together with 

all supporting documentation, in 

accordance with § 1.31. 

FIA generally supported the 

proposal.451 FIA noted that proposed 

§ 1.32(a) requires an FCM to compute its 

daily segregation requirement on a 

currency-by-currency basis, and 

requested that the Commission confirm 

that a single Segregation Schedule can 

be completed for each account class 

(i.e., futures customers funds, Cleared 

Swaps Customers funds, and § 30.7 

customer funds) on a U.S. dollarequivalent basis. FIA further stated that 

the detail regarding the investment of 

customer funds provided by NFA on its 

Web site is the appropriate level of 

detail that should be made public 

because additional detail would 

disclose proprietary financial and 

business information.452

Jefferies supported the proposal, and 

recommended that the listing of detailed 

investments should include all 

investments, including cash and other 

investments, regardless of where the 

investments are held, and should 

provide greater transparency for the 

FCMs’ customers.453 MFA supported 

the proposed amendments to § 1.32 to 

require FCMs to provide the 

Commission and their DSROs with: (1) 

Daily reporting of the segregation and 

part 30 secured amount computations; 

and (2) semi-monthly reporting of the 

location of customer funds and how 

such funds are invested under § 1.25.454

The Commission has considered the 

comments and is adopting the 

amendments to §§ 1.32, 22.2(g), and 

30.7(l) as proposed. In response to 

Jefferies comment, the Commission 

notes that the proposed and final 

regulation require an FCM to report all 

investments, including cash and other 

investments, regardless of where the 

investments are held. 

In response to FIA’s comment, the 

Commission does not believe that a full 

disclosure of the investment of customer 

funds would disclose proprietary 

information of the FCM. The 

Commission would require the disclose 

of investment information in a manner 

consistent with the current NFA 

disclosures, which includes, for each 

FCM, the percentage of the invested 

customer funds that are held by banks, 

or invested in U.S. government 

securities, bank certificates of deposit, 

money market funds, municipal 

securities, and U.S. government 

sponsored enterprise securities. The 

Commission, however, further believes 

that FCMs also should disclose the 

amount of customer funds that are held 

by clearing organizations and brokers. 

The Commission also believes that 

FCMs should disclose the amount of 

customer-owned securities that are on 

deposit as margin collateral, and 

information regarding repurchase 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68559 

455 7 U.S.C. 7(d)(11). 

456 7 U.S.C. 21(p). 

457 77 FR 36611 (June 19, 2012). 

458The original signatories of the joint audit plan 

approved on March 18, 2009 are as follows: Board 

of Trade of the City of Chicago, Inc.; Board of Trade 

of Kansas City; CBOE Futures Exchange, LLC; 

Chicago Climate Futures Exchange, LLC; Chicago 

Mercantile Exchange Inc.; Commodity Exchange, 

Inc.; ELX Futures, L.P.; HedgeStreet, Inc.; ICE 

Futures U.S., Inc.; INET Futures Exchange, L.L.C.; 

Minneapolis Grain Exchange; NASDAQ OMX 

Futures Exchange; National Futures Association; 

New York Mercantile Exchange, Inc.; NYSE Liffe 

US, L.L.C.; and One Chicago, L.L.C. 

transactions involving customer funds 

or securities. The additional disclosures 

will provide customers and the market 

with additional information that may be 

relevant to their assessment of the risks 

of placing their funds with a particular 

FCM. The Commission further notes 

that it plans to work with the SROs to 

determine the most efficient and 

effective method to disclose this 

information to the public. 

The Commission also confirms that an 

FCM satisfies the requirement of § 1.32 

if it prepares and submits to the 

Commission, and to its DSRO, a 

consolidated Segregation Schedule for 

each account class on a U.S. dollarequivalent basis. The FCM, however, 

must prepare segregation records on a 

daily basis on a currency-by-currency 

basis to ensure compliance with § 1.49, 

which governs how FCMs may hold 

funds in foreign depositories. The FCM 

is not required under § 1.32 to file the 

currency-by-currency segregation 

records with the Commission or with its 

DSRO. 

O. § 1.52: Self-regulatory Organization 

Adoption and Surveillance of Minimum 

Financial Requirements 

SROs are required by the Act and 

Commission regulations to monitor their 

member FCMs for compliance with the 

Commission’s and SROs’ minimum 

financial and related reporting 

requirements. Specifically, DCM Core 

Principle 11 provides, in relevant part, 

that a board of trade shall establish and 

enforce rules providing for the financial 

integrity of any member FCM and the 

protection of customer funds.455 In 

addition, section 17 of the Act requires 

NFA to establish minimum capital, 

segregation, and other financial 

requirements applicable to its member 

FCMs, and to audit and enforce 

compliance with such requirements.456

The Commission also has established 

in § 1.52 minimum elements that each 

SRO financial surveillance program 

must contain to satisfy the statutory 

objectives of Core Principle 11 and 

section 17 of the Act. In this regard, 

§ 1.52 requires, in part, each SRO to 

adopt and to submit for Commission 

approval rules prescribing minimum 

financial and related reporting 

requirements for member FCMs. The 

rules of the SRO also must be the same 

as, or more stringent than, the 

Commission’s requirements for financial 

statement reporting under § 1.10 and 

minimum net capital under § 1.17. 

In addition, the Commission adopted 

final amendments to § 1.52 on May 10, 

2012, to codify previously issued CFTC 

staff guidance regarding the minimum 

elements of an SRO financial 

surveillance program.457 In order to 

effectively and efficiently allocate SRO 

resources over FCMs that are members 

of more than one SRO, § 1.52(c) 

currently permits two or more SROs to 

enter into an agreement to establish a 

joint audit plan for the purpose of 

assigning to one of the SROs (the DSRO) 

of the joint audit plan the function 

examining member FCMs for 

compliance with minimum capital and 

related financial reporting obligations. 

The audit plan must be submitted to the 

Commission for approval. Currently all 

active SROs are members of a joint audit 

plan that was approved by the 

Commission on March 18, 2009.458

The Commission proposed additional 

amendments to § 1.52 to enhance and 

strengthen the minimum requirements 

that SROs must abide by in conducting 

financial surveillance. As the 

Commission explained in the Proposal, 

these amendments are intended to 

minimize the chances that FCMs engage 

in unlawful activities that result, or 

could result, in the loss of customer 

funds or the inability of the firms to 

meet their financial obligations to 

market participants. Proposed § 1.52(a) 

added a definitions section identifying 

the terms ‘‘examinations expert,’’ 

‘‘material weakness,’’ and ‘‘generally 

accepted auditing standards.’’ 

The term ‘‘examinations expert’’ was 

defined as a ‘‘nationally recognized 

accounting and auditing firm with 

substantial expertise in audits of futures 

commission merchants, risk assessment 

and internal control reviews, and is an 

accounting and auditing firm that is 

acceptable to the Commission.’’ The 

Commission received several comments 

regarding the opinion that the 

examinations expert is required to 

provide on its review of the SRO 

programs, which is addressed in section 

II.O.4 below. The Commission did not, 

however, receive comments regarding 

the defined term ‘‘examinations expert’’ 

and is adopting the definition as 

proposed. 

The term ‘‘material weakness’’ was 

defined as ‘‘as a deficiency, or a 

combination of deficiencies, in internal 

control over financial reporting such 

that there is a reasonable possibility that 

a material misstating of the entity’s 

financial statements and regulatory 

computations will not be prevented or 

detected on a timely basis by the entity’s 

internal controls.’’ The Commission has 

determined not to adopt the definition 

of material weakness to eliminate the 

concern that the SROs examinations are 

intended to replicate the financial 

statement audits performed by public 

accountants under § 1.16. 

Proposed § 1.52(b) requires each SRO 

to adopt rules prescribing minimum 

financial and related reporting 

requirements, and requires its member 

FCMs to establish a risk management 

program that is at least as stringent as 

the risk management program required 

of FCMs under § 1.11. Proposed 

amendments to § 1.52 (c) requires each 

SRO to establish a supervisory program 

to oversee their member FCMs’ 

compliance with SRO and Commission 

minimum capital and related reporting 

requirements, the obligation to properly 

segregated customer funds, risk 

management requirements, financial 

reporting requirements, and sales 

practices and other compliance 

requirements. The supervisory program 

must address: (1) Levels and 

independence of SRO examination staff; 

(2) ongoing surveillance of member 

FCMs; (3) procedures for identifying 

high-risk firms; (4) on-site examinations 

of member firms; and (5) the 

documentation of all aspects of the 

supervisory program. The supervisory 

program also must be based on an 

understanding of the internal control 

environment to determine the nature, 

timing, and extent of controls testing 

and substantive testing to be performed 

and must address all areas of risk to 

which the FCM can reasonably be 

foreseen to be subject. Proposed 

§ 1.52(c) also requires that all aspects of 

the SRO’s supervisory program must, at 

a minimum, conform to generally 

accepted auditing standards after 

consideration to the auditing standards 

issued by the PCAOB. 

Proposed § 1.52(c) also requires each 

SRO to engage an ‘‘examinations 

expert’’ at least once every two years to 

evaluate the quality of the supervisory 

oversight program and the SRO’s 

application of the supervisory program. 

The SRO must obtain a written report 

from the examinations expert with an 

opinion on whether the supervisory 

program is reasonably likely to identify 

a material weakness in internal controls 

over financial and/or regulatory 

reporting, and in any of the other areas 


TKELleY on DSK3SPTVN1PROD with RULES2
68560 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

459MGEX stated that the Commission’s Proposal 

generally supports the current DSRO program by 

requiring FCMs to file various reports and notices 

with the Commission and with the firms’ DSROs. 

MGEX further stated that the Commission should 

not create a regulatory monopoly and should 

recognize that an SRO may not wish to join the JAC. 

The Commission believes that each SRO has a right 

to elect to perform the financial surveillance 

required under § 1.52 directly or to participate in 

a joint audit agreement with other SROs. In 

addition, § 38.604 requires each SRO to have rules 

in place that require member FCMs to submit 

financial information to the SRO. 

460 77 FR 66288 (Nov. 2, 2012). Regulation 1.3 is 

the general definitions provision of the 

Commission’s regulations. 

461 78 FR 33476 (June 4, 2013). 

462 Id. 

463NFA Comment Letter at 3 (Feb. 15, 2013). See 

also Paul/Weiss Comment Letter at 2 (Feb. 15 2013), 

BlackRock Letter at 3 (Feb. 15. 2013), and MFA 

Comment Letter at 4 (Feb. 15, 2013) expressing 

general support for the proposed enhancements to 

the SRO examinations program. 

464 Id. 

465 Id. 

466CME Comment Letter at 8–9 (Feb. 15, 2013); 

JAC Comment Letter at 2–4 (Feb. 14, 2013); JAC 

Comment Letter 2–4 (July 25, 2013). 

467CME Comment Letter at 11 (Feb. 15, 2013). 

468 Id. 

469 JAC Comment Letter at 2 (July 25, 2013). 

470 Id. See also JAC Comment Letter at 5 (Feb. 14, 

2013). 

471 Id. 

472 Id. 

473 Id. The JAC noted that the examination of the 

controls and risk management policies and 

procedures over an FCM’s technology systems 

would require particular expertise that is different 

from the knowledge and expertise or regulatory 

staff, and that SROs will have to hire specialized 

examiners to conduct such reviews. 

that are subject to the supervisory 

program. 

Proposed § 1.52(d) provides that two 

or more SROs may enter into an 

agreement to delegate the responsibility 

of monitoring and examining an FCM 

that is a member of more than one SRO 

to a DSRO. The DSRO would monitor 

the FCM for compliance with the 

Commission’s and SROs’ minimum 

financial and related reporting 

requirements, and risk management 

requirements, including policies and 

procedures relating to the receipt, 

holding, investing and disbursement of 

customer funds. 

The Commission received several 

comments on the proposed amendments 

to § 1.52 and, with the exception of the 

issues discussed below, has determined 

to adopt the amendments as 

proposed.459

1. Swap Execution Facilities Excluded 

From the Scope of Regulation 1.52 

The Commission is revising the final 

§ 1.52 by adding a new defined term, 

‘‘self-regulatory organization,’’ to 

paragraph (a). The term ‘‘self-regulatory 

organization’’ is defined in paragraph (a) 

to mean, for purpose of § 1.52 only, a 

contract market, as defined in § 1.3(h), 

or a registered futures association. The 

term ‘‘self-regulatory organization’’ is 

further defined in paragraph (a) to 

explicitly exclude a swap execution 

facility (‘‘SEF’’), as defined in § 1.3(rrrr). 

The revision to definition of selfregulatory organization in § 1.52 is 

necessary due to the recent amendments 

to the definition of ‘‘self-regulatory 

organization’’ set forth in § 1.3(ee), 

which defines the term as a contract 

market, as defined in § 1.3(h), a SEF, as 

defined in § 1.3(rrrr), or a registered 

futures association under section 17 of 

the Act.460 Therefore, since § 1.52 

applies to each SRO, without including 

a definition for the term ‘‘self-regulatory 

organization’’ under § 1.52(a) that 

excludes SEFs, the full provisions of 

§ 1.52 would apply to SEFs. 

In adopting new regulations 

implement core principles and other 

requirements for SEFs, the Commission 

did not require SEFs to adopt minimum 

capital and related financial reporting 

requirements for its member firms.461

The Commission further stated that a 

SEF’s obligation to monitor its member 

for financial soundness extended only 

to a requirement to ensure that the 

members continue to qualify as eligible 

contract participants as defined in 

section 1a(18) of the Act.462 Therefore, 

the Commission previously has 

determined that the extensive oversight 

program required of SROs that are 

contract markets or registered futures 

associations by § 1.52 is not applicable 

to SEFs. 

2. Revisions to the Current SRO 

Supervisory Program 

The Commission received several 

comments concerning the proposed 

amendments to § 1.52, many of which 

varied in support and context. The NFA 

stated that it fully supports the 

requirement that the supervisory 

program include both controls testing 

and substantive testing, and that the 

examinations process be driven by the 

risk profile of the FCM.463 NFA noted 

that it has been modifying its 

procedures to enhance its examination 

of FCM internal controls as well as 

substantive testing, and also has 

updated its risk system to create risk 

profiles of each of its FCMs.464 NFA also 

agreed that SROs should identify those 

FCMs that pose a high degree of 

potential risk so that the SRO can 

increase its monitoring of those firms 

and that the examinations should focus 

on the higher risk areas at each FCM.465

The CME and JAC generally did not 

support the proposed amendments to 

§ 1.52, stating that the current limited 

role of regulatory exams is appropriate 

as its purpose is not intended to give the 

same level of assurances to the FCM, the 

FCM’s investors, or third parties as that 

which external auditors provide in 

conducting financial statement audits of 

FCMs.466 The CME also stated that 

regulatory reviews are not designed to 

protect investors in FCMs, nor should 

they be.467 In addition, the CME 

believes that SROs and DSROs play 

regulatory roles, and it is no more 

appropriate to have them report to an 

audit committee of an FCM than it 

would be to have the Commission itself 

report to that audit committee.468

The JAC stated that the SRO 

examinations are compliance reviews 

focused on the particular and distinctive 

regulatory requirements and associated 

risks of the futures industry, including 

whether FCMs are in compliance with 

customer regulations and net capital 

requirements to protect customers and 

the functioning of the futures 

industry.469 The JAC further stated that 

incorporating the full risk management 

requirements of § 1.11 into the SRO’s 

examinations of FCMs, and the 

requirement that the SRO audit program 

address all areas of risk to which FCMs 

can reasonably be foreseen to be subject, 

are overly broad requirements that are 

impractical, and virtually impossible to 

meet.470

The JAC further stated that proposed 

§ 1.52 imposes potential duplicative 

oversight of FCM risk management 

policies and procedures by SROs and 

DCOs. The JAC noted that § 39.13(h)(5) 

requires a DCO to review the risk 

management policies, procedures, and 

practices of each of its clearing 

members.471 The JAC requested 

clarification on the oversight 

responsibilities of SROs and DCOs to 

address potential duplicative 

requirements.472 Lastly, the JAC stated 

that expanding the SRO oversight 

program to include operational and 

technical risks will require additional 

expertise, time and resources to perform 

such reviews and will result in 

increased costs.473

The Commission believes that the 

CME, NFA, JAC, SROs and DSROs play 

a critical role in examining FCMs and 

other registrants under the selfregulatory structure of the futures 

industry. Recent events, however, 

demonstrate that the SROs’ current 

focus on CFTC and SRO regulatory 

requirements, including segregation and 

net capital computations, are not in and 

of themselves adequate to assess risk 

and protect customers of the FCM. For 

instance, a failure in an FCM’s nonfutures operations may pose risks to 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68561 

474Under the current JAC structure, the CME is 

the only entity that is both an SRO that performs 

periodic examinations of FCMs and a DCO that has 

responsibilities under § 39.13(h)(5) to perform risk 

management on clearing FCMs. 

475NFA Comment Letter at 3 (Feb. 15, 2013); 

CME Comment Letter at 9–10 (Feb. 15, 2013); JAC 

Comment Letter at 2–3 (Feb 14, 2013). 

476 Id. 

477CME Comment Letter at 9–10 (Feb. 15, 2013). 

478NFA Comment Letter at 3–4 (Feb. 15, 2013). 

479The Commission is revising final § 1.52 to 

remove from paragraph (a) a definition for the term 

‘‘U.S. Generally accepted auditing standards’’ as 

that term is no longer contained in the final 

regulation. 

480 JAC Comment Letter at 3–4 (Feb. 14, 2013); 

Center for Audit Quality Comment Letter at 3 (Jan. 

14, 2013); Ernst & Young Comment Letter at 3–4 

(Jan. 14, 2013); PWC Comment Letter at 3 (Jan. 15, 

2013). 

futures customers and the operation of 

an FCM. In addition, technology failures 

at an FCM also may pose risks to the 

operation of an FCM and the overall 

protection of customer funds. 

Accordingly, to properly monitor and 

assess risks to the FCM, the SRO must 

be aware of non-futures related 

activities of the FCM. 

Recent events also demonstrate that 

the examinations of FCMs must be risk 

based and that the testing must be based 

on an understanding of the registrant’s 

internal control environment to 

determine the nature, timing and extent 

of the necessary tests. In order to help 

ensure an appropriate risk based exam 

is performed, an examiner must take 

into account the risk profile of the firm 

and build the examination program 

accordingly. For example, if a firm has 

weak controls over cash, the risk of 

inaccurate accounting for cash 

movements is greater and therefore 

more detailed substantive testing of cash 

transactions and balances is necessary 

to provide the examiner with sufficient 

assurance that reported balances are 

accurate. To the contrary, if controls are 

good over cash then less substantive 

testing is needed. 

The Commission acknowledges that 

revised § 1.52 imposes new obligations 

on SROs by requiring their supervisory 

programs to include an assessment of 

whether member FCMs comply with the 

risk management requirements of § 1.11. 

However, § 1.52 also requires that the 

SRO’s examination of FCMs be 

performed on a risk-based approach. 

The scope of the examinations should 

be based upon the SRO’s assessment of 

risk at the FCM and full, detailed testing 

is not mandated by § 1.52 in each area. 

Lastly, the Commission recognizes that 

DCOs impose certain risk management 

requirements on clearing FCMs and are 

required to review the operation of such 

risk management requirements. While 

§ 39.13(h)(5) is directed at risk that an 

FCM may pose to a DCO and, therefore, 

is more narrowly focused than the risk 

management requirements in § 1.11, 

SROs may coordinate with a DCO to 

ensure that duplicative work is not 

being performed by the separate 

organizations.474

3. Auditing Standards Utilized in the 

SRO Supervisory Program 

Proposed § 1.52(c)(2)(ii) and 

(d)(2)(ii)(F) require all aspects of an 

SRO’s or DSRO’s, supervisory program 

to conform, at a minimum, to U.S. 

GAAS after giving full consideration to 

the auditing standards issued by the 

PCAOB. NFA, CME, and JAC questioned 

what is meant by the term ‘‘after giving 

full consideration of auditing standards 

prescribed by the PCAOB.’’ 475 NFA, 

CME, and JAC did not agree with basing 

the SRO Supervisory Program 

framework on either U.S. GAAS or 

PCAOB standards, largely because the 

DSRO does not issue a report that 

expresses an opinion with respect to the 

FCM’s financial statements or issue an 

Accountant’s Report on Material 

Inadequacies.476 Additionally, CME 

noted that invoking U.S. GAAS and 

PCAOB standards opens up a complex 

and detailed regulatory structure, which 

includes a framework allowing auditor’s 

to rely on interpretive publications, 

professional journals and auditing 

publications from state CPA societies, 

none of which were designed to address 

the regulatory function played by an 

SRO or DSRO.477 However, NFA 

acknowledged that certain U.S. GAAS 

and PCAOB accounting standards and 

practices should be followed by DSROs 

in performing their regulatory 

examinations (e.g., those standards 

focusing on recordkeeping, training and 

experience, the scope of the 

examination and testing, the 

confirmation process, and other related 

examination practices).478

The Commission notes that the 

objective of the Proposal was to ensure 

that the SRO examinations are 

conducted consistent with the 

professional standards that CPAs and 

others are subject to in conducting their 

examinations. The Commission 

recognizes that certain U.S. GAAS 

principles and PCAOB principles would 

not be applicable to the SRO 

examinations (such as principles 

addressing reporting, which provide 

that the CPA must state whether the 

financial statements are prepared in 

accordance with Generally Accepted 

Accounting Principles). However, other 

U.S. GAAS and PCAOB standards 

would be relevant to SRO examinations. 

Such principles include standards 

addressing the competency and 

proficiency of the examinations staff 

and the obtaining and documenting of 

adequate audit evidence to support the 

examiner’s conclusions. 

The Commission has considered these 

comments and has revised the proposed 

language to state that at a minimum, an 

examination should conform to PCAOB 

auditing standards to the extent such 

standards address non-financial 

statement audits. While it is 

acknowledged that PCAOB audit 

standards are directed at financial 

statement audits, the concept of many of 

the standards are just as applicable to an 

examination performed by an SRO or 

DSRO, and as such should be adopted 

in that light. The relevant PCAOB 

standards would include, but are not 

limited to, the training and proficiency 

of the auditor, due professional care in 

the performance of the work, 

consideration of fraud in an audit, audit 

risk, consideration of materiality in 

planning and performing an audit, audit 

planning, identifying and assessing risks 

of material misstatement, the auditor’s 

responses to the risk of material 

misstatement, audit documentation, 

evaluating the audit results, 

communications with audit committees, 

and due professional care in the 

performance of work. In developing the 

supervisory program, consideration 

should also be given to other related 

guidance such as the standards adopted 

by the Institute of Internal Auditors 

(Standards & Guidance—International 

Professional Practices Framework) and 

the Policy Statement and Supplemental 

Policy Statement on the Internal Audit 

Function and its Outsourcing issued by 

the Board of Governors of the Federal 

Reserve System, and generally accepted 

auditing standards issued by the 

American Institute of Certified Public 

Accountants.479

4. ‘‘Examinations Expert’’ Reports 

Proposed § 1.52(c)(2)(iv) and 

(d)(2)(ii)(I) require each SRO and DSRO, 

respectively, to engage an examinations 

expert to evaluate the SROs or DSROs 

programs and to express an opinion as 

to whether the program is reasonably 

likely to identify a material deficiency 

in internal controls over financial and/ 

or regulatory reporting and in any of the 

other areas that are subject to SRO or 

DSRO review under the programs. The 

JAC, CME, Center for Audit Quality, 

Ernst & Young, and PWC did not 

support the ‘‘examinations expert’’ 

requirement.480 Several of these 

commenters expressed concern that the 

term ‘‘examinations expert’’ as defined 


TKELleY on DSK3SPTVN1PROD with RULES2
68562 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

481CME Comment Letter at 13 (Feb. 15, 2013); 

Center for Audit Quality Comment Letter at 3 (Jan. 

14, 2013); Ernst & Young Comment Letter at 3–4 

(Jan. 14, 2013); PWC Comment Letter at 3 (Jan. 15, 

2013). 482NFA Comment Letter at 4–5 (Feb. 15, 2013); 

JAC Comment Letter at 4 (Feb. 14, 2013) MGEX 

Comment Letter at 3–4 (Feb. 18, 2013). 483NFA Comment Letter at 4–5 (Feb. 15, 2013); 

JAC Comment Letter at 4 (Feb. 14, 2013). 

484CME Comment Letter at 13 (Feb. 15, 2013). 

485The Commission has previously approved an 

alternative ‘‘generic’’ risk disclosure statement for 

use in the United Kingdom, Ireland and the U.S. 

486FCMs and IBs are permitted to open 

commodity futures accounts for ‘‘institutional 

customers’’ pursuant to § 1.55(f) without furnishing 

such institutional customers with a Risk Disclosure 

Statement or obtaining the written acknowledgment 

required by § 1.55. The term ‘‘institutional 

customer’’ is defined by § 1.3(g) and section 1a of 

the Act as an eligible contract participant. The 

Commission did not propose to amend § 1.55(f) to 

require FCMs or IBs to furnish institutional 

customers with Risk Disclosure Statements. 

by § 1.52 imposes a criterion that most 

CPA firms may not possess or would not 

be willing to issue such a report.481

Moreover, NFA, JAC, and MGEX stated 

that requiring an ‘‘examinations expert’’ 

is unnecessary and duplicative of 

already existing Commission 

responsibilities, noting that the JAC 

provides the examination programs to 

the Commission annually, and that the 

Commission can perform a review of the 

examination programs.482

NFA and JAC suggested, as cost 

effective and more practical solution, 

inviting individuals meeting the 

‘‘examinations expert’’ designation to 

participate in the already existing JAC 

audit committee meetings.483 CME 

suggested that if the proposed structure 

is adopted, the time frame for review be 

extended from 18 months to 31⁄2 years, 

matching that required by the AICPA in 

its Peer Review program.484

The Commission has taken these 

comments into consideration and has 

revised the final regulation by providing 

that the report of the examinations 

expert should conform to the consulting 

services standards of the AICPA. The 

Commission recognizes that generally 

accepted auditing standards do not 

provide a reporting framework by which 

a certified public accountant can issue 

an audit opinion consistent with the 

requirements contained in § 1.52. 

Accordingly, the Commission has 

revised the final regulation by removing 

the requirement that the examinations 

expert provide an audit opinion. 

The Commission also does not believe 

that it is in a position to perform the 

type of review of the SRO examination 

reports required by § 1.52 given its 

limited resources. Furthermore, the 

examinations expert is an independent 

party with expert knowledge of risk 

assessment and internal controls 

reviews and will be able to provide 

more thorough and detailed review of 

the joint audit program than 

Commission staff can currently devote 

to such a review. In addition, the 

Commission staff has communicated to 

the JAC that it would be very supportive 

of having the accounting and auditing 

experts join the JAC meetings to discuss 

current industry issues. 

The Commission has also considered 

the impact of performing such a review 

every two years and has modified the 

proposal to require such a report on a 

three year basis. This reflects the fact 

that the DSROs will be updating their 

programs as needed and therefore the 

program should not be stagnant during 

the intervening years. Finally, it was 

pointed out that given the nature of the 

report and to facilitate an open and 

frank dialogue amongst the 

examinations expert, the DSROs, and 

the Commission, such report should be 

considered confidential. The 

Commission is revising the regulation to 

provide that the report is confidential, 

which is consistent with how the 

PCAOB conducts its reviews of CPA 

firms. 

P. § 1.55: Public Disclosures by Futures 

Commission Merchants 

Regulation 1.55(a) currently requires 

an FCM, or an IB in the case of an 

introduced account, to provide a 

customer with a separate written risk 

disclosure statement prior to opening 

the customer’s account (‘‘Risk 

Disclosure Statement’’). Regulation 

1.55(a) also provides that the Risk 

Disclosure Statement may contain only 

the language set forth in § 1.55(c) (with 

an exception for non-substantive 

additions such as captions), except that 

the Commission may authorize the use 

of Risk Disclosure Statements approved 

by foreign regulatory agencies or selfregulatory organizations if the 

Commission determines that such Risk 

Disclosure Statements are reasonably 

calculated to provide the disclosures 

required by the Commission under 

§ 1.55.485 Regulation 1.55(a) further 

requires the FCM or IB to receive a 

signed and dated statement from the 

customer acknowledging his or her 

receipt and understanding of the Risk 

Disclosure Statement.486

The Commission reviewed the 

adequacy of the current prescribed Risk 

Disclosure Statement in light of its 

experience with customer protection 

issues during the recent failures of two 

FCMs, MFGI and PFGI. In this regard, in 

responding to questions and issues 

raised primarily by non-institutional 

market participants, including market 

participants from the agricultural 

community and retail market 

participants, the Commission 

recognized that such market 

participants would benefit from several 

additional disclosures regarding the 

potential general risks of engaging in 

futures trading through an FCM, and the 

potential specific risks resulting from 

the bankruptcy of an FCM. In addition 

to proposing new general risk 

disclosures, the Commission proposed 

to also require each FCM to provide 

customers and potential customers with 

information about the FCM, including 

its business, operations, risk profile, and 

affiliates. The firm specific disclosures 

are intended to provide customers with 

access to material information regarding 

an FCM to allow the customers to 

independently assess the risk of 

entrusting funds to the firm or to use the 

firm for the execution of orders. 

1. Amendments to the Risk Disclosure 

Statement 

The mandatory Risk Disclosure 

Statement currently addresses the risks 

of engaging in commodity futures 

trading. The risks that must be disclosed 

include: (1) The risks that a customer 

may experiences losses that exceed the 

amount of funds that he or she 

contributed to trading and that the 

customer may be responsible for losses 

beyond the amount of funds deposited 

for trading; (2) the risks that under 

certain market conditions, a customer 

may find it difficult or impossible to 

liquidate a position, such as when a 

market has reached a daily price move 

limit; (3) the risks that placing certain 

contingent orders (such as a stop limit 

order) may not necessarily limit the 

customer’s losses; (4) the risks 

associated with the high degree of 

leverage that may be obtainable from the 

futures markets; and (5) the risks of 

trading on non-U.S. markets, which may 

not provide the same level of 

protections provided under Commission 

regulations. 

As noted above, the Commission 

proposed several additional disclosures 

based upon its experience in working 

with customers, particularly retail and 

other non-institutional market 

participants, during the recent failures 

of MFGI and PFGI. Specifically, the 

Commission proposed to amend the 

Risk Disclosure Statement to provide 

market participants with more 

information regarding the risks 

associated with an FCM holding 

customer funds. In this regard, certain 

market participants believed that the 

fact that their funds were segregated 

from the FCM’s proprietary funds 

protected them from loss in the event of 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68563 

487NFA Comment Letter at 15 (Feb. 15, 2013). 

488FIA Comment Letter at 41 (Feb. 15, 2013). 

489FIA Comment Letter at 2 (Feb. 15, 2013). The 

FIA formed a special committee to develop and 

recommend specific measures that could be 

implemented by both the industry best practices 

and regulatory change to address the issues arising 

from the bankruptcy of MFGI. 

490 Id. FIA’s ‘‘Protection of Customer Funds— 

Frequently Asked Questions’’ provides information 

covering five broad areas: (1) segregation of 

customer funds; (2) collateral management and 

investments; (3) basic information on FCMs, such 

as the purpose of capital requirements and margin 

processing: (4) issues for joint FCM/BDs; and (5) the 

role of the DCO guarantee fund. 

491 Id. at 41. 

492 Id. at 41–42. 

493NEFI/PMAA Comment Letter at 2 (Jan. 14, 

2013). 

an FCM bankruptcy. Other customers 

believed that a DCO guaranteed 

customer losses, and other customers 

believed that funds deposited for futures 

trading were protected by the Securities 

Investor Protection Corporation in the 

event of an FCM/BD bankruptcy. 

To provide greater clarity as to the 

how customer funds are held and the 

potential risks associated with FCMs 

holding customer funds, the 

Commission proposed to revise the Risk 

Disclosure Statement by amending 

§ 1.55(b) to include new paragraphs (2) 

through (7) as follows: 

(2) The funds you deposit with an 

FCM for trading futures positions are 

not protected by insurance in the event 

of the bankruptcy or insolvency of the 

futures commission merchant, or in the 

event your funds are misappropriated 

due to fraud; 

(3) The funds you deposit with an 

FCM for trading futures positions are 

not protected by the Securities Investor 

Protection Corporation even if the 

futures commission merchant is 

registered with the SEC as a BD; 

(4) The funds you deposit with an 

FCM are not guaranteed or insured by 

a DCO in the event of the bankruptcy or 

insolvency of the FCM, or if the FCM is 

otherwise unable to refund your funds; 

(5) The funds you deposit with an 

FCM are not held by the FCM in a 

separate account for your individual 

benefit. FCMs commingle the funds 

received from customers in one or more 

accounts and you may be exposed to 

losses incurred by other customers if the 

FCM does not have sufficient capital to 

cover such other customers’ trading 

losses; 

(6) The funds you deposit with an 

FCM may be invested by the FCM in 

certain types of financial instruments 

that have been approved by the 

Commission for the purpose of such 

investments. Permitted investments are 

listed in Commission Regulation 1.25 

and include: U.S. government securities; 

municipal securities; money market 

mutual funds; and certain corporate 

notes and bonds. The FCM may retain 

the interest and other earnings realized 

from its investment of customer funds. 

You should be familiar with the types 

of financial instruments that an FCM 

may invest customer funds in; and 

(7) FCMs are permitted to deposit 

customer funds with affiliated entities, 

such as affiliated banks, securities 

brokers or dealers, or foreign brokers. 

You should inquire as to whether your 

FCM deposits funds with affiliates and 

assess whether such deposits by the 

FCM with its affiliates increases the 

risks to your funds. 

The Commission received several 

comments on the proposed amendment 

to the Risk Disclosure Statement. NFA 

stated that it fully supported the 

Commission’s goal of ensuring that 

customers receive a full description of 

the risk associated with futures trading, 

and agreed with the Commission that it 

is important to update the Risk 

Disclosure Statement to provide 

information on the extent to which 

customer funds are protected when 

deposited with an FCM as margin or to 

guarantee performance for trading 

commodity interest.487

The FIA generally supported the 

proposed amendments to the general 

Risk Disclosure Statement set forth in 

§ 1.55(b) and outlined above.488 The FIA 

stated that many of the Commission’s 

proposed amendments are consistent 

with FIA’s recommendations to enhance 

disclosures set forth in its paper, ‘‘Initial 

Recommendations for the Protection of 

Customer Funds,’’ which was published 

on February 28, 2012 (‘‘Initial 

Recommendations’’) in response to 

MFGI.489 FIA also stated that its 

document, ‘‘Protection of Customer 

Funds—Frequently Asked Questions,’’ 

is being used by FCMs to provide 

customers with increased disclosures on 

the scope of how the laws and 

regulations protect customers in the 

futures market.490

With respect to the Commission’s 

proposed amendments to § 1.55(b), FIA 

recommended that the Commission 

delete the phrase ‘‘due to fraud’’ in 

§ 1.55 (b)(2) because customer funds 

may be misappropriated for any 

reason.491 Additionally, FIA suggested 

the disclosure in § 1.55(b)(4) be revised 

to take account of the CME Group 

Family Farmer and Rancher Protection 

Fund established in the wake of MFGI 

as this fund will provide up to $25,000 

to qualifying individual farmers and 

ranchers and $100,000 to co-ops that 

hedge their risk in CME futures 

markets.492

The Commission has considered FIA’s 

comments and had determined to revise 

the proposal. The Commission 

recognizes that customer funds may be 

misappropriated as a result of wrongful 

conduct that does not rise to the level 

of fraud. Accordingly, the Commission 

is revising § 1.55(b)(4) by removing the 

phrase ‘‘due to fraud’’ so that the 

disclosure provides that customers’ 

funds are not covered by insurance in 

the event of the insolvency of the FCM 

or in the event the funds are 

misappropriated. 

The Commission also is revising final 

§ 1.55(b)(4) in response to FIA’s 

comment to provide an overall 

statement that customer funds generally 

are not insured by DCOs. The 

Commission is further revising final 

§ 1.55(b)(4) to include in the disclosure 

the fact that a DCO may offer an 

insurance program, and that a customer 

should inquire of the FCM the extent of 

any DCO insurance programs and 

whether the customer would qualify for 

coverage and understand the limitations 

and benefits of the coverage. The 

Commission believes that this approach 

is more flexible to address future 

developments in this area than a direct 

reference to specific DCO insurance 

programs that currently are available. 

NEFI/PMAA questioned whether or 

not existing and proposed disclosures 

are sufficient, and further stated that 

disclosure of customer protections are 

equally important as the disclosure of 

potential risks to ensure customer 

confidence.493 Pilot Flying J stated 

FCMs must be required to disclose 

information to their customers on how 

their accounts and positions will be 

managed, as well as associated risks and 

what kinds of financial protections are 

afforded to customers by the firm, 

exchange, and the Commission. 

The Commission agrees with NEFI/

PMAA and Pilot Flying J that a 

customer’s understanding of the 

protections is as important as 

understanding the risks. The Risk 

Disclosure Statement is the minimum 

information that an FCM should provide 

to prospective customers, and is 

intended to provide a high level 

summary of the general risk of trading 

commodity interests. FCMs should 

provide additional information as 

necessary to ensure that customers have 

adequate information. The Commission 

believes that FIA’s Initial 

Recommendation and FAQ, which 

includes the types of information that 

NEFI/PMAA and Pilot Flying J are 

requesting, should be made available to 

all potential customers. FIA should 

revise the documents, as appropriate, in 


TKELleY on DSK3SPTVN1PROD with RULES2
68564 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

494FIA Comment Letter at 42–43 (Feb. 15, 2013). 

495 Id. 

496CFA Comment Letter at 8 (Feb. 13, 2013). 

497NGFA Comment Letter at 5 (Feb. 15, 2013). 

498FIA Comment Letter at 43 (Feb. 15, 2013). 

499 Id. 

response to changing market events or 

other factors. 

The Commission also requested 

comment on whether and how the new 

or revised Risk Disclosure Statement 

should be provided to existing 

customers at the effective date of the 

regulation. Particularly, the Commission 

requested comment on whether FCMs 

should be required to obtain new 

signature acknowledgments from 

existing customers. 

FIA stated that it was not opposed to 

a requirement that FCMs provide the 

revised Risk Disclosure Statement to 

existing customers that are otherwise 

required to receive the disclosure 

document.494 FIA stated, however, that 

FCMs should not be required to obtain 

a written acknowledgment from existing 

customers. FIA further stated that it 

should be sufficient if the FCM makes 

each customer aware of the revised Risk 

Disclosure Statement by any appropriate 

means, consistent with the means by 

which the FCM normally communicates 

important information to customers, 

including but not limited to, a separate 

mailing.495 The CFA stated that it is 

very important for FCMs and their 

DSROs to ascertain whether existing 

and potential customers have 

acknowledged receipt of the Risk 

Disclosure Statement, and FCMs should 

keep records of acknowledgments that 

the Risk Disclosure Statements were 

received.496 NGFA noted that providing 

updated risk disclosure, with signed 

acknowledgment of such to the FCM, is 

a sound concept.497

Regulation 1.55(a) will continue to 

require FCMs to obtain and retain 

signed acknowledgments from new 

customers that they received and 

understand the Risk Disclosure 

Statement. With respect to existing FCM 

customers on the effective date of the 

regulation, the Commission believes 

that it is adequate for an FCM to provide 

each of the customers with a revised 

Risk Disclosure Statement via its normal 

means of communicating with 

customers, including the use of a 

separate mailing, or providing a link on 

the firm’s Web site to the revised Risk 

Disclosure Statement, provided that the 

FCM provides a paper copy of the Risk 

Disclosure Statement upon the request 

of a customer. The communication of 

the revised Risk Disclosure Statement to 

customers must be highlighted by the 

FCM in such a manner to reasonably 

ensure that the customers are 

adequately apprised of the revised Risk 

Disclosure Statement. 

FIA also noted that the Commission 

previously approved, pursuant to 

§ 1.55(c), an alternative risk disclosure 

statement for use in the U.S., the United 

Kingdom, and Ireland.498 The 

alternative risk disclosure statement is 

set forth in Appendix A to § 1.55. FIA 

requested that the Commission confirm 

whether FCMs may continue to use the 

alternative risk disclosure statement and 

further encouraged the Commission to 

coordinate with other derivatives 

regulatory authorities to revise the 

alternative risk disclosure statement to 

meet its regulatory objectives.499

Regulation 1.55(c) provides that the 

Commission may approve for use in lieu 

of the standard Risk Disclosure 

Statement required by § 1.55(b) a risk 

disclosure statement approved by one or 

more foreign regulatory agencies or selfregulatory organizations if the 

Commission determines that such risk 

disclosure statement is reasonably 

calculated to provide the disclosure 

required by the standard Risk Disclosure 

Statement. As noted above, the 

Commission proposed amendments to 

the Risk Disclosure Statement due to its 

recent experiences with the MFGI and 

PFGI insolvencies where certain 

customers, particularly less 

sophisticated customers, did not fully 

comprehend the nature of the 

protections of customer funds. Based 

upon this recent experience, the 

Commission does not believe that the 

disclosures in the alternative risk 

disclosure statement contained in 

Appendix A provide sufficient detailed 

disclosures to customers regarding the 

risk of trading futures transactions. 

Accordingly, the Commission is revising 

§ 1.55(c) to provide that an FCM may 

continue to use the alternative risk 

disclosure statement provided that the 

FCM also provides each customer 

required to receive a disclosure 

document with the revised Risk 

Disclosure Statement and receives such 

customer’s written acknowledgment 

that it has received and understands the 

Risk Disclosure Statement. This will 

allow FCMs to continue to have a 

common risk disclosure statement with 

the United Kingdom and Ireland, and 

also ensure that customers receive 

additional risk disclosures to enhance 

their understanding of engaging in 

futures trading. 

a. Firm Specific Disclosure Document 

i. General Requirements 

The Commission proposed new 

paragraphs (i) and (k) to § 1.55 to 

provide that an FCM may not enter into 

a customer account agreement or accept 

funds from a customer unless the FCM 

discloses to the customer all 

information about the FCM, including 

its business, operations, risk profile, and 

affiliates, that would be material to the 

customer’s decision to entrust such 

funds to such FCM and otherwise 

necessary for full and fair disclosure to 

customers (‘‘Firm Specific Disclosure 

Document’’). 

The Firm Specific Disclosure 

Document is intended to enable 

customers to make informed judgments 

regarding the appropriateness of 

selecting an FCM by providing 

information for the meaningful 

comparisons of business models and 

risks across FCMs. Such information 

will greatly enhance the due diligence 

that a customer can conduct both prior 

to opening an account and on an 

ongoing basis, as the proposal will 

require the FCM to update the Firm 

Specific Disclosure Document at least 

once every 12 months and as and when 

necessary to keep it accurate and 

complete. The Commission believes that 

the proposed firm specific Firm Specific 

Disclosure Document, coupled with the 

existing Risk Disclosure Statement, will 

provide customers with a more 

complete perspective regarding the risks 

of participating in the futures markets 

and of opening an account with a 

particular firm. 

Proposed § 1.55(j) requires an FCM to 

make the Firm Specific Disclosure 

Document available to customers and to 

the general public by posting the Firm 

Specific Disclosure Document on the 

FCM’s Web site. An FCM may, however, 

use an alternative electronic means to 

provide the Firm Specific Disclosure 

document to its customers provided that 

the electronic version is presented in a 

format that is readily communicated to 

the customers. Paper copies of the Firm 

Specific Disclosure Document also must 

be available upon the request of a 

customer. The Commission also 

proposed that each FCM disclose certain 

financial information on its Web site to 

provide the public with additional 

information on the firm and the 

customer funds that it holds. The 

additional financial disclosures are set 

forth in § 1.55(o) and are discussed 

below. 

SIFMA stated that the public 

disclosure requirements will help 

empower its members to choose safe 

and trustworthy FCMs, and that the 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68565 

500SIFMA Comment Letter at 2 (Feb. 21, 2013). 

501 Vanguard Comment Letter at 4 (Feb. 2, 2013). 

See also, Prudential Comment Letter at 2 (Jun. 9, 

2013) and Security Benefit Comment Letter at 2 

(Jan. 11, 2013 supporting the additional disclosures 

proposed under § 1.55(i). 

502FHLB Comment Letter at 10 (Feb. 15, 2013). 

503FIA Comment Letter at 41 (Feb. 15, 2013). 

504FIA Comment Letter at 43–44 (Feb. 15, 2013). 

505 Id. 

506 Id. 

507 Id. at 44. 

508 Id. 509FIA Comment Letter at 51 (Feb. 15, 2013). 

disclosures will hold FCMs accountable 

to their customers, allowing the 

customers to conduct due diligence 

efficiently, actively monitor FCMs’ 

financial condition and regulatory 

compliance, and make informed 

decisions when selecting and doing 

business with FCMs.500 Vanguard 

expressed the view that the best 

protection for customers is their own 

due diligence, and that the proposed 

additional enhancements add 

significant, and much needed, 

protections and transparency.501 The 

FHLB supported the proposal with 

respect to the publication of the Firm 

Specific Disclosure Document and 

strongly endorsed the requirement that 

the FCM update the document as 

circumstances warrant.502

FIA stated that it supports enhancing 

disclosures to customers regarding the 

FCM through which the customer may 

elect to trade.503 FIA requested that the 

Commission confirm that an FCM that 

is part of a publicly-traded company, 

whether U.S. or non-U.S., or is 

otherwise required to prepare and to 

make public an annual report including 

information comparable to that required 

by the Firm Specific Disclosure 

Document under the proposed 

regulation, may comply with the 

regulation by making such annual 

report, and any amendments thereto, 

available on its Web site.504 FIA noted 

that the Management Discussion and 

Analysis (‘‘MD&A’’) required under SEC 

rules (17 C.F.R. 229.303) requires 

publicly traded companies to discuss 

essentially the same topics required to 

be discussed under the Commission’s 

proposal. FIA stated that the topics 

include business environment; critical 

accounting policies; use of estimates; 

results of operations; balance sheet and 

funding sources; off-balance sheet 

arrangements and contractual 

obligations; overview and structure of 

risk management; liquidity risk 

management; market risk management; 

credit risk management; operational risk 

management; recent accounting 

developments; and certain risk factors 

that may affect the company’s 

business.505 FIA estimated that 

approximately 90 percent of customer 

funds are held by FCMs that are also 

SEC registered or part of a bank holding 

company or publicly-traded company 

and believes this position is necessary 

to avoid customer confusion in certain 

circumstances and to assure that FCMs 

are not subject to duplicative and, 

perhaps conflicting, disclosure 

requirements.506

FIA further requested that the 

Commission confirm the level of detail 

required to be provided by privatelyheld FCM companies should be 

consistent with that provided in the 

annual reports of publicly-traded 

companies.507 Additionally, FIA stated 

that privately-held companies would 

need a period of time to develop the 

required disclosures and requested that 

the Commission make the compliance 

date of the regulation no sooner than six 

months after the effective date of the 

regulation.508

The Commission has considered the 

comments and is adopting § 1.55(i) and 

(j) as proposed. In response to FIA’s 

comments, the Commission confirms 

that beyond the requirements stated in 

§ 1.55, the Commission is not mandating 

the form in which the required 

information is conveyed, provided it is 

responsive to the information 

requirements of § 1.55 and provides 

such information in a clear, concise, and 

understandable matter. Accordingly an 

FCM that is part of a publicly traded 

company, or is otherwise required to 

prepare and make public an annual 

report including information 

comparable to the information required 

by proposed § 1.55(k), may satisfy the 

disclosure requirements in § 1.55 by 

making an annual report, and any 

amendments thereto, available on its 

Web site; provided that such annual 

report provides the information required 

by § 1.55 in a manner that is clear, 

concise and understandable. The 

Commission is similarly confirming that 

a privately-held company may satisfy 

the requirements in § 1.55 by making an 

annual report, and any amendments 

thereto, available on its Web site; 

provided that such annual report 

provides the information required by 

§ 1.55 in a manner that is clear, concise 

and understandable. 

In assessing whether the annual 

report contains the necessary 

information required by § 1.55 in a 

clear, concise and understandable 

manner, the FCM must ensure that the 

disclosures specifically address the risks 

at the FCM and are not so general in 

nature that they reflect that the FCM’s 

business may not be material to the 

public or private company for which the 

annual report is prepared. An FCM is 

not in compliance with § 1.55 if the 

annual report information does not 

disclose the information required by 

§ 1.55 as it relates to the FCM. The 

objective of the disclosures is to provide 

prospective and existing customers of 

the FCM with material information that 

could have an impact on their decision 

to engage in a relationship with the 

FCM. If the annual report does not 

include information regarding the FCM, 

or such information is not clear concise 

and understandable, the FCM would 

have to enhance the disclosure by 

providing supplemental material or 

otherwise making the required 

disclosures available to customers and 

the public in a manner that is clear, 

concise and understandable. In 

addition, in order to provide customers 

with clear, concise and understandable 

disclosures, an FCM may be required to 

extract information from various 

sections of its annual report and provide 

such information in an easy to read 

format. If customers are required to 

search through detailed annual reports 

to locate the required § 1.55 disclosures, 

the FCM is not providing the 

information in a clear, concise and 

understandable manner. 

ii. Specific Disclosure Information 

Required (by Rule Paragraph) 

Proposed § 1.55(k)(1) requires an FCM 

to disclose contact information for the 

firm including the address of its 

principal place of business and its 

phone number. No comments were 

received on the proposed § 1.55(k)(1) 

and the Commission is adopting the 

amendments as proposed. 

Proposed § 1.55(k)(2) requires an FCM 

to disclose the name and business 

addresses of the FCM’s senior 

management, including business titles 

and background, areas of responsibility 

and nature of duties of each person. The 

FIA recommended the disclosure be 

limited to those individuals identified 

as principals on the NFA BASIC 

system.509

The term ‘‘principal’’ is defined in 

§ 3.1 to mean, with respect to an FCM: 

(1) The proprietor and chief compliance 

officer if the FCM is organized as a sole 

proprietorship; (2) any general partner 

and chief compliance officer if the FCM 

is organized as a partnership; (3) any 

director, the president, chief executive 

officer, chief operating officer, chief 

financial officer, chief compliance 

officer, and any person in charge of a 

principal business unit, division or 

function subject to regulation by the 

Commission if the FCM is organized as 


TKELleY on DSK3SPTVN1PROD with RULES2
68566 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

510 Id. at 45. 511 Id. at 47–48. 

512FIA Comment Letter at 45 (Feb. 15, 2013). 

513 Id. 

514 Id. 

515 Id. 

516Section 939A required that the Commission, 

‘‘remove any reference to or requirement of reliance 

on credit ratings and to substitute in such 

regulations such standard of creditworthiness as 

each respective agency shall determine as 

appropriate for such regulations.’’ FIA Comment 

Letter at 46 (Feb. 15, 2013). 

517FIA Comment Letter at 46 (Feb. 15, 2013). 

518 Id. at 51. 

a corporation; (4) any director, the 

president, chief executive officer, chief 

operating officer, chief financial officer, 

chief compliance officer, the manager, 

managing member or those members 

vested with the management authority 

for the entity, and any person in charge 

of a principal business unit, division or 

function subject to regulation by the 

Commission if the FCM is organized as 

a limited liability company or limited 

liability partnership; and (5) in addition, 

any person at the FCM occupying a 

similar status or performing similar 

functions as described above, having the 

power, directly or indirectly, through 

agreement or otherwise, to exercise a 

controlling influence over the entity’s 

activities that are subject to regulation 

by the Commission. 

The Commission agrees with FIA’s 

comment and is revising the final 

regulation to require an FCM to disclose 

persons that are defined as ‘‘principals’’ 

of the FCM under § 3.1. 

Proposed § 1.55(k)(3) requires an FCM 

to disclose the significant types of 

activities and product lines that the 

FCM engages in and the approximate 

percentage of assets and capital that are 

contributed to each type of business 

activity or product line. FIA 

recommended that an FCM be required 

to update the description in its annual 

report, only if it adds a new business 

activity or product line that requires 

higher minimum capital under 

applicable capital rules because the 

approximate percentage of the FCM’s 

assets and capital used in each type of 

activity can change frequently.510

The Commission believes that FIA is 

defining the requirements of § 1.55(k)(3) 

too narrowly. The regulation is intended 

to provide the public with information 

concerning the major businesses 

activities that an FCM engages in to 

provide information regarding the 

benefits and risks of using such firm to 

conduct transactions in commodity 

interests. Minimum capital 

requirements are generally driven by 

regulated business, such a being 

registered as a BD. While such 

information is material to potential 

customers and is required to be 

disclosed under § 1.55(k)(3), the 

regulation also requires the disclosure of 

non-regulated business that a firm may 

engage in. 

The Commission also recognizes that 

an FCM’s assets and capital contributed 

to different business activities can 

change frequently, but such information 

may be material for the public in 

determining to entrust funds with the 

firm and to perform effective due 

diligence in monitoring the firm. Each 

FCM will need to assess the materiality 

of changes and use its judgment to 

determine whether the Firm Specific 

Disclosure Document should be revised. 

In addition, the Commission notes that 

§ 1.55(i) requires that the Firm Specific 

Disclosure Document must be revised as 

and when necessary, but at least 

annually, to keep the information 

accurate and complete. The Commission 

has considered the comments and is 

adopting the amendments as proposed. 

Proposed § 1.55(k)(4) requires an FCM 

to disclose its business on behalf of 

customers, including types of accounts, 

markets traded, international business, 

and clearinghouses and carrying brokers 

used, and its policies and procedures 

concerning the choice of bank 

depositories, custodians, and other 

counterparties. FIA requested the 

Commission confirm that: (1) The 

disclosure required under this 

paragraph is limited to the activities of 

the FCM in its capacity as such; (2) the 

term ‘‘accounts’’ means ‘‘customers’’; 

and (3) the term ‘‘counterparties’’ is 

limited to counterparties for § 1.25 

investments.511

Regulation 1.55(k)(4) is intended to 

provide customers and the public with 

information regarding the FCM 

operating its FCM’s business. 

Accordingly, the Commission confirms 

that the disclosures required under 

§ 1.55(k)(4) are limited to the activities 

of the FCM acting in its capacity as an 

FCM. The term ‘‘types of accounts’’ in 

§ 1.55(k)(4) should be ‘‘types of 

customers,’’ and requires the FCM to 

disclose the nature of its customer base 

in the futures markets (i.e., institutional, 

retail, agricultural, hedgers,) to provide 

the public with information regarding 

the firm’s experiences with different 

types of markets and market 

participants. The Commission also 

confirms that the term ‘‘counterparties’’ 

is limited to § 1.25 counterparties. The 

Commission is revising final § 1.55(k)(4) 

accordingly. 

Proposed § 1.55(k)(5) requires an FCM 

to discuss the material risks, 

accompanied by an explanation of how 

such risks may be material to its 

customers, of entrusting funds to the 

FCM, including, without limitation, the 

nature of investments made by the FCM 

(including credit quality, weighted 

average maturity, and weighted average 

coupon); the FCM’s creditworthiness, 

leverage, capital, liquidity, principal 

liabilities, balance sheet leverage and 

other lines of business; risks to the FCM 

created by its affiliates and their 

activities, including investment of 

customer funds in an affiliated entity; 

and any significant liabilities, 

contingent or otherwise, and material 

commitments. 

FIA commented that the word ‘‘risks’’ 

in § 1.55(k)(5) should be replaced with 

the word ‘‘information,’’ and that the 

Commission remove the phrase 

‘‘accompanied by an explanation of how 

such risks may be material to its 

customers.’’ 512 FIA believed it sufficient 

that an FCM present the required 

information to the customer and that it 

is the customer’s responsibility to 

analyze this information and determine 

the extent to which it is important or 

relevant to the customer’s decision to 

open or maintain an account with the 

FCM.513 FIA further stated that if the 

Commission believes FCMs should 

provide guidance to customers 

regarding the potential importance of 

specific information, FIA believes this 

guidance should be provided by means 

of a generic statement.514 In addition, 

FIA asked the Commission to confirm 

that the term ‘‘investments’’ is limited to 

investments of customer funds, and 

does not include all investments made 

by the FCM as an entity.515

Additionally, FIA requested that the 

Commission delete the term 

‘‘creditworthiness,’’ stating that such 

reference is incongruous with 

instructions under section 939A of the 

Dodd-Frank Act.516 Moreover, FIA 

opined that the only lines of business 

that an FCM should be required to 

disclose are those that would require 

higher minimum capital under 

applicable capital rules, and that this 

information should only be required to 

be updated annually.517 Additional 

clarification was requested by FIA 

regarding the phrase ‘‘investment of 

customer funds with an affiliated 

entity,’’ and whether that phrase refers 

to the ‘‘deposit of customer funds in an 

affiliated bank.’’ 518 Further clarification 

was requested regarding the types of 

liabilities and commitments requiring 

disclosure under this section and 

whether this information should 

updated no more often than 

semiannually, consistent with 

comparable disclosures applicable to 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68567 

519 Id. at 46. 

520 Id. at 34. 

521Regulation 4.24(l)(2) requires a CPO to 

disclose in a disclosure document for a commodity 

pool certain material administrative, civil, or 

criminal actions against an FCM that the CPO 

engages to trade futures. 

BDs.519 Finally, FIA, while not opposed 

to providing leverage information, 

believed that disclosure should not be 

required until it is certain the 

calculation provides the most 

appropriate measure of risk.520

The Commission believes that it is 

appropriate that § 1.55(k)(5) requires an 

FCM to identify material risks and to 

explain how such risks may be material 

to customers. The Commission further 

believes, based upon its experiences 

during MFGI, that customers 

(particularly retail and less 

sophisticated customers) would benefit 

from an FCM providing its assessment 

of the risks of the firm, accompanied by 

an explanation of such risks. 

The Commission notes, in response to 

FIA’s comments, that § 1.55(k)(5) 

requires an FCM to provide information 

regarding its general investments and is 

not limited to the investment of 

customer funds. The disclosures 

contemplated by § 1.55(k)(5) go to the 

full operation of the FCM and not just 

its regulated or futures activities. In 

addition, limiting the disclosures only 

to investments that result in an increase 

in minimum capital requirements may 

result in the non-disclosure of 

significant operations that may impact a 

customer’s decision to do business with 

an FCM. 

The Commission also notes that the 

requirement in § 1.55(k)(5) for FCMs to 

disclose leverage information would be 

met by an FCM providing the leverage 

information that each FCM is required 

to calculate under § 1.10 and in 

accordance with the regulations of the 

NFA. An FCM should define the 

leverage calculation in the Disclosure 

Document and may provide any other 

information necessary to make the 

information meaningful for the public, 

but if materially different from the then 

prevailing NFA methodology, should 

provide an explanation of the 

differences therefrom. 

Proposed § 1.55(k)(6) requires an FCM 

to disclose the name of its DSRO and 

the DSRO’s Web site, and the location 

of where the FCM’s annual financial 

statements are available. The 

Commission received no comments on 

proposed § 1.55(k)(6) and is adopting 

the regulation as proposed. 

Proposed § 1.55(k)(7) requires an FCM 

to disclose any material administrative, 

civil, enforcement, or criminal action 

then pending, and any enforcement 

actions taken in the last three years. FIA 

requested that the Commission confirm 

that a ‘‘pending’’ action is an action that 

has been filed but not concluded, and 

recommended the Commission confirm 

that the disclosure required under this 

paragraph would be limited to matters 

required to be disclosed in accordance 

with § 4.24(l)(2).521

The Commission agrees with FIA that 

the regulation should require an FCM to 

disclose administrative, civil, 

enforcement, and criminal actions that 

have been filed but not concluded. The 

proposal was not intended to cover 

open or closed investigations that have 

not resulted in the filing of a complaint. 

The Commission is revising § 1.55(k)(7) 

as appropriate to reflect this concept. 

The Commission, however, does not 

agree with FIA’s comment that 

disclosures under proposed § 1.55(k)(7) 

should be limited to administrative, 

civil, enforcement, or criminal matters 

that would be required to be disclosed 

under § 4.24(l)(2). Regulation 4.24(l)(2) 

provides that an action will be deemed 

material if: (1) The action would be 

required to be disclosed in the footnotes 

to a commodity pool’s financial 

statements under generally accepted 

accounting principles as adopted in the 

U.S.; (2) the action was brought by the 

Commission, provided that if the matter 

was concluded and did not result in a 

civil monetary penalty in excess of 

$50,000, it does not need to be 

disclosed; and (3) the action was 

brought by any other federal or state 

regulatory agency, a non-U.S. regulatory 

agency, or an SRO and involved 

allegations of fraud or other willful 

misconduct. The Commission believes 

that the regulation’s requirement to 

disclose material actions is appropriate 

in the context of disclosures so that a 

customer can perform adequate due 

diligence to assess the risk of engaging 

an FCM to conduct futures business and 

in entrusting funds to the FCM. In this 

regard, the Commission believes that 

FCMs should disclose Commission 

disciplinary actions that are pending or 

have been concluded against the FCM 

without regard to the amount of the civil 

monetary penalty that may have been 

imposed. In addition, the Commission 

believes that there may be 

circumstances in addition to fraud or 

other willful misconduct that should be 

disclosed to customers to allow 

customers to better appreciate the 

potential risks of entering into a 

business relationship with an FCM. 

Proposed § 1.55(k)(8) requires the 

Firm Specific Disclosure Document to 

contain a basic overview of customer 

fund segregation, collateral management 

and investments, FCMs, and dual 

registrant FCM/BDs. The disclosures 

included under § 1.55(k)(8) should not 

only include information regarding the 

segregation of funds for trading on 

designated contract markets, but should 

also include information regarding the 

risk to customers of engaging in foreign 

futures and foreign options trading. In 

conjunction with § 1.55(k)(4), which 

requires an FCM to provide a profile of 

its customer business, including its 

international business and 

clearinghouses and carrying brokers 

used, an FCM in order to comply with 

§ 1.55(k)(8) should disclose the risks of 

engaging in trading on foreign markets. 

The disclosures required by § 1.55(k)(8) 

should include information that in the 

event of the insolvency of the FCM, or 

the insolvency of a foreign broker or 

foreign depository that is holding 

customer funds, customer funds held in 

foreign jurisdictions may be subject to a 

different bankruptcy regime and legal 

system than if the funds were held in 

the U.S. In addition, an FCM should 

disclose that a customer also is subject 

to fellow customer risk in foreign 

jurisdictions and that, for purposes of 

bankruptcy protection, a customer that 

trades only in one country or in one 

market is also exposed to fellow 

customer risk from losses that may be 

incurred in other countries and other 

markets. The Commission did not 

receive comment on § 1.55(k)(8) and is 

adopting the amendments as proposed. 

Proposed § 1.55(k)(9) requires the 

FCM to include in the Firm Specific 

Disclosure Document information on 

how a customer may obtain information 

regarding filing a complaint with the 

Commission or the firm’s DSRO. The 

Commission did not receive comment 

on § 1.55(k)(9) and is adopting the 

amendments as proposed. 

Proposed § 1.55(k)(10) requires the 

Firm Specific Disclosure Document to 

include the following financial 

information for the most recent month 

end: (1) The FCM’s total equity, 

regulatory capital, and net worth, all 

computed in accordance with U.S. 

Generally Accepted Accounting 

Principles and the Commission’s capital 

rule, § 1.17; (2) the dollar value of the 

FCM’s proprietary margin requirements 

as a percentage of the aggregated margin 

requirements for futures customers, 

Cleared Swaps Customers, and 30.7 

customers; (3) the number of futures 

customers, Cleared Swaps Customers, 

and 30.7 customers that comprise 50 

percent of the funds held for such 

customers, respectively; (4) the 

aggregate notional value, by asset class, 

of all non-hedged, principal over-thecounter transactions into which the 


TKELleY on DSK3SPTVN1PROD with RULES2
68568 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

522CMC Comment Letter at 2 (Feb. 15, 2013). 

523NFA Comment Letter at 15–16 (Feb. 15, 2013). 

524 Id. 

525 Id. at 1. 

526 Id. at 16. 

527 Id. 

528FIA Comment Letter at 48 (Feb. 15, 2013). 

529 Id. 

530RJ O’Brien Comment Letter at 11 (Feb. 15, 

2013). 531FIA Comment Letter at 46–47 (Feb. 15, 2013). 

FCM has entered; (5) the amount, 

generic source and purpose of any 

unsecured lines of credit or similar 

short term funding the FCM has 

obtained but not yet drawn upon; (6) the 

aggregated amount of financing the FCM 

provides for customer transactions 

involving illiquid financial products for 

which it is difficult to obtain timely and 

accurate prices; and (7) the percentages 

of futures customers, Cleared Swaps 

Customers, and 30.7 customers 

receivable balances that the FCM had to 

write-off as uncollectable during the 

past 12 months, as compared to the 

current balance held for such customers. 

CMC generally supported proposed 

§ 1.55(k)(10), as it would enhance 

transparency to the public.522 NFA 

provided a general comment supporting 

the Commission’s objective of providing 

customers with meaningful information, 

but expressed concern that much of the 

information proposed to be disclosed 

under § 1.55(k)(10) may not be 

understandable to smaller and less 

sophisticated customers.523 NFA 

specifically questioned whether such 

customers would comprehend: (1) The 

dollar value of the FCM’s proprietary 

margin requirements as a percentage of 

the aggregate margin requirements for 

futures customers, Cleared Swaps 

Customers, and 30.7 customers; (2) the 

number of futures customers, Cleared 

Swaps Customers, and 30.7 customers 

that comprise 50 percent of the funds 

held for such customers, respectively; 

(3) the aggregate notional value, by asset 

class, of all non-hedged, principal overthe-counter transactions into which the 

FCM has entered; (4) the amount, 

generic source and purpose of any 

unsecured lines of credit or similar 

short term funding the FCM has 

obtained but not yet drawn upon; (5) 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; and (6) the percentages 

of futures customers, Cleared Swaps 

Customers, and 30.7 customers 

receivable balances that the FCM had to 

write-off as uncollectable during the 

past 12 months, as compared to the 

current balance held for such 

customers.524 NFA noted that as one of 

its responses to MFGI, its Board of 

Directors formed a special committee on 

the protection of customer funds 

(‘‘Special Committee’’) that was 

comprised of NFA’s public directors.525

NFA stated that the Special Committee 

spent a significant amount of time 

reviewing information that FCMs 

should make available to customers, 

while focusing on the needs of smaller, 

less sophisticated customers, and 

concluded that much of the information 

in § 1.55(k)(10) is complicated and not 

meaningful for less sophisticated 

customers.526 NFA also noted that more 

sophisticated institutional customers 

could request and would likely receive 

this information directly from an 

FCM.527

The Commission understands that not 

all customers would have the same use 

for the detailed information required by 

§ 1.55(k)(10). In developing the 

proposal, the Commission sought to 

balance the information needs of all 

types of customers and their respective 

levels of sophistication. While certain 

customers may not use the full amount 

of information in assessing risks, the 

Commission anticipates that other 

customers will incorporate all or most of 

the information into their risk 

management process and will benefit 

from the disclosures in performing their 

due diligence. The Commission also 

believes that the information should be 

available to all customers without the 

need for customers to specifically 

request the § 1.55(k)(10) disclosures 

from the FCM. 

FIA agrees that customers should be 

advised whether an FCM engages in 

proprietary futures trading but does not 

believe that FCMs should be required to 

disclose the dollar value of their 

proprietary margin requirements as a 

percentage of customer margin 

requirements as proposed in 

§ 1.55(k)(10(ii) as such percentages will 

change frequently.528 FIA also questions 

the implication that customers may be 

at greater risk if an FCM carries 

proprietary futures positions noting, for 

instances, that the FCM’s funds to 

margin its proprietary positions would 

be available to cover a potential 

customer default.529 RJ Obrien, 

however, noted that it is important that 

customers be aware of the nature and 

extent of a firm’s proprietary trading.530

The Commission believes that 

information regarding an FCM’s 

proprietary trading is necessary for 

customers to appropriately assess the 

risks of entrusting their funds to an 

FCM. The risk profile of an FCM is 

certainly different if it acts primarily as 

an agent in handling customer funds, or 

if it acts as agent for customers and also 

engages in proprietary trading. The 

Commission further believes that 

customers would benefit from some 

measure of the FCM’s proprietary 

trading rather than a simple statement 

that the firm does or does not engage in 

proprietary trading. The dollar value of 

the FCM’s margin requirements for its 

proprietary trading listed as a 

percentage of its customer margin 

requirements provides a means of 

measuring how active and extensive a 

firm’s proprietary trading may be 

relative to its customer business, which 

will factor into the public’s risk profile 

of the firm. 

FIA requested confirmation that the 

requirement in § 1.55(k)(10)(iii) for an 

FCM to disclose the number of futures 

customers, cleared swap customers, and 

30.7 customers that comprise 50 percent 

of the FCM’s total funds held for such 

customers, respectively, should be 

based upon the smallest number of 

customers that comprise the 50 percent 

threshold.531 The Commission confirms 

that FIA’s assumption is correct and is 

revising the final regulation accordingly. 

A purpose of the disclosure is to 

provide information on the extent to 

which a firm may have customers with 

large positions relative to the FCM’s 

general customer base. 

FIA stated that the requirement in 

§ 1.55(k)(10)(iv) for an FCM to disclose 

the aggregate notional value, by asset 

class, of its non-hedged, principal overthe-counter transactions would require 

the FCM to disclose proprietary 

information. In addition, FIA stated that 

providing such information is not 

practical as firms generally do not 

manage their books this way and the 

categorization of a swap transaction as 

being hedged or not hedged would 

change each day. 

The objective of § 1.55(k)(10)(iv) is for 

an FCM to disclose the extent of the risk 

it is exposed to from over-the-counter 

transactions that are not hedged or for 

which the FCM does not hold margin 

from the counterparty sufficient to cover 

the exposure. While the Commission 

recognizes that such information may 

change frequently, § 1.55 only requires 

an FCM to update the information on an 

annual basis, or more frequently if the 

changes are material. The information 

also is in the aggregate, which should 

minimize the risk of disclosing detailed 

proprietary information. After 

considering the comments, the 

Commission is adopting the regulation 

as proposed. 

FIA stated that the Commission 

should distinguish between committed 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68569 

532 Id. 

533 Id. 

534Newedge Comment Letter at 4 (Feb. 15, 2013); 

RJ O’Brien Comment Letter at 11 (Feb. 15, 2013). 

535FIA Comment Letter at 50 (Feb. 15, 2013). 

536FIA Comment Letter at 50 (Feb. 15, 2013). 

537MFA Comment Letter at 4 (Feb. 15, 2013); 

SIFMA Comment Letter at 2 (Feb. 21, 2013); 

Prudential Comment Letter at 2 (Jun. 9, 2013); 

Security Benefit Comment Letter at 2 (Jan. 11, 

2013); CoBank Comment Letter at 2 (Jan. 14, 2013); 

FHLB Comment Letter at 7 (Feb. 15, 2013). 

538 Id. See also The Commercial Energy Working 

Group Comment Letter at 2–3 (Feb. 12, 2013). 

539MFA Comment Letter at 4–6 (Feb. 15, 2013); 

SIFMA Comment Letter at 2 (Feb. 21, 2013). 

540ACLI Comment Letter at 2–3 (Feb. 15, 2013). 

541 Id. 

and uncommitted lines of credit in the 

requirement in § 1.55(k)(10)(v), which 

requires an FCM to disclose the amount, 

generic source and purpose of any 

unsecured lines of credit it has obtained 

but not yet drawn upon.532 The 

Commission agrees that it would be 

more appropriate to disclose committed 

lines of credit and to exclude lines of 

credit that could be withdrawn by the 

potential lender. The Commission is 

revising the final regulation to reflect 

this change. In addition, the 

Commission is clarifying that the 

provision in § 1.55(k)(10)(v) that 

requires the disclosure of the amount, 

source and purpose of any unsecured 

lines of credit or similar short-term 

funding would include secured and 

unsecured short-term funding. 

Regulation 1.55(k)(10)(vi) requires an 

FCM to disclose the aggregated amount 

of financing the FCM provides for 

customer transactions involving illiquid 

financial products for which it is 

difficult to obtain timely and accurate 

prices. FIA requested that the 

Commission define the type of financing 

covered by the regulation, and also 

requested that the Commission define 

the term ‘‘illiquid financial products’’ 

and confirm whether the information 

should include secured as well as 

unsecured financing.533

The Commission notes that the 

purpose of the disclosure is to provide 

the public with information regarding 

the possible extent of exposures an FCM 

may have if customers failed to meet 

their financial obligations to the FCM. 

The Commission is adopting the 

requirement as proposed. FCMs are 

required to provide the necessary 

information in the Disclosure 

Document, and may explain the factors 

it uses to determine if a financial 

product is liquid or illiquid and the 

extent to which transactions are secured 

or unsecured. 

Regulation 1.55(k)(10)(vii) requires an 

FCM to disclose the percentage of 

futures customer, Cleared Swaps 

Customer, and 30.7 customer receivable 

balances that the FCM had to write-off 

as uncollectable during the past 12 

months, as compared to the current 

balances of funds held for such 

customers. 

Newedge and RJ O’Brien commented 

that providing this information would 

provide customers with valuable insight 

into the strength of an FCM’s credit 

policies, which benefits all 

customers.534 FIA, however, 

commented that it did not recognize the 

relevance of the requested information, 

which may be misleading without the 

proper context (such as whether the 

losses were caused by one or two large 

customers or an aggregate of small 

customers).535 FIA further stated that if 

the Commission were to adopt the rule, 

normal business write-offs should be 

excluded, and the Commission should 

establish a de minimis threshold were 

reporting would not be required. 

The Commission has considered the 

comments and is adopting the 

regulation as proposed. The 

Commission believes that the disclosure 

of the amount of write-offs an FCM had 

to incur as a result of customers failing 

to pay receivable balances will provide 

information regarding the credit policies 

of the FCM. The Commission does not 

believe that there should be any de 

minimis level or threshold amount 

before the disclosure of the information 

becomes a requirement. In response to 

FIA’s comments that the information 

may be misleading if not provided in 

context, the Commission notes that 

FCMs may include explanatory text in 

the Disclosure Document provided such 

information is not misleading. 

Finally, proposed § 1.55(k)(11) 

requires a summary of the FCM’s 

current risk practices, controls and 

procedures. FIA asked for confirmation 

that the discussion of the FCM’s current 

risk practices, controls and procedures 

may be general in nature, noting that the 

Commission has recognized that an 

FCM’s risk practices, controls and 

procedures may include proprietary 

information.536 The Commission 

confirms that the discussion of the 

current risk practices, controls and 

procedures may be general in nature so 

that it does not disclose confidential 

proprietary information. 

2. Public Availability of FCM Financial 

Information 

Proposed § 1.55(o) requires each FCM 

to make the following information 

available to the public on its Web site: 

(1) The daily Segregation Schedule, 

Secured Amount Schedule, and the 

Cleared Swaps Segregation Schedule for 

the most current 12-month period; (2) a 

summary schedule of the FCM’s 

adjusted net capital, net capital, and 

excess net capital, all computed in 

accordance with § 1.17 and reflecting 

balances as of the month-end for the 12 

most recent months; and, (3) the 

Statement of Financial Condition, the 

Segregation Schedule, Secured Amount 

Schedule, and Cleared Swaps 

Segregation Schedule and all related 

footnotes contained in the FCM’s most 

recent certified annual financial report. 

Regulation 1.55(o) also requires each 

FCM to include a statement on its Web 

site that additional financial 

information on the firm and other FCMs 

may be obtained from the NFA and the 

Commission, and to include hyperlinks 

to the NFA and Commission Web sites. 

MFA, SIFMA, Prudential, Security 

Benefit, CoBank, and the FHLBs 

supported the requirement for FCMs to 

post their daily Segregation Schedule, 

Secured Amount Schedule, and Cleared 

Swaps Segregation Schedule on their 

Web site each day, stating that the 

disclosure of such information would 

place customers in a better position to 

assess an FCM’s stability, and if 

customers identify concerns and deem 

appropriate, to transfer their positions 

and funds to a different FCM.537 MFA, 

SIFMA, Prudential, Security Benefit, 

CoBank, and the FHLBs also stated that 

the Commission should require FCMs to 

disclose additional information, 

including the FCM’s monthly 

Segregation Schedule, Secured Amount 

Schedule, and Cleared Swaps 

Segregation Schedule, and monthly 

summary balance sheet and income 

statement information, for the most 

recent 12-month period.538 MFA noted 

that each FCM’s monthly Segregation 

Schedule, Secured Amount Schedule, 

and Cleared Swaps Segregation 

Schedule are publicly available under 

§ 1.10, and suggested that each FCM 

should be required to disclose the 

schedules to the public without the 

public having to request such 

statements from the firms as is currently 

required under § 1.10.539

The ACLI encouraged the 

Commission to make public as much 

information as possible regarding FCMs’ 

financial condition, treatment of 

customer funds, and regulatory 

compliance.540 The ACLI also noted that 

access to these categories of information 

should be straightforward and 

simple.541 TIAA–CREF supported the 

proposed enhanced financial 

disclosures and encouraged the 

Commission to require the prompt 

public disclosure of relevant FCM 


TKELleY on DSK3SPTVN1PROD with RULES2
68570 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

542ACLI Comment Letter at 2–3 (Feb. 15, 2013). 

543TIAA–CREF Comment Letter at 2–3 (Feb. 15, 

2013). 

544FXCM Comment Letter at 2–3 (Dec. 14, 2013). 

545 Id. See also forex form letter group: Michael 

Krall; David Kennedy; Robert Smith; Michael 

Carmichael; Andrew Jackson; Donald Blais; 

Suzanne Slade; Patricia Horter; JoDan Traders; Jeff 

Schlink; Sam Jelovich; Matthew Bauman; Mark 

Phillips; Deborah Stone; Po Huang; Aaryn Krall; 

Vael Asset Management; Kos Capital; James Lowe; 

Tracy Burns; Treasure Island Coins; Clare Colreavy, 

Brandon Shoemaker. 

546Phillip Futures Inc. Comment Letter at 3 (Feb. 

14, 2013). 

547 Id. 

548RCG Comment Letter at 6 (Feb. 12, 2013). 

549TD Ameritrade Comment Letter at 4 (Feb. 15, 

2013). 

550 Id. 

information.542 TIAA–CREF stated that 

such disclosures would be a positive 

step towards ensuring a level playing 

field between each FCM and its 

customers and among FCMs themselves, 

and supported the Commission’s efforts 

to require FCMs to disclose information 

regarding the FCM’s segregation of 

customer property (e.g., the Cleared 

Swaps Segregation Schedule), financial 

health and creditworthiness and would 

also support efforts by the Commission 

to cause such disclosures to be posted 

on the relevant FCM’s Web site, in lieu 

of requiring customers to make a request 

to the Commission to receive such 

information (which may be 

administratively burdensome).543

FXCM noted that currently the 

Commission’s monthly ‘‘net capital’’ 

reports is the only publicly available 

way to determine how much money an 

FCM or RFED has set aside for net 

capital, but this provides very little 

insight into how the firm is doing 

financially.544 FXCM stated that FCMs 

and RFEDs should be required to 

publish quarterly consolidated balance 

sheets and income statements, including 

holding company financials, for the 

trading public so they will know the 

level of risk involved in dealing with a 

firm.545

FIA stated that the daily segregation, 

secured amount, and cleared swaps 

customer account calculations should 

not be made publicly available. FIA 

noted that NFA currently makes this 

information available on its Web site as 

of the 15th and last business day of each 

month and believes disclosure twice 

each month should be sufficient. If the 

Commission concludes more frequent 

disclosure is necessary, FIA 

recommended that disclosure should be 

required no more often than weekly, i.e., 

as of the close of business each Friday 

(or the last business day of the week if 

Friday is a holiday). 

Phillip Futures Inc. proposed that the 

Commission limit the financial data 

made public to that which is most 

appropriate for the average customer to 

make an educated decision regarding 

his choice of broker.546 It further stated 

that rather than making the financial 

information public, it should only be 

provided to customers at their 

request.547

RCG stated that if the Commission 

makes the Segregation Schedule, 

Secured Amount Schedule, and Cleared 

Swaps Segregation Schedule public, the 

public will only see a targeted residual 

interest amount, without realizing and 

comprehending the many factors that 

have impacted a particular firm’s 

determination of its target.548

TD Ameritrade expressed its concern 

regarding the public disclosure of the 

firm’s targeted residual interest 

computation.549 TD Ameritrade stated 

that the public would not be privy to 

any of the internal discussions and 

analysis that goes into the development 

and setting of the firm’s targeted 

residual interest, and that any changes 

to its target could cause market 

upheaval, volatility, and unintended 

consequences.550

The Commission has considered the 

comments and is adopting the 

regulations as proposed, with the 

revision to § 1.55(o) to require each FCM 

to disclose on its Web site its monthly 

Segregation Schedule, Secured Amount 

Schedule, and Cleared Swaps 

Segregation Schedule for the 12 most 

recent month-end dates. 

The Commission currently discloses 

FCM financial data on its Web site. 

Specifically, § 1.10(g) provides that the 

Form 1–FR–FCM (or FOCUS Report) is 

exempt from mandatory public 

disclosure under the Freedom of 

Information Act and the Government in 

the Sunshine Act, except for the 

following information: (1) The amount 

of the FCM’s adjusted net capital under 

§ 1.17 as of the reporting date, the 

amount of adjusted net capital 

maintained by the firm on the reporting 

date, and the amount of excess net 

capital on the reporting date; (2) the 

Segregation Schedule and Secured 

Amount Schedule as of the reporting 

date; and (3) the Statement of Financial 

Condition in the certified annual report 

and related footnote disclosures. The 

Commission summarizes the FCM’s 

segregation, secured amount and capital 

information each month and makes 

such information available to the public 

on its Web site. 

The Commission believes that 

customers should have access to 

sufficient financial information for each 

FCM to allow such customers to 

adequately assess and monitor the 

financial condition of firms. The 

disclosure of the daily segregation and 

secured amount computations will 

provide customers with additional 

information to assess the adequacy of an 

FCM’s targeted residual interest given 

the firm’s business operations and 

amount of customer funds held in 

segregated or secured accounts. The 

Commission also believes that the 

expanded disclosures required under 

§ 1.55 offer each FCM with the ability to 

provide an explanation describing the 

rationale and business justification for 

its computation of the target residual 

interest to better inform the public. The 

reporting of segregated and secured 

account balances on a daily basis also 

will provide customers with 

information regarding any trends 

developing with particular reported 

balances that the customers may wish to 

consider as part of their risk assessment 

of the FCMs. 

The Commission further believes that 

customers should have access to an 

FCM’s financial information by 

reviewing such information directly on 

the FCM’s Web site as part of the Firm 

Specific Disclosures. By reviewing the 

Firm Specific Disclosures and having 

access to financial data of the FCM, 

customers will be able to better assess 

the risks of engaging a particular FCM. 

The Commission also believes that 

customers would benefit from being 

informed that additional financial 

information on each FCM is available 

from the NFA and Commission, and by 

requiring the FCMs to maintain a 

hyperlink to the Commission’s and 

NFA’s Web sites. NFA and Commission 

data provide historical information that 

allows customers to assess financial 

trends on a customer-by-customer basis, 

and provides sufficient financial 

information such that customers can 

compare financial data across FCMs as 

part of their risk management program. 

The NFA also discloses additional 

information regarding how FCMs are 

holding customer funds and investing 

customer funds under § 1.25, which is 

material information for customers in 

assessing risk at particular FCMs. 

Regulation 1.10(g) currently requires a 

customer to request from the FCM 

monthly Segregation Schedules and 

Secured Amount Schedules, as well as 

the Statement of Financial Condition 

contained in the FCM’s certified annual 

report. In response to several of the 

comments, the Commission is revising 

§ 1.55(o) to require each FCM to post 

such financial information on its Web 

site. The Commission agrees with the 

commenters that FCMs should disclose 

this information, which is currently 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68571 

551See discussion in section I.A. above. 

552MFA Comment Letter at 9 (Feb. 15, 2013); 

CIEBA Comment Letter at 3–4 (Feb. 20, 2013); 

Franklin Comment Letter at 2 (Feb. 15, 2013). 

553 77 FR 6336, 6343. 

554 Id. at 6343–6344. 

555See section II.G.9. above. 

556See LCH.Clearnet Comment Letter at 4–5 (Jan. 

25, 2013); FIA Comment Letter at 22–23 (Feb. 15, 

2013). 

557See, e.g., LCH.Clearnet Comment Letter at 4– 

5 (Jan. 25, 2013); Paul/Weiss Comment Letter at 3– 

5 (Feb. 15, 2013); ISDA Comment Letter at 2–3 (Feb. 

15, 2013). ISDA further argued that variation margin 

payments are not ‘‘used’’ until the point of 

settlement. See ISDA Comment Letter at 1–2 (Aug. 

27, 2013) (citing CFTC Letter No. 12–31, ‘‘Staff 

Interpretation Regarding Part 22,’’ (November 1, 

2012) (‘‘Part 22 Staff Interpretation’’) and arguing 

that the use restriction set forth in 4d(f)(2)(B) of the 

CEA ‘‘is driven by the meaning of ‘property . . . 

received’ ’’ and that ‘‘‘received’ in this context 

cannot be intended to include variation margin 

fluctuations pre-settlement because it is only upon 

settlement that an item of property will have been 

received by the FCM.’’). 

publicly available under § 1.10(g), 

without requiring each customer or 

member of the public having to 

specifically request such information 

from the FCM. 

The Commission is not expanding the 

required disclosures to include 

summary income statement information 

or balance sheet information as 

requested by several commenters. As 

noted above, § 1.10(g) currently 

provides that the Form 1–FR–FCM and 

FOCUS Reports are not subject to 

mandatory public disclosure under the 

Freedom of Information Act or the 

Government in the Sunshine Act, and 

the Commission did not propose to 

amend § 1.10(g) in the Proposal. In 

addition, the comments addressing 

quarterly financial statements and 

consolidated financial statements for 

FCMs and RFEDs are beyond the scope 

of the Proposal as the Commission did 

not propose to amend the regulations to 

require an FCM or RFED to prepare or 

file with the Commission quarterly 

financial statements on either an 

individual or consolidated basis. 

Accordingly, the Commission is not 

revising final § 1.55(o) to require such 

disclosures. 

Q. Part 22—Cleared Swaps 

As discussed above, the Commission 

adopted final regulations in part 22 that 

implement certain provisions of the 

Dodd Frank Act and impose 

requirements on FCMs and DCOs 

regarding the treatment of Cleared 

Swaps Customer contracts (and related 

collateral).551 Although substantive 

differences in the segregation regimes 

between futures and cleared swaps exist 

at the clearing level under the final part 

22 regulations, requirements with 

respect to collateral which is not posted 

to clearinghouses and maintained by 

FCMs for Cleared Swaps Customers 

replicate or incorporate by reference 

many of the same regulatory 

requirements applicable to the 

segregation of futures customer funds 

under section 4d(a)(2) of the Act and 

Commission regulations (for example, 

holding funds separate and apart from 

proprietary funds, limitations on the 

FCM’s use of customer funds, titling of 

depository accounts, Acknowledgment 

Letter from depository requirements, 

and limitations on investment of swap 

customers’ funds, are currently 

contained in both part 1 and part 22 

regulations). 

The determination that appropriate 

enhancements are necessary with 

respect to the regulatory requirements 

discussed above for segregated futures 

customer funds under section 4d(a)(2) of 

the Act is equally applicable to Cleared 

Swaps Customer Collateral. In this 

regard, the risk management program 

that each FCM that holds customer 

funds is required to implement under 

§ 1.11 encompasses the firm’s business 

with futures customers, Cleared Swaps 

Customers, and 30.7 customers. 

In addition, the Commission proposed 

amendments to § 22.2(d)(1) and (f)(6) 

that require an FCM to maintain at all 

times sufficient residual interest in 

Cleared Swaps Customer Accounts to 

exceed the sum of the margin deficits 

(i.e., undermargined amounts) of all of 

its Cleared Swaps Customers. The 

proposed amendments to § 22.2(e)(1) 

that explicitly provide that an FCM 

shall bear sole responsibility for any 

losses resulting from the investment of 

Cleared Swaps Customer Funds in 

§ 1.25 compliant instruments is 

consistent with the amendments 

adopted for § 1.29(b) that require an 

FCM to bear sole responsibility for any 

losses resulting from the investment of 

futures customers funds in § 1.25 

compliant instruments. The proposed 

amendments to § 22.2(f)(4) provide that 

an FCM must be in compliance at all 

times with its segregation requirements 

for Cleared Swaps Customers is 

consistent with amendments adopted in 

§ 1.20(a) that require an FCM to be in 

compliance at all times with its 

segregation requirements for futures 

customers. The proposed amendments 

in § 22.2(f)(5)(iii)(B) permit an FCM to 

develop its own program to assess credit 

risk for purposes of computing haircuts 

on securities securing a Cleared Swaps 

Customer’s deficit account is consistent 

with the amendments adopted in 1.32 

for computing haircuts on securities 

securing a futures customer’s deficit 

account. The proposed amendments to 

§ 22.2(g)(2), (3), and (5) require an FCM 

to prepare and submit to the 

Commission and the FCM’s DSRO a 

daily Cleared Swap Segregation 

Schedule and twice monthly listing of 

the holding of Cleared Swaps Customer 

funds is consistent with the 

amendments adopted to § 1.32 that 

require an FCM to prepare and submit 

to the Commission and the FCM’s DSRO 

a daily Segregation Schedule and twice 

monthly listing of the holding of futures 

customer funds. 

Comments on the substantive 

provisions being adopted by the 

Commission under part 22 have been 

considered and addressed in large part 

in the discussion of the related 

substantive provisions in part 1 with 

respect to futures customer segregated 

funds. The Commission has considered 

those comments and, with the exception 

of the proposed amendments to § 22.2(a) 

and (f)(6), is adopting the amendments 

to part 22 as proposed. 

In addition, several commenters, 

including MFA, CIEBA and Franklin 

urged the Commission to adopt a full 

physical segregation option specific for 

Cleared Swaps Customer Collateral.552

This comment is outside of the scope of 

the proposal. The Commission, 

however, has previously clarified the 

ability of FCMs to employ third party 

custodial accounts for Cleared Swaps 

Customer Collateral, while reiterating 

that as customer property, in the event 

of an FCM insolvency, any funds held 

in such a third party custodial account 

would be subject to pro-rata distribution 

along with all other customer 

property.553 Commission staff is also 

continuing to explore alternative 

collateral custody arrangements as 

directed by the Commission.554

As discussed in more detail above, 

several commenters objected to 

proposed residual interest requirements 

under §§ 1.20(i) and 22.2(f).555 Of those 

commenters, a number focused on the 

proposed residual interest requirements 

for Cleared Swaps and highlighted the 

inconsistency of the ‘‘at all times’’ 

requirement with the Commission’s 

analysis in the part 22 final rules.556

LCH.Clearnet, ISDA, Paul/Weiss, and 

other commenters specifically stated 

that the inclusion of the language ‘‘at all 

times’’ is inconsistent with the LSOC 

requirement to calculate such deficits at 

the time of a margin call by a DCO to 

its clearing FCMs, and with the 

requirement to have sufficient residual 

interest to cover such deficit by the time 

the clearing FCMs are required to meet 

such payment obligations.557 These 

commenters argued that when the 

Commission adopted the part 22 final 

rules, it considered this point in time 


TKELleY on DSK3SPTVN1PROD with RULES2
68572 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

558See LCH.Clearnet Comment Letter at 4–5 (Jan. 

25, 2013); FIA Comment Letter at 22–23 (Feb. 15, 

2013); ISDA Comment Letter at 2–3 (Feb. 15, 2013). 

559See also Part 22 Staff Interpretation. 

560See id. at 2 (answer to Question 2.1). 

561 In this context, a Cleared Swaps Customer is 

undermargined to the extent that (a) the minimum 

margin requirement, attributable to that Cleared 

Swaps Customer’s portfolio of rights and 

obligations, at the DCO (for an FCM that is clearing 

such Cleared Swaps Customer’s positions directly) 

or at the Collecting FCM (for a Depositing FCM) 

exceeds (b) the customer’s net liquidating value, 

including securities posted at margin value. 

562See Part 22 Staff Interpretation at 2. 

563 52 FR 28980 (Aug. 5, 1987). 

564The Commission is also adopting as final 

amendments to § 1.20(a) that clarify and provide 

explicitly that an FCM is required to hold funds in 

segregated accounts in an amount at all times in 

excess of its total obligations to all futures 

customers. See section II.G.9. above for a discussion 

of the amendments to § 1.20. 

approach to be consistent with the Act 

and sufficient to ensure that the 

collateral of one Cleared Swaps 

Customer is never used to margin the 

positions of another customer.558

In response to these comments, the 

Commission notes that the proposed 

amendments to § 22.2(a) and (f)(6) were 

meant to capture the current practice 

with respect to residual interest buffer 

calculations for Cleared Swaps using 

language that was consistent with the 

Proposed Residual Interest Requirement 

for futures. In other words, the 

Commission did not intend to alter the 

current residual interest requirements, 

as set forth in the part 22 final rules.559

Indeed, the Commission notes that Staff 

guidance from November 1, 2012, states 

that ‘‘FCMs are prohibited from ‘us[ing] 

or permit[ing] 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.’ Where a Cleared Swaps 

Customer is undermargined, then the 

FCM must ensure that, to the extent of 

such shortfall, its own money, 

securities, or other property—and not 

that of other Cleared Swaps 

Customers—is used to cover a margin 

call (whether initial or variation) 

attributable to that Cleared Swaps 

Customer’s portfolio of rights and 

obligations.’’ 560

Because of the confusion expressed by 

commenters regarding the residual 

interest requirements for Cleared Swaps, 

the Commission is revising § 22.2(a) and 

(f). The Commission is revising 

proposed § 22.2(a) by deleting the last 

sentence. The Commission is revising 

§ 22.2(f)(6) by replacing the language 

from the proposal with new language 

which sets forth the residual interest 

requirements for Cleared Swaps in a 

manner that is consistent with current 

market practice and that parallels the 

language used in § 1.22. To be clear, and 

as requested by several commenters, the 

Commission confirms that the language 

in § 22.2(f)(6) is not intended to, and 

thus should not be read to, change 

current practice with respect to an 

FCM’s residual interest requirements for 

Cleared Swaps as set forth in 

Commission regulations and JAC 

Update 12–03, and consistent with Staff 

Interpretation 12–31. Thus, ‘‘where a 

Cleared Swaps Customer is 

undermargined,561 the FCM must 

ensure that, to the extent of such 

shortfall, its own money, securities, or 

other property—and not that of other 

Cleared Swaps Customers—is used to 

cover a margin call (whether initial or 

variation) attributable to that Cleared 

Swaps Customer’s portfolio of rights 

and obligations.’’ 562 Consistent with 

this revised residual interest 

requirement, § 22.2(f)(4) is being 

amended to state that the amount of 

funds an FCM is holding in segregation 

may not be reduced by any debit 

balances that the futures customers of 

the futures commission merchants have 

in their accounts. Finally, § 22.2(f)(2) is 

being revised, consistent with 1.20(i)(2) 

and current market practice, to clarify 

that the calculation set forth therein is 

the Net Liquidating Equity Method. 

R. Amendments to § 1.3: Definitions; 

and § 30.7: Treatment of Foreign 

Futures or Foreign Options Secured 

Amount 

Part 30 of the Commission’s 

regulations was adopted in 1987 and 

governs the offer and sale in the U.S. of 

futures contracts and options traded on 

or subject to the rules of a foreign board 

of trade.563 The Commission proposed 

to amend several regulations in part 30 

to provide a more coordinated approach 

to the regulations governing the offer 

and sales of futures contracts traded on 

foreign boards of trade and the 

comparable regulations governing the 

offer and sale of futures contracts traded 

on designated contract markets. 

Aligning the regulations, including 

regulations governing how an FCM 

holds funds for customers trading on 

non-U.S. markets with the requirements 

for customers trading on U.S. markets, 

will greatly enhance the protection of 

customer funds, and avoid competitive 

imbalances between trading on 

domestic and foreign contract markets 

that might result in regulatory arbitrage. 

The Commission’s Proposal, along with 

the comments received, is discussed in 

the sections below. 

1. Elimination of the ‘‘Alternative 

Method’’ for Calculating the Secured 

Amount 

Regulation 30.7(a) requires an FCM to 

set aside in separate accounts for the 

benefit of its ‘‘foreign futures or foreign 

options customers’’ an amount of funds 

defined as the ‘‘foreign futures or 

foreign options secured amount.’’ The 

term ‘‘foreign futures or foreign options 

customer’’ is defined in § 30.1 as any 

person located in the U.S., its territories, 

or possessions who trades in foreign 

futures or foreign options. The term 

‘‘foreign futures or foreign options 

secured amount’’ is defined in § 1.3(rr) 

as the amount of funds necessary to 

margin the foreign futures or foreign 

options positions held by the FCM for 

its foreign futures or foreign options 

customers, plus or minus any gains or 

losses on such open positions. The 

calculation of the foreign futures or 

foreign options secured amount as 

defined in § 1.3(rr) is referred to as the 

‘‘Alternative Method.’’ 

Requirements concerning the 

collateral of foreign futures or foreign 

options customers are substantially less 

robust for funds deposited with an FCM 

under the Alternative Method than 

requirements concerning the collateral 

of futures customers deposited with an 

FCM under section 4d(a)(2) of the Act 

or Cleared Swaps Customer Funds 

deposited under section 4d(f) of the Act. 

Section 4d(a)(2) of the Act and §§ 1.20 

and 1.22 require an FCM to hold in 

accounts segregated for the benefit of 

futures customers a sufficient amount of 

funds to satisfy the full account equities 

of all of the FCM’s futures customers 

trading on designated contract 

markets.564 Section 4d(f) and § 22.2 

require an FCM to segregate for the 

benefit of Cleared Swaps Customers a 

sufficient amount of funds to satisfy the 

full account equities of all of the FCM’s 

Cleared Swaps Customers. The 

calculations required under sections 

4d(a)(2) and 4d(f) of the Act are referred 

to as the ‘‘Net Liquidating Equity 

Method.’’ 

The Alternative Method contrasts 

with the Net Liquidating Equity Method 

in that the Alternative Method obligates 

an FCM to set aside in separate accounts 

for the benefit of its customers an 

amount of funds sufficient to cover only 

the margin required on open foreign 

futures and foreign option positions, 

plus or minus any unrealized gains or 

losses on such positions. Any funds 

deposited by foreign futures or foreign 

options customers in excess of the 

amount required to be set aside in 

separate accounts may be held by the 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68573 

565The Commission recently adopted final 

regulations that revised the definitions in § 1.3. In 

this rulemaking, § 1.3(gg) was renumbered as 1.3(jjj) 

and re-designated ‘‘futures customer funds.’’ The 

substance of the definition, however, was not 

revised and the final rulemaking has no impact on 

the analysis in this rulemaking. See 77 FR 66288 

(Nov. 2, 2012). 

566See section II.R.4. below for a discussion of 

the residual interest proposal. CFA stated that it 

generally supported the proposed amendments to 

§ 30.7 and treating customers from all parts of the 

globe in a similar manner. CFA Comment Letter at 

9 (Feb. 13, 2013). 

567Pilot Flying J Comment Letter at 2 (Feb. 14, 

2013). 

FCM in operating cash accounts and 

may be used by the FCM as if it were 

its own capital. Since an FCM is not 

required under the Alternative Method 

to set aside in separate accounts an 

amount of funds sufficient to repay the 

full account balances of each of its 

foreign futures or foreign options 

customers, the FCM may not be in a 

financial position to return 100 percent 

of the account equities (or transfer such 

account equities to another FCM) of 

each foreign futures or foreign options 

customer in the event of the insolvency 

of the FCM. 

In addition § 30.7 further differs from 

the regulations governing how FCMs 

hold funds for futures customers and 

Cleared Swap Customers in that § 30.7 

requires an FCM to set aside in a 

separate account funds only for ‘‘foreign 

futures or foreign options customers.’’ 

As previously stated, the term ‘‘foreign 

futures or foreign options customer’’ is 

defined in § 30.1 as any person located 

in the U.S., its territories, or possessions 

who trades in foreign futures or foreign 

options. Thus, an FCM is not required 

to set aside in separate accounts funds 

for foreign-domiciled customers trading 

on foreign futures markets. Regulation 

30.7 permits an FCM to set aside funds 

for foreign futures customers located 

outside of the U.S., but an FCM is not 

obligated under the regulations to do so. 

Requiring FCMs to include foreigndomiciled customers’ funds in 

segregated accounts benefits all 

customers placing funds on deposit for 

use in trading foreign futures and 

foreign options. Neither Subchapter IV 

of Chapter 7 of the Bankruptcy Code nor 

the Commission’s part 190 regulations 

discriminate between foreign-domiciled 

and domestic-domiciled customers. 

Thus, any deficiency arising from the 

reduced requirements will impact both 

foreign and domestic customers pro 

rata. 

The Commission proposed various 

amendments to the part 30 regulations 

to eliminate the Alternative Method and 

to require FCMs to use the Net 

Liquidating Equity Method to compute 

the amount of funds they must set aside 

in separate accounts for the benefit of 

foreign futures or foreign options 

customers. The Commission also 

proposed to extend the protections of 

part 30 to foreign-domiciled customers 

trading on foreign markets through an 

FCM. The intent of the proposed 

amendments is to provide 30.7 

customers with equivalent protections 

available to futures customers and 

Cleared Swaps Customers by requiring 

each FCM to hold in secured accounts 

sufficient funds to cover the full Net 

Liquidating Equity of each customer 

trading on foreign futures markets. 

To implement these revisions, the 

Commission proposed to define the 

term ‘‘30.7 customer’’ in § 30.1 to mean 

any person, whether domiciled within 

or outside of the U.S., that engages in 

foreign futures or foreign options 

transactions through the FCM. The 

Commission also proposed to amend 

§ 1.3(rr) to match structurally the 

definition of the term ‘‘customer funds’’ 

in § 1.3(gg) 565 and to define the term 

‘‘foreign futures or foreign options 

secured amount’’ to mean ‘‘all money, 

securities and property received by an 

FCM for, or on behalf of, ‘‘30.7 

customers’’ to margin, guarantee, or 

secure foreign futures and foreign 

options transactions, and all funds 

accruing to ‘‘30.7 customers’’ as a result 

of such foreign futures and foreign 

options transactions.’’ The effect of the 

proposed amendments is to adopt the 

Net Liquidating Equity Method for 

foreign futures and foreign options by 

requiring an FCM to set aside in 

separate accounts a sufficient amount of 

funds to cover the full account balances 

(i.e., the Net Liquidating Equities) of 

both the U.S. and foreign-domiciled 

customers. 

The Commission also proposed to 

amend § 30.7(a) to allow an FCM to use 

an internal credit risk model to compute 

the appropriate market deductions, or 

haircuts, on readily marketable 

securities deposited by customers that 

have account deficits. The proposal is 

consistent with the proposed 

amendments for computing haircuts on 

securities under § 1.32(b) in section II.N. 

above. The result of these amendments 

as discussed should be consistency 

between the methodologies applied in 

the 4d segregation calculation and the 

§ 30.7 calculation. 

Consistent with proposed changes in 

§ 1.20(i) and part 22, the Commission 

also proposed to add language to 

§ 30.7(a) to provide that an FCM must 

hold residual interest in accounts set 

aside for the benefit of 30.7 customers 

equal to the sum of all margin deficits 

(i.e., undermargined amounts) for such 

accounts, to provide an equivalent clear 

mechanism for ensuring that the funds 

of one 30.7 customer are not margining 

or guaranteeing the positions of another 

30.7 customer 

With the exception of the residual 

interest proposal, the Commission did 

not receive any comments on the 

various proposed amendments 

discussed above, including its proposal 

to eliminate the ‘‘Alternative Method’’ 

and to require FCMs to use the ‘‘Net 

Liquidating Equity Method’’ to compute 

the amount of funds they must set aside 

in separate accounts for the benefit of its 

foreign futures or foreign options 

customers. Accordingly, the 

amendments referred to above, with the 

exception of the residual interest 

proposal as discussed further below, are 

being adopted by the Commission.566

2. Funds Held in Non-U.S. Depositories 

The Commission proposed to amend 

§ 30.7(c) to limit the amount of 30.7 

customers’ funds that an FCM could 

hold in non-U.S. jurisdictions. Under 

the proposal, an FCM must hold 30.7 

customer funds in the U.S., except to 

the extent that the funds held outside of 

the U.S. are necessary to margin, 

guarantee, or secure (including any 

prefunding obligations) the foreign 

futures or foreign options positions of 

an FCM’s 30.7 customers. The proposal 

further allowed an FCM to deposit 

additional 30.7 customer funds outside 

of the U.S. up to a maximum of 10 

percent of the total amount of funds 

required to be held by non-U.S. brokers 

or foreign clearing organizations for 30.7 

customers as a cushion to meet 

anticipated margin requirements. The 

proposal also provided that the FCM 

must hold 30.7 customer funds under 

the laws and regulations of the foreign 

jurisdiction that provide the greatest 

degree of protection to such funds; and 

that the FCM may not by contract or 

otherwise waive any of the protections 

afforded customer funds under the laws 

of the foreign jurisdiction. 

Several comments were received on 

the proposal. Pilot Flying J supported 

the requirement that 30.7 customer 

funds, if held outside of the U.S., must 

be held under the laws of the foreign 

jurisdiction that provides the funds with 

the greatest degree of protection.567

FIA and Jefferies each recommended 

that an FCM be permitted to maintain 

an excess of up to 50 percent of the 

amount an FCM is required to deposit 

with a foreign broker to maintain 

customer foreign futures and foreign 

options positions, a position that they 


TKELleY on DSK3SPTVN1PROD with RULES2
68574 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

568FIA Comment Letter at 37 (Feb. 15, 2013); 

Jefferies Bache Comment Letter at 6 (Feb. 15, 2013). 

569FIA Comment Letter at 37 (Feb. 15, 2013). 

570 Id. See also RJ O’Brien Comment Letter at 11 

(Feb.15, 2013). 

571FIA Comment Letter at 37 (Feb. 15, 2013). 

572RCG Comment Letter at 7 (Feb. 12, 2013). 

573 Jefferies Bache Comment Letter at 6 (Feb. 15, 

2013). 

574Advantage Letter at 8 (Feb. 15, 2013). 

575 Id. at 9. 

576 Id. 

577CFTC Advisory No. 87–4 (Nov. 18, 1987). 

578See 52 FR 28980, 28985–28986. 

stated is consistent with § 1.17 that 

requires an FCM to incur a capital 

charge for unsecured receivables due 

from a foreign broker greater than 150 

percent of the amount required to 

maintain positions in accounts with the 

foreign broker.568 FIA recommended 

that, at a minimum, a cushion of 20 

percent should be provided.569 FIA 

stated that the proposal is more 

restrictive than the provisions of § 1.49, 

which set out the terms and conditions 

pursuant to which an FCM may hold 

futures customers’ segregated funds and 

Cleared Swaps Collateral outside of the 

U.S. and suggested that the proposal be 

revised to permit an FCM to hold funds 

comprising the foreign futures and 

foreign options secured amount in 

depositories outside of the U.S. to the 

same extent that an FCM may hold 

futures customer segregated funds and 

Cleared Swaps Collateral outside of the 

U.S.570 They further recommended that 

the ‘‘10% limitation’’ apply only to 

funds deposited with a foreign broker or 

foreign clearing organization.571

RCG requested the Commission to 

clarify application of § 30.7(c) as it 

relates to banks located outside the U.S. 

that FCMs use for settlement purposes, 

and how the limitation applies to 

variation amounts.572

Jefferies stated that the proposed rule 

disadvantages customers who may no 

longer deposit ‘‘customer owned’’ 

securities and would instead have to 

prefund their obligations with cash.573

Advantage stated that FCMs typically 

must maintain a relationship with a 

foreign bank in order to meet cutoff 

times for payment of fees and clearing 

on foreign exchanges and that if an FCM 

can’t maintain funds at a foreign 

institution, it may inhibit its ability to 

trade foreign futures.574 The effect, they 

asserted, could be that U.S. FCMs will 

be required to use non-U.S. brokers that 

are not regulated by the Commission for 

their foreign futures business.575 They 

further requested that the Commission 

clarify how the prohibition on keeping 

non-margin foreign futures funds in an 

institution outside the U.S. would apply 

to § 30.7(b), which appears to allow 

such funds to be held at a bank or trust 

company outside the U.S.576

In response to commenter concerns, 

the Commission is adopting the 

amendments generally as proposed, but 

the final rule will permit an FCM to post 

with depositories outside of the U.S. 

sufficient funds to cover the full margin 

obligations imposed by foreign brokers 

or foreign clearing organizations on the 

FCM’s 30.7 customers’ positions, plus 

an additional amount equal to 20 

percent of the required margin on such 

positions. 

The Commission is increasing the 

amount of 30.7 customer funds that an 

FCM may hold in a foreign jurisdiction 

in response to the comments. The 

Commission is adopting this regulation 

to provide greater protection to both 

U.S. and foreign-domiciled customers in 

the event of the insolvency of the FCM. 

Recent experience has demonstrated 

that funds held outside of the U.S, at 

depositories subject to foreign 

insolvency regimes, present challenges 

and potential delays in the ability of the 

Trustee to return customer property to 

the customers of the FCM. In increasing 

the amount of funds an FCM may hold 

outside of the U.S. from 10 percent of 

the required margin to 20 percent of the 

required margin, the Commission is 

striving to strike a proper balance that 

would not interfere with the ability of 

30.7 customers to trade on foreign 

markets (and the ability of FCMs to 

facilitate such transactions by allowing 

them to meet their 30.7 customers’ 

margin and other financial obligations 

to foreign brokers and clearing 

organizations), with the Commission’s 

desire to provide 30.7 customers with 

an appropriate level of protection in the 

event of the insolvency of an FCM. The 

Commission believes that, to the 

maximum extent commercially 

practicable, funds deposited by 30.7 

customers that are not required to 

margin positions with foreign brokers or 

foreign clearing organizations should be 

held within in the U.S. to provide 

greater assurance that such funds would 

be subject to the bankruptcy provision 

of U.S. law and the Commission’s 

regulations under the jurisdiction of 

U.S. courts. 

The Commission further notes that 

the 20 percent limitation is based upon 

the amount of margin required on open 

positions. In response to RCG’s request 

for clarification, FCMs may transfer 

funds to foreign depositories to cover 

variation margin calls and exclude such 

funds from the calculation of the 20 

percent ‘‘cushion.’’ In addition, the 

Commission notes that FCMs may 

deposit 30.7 customer funds with any of 

the foreign depositories listed under 

§ 30.7(b), provided that the FCMs do not 

exceed the 20 percent limit on the 

amount of funds that are permitted to be 

held in foreign jurisdictions. The 

Commission believes that the ability to 

post variation margin in foreign 

jurisdictions and an additional 20 

percent cushion should allow FCMs to 

conduct foreign futures activities on 

behalf of their customers, while also 

providing additional protections to the 

current regulatory regime. 

3. Commingling of Positions in Foreign 

Futures and Foreign Options Accounts 

Commission staff previously issued 

an Advisory stating that while it was 

desirable for FCMs to hold only a 

customer’s foreign futures transactions 

(and the funds supporting such 

transactions) in such customer’s foreign 

futures account, this limitation was not 

mandatory and that the FCM could also 

hold such customer’s unregulated 

transactions (and the funds supporting 

such transactions) in the foreign futures 

accounts.577 Thus, pursuant to this 

Advisory, FCMs were permitted to 

commingle the funds supporting a 

customer’s foreign futures and options 

transactions with such customer’s 

unregulated transactions, including 

over-the-counter transactions. The 

Advisory was issued before the passage 

of Dodd-Frank, section 724(a) of which 

established in section 4d(f) of the CEA 

a segregation regime for the funds of 

cleared swaps customers, and the 

Commission’s promulgation of part 22, 

implementing that statute. 

In response to an FIA 

recommendation at a public roundtable 

held in advance of the Commission’s 

publication of the proposal, the 

Commission proposed to amend § 30.7 

by adopting new paragraph (e) to 

prohibit an FCM from commingling 

funds from unregulated transactions 

with funds for foreign futures and 

options transactions in part 30 secured 

accounts, except as authorized by 

Commission order. The prohibition on 

holding unregulated transactions or 

other non-foreign futures or foreign 

option transactions in part 30 set aside 

accounts is consistent with the 

treatment applicable under section 

4d(a)(2) of the Act for segregated 

accounts and section 4d(f) of the Act for 

Cleared Swaps Customers’ accounts. 

The Commission noted in the 

proposal that when part 30 was being 

adopted, commenters cited back office 

operational difficulties with establishing 

multiple ‘‘customer’’ account classes or 

origins.578 Given the technological 

changes during the intervening decades, 

and the new statutory and regulatory 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68575 

579CIEBA Comment Letter at 4 (Feb. 20, 2013). 

580Nodal Comment Letter at 1–2 (Jan. 21, 2013). 

581LCH.Clearnet Comment Letter at 6–7 (Jan. 25, 

2013). 

582See § 22.2(d)(2). 

583See sections II.G.9. and II.Q. above for 

discussion of the Proposed Residual Interest 

Requirement. 

584See section II.G.9. above. 

585See Roundtable Tr. at 266–267 (Feb. 5, 2013). 

framework, these concerns should no 

longer dictate the advisability of 

commingling the funds of regulated 

foreign futures and foreign options 

transactions with unregulated 

transactions. 

New § 30.7(e) extends the prohibition 

against commingling of customer funds 

currently found in section 4d(a)(2) 

futures customer accounts and section 

4d(f) Cleared Swaps Customer Accounts 

to 30.7 customer accounts, except as 

otherwise permitted by Commission 

regulation or order. 

CIEBA stated that it supported the 

prohibition on the commingling of 

funds deposited by futures customers, 

Cleared Swaps Customers, and 30.7 

customers.579 Nodal requested that the 

Commission make explicit in the 

adopting release that 30.7 accounts may 

continue to hold customer funds to 

margin contracts traded on a market that 

is pending designation as a contact 

market at the time the rules become 

effective, until such market is registered 

as a DCM or upon the withdrawal or 

denial of the DCM application.580

LCH.Clearnet noted that while it does 

not have a position on whether the 

Commission should prohibit 

commingling of 30.7 customer funds 

with the funds of futures customers and 

Cleared Swaps Customers, if adopted, it 

urged the Commission to preserve the 

ability to allow such commingling 

pursuant to a Commission rule or 

order.581

The Commission is adopting new 

§ 30.7(e) as proposed. As it noted in the 

proposal, should there be a need to 

permit commingling of funds, the 

Commission will continue to have the 

ability to permit such commingling 

under the formalities of processes 

associated with a Commission order or 

rule pursuant to section 4d of the CEA. 

Absent such a rule or order, however, 

protection for such customer property 

would not be available under the 

Commission’s part 190 regulations or 

the Bankruptcy Code, and thus such 

commingling would not be permitted. In 

addition, the Commission does not 

agree with Nodal’s request that FCMs 

may continue to hold margin funds in 

30.7 accounts for positions that are 

executed on markets that are pending 

approval as designed contract markets. 

As noted above, a purpose of § 30.7(e) 

is to enhance the protection of 30.7 

customers by prohibiting the 

commingling of 30.7 customer funds 

with funds held by an FCM for 

unregulated transactions. Commingling 

of unregulated transactions with 

regulated transactions could also 

impede the resolution of 30.7 customer 

claims in the event of the insolvency of 

the FCM carrying the funds. 

4. Further Harmonization With 

Treatment of Customer Segregated 

Funds 

The Commission proposed to adopt 

new paragraphs (f) and (k) in § 30.7, to 

extend regulatory provisions from 

§§ 1.20, 1.21, 1.22 and 1.24, that 

previously were applicable only to 4d 

segregated funds, to funds set aside as 

the foreign futures or foreign options 

secured amount under § 30.7. These 

proposed requirements would make 

clear that: (1) FCMs would not be 

permitted to use funds set aside as the 

foreign futures or foreign options 

secured amount other than for the 

benefit of 30.7 customers; (2) FCMs 

must hold sufficient residual interest in 

30.7 accounts to make sure that 30.7 

customer funds of one 30.7 customer are 

not used to margin, secure or guarantee 

the obligations of other customers; (3) 

funds set aside as the foreign futures or 

foreign options secured amount should 

not be invested in any obligations of 

clearing organizations or boards of 

trade; and (4) no funds placed at foreign 

brokers should be included as funds set 

aside as the foreign futures or foreign 

options secured amount unless those 

funds are on deposit to margin the 

foreign futures or foreign options 

positions of 30.7 customers. In addition 

to extending the existing Commission 

regulations noted above to § 30.7, the 

Commission also proposed a new 

requirement prohibiting an FCM from 

imposing any liens or allowing any liens 

to be imposed on funds set aside as the 

foreign futures or foreign options 

secured amount. This requirement 

parallels that currently applicable to 

cleared swap customers with respect to 

the segregation of Cleared Swaps 

Collateral.582

As discussed above, the Commission 

received several comments regarding 

the residual interest requirements set 

forth in the Proposal.583 While most of 

the commenters focused on the impact 

of the Proposed Residual Interest 

Requirement to the futures market, some 

of the more general comments would 

also apply to the foreign futures or 

foreign options market. Given the 

statutory prohibition in sections 4d(a) 

and 4d(f) of the Act against using one 

customer’s funds to margin, secure or 

guarantee the obligations of another 

customer, FCMs that participate in the 

swaps and futures market may not 

‘‘use’’ one customer’s property to 

margin another customer’s positions. 

Nonetheless, the Commission clarified 

that an FCM does not ‘‘use’’ a 

customer’s funds until the time of 

settlement.584

The Commission recognizes that the 

statutory prohibitions set forth in 

sections 4d(a) and 4d(f) of the Act apply 

to the futures and swaps markets. 

Conversely, as discussed above, the 

proposed changes to § 30.7 were 

intended to provide a more coordinated 

approach to the regulations governing 

foreign futures and foreign options, with 

standards that are consistent with those 

for the futures and swaps markets. 

These regulations, including regulations 

governing how an FCM holds funds for 

customers trading on non-U.S. markets, 

would greatly enhance the protection of 

customer funds and avoid regulatory 

arbitrage. Such consistency would, to 

the extent practicable and appropriate, 

contribute to the goal of having 

customer protection across futures, 

swaps and foreign futures markets be 

substantively similar. 

The Commission did not receive any 

comments opposing the concept of 

having consistent residual interest 

requirements across markets. The 

Commission did, however, receive 

comments regarding the additional 

complexities associated with trading 

foreign futures and foreign options.585

As such, the Commission is adopting 

residual interest requirements in part 30 

that are substantively similar to the 

amended requirement in part 1, but 

with a modification as to the time by 

which an FCM must maintain such 

residual interests that will give FCMs 

the flexibility necessary to account for 

differences in the regulatory 

requirements and market practices 

applicable to foreign brokers and 

clearing organizations in other 

jurisdictions. Thus, the Commission is 

revising § 30.7(f) as follows. 

Regulation 30.7(f)(1)(i) sets forth the 

general requirement that an FCM may 

not use, or permit the use of, the funds 

of one 30.7 customer to purchase, 

margin or settle the trades, contracts, or 

commodity options of, or to secure or 

extend credit to, any person other than 

such 30.7 customer. Regulation 

30.7(f)(1)(ii)(A) states that the 

undermargined amount for a 30.7 

customer’s account is the amount, if any 

(i.e., the must be amount equal to or 


TKELleY on DSK3SPTVN1PROD with RULES2
68576 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

586MFA Comment Letter at 10 (Feb. 15, 2013). 

587Specifically, In the Final LSOC Release the 

Commission clarified: 

an FCM may not, under any circumstances, grant 

a lien to any person (other than to a DCO) on its 

Cleared Swaps Customer Account, or on the FCM’s 

residual interest in its Cleared Swaps Customer 

Account. On the other hand, a Cleared Swaps 

Customer may grant a lien on the Cleared Swaps 

Customer’s individual cleared swaps account (an 

‘FCM customer account’) that is held and 

maintained at the Cleared Swaps Customer’s FCM. 

77 FR at 6352. 

In addition, Commission Staff issued an 

interpretive letter that stated: 

Regulation 22.2(d) does not prohibit a Cleared 

Swaps Customer from granting security interests in, 

rights of setoff against, or other rights in its own 

Cleared Swaps Customer Collateral, regardless of 

whether those assets are held in the Cleared Swaps 

Customer’s FCM customer account. Furthermore, 

nothing in the rule is intended to inhibit this right 

of the Cleared Swaps Customer. 

CFTC Letter No. 12–28 at 2 (Oct. 17, 2012). 588 76 FR 78776, 78802 (December 19, 2011). 

greater than zero), by which the total 

amount of collateral required for that 

30.7 customer’s positions in that 

account at a specified time exceeds the 

value of the 30.7 customer funds in that 

account, as calculated in new 

§ 30.7(f)(2)(ii). Regulation 

30.7(f)(1)(ii)(B) requires FCMs to 

perform a residual interest buffer 

calculation, at the close of each business 

day, based on the information available 

to the FCM at that time, by calculating 

(1) the undermargined amounts, based 

on the clearing initial margin that will 

be required to be maintained by that 

FCM for its 30.7 customers, at each 

clearing organization of which the FCM 

is a member, at any settlement that will 

occur before 6:00 p.m. Eastern Time on 

the following business day for each such 

clearing organization less (2) any debit 

balances referred to in § 30.7(f)(2)(B)(iv) 

that is included in such undermargined 

amounts. 

In addition, and for the reasons set 

forth above, pursuant to 

§ 30.7(f)(1)(ii)(C)(1) FCMs must maintain 

residual interest prior to 6:00 p.m. 

Eastern Time on the date referenced in 

§ 30.7(f)(1)(ii)(B) in segregated funds 

that is equal to or exceeds the 

computation set forth in (ii)(B). 

Moreover, § 30.7(f)(1)(ii)(C)(2) provides 

that an FCM may reduce the amount of 

residual interest required in 

§ 30.7(f)(1)(ii)(C)(1) to account for 

payments received from or on behalf of 

undermargined 30.7 customers (less the 

sum of any disbursements made to or on 

behalf of such customers) between the 

close of business the previous business 

day and 6:00 p.m. Eastern Time on the 

following business day. Regulation 

30.7(f)(1)(ii)(D) provides that for 

purposes of § 30.7(f)(1)(ii)(B), an FCM 

should include, as clearing initial 

margin, customer initial margin that the 

FCM will be required to maintain, for 

that FCM’s 30.7 customers, at a foreign 

broker, and, for purposes of 

§ 30.7(f)(1)(ii)(C), must do so by 6:00 

p.m. Eastern Time. In other words, 

§ 30.7(f)(1)(ii)(D) is intended to make 

clear that the requirements with respect 

to 30.7 customer funds that are used by 

an FCM that clears through a foreign 

broker are parallel to the requirements 

applied to 30.7 customer funds that are 

used when an FCM clears directly on a 

clearing organization. 

Finally, to provide greater clarity, the 

Commission is adding a new 

subparagraph (2) to paragraph (f), which 

sets out the requirements as to the 

FCM’s calculation of the Net 

Liquidating Equities of their 30.7 

customers. Because of the addition of 

new subparagraph (2), the Commission 

is renumbering proposed § 30.7(f)(2) and 

(f)(3) to § 30.7(f)(3) and (f)(4), and since 

the Commission did not receive any 

comments on the substantive provisions 

of these paragraphs, it is adopting them 

as proposed. 

The Commission did not receive any 

comments on the substantive provisions 

of proposed § 30.7(k) and is adopting 

this new paragraphs as proposed. 

MFA, however, requested 

confirmation that the Commission’s 

prior guidance with respect to a 

customer’s authority to grant liens or 

security interests on its own Cleared 

Swaps Customer Account under part 22 

would also be applicable to customers 

on their foreign futures or foreign 

options secured amount under § 30.7.586

The Commission agrees with this 

position and hereby confirms the 

applicability of its prior guidance.587

5. Harmonization With Other 

Commission Proposals 

The Commission also proposed 

various other amendments to its part 30 

regulations to harmonize the rules with 

those applicable to U.S. customers 

under other Commission regulations. 

As discussed in section II.I. above, the 

Commission is adopting in this release 

new limitations on withdrawals of 

segregated funds in § 1.23. The 

amendments provide for an FCM’s 

residual interest in segregated funds, 

and permit withdrawals from segregated 

funds for the proprietary use of the FCM 

to the extent of such residual interest, 

subject to the requirement that the 

withdrawal must not occur prior to the 

completion of the daily segregation 

computation for the prior day, and 

should the withdrawal (individually or 

aggregated with other withdrawals) 

exceed 25 percent of the prior day 

residual interest, the withdrawal must 

be subject to specific approvals by 

senior management and appropriately 

documented, and further subject to a 

complete prohibition on withdrawals of 

residual interest to the extent necessary 

to maintain proper residual interest to 

cover undermargined amounts. The 

Commission proposed and is adopting 

paragraph (g) of § 30.7 to apply the same 

restrictions on withdrawals of an FCM’s 

residual interest in funds set aside as 

the foreign futures or foreign options 

secured amount. 

Current § 30.7(g) was recently adopted 

by the Commission to provide that the 

investment of § 30.7 funds be subject to 

the investment limitations contained in 

§ 1.25.588 As proposed, the Commission 

is moving this permitted investment 

requirement to a new paragraph 

§ 30.7(h), and further is adopting a new 

paragraph § 30.7(i) to make clear that 

FCMs are solely responsible for any 

losses resulting from the permitted 

investment of funds set aside as the 

foreign futures or foreign options 

secured amount. New paragraph 

§ 30.7(i) is intended to apply the same 

standard as is being adopted in the 

amendment to § 1.29 for segregated 

funds discussed above. 

The Commission also proposed and is 

adopting an amended paragraph (j) to 

§ 30.7 to clarify the circumstances under 

which an FCM may make secured loans 

to 30.7 customers and to adopt the same 

restriction on unsecured lending to 30.7 

customers as has been adopted with 

respect to futures customers and 4d 

segregated funds in the amendment to 

§ 1.30 discussed above. 

Finally, the Commission proposed 

and is adopting an amended paragraph 

(l) to § 30.7 to require the daily 

computation of the foreign futures or 

foreign options secured amount and the 

filing of such daily computation with 

the Commission and DSROs, as well as 

to require the FCM to provide 

investment detail of the foreign futures 

or foreign options secured amount as of 

the middle and end of the month. The 

amendments to paragraph (l) of § 30.7 

are intended to be consistent with the 

requirements for the daily segregation 

calculation for segregated customer 

funds and the provision of the 

segregation investment detail which are 

adopted in § 1.32. 

No comments were received on the 

above proposals and the Commission is 

adopting the amendments as proposed. 

S. § 3.3: Chief Compliance Officer 

Annual Report 

Regulation 3.3 requires each FCM (as 

well as swap dealers and major swap 

participants) to designate an individual 

to serve as its CCO. The CCO is required 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68577 

589NFA Comment Letter at 9 (Feb. 15, 2013). 

590Advantage Comment Letter at 2 (Feb. 15, 

2013). 

591The SEC recently amended its regulations to 

require public accountants to conduct audits of BDs 

pursuant to the audit standards issued by the 

PCAOB. This requirement is effective for audits of 

BDs with a year-end of June 1, 2014 or later. See 

78 FR 51910 (Aug. 21, 2013). 

to be vested with the responsibility and 

authority to develop, in consultation 

with the FCM’s board of directors or 

senior officer, appropriate policies and 

procedures to fulfill the duties set forth 

in the Act and Commission regulations 

relating to the FCM’s activities as an 

FCM. Regulation 3.3(e) also requires the 

FCM’s CCO to prepare an annual 

compliance report that includes a 

description of any non-compliance 

events that occurred during the last 

reporting period along with the action 

taken to address such events. The 

annual compliance report currently is 

required to be filed electronically with 

the Commission simultaneously with 

the FCM’s certified annual financial 

report, and in no event later than 90 

days after the firm’s fiscal year end. 

The Commission proposed a 

conforming amendment to § 3.3(f)(2) to 

reflect the amendments to 

§ 1.10(b)(1)(ii), discussed in section II.A. 

above, that require an FCM to file its 

annual certified financial statements 

with the Commission within 60 days of 

the firm’s fiscal year end. In this regard, 

the Commission proposed to require 

that each FCM file the CCO annual 

report with the Commission 

simultaneously with the filing of the 

firm’s certified annual report, and in no 

event later than 60 days after the FCM’s 

fiscal year end. 

The NFA commented that it 

supported the proposal.589 No other 

comments were received. The 

Commission has determined to amend 

§ 3.3 as proposed. 

III. Compliance Dates 

The final regulations will be effective 

January 13, 2014. The compliance date 

for the regulations will be the effective 

date, subject to the following 

exceptions: 

A. Financial Reports of FCMs: § 1.10 

An FCM that is not dually-registered 

as a BD currently is required to submit 

its certified annual report to the 

Commission within 90 days of the firm’s 

year end date. The Commission has 

amended § 1.10(b)(1)(ii) to require such 

certified annual report to be submitted 

within 60 days of the firm’s year end 

date. 

The Commission recognizes that 

many FCMs have contracted with public 

accountants to perform the current 

year’s audit examination, and that those 

audits are currently in process. In order 

to allow the current year audits to be 

completed, the Commission is setting a 

compliance date for § 1.10(b)(1)(ii) for 

FCMs with years ending after June 1, 

2014. This date will also coincide with 

several other compliance dates affecting 

public accountants discussed under 

§ 1.16 below. 

B. Risk Management Program for FCMs: 

§ 1.11 

Section 1.11 requires each FCM that 

carries customer funds to establish a 

risk management program. RJ O’Brien 

requested that the Commission provide 

at least one year for FCMs to comply 

with the new risk management 

regulations in the event the proposed 

Risk Management Program is adopted. 

RJ O’Brien stated that the new 

requirements would likely necessitate a 

period of time for firms to reorganize, 

develop the policies and procedures, 

implement the policies and procedures, 

acquire adequate personnel, and 

conduct extensive training of new and 

existing employees. Advantage stated 

‘‘that most aspects of proposed § 1.11 

are appropriate and unlikely to be 

burdensome as FCMs typically have 

most (if not all) of these requirements in 

place.’’ 590

The Commission recognizes that some 

FCMs may need a sufficient period of 

time to develop and implement a risk 

management program that complies 

with § 1.11, but believes that many firms 

already maintain programs that comply 

with many of the requirements in § 1.11. 

Accordingly, FCMs must file their 

initial Risk Management Program within 

180 days of the effective date of the 

regulation. The filings must be made via 

electronic transmission to the 

Commission using the WinJammer 

electronic filing system. 

C. Qualifications and Reports of 

Accountants: § 1.16 

The Commission is amending § 1.16 

to require a public accountant to meet 

certain qualification standards in order 

to be qualified to conduct audits of 

FCMs. The Commission is amending 

§ 1.16(b) to require that the public 

accountant: (1) Must be registered with 

the PCAOB; (2) must have undergone a 

PCAOB inspection; and (3) may not be 

subject to a temporary or permanent bar 

to engage in the audit of public issuers 

or BDs as a result of a PCAOB 

disciplinary action. The Commission is 

further amending § 1.16(c) to require 

that the public accountant’s audit report 

must state whether the audit was 

conducted in accordance with PCAOB 

auditing standards. 

The Commission is establishing a 

compliance date of June 1, 2014 for the 

amendment to § 1.16(b)(1) that requires 

a public accountant to be registered 

with the PCAOB in order to conduct an 

audit of an FCM. The Commission also 

is establishing a compliance date of June 

1, 2014 for the amendment to § 1.16(c) 

that requires a public accountant to 

conduct an audit of an FCM in 

accordance with the standards issued by 

the PCAOB. A compliance date of June 

1, 2014 will allow current year audits to 

be completed without interruption, and 

provides sufficient time for public 

accountants that audit FCMs to register 

with the PCAOB if such public 

accountants are not already registered. 

In addition, a June 1, 2014 compliance 

date will align the Commission’s 

requirements for the use of PCAOB 

standards in the audit of an FCM with 

the SEC audit standards for public 

accountants auditing BDs.591 Without 

such alignment, public accounts of a 

dually-registered FCM/BD would have 

to issue two different audit reports; one 

audit report to the SEC for an 

examination conducted under PCAOB 

audit standards, and a second audit 

report for the Commission for an 

examination conducted under U.S. 

GAAS. 

The Commission also is establishing a 

compliance date of December 31, 2015 

for the requirement in § 1.16 that a 

public accountant must have undergone 

an inspection by the PCAOB in order to 

qualify to conduct an audit of an FCM. 

The extension of the compliance date to 

December 31, 2015 will provide 

additional time for the PCAOB to 

conduct inspections of public 

accountants that registered with, but 

have not been inspected by, the PCAOB. 

Lastly, the compliance date for the 

amendment to § 1.16(b)(1) the provides 

that a public accountant may not be 

subject to a temporary or permanent bar 

to engaging in the audit of public issuers 

or BDs as a result of a PCAOB 

disciplinary action is the effective date 

of the amendment. The Commission 

believes that if a public accountant is 

registered with the PCAOB and is 

subject to a PCAOB disciplinary action 

that temporarily or permanently bars the 

public accountant from auditing public 

issuers, the public accountant is not 

qualified to conduct audits of FCMs. 

D. Minimum Financial Requirements for 

FCMs 

The Commission is amending the 

capital rule to require an FCM to incur 

a capital charge for undermargined 


TKELleY on DSK3SPTVN1PROD with RULES2
68578 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

592The regulations, however, provide that an 

FCM is not required to obtain an acknowledgment 

letter from a DCO if the DCO maintains rules that 

have been submitted to the Commission and that 

provide for the segregation of customer funds in 

accordance with all relevant provisions of the Act 

and Commission regulations or orders. See 

§§ 1.20(d)(1) and 30.7(d)(1). 

593See Roundtable Tr. at 252–255, 257, 266–267 

(Feb. 5, 2013). 

594See FIA Comment Letter at 21 (Feb. 15, 2013). 

595See RCG Comment Letter at 8 (Feb. 12, 2013). 

596For further discussion regarding the phase-in 

schedule for the requirements in § 1.22(c), see 

section II.G.9. 

597The Commission also amended 

§ 1.52(d)(2)(ii)(H) to provide that a Joint Audit 

Committee must submit an initial Joint Audit 

Program to the Commission, along with an 

examinations expert’s report on the Joint Audit 

Program, within 180 days of the effective date of the 

regulation. The Director of the Division of Swap 

Dealer and Intermediary Oversight and the Director 

of the Division of Clearing and Risk also are 

authorized under § 1.52(d)(2)(ii)(H) an § 140.91(10), 

with the concurrence of the General Counsel or, in 

his or her absence, a Deputy General Counsel, to 

extend the initial filing deadline if warranted. 

customer, noncustomer, and omnibus 

accounts that are undermargined more 

than one business day after a margin 

call is issued by the FCM. For example, 

if an account is undermargined on 

Monday and the FCM issues a margin 

call on Tuesday, the FCM would have 

to take a reduction to capital equal to 

the amount of the margin call that was 

not met by close of business 

Wednesday. 

The Commission is establishing a 

compliance date for the revised 

timeframe for the capital charges 

required by § 1.17(c)(5)(viii) and (ix) of 

one year following publication of this 

rule in the Federal Register. The 

compliance date provides FCMs with a 

period of time that the Commission 

believes is sufficient to adjust its 

systems for issuing and collecting 

margin from customers and provides 

customers with an opportunity to adjust 

their operations, as necessary, to meet 

its margin obligations on a reduced 

timeframe for the current regulation. 

E. Written Acknowledgment Letters: 

§§ 1.20, 1.26, and 30.7 

The Commission is amending 

§§ 1.20(d) and (g), 1.26(b), and 30.7(d) to 

require FCMs and DCOs, as applicable, 

to obtain standard form 

acknowledgment letters from each 

depository that the FCMs or DCOs use 

to hold customer funds.592 The 

Commission is further requiring FCMs 

and DCOs to use Template Letters set 

forth in appendices to the regulations. 

The Commission is establishing a 

compliance date of 180 days after the 

effective date of the regulations in order 

to provide FCMs and DCOs with 

sufficient time to obtain from 

depositories new acknowledgment 

letters that conform to the Template 

Letters. 

F. Undermargined Amounts: §§ 1.22(c), 

30.7(f) 

The Commission received several 

comments on the appropriate timing for 

the effectiveness of the Proposed 

Residual Interest Requirement. At the 

public roundtable held on February 5, 

2013, several panelists argued that the 

Proposed Residual Interest Requirement 

would require substantial time to 

implement in order to change the 

behavior of all futures markets 

participants.593 In addition, FIA 

asserted that implementation would 

require multiple years and ‘‘radical’’ 

changes to processing procedures for 

futures market participants,594 and RCG 

requested that the Commission provide 

‘‘with a period of time not less than one 

year from the promulgation of the 

relevant final rules for FCMs to 

implement them.’’ 595

As discussed above, the residual 

interest requirements set forth in part 22 

are the requirements that are currently 

in place today. As such, FCMs are 

expected to continue meeting their 

regulatory requirements. With respect to 

the residual interest requirements set 

forth in §§ 1.22(c) and 30.7(f), the 

Commission recognizes that these 

requirements represent a significant 

change in current market practice. 

Given the costs associated with 

compliance with these requirements, as 

well as comments received from the 

interested parties requesting sufficient 

time to achieving compliance with these 

requirements, the Commission has 

determined that a phased compliance 

schedule for § 1.22(c) is necessary and 

appropriate. The phased compliance 

schedule for § 1.22(c) is set forth in 

§ 1.22(c)(5)(iii). However, the Residual 

Interest Deadline of 6:00 p.m. Eastern 

Time in § 1.22(c)(5)(ii) shall begin one 

year following the publication of this 

rule in the Federal Register.596 With 

regards to the residual interest 

requirements set forth in § 30.7(f), the 

Commission is establishing a 

compliance date of one year following 

the publication of this rule in the 

Federal Register. 

G. SRO Minimum Financial 

Surveillance: § 1.52 

The Commission amended § 1.52 to 

require each SRO to establish a 

supervisory program to oversee their 

member FCMs’ compliance with SRO 

and Commission minimum capital and 

related reporting requirements, the 

obligation to properly segregated 

customer funds, risk management 

requirements, financial reporting 

requirements, and sales practices and 

other compliance requirements. The 

Commission also amended § 1.52(c) to 

require each SRO to engage an 

‘‘examinations expert’’ at least once 

every three years to evaluate the quality 

of the supervisory oversight program 

and the SRO’s application of the 

supervisory program. The SRO must 

obtain a written report from the 

examinations expert with an opinion on 

whether the supervisory program is 

reasonably likely to identify a material 

weakness in internal controls over 

financial and/or regulatory reporting, 

and in any of the other areas that are 

subject to the supervisory program. 

The Commission established a 

compliance date in amended § 1.52(e) 

that requires each SRO to submit a 

supervisory program to the Commission 

for review, together with the 

examinations expert’s report on the 

supervisory program, within 180 days of 

the effective date of the amendments to 

§ 1.52, or such other time as may be 

approved by the Commission. The 

Commission further revised § 140.91(10) 

to delegate the authority to extend the 

time period for the submission of the 

initial supervisory program to the 

Director of the Division of Swap Dealer 

and Intermediary Oversight and the 

Director Division of Clearing and Risk, 

with the concurrence of the General 

Counsel or, in his or her absence, a 

Deputy General Counsel.597

Commission staff will consult with 

the SROs to assess their progress in 

preparing an initial supervisory 

program, including the examinations 

expert’s review, and may adjust 

compliance dates as appropriate. 

H. Public Disclosures by FCMs: § 1.55 

The Commission has amended 

§ 1.55(b) by revising the Risk Disclosure 

Statement to include several additional 

disclosures intended to provide 

customers and potential customers with 

enhanced information to further their 

understanding of the risks of engaging 

in the futures markets. The Commission 

recognizes that FCMs will be required to 

revise the Risk Disclosure Statement to 

implement the revisions, and is 

establishing a compliance date for the 

amendments to 1.52(b) of 90 days after 

the effective date of the amendments. 

The Commission believes that this 

provides sufficient time for FCMs to 

revise the Risk Disclosure Statement 

and to modify their systems, if 

necessary, in the case of firms that 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68579 

598The failure of one clearing member could lead 

to losses for other clearing members if the losses 

due to the first member’s failure are large enough 

to exhaust the guarantee fund and require 

additional capital infusion from other clearing 

members. 

provide electronic account opening 

documents. 

The Commission also amended 

§ 1.55(i)–(k) to require each FCM to 

disclose to customers all information 

that would be material to the customers’ 

decision to entrust funds to, or 

otherwise do business with, the FMC, 

including its business, operations, risk 

profile, and affiliates. The Commission 

is establishing a compliance date of 180 

days after the effective date of the 

regulation to provide adequate time for 

FCMs to develop the required 

disclosures and make them available to 

the public. 

The Commission also amended 

§ 1.55(o) to require each FCM to disclose 

on its Web site certain current and 

historical information regarding its 

holding of customer funds, and its 

certified annual report. The Commission 

is establishing a compliance date of 180 

days after the effective date of the 

regulation to provide FCMs with 

sufficient time to modify electronic 

systems, and make any additional 

operational changes, necessary for the 

firms to comply with the requirements. 

IV. Cost Benefit Considerations 

Statutory Mandate To Consider the 

Costs and Benefits of the Commission’s 

Action: Commodity Exchange Act 

Section 15(a) 

Section 15(a) of the Act requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the Act 

or issuing certain orders. Section 15(a) 

further specifies that the costs and 

benefits shall be evaluated in light of the 

following five broad areas of market and 

public concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness and the 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission considers the costs and 

benefits resulting from its discretionary 

determinations with respect to the 

section 15(a) considerations. 

In the NPRM, the Commission 

established, based on the subject matter 

of the proposals, that it did not consider 

any of the proposals contained therein 

to have any significant impact on price 

discovery. The Commission received no 

responses from commenters with 

respect to its analysis regarding price 

discovery. For the remaining areas, the 

Commission addressed, section by 

section, the qualitative substantial 

benefits perceived to be obtained from 

the regulatory proposals contained in 

the NPRM. Where reasonably possible, 

the Commission has estimated costs 

quantitatively associated with such 

proposals section by section. The 

Commission asked specifically and 

generally for comments with respect to 

its analysis of benefits and such cost 

estimates, and requested information 

from commenters where the 

Commission qualitatively considered 

but could not reasonably quantitatively 

estimate costs. 

The underlying purpose of the 

regulations adopted herein as stated in 

the NPRM was to bolster the protection 

of customers and customer funds, in 

response to the misuse or mishandling 

of customer funds at specific FCMs like 

MFGI or PFGI. Further, the purpose of 

certain proposals was to provide 

regulators the means by which to detect 

and deter the misuse or mishandling of 

customer funds by FCMs, including 

bolstering standards for the examination 

and oversight of FCMs by SROs and 

public accountants. In addition to the 

significant benefits to the protection of 

market participants and the public, the 

Commission determined that a strong 

package of reforms, including enhanced 

information and disclosures available to 

customers, adopted in light of the recent 

FCM failures resulting in and from 

misuse of customer funds, would be 

extremely beneficial to restore trust in 

the financial integrity of futures 

markets. The Commission also included 

certain proposals intended to both 

increase the protection of customer 

funds and strengthen FCM risk 

management, specific to customer funds 

processes and procedures. 

As stated in the NPRM, a loss of trust 

in the financial integrity of futures 

markets could deter market participants 

from the benefits of using regulated, 

transparent markets and clearing. The 

overarching purpose of the reforms 

contained in this rulemaking is to 

produce the benefits that accrue by 

virtue of avoiding similar defaults in the 

future. This prevents the costs certain to 

follow, including lost customer funds, 

decreased market liquidity that follows 

from a crisis in confidence, and the 

potential for the failure of one FCM to 

cause losses in other clearing 

members.598

In this rulemaking, the Commission 

adopted new rules and amended 

existing rules to improve the protection 

of customer funds. The content of the 

Commission’s adopted new rules and 

amended rules can be categorized in 

seven parts: (1) requiring FCMs to 

implement extensive risk management 

programs including written policies and 

procedures related to various aspects of 

their handling of customer funds; (2) 

increasing reporting requirements for 

FCMs related to segregated customer 

funds, including daily reports to the 

Commission and DSRO; (3) requiring 

FCMs to establish target amounts of 

residual interest to be maintained in 

segregated accounts as well as creating 

restrictions and increased oversight for 

FCM withdrawals out of such residual 

interest in customer segregated 

accounts, specifically including clear 

sign off and accountability from senior 

management for such withdrawals; (4) 

strengthening requirements for the 

acknowledgment letters that FCMs and 

DCOs must obtain from their 

depositories; (5) eliminating the 

Alternative Method for calculating 30.7 

customer funds segregation 

requirements and requiring FCMs to 

include foreign investors’ funds in 

segregated accounts; (6) strengthening 

the regulatory requirements applicable 

to SRO and DSRO oversight of FCMs, 

including regulating oversight provided 

under the function of a Joint Audit 

Committee that would establish 

standards for, and oversee the execution 

of, FCM audits; and (7) requiring FCMs 

to provide additional disclosures to 

investors. 

Overview of the Costs and Benefits of 

the Proposed Rules and Amendments in 

Light of the 15(a) Considerations— 

Protection of Market Participants and 

the Public 

The Commission designed the 

adopted reforms to improve the 

protection of customer funds. The 

Commission expects each of the seven 

categories identified above to 

significantly increase the levels of 

protection for customer funds. 

Requiring FCMs to implement risk 

management programs that include 

documented policies and procedures 

regarding various aspects of handling 

customer funds helps to protect 

customer funds by promoting robust 

internal risk controls and reducing the 

likelihood of errors or fraud that could 

jeopardize customer funds. In addition, 

by requiring each FCM to document 

certain policies and procedures, the 

rules enable the Commission, DSROs, 

and other auditors to evaluate each 

FCM’s compliance with their own 

policies and procedures. Moreover, the 

requirement that FCMs establish a 

program for quarterly audits by 

independent or external people that is 

designed to identify any breach of the 

policies and procedures helps to ensure 


TKELleY on DSK3SPTVN1PROD with RULES2
68580 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

regular, independent validation that the 

procedures are followed diligently. 

Audits of this sort provide more 

thorough review of internal procedures 

than the Commission or DSROs are able 

to perform regularly with existing 

resources, which provides helpful 

scrutiny of each FCM’s procedures on a 

regular basis. This, together with the 

requirement that FCMs establish a 

program of governing supervision that is 

designed to ensure the policies required 

in § 1.11 are followed, will tend to 

promote compliance with the FCM’s 

own policies and procedures. And by 

promoting such compliance, the 

requirements reduce the risk of 

operational errors, lax risk management, 

and fraud, and thus the risk of 

consequent loss of customer funds. 

Increasing reporting requirements for 

FCMs related to segregated customer 

funds helps the Commission and DSRO 

identify FCMs that should be monitored 

more closely in order to safeguard 

customer funds. Moreover, by making 

some additional reported information 

public, the rules facilitate additional 

market discipline that further promotes 

protection of customer funds. 

Creating restrictions and increased 

oversight for FCM withdrawals out of its 

residual interest in customer segregated 

accounts, and requiring review by 

senior management for large 

withdrawals protects customers by 

helping to ensure that such withdrawals 

do not cause segregated account 

balances to drop below required 

amounts, which are, in turn, designed to 

prevent losses of customer funds. 

Moreover, requiring personal 

accountability by senior management 

for withdrawals that affect the balance 

of such accounts promotes more 

effective oversight of customer 

segregated accounts. 

The acknowledgments and 

commitments depositories are required 

to make through §§ 1.20, 1.26, and 30.7 

provide additional protection for 

customer funds by, among other things, 

requiring depositories that accept 

customer funds to acknowledge that 

customer funds cannot be used to secure 

the FCM’s obligations to the depository. 

Such an acknowledgment provides 

additional protection of customer funds 

and fosters prompt transfer in the event 

of an FCM’s default. 

In addition, depositories must agree 

in the acknowledgment letter to give the 

Commission and DSROs read-only 

electronic access to an FCM’s segregated 

accounts, which benefits customers by 

enabling the Commission and DSROs to 

review the accounts for discrepancies 

between the FCM’s reports and the 

balances on deposit at various 

depositories. These enhancements to 

oversight provide an additional 

mechanism by which customers would 

be protected against a shortfall in 

customer funds due to operational 

errors or fraud. 

Requiring FCMs to include foreigndomiciled customers’ funds in 

segregated accounts benefits all 

customers placing funds on deposit for 

use in trading foreign futures and 

foreign options. Because neither the 

Bankruptcy Code nor the Commission’s 

part 190 regulations distinguish 

between foreign-domiciled and U.S. 

domiciled customers at the point 

customer funds are distributed, any 

shortfall in available funds would be 

shared among all such customers. As 

discussed below, the Commission 

understands that most, if not all, FCMs 

currently compute secured amount 

requirements for both U.S.-domiciled 

and foreign-domiciled customers. 

However, incorporating foreigndomiciled customers within the 

calculations required for 30.7 customers 

ensures that both groups are fully 

protected. Similarly, eliminating the 

Alternative Method provides additional 

protection to customer funds by 

ensuring that FCMs are not allowed to 

reduce their segregation requirements 

for 30.7 accounts during a time of 

financial strain. As discussed below, 

this change provides protection to both 

U.S-domiciled and foreign-domiciled 

customers with funds in 30.7 accounts. 

The provisions in § 1.52 include 

additional requirements for both the 

supervisory program for SROs as well as 

for the formation of a Joint Audit 

Committee to oversee the 

implementation and operation of a Joint 

Audit Program that directs audits of 

FCMs by DSROs. By requiring both the 

SRO supervisory programs and the Joint 

Audit Program to comply with U.S. 

generally accepted audit standards, to 

develop written policies and 

procedures, to require controls testing as 

well as substantive testing, and to have 

an examinations expert review the 

programs at least once every two years, 

the amendments help to ensure that 

audits of FCMs by SROs or DSROs are 

thorough, effective, and continue to 

incorporate emerging best practices for 

such audits. As a consequence, the 

amendments help to ensure that audits 

are as effective as possible at identifying 

potential fraud, strengthening internal 

controls, and verifying the integrity of 

FCMs’ financial reports, each of which 

tend to provide protection for FCMs’ 

customers, counterparties, and 

investors. 

In addition § 1.55 requires disclosure 

of firm-specific risks to customers. This 

additional information should be 

helpful to customers when selecting an 

FCM to deposit their funds. In doing so, 

the rules promote market discipline that 

incents FCMs to manage their risks 

carefully and assists customers in 

understanding how their funds are held 

and what risks may be relevant to the 

safety of their funds. 

Last, FCMs maintaining residual 

interest in customer accounts is an 

important aspect of protection for 

customer funds. While an FCM’s 

residual interest is not exhausted, it may 

be used to meet the FCM’s obligations 

to each customer without using another 

customer’s funds to do so. All else being 

equal, the larger the residual interest, 

the less likely that market participants 

will lose customer funds posted as 

collateral, with associated detriment to 

members of the public with interests in 

such market participants. 

Efficiency, Competitiveness and 

Financial Integrity of Futures Markets 

The proposed amendments should 

increase the efficiency and financial 

integrity of the futures markets by 

ensuring that FCMs have strong risk 

management controls that are subject to 

multiple and enhanced external checks, 

by enhancing reporting requirements, 

facilitating increased oversight by the 

Commission and DSROs, by allowing 

FCMs flexibility in the development of 

newly required policies and procedures 

wherever the Commission has 

determined that such flexibility is 

appropriate, and by requiring FCMs to 

implement training regarding the 

handling of customer funds. In addition, 

the rules include some requirements 

that many industry participants have 

requested as necessary for the adequate 

protection of customers and also 

highlighted as best practices already 

adopted within the industry. Requiring 

such standards to be adopted by all 

FCMs promotes the competitiveness of 

futures markets by preventing an FCM 

from skimping on customer protection 

safeguards. There are also provisions in 

the proposal that permit FCMs that are 

not BDs to implement certain securities 

net capital haircuts that apply to jointly 

registered FCM/BDs by the SEC. This 

enhances competition between FCMs 

that are not dually registered and jointly 

registered FCM/BDs with respect to 

such requirements. 

Smaller FCMs may have more 

difficulty than large FCMs in absorbing 

the additional costs created by the 

requirements of the rules (particularly 

§ 1.22). It is possible that some smaller 

FCMs may elect to stop operating as 

FCMs as a result of these costs. The 

Commission does not anticipate, 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68581 

however, that the rules will have a 

material effect on FCM pricing due to 

reduced competition (although the 

increased costs may affect pricing). 

More specifically, the amendments to 

§§ 1.10, 1.11, 1.12, 1.32, 22.2, and 30.7 

increase reporting requirements for 

FCMs related to segregated customer 

funds, including daily, bi-monthly, and 

additional event-triggered reports to the 

Commission and DSROs. The expanded 

range and frequency of information that 

the Commission and DSRO receive 

under the proposed regulations 

enhances their ability to monitor each 

FCM’s segregated accounts, which 

promotes the integrity of futures 

markets by helping to ensure proper 

handling of customer funds at FCMs. 

In addition, the changes facilitate 

increased oversight by the Commission 

and DSROs by including additional 

notification requirements, obligating 

FCMs to alert the Commission when 

certain events occur that could indicate 

an FCM’s financial strength is 

deteriorating or that important 

operational errors have occurred. Such 

notifications should enable the 

Commission and DSROs to increase 

monitoring of such FCMs to ensure that 

customer funds are handled properly in 

such circumstances. The rules also 

require FCMs to obtain an 

acknowledgment letter from 

depositories that should give the 

Commission and DSROs electronic 

access to view customer accounts at 

each depository when requested by the 

Commission. That should enable both 

the Commission and DSROs to verify 

the presence of customer funds which 

would provide a safeguard against fraud 

and would promote the integrity of 

markets for futures, cleared options, and 

cleared swaps. 

The rules also require FCMs to 

establish policies and procedures 

regarding several aspects of how they 

handle customer funds. The rules 

should give FCMs the flexibility, where 

appropriate, to develop policies and 

procedures tailored to the unique 

composition of their customer base, 

size, and other operational 

disincentives. This flexible approach 

protects FCMs from additional 

regulatory compliance costs that could 

otherwise result from rules requiring 

every FCM to operate in exactly the 

same way without sacrificing the 

additional accountability that results 

from written policies and procedures 

that the Commission or DSRO can 

review and use as the basis for FCM 

audits. 

The requirement that FCMs provide 

annual training to all finance, treasury, 

operations, regulatory, compliance, 

settlement and other relevant employees 

regarding the segregation requirements 

for segregated funds, for notices under 

§ 1.12, procedures for reporting noncompliance, and the consequences of 

failing to comply with requirements for 

segregated funds, should enhance the 

integrity of the futures markets by 

promoting a culture of compliance by 

the FCM’s personnel. The training 

should help to ensure that FCM 

employees understand the relevant 

policies and procedures, that they are 

empowered and incented to abide by 

them, and that they know how to report 

non-compliance to appropriate 

authorities. 

The rules allow FCMs that are not 

dual registrants (i.e., are not both FCMs 

and BDs) to follow the same procedures 

as dual registrants when determining 

what regulatory capital haircut applies 

to certain types of securities in which 

the FCM invests its own capital or 

customer funds. This change is needed 

as the SEC has proposed a change for 

BDs which would permit joint 

registrants to possibly apply a lower 

regulatory haircut for certain securities, 

but which would not be applicable to 

FCMs that are not dual registrants 

without this rule. Therefore, the rule 

should help to ensure that FCMs that 

are not dual registrants are not 

competitively disadvantaged and are 

able to continue applying the same 

regulatory capital haircuts for such 

securities as joint registrants. 

Last, residual interest is an important 

aspect of protection for customer funds 

because it enables the FCM to ensure 

that it can meet its obligations to each 

customer without using another 

customer’s funds to do so. All else being 

equal, the larger the residual interest, 

the more secure are customer funds. 

This contributes to confidence in U.S. 

futures markets and their financial 

integrity. Adequate residual interest 

improves the competition between 

FCMs, inasmuch as FCMs are competing 

less by transferring risks from customers 

with deficit funds to customers with 

surplus funds. 

Sound Risk Management 

The amendments should promote 

sound risk management by facilitating 

market discipline, enhancing internal 

controls, enabling the Commission and 

DSROs to monitor FCMs for compliance 

with those controls, by reducing the risk 

that an FCM’s financial strain could 

interfere with customers’ ability to 

manage their positions, by requiring 

FCMs to notify the Commission in 

additional circumstances that could 

indicate emerging financial strain, and 

by requiring senior management to be 

involved in the process of setting targets 

for residual interest. 

The reporting requirements should 

enhance market discipline by providing 

additional information to investors 

regarding the location of their funds, 

and the size of residual interest buffer 

that an FCM targets and maintains in its 

segregated accounts. This additional 

information should be valuable to 

customers selecting an FCM and 

monitoring the location of their funds 

deposited with the FCM which should 

promote market discipline. For 

example, if an FCM were to establish a 

low target for residual interest, or 

maintain a very low residual interest, 

then market participants are likely to 

recognize this as a practice that could 

increase risk to the funds they have on 

deposit at the FCM. Consequently, 

customers would likely either apply 

pressure to the FCM to raise their target, 

or take their business to a different FCM 

that maintains a larger residual interest 

in customer fund accounts. This market 

discipline should incent FCMs to 

maintain a level of residual interest that 

is adequate to ensure that a shortfall 

does not develop in the customer 

segregated accounts. 

The rules should also enhance FCM 

internal controls by requiring them to 

establish a risk management program 

that includes policies and procedures 

related to various aspects of how 

segregated customer funds are handled. 

For example, FCMs are required to 

establish procedures for continual 

monitoring of depositories where 

segregated customer funds are held, and 

should have to establish a process for 

evaluating the marketability, liquidity, 

and accuracy of pricing for § 1.25 

compliant investments. 

In addition, documented policies and 

procedures should benefit the FCM 

customers and the public by providing 

the Commission and DSROs greater 

ability to monitor and enforce 

procedures that FCMs perform to ensure 

that the protection of customer funds is 

achieved, with the effect that the 

Commission should have a greater 

ability to address and protect against 

operational errors and fraud that put 

customer funds at risk of loss. 

Further, through the amendments to 

§ 1.17(a)(4), FCMs will need to manage 

their access to liquidity so as to be able 

to certify to the Commission, at its 

request, that they have sufficient access 

to liquidity to continue operating as a 

going concern. This rule should provide 

the Commission with the flexibility to 

deal with emerging liquidity drains at 

FCM s which may endanger customers, 

potentially prior to instances of 

regulatory capital non-compliance, 


TKELleY on DSK3SPTVN1PROD with RULES2
68582 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

599The Commission was not able to quantify the 

costs that would result from increased residual 

interest held in customer segregated accounts, from 

increased capital held by the FCM, or from lost 

investment opportunities due to restrictions on the 

amount of funds that may be held overseas. The 

Commission did not have sufficient data to estimate 

the amount of additional residual interest FCMs are 

likely to need as a consequence of proposed, the 

amount of additional capital they may hold for 

operational purposes, the cost of capital for FCMs, 

or the opportunity costs FCMs may experience 

because of restrictions on the amount of customer 

funds they can hold overseas, each of which would 

be necessary in order to estimate such costs. 

600The lower bound assumes an FCM requires 

the minimum estimated number of personnel hours 

to be compliant with these new rules and that, 

when possible, they already have policies, 

procedures, and systems in place that would satisfy 

the proposed requirements. The upper bound 

assumes an FCM requires the maximum amount of 

personnel hours and do not have pre-existing 

policies, procedures, and systems in place that 

would satisfy the proposed requirements. The 

greatest amount of variation within in the range 

would depend on the number of new depositories 

an FCM must establish relationships with due to 

current depositories that would not be willing to 

sign the required acknowledgment letter. The lower 

bound assumes that an FCM does not need to 

establish any new relationships with depositories. 

The Commission estimates that the largest FCMs 

may have as many as 30 depositories, and as a 

conservative estimate, the Commission assumes for 

the upper bound that an FCM would have to 

establish new relationships with 15 depositories. 

allowing customer positions and funds 

to be transferred intact and quickly to 

another FCM. This change should 

promote sound risk management 

practices by helping to ensure that 

customers maintain control of their 

positions without interruption. 

The proposed additions to 

notification requirements established in 

§ 1.12 should enhance the Commission’s 

ability to identify situations that could 

lead to financial strain for the FCM, 

which makes it possible for the 

Commission to monitor further 

developments with that FCM more 

carefully and to begin planning earlier 

for the possibility that the FCM’s 

customer positions may need to be 

transferred to other FCMs, in the event 

that the FCM currently holding those 

positions defaults. Advance notice helps 

to ensure customers’ positions are 

protected by enabling the Commission 

to work closely with DCOs and DSROs 

to identify other FCMs that have 

requisite capital to meet regulatory 

requirements if they were to take on 

additional customer positions, thus 

facilitating smooth transition of those 

positions in the event that it is 

necessary. 

Last, FCMs maintaining residual 

interest in customer accounts is an 

important aspect of protection for 

customer funds. While an FCM’s 

residual interest is not exhausted, it may 

be used to meet the FCM’s obligations 

to each customer without using another 

customer’s funds to do so. All else being 

equal, the larger the residual interest, 

the more secure are customer funds. 

Moreover, these requirements will 

create incentives for FCMs to monitor 

their customers’ undermargined 

amounts, thereby enhancing the FCM’s 

risk management. By requiring that 

senior management set the target for 

residual interest, and that they conduct 

adequate due diligence in order to 

inform that decision, the rule promotes 

both informed decision making about 

this important form of protection, and 

accountability among senior 

management for this decision, both of 

which are consistent with sound risk 

management practices. 

Other Public Interest Considerations 

As discussed above, the recent 

failures of MFGI and PFGI, FCMs to 

which customers have entrusted their 

funds, sparked a crisis of confidence 

regarding the security of those funds. 

This crisis in confidence could deter 

market participants from using 

regulated, transparent markets and 

clearing which would create additional 

costs for market participants and losses 

in efficiency and safety that could create 

additional burdens for the public. The 

Commission hopes that this rule will 

not only address the current crisis of 

confidence, but that it will produce 

benefits for the public by virtue of 

avoiding similar defaults in the future. 

These amendments are not, however, 

without costs. First, the most significant 

costs created by the amendments are 

those that result from the increased 

amount of capital that FCMs are 

required to hold in segregated accounts 

as part of establishing a target for their 

residual interest and requiring residual 

interest for undermargined amounts. 

Second, additional costs may be created 

by the amendments that incent FCMs to 

hold additional capital, and prevent 

them from holding excess segregated 

funds overseas. Third, operational costs 

are likely to arise from amendments that 

result in the formation of a risk 

management unit and adoption of new 

policies and procedures. 

Multiple rule changes are expect to 

incent or require FCMs to increase the 

amount of residual interest that they 

maintain in segregated accounts 

including: (1) Requiring FCMs to 

establish a target for residual interest 

that reflects proper due diligence on the 

part of senior management; (2) 

disclosing the FCMs’ targeted residual 

interest publicly; (3) requiring them to 

report to the Commission and their 

DSROs any time their residual interest 

drops below that target, and (4) 

requiring FCMs to hold residual interest 

large enough to cover their customers’ 

undermargined amounts. In addition by 

restricting FCMs’ ability to withdraw 

residual interest from segregated 

accounts and obligating FCMs to report 

to the Commission and their respective 

DSRO each time the residual interest 

drops below the target, the regulations 

should incent FCMs to hold additional 

capital, which is also likely to be a 

significant cost. 

When FCMs hold excess customer 

funds overseas, such funds will likely 

be held at depositories that are 

themselves subject to foreign insolvency 

regimes. These regimes may provide 

less effective protections for customer 

funds than those applicable under U.S. 

law. By prohibiting FCMs from holding 

some excess customer funds overseas, 

and thereby reducing investment 

opportunities for customer funds, the 

regulations may reduce the returns that 

FCMs can obtain on invested customer 

funds. 

And last, the requirements related to 

operational procedures are likely to 

create significant costs, particularly 

related to creating and documenting 

policies and procedures, as well as 

complying with ongoing training, due 

diligence, and audit requirements. 

However, in several cases the 

implementation costs of the changes 

should be minor. For example, some 

proposed requirements should obligate 

FCMs to provide the Commission and 

DSROs more regular access to 

information that FCMs and their 

depositories are already required to 

maintain, or in some cases are already 

reporting to their DSROs. The 

Commission also anticipates that some 

of the changes proposed codify best 

practices for risk management that many 

FCMs and DCOs may already follow. In 

such cases, the costs of compliance 

would be mitigated by the compliance 

programs or best practices that the firm 

already has in place. Moreover, in other 

cases the changes codify practices that 

are already required by SROs, and 

therefore would impose no additional 

costs. 

The initial and ongoing costs of the 

rules for FCMs should vary significantly 

depending on the size of each FCM, the 

policies and procedures that they 

already have in place, and the frequency 

with which they experience certain 

events that would create additional 

costs under the rules. In the NPRM, the 

Commission estimated that the initial 

operational cost 599 of implementing the 

rules would be between $193,000 and 

$1,850,000 per FCM.600 And the initial 

cost to the SROs and DSROs would be 

between $41,100 and $63,500 per SRO 

or DSRO. The Commission estimated 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68583 

601As above, the lower bound assumes that an 

FCM requires the minimum estimated number of 

personnel hours to be compliant and that for eventtriggered costs, the FCM bears the minimum 

number of possible events. The upper bound 

assumes an FCM requires the maximum number of 

personnel hours to be compliant. It also assumes an 

FCM has to notify the Commission pursuant to the 

proposed amendments in § 1.12 five times per year, 

and that an FCM withdraws funds from residual 

interest for proprietary use 50 times per year. The 

estimate does not include additional costs that 

would result if FCMs increase the amount of 

residual interest or capital that they hold in 

response to the proposed rules, or certain 

operational costs that the Commission does not 

have sufficient information to estimate. 

602The Segregation Schedule and Secured 

Amount Schedule are already public documents. 603NFA Comment Letter at 8 (Feb. 15, 2013). 

that the ongoing operational cost to 

FCMs would be between $287,000 and 

$2,300,000 per FCM per year.601 As 

described below in § 1.52, the 

Commission did not have adequate 

information to determine the ongoing 

cost of the proposed requirements for 

SROs and DSROs. 

On a minor note, the rules also 

harmonize the definition of leverage 

ratio reporting with the definition 

established by a registered futures 

association. 

In the sections that follow, the 

Commission provides its analysis of cost 

benefit considerations including 

comments received, section by section, 

in light of the relevant 15(a) public 

interest, cost-benefit considerations. 

Consideration of Costs and Benefits 

Section by Section 

Section 1.3(rr)—Definition of ‘‘Foreign 

Futures or Foreign Options Secured 

Amount’’ 

The Commission adopted an 

amendment to § 1.3(rr) replacing the 

term ‘‘foreign futures or foreign options 

customers’’ with the term ‘‘30.7 

customers.’’ The former only included 

U.S.-domiciled customers, whereas the 

term ‘‘30.7 customers’’ includes both 

U.S.-domiciled and foreign-domiciled 

customers who place funds in the care 

of an FCM for trading on foreign boards 

of trade. This change expanded the 

range of funds that the FCM must 

include as part of the foreign futures or 

foreign options secured amount. 

In addition, the definition of ‘‘foreign 

futures or foreign options secured 

amount’’ was amended so that it is 

equal to the amount of funds an FCM 

needs in order to satisfy the full account 

balances of each of its 30.7 customers at 

all times. This definitional change is 

necessary to implement the conversion 

in § 30.7 from the ‘‘Alternative Method’’ 

to the ‘‘Net Liquidating Equity Method’’ 

of calculating the foreign futures or 

foreign options secured amount. 

Costs and Benefits 

These definitional changes determine 

how much funds are considered part of 

the ‘‘foreign futures or foreign options 

secured amount.’’ However, the costs 

and benefits of these changes are 

attributable to the substantive 

requirements related to the definitions 

and, therefore, are analyzed with respect 

to changes adopted to § 30.7 and 

discussed below. 

Section 1.10—Financial Reports of 

Futures Commission Merchants and 

Introducing Brokers 

The Commission adopted 

amendments to § 1.10 revising the Form 

1–FR–FCM by establishing a new 

schedule called the ‘‘Cleared Swap 

Segregation Schedule’’ that is included 

in the FCM’s monthly report, together 

with the Segregation Schedule and 

Secured Amount Schedule. The 

amendments also provide that the 

Cleared Swap Segregation Schedule is a 

public document.602 The Commission 

also amended the Segregation Schedule 

and the Secured Amount Schedule to 

include reporting of the FCM’s target for 

residual interest in the accounts 

relevant to that Schedule, as well as a 

calculation of any surplus or deficit in 

residual interest with respect to that 

target. The Commission also required 

each FCM to report to the Commission 

monthly leverage information. 

Costs and Benefits 

In the NPRM, the Commission 

considered the amendments to § 1.10 to 

have significant benefits to the 

protection of market participants, 

namely, customers. The Commission 

anticipated that continuing the public 

availability of the Segregation Schedule 

and the Secured Amount Schedule, 

with the addition of the Cleared Swaps 

Segregation Schedule, would be 

beneficial to customers in assessing the 

financial condition of the FCMs with 

whom they choose to transact. The 

Commission posited that FCMs would 

have competing incentives to set higher 

or lower targeted residual amounts, but 

that public disclosure would enhance 

the quality of the assessment of a 

reasonable targeted amount of residual 

interest. The Commission stated that 

providing publicly the additional 

information would permit customers to 

weigh this consideration, along with 

considerations of price, in selecting an 

FCM, benefiting the protection of 

market participants. The Commission 

also stated that requiring FCMs to report 

their leverage to the Commission on a 

monthly basis would assist the 

Commission in monitoring each FCM’s 

overall risk profile, which would help 

the Commission to identify FCMs that 

should be monitored more closely for 

further developments that could weaken 

their financial position, enhancing the 

protection of market participants. 

The Commission could not 

quantitatively estimate the cost of FCMs 

having an incentive by public disclosure 

to hold higher targeted residual amounts 

in customer segregated accounts. The 

Commission did consider that 

qualitatively it expected that costs 

would be incurred as a result, as a 

return available to FCMs on restricted 

investments permissible under § 1.25 

would likely be lower than returns on 

capital not restricted by being held as 

target residual amounts subject to the 

investment requirements of § 1.25, and 

public disclosure would, other factors 

being equal, give an incentive to FCMs 

to hold a larger target residual amount. 

The Commission estimated 

quantitatively costs associated with 

system modifications to produce 

additional reports for leverage. The 

Commission did not receive comments 

regarding its quantitative estimates of 

those costs or its qualitative analysis 

that costs would be associated with the 

amendments to § 1.10, particularly the 

public disclosure of the Cleared Swaps 

Segregation Schedule and the changes 

to the Segregation Schedule and 

Secured Amount Schedule to include 

the targeted residual amount. 

Specifically, the Commission received 

no comments regarding the assumption 

that the target residual amount would in 

fact be higher once publicly disclosed, 

or as to what forms or costs associated 

with any additional capital that may be 

required following disclosure of the 

target residual amount, if any at all. Nor 

did the Commission receive comments 

discussing the quantitative spread 

difference between § 1.25 investments 

compared to investments that are not 

subject to § 1.25. Without comment as to 

these cost drivers, the Commission is 

unable to accurately estimate these 

costs. 

The Commission received a comment 

from NFA to consider an alternative to 

the regulatory language proposed for 

leverage ratio reporting to refer to the 

formulation of leverage established by a 

registered futures association.603 The 

Commission, believing that this 

alternative would have no detrimental 

impact on the benefits anticipated from 

obtaining reporting of leverage, 

modified the language in the final 

regulation to conform to the alternative 


TKELleY on DSK3SPTVN1PROD with RULES2
68584 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

604 Id. 

605See, e.g., SIFMA Comment Letter at 2 (Feb. 21, 

2013); SUNY Buffalo Comment Letter at 8 (Mar. 19, 

2013); Vanguard Comment Letter at 5–6 (Feb. 22, 

2013). 

606 Id. 

607See, e.g., FIA Comment Letter at 52 (Feb. 15, 

2013); RJ O’Brien Comment Letter at 6 (Feb. 15, 

2013). 

608 Id. 

609Commercial Energy Working Group Comment 

Letter at 2 (Feb. 12, 2013). 

610 Id. at 3 

611NFA Comment Letter at 15 (Feb. 15, 2013). 

612 Id. at 16. 

suggested by NFA. The alternative 

language in the final regulation will 

permit the leverage reporting 

requirement to stay harmonized with 

NFA’s leverage reporting requirement as 

NFA has indicated it intends to update 

and refine the formulation, which will 

continue to provide the Commission 

with information necessary to monitor 

FCMs for the protection of market 

participants.604

The Commission received numerous 

comments regarding the benefits of the 

public disclosure of the Segregation 

Schedule, Secured Amount Schedule, 

and Cleared Swaps Segregation 

Schedule, and the amounts of the FCM’s 

targeted residual interest.605 Many 

commenters reiterated the utility of, and 

value to, customers of the public 

availability of the schedules and 

financial condition information of 

FCMs.606 However, several FCMs 

commented, and FIA expressed 

concern, that the information would not 

be useful to customers and would be 

difficult for customers to understand 

without understanding all the factors 

involved in setting a target residual 

amount.607 These commenters were 

concerned that customers may, to their 

detriment, overweigh the consideration 

of the targeted residual amount.608

These comments are discussed in detail 

at section II.P. above. 

The Commission understands the 

concerns of both sets of commenters but 

believes that the protection of market 

participants is enhanced in this 

circumstance by the greater availability 

of public information, particularly 

concerning customer funds, to 

customers and potential customers. 

Notwithstanding the concerns of FIA 

and several FCMs particularly 

questioning the benefits of the public 

availability of the targeted residual 

amount, the Commission believes that 

public disclosure—and consequent 

market discipline—is an important 

counterweight to other FCM incentives 

with respect to establishing the target. 

The Commission herein has adopted 

numerous measures increasing 

disclosures to customers, believing, on 

balance, that additional disclosures 

regarding customer funds in particular 

to have significant benefits to the 

protection of market participants. 

Greater availability of information may 

also provide additional confidence in 

the financial integrity of futures 

markets. 

Finally, the Commission, in its 

consideration of costs and benefits for 

the amendments to § 1.10, asked 

questions for particular comments on 

the costs and benefits of making public 

daily segregation and secured amount 

calculations, or other more frequent 

calculations, and solicited comments on 

alternatives. Similar to the comments on 

the public availability of the Segregation 

Schedule, Secured Amount Schedule, 

and the Cleared Swaps Segregation 

Schedule, some commenters supported 

and other commenters opposed the 

public availability of daily margin 

segregation calculations. 

The Commercial Energy Working 

Group noted, generally, that the 

Commission’s proposals for the 

publication of information would be a 

cost-effective mechanism to make FCMs 

more accountable to their customers.609

The Commercial Energy Working Group 

posited that additional costs of 

publication of daily segregation 

calculations should be nominal.610

There were no other specific comments 

on the costs of making publicly 

available daily or more frequent 

information. The Commission proposed 

requiring daily segregation disclosures 

in the amendments adopted to § 1.55, 

and the benefits of such disclosures will 

be further discussed in that section, 

although the only comment received as 

to the costs of such publication of 

information was as discussed herein. 

The NFA commented that the 

Commission should consider the 

alternative of directing customers to its 

BASIC system where certain financial 

information on FCMs would be 

available in one place, as opposed to 

requiring FCMs to publish financial 

information, including the Segregation 

Schedule, Secured Amount Schedule, 

and Cleared Swaps Segregation 

Schedule on their respective Web 

sites.611 NFA commented that the 

Commission should carefully 

distinguish between categories of 

information, as those meaningful to all 

customers which should be readily 

available, meaningful to regulators but 

which may be sensitive and subject to 

misinterpretation if made public, and 

meaningful to more sophisticated 

customers that FCMs should be required 

to provide upon request.612 The 

Commission believes enhanced benefits 

to the protection of market participants 

and the financial integrity of futures 

markets, and market discipline, are best 

achieved by the public availability of 

the Segregation Schedules, Secured 

Amount Schedules, and Cleared Swaps 

Segregation Schedules in their entirety 

on a monthly basis, but also agrees with 

NFA’s concern regarding the sensitivity 

of information that may be readily 

available to regulators but not publicly 

disclosed. The Commission does not 

agree that there may be a benefit to 

distinguishing between categories of 

customers with respect to public 

availability of information. The 

Commission agrees there could be 

enhanced utility to customers by having 

schedules provided by the NFA through 

its BASIC portal as an alternative, 

however, also notes that NFA could 

implement this under the rule as 

adopted so long as the schedules are 

required to be made publicly available 

and are not exempt from public 

disclosure. 

Section 1.11 Risk Management 

Program for Futures Commission 

Merchants 

The Commission adopted new § 1.11 

requiring an FCM that carries accounts 

for customers to establish a risk 

management unit that is independent 

from the business unit handling 

customers or customer funds and 

reports directly to senior management. 

In addition, each FCM must establish 

and document a risk management 

program, approved by the governing 

body of the FCM, that, at a minimum: 

(a) Identifies risks and establishes risk 

tolerance limits related to various risks 

that are approved by senior 

management; (b) includes policies and 

procedures for detecting breaches of risk 

tolerance limits, and for reporting them 

to senior management; (c) provides risk 

exposure reports quarterly and 

whenever a material change in the risk 

exposure of the FCM is identified; (d) 

includes annual review and testing of 

the risk management program; and (e) 

meets specific requirements related to 

segregation risk, operational risk, and 

capital risk. 

Regarding segregation risk, each FCM 

must establish written policies and 

procedures that require, at a minimum: 

(1) Documented criteria for selecting 

depositories that would hold segregated 

funds; (2) a program to monitor 

depositories on an ongoing basis; (3) an 

account opening process that ensures 

the depository acknowledges that funds 

in the account are customers’ funds 

before any deposits are made to the 

account, and that also ensures accounts 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68585 

613RCG Comment Letter at 5 (Feb. 12, 2013); 

Phillip Futures Comment Letter at 2 (Feb. 14, 2013). 

614Phillip Futures Comment Letter at 2 (Feb. 14, 

2013). 

615 Id. 

616CHS Hedging Comment Letter at 3 (Feb. 15, 

2013); RJ O’Brien Comment Letter at 9–10 (Feb. 15, 

2013). 

are titled appropriately; (4) a process for 

determining a residual interest target for 

the FCM that involves due diligence 

from senior management; (5) a process 

for the withdrawal of an FCM’s residual 

interest when such a withdrawal is not 

made for the benefit of the FCM’s 

customers; (6) a process for determining 

the appropriateness of investing funds 

in § 1.25 compliant investments; (7) 

procedures to assure that securities and 

other non-cash collateral held as 

segregated funds are properly valued 

and readily marketable and highly 

liquid; (8) procedures that help to 

ensure appropriate separation of duties 

between those who account for funds 

and are responsible for statutory and 

regulatory compliance versus those who 

act in other capacities with the company 

(e.g., those who are responsible for 

treasury functions); (9) a process for the 

timely recording of all transactions; and 

(10) a program for annual training of 

FCM employees regarding the 

requirements for handling customer 

funds. 

The new § 1.11 requires automated 

financial risk management controls that 

address operational risk, and written 

procedures reasonably designed to 

ensure that an FCM has sufficient 

capital to be in compliance with the Act 

and regulations and to meet its liquidity 

needs for the foreseeable future. 

Costs and Benefits 

In the NPRM, the Commission 

provided a detailed discussion of the 

significant benefits of the new risk 

management requirements for FCMs to 

the protection of market participants 

and customer funds, sound risk 

management, and directly as well as by 

extension, the financial integrity of 

futures markets. Specifically, the 

Commission stated that it considered 

the specific requirements of § 1.11 to 

reduce the negative impact of conflicts 

of interest on decision making relating 

to customer funds, to result in stronger 

controls which could quickly focus 

management attention on emerging risks 

and minimize the risk of a breakdown 

in control at times of financial stress, 

and to promote more formal 

responsibility and require specific 

accountability up the chain of FCM 

management and governance for risk 

controls both generally and specific to 

customer funds processes and 

procedures. Documentation 

requirements for policies and 

procedures were considered beneficial 

to promote Commission and SRO 

oversight of the tools chosen by FCMs 

in putting the stronger controls in place, 

although the Commission also 

determined that permitting flexibility 

with respect to the manner of the 

policies and procedures would be 

beneficial to the efficiency of FCMs in 

putting the new stronger and more 

rigorous requirements into practice. The 

Commission considers the requirements 

adopted under § 1.11 to be extremely 

important in eradicating the potential 

for poor internal controls environments 

at FCMs, which could be susceptible to 

fraud or operational error, which in turn 

could result in losses to customer funds 

without clear and documented 

management accountability. 

Documentation of the criteria for 

decision making and management 

determinations with respect to choice of 

depositories, and other management 

determinations impacting customer 

funds such as residual interest and 

investment choices, as well as requiring 

periodic review and testing of the risk 

management program, allows for an 

iterative process with a clear purpose, 

the protection of customers and 

customer funds, transparent to both 

Commission and SRO examination. 

Providing clear factors which must be 

considered by FCMs in their adopted 

practices, such as selection of 

depositories, was also considered by the 

Commission to provide greater clarity to 

customers with respect to 

determinations of significant 

consequence for customers, with a 

result being likely enhanced market 

discipline coming from customers 

evaluating FCMs. In many specific 

areas, the Commission considered the 

requirements being adopted to greatly 

benefit risk management, the protection 

of market participants and the financial 

integrity of futures markets as the 

requirements would necessarily require 

FCMs to improve internal management 

communication, internal controls, 

management accountability, separation 

of duties, and training of personnel in 

many respects. The Commission 

considered that FCMs were already 

responsible under the Act and existing 

regulations for the protection of 

customer funds. The adoption of § 1.11 

requires now that FCMs develop written 

policies and procedures and put 

programs and controls into practice, to 

ensure going forward that they have in 

place consistent and reviewable 

processes to achieve the required 

outcomes for protecting customers and 

customer funds. The Commission, in 

adopting the rules, was however, 

cognizant that there would be 

significant costs involved in compliance 

with § 1.11, to the extent that for some 

FCMs these processes and procedures 

were not already in place or have no 

equivalent foundation. However, the 

Commission considered an additional 

benefit to the requirements to be that 

there would no longer be a competitive 

cost advantage to FCMs to not put in 

place such important measures. Many 

FCMs are anticipated by the 

Commission to already have in place 

strong internal controls and practices 

similar to what is now specifically being 

required to be put in place under § 1.11, 

and those FCMs will not have to bear a 

competitive disadvantage any longer for 

doing so with respect to bearing the 

costs of such practices in order to 

adequately protect customers. The 

Commission, cognizant of the 

significance of its estimates of costs 

with respect to the requirements, 

adopted the regulations in a manner that 

provides FCMs with flexibility in the 

manner of adopting practices that fulfill 

the requirements. The Commission did 

not receive specific comments on its 

quantitative estimates of the initial and 

recurring costs of adopting § 1.11. 

The Commission did receive 

comments from several FCMs objecting 

to the requirements of § 1.11 to require 

the independence of risk management 

from the business unit (defined to 

identify parties responsible for customer 

business or dealing with customer funds 

or supervising such lines of 

responsibility). RCG and Phillip Futures 

cited the loss of a talent pool available 

to participate in risk management as a 

negative consequence of the 

requirement.613 Phillip Futures also 

recommended that the Commission 

consider as an alternative that internal 

controls, senior leadership and training 

programs could suffice in lieu of 

required separations between risk 

management and the business unit.614

Phillip Futures contended that natural 

conflicts of interest will always exist 

and can be mitigated by supervisory 

levels, policies and procedures.615

CHS Hedging and RJ O’Brien cited the 

difficulty of a small or mid-size FCM 

having a separate unit for risk 

management personnel, noting it to be 

impracticable operationally or 

financially and not cost effective.616

Frontier Futures generally commented 

that the costs associated with requiring 

FCMs to increase risk management 

standards for the purpose of protecting 

an FCM’s customers from losses caused 

by fellow customers, would be 

prohibitive to smaller FCMs being able 


TKELleY on DSK3SPTVN1PROD with RULES2
68586 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

617Frontier Futures Comment Letter at 2 (Feb. 14, 

2013). 

618FIA Comment Letter at 55 (Feb. 15, 2013). 

619FHLB Comment Letter at 3 (Feb. 15, 2013). 

620FIA Comment Letter at 37 (Feb. 15, 2013); RJ 

O’Brien Comment Letter at 10 (Feb. 15, 2013). 

to continue operations, and is an area 

that FCMs were adept at and already 

have a large incentive to properly 

manage.617 FIA asked for clarification 

that § 1.11 does not require formal 

structured risk management units, 

provided that the FCM is able to 

identify all personnel responsible for 

required risk management activities in 

order to comply with the line reporting 

requirements and independence from 

supervision by the business unit.618

The Commission understands the 

general concerns of commenters 

regarding the costs of the requirements 

of § 1.11, along with the other new 

provisions being adopted herein by the 

Commission. The Commission did 

provide clarity in section II.B. as 

requested by FIA, which is intended to 

make clear the amount of flexibility 

available in complying with the 

separation of duties of risk management 

adopted in § 1.11. However, the 

Commission notes that such separation 

as a fixed requirement is particularly 

important to the protection of market 

participants, as the Commission 

continues to believe conflicts of interest 

to be a significant risk to the protection 

of customer funds during periods of 

financial or operational stress absent 

such clear reporting and accountability 

lines being established. 

Section 1.12 Maintenance of Minimum 

Financial Requirements by Futures 

Commission Merchants and Introducing 

Brokers 

The changes to § 1.12 alter the notice 

requirements so that it is no longer 

acceptable to give ‘‘telephonic notice to 

be confirmed, in writing, by facsimile.’’ 

Instead, all notices from FCMs must be 

made in writing and submitted through 

an electronic submission protocol in 

accordance with instructions issued or 

approved by the Commission (currently, 

WinJammer). 

In addition, the amendments to § 1.12 

require that if an FCM has a shortfall in 

net capital, but is unable to accurately 

compute its current financial condition, 

the FCM should not delay reporting the 

under capitalization to the Commission. 

The FCM must communicate each piece 

of information (knowledge of the 

shortfall and knowledge of the financial 

condition of the FCM) to the 

Commission as soon as it is known. 

The Commission proposed 

requirements in paragraphs (i), (j), (k) 

and (l) of § 1.12 to identify additional 

circumstances in which the FCM must 

provide immediate written notice to the 

Commission, relevant SRO, and to the 

SEC if the FCM is also a BD. Those 

circumstances were: (1) If an FCM 

discovers that any of the funds in 

segregated accounts are invested in 

investments not permitted under § 1.25; 

(2) if an FCM does not have sufficient 

funds in any of its segregated accounts 

to meet its targeted residual interest; (3) 

if the FCM experiences a material 

adverse impact to its creditworthiness 

or ability to fund its obligations; (4) 

whenever the FCM has a material 

change in operations including changes 

to senior management, lines of business, 

clearing arrangements, or credit 

arrangements that could have a negative 

impact on the FCM’s liquidity; and (5) 

if the FCM receives a notice, 

examination report, or any other 

correspondence from a DSRO, the SEC, 

or a securities industry SRO, the FCM 

must notify the Commission, and 

provide a copy of the communication as 

well as a copy of its response to the 

Commission. The Commission adopted 

the proposed additional notification 

requirements with some changes in 

response to commenters, narrowing the 

scope of certain of the new notification 

requirements. 

Last, the Commission adopted a new 

paragraph (n) of § 1.12 that requires that 

every notice or report filed with the 

Commission pursuant to § 1.12 include 

a discussion of how the reporting event 

originated and what steps have been, or 

are being taken, to address the event. 

Costs and Benefits 

The benefits of requiring that notice to 

the Commission be given in written 

form via specified forms of electronic 

communication not only adapt the rule 

to account for modern forms of 

communication, but also reduce the 

possibility of notification being delayed 

in reaching appropriate Commission 

staff. Ensuring that important regulatory 

notices go directly through electronic 

systems will result in appropriate staff 

being alerted as soon as possible and 

that there are no unnecessary delays to 

regulatory attention to the notice, which 

should benefit the protection of market 

participants and the financial integrity 

of futures markets, potentially 

significantly depending on the 

importance of the issue being addressed. 

For example, with respect to the 

adopted change in § 1.12(a)(2), if an 

FCM knows that it does not have 

adequate capital to meet the 

requirements of § 1.17 or other capital 

requirements, and is also not able to 

calculate or determine its financial 

condition, it is likely that the FCM is in 

a period of extraordinary stress. In these 

circumstances, time is of the essence for 

the solvency of the FCM and for the 

protection of its customers and 

counterparties. Therefore, it is 

important that the Commission, DSRO, 

and SEC (if the FCM is also a BD) be 

notified immediately so that they can 

begin assessing the FCM’s condition, 

and if necessary, make preparations to 

allow the transfer of the customers’ 

positions to another FCM in the event 

that the FCM currently holding those 

positions has insufficient regulatory 

capital. These preparations help to 

ensure that the customers’ funds are 

protected in the event of the FCM’s 

default, and that the positions of its 

customers are transferred expeditiously 

to another FCM where those customers 

may continue to hold and control those 

positions without interruption. 

The situations enumerated as adopted 

in § 1.12(i) and (j) are more specific 

indicators of potential or existing 

problems in the customer segregated 

funds accounts. Notifying the 

Commission in such circumstances 

enables it to monitor steps the FCM is 

taking to address a shortfall in targeted 

residual interest, or to direct the FCM as 

it takes steps to address improperly 

invested segregated funds. In either 

case, the Commission will be able to 

closely monitor the FCM’s actions, 

benefiting the continued protection of 

customer segregated funds. 

The Commission also asked questions 

in the NPRM regarding whether public 

availability of § 1.12 notices would 

enhance customer protection, but did 

not propose to make the notifications 

public as it did other additional 

disclosures relevant to customer funds, 

such as the various segregation 

schedules. Comments were received 

both in favor of and in opposition to 

public availability. One commenter, 

FHLB, posited that the costs of public 

availability would be negligible because 

the reporting would already be done 

and be done electronically, and the 

benefit substantial, so that the 

Commission should require public 

availability.619 However, other 

commenters, including RJ O’Brien and 

FIA, raised concerns about potential 

detrimental market impacts on FCMs 

from the public availability of § 1.12 

notices, at odds with FHLB’s assertion 

that FCMs could not be impacted by a 

‘‘run on the bank’’ scenario and that 

costs would be negligible, with RJ 

O’Brien believing a main risk of public 

availability being precisely a possibly 

disorderly and erroneous ‘‘run on the 

bank’’ scenario.620


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68587 

621TD Ameritrade Comment Letter at 3 (Feb. 15, 

2013). 

622See In the Matter of Jeannie Veraja-Snelling, 

CFTC Docket No. 13–29, available at http://

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

lrenforcementactions/documents/legalpleading/

enfverajaorder082613.pdf. 

The Commission, although in most 

circumstances believing there to be 

substantial benefits to greater 

availability of public information 

concerning segregated funds, declined 

to adopt any requirement for public 

availability of § 1.12 notices, weighing 

the comments received, and recognizing 

an additional benefit to maintaining 

equivalence of treatment with the SEC 

for joint registrants, whose similar 

notices are not made public. The 

Commission agrees that the risk of the 

possibility of a disorderly ‘‘run on the 

bank’’ scenario from § 1.12 notices being 

made immediately public would be too 

great relative to the benefit of such 

publication. The possibility of that 

result could exacerbate a potentially 

solvable problem at an FCM and not 

result in the best protection of market 

participants. The Commission is 

adopting other types of additional 

customer disclosures required of FCMs 

under § 1.55, which it believes are more 

beneficial to the protection of customers 

and appropriate to the disclosure 

purposes than the public availability of 

§ 1.12 notices. 

The situations enumerated that were 

proposed in § 1.12(k) through (l) are 

circumstances indicating that the FCM 

is undergoing changes that could 

indicate or lead to financial strain. 

Alerting the Commission and relevant 

SROs in such circumstances will benefit 

the protection of market participants by 

fostering their ability to monitor such 

FCMs more closely in order to ensure 

that any developing problems are 

identified quickly and addressed 

proactively by the FCM with the 

oversight of the Commission and the 

relevant SROs. In response to 

commenters who proposed alternatives, 

believing the proposals to be overly 

broad and difficult to clearly comply 

with, the Commission adopted the 

requirements but narrowed and 

provided additional detail for the 

circumstances under which such 

notices would be required. The 

Commission believes the requirements 

as adopted continue to provide the 

intended benefits to the protection of 

market participants. 

The proposed § 1.12(m) requirement 

that the FCM notify the Commission 

whenever it receives a notice or results 

of an examination from its DSRO, the 

SEC, or a securities-industry SRO, was 

intended to ensure that the Commission 

is aware of any significant 

developments affecting the FCM that 

have been observed or communicated 

by other regulatory bodies. Such 

communications could prompt the 

Commission to heighten its monitoring 

of specific FCMs, or create an 

opportunity for the Commission to work 

collaboratively and proactively with 

other regulators and self-regulatory 

organizations to address any concerns 

about how developments in the FCM’s 

business could affect customer funds. 

The Commission adopted § 1.12(m), 

with changes to address the requests of 

commenters that the scope of the 

requirement needed to be narrowed in 

order to provide the benefit intended 

without potentially overly burdensome 

costs. TD Ameritrade, in particular, 

commented that the volume of its filings 

with securities regulators would make 

the § 1.12(m) requirement both overly 

costly with respect to the intended 

benefit, and also not likely to result in 

the benefit as intended.621 The 

Commission believes the narrowed 

language adopted for § 1.12(m) should 

appropriately address the comment and 

provide the benefit intended without 

overly burdensome costs. 

The requirement that notifications to 

the Commission pursuant to § 1.12 

include a discussion of what caused the 

reporting event and what has been, or is 

being done about the event, would 

provide additional information to 

Commission staff that would help them 

quickly gauge the potential severity of 

related problems that have been or are 

developing at the reporting FCM, IB, or 

SRO. The benefit of requiring the 

additional information is that it will 

assist Commission or SRO staff in 

determining whether the situation is 

likely to be corrected quickly or to 

continue deteriorating. Commission 

staff may be best able to protect market 

participants with appropriate and 

timely intervention, with more 

information received initially regarding 

how a potential regulatory problem is 

being handled. 

The Commission made quantitative 

estimates of costs for the amendments to 

§ 1.12 in the NPRM, including the new 

notice requirements, the additional 

information required to be included in 

notices, and monitoring that would be 

necessary in order for FCMs to submit 

notices and received no comments 

specific to those estimates. The 

Commission estimated the costs of 

requiring electronic filing of notices for 

FCMs to be negligible as the filing 

system is already in place, and received 

no comment on that estimate. The 

Commission asked specific questions 

regarding costs for the additional notice 

requirements and did not receive any 

response to such questions from 

commenters. 

Section 1.16 Qualifications and 

Reports of Accountants 

The adopted changes to § 1.16 require 

that in order for an accountant to be 

qualified to conduct an audit of an FCM, 

the accountant would have to be 

registered with the PCAOB, and have 

undergone inspection by the PCAOB. In 

addition, the amendments also would 

require that the governing body of the 

FCM ensure that the accountant engaged 

for an audit is duly qualified, and 

specifies certain qualifications that must 

be considered when evaluating an 

accountant for such purpose. Finally, 

the amendments require the public 

accountant to state in the audit opinion 

that the audit was conducted in 

accordance with the auditing standards 

adopted by the PCAOB. 

Costs and Benefits 

The Commission adopted 

amendments to § 1.16 primarily to 

obtain the benefits of quality control 

and oversight of accountants and higher 

standards to apply to certified audits of 

FCMs, for the greater protection of 

market participants, and to increase the 

financial integrity of futures markets. In 

at least one circumstance of FCM 

failure, which was an impetus for the 

package of additional protections to 

customer funds contained in the 

Proposal, the experience and quality of 

the FCM auditor contributed to the 

audit failure and the inability of an 

audit to be an effective additional check 

on the compliance and financial 

integrity of FCMs and customer 

funds.622

The Commission also considers the 

newly adopted requirement for the 

governing body of the FCM to have 

accountability for assessing auditor 

qualifications to be an appropriate tool 

to ensure responsibility for a lack of 

conflicts, true independence and a 

quality audit by experienced auditors to 

be connected back to the FCM’s 

governing body and to be clearly 

understood to be a responsibility of that 

governing body. The Commission 

believes this enhanced accountability 

will benefit the protection of market 

participants and promote the financial 

integrity of futures markets by 

contributing to ensuring audit quality of 

FCMs. 

In the NPRM, the Commission did not 

quantitatively estimate costs associated 

with the amendments to § 1.16, 

however, it qualitatively considered the 


TKELleY on DSK3SPTVN1PROD with RULES2
68588 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

623AICPA Comment Letter at 3 (Feb. 11, 2013). 

624 Id. at 2–3. 

625See additional discussion at section II.E. 

above. 

626See http://pcaobus.org/Registration/rasr/

Pages/AnnualFees.aspx. 

627 Id. 

628Under the SEC proposal, a BD may impose the 

default haircuts of 15 percent of the market value 

of readily marketable commercial paper, convertible 

debt, and nonconvertible debt instruments or 100 

percent of the market value of nonmarketable 

commercial paper, convertible debt, and 

nonconvertible debt instruments. A BD, however, 

may impose lower haircut percentages for 

commercial paper, convertible debt, and 

nonconvertible debt instruments that are readily 

marketable, if the BD determines that the 

investments have only a minimal amount of credit 

risk pursuant to its written policies and procedures 

designed to assess the credit and liquidity risks 

applicable to a security. A BD that maintains 

written policies and procedures and determines 

that the credit risk of a security is minimal is 

permitted under the SEC proposal to apply the 

lesser haircut requirement currently specified in the 

SEC capital rule for commercial paper (i.e., between 

zero and 1⁄2; of 1 percent), nonconvertible debt (i.e., 

between 2 percent and 9 percent), and preferred 

stock (i.e., 10 percent). 

629 In computing its adjusted net capital, an FCM 

is required to reduce the value of proprietary 

futures and securities positions included in its 

liquid assets by certain prescribed amounts or 

percentages of the market value (otherwise known 

as ‘‘haircuts’’) to discount for potential adverse 

market movements in the securities. 

630The adoption of the Commission’s rule is 

conditional upon the SEC adoption as final its 

proposed rule to eliminate references to credit 

ratings. 

likelihood that PCAOB registered 

accountants would be expected, all else 

being equal, to have higher audit fees, 

thereby incurring additional costs. The 

Commission requested, but did not 

receive, quantitative information from 

commenters to better assess these costs. 

However, the Commission did receive 

several comments regarding the 

proposed amendments to § 1.16 and the 

Commission altered some of the 

proposed § 1.16 requirements in 

response to such comments, as 

discussed in section II.E. above. 

One commenter, the AICPA, proposed 

that the Commission consider a practice 

monitoring program, such as the AICPA 

peer review, as an alternative to the 

PCAOB inspection requirement.623 The 

AICPA stated it did not believe the 

PCAOB inspection requirement would 

have the benefit of enhancing audit 

engagements in situations where 

inspections are not required (i.e., nonissuer FCMs).624 The Commission does 

believe the PCAOB inspection 

requirement will enhance audit quality 

over time, particularly as inspections 

become required for the audits of SEC 

registered BDs. 

However, in considering the practical 

impediments to registering and 

becoming inspected by the PCAOB, the 

Commission made several clarifications 

in adopting the amendments.625 Most 

notably, the Commission extended the 

compliance date for inspection by the 

PCAOB until December 31, 2015. As 

noted above in section II.E., based on 

the Commission’s most recent review, 

currently there are only seven CPA 

firms (auditing fifteen FCMs) that would 

not meet this requirement. Six of those 

firms are registered with the PCAOB as 

and indicate that they will be subject to 

the PCAOB BD inspection program and 

will presumably receive a PCAOB 

inspection in the future. Therefore, the 

Commission is adopting the inspection 

requirement as proposed but has 

extended the compliance date to 

December 31, 2015 in order to provide 

additional time for accountants to be 

subject to PCAOB inspections. 

The Commission received no 

comments addressing costs associated 

with an anticipated increase in audit 

fees for PCAOB registration. Nor did the 

Commission receive comment as to any 

increased costs associated with 

becoming PCAOB registered. 

Nonetheless, the Commission believes 

that currently only one FCM audit firm 

is not PCAOB registered, and would 

therefore be required to register to 

continue to conduct audits of FCMs. 

Currently, a public accountant that 

audits less than 49 public issuers is 

required to pay the PCAOB a 

registration fee of $500.626 Annual fees 

for public accountants with less 200 

issuers also are $500 per year.627

Therefore, any costs associated with 

registering the one and only existing 

accounting firm which would not be in 

compliance, or any firm in the future 

that will need to register with the 

PCAOB, will be nominal. 

Section 1.17 Minimum Financial 

Requirements for Futures Commission 

Merchants and Introducing Brokers 

Section 4f(b) of the Act provides that 

no person may be registered as an FCM 

unless such person meets the minimum 

financial requirements that the 

Commission has established by 

regulation. The Commission’s minimum 

capital requirements for FCMs are set 

forth in § 1.17 which, among other 

things, provides that an FCM must cease 

operating as an FCM and transfer its 

customers’ positions to another FCM if 

the FCM is not in compliance with the 

minimum capital requirements, or is 

unable to demonstrate its compliance 

with the minimum capital requirements. 

The Commission proposed to amend 

§ 1.17 by adding a new provision that 

will authorize the Commission to 

require an FCM to cease operating as an 

FCM and transfer its customer accounts 

if the FCM is not able to certify and 

demonstrate sufficient access to 

liquidity to continue operating as a 

going concern. Additionally, FCMs that 

are also registered BDs will be allowed 

to use the SEC’s BD approach 628 to 

evaluate the credit risk of securities that 

the FCM invests in and assign smaller 

haircuts 629 to those that are deemed to 

be a low credit risk.630 The 

Commission’s amendment to 

§ 1.17(c)(5)(v) allows FCMs that are not 

dual registrants to use the same 

approach. Finally, the Commission has 

adopted amendments revising the 

period of time that an FCM is permitted 

to wait before taking an undermargined 

capital charge from three business days 

after the call is issued on a customer’s 

account to one business day, and from 

two business days after the call is issued 

on a noncustomer or omnibus account 

to one business day. 

Costs and Benefits 

In the NPRM, the Commission 

provided a detailed discussion of the 

benefits the changes to § 1.17 would 

provide. Regarding the potential transfer 

of customer accounts if the FCM was 

unable to certify and demonstrate 

sufficient access to liquidity to continue 

operating as a going concern, several 

commentators stated that the 

Commission should not adopt the rule 

before clearly articulated objective 

standards were established and exigent 

circumstances that would give the 

Commission authority to require an 

FCM to cease operating were defined. 

The Commission understands the 

concerns of commenters regarding the 

process by which the Commission, or 

the Director of the Division of Swap 

Dealer and Intermediary Oversight 

acting pursuant to delegated authority 

under § 140.91(6), could require 

immediate cessation of business as an 

FCM and the transfer of customer 

accounts. 

However, that same authority 

currently exists should a firm fail to 

meet its minimum capital requirement. 

The Commission believes the ability to 

certify, and if requested, demonstrate 

with verifiable evidence, sufficient 

liquidity to operate as a going concern 

to meet immediate financial obligations, 

is a minimum financial requirement 

necessary to ensure an FCM will 

continue to meet its obligations as a 

registrant under the Act. Moreover, 

because liquidity difficulties will not be 

made transparent to the FCM’s 

customers pursuant to 1.12, it is 

especially important that the 

Commission be permitted to act. 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68589 

631CFA Comment Letter at 4–5 (Feb. 13, 2013). 632Commission Regulations 1.17(c)(5)(v) and 

1.32(b) both incorporate 17 CFR 240.15c3– 

1(c)(2)(vi) by reference. 633See 43 FR 15072, 15077 (Apr. 10, 1978) and 

43 FR 39956, 39963 (Sept. 8, 1978). 634See discussion adopting § 1.17(c)(5)(vi) for 

options haircuts, with respect to the applicability of 

provisions incorporating by reference and referring 

to the rules of the SEC for securities broker dealers 

also registered as futures commission merchants. 43 

FR 39956, 39964. 

635FIA Comment Letter at 26 (Feb. 15, 2013). 

636 Id. 

637RJ O’Brien Comment Letter at 3–4 (Feb. 15, 

2013). 

638 Id. 

639 Id. 

640 Id. 

641NPPC Comment Letter at 2 (Feb. 14, 2013); 

NGFA Comment Letter at 3 (Feb. 15, 2013); NEFI/ 

PMAA Comment Letter at 3 (Jan. 14, 2013); AIM 

Comment Letter at 15 (Jan. 24, 2013); Amarillo 

Comment Letter at 1 (Feb. 14, 2013); NCFC 

Comment Letter at 1 (Feb. 15, 2013); NFA Comment 

Letter at 12–13 (Feb. 15, 2013); FCStone Comment 

Letter at 3 (Feb. 15, 2013); Advantage Comment 

Letter at 1–2 (Feb. 15, 2013); AFBF Comment Letter 

at 2 (Feb. 15, 2013); CCC Comment Letter at 2 (Feb. 

15, 2013); CME Comment Letter at 5 (Feb. 15, 2013); 

AIM resubmitted the comment letters of Premier 

Metal Services, NEFI/PMAA, and the ISRI and 

indicated its support for the recommendations 

therein (Jan. 14, 2013). 

642 Id. 

643 Id. 

644CCC Comment Letter at 2–3 (Feb. 15, 2013). 

645 Id. 

Regarding the proposed amendment 

to § 1.17(c)(5)(v) revising the capital 

charge (or haircut) procedures for FCMs, 

the Commission notes that it only 

impacts FCMs that are not dual 

registrants. Because FCMs that are not 

dual registrants do not typically invest 

in securities that would be subject to 

reduced haircuts under the SEC’s 

proposed rules, the change should not 

have a significant impact on the capital 

requirements for such FCMs. The CFA 

believes that capital models should be 

established by the relevant regulatory 

agencies for use by FCMs or BDs and 

has serious concerns that internal 

models used for calculating minimum 

capital requirements are prone to failure 

in crisis.631 The Commission 

appreciates the CFA’s concerns, 

however, the Commission notes that for 

securities positions, § 1.17 incorporates 

by reference the securities haircuts that 

a BD is required to take in computing 

its net capital under the SEC’s 

regulations.632 This is a result of the 

Commission’s determination to defer to 

the SEC in areas of its expertise, 

specifically with respect to market risk 

and appropriate haircuts on securities 

positions.633 For FCMs that are duallyregistered as BDs, any changes adopted 

by the SEC to these securities haircuts 

will be applicable under § 1.17(c)(5)(v) 

unless the Commission specifically 

provides an alternate treatment for 

FCMs.634 The Commission’s 

amendment merely allows FCMs that 

are not dual registrants to follow the 

same rules as those that are dual 

registrants. This change would 

harmonize the regulation of FCMs with 

respect to minimal financial 

requirements and would place FCMs 

that are not dual registrants on a more 

level playing field with those that are 

dual registrants, which improves the 

competition between FCMs. The FCMs 

that use their own internal models will 

also be subject to review by regulators, 

including the SEC, SROs, or securities 

SROs. 

Regulation 1.17(c)(5)(viii) required an 

FCM to take a capital charge if a 

customer account is undermargined for 

three business days after the margin call 

is issued. Likewise, § 1.17(c)(5)(ix) 

required an FCM to take a capital charge 

for noncustomer and omnibus accounts 

that are undermargined for two business 

days after the margin call is issued. 

These timeframes were appropriate 

when the capital rules were adopted in 

the 1970s, when the use of checks and 

the mail system were more prevalent for 

depositing margin with an FCM. They 

are obsolete, however, in today’s 

markets with the use of wire transfers to 

meet margin obligations. Therefore, the 

Commission has amended 

§ 1.17(c)(5)(viii) and (ix) to require an 

FCM to take capital charges for 

undermargined customer, noncustomer, 

and omnibus accounts that are 

undermargined for more than one 

business day after a margin call is 

issued. 

FIA stated that while institutional and 

many commercial market participants 

generally meet margin calls by means of 

wire transfers, the proposal creates 

operational problems because it does 

not consider delays arising from 

accounts located in other time zones 

that cannot settle same day, or ACH 

settlements, or the requirement to settle 

or convert certain non-U.S. dollar 

currencies.635 FIA also stated that a 

substantial number of customers that do 

not have the resources of large 

institutional customers (in particular 

members of the agricultural community) 

depend on financing from banks to fund 

margin requirements, which may 

require more than one day to obtain.636

RJ O’Brien objected to the proposed 

amendment because many customers 

that use the markets to hedge 

commercial risk still meet margin calls 

by check or ACH because of the 

impracticality and costliness of wire 

transfers to their circumstances.637 RJ 

O’Brien stated that in many cases, the 

costs of a wire transfer would exceed 

the transaction costs paid by the client 

to its FCMs, and additionally, that some 

customers in the farming and ranching 

community finance their margin calls, 

which can require additional time to 

arrange for delivery of margin call funds 

due to routine banking procedures.638 RJ 

O’Brien also stated that if the proposal 

is adopted, FCMs that service noninstitutional clients will struggle to 

remain competitive and the proposal 

may result in fewer clearing FCMs and 

greater systemic risk to the 

marketplace.639 RJ O’Brien further 

stated that a loss of such smaller FCMs 

will result in fewer options available to 

these ranchers, farmers and other 

commercial market participants that 

wish to hedge their commercial risks.640

Other commenters expressed the 

general concern that the proposal will 

harm the customers it is meant to 

protect by requiring more capital to be 

kept in customer accounts, possibly 

forcing users to hold funds at FCMs well 

in excess of their margin 

requirements.641 Those commenters 

argued that such pre-funding could add 

significant financial burdens to trading 

as customers find themselves having to 

provide excess funds to their brokers 

which could increase their risk with 

regard to the magnitude of funds 

potentially at risk in the event of future 

FCM insolvencies.642 The commenters 

generally expressed significant concerns 

that reducing margin calls to one day 

will harm many customers as: (1) Many 

small businesses, farmers, cattle 

producers and feedlot operators 

routinely pay by check and forcing them 

to use wire transfers increases their cost 

of doing business; (2) clients who make 

margin calls by ACH payments instead 

of wire transfers because ACH is 

cheaper, would no longer be able to do 

so because there is a one-day lag in 

availability of funds; and (3) foreign 

customers would not be able to make 

margin calls due to time zone 

differences, the time required to convert 

certain non-USD currencies, and for 

whom banking holidays fall on different 

days.643

The CCC stated that the proposed 

amendment to the capital rule places an 

undue burden on the FCMs, which will 

likely result in FCMs demanding that 

customers prefund trades to prevent 

market calls and potential capital 

charges.644 The CCC also stated that the 

proposal could result in forced 

liquidations of customer positions to 

ensure that the FCM does not incur a 

capital charge.645

FIA and RJ O’Brien suggested 

alternatives to the Commission’s 


TKELleY on DSK3SPTVN1PROD with RULES2
68590 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

646FIA Comment Letter at 27 (Feb. 27, 2013); RJ 

O’Brien Comment Letter at 4 (Feb. 15, 2013). 

647FIA Comment Letter at 27 (Feb. 15, 2013). 

648RJ O’Brien Comment Letter at 4 (Feb. 15, 

2013). 

649NFA Comment Letter at 13 (Feb. 15, 2013). 

proposal. Both FIA and RJ O’Brien 

offered that an FCM be required to take 

a capital charge for any customer margin 

deficit exceeding $500,000 that is 

outstanding for more than one business 

day.646 FIA further suggested that if the 

customer’s margin deficit is $500,000 or 

less, the FCM should take a capital 

charge if the margin call is outstanding 

two business days or more after the 

margin call is issued.647 RJ O’Brien also 

stated that the Commission should 

provide at least a one year period of 

time for any changes to the timeframe 

for taking a capital charge for 

undermargined accounts to be effective, 

and that the Commission should require 

futures exchanges to increase their 

margin requirements to 135% of 

maintenance margin to reduce the 

number and frequency of margin 

calls.648

The NFA and FIA stated that if the 

Commission adopts the amendments 

regarding residual interest as proposed, 

then the Commission should consider 

whether a capital charge for 

undermargined accounts remains 

necessary at all because the FCM will 

have already accounted for an 

undermargined account by maintaining 

a residual interest sufficient at all times 

to exceed the sum of all margin deficits; 

hence the capital charges related to an 

undermargined account appear to 

impose an additional financial burden 

without any necessary financial 

protection.649

The Commission has considered the 

comments and is adopting the 

amendments to § 1.17(c)(5)(vii) and (ix) 

as proposed. The revised regulation will 

provide the intended benefits to 

customers and the marketplace. 

Commenters have stated that the 

proposal would increase customer costs 

by requiring the prefunding of margin 

calls, which will also potentially expose 

more customer funds to FCM control. 

Commenters, however, did not provide 

any quantitative estimates or provide 

any substantive analysis in support of 

their statements. In addition, the 

Commission notes that much of this 

argument is based on the assumption 

that FCMs would not be able to support 

the additional capital charge through 

their existing excess capital. In addition, 

many FCMs utilize a variety of funding 

sources from which additional capital 

may be obtained, if required, and 

therefore costs could vary significantly 

from one FCM to another FCM. Without 

quantitative estimates as to how much 

excess capital FCMs typically maintain, 

would be required to maintain, or the 

difference of these costs in relation to 

aged margin calls between one and three 

days, the Commission cannot quantify 

any increase in costs associated with 

this amendment. 

Moreover, the Commission believes 

that the benefits of the final regulation 

will enhance the protection of the 

markets and customers. The 

Commission notes that the timely 

collection of margin is a critical 

component of an FCM’s risk 

management program and is intended to 

ensure that an FCM holds sufficient 

funds deposited by account owners to 

meet potential obligations to a DCO. As 

guarantor of the financial performance 

of the customer accounts that it carries, 

the FCM is financially responsible if the 

owner of an account cannot meet its 

margin obligations to the FCM and 

ultimately to a DCO. 

Regulation 39.13(g)(2) requires that a 

sufficient amount of funds is 

maintained in an account to cover 99 

percent of the observed market moves 

over a specified period of time. 

Customers that maintain fully margined 

accounts are exposed to greater risk to 

the safety of their funds if some of the 

accounts of their fellow customers are 

undermargined. The intent of the 

proposed amendment is to encourage an 

FCM to require customers to promptly 

fund margin deficiencies, or to reserve 

a sufficient amount of capital to cover 

the amount of the deficiencies. As a 

consequence, the risk that a debit 

balance could develop in a customer’s 

account due to tardy margin call 

payments would be reduced, and the 

amount of residual interest that the FCM 

would need to maintain in the 

segregated accounts in order to protect 

against the possibility that such debit 

balances could cause them to have less 

that is required in their segregated 

accounts would also be reduced. This 

provides benefits for the FCM by 

reducing the amount of capital that it 

must contribute to the customer 

segregated accounts. Customers also 

benefit by FCMs requiring more prompt 

payments on undermargined accounts, 

as it is less likely that FCMs would close 

out the positions of customers failing to 

meet margin obligations more quickly, 

reducing the potential losses that would 

be passed on to non-defaulting 

customers in the event of a default of a 

customer and a default of a clearing 

member. 

Section 1.20 Futures Customer Funds 

To Be Segregated and Separately 

Accounted for 

The amendments to § 1.20 reorganize 

the section and alter the substance of 

the section’s requirements in certain 

places. 

The final § 1.20 includes Appendix A 

and Appendix B, which set forth the 

Template Letters for the written 

acknowledgments that FCMs and DCOs, 

respectively, must obtain from any 

depository with which they open an 

account to hold futures customer funds. 

The rule requires FCMs and DCOs to 

use the applicable Template Letter to 

obtain the required acknowledgment 

before depositing any funds with a 

depository. Regulation 1.20 also 

requires FCMs, DCOs, and depositories 

to file the written acknowledgment with 

the Commission within three business 

days of executing the letter, and to 

update the written acknowledgment 

within 120 days of any changes to the 

business name, address, or account 

numbers referenced in the letter. 

The Commission received 15 

comment letters related to the proposed 

acknowledgment letter requirements. 

Some commenters addressed the costs 

and benefits associated with these 

requirements; none of them, however, 

provided any data to aid the 

Commission in estimating costs. In the 

sections that follow, the Commission 

considers the benefits and costs arising 

from the adoption of the 

acknowledgment letter requirements. 

The Commission also discusses the 

corresponding comments accordingly. 

Benefits 

Regulation 1.20(d)(2) requires an FCM 

to use the Template Letter in Appendix 

A to obtain a written acknowledgment 

from any depository that holds futures 

customer funds. A depository accepting 

customer funds is required to: (1) 

Acknowledge that the funds are 

customer segregated funds subject to 

section 4d of the Act and the 

Commission’s regulations thereunder; 

(2) acknowledge and agree that the 

funds cannot be used to secure any 

obligation of the FCM to the depository 

or used by the FCM to secure or obtain 

credit from the depository; (3) agree to 

reply promptly and directly to any 

request from the Commission or the 

FCM’s DSRO for confirmation of 

account balances or provision of any 

other information regarding or related to 

an account; (4) agree that the depository 

will allow the Commission and the 

FCM’s DSRO to examine the accounts at 

any reasonable time; and (5) 

acknowledge and agree that the 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68591 

650 Depository Bank Group Comment Letter at 2 

(Feb.15, 2013). 

651Eurex Comment Letter at 1 (Aug. 1, 2013). 

652CME Comment Letter at 7 (Feb. 15, 2013). 

653MGEX Comment Letter at 3 (Feb. 18, 2013) 

and RCG Comment Letter at 7 (Feb. 12, 2013). 

654This estimate assumed 10–40 hours of time 

from a compliance attorney and 10–20 hours from 

an office services supervisor. The average 

compensation for a compliance attorney is $85.35/ 

hour [$131,303 per year/(2000 hours per year)*1.3 

is $85.35 per hour]; $85.35*10 = $853.47 and 

$85.35*40 = $3,413.88. The average compensation 

for an office services supervisor is $40.15/hour 

[$61,776.00 per year/(2000 hours per year)*1.3 is 

$40.15 per hour]; $40.15*10 = $401.54 and 

$40.15*20 = $803.09. These figures were taken from 

the 2011 SIFMA Report on Management and 

Professional Earnings in the Securities Industry. 

655Total figures are taken from previous 

calculation. ($1,255.01+$4,216.97)/2 = $2,735.99; 

$2,735.99*1 = $2,735.99 and $2,735.99*30 = 

$82,079.69. 

656This estimate assumed one compliance 

attorney working full-time for 3–6 months, 50–200 

hours from an office services supervisor, 80–160 

hours of time from a risk management specialist, 

and 40–60 hours from an intermediate accountant. 

The average compensation for a compliance 

attorney is $85.35/hour [$131,303 per year/(2000 

hours per year)*1.3 is $85.35 per hour]; $85.35 *40 

hours/week*4 weeks/month*3 months = $40,966.54 

and $85.35 *40 hours/week*4 weeks/month*6 

months = $81,933.07. The average compensation for 

an office services supervisor is $40.15/hour 

[$61,776.00 per year/(2000 hours per year)*1.3 is 

$40.15 per hour]; $40.15*50 = $2,007.72 and 

$40.15*200 = $8,030.88. The average compensation 

for a risk management specialist is $65.33/hour 

[$100,500 per year/(2000 hours per year)*1.3 is 

$65.33 per hour]; $65.33*80 = $5,226.00 and 

$268.84*160 = $10,452.00. The average 

compensation for an intermediate accountant is 

$34.11/hour [$52,484.00 per year/(2000 hours per 

year)*1.3 is $34.11 per hour]; $34.11*40 = 

$1,364.58 and $34.11*60 = $2,046.88. These figures 

were taken from the 2011 SIFMA Report on 

Management and Professional Earnings in the 

Securities Industry. 

657This assumed 20–50 hours per year from an 

office manager for operational costs. The average 

compensation for an office manager is $55.82/hour 

[$85,875 per year/(2000 hours per year)*1.3 = 

$55.82/hour]; $55.82*20 = $1,116.38 and $55.82*50 

= $2,790.94. This figure was taken from the 2011 

Continued 

depository will provide the Commission 

with technological connectivity 

necessary to permit read-only electronic 

access to the accounts. 

Regulation 1.20(g)(4) requires a DCO 

to use the Template Letter in Appendix 

B to obtain a written acknowledgment 

from any depository that holds futures 

customer funds. The DCO Template 

Letter is largely the same as the FCM 

Template Letter except that: (1) It does 

not require read-only electronic access; 

and (2) it does not require the 

depository to agree to Commission or 

DSRO examination of customer 

accounts. 

These acknowledgments and 

commitments would result in important 

benefits. First, by acknowledging that 

the funds are subject to the Act and 

CFTC regulations, the depository 

recognizes that it must comply with 

relevant statutory and regulatory 

requirements related to its handling of 

those funds. Second, the depository 

acknowledges that neither the FCM (or 

DCO) nor the depository is permitted to 

use customer funds as belonging to any 

person other than the customer which 

deposited them, i.e., an FCM or DCO 

cannot use customer funds to secure its 

obligations to the depository. Third, the 

Template Letter for FCMs constitutes 

written permission by the depository to 

allow Commission or DSRO officials to 

examine the FCM’s customer accounts 

at any reasonable time and to provide 

the Commission with read-only 

electronic access to those accounts. As 

a consequence, the Template Letters 

would enable both the Commission and 

the DSRO to monitor actual balances at 

the depository more readily. This would 

help to ensure that any discrepancy 

between balances reported by the FCM 

on its daily customer segregation 

account reports and balances actually 

held by the depository would be 

identified quickly by the Commission or 

the DSRO. Moreover, with the explicit 

agreement from the depository 

permitting the examination of customer 

segregated accounts, both the 

Commission and DSRO would be better 

able to move quickly to resolve a 

problem. 

By requiring FCMs and DCOs to 

submit copies of the executed Template 

Letters to both the Commission and, as 

applicable, an FCM’s DSRO, the 

Commission and DSROs would be better 

able to act quickly to protect customer 

funds because the necessary legal 

permissions will be in place. In 

addition, the Template Letters provide 

account information such as account 

numbers, essential for management of 

an FCM or DCO bankruptcy situation. 

Also, requiring that the Template Letters 

be retained for five years past the time 

when customer segregated funds are no 

longer held by a depository helps ensure 

that proper documentation of all 

relevant acknowledgments and 

commitments is in the possession of 

each party that relies upon the existence 

of those commitments. 

Commenters were generally 

supportive of adopting the Template 

Letters. The Depository Bank Group 

stated that ‘‘the acknowledgment letters 

will help to facilitate a more efficient 

process for the establishment and 

maintenance of customer segregated 

accounts by FCMs and DCOs and serve 

to clarify the rights and responsibilities 

of depository institutions holding 

customer segregated funds.’’ 650 Eurex 

expressed their appreciation for ‘‘the 

potential convenience and increases in 

certainty and transparency that such a 

standardized approach would likely 

afford.’’ 651 CME stated its support for 

‘‘the Commission’s efforts to strengthen 

and standardize the form of 

acknowledgment letters.’’ 652

Costs 

To date, FCMs and DCOs have 

negotiated each acknowledgment letter 

with depositories; accordingly, the use 

of standardized non-negotiable language 

in the Template Letter may result in cost 

savings. However, FCMs and DCOs are 

likely to bear some initial and ongoing 

costs as a result of the requirement to 

use the Template Letters. Regarding 

initial costs, some depositories may not 

be willing to sign the Template Letter, 

which would require the FCM or DCO 

to move any customer funds held by 

that depository to a different depository, 

creating certain due diligence and 

operational costs. These cost concerns 

were discussed in the comment letters 

from MGEX and RCG.653

In the NPRM, the Commission 

estimated that the cost of obtaining a 

new acknowledgment letter from each 

existing depository is between $1,300 

and $4,200.654 The Commission 

estimated that FCMs and DCOs would 

have approximately 1 to 30 depositories 

each, from which they would need to 

obtain a new acknowledgment letter. 

Therefore, the Commission estimated 

that the cost of obtaining new 

acknowledgment letters from existing 

depositories would be between $2,700 

and $82,000 per FCM or DCO.655 In 

addition, the Commission estimated that 

the process of identifying new potential 

depositories, conducting necessary due 

diligence, formalizing necessary 

agreements, opening accounts, and 

transferring funds to a new depository 

would likely take between three to six 

months and would likely require 

support from compliance attorneys, as 

well as operations, risk management, 

and administrative personnel. In the 

NPRM, the Commission estimated that 

the cost of moving accounts from an 

existing depository that is not willing to 

sign the letter would be between 

$50,000 and $102,000.656

There may be additional operational 

costs associated with any changes that 

would necessitate updating the letter. 

The per-entity cost of obtaining the 

letter from new depositories is likely to 

be the same as it would be for obtaining 

the letter from existing depositories (i.e., 

$1,300 and $4,200). In the NPRM, the 

Commission estimated that the cost 

associated with changes that would 

require the acknowledgment letter to be 

updated would be between $1,100 and 

$2,800 per year.657


TKELleY on DSK3SPTVN1PROD with RULES2
68592 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

SIFMA Report on Management and Professional 

Earnings in the Securities Industry. 

658RCG Comment Letter at 8 (Feb. 12, 2013). 

659MGEX Comment Letter at 3 (Feb.18. 2013). 

660 Depository Bank Group Comment Letter at 2 

(Feb. 15, 2013), FIA Comment Letter at 40 (Feb. 15, 

2013) and Schwartz & Ballen Comment Letter at 6 

(Feb. 15, 2013). 

661 ICI Comment Letter at 5 (Jan. 14, 2013). 

Although ICI’s comments focused on MMMFs, 

some of the costs they discussed apply generally to 

read-only access requirements. 

662The Commission intends to rely primarily on 

other means of obtaining account information from 

depositories, and would activate the read-only 

electronic access only in situations where it was 

deemed necessary. The Commission will generally 

seek to obtain account information from the NFA 

and CME automated daily segregation confirmation 

system and/or from depositories directly prior to 

requesting a depository to activate electronic access. 

663 DCOs hold omnibus customer segregated 

accounts that do not reflect funds attributable to 

individual clearing members or customers. 

664FCStone Comment Letter at (Feb. 15, 2013). 

665 ICI Comment Letter at 5 (Jan. 14, 2013). 

666See note 395 above regarding the operation of 

the requirement in § 1.22(c)(3) where an FCM is 

subject to multiple Residual Interest Deadlines. 

RCG discussed the need to develop 

policies and procedures as well as train 

personnel.658 These costs were 

considered in the NPRM and are 

discussed above. MGEX asserted, based 

on the Commission’s estimates in the 

NPRM, that the costs of using the 

Template Letters would outweigh the 

benefits of using them. It did not, 

however, provide further analysis as to 

the basis for its conclusion.659 In the 

NPRM, the Commission quantified some 

of the potential costs and only discussed 

the benefits qualitatively. Consequently, 

there is no direct comparison between 

the costs and benefits based on the 

Commission’s estimates in the NPRM. 

The Depository Bank Group, FIA, and 

Schwartz & Ballen expressed concern 

that the Template Letters’ standard of 

liability provision would shift 

significant amount of risk onto 

depository institutions and would likely 

increase the costs incurred in both 

monitoring for violations and 

maintaining customer segregated 

accounts.660 As discussed in the 

preamble, the Commission revised the 

language in the Template Letters to 

address these concerns. FCStone and 

Schwartz & Ballen commented that the 

proposed restriction on depositories 

placing liens on customer accounts 

when there is an overdraft in an account 

would likely lead to losses to 

depositories. As discussed in the 

preamble, the Template Letter clarifies 

that liens on accounts are permitted 

only in certain limited circumstances 

and that a depository may not take a 

lien against a customer account to cover 

overdrafts. The final Template Letters 

do not deny a depository the right to 

recover funds advanced in the form of 

cash transfers, lines of credit, 

repurchase agreements or other similar 

liquidity arrangements made in lieu of 

liquidating non-cash assets held in an 

account or in lieu of converting cash in 

one currency to cash in a different 

currency. 

The requirement, embedded in the 

FCM Template Letter, that depositories 

provide the Commission with read-only 

electronic access to customer accounts 

would create certain costs for 

depositories that would likely be passed 

onto FCMs. ICI noted that the read-only 

access requirement would result in a 

process that might be burdensome.661

The Commission does not have 

adequate data to estimate the cost for 

establishing such a system and no data 

was provided by commenters to aid the 

Commission in estimating such costs.662

The Commission also has decided not to 

adopt the read-only electronic access 

requirement for DCOs.663

FCStone asserted that the ultimate 

costs of requiring Template Letters will 

be borne by customers of FCMs.664 ICI 

noted that the costs with respect to a 

MMMF Template Letter requirements 

would be borne by all investors in a 

MMMF and not just by the FCMs.665

The Commission, however, is unable to 

forecast how these costs will ultimately 

be allocated. 

Section 1.22 Use of Customer Funds 

Restricted 

Under current regulations, an FCM is 

not permitted to use one customer’s 

funds to purchase, margin, secure, or 

settle positions for another customer. 

However, prior regulations did not 

specify how FCMs should demonstrate 

compliance with this requirement. 

Revised regulation 1.22(c) provides such 

a mechanism. 

Section 1.22(c)(1) defines the 

undermargined amount for an account. 

Sections 1.22(c)(2) and (c)(4) require 

FCMs to compute, based on the 

information available to the FCM as of 

the close of each business day, (i) the 

undermargined amounts, based on the 

clearing initial margin that will be 

required to be maintained by that FCM 

for its futures customers, at each DCO of 

which the FCM is a member or FCM 

through which the FCM clears, at the 

point of the daily settlement (as 

described in 39.14) that will complete 

during the following business day for 

each such DCO (or FCM through which 

the FCM clears) less (ii) any debit 

balances referred to in 1.20(i)(4) 

included in such undermargined 

amounts. 

Moreover, under section 1.22(c)(3), an 

FCM is required to, prior to the Residual 

Interest Deadline defined in section 

1.22(c)(5), have residual interest in the 

segregated account in an amount that is 

at least equal to the computation set 

forth in section 1.22(c)(2).666 The 

amount of residual interest that an FCM 

must maintain may be reduced to 

account for payments received from or 

on behalf of undermargined futures 

customers between the close of the 

previous business day and the Residual 

Interest Deadline. 

Section 1.22(c)(5) defines the Residual 

Interest Deadline. During an initial 

phase-in period, the Residual Interest 

Deadline is 6:00 p.m. Eastern Time on 

the date of the settlement referenced in 

(c)(2)(i) or (c)(4). On December 31, 2018, 

which is the expiration of the phase-in 

period, the Residual Interest Deadline 

shifts to the time of the settlement 

referenced in (c)(2)(i) or (c)(4). In the 

interim, paragraph 1.22(c)(5)(iii) 

requires Commission staff to solicit 

further public comment and conduct 

further analysis in a report (the 

‘‘Report’’) for publication in the Federal 

Register regarding the practicability of 

moving the Residual Interest Deadline 

from 6:00 p.m. Eastern Time on the date 

of settlement to the time of settlement 

(or to some other time of day). The 

Report will discuss whether and on 

what schedule it would be feasible to 

move the Residual Interest Deadline, 

and the cost and benefits of such 

potential requirements. In addition, staff 

is instructed to, using the Commission’s 

Web site, solicit public comment and 

conduct a public roundtable regarding 

specific issues to be covered by the 

Report. Paragraph 1.22(c)(5)(iii)(B) 

provides that the Commission may, 

taking into account the Report, (1) 

terminate the phase-in period, in which 

case the phase-in shall end as of a date 

established by Commission order 

published in the Federal Register, 

which date shall be no less than one 

year after the date of such Commission 

order, or (2) determine that it is 

necessary and appropriate in the public 

interest to propose through rulemaking 

a different Residual Interest Deadline. In 

that event, the Commission shall 

establish by order published in the 

Federal Register, a phase-in schedule. 

Costs and Benefits 

The requirement in § 1.22(c) benefits 

customers whose accounts are not 

undermargined by reducing the risk that 

their segregated funds would be used to 

cover a shortfall in customer funds due 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68593 

667See discussion of double defaults in sections 

I.D. and II.G.9. above. 

668See the discussion in section II.G.9. above. 

669See the discussion in section II.G.9. above. 

670 In the absence of information regarding what 

specific changes various market participants might 

make to their systems and operations in order to 

expedite margin payments, it is not possible for the 

Commission to provide an estimate of these costs. 

671Commenters did not provide, and the 

Commission does not have, data characterizing the 

range of investment strategies used by FCM 

customers, its impact on their cost of capital for 

additional margin, the extent to which customers 

will not be able to develop the ability to make more 

rapid margin payments, or the extent of the margin 

requirements for those customers. In the absence of 

this information it is not possible at this time to 

estimate the additional cost associated with prefunding requirements that some customers may 

bear. These are subjects that may be addressed in 

the Report. 

to a ‘‘double default.’’ 667 When 

combined with the reporting 

requirements in §§ 1.10, 1.32, 22.2, and 

30.7, the requirement in § 1.22(c) will 

further provide the Commission and the 

public with information that should 

allow them to determine whether FCMs 

are using one customer’s funds to 

purchase, margin, secure or settle 

positions for another customer.668

It would be difficult to quantify these 

benefits reliably. An estimate would 

depend on the expected value of losses 

due to a double default (i.e., a default of 

both a customer and the FCM) which, in 

turn, depend on the probability of a 

double default and the magnitude of 

deficits that would exist in customer 

accounts compared to the amount of 

residual interest at the time of the 

double default. Given the small number 

of historical examples, it is unlikely that 

any estimate of probability would be 

reliable. Moreover, the magnitude of the 

impact of a loss of customer funds is 

dependent on an estimate of the amount 

of funds lost, a number that is also 

difficult to predict with any reliability, 

as well as the loss of market confidence 

(which may be even more important), 

which is also difficult to estimate 

reliably. 

As discussed above, the Commission 

has revised the residual interest 

requirements in the final rule by 

adopting a point in time approach.669

As a consequence, once the requirement 

in § 1.22(c) is phased in, FCMs will have 

several hours between the close of 

business on a particular day (the point 

in time upon which the calculation is 

based), and the time of day when the 

requisite amount of residual interest 

must be held in segregation (that is, the 

time of the daily settlement). Moreover, 

during the phase-in period described in 

§ 1.22(c)(5), FCMs will initially have a 

longer period (until 6:00 p.m. Eastern 

Time on the following business day) to 

ensure that the requisite amount of 

residual interest is held in segregation. 

These adjustments to the final rule 

will avoid the need for FCMs 

continuously to monitor whether they 

are maintaining residual interest in their 

segregated customer accounts that is 

sufficient to cover the sum of the 

undermargined amounts in customers’ 

accounts. Instead, FCMs will have to 

ensure that they are able to cover the 

sum of the undermargined amounts in 

customers’ accounts by the Residual 

Interest Deadline. This should 

significantly reduce the amount of 

residual interest that an FCM must 

maintain in segregated accounts on an 

ongoing basis. In the absence of 

information regarding what specific 

changes various market participants 

might make to their systems and 

operations in order to expedite margin 

payments, it is not possible for the 

Commission to provide an estimate of 

the costs of such technical changes. 

Moreover, the FCM’s funding 

requirement will be reduced to the 

extent that customers are able to reduce 

the undermargined amount in their 

accounts prior to the Residual Interest 

Deadline. The Commission expects that 

FCMs will work with customers during 

the phase-in period to develop the 

systems and operational patterns that 

will be necessary to facilitate more 

prompt margin calls and payments. As 

a consequence, those FCMs’ customers 

that do not already have the capability 

to make margin payments before the 

Residual Interest Deadline may develop 

that capability, which will further 

reduce the funding burden borne by 

FCMs. 

The cost associated with maintaining 

sufficient residual interest to cover 

undermargined amounts will also 

depend upon the policies and 

procedures that FCMs put into place to 

meet the targeted residual interest 

requirement set forth in § 1.11. To the 

extent that the undermargined amount 

is greater than the targeted residual 

interest amount that an FCM maintains 

in its customer accounts, the FCM 

would have to increase the amount of 

residual interest it maintains in the 

customer segregated account by the time 

it is obligated to make settlement 

payments to the DCO. Some FCMs may 

seek to avoid this situation by requiring 

their customers to pre-fund (i.e., require 

customers to provide initial margin for 

a position before the FCM sends the 

position to a DCO to be cleared, and 

provide sufficient excess margin to the 

FCM to reduce any undermargined 

amount). If the FCM elects to increase 

the amount of residual interest that it 

maintains in the customer segregated 

accounts, this would likely reduce the 

range of investment options the FCM 

has for those additional funds and may 

prompt the FCM to hold additional 

capital to meet operational needs. 

Similarly, if the FCM requires 

additional margin from customers, that 

will result in capital costs to those 

customers. 

On the other hand, to the extent the 

FCM would otherwise maintain targeted 

residual interest (i.e., to the extent the 

targeted residual interest is greater than 

or is included within the 

undermargined amount), then the rule 

would not create any additional funding 

costs. 

Despite these revisions to the 

proposed rule, the Commission 

recognizes that the requirements of final 

rule § 1.22(c) will create significant 

additional costs for FCMs and their 

customers. Developing and 

implementing the systems and 

operational changes necessary to 

facilitate more rapid margin payments 

will create costs for FCMs and their 

customers. Those costs are likely to vary 

significantly across FCMs depending on 

the infrastructure and operational 

patterns that each FCM already has in 

place, and depending on the 

specifications of the revised systems 

and operational patterns that FCMs and 

customers develop in order to facilitate 

more rapid margin payments.670

In addition, the Commission expects 

that some FCMs may choose to require 

some customers to increase the amount 

of margin they maintain in their 

accounts. This is more likely for those 

customers who are presently not able to 

make their margin payments prior to the 

Residual Interest Deadline. Customers 

subject to increased pre-funding 

requirements will bear costs from their 

cost of capital resulting from prefunding multiplied by the amount of the 

increased pre-funding requirement. The 

cost of capital for each customer 

depends on the investment strategy of 

the individual customer, and the 

amount of increased pre-funding 

requirement is likely to vary depending 

on the ability of the customer to respond 

to margin calls promptly and the FCM’s 

ability to cover the customer’s deficits 

through increased residual interest 

contributions.671

Last, whatever undermargined 

amounts are not addressed through 

customer payments prior to the Residual 

Interest Deadline will have to be 

covered through increased residual 

interest contributions from the FCM. 

The Commission expects that in order 

to comply with the requirements of 

§ 1.22(c), FCMs may need to maintain 


TKELleY on DSK3SPTVN1PROD with RULES2
68594 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

672FIA Comment Letter at 14, 16 (Feb. 15, 2013). 

673See FIA Comment Letter at 2–3 (June 20, 

2013). 

674 Id. at 8. 

675 Id. 

676See ISDA Comment Letter at 4 (Feb. 15, 2013). 

ISDA used market data for FCMs (November 30, 

2012) available at http://www.cftc.gov/

MarketReports/FinancialDataforFCMs/index.htm. 

677 17 CFR 1.25. 

678For example, FIA cited a historical cost of 

funds of 8.125% in January 1990. At that time, the 

constant maturity one month Treasury yield was 

7.86%, see http://mortgage-x.com/general/indexes/ 

cmt_tcm_history.asp?f=m. Thus, using the cost of 

funds proxy from the commenter, the cost of funds 

would be closer to 0.365% (calculated as 8.125% 

¥ 7.86% + 0.10% (for underwriting and 

administrative overhead)). 

679See section II.G.10. above. 

680See ISDA Comment Letter at 6 (Feb. 15, 2013); 

FIA Comment Letter at 23–25 (Feb. 15, 2013); 

LCH.Clearnet comment Letter at 5 (Jan. 25, 2013); 

Paul/Weiss Comment Letter at 4–5 (Feb. 15, 2013); 

RJ O’Brien Comment Letter at 5 (Feb. 15, 2013). 

681 ISDA Comment Letter at 6 (Feb. 15, 2013). 

682 ISDA Comment Letter at 2 (May 8, 2013). 

683 Id. ISDA further observed that many FCM 

customers use custodians across the world, and 

‘‘many customers cannot assure payment of their 

morning FCM call before the end of the New York 

day,’’ and therefore recommended that Commission 

study the feasibility of reducing the time in which 

customers have to meet margin calls, if that is 

‘‘imperative.’’ Id. at 3. This will be addressed in the 

Report. 

additional residual interest in order to 

cover the sum of undermargined 

amounts in customers’ accounts that 

still remain by the Residual Interest 

Deadline on ordinary trading days, and 

are likely to acquire and maintain access 

to additional liquidity that can be 

accessed rapidly to meet the sum of 

customers’ gross undermargined 

amounts in a worst-case-scenario. 

Therefore, in order to estimate the cost 

of additional residual interest that FCMs 

will maintain, it is necessary to estimate 

the amount of additional residual 

interest that FCMs will need to maintain 

in their segregated accounts during 

ordinary trading days, the amount of 

additional residual interest that will be 

needed on highly volatile trading days, 

the ratio of ordinary to highly volatile 

trading days on an annual basis, the cost 

of capital for the additional funds that 

are deposited into residual interest, and 

the cost to maintain a revolving credit 

facility or some other source of funding 

that can be accessed quickly and that is 

sufficient to cover the projected largest 

undermargined amount in aggregate for 

customers’ accounts. 

As discussed further below, the 

Commission believes that the point in 

time approach adopted in this final rule 

will significantly reduce the amount of 

additional residual interest that FCMs 

need to maintain in their segregated 

accounts on an ongoing basis in order to 

comply with § 1.22(c). 

Several commenters provided 

estimates of the cost of the ‘‘at all times’’ 

portion of the proposal. FIA estimated 

that compliance with the ‘‘at all times’’ 

portion of the proposal would require 

FCMs or their customers to deposit 

significantly in excess of $100 billion 

into customer funds accounts beyond 

the sum required to meet initial margin 

requirements, and that the annual 

financing costs for these increased 

deposits will range from $810 million to 

$8.125 billion.672 FIA estimated the 

highest single day customer margin 

deficits per FCM would likely be 

between $196 million to $6.1 billion per 

FCM, depending on the size and 

composition of the FCM’s customer 

accounts.673 Jefferies estimated that it 

would be required to increase its own 

residual interest by $15 million (nonpeak) or $30 million (peak), 

respectively.674 Jefferies also stated that 

the industry would be required to 

increase its residual interest by $49 

billion (non-peak) or $83 billion (peak) 

at a cost of approximately $2 billion 

(non-peak) or $5 billion (peak), 

respectively.675 ISDA estimated that the 

highest single day sum of gross 

customer margin deficits would likely 

be approximately $73.2 billion for all 

FCMs combined, with a long term 

funding impact of $335 billion.676

While the Commission expects that 

the residual interest requirement will 

create additional capital costs for most 

FCMs, the Commission believes that the 

estimates presented by commenters 

include certain assumptions that may 

lead to overstated costs. First, residual 

interest that is not needed to be pledged 

as collateral for customers may be 

invested overnight and during the day 

in investments that are consistent with 

the requirements of Commission 

Regulation 1.25 (‘‘§ 1.25 

investments’’).677 The return on residual 

interest would offset a portion of the 

cost of funds. That is, the additional 

funds that FCMs place in residual 

interest will both incur costs and 

generate returns for the FCM. Estimates 

of the effective cost of the additional 

funds that must be used to increase 

residual interest must account for 

both.678 The returns on § 1.25 

investments have the potential to reduce 

the effective cost of funds. 

Second, both FIA and ISDA confound 

total residual interest with additional 

residual interest by assuming that the 

total amount of residual interest that 

would be required by the proposed rule 

is equal to the additional amount of 

additional interest that would be 

required by the rule. FCMs, in general, 

maintained some residual interest prior 

to this rule, and are required to do so 

to comply with § 1.23.679 Therefore, it is 

only the additional residual interest that 

is necessary because of rule 1.22(c) that 

is relevant for consideration here. 

Third, the Commission agrees with 

FIA that U.S. Treasury securities are an 

appropriate proxy for the marginal cost 

of capital for a low-risk project, such as 

funds to be placed in residual interest. 

FIA and Jefferies did not explain why 

they chose long-dated maturities on the 

yield curve for their estimates. 

Presumably, an FCM could borrow 

funds at a much shorter maturity than 

five years, for example, a month or less, 

potentially lowering borrowing costs 

substantially. 

The Commission notes, and discusses 

further below, that FCMs might mitigate 

costs by maintaining a credit facility 

that is sufficient to cover most of their 

additional residual interest needs on 

unusually volatile trading days, but that 

is not used on the majority of trading 

days. This approach would not only 

lower the amount of capital needed, but 

would also reduce the amount of time 

during which the capital is borrowed. 

As discussed further below, the 

Commission is not able to estimate 

accurately what fees banks would 

charge. However, the Commission has 

considered that FCMs would bear an 

ongoing cost associated with 

maintaining an open credit facility that 

is able to provide rapid access to 

sufficient liquidity to meet any 

additional residual interest 

requirements on highly volatile days. 

As noted above, several commenters 

requested the Commission revise the 

proposal to require that the residual 

interest calculation be made once a day, 

specifically by the end of the business 

day.680 These commenters suggested an 

alternative (the ‘‘Industry Commenters’ 

Alternative’’) by which, at this point in 

time, an FCM would be required to 

maintain a residual interest in its 

customer funds accounts at least equal 

to its customers’ aggregate margin 

deficits for the prior trade date. ISDA 

stated this alternative ‘‘would rationally 

reduce’’ FCMs cost of compliance 681

and that ‘‘[f]or an FCM with robust 

credit risk management systems, 

covering end-of-day customer deficits 

should not be a significant cost.’’ 682

ISDA also noted that at the end of the 

day ‘‘typically, all customer calls have 

been met, and all customer gains have 

been paid out; all achieved without the 

FCM having recourse to its own funding 

resources.’’ 683 FIA asserted that it 

would ‘‘achieve the Commission’s 

regulatory goals without imposing the 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68595 

684FIA Comment Letter at 23 (Feb. 15, 2013). See 

also ISDA Comment Letter at 4 (May 8, 2013). 

685 ISDA Comment Letter at 1–2 (May 8, 2013); 

FIA Comment Letter at 8–10 (June 20, 2013). 

686 ISDA Comment Letter at 3 (May 8, 2013). 

687 Id. at 3–4. 

688 Id. at 4. 

689See FIA Comment Letter at 3 (June 20, 2013). 

690See FIA Comment Letter at 8–10 (June 20, 

2013). While the rates used by FIA in this exercise 

may be conservative, and the Commission does not 

adopt these precise estimates, the exercise is 

nevertheless illustrative and useful for the purpose 

of comparing the costs of the at all times approach 

and the Industry Commenters’ Alternative. 

691 Id. at 9. 

692FIA estimated that the Industry Commenters’ 

Alternative would reduce the amount of additional 

residual interest that is necessary by 90–95% when 

compared to the at all times approach. See id. at 

3 (June 20, 2013). See also ISDA Comment Letter 

at 1–2 (May 8, 2013). 

693See ISDA Comment Letter at 4–5 (Feb. 15, 

2013). 

damaging financial and operational 

burdens on FCMs, and the resulting 

financial burdens on customers.’’ 684

ISDA and FIA evaluated the costs 

associated with requiring FCMs to 

perform the residual interest calculation 

once each day at the close of business 

on the first business day following the 

trade date.685 ISDA estimated that 

‘‘removing the predictive element of 

FCM funding requirements’’ of the ‘‘at 

all times’’ method in favor of the 

Industry Commenters’ Alternative 

would permit markets to ‘‘reap the 

efficiencies of end-of-day 

accounting,’’ 686 thereby reducing the 

overall cost of compliance with the 

regulation. ISDA estimated that for 

exchange-traded futures, the costs 

associated with the alternative would be 

the cost of covering the outstanding 

margin deficits of between 2% and 5% 

of an FCM’s futures customers, and thus 

that approach would impose only 

‘‘incremental funding requirements’’ on 

FCMs.687 ISDA estimated that the costs 

of the alternative would be even smaller 

for cleared swaps, due to the ‘‘more 

professional’’ nature of the market.688

FIA acknowledged that if FCMs were 

given until the end of the following 

business day to ensure that the requisite 

amount of residual interest was 

maintained, that approach would 

eliminate approximately 90–95% of the 

anticipated additional residual interest 

that larger FCMs would need to 

maintain in order to meet an at all times 

requirement.689 FIA estimated the 

financing costs to FCMs of complying 

with the Industry Commenters’ 

Alternative, and concluded that the 

costs associated with an at all times 

residual interest requirement would be 

approximately ten times the costs 

associated with the Industry 

Commenters’ Alternative.690 Finally, the 

FIA concluded that the Industry 

Commenters’ Alternative would not 

‘‘impos[e] damaging financial and 

operational burdens on FCMs . . . and 

the resulting financial burdens on 

customers’’ that would result from the at 

all times approach.691

However, the point in time approach 

adopted in final rule § 1.22(c) gives 

FCMs until the time of settlement with 

the DCO (typically the beginning of the 

following business day for end of day 

margin calls from the DCO), and also 

provides an extended phase-in period, 

during which FCMs have until 6:00 p.m. 

Eastern Time on the date of such 

settlement. After the phase-in period, 

and absent further Commission action 

following the Report, the final rule does 

not provide FCMs until the end of the 

following business day to ensure that 

the requisite amount of residual interest 

is held, as would be the case in the 

Industry Commenters’ Alternative. 

Therefore, the Commission expects that 

the point in time approach adopted by 

the Commission will reap much, but not 

all, of the cost reduction discussed by 

the industry commenters.692

During the phase-in period, FCMs 

would be subject to Industry 

Commenters’ Alternative (and, thus, all 

of those cost savings would be realized). 

The following analysis assumes that 

the Commission does not take further 

action to modify the Residual Interest 

Deadline after considering the results of 

the Report. It refers to estimates of 

ongoing costs and benefits that only 

would be incurred and realized after the 

end of the phase-in period. 

The Commission expects that the 

post-phase-in form of § 1.22(c)—with a 

point in time requirement 

corresponding to the time of 

settlement—will achieve some, but not 

all of the cost reductions associated 

with Industry Commenters’ Alternative. 

Moreover, during the phase-in period, 

the Commission anticipates that 

customers and FCMs will improve their 

abilities to submit and receive margin 

payments prior to the FCM’s settlement 

with the DCO, and the Commission will 

be examining this issue further in the 

Report. In light of these factors, the 

Commission believes it is reasonable to 

suppose that the settlement time 

approach will significantly reduce— 

perhaps by 25% to 50%—the amount of 

additional residual interest that is 

needed on highly volatile trading days, 

and by a greater amount on ordinary 

trading days. 

In order to reasonably estimate the 

potential range of the amount of 

additional capital that is necessary on 

highly volatile trading days, the 

Commission uses ISDA’s formulation 

for the aggregate gross deficit across all 

customers. ISDA estimated that on high 

volatility days, the aggregate amount of 

all customers’ gross margin deficits for 

all FCMs would be equal to 60% of 

initial margin required by all customers’ 

positions. This estimate is based on an 

assumption that all of an FCM’s 

customers will be holding positions in 

the same commodity (or that all 

commodities in which customers hold 

positions will move in unison) and that 

either shorts or longs will 

predominate.693 This approach is 

conservative because it does not take 

into account diversification effects. For 

example, while some customers may 

hold positions in energy products, 

which may be volatile on a particular 

day, others may predominately hold 

positions in interest rates, which may 

not be volatile on the same day. 

Moreover, because of the point in time 

approach adopted by the Commission, 

FCMs will have time to react to such 

changes. 

The Commission’s cost estimates for 

the amount of additional residual 

interest that will be required reflect an 

effort to make a reasonable assumption 

regarding the potential range of 

additional residual interest that could 

be necessary on a volatile trading day. 

The amount of additional residual 

interest that could reasonably be 

expected to be necessary on an ordinary 

trading day would be much lower 

because the aggregate of all customers’ 

gross undermargined amounts would be 

significantly lower on such days. 

However, commenters only estimated 

the aggregate of customers’ gross 

undermargined amounts on highly 

volatile days. They did not estimate or 

provide data regarding the aggregate of 

customers’ gross undermargined 

amounts on ordinary trading days. In 

the absence of either data or estimates 

from commenters regarding 

undermargined amounts in customers’ 

accounts on ordinary trading days, the 

Commission is not able to quantify the 

amount of additional residual interest 

needed by FCMs in ordinary trading 

conditions, but believes that it is 

significantly less than what is estimated 

above for volatile trading days. 

Commenters did not identify what 

level of volatility they had in view when 

offering estimates for additional residual 

interest that would be necessary for a 

‘‘volatile’’ trading day. For example, 

commenters may have had in mind days 

that were volatile relative to market 

conditions over the last year or two, or 

that are volatile relative to the range of 

all possible outcomes. Context suggests 


TKELleY on DSK3SPTVN1PROD with RULES2
68596 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

694See, e.g., LCH.Clearnet Comment Letter at 4– 

5 (Jan. 25, 2013) (noting that ‘‘regardless of the 

amount of capital an FCM dedicated to continuous 

compliance, FCMs would still be at risk of a 

violation’’). See also CMC Comment Letter at 2 (Feb. 

15, 2013); CME Comment Letter at 5 (Feb. 15, 2013); 

FIA Comment Letter at 4, 13, 15 (Feb. 15, 2013); 

MFA Comment Letter at 8 (Feb. 15, 2013); NPPC 

Comment Letter at 2 (Feb. 15, 2013); TD Ameritrade 

Comment Letter at 4–5 (Feb. 15, 2013). 

695See http://www.cftc.gov/MarketReports/

FinancialDataforFCMs/HistoricalFCMReports/

index.htm. 

696The Commission computes the average yields 

from July 2001 to July 2013. The constant maturity 

4-week Treasury yield time series with month 

observations begins in July of 2001. See http://

www.federalreserve.gov/releases/H15/data.htm. 697The Commission recognizes that there may be 

some FCMs with weak credit ratings that would 

have to pay even more than the prime interest rate 

to secure additional residual interest. See id. 698The Commission believes that the November 

30, 2012 FCM data is typical. Moreover, this 

permits comparison with other estimates in the 

comment letter. 

699See http://www.cftc.gov/MarketReports/

FinancialDataforFCMs/HistoricalFCMReports/

index.htm. 

700See id. 

701 Id. 

702That is, 31% of $35.4 billion and $2.3 billion, 

respectively. 

703See http://www.cftc.gov/MarketReports/

FinancialDataforFCMs/HistoricalFCMReports/

index.htm. 

704See id. 

the latter assumption, since commenters 

asserted elsewhere that FCMs would 

have to anticipate market movements in 

order to maintain sufficient residual 

interest at all times to cover the sum of 

customers’ undermargined amounts 

during a highly volatile trading day.694

Given this, the Commission notes that 

highly volatile days are only a small 

fraction of all total trading days, and 

therefore, the costs associated with 

additional residual interest required on 

such highly volatile days would only 

accrue on a correspondingly small 

fraction of the total trading days in a 

given year. 

FCMs would, however, bear an 

ongoing cost associated with 

maintaining an open credit facility or 

some other source of funds that is able 

to provide rapid access to sufficient 

liquidity to meet any additional residual 

interest requirements when highly 

volatile days do occur. The Commission 

does not have adequate data to estimate 

the cost of this credit facility. Since it 

is not feasible to estimate the costs to 

FCMs to cover the need for additional 

residual interest between the times of 

the daily settlement and the end-of-day 

by obtaining intraday lines of credit 

from lenders, the Commission has taken 

a conservative approach, and has 

assumed, for the sake of quantification, 

that firms will raise capital sufficient to 

meet their residual interest needs on 

highly volatile trading days, and will 

keep that amount of capital on all days, 

holding it either in residual interest or 

in liquid assets that are available to be 

deposited into segregation. 

The Commission is aware that the 

top-10 largest FCMs (ranked by total 

amount of customer funds in section 

4d(a)(2) segregated accounts and 30.7 

accounts as of November 30, 2012) are 

contained in bank holding 

companies.695 Most of these bank 

holding companies have short-term 

credit ratings of Moody’s P–1, Standard 

& Poor’s A–1, and Fitch F1, while a few 

have holding companies with P–2, A–2, 

and F2 ratings. The FCM subsidiary 

usually derives its credit standing from 

the bank holding company, with the 

rating of the FCM subsidiary being often 

the same or sometimes one credit grade 

lower than the holding company. To 

estimate the interest rate that a bank 

holding company would charge its FCM 

subsidiary for funding additional 

residual interest, the Commission is 

using as a proxy for the costs of these 

funds the historical average of 30-day 

AA-financial commercial paper 

(consonant with the short-term credit 

ratings of the bank holding companies) 

minus the yield on the 4-week constant 

maturity U.S. Treasury bill (to account 

for the return that FCMs will earn on 

investments permitted under Regulation 

1.25) and is adding 0.10% for 

underwriting and administrative 

overhead costs to issue commercial 

paper.696 This results in an average cost 

of funds of 0.35% for the top-10 largest 

FCMs from July 2001 to July 2013. For 

the remaining FCMs, the Commission is 

using as a proxy for the costs of funds 

the difference between the prime rate 

and the yield on the 4-week constant 

maturity U.S. Treasury bill. This results 

in an average cost of funds of 3.25% 

from July 2001 to July 2013.697 The 

Commission is using historical FCM 

data from November 30, 2012, even 

though there is more recent data 

available, to be consistent with the data 

ISDA used in the analysis in its 

comment letter.698 As of November 30, 

2012, there was approximately $147.1 

billion in customer funds in section 

4d(a)(2) segregated accounts (excluding 

excess amounts contributed by 

FCMs).699 The top-10 FCMs held 

approximately $111.7 billion in section 

4d(a)(2) segregated accounts,700 and the 

remaining FCMs held approximately 

$35.4 billion in section 4d(a)(2) 

segregated accounts.701

ISDA estimated the potential future 

FCM funding requirement for futures 

arising from the residual interest 

proposal by subtracting the existing 

customer excess. ISDA estimated the 

futures excess to be between $40–$70 

billion and employed the midpoint of 

this range, $55 billion in its 

calculations. Using ISDA’s point 

estimate for existing customer excess of 

$55 billion, the Commission estimates 

there was, at the top-10 FCMs, (55/

177.1) (i.e., 31%) times $111.7 billion or 

approximately $34.7 billion in existing 

customer excess in section 4d(a)(2) 

segregated accounts. Similarly, for the 

remaining FCMs, the Commission 

estimates that there was approximately 

$11 billion in customer excess in 

section 4d(a)(2) segregated accounts.702

First, the Commission performs its 

calculations for the residual interest 

projected in the section 4d(a)(2) 

segregated accounts based on ISDA’s 

assumption that residual interest were 

required ‘‘at all times.’’ For the top-10 

FCMs, the Commission subtracts $34.7 

billion from $111.7 billion giving 

approximately $77 billion in required 

margin. The Commission uses ISDA’s 

suggestion for additional residual 

interest needed by FCMs and takes 60% 

of this figure, approximately $46.2 

billion, as the estimate for total residual 

interest needed. As of November 30, 

2012, the top-10 FCMs held 

approximately $6.5 billion in residual 

interest.703 Using these figures, the top10 FCMs would need to fund 

approximately $39.7 billion in 

additional residual interest. At a cost of 

funds of 0.35%, this would result in an 

annual cost of $139 million for the top10 FCMs based on the historical costs of 

funds. 

For the remaining FCMs, the 

Commission subtracts $11 billion 

(excess margin) from $35.4 billion 

(balance in 4d(a)(2) accounts) leaving 

approximately $24.4 billion (required 

margin in 4d(a)(2) accounts). Again, 

using ISDA’s 60% formulation gives 

$14.6 billion in total residual interest 

needed under an at all times approach. 

The remaining FCMs are holding 

approximately $3.9 billion in residual 

interest.704 Consequently, the remaining 

FCMs would need to fund 

approximately $10.7 billion ($14.6 

billion–$3.9 billion) in additional 

residual interest. At a cost of funds of 

3.25%, this gives the historical annual 

cost of approximately $348 million. 

For all FCMs, the aggregate annual 

cost is approximately $487 million (that 

is, $139 million plus $348 million) to 

fund the additional residual interest 

needed by FCMs due to § 1.22 if 

residual interest were required at all 

times. 

However, these figures change 

significantly if residual interest is not 

required until the daily settlement. As 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68597 

705The fact that the reduction of 37.5% (the 

midpoint of 25% and 50%) multiplied by ISDA’s 

estimate of 60% results in a product that is also 

37.5% is coincidental. 

706See http://www.cftc.gov/MarketReports/

FinancialDataforFCMs/HistoricalFCMReports/

index.htm. 

707See, e.g., CFA Comment Letter at 5–6 (Feb. 13, 

2013); CIEBA Comment Letter at 2–3 (Feb. 20, 

2013); ICI Comment Letter at 3 (Jan. 14, 2013); 

Franklin Comment Letter at 2 (Feb. 15, 2013); Paul/ 

Weiss Comment Letter at 3 (Feb. 15, 2013); SIFMA 

Comment Letter at 2 (Feb. 21, 2013); Vanguard 

Comment Letter at 7–8 (Feb. 22, 2013). 

708SIFMA Comment Letter at 2 (Feb. 21, 2013). 

709 Vanguard Comment Letter at 7 (Feb. 22, 2013). 

710See, e.g. Advantage Comment Letter at 6–8 

(Feb. 15, 2013); CMC Comment Letter at 2 (Feb. 15, 

2013); CME Comment Letter at 5 (Feb. 15, 2013); 

FIA Comment Letter at 4, 7–8, 13 (Feb. 15, 2013); 

LCH.Clearnet Comment Letter at 4–5 (Jan. 25, 2013); 

MFA Comment Letter at 8 (Feb. 15, 2013); MGEX 

Comment Letter at 2 (Feb. 18, 2013); Newedge 

Comment Letter at 2 (Feb. 15, 2013); NPPC 

Comment Letter at 2 (Feb. 15, 2013; RCG Comment 

Letter at 3 (Feb. 12, 2013); TD Ameritrade Comment 

Letter at 4–5 (Feb. 15, 2013). 

711See, e.g., Advantage Comment Letter at 8 (Feb. 

15, 2013) (‘‘The avalanche of buying or selling that 

this rule will induce contradicts decades of effort 

by the industry to thwart market panics and provide 

markets with liquidity and stability.’’); CMC 

Comment Letter at 2 (Feb. 15, 2013) (stating that the 

proposal ‘‘could create liquidity issues and increase 

costs for FCMs and end users. Such a decrease in 

liquidity could be substantial, and limit the number 

and type of transactions FCMs clear, the number of 

customers they service and the amount of financing 

they provide.’’); CME Comment Letter at 5–6 (Feb. 

15, 2013) (‘‘We believe that this will be a significant 

and unnecessary drain on liquidity that will make 

trading significantly more expensive for customers 

to hedge financial or commercial risks. The 

liquidity drain will be exacerbated to the extent that 

the demand for excess margin will increase the 

costs and limit the activities of market makers.’’). 

712See, e.g., FIA Comment Letter at 17 (Feb. 15, 

2013); MFA Comment Letter at 8 (Feb. 15, 2013); 

Newedge Comment Letter at 2 (Feb. 15, 2013). 

713FHLB Comment Letter at 3–4 (Feb. 15, 2013). 

714 Id. at 4 n.5. 

715 ISDA Comment Letter at 3 (Feb. 15, 2013) 

(noting that ‘‘[e]ffectively doubling margins will 

damage futures and swaps markets by destroying 

the value proposition for many liquidity providers 

essential to the market’s efficiency.’’). See also ISDA 

Comment Letter at 2–3 (May 8, 2013) (stating that 

the proposal would cause customers to pre-fund 

margin, which ‘‘would remake the cleared swaps 

and futures markets into one exclusively for ‘selfguaranteeing’ customers,’’ which ‘‘would be 

damaging to markets by destroying the incentives 

for continued participation by liquidity providers 

essential to the markets’ efficiency.’’). 

716 Id. 

noted above, both FIA and ISDA 

estimate that the residual interest 

requirement would be reduced by 90% 

or more if it were required to be present 

at the end-of-day on the following 

business day. As discussed above, the 

Commission estimates that using the 

point in time approach with morning 

settlement (rather than end-of-day) will 

reduce the need for additional residual 

interest by 25–50%. The midpoint of 

this range is 37.5%. A reduction of 

37.5% (as a consequence of moving to 

the point in time approach) leaves a 

multiplier of 62.5%. Multiplying 62.5% 

by ISDA’s estimate (for the at all times 

approach) of 60% of required margin 

results in a product of 37.5%.705 For the 

top-10 FCMs, the Commission 

multiplies the $77 billion in required 

margin by 37.5% giving approximately 

$28.9 billion in residual interest needed. 

The top-10 FCMs are currently holding 

approximately $6.5 billion in residual 

interest. The top-10 FCMs would be 

required to fund approximately $22.4 

billion ($28.9 billion–$6.5 billion) in 

additional residual interest. At a cost of 

funds of 0.35%, this would result in an 

annual cost of approximately $78 

million for the top-10 FCMs. 

For the remaining FCMs, the 

Commission multiplies $24.4 billion 

(required margin in 4d(a)(2) accounts) 

by 37.5% giving approximately $9.2 

billion. The remaining FCMs are 

holding $3.9 billion in residual 

interest.706 Consequently, the remaining 

FCMs would be required to fund 

approximately $5.3 billion ($9.2 

billion¥$3.9 billion) in additional 

residual interest. At a cost of funds of 

3.25%, this would result in an annual 

cost of approximately $171 million with 

current economic conditions. This 

result in a total annual cost of 

approximately $249 million to fund the 

additional residual interest needed by 

FCMs due to § 1.22 using the 

Commission’s assumption of 37.5% of 

initial margin needed for residual 

interest. 

As explained above, the final rule 

does not require FCMs to take this 

approach. Instead, the Commission 

believes that firms are likely to manage 

margin calls to reduce the sum of 

customers’ gross undermargined 

amounts prior to the time of settlement. 

They may also mitigate costs by using 

revolving credit facilities or other 

temporary sources of liquidity to meet, 

in part, the need for additional residual 

interest on volatile trading days. The 

Commission received comments on the 

proposed costs and benefits of § 1.22. 

Several commenters supported the 

proposal, noting that it would prevent 

customer funds from being used to 

subsidize an FCM’s obligations, reduce 

systemic risk, and enhance customer 

protection, especially in the event of an 

FCM bankruptcy.707 In particular, 

SIFMA stated that the proposal, ‘‘in 

effect, shifts the costs and burdens of a 

margin shortfall from customers with 

excess margin to customers with 

deficits, where it properly belongs.’’ 708

In addition, Vanguard argued that the 

‘‘proposed changes correctly shift the 

risk to customers in deficit and away 

from any excess margin transferred by 

other customers.’’ 709

On the other hand, a number of 

commenters interpreted the ‘‘at all 

times’’ language to require FCMs to 

continuously calculate their customers’ 

aggregate margin deficits and stated that 

they believe such a requirement is 

infeasible.710 As a result of this 

interpretation of the proposal, these 

commenters argued that the proposal 

would dramatically increase costs and 

create liquidity issues for FCMs and 

their customers.711 Many commenters 

asserted that the proposal would 

therefore result in FCMs requiring 

customers to pre-fund their positions.712

FHLB cautioned that ‘‘[w]hile it cannot 

be disputed that a residual interest 

buffer should lower the risk that an 

FCM will fall out of compliance with its 

segregation requirements, there will 

likely be a real economic cost associated 

with maintaining whatever residual 

interest buffers is established by an 

FCM.’’ 713 FHLB further noted that the 

‘‘funds maintained by an FCM as 

residual interest can reasonably be 

expected to earn less than the FCM’s 

unrestricted funds,’’ thus, the proposal 

‘‘represents a real cost to FCMs’’ that 

will be passed on to customers.714 ISDA 

stated that the proposal will make 

customers ‘‘self-guaranteeing’’ and 

diminish reliance on the FCM, and that, 

while this would diminish overall risk 

of FCM default, it comes at a very 

significant cost to market participants, 

market volumes, and liquidity.715 CHS 

Hedging observed that ‘‘pre-funding 

accounts concentrates additional funds 

at FCMs, which seems to contradict the 

spirit of the’’ customer protection 

rules.716

As noted above, the Commission 

recognizes that some FCMs may require 

their customers, or some subset of their 

customers, to increase the margin they 

maintain in their accounts in order to 

cover possible deficits that could 

materialize during the period of time it 

would typically take that customer to 

respond to a margin call. This is 

particularly the case if and when the 

Residual Interest Deadline moves to the 

time of the daily settlement. However, 

the Commission expects that the 

number of customers and the amount of 

additional margin required from those 

customers would be significantly less 

than was asserted by some of the 

commenters because of modifications 

made to the final rule. As noted above, 

the final version of the rule allows 

FCMs to meet the gross sum of the 

undermargined amounts several hours 

after (and, during the phase-in period, at 

the end of the next business day after) 


TKELleY on DSK3SPTVN1PROD with RULES2
68598 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

717The Commission expects that this would 

happen on normal trading days. On highly volatile 

trading days, the Commission expects that 

customers’ gross undermargined amounts would 

likely be covered by residual interest acquired 

through a line of credit or credit facility, as 

discussed above, rather than through customer prefunding since the costs of the former are likely to 

be considerably less than the costs of the latter. 

However, the Commission does not, at this time, 

have data regarding individual customers’ historical 

gross undermargined amounts and therefore does 

not have adequate information to estimate the 

number of FCM and customer combinations where 

additional customer margin would be required on 

an ongoing basis. 

718See, e.g., CHS Hedging Comment Letter at 2 

(Feb. 15, 2013); CME Comment Letter at 6 (Feb. 15, 

2013); FIA Comment Letter at 17 (Feb. 15, 2013); 

Frontier Futures Comment Letter at 3 (Feb. 15, 

2013); Jefferies Comment Letter at 7 (Feb. 15, 2013); 

JSA Comment Letter at 1–2 (Feb. 15, 2013); NCFC 

Comment Letter at 2 (Feb. 15, 2013); NIBA 

Comment Letter at 1 (Feb. 15, 2013). 

719See FIA Comment Letter at 17 (Feb. 15, 2013). 

720See id. at 4, 17. 

721 JSA Comment Letter at 1 (Feb. 15, 2013). 

722 Id. at 2. 

723See Congressional Committees Letter at 1 

(Sept. 25, 2013). 

724See, e.g., CME Comment Letter at 5–6 (Feb. 15, 

2013); FCStone Comment Letter at 3 (Feb. 15, 2013); 

Global Commodity Comment Letter at 1 (Feb. 13, 

2013); Randy Fritsche Comment Letter at 1 (Feb. 15, 

2013); JSA Comment Letter at 1 (Feb. 15, 2013); 

NCBA Comment Letter at 2 (Feb. 15, 2013); NCFC 

Comment Letter at 2 (Feb. 15, 2013); RJ O’Brien 

Comment Letter at 3 (Feb. 15, 2013); ICA Comment 

Letter at 1–2 (Feb. 15, 2013); TCFA Comment Letter 

at 2 (Feb. 15, 2013). 

725CME Comment Letter at 6 (Feb. 15, 2013). 

726 Id. 

727See Frontier Futures Comment Letter at 2–3 

(Feb. 14, 2013). 

728 Id. 

729RJ O’Brien Comment Letter at 3 (Feb. 15, 

2013). See also ICA Comment Letter at 1–2 (Feb. 15, 

2013). 

730RJ O’Brien Comment Letter at 3 (Feb. 15, 

2013). 

731CME Comment Letter at 6 (Feb. 15, 2013) 

(emphasis in original). 

the undermargined amount is 

calculated, which is expected to 

significantly mitigate the need for FCMs 

to maintain a ‘‘preventative buffer’’ of 

residual interest or additional customer 

margin that is sufficient to cover 

customers’ potential undermargined 

amounts in a worst case scenario. 

Moreover, in cases where customers 

develop the ability to submit margin 

payments prior to the Residual Interest 

Deadline, there will not be any need for 

additional customer margin on an 

ongoing basis. It is therefore likely that 

FCMs will require additional customer 

margin on an ongoing basis in situations 

only where (1) a particular customer is 

not be able to routinely make margin 

payments prior to the Residual Interest 

Deadline, and (2) the sum of the 

undermargined amounts in customers’ 

accounts that cannot be collected before 

the Residual Interest Deadline is a 

relatively large compared to the amount 

of residual interest that the FCM 

otherwise chooses to maintain.717

The Commission does not agree that 

increased residual interest requirements 

are contrary to the spirit of the customer 

protection rules. The rules are intended 

to provide additional protections to 

funds held at FCMs, not to reduce the 

amount of funds held at FCMs. The 

likelihood of customer defaults leading 

to an FCM default is reduced. So, 

additional customer funds at FCMs are 

better protected with the increased 

residual interest requirements in place. 

Several commenters argued that the 

costs associated with the proposal 

would decrease competition between 

FCMs.718 In particular, FIA stated that 

the proposal may force a number of 

small to mid-sized FCMs out of the 

market, which will decrease access to 

the futures markets and increase costs 

for IBs, hedgers and small traders.719 In 

addition, FIA argued that the proposal 

would significantly impair the price 

discovery and risk management 

functions served by the market.720 JSA 

argued that the proposal would be 

‘‘punitive in a highly competitive 

environment that already places the 

midsize operator at a disadvantage to 

his better capitalized multinational 

competitors.’’ 721 Moreover, JSA stated 

that the cost of the proposal would 

result in a higher cost of hedging, which 

would be prohibitive and prompt 

agricultural users to walk away from the 

futures market.722 The Congressional 

Committees requested that the 

Commission consider these effects in 

drafting the final rule.723

Other commenters argued that the 

proposal would disproportionately 

burden smaller FCMs and the customers 

of smaller FCMs.724 CME asserted that, 

given this increase in cost, some 

customers may transfer their accounts to 

the larger, better-capitalized FCMs to 

reduce the cost of trading,725 but that 

agricultural customers ‘‘likely will not 

be able to transfer to the larger FCMs 

because they do not fit their customer 

profile,’’ thereby making these 

customers bear more of the cost 

burden.726 Frontier Futures asserted that 

many small customers, including most 

farmers, do not watch markets 

constantly. Therefore, it would be 

difficult for them to meet margin calls 

on a moment’s notice, thereby causing 

FCMs to require significantly higher 

margins or to liquidate customer 

positions where margin calls cannot be 

immediately met.727 Frontier Futures 

also asserted that the proposal ‘‘may 

force a number of small to mid-sized 

FCMs out of the market,’’ making it 

more expensive, if not impossible, for 

IBs and small members to clear their 

business, removing ‘‘significant capital 

from the futures industry,’’ and 

‘‘reducing stability to the markets as a 

whole.’’728 RJ O’Brien stated that the 

proposed residual interest requirement 

is impractical because many farmers 

and agricultural clients still use checks 

and ACH to meet margin calls.729 RJ 

O’Brien also stated that if the proposal 

is adopted, FCMs that service noninstitutional clients will struggle to 

remain competitive and the proposal 

may result in fewer clearing FCMs and 

greater systemic risk to the 

marketplace.730 Similarly, CME stated 

that the proposed residual interest 

requirement would lead to 

consolidation among FCMs, which will 

‘‘actually increase[ ] systemic risk by 

concentrating risk among fewer market 

participants.’’ 731

The Commission recognizes that 

smaller FCMs may have more difficulty 

than large FCMs in absorbing the 

additional costs created by the 

requirements in § 1.22. In general, it is 

likely that smaller FCMs have a larger 

percentage of customers who do not 

have requisite personnel or systems to 

receive margin calls and make margin 

payments in a matter of hours, thus 

creating a disproportionate need for prefunding or additional residual interest at 

smaller FCMs. Smaller FCMs are also 

likely to have higher borrowing costs 

than larger FCMs, so the impact of 

obtaining additional capital to meet 

increased residual interest needs may be 

more significant for them. If increased 

costs force some smaller FCMs out of 

the market, it is possible, though not 

certain, that smaller customers could 

have difficulty finding alternative FCMs 

to service their needs. However, as 

noted above, the Commission believes 

that the changes made to § 1.22(c), and 

the extended phase-in period, in the 

final rule substantially reduce the costs 

to FCMs and their customers when 

compared to the proposed version of the 

requirement. By reducing the costs, 

these changes have also reduced some 

of the associated burdens that would 

potentially be disproportionately borne 

by smaller FCMs. The Commission does 

not agree that a reduced number of 

FCMs would necessarily reduce 

competition in a way that impacts the 

price of services. Any increases in costs 

to customers are more likely the result 

of increased costs to the FCM that are 

passed on to customers, which are the 

costs that have been mitigated by 

changes to the final rule. Moreover, the 

Commission is cognizant of the cost of 

an FCM failure where customers suffer 

a loss of segregated funds, both in terms 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68599 

732See CIEBA Comment Letter at 3 (Feb. 20, 

2013). 

733See, e.g., MGEX Comment Letter at 2 (Feb. 18, 

2013); AIMA Comment Letter at 3 (Feb. 15, 2013); 

CMC Comment Letter at 2 (Feb. 15, 2013). 

734Newedge Comment Letter at 3 (Feb. 15, 2013). 

See also RJ O’Brien Comment Letter at 5 (Feb. 15, 

2013). 735See Frontier Futures Comment Letter at 3 (Feb. 

14, 2013). 736 Id. 

737See, e.g., AIMA Comment Letter at 3 (Feb. 15, 

2013); CCC Comment Letter at 2–3 (Feb. 15, 2013); 

CHS Hedging Comment Letter at 2–3 (Feb. 15, 

2013); CME Comment at 5–7 (Feb. 15, 2013); AFBF 

Comment Letter at 2 (Feb. 15, 2013); Jefferies 

Comment Letter at 9 (Feb. 15, 2013); JSA Comment 

Letter at 1–2 (Feb. 15, 2013); NCBA Comment Letter 

at 2 (Feb. 15, 2013); NGFA Comment Letter at 5 

(Feb. 15, 2013); NIBA Comment Letter at 1–2 (Feb. 

15, 2013); TCFA Comment Letter at 2 (Feb. 15, 

2013); AFMP Group Comment Letter at 1–2 (Sept. 

18, 2013). 

738Congressional Committees Comment Letter at 

1 (Sept. 25, 2013). 

of costs to the customers who lose such 

funds (or, if such funds are ultimately 

recovered, the use of such funds) as well 

as the industry-wide cost associated 

with a loss in confidence in the safety 

of customer funds. These costs support 

the importance of increasing the safety 

of the system. Moreover, the 

Commission will closely review these 

issues as part of considering the Report. 

The Commission disagrees with the 

comments that there would be a 

consolidation of FCMs that would cause 

the rule to have a net effect of increasing 

systemic risk. Instead, the Commission 

expects that the overall effect of the 

final rule will be to significantly reduce 

systemic risk. For example, as noted by 

CIEBA,732 the residual interest 

requirement will likely reduce systemic 

risk by enabling FCMs to ensure that 

they can meet all customer obligations 

at any time without using another 

customer’s funds to do so. Moreover, 

larger, well-capitalized FCMs are more 

likely to be able to absorb losses than 

less well-capitalized FCMs. To the 

extent that FCMs that are affiliated with 

large financial institutions take on 

additional business as a result of a 

potential reduction in the number of 

FCMs, the increase in risk to these 

financial institutions is expected to be 

small relative to their existing risk and 

to not materially increase the systemic 

risk associated with these financial 

institutions. Finally, some of the costs 

that commenters asserted could lead to 

a reduction in the number of FCMs 

under the proposed rule have been 

mitigated by changes to the final rule. 

Several commenters also observed 

that the proposal would mark a 

significant departure from current 

market practice and could have a 

material adverse impact on the liquidity 

and smooth functioning of the futures 

and swaps markets.733 The Commission 

has chosen to provide an extended 

phase-in period for the requirement in 

§ 1.22(c) and therefore does not expect 

that smooth functioning of the futures 

and swap markets will be disrupted. If 

customers withdraw from the futures 

and swap markets as a consequence of 

the additional costs, liquidity could be 

negatively affected. However, the 

Commission believes that by allowing 

FCMs several hours (and, during the 

phase-in period, until the end of the 

next business day) after customer 

accounts become undermargined to 

ensure that the requisite amount of 

residual interest is on deposit, the costs 

associated with the requirement have 

been mitigated, which reduces the 

likelihood that customers will be 

prompted to withdraw from the markets 

due to related expenses. 

The Commission also considered 

several additional alternative proposals 

raised by the commenters. 

Newedge suggested that the 

Commission consider less costly 

alternatives to the proposed rule, such 

as allowing the FCM ‘‘to count guaranty 

fund deposits with [DCOs] as part of 

their residual interest’’ or limiting the 

residual interest amount that an FCM 

must carry to only a limited number of 

its largest customers.734 The 

Commission believes, however, that the 

latter proposal is not consistent with the 

statutory requirement that ‘‘one 

customer’s funds may not be used to 

margin, guarantee, or pay another 

customer’s obligations’’ and therefore 

did not adopt this suggestion. Regarding 

the former alternative, guarantee funds 

held at the DCO are a critical part of the 

waterfall that covers losses in the event 

of an FCM’s default. One of the primary 

purposes of the customer protection 

regime is to protect customers from the 

risk of losses in the event that their FCM 

defaults. Using funds that may be used 

to cover the FCM’s proprietary losses 

(i.e., the guarantee fund) to guarantee 

customers’ funds could expose customer 

funds to the FCM’s losses in a double 

default scenario. The Commission, 

therefore, does not believe that this 

alternative is consistent with the goals 

of the customer protection regime. 

Frontier Futures suggested that firm 

firewalls be put in place between 

customer funds and an FCM’s 

proprietary funds in the form of 

approval by an independent agency for 

an FCM to transfer customer funds.735

Frontier Futures also recommended that 

FCMs ‘‘do their proprietary trading 

through another FCM thereby engaging 

the risk management of a third 

party.’’ 736 The Commission has chosen 

not to require FCMs to seek external 

approval before pulling excess residual 

interest out of a customer segregated 

account, or to conduct their proprietary 

trading through another FCM. The 

Commission expects that the 

requirements in § 1.23 will accomplish 

some of the same benefits—ensuring 

that FCMs only withdraw significant 

portions of excess residual interest 

when they have adequate information to 

ensure that it is truly excess and that 

senior management is accountable for 

such decisions—with greater efficiency 

and less operational costs. Internal 

verification of residual interest balances 

and obtaining signatures from 

individuals inside the organization is 

likely to be considerably faster, and 

therefore more efficient and less costly. 

Regarding the second proposal, it is 

not clear how the commenter expected 

the third party FCM to augment the first 

FCM’s risk management or what specific 

type of risk would be addressed by such 

an arrangement. A third party FCM 

would be responsible for collecting 

margin and for making payments to the 

DCO for positions related to the first 

FCM’s proprietary positions. But this 

arrangement would not help protect 

customers at the first FCM from ‘‘fellow 

customer risk.’’ 

Finally, some commenters requested 

that the Commission refrain from 

adopting the proposal until it conducts 

further analysis with the industry 

regarding the costs and benefits of such 

proposal.737 Further, the Congressional 

Committees requested that the 

Commission weigh the costs and 

benefits of the final rule, and in 

particular ‘‘carefully consider the 

consequences of changing the manner or 

frequency in which ‘residual interest’ 

. . . is calculated.’’ 738 The ‘‘point in 

time’’ approach adopted by the 

Commission in this final rule and the 

extended phase-in period will 

significantly reduce (as compared to the 

proposed rule) the amount of additional 

residual interest that FCMs need to 

maintain in their segregated accounts on 

an ongoing basis in order to comply 

with § 1.22(c). As noted above, the final 

rule will mitigate some, though not all 

of the costs associated with pre-funding 

obligations that commenters expressed 

concern about, while simultaneously 

ensuring that the statutory obligations 

are met and that the corresponding 

protection from ‘‘fellow customer risk’’ 

is achieved. 

In light of these concerns and in 

response to the commenters’ requests, 

the Commission is directing staff to, 

within thirty months of the publication 


TKELleY on DSK3SPTVN1PROD with RULES2
68600 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

of this release, solicit further public 

comment, hold a public roundtable, and 

conduct further analysis regarding the 

practicability of moving the Residual 

Interest Deadline from 6:00 p.m. Eastern 

Time on the date of settlement to the 

time of settlement (or to some other time 

of day). The Report should include an 

analysis of whether and on what 

schedule it would be feasible to move 

the Residual Interest Deadline, and the 

costs and benefits of such potential 

requirements. All of this will take place 

well before the expiration of the phasein period. The Commission will 

consider the Report and within nine 

months after the publication of the 

Report may take additional action 

regarding the phase-in period by 

Commission order and may change the 

Residual Interest Deadline by 

rulemaking. 

Section 1.23 Interest of Futures 

Commission Merchants in Segregated 

Funds; Additions and Withdrawals 

Revised § 1.23 places new restrictions 

regarding an FCM’s withdrawal of 

residual interest funds not for the 

benefit of customers. As adopted, an 

FCM cannot withdraw any residual 

interest funds not for the benefit of 

customers unless it has prepared the 

daily segregation calculation from the 

previous day and has adjusted the 

segregation calculation for any activity 

or events that may have decreased 

residual interest since the close of 

business the previous day. In addition, 

an FCM is permitted to withdraw more 

than 25 percent of its residual interest 

for purposes other than the benefit of 

customers within one day only if it: (1) 

Obtains a signature from the CEO, CFO 

or other senior official as described in 

§ 1.23(c)(1) confirming approval to make 

such a withdrawal; and (2) sends 

written notice to the Commission and 

the firm’s DSRO indicating that the 

requisite approvals from the CEO, CFO 

or other senior official have been 

obtained, providing reasons for the 

withdrawal, listing the names and 

amounts of funds provided to each 

recipient, and providing an affirmation 

from the signatory indicating that he or 

she has knowledge and reasonable belief 

that the FCM is still in compliance with 

segregation requirements after the 

withdrawal. 

In addition, if the FCM drops below 

its target threshold for residual interest 

because of a withdrawal of residual 

interest not for the benefit of customers, 

the next day it must either replenish 

residual interest sufficient to surpass its 

target, or if senior leadership believes 

that the original target is excessive, the 

FCM may revise its target in accordance 

with its policies and procedures 

established in § 1.11. The amendments 

to § 1.23 were also made for Cleared 

Swaps and foreign futures at § 22.17, 

and § 30.7(g) respectively, and the costs 

and benefits considerations of those 

amendments are considered to be 

substantively the same. 

Costs and Benefits 

Restrictions on withdrawals of 

residual interest provide the benefit of 

an additional layer of protection for 

customer funds contained in segregated 

accounts. An FCM may withdraw 

residual interest as long as it always 

maintains sufficient FCM funds in the 

account to cover any shortfall that exists 

in all of its customers’ segregated 

accounts. However, as a practical 

matter, the segregation requirements 

fluctuate constantly with market 

movements, and customer surpluses or 

deficits also fluctuate depending on the 

speed with which customers meet 

margin calls. As a consequence, the 

amount of residual interest an FCM has 

in a segregated account similarly 

fluctuates. A sufficient amount of 

residual interest to cover deficiencies in 

customers’ accounts at one point in time 

may appear insufficient by the next 

settlement cycle in extreme market 

conditions. Therefore, it is important for 

an FCM to maintain sufficient residual 

interest to cover both current 

deficiencies in customer accounts as 

well as any additional deficiencies that 

could develop over a relatively short 

period of time. Restrictions on 

withdrawals of residual interest help to 

ensure that the FCM maintains a stable 

base of residual interest and not 

withdraw it for other liquidity needs 

when doing so may result in 

jeopardizing customer funds in the 

segregated account if market conditions 

change quickly. 

Prohibiting any withdrawal of 

residual interest until the customer 

segregation account calculations are 

complete for the previous day and 

requiring the FCM take into account any 

subsequent developments in the market 

or the account that could impact the 

amount of residual interest before 

withdrawing funds protects customer 

funds by reducing the likelihood that 

lack of current information could cause 

the FCM to make a withdrawal from 

customer funds that is large enough to 

cause the account to fall below its 

segregated funds requirement. 

The adopted amendments require 

FCMs to take several steps in order to 

remove more than 25 percent of their 

residual interest in a single day. Large, 

single-day withdrawals of the FCM’s 

residual interest in the customer 

segregated account could be an 

indication of current or impending 

capital or liquidity strains at the FCM. 

The additional steps ensure that senior 

management is knowledgeable of and 

accountable for such withdrawals, that 

no shortfall in the customer segregated 

accounts is created by the withdrawals, 

and that the CFTC and DSRO are both 

alerted to allow them to monitor the 

FCM and its segregated accounts closely 

over subsequent days and weeks. 

Additional monitoring will help to 

ensure that the integrity and sufficiency 

of the FCM’s customer segregated 

accounts are protected. In addition, 

notifying the CFTC and DSRO gives 

both an opportunity to ask questions 

about the FCM’s reasonable reliance on 

its estimations of the adequacy of its 

funds necessary to meet segregation 

requirements. Such questions may give 

the Commission and DSRO comfort that 

the transaction does not indicate any 

strain on the FCM’s financial position, 

or conversely, may raise additional 

questions and alert the CFTC and DSRO 

to the need for heightened monitoring of 

the FCM or further investigation of its 

activities. The amendment also adds 

protection by ensuring that the 

Commission has records regarding the 

name and address of parties receiving 

funds from any withdrawal of residual 

interest in segregated funds not for the 

benefit of customers. Also, requiring an 

FCM to replenish its residual funds the 

following day any time a withdrawal 

causes it to drop below the FCM’s target 

amount helps to ensure that residual 

interest is not used by the firm to 

address liquidity needs in other parts of 

the firm unless those needs are very 

short-term in nature (i.e., less than 24 

hours). Finally, the amendments are 

consistent with rules imposed on all 

FCMs by the DSROs. 

In the NPRM, the Commission 

qualitatively analyzed that the 

amendments to § 1.23 would create 

costs for FCMs and quantitatively 

estimated costs associated with 

obtaining management approvals for 

withdrawals exceeding 25 percent of the 

prior day’s residual interest. The 

restrictions on withdrawals were 

anticipated to potentially prevent an 

FCM from withdrawing funds quickly in 

order to meet certain operational needs, 

or to take advantage of specific 

investment opportunities, and in 

general could be expected to result in an 

FCM needing to hold additional capital 

outside of residual interest in order to 

meet operational needs. 

The Commission did not receive 

comments on its quantitative estimates 

of the costs of obtaining management 

approvals. However, the Commission 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68601 

739See FIA Comment Letter at 29 (Feb. 15, 2013); 

Jefferies Comment Letter at 4 (Feb. 15, 2013). 

740FIA Comment Letter at 13 (Feb. 15, 2013). 

741 Jefferies Comment Letter at 5 (Feb. 15, 2013). 

742FIA Comment Letter at 27–29 (Feb. 15, 2013). 

did receive comments on its qualitative 

analysis of costs, and also received 

comments that the use of the prior day’s 

actual residual interest as the amount 

applicable to the restriction would 

provide a disincentive to FCMs holding 

additional funds at DCOs as residual 

interest, which commenters posited as 

less beneficial to the protection of 

customers. Several commenters, 

including FIA and Jefferies suggested 

the Commission utilize the targeted 

residual amount as the threshold for 

notifications and withdrawal 

restrictions, in order to not discourage 

FCMs from holding additional funds as 

residual interest.739 FIA suggested that 

the qualitative analysis of the costs was 

not sufficient and that the amendments 

would impose a tremendous operational 

and financial burden on the industry, 

requiring the development and 

implementation of entirely new systems 

to assure compliance and detrimentally 

impacting liquidity.740 The Commission 

believes however, that this comment is 

not directed to the withdrawal 

restrictions as adopted or the necessity 

to replenish the targeted residual 

interest amount, but instead directed at 

requirements with respect to holding 

residual interest sufficient to cover 

customer under margined amounts, 

which is addressed separately in the 

cost benefit considerations for § 1.22. 

Jefferies provided some quantitative 

estimates of the costs of holding 

increased residual interest, specifically 

positing that even a five percent 

increase in residual interest could cost 

Jefferies $500,000.741 FIA posited that 

FCMs currently may increase residual 

interest day-to-day for expected events, 

including during stressed market 

conditions and for the purpose of 

currency facilitation, and to impose 

withdrawal restrictions based on the 

actual, as opposed to targeted, excess 

would reduce the actual likelihood of 

FCMs infusing of additional proprietary 

funds in those circumstances.742

The Commission understands that 

establishing a target and holding 

residual interest does have costs, but 

disagrees with the underlying 

assumptions of the cost estimates 

provided by Jefferies. The cost estimates 

provided by Jefferies imply the cost of 

holding additional residual interest is 

the same as the FCM’s cost of capital. 

However, the cost considered for the 

amendments should be the difference in 

what can be earned by more 

conservative investments permitted for 

segregated funds versus otherwise if 

held by FCMs as unrestricted capital, 

unless the targeted residual amount 

exceeds an FCM’s minimum net capital 

requirement. The costs of holding some 

amount of residual interest is an 

existing cost of doing business as an 

FCM because, practically speaking, 

there is a need to hold some amount of 

residual interest on a day to day basis 

to remain in segregation compliance. 

Significant minimum net capital 

requirements exist for FCMs, currently. 

Unless the targeted residual interest in 

fact exceeds a firm’s minimum net 

capital requirement, the requirement to 

hold capital as residual interest in 

customer segregated accounts is not a 

separate additional capital requirement. 

Therefore, Jefferies’ contention with 

respect to the costs of the withdrawal 

restrictions being represented by the 

costs of additional required capital for a 

firm is not persuasive. Such cost is only 

an incremental cost of the newly 

adopted requirements of establishing or 

publicizing targets or imposing 

withdrawal restrictions. Further, the 

withdrawal restrictions adopted require 

a one day delay, and management 

approval and regulatory notifications. 

These are not absolute restrictions to the 

withdrawal of residual interest funds 

and the costs considered and incentives 

or disincentives created should not be 

analyzed as if they were. Even the 

replenishment requirement adopted, 

with respect to withdrawals not for the 

benefit of customers resulting in 

residual interest dropping below the 

target for residual interest, in order to 

maintain the targeted residual amount, 

provides an FCM with the flexibility to 

reassess the target as an alternative. 

However, all these processes must be 

transparent to the Commission, 

including the FCM’s management’s 

accountability for such processes. 

The Commission is not persuaded 

that the reduced incentives to provide 

added funds to residual interest would 

be a reason to adopt an alternative of 

using the targeted residual as opposed 

to the actual prior day residual as the 

measurement for the 25 percent 

withdrawal restriction, which is a 

requirement for notice and approval, 

and therefore, not an absolute 

restriction. The rationales for adding 

funds specific to certain anticipated 

events could just as easily provide a 

clear basis for the management approval 

and notification process required for the 

subsequent withdrawal of funds after 

those circumstances, as opposed to 

making them unlikely to occur at all. 

The benefits of clear management 

accountability and regulatory 

transparency with respect to such 

practices and related operational risks 

(such as potentially more volatile cash 

flows through segregated accounts not 

for the benefit of customers) would still 

be obtained. 

Section 1.25 Investment of Customer 

Funds 

Regulation 1.25 sets forth the 

financial investments that an FCM or 

DCO may make with customer funds. 

Among other things, § 1.25 permits 

FCMs and DCOs to use customer funds 

to purchase securities from a 

counterparty under an agreement for the 

resale of the securities back to the 

counterparty. This type of transaction is 

referred to as a reverse repurchase 

agreement and in effect, is a 

collateralized loan by the FCM to its 

counterparty. Regulation 1.25(b)(3)(v) 

establishes a counterparty concentration 

limit, prohibiting FCMs and DCOs from 

using more than 25 percent of the total 

funds in the customer segregated 

account to conduct reverse repos with a 

single counterparty. The Commission’s 

amendment expands the definition of a 

counterparty to include additional 

entities under common ownership or 

control. Thus, as adopted, the 25- 

percent counterparty concentration 

limit for reverse repurchase agreements 

applies not only to a single 

counterparty, but to all counterparties 

under common control or ownership. 

The additional adopted changes to 

§ 1.25 are conforming amendments 

proposed in order to harmonize this 

section with other amendments adopted 

in this release. 

Costs and Benefits 

In the NPRM, the Commission 

discussed how the expansion of the 

concentration limitation to 

counterparties under common control or 

ownership is consistent with the 

original intention of the concentration 

limitation, which was to mitigate the 

potential losses or disruptions due to 

the default of a counterparty. The 

Commission has elected to adopt the 

amendment as a further protection to 

customer funds, because a default by 

one counterparty that is under common 

control or ownership, may adversely 

impact all of the counterparties to the 

reverse repurchase agreement and hence 

adversely impact the FCM and the funds 

it holds for its customers. Because the 

amendment incorporates the 

Commission’s interpretation of the 

existing rule, it does not alter the rule’s 

meaning and, therefore, the amendment 

does not create any incremental costs or 

benefits. Likewise, the additional 


TKELleY on DSK3SPTVN1PROD with RULES2
68602 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

743Schippers Comment Letter (Dec. 10, 2013), 

Randy Fritsche Comment Letter (Feb. 14, 2013), 

NPPC Comment Letter at 2 (Feb. 14, 2013), Strelitz/ 

California Metal X Comment Letter (Jan. 15, 2013), 

Premier Metal Services Comment Letter at 4 (Jan. 

3, 2013), ISRI Comment Letter at 5–7 (Dec. 4, 2012), 

AIM Comment Letter at 4 (Jan. 24, 2013), Kripke 

Enterprises Comment Letter (Dec. 12, 2012), 

Manitoba Comment Letter (Dec. 13, 2012), Solomon 

Metals Corp. Comment Letter (Jan. 15, 2013), 

Michael Krall Comment Letter (Dec. 17, 2012), 

David Kennedy Comment Letter (Dec. 17, 2012), 

Robert Smith Comment Letter (Dec. 17, 2012), 

Michael Carmichael Comment Letter (Dec. 17, 

2012), Andrew Jackson Comment Letter (Dec. 17, 

2012), Donald Blais Comment Letter (Dec. 17, 

2012), Suzanne Slade Comment Letter (Dec. 17, 

2012), Patricia Horter Comment Letter (Dec. 17, 

2012), JoDan Traders Comment Letter (Dec. 17, 

2012), Jeff Schlink Comment Letter (Dec. 18, 2012), 

Sam Jelovich Comment Letter (Dec. 18, 2012), 

Matthew Bauman Comment Letter (Dec. 20, 2012), 

Mark Phillips Comment Letter (Dec. 22, 2012), 

Deborah Stone Comment Letter (Dec. 24, 2013), Po 

Huang Comment Letter (Dec. 24, 2012), Aarynn 

Krall Comment Letter (Jan. 8, 2013), Vael Asset 

Management Comment Letter (Jan. 10, 2013), Kos 

Capital Comment Letter (Jan. 11, 2013), James Lowe 

Comment Letter (Jan. 13, 2013), Tracy Burns 

Comment Letter (Jan. 14, 2013), Treasure Island 

Coins Comment Letter (Jan. 14, 2013), and Clare 

Colreavy Comment Letter (Jan. 9, 2013). 

744NPPC Comment Letter at 2 (Feb. 14, 2013), 

Premier Metal Services Comment Letter at 4 (Jan. 

3, 2013), ISRI Comment Letter at 5–7 (Dec. 4, 2012), 

AIM Comment Letter at 4 (Jan. 24, 2013), Kripke 

Enterprises Comment Letter (Dec. 12, 2012), 

Manitoba Comment Letter (Dec. 13, 2012), Solomon 

Metals Corp. Comment Letter (Jan. 15, 2013), 

Michael Krall Comment Letter (Dec. 17, 2012), 

David Kennedy Comment Letter (Dec. 17, 2012), 

Robert Smith Comment Letter (Dec. 17, 2012), 

Michael Carmichael Comment Letter (Dec. 17, 

2012), Andrew Jackson Comment Letter (Dec. 17, 

2012), Donald Blais Comment Letter (Dec. 17, 

2012), Suzanne Slade Comment Letter (Dec. 17, 

2012), Patricia Horter Comment Letter (Dec. 17, 

2012), JoDan Traders Comment Letter (Dec. 17, 

2012), Jeff Schlink Comment Letter (Dec. 18, 2012), 

Sam Jelovich Comment Letter (Dec. 18, 2012), 

Matthew Bauman Comment Letter (Dec. 20, 2012), 

Mark Phillips Comment Letter (Dec. 22, 2012), 

Deborah Stone Comment Letter (Dec. 24, 2013), Po 

Huang Comment Letter (Dec. 24, 2012), Aarynn 

Krall Comment Letter (Jan. 8, 2013), Vael Asset 

Management Comment (Jan. 10, 2013), Kos Capital 

Comment (Jan. 11, 2013), James Lowe Comment 

Letter (Jan. 13, 2013), Tracy Burns Comment Letter 

(Jan. 14, 2013), Treasure Island Coins Comment 

Letter (Jan. 14, 2013), and Clare Colreavy Comment 

Letter (Jan. 9, 2013). 

745NPPC Comment Letter at 2 (Feb. 14, 2013); 

Premier Metal Services Comment Letter at 4 (Jan. 

3, 2013); ISRI Comment Letter at 6 (Dec. 4, 2012); 

AIM Comment Letter at 6 (Jan. 24, 2013); Kripke 

Enterprises Comment Letter (Dec. 10, 2012); 

Manitoba Comment Letter (Dec. 13, 2012); and 

Solomon Metals Corp. Comment Letter (Jan, 15, 

2013). 

746 Vanguard Comment Letter at 4–6 (Feb. 22, 

2013). 

747Further, per § 1.25(c)(3), the FCM or DCO shall 

obtain the § 1.26 Template Letter from ‘‘an entity 

that has substantial control over the [MMMF] shares 

purchased with customer funds and has the 

knowledge and authority to facilitate redemption 

and payment or transfer of the customer funds. 

Such entity may include the [MMMF] sponsor or 

depository acting as custodian for [MMMF] shares.’’ 

changes to § 1.25 are conforming 

amendments proposed in order to 

harmonize this section with other 

amendments proposed in this release, 

and, therefore, do not create any 

incremental costs or benefits. 

Because § 1.25 sets forth the financial 

investments that an FCM or DCO may 

make with customer funds, several 

members of the public 743 expressed 

their general opinions regarding the 

investment and handling of customer 

funds by FCMs and DCOs. In general, all 

of the commenters supported the 

position that FCMs and DCOs only be 

allowed to make safe/non-speculative 

investments of customer funds and not 

be allowed to add risk that customers 

are unaware of or do not sanction. In 

addition, some of the commenters 744

proposed that the Commission amend 

its regulations to provide commodity 

customers with the ability to ‘‘opt out’’ 

of granting FCMs the ability to invest 

customer funds (including 

hypothecation and rehypothecation); 

seven 745 of which further requested that 

the Commission mandate that an FCM 

cannot prevent a customer who so ‘‘opts 

out’’ from continuing to trade through 

that FCM merely because the customer 

elected to ‘‘opt out.’’ Additionally, 

Vanguard requested that customers have 

immediate access to the reports 

indicating that FCMs have failed to 

comply with various mandates 

including compliance with § 1.25 

margin investment limits; and that 

customers have access on a twice 

monthly basis to reports on an FCM’s 

actual investment of customer assets to 

determine whether such investments are 

concentrated in more or less liquid 

assets as allowed under § 1.25.746

Although the Commission understands 

the concern of the public regarding the 

safety and investment of customer 

funds, because an ‘‘opt out’’ provision 

was not proposed by the Commission, 

and would in any case not be effective 

due to pro-rata distribution in an FCM 

bankruptcy, this alternative is not 

adopted in this final rulemaking. 

Section 1.26 Deposit of Instruments 

Purchased with Customer Funds 

Regulation 1.26 requires an FCM or 

DCO that invests futures customer funds 

in instruments described in § 1.25 to 

obtain a written acknowledgment from 

any depository holding such 

instruments. The FCM or DCO must use 

the Template Letters in the appendices 

to § 1.20, in accordance with the 

requirements established in § 1.20. The 

specifics of those requirements, as well 

as the costs and benefits of them, are 

detailed in the discussion of costs and 

benefits for § 1.20. If, however, an FCM 

or DCO invests funds with a money 

market mutual fund (MMMF), the FCM 

or DCO must use the Template Letters 

in the appendices of § 1.26 rather than 

the acknowledgment letters in the 

appendices of § 1.20.747 The content of 

the Template Letters in the appendices 

to § 1.26 is identical to those in the 

appendices to § 1.20 except that they 

include three additional provisions 

related specifically to funds held by the 

MMMF or its custodian. Specifically, 

the Template Letters set out the 

requirements established in § 1.25(c) 

that: (1) the value of the fund must be 

computed and made available to the 

FCM or DCO by 9:00 a.m. on the 

following business day; (2) the fund 

must be legally obligated to redeem 

shares and make payments to its 

customers (i.e., the FCM or DCO) by the 

following business day; and (3) the 

MMMF does not have any agreements in 

place that would prevent the FCM or 

DCO from pledging or transferring fund 

shares. 

Benefits 

The benefits are largely the same as 

for the Template Letters required under 

§ 1.20, described above in the cost-andbenefit section related to § 1.20. 

However, there are benefits to requiring 

FCMs and DCOs to obtain a different 

Template Letter from MMMFs with 

respect to customer funds invested in 

MMMFs. Specifically, MMMFs or their 

custodians (as applicable) are required 

to acknowledge their additional 

obligations under § 1.25(c). 

Costs 

The costs are largely the same as for 

the Template Letters required under 

§ 1.20. The general concerns raised by 

commenters regarding the costs arising 

from the Template Letters as well as the 

Commission’s responses are detailed in 

the discussion of costs for § 1.20. 

Section 1.29 Gains and Losses 

Resulting From Investment of Customer 

Funds 

Regulation 1.29 provides that an FCM 

or DCO may keep as its own any interest 

or other gain resulting from the 

investment of customer funds in 

financial instruments permitted under 

§ 1.25; however, the FCM or DCO must 

manage the permitted investments 

consistent with the objectives of 

preserving principal and maintaining 

liquidity. The Commission’s 

amendment also explicitly provides that 

although an FCM or DCO is not required 

to pass the earnings on the investment 

of customer funds back to its futures 

customers, the FCM or DCO is solely 

responsible for any losses that result 

from its investment of customer funds. 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68603 

748FIA, ‘‘Initial Recommendations for Customer 

Funds Protection’’ available at http://

www.futuresindustry.org/downloads/Initial_

Recommendations_for_Customer_Funds_

Protection.pdf. 

749FIA Comment Letter at 30–31 (Feb. 15, 2013). 

Costs and Benefits 

In the NPRM, the Commission 

discussed how the amendment clarifies 

that the allocation of losses on the 

investment of customer funds by an 

FCM or DCO to its customers would 

result in the use of customer funds in a 

manner that is not consistent with 

section 4d(a)(2) and § 1.20, as customer 

funds can only be used for the benefit 

of futures customers and limits 

withdrawals from futures customer 

accounts, other than for the purpose of 

engaging in trading, to certain 

commissions, brokerage, interest, taxes, 

storage or other fees or charges lawfully 

accruing in connection with futures 

trading. This change was supported by 

FIA, which stated its belief that the 

FCM’s or DCO’s responsibility for losses 

in § 1.25 investments ‘‘is clear and is 

implicit in the Act and the 

Commission’s rules.’’ 748 The 

Commission believes that market 

participants already recognize this 

responsibility and obligation and direct 

the investment of customer funds 

accordingly. Therefore, the Commission 

does not believe that the amendment to 

§ 1.29(b) will create any additional 

costs; however, the marketplace will 

benefit in that the amendment provides 

clarity as to the FCM’s or DCO’s sole 

responsibility for any losses resulting 

from the investment of customer funds 

in the financial instruments listed under 

§ 1.25. FIA filed a comment supporting 

the proposed amendments to § 1.29.749

No other comments were received. The 

Commission has adopted the 

amendments to § 1.29 as proposed. 

Section 1.30 Loans by Futures 

Commission Merchants; Treatment of 

Proceeds 

The Commission adopted 

amendments to § 1.30 to clarify that, 

while an FCM may provide secured 

loans to a customer with adequate 

collateral, it may not make loans to a 

customer on an unsecured basis or use 

a customer’s futures or options positions 

as security for a loan from the FCM to 

that customer. 

Costs and Benefits 

The amendments prohibiting FCMs 

from providing unsecured loans to 

customers and from using a customer’s 

positions to secure loans made to such 

customers reduce counterparty risk 

borne by the FCM. The former 

prohibition prevents the FCM from 

accumulating exposures to customers 

that have not margined their positions, 

while the latter prevents the additional 

exposure that otherwise would result 

from using the same collateral to secure 

two different risks (i.e., the risks 

associated with the open positions and 

the risks associated with the secured 

loan). Additionally, to the extent that 

the amendments would force certain 

customers to obtain loans from another 

lender, it diversifies the counterparty 

risk across multiple entities. The 

amendments also are comparable to 

rules of the CME for its member firms. 

The Commission did not 

quantitatively estimate the potential 

increase to customers’ operational costs 

due to the inability of customers who 

need or desire to use borrowed funds to 

meet initial and maintenance margin 

requirements to obtain loans necessary 

to fund their futures or options 

positions from a third party lender. The 

Commission requested, but did not 

receive, comments regarding the 

prevalence of FCMs’ extension of loans 

to customers and the potential costs 

customers might bear if it were 

necessary to obtain loans from third 

parties rather than from the FCMs with 

whom their segregated customer 

accounts are held. Neither were any 

comments received generally suggesting 

a qualitative burden in complying with 

the amendments. 

Section 1.32 Reporting of Segregated 

Account Computation and Details 

Regarding the Holding of Customer 

Funds 

The adopted amendments to § 1.32 

allow an FCM that is not a dual 

registrant to follow the same procedures 

as dual registrants (FCM/BDs) when 

assessing a haircut to securities 

purchased with customer funds if the 

FCM determines that those securities 

have minimal credit risk. This is the 

same change as adopted in § 1.17, 

except that in § 1.17 the amendment is 

with respect to the haircut for securities 

purchased by an FCM with its own 

capital, whereas this amendment 

applies to the haircut ascribed to the 

collateral value of securities deposited 

by customers for the purpose of securing 

customer net debits. The cost benefit 

considerations are the same as those 

analyzed with the corresponding 

amendment to § 1.17. 

In addition, the adopted amendments 

(1) require FCMs to submit their daily 

Segregation Schedules, Secured Amount 

Schedules, and Cleared Swaps 

Segregation Schedules to the 

Commission and their DSROs 

electronically by noon the following 

business day; (2) require that twice per 

month, each FCM submits a detailed list 

of all the depositories and custodians 

where customers’ segregated funds are 

held, including the amount of customer 

funds held by each entity and a breakdown of the different categories of § 1.25 

investments held by each entity, further 

identifying if any of the depositories are 

affiliated with the FCM; and (3) require 

that the detailed list of depositories be 

submitted to the Commission 

electronically by 11:59 p.m. the 

following business day and that both 

segregation and secured amount 

statements and the detailed listing of 

depositories be retained by the FCM in 

accordance with § 1.31. 

Costs and Benefits 

Requiring FCMs to submit their daily 

segregation and secured amount 

calculations to the Commission and 

DSROs will enable the Commission and 

DSROs to better protect customer funds 

by more closely monitoring for any 

discrepancies between the assets in 

segregated accounts reported by the 

FCM and their depositories as reported 

to the DSRO and available to the 

Commission through an aggregator of 

depository balances. The ability of the 

Commission and DSRO to check for 

discrepancies more regularly, without 

notice, is likely to provide an additional 

deterrent to fraud. Moreover, it will 

enable both the Commission and DSROs 

to monitor for any trends that would 

indicate that operational or financial 

problems are developing at the FCM, 

which would give the Commission an 

opportunity to enhance its supervision 

and to intervene, if necessary, to protect 

customer segregated funds. In addition, 

the amendments are consistent with the 

rules of SROs that currently require 

each FCM to submit daily segregation 

and secured amount calculations to the 

SROs. 

The detailed list of depositories will 

provide additional information to the 

Commission and DSROs beyond what is 

required under §§ 1.20, 1.26, and 30.7. 

First, the detailed list of depositories 

will provide additional account detail 

including the types of securities and 

investments that constitute each 

account’s assets, rather than just the 

total value. Second, the reports will 

account for any pending transactions 

that would not necessarily be apparent 

from the daily balances submitted to an 

aggregator by the depositories. Third, 

FCMs will, in these reports, provide to 

the Commission and DSROs a 

reconciled balance, which will not be 

included with balances provided to the 

aggregator by depositories. Last, the 

FCM will be required to specifically 


TKELleY on DSK3SPTVN1PROD with RULES2
68604 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

750See Segregated Investment Detail Report at 

http://www.nfa.futures.org/NFA-compliance/NFAfutures-commission-merchants/fcm-reporting.pdf. 751FIA Comment Letter at 30–31 (Feb. 15, 2013). 752See Jefferies Comment Letter at 3 (Feb. 15, 

2013). 753See CFA Comment Letter at 7 (Feb. 13, 2013). 

identify any depositories that are 

affiliated with the FCM. Each of these 

additional forms of information would 

enable the Commission and DSROs to 

provide better oversight and create 

additional accountability for the FCM, 

enhancing the protection of market 

participants. 

FCMs are already calculating 

segregated funds information daily and 

reporting the results to NFA via 

WinJammer by noon the following day. 

Similarly, the detailed list of 

depositories that would be required to 

be submitted twice per month is already 

required by NFA to be produced and 

submitted to NFA via WinJammer.750

Requiring FCMs to submit these reports 

to the Commission via the same 

platform is not expected to create any 

additional costs. 

FIA commented in support of the 

amendments to § 1.32 and asked for 

clarification that on a daily basis, a 

single U.S. dollar equivalent, as 

opposed to multiple currency by 

currency schedules, is what is required 

to be filed.751 Jefferies commented that 

the amendments to § 1.32 will not 

achieve the benefit of transparency to 

customers because of the way cash and 

investments are presented separately 

from balances at other FCMs and 

DCOs.752 However, this comment 

appears related to the requirements of 

disclosure to customers of NFA’s 

publicly available information, not the 

requirements of § 1.32, which require 

similar information to be reported to the 

Commission and DSROs. The 

Commission believes the detailed 

information required, along with all the 

additional disclosures being provided to 

customers in the amendments to all 

rules contained herein, do provide 

sufficient transparency for customers to 

be able to assess the risks of depositing 

funds with FCMs. The specific detailed 

amounts of cash and securities held in 

segregation must be provided, by 

individual depository, including DCOs, 

under the amendment to § 1.32. The 

Commission does not believe that 

customers will misinterpret the 

liquidity of cash held at DCOs as 

opposed to other types of depositories, 

and that therefore the requirements do 

not provide the transparency intended, 

although the Commission understands 

that Jefferies is concerned with the 

appearance of percentage calculations 

that are provided publicly on NFA’s 

portal. The Commission notes, however, 

that the amendments to § 1.32 do not 

require reporting of any percentage 

calculations. There were no comments 

received regarding the Commission’s 

analysis that, due to the existing NFA 

requirements, the Commission’s 

amendments to § 1.32 were not expected 

to result in incremental costs for FCMs. 

With respect to the adopted changes 

to allow FCMs to utilize lower haircuts 

applicable to the market value of 

customer securities, if such securities 

are determined to have minimal credit 

risk, in determining the allowance 

provided for securing net deficits of 

customers, the CFA specifically objected 

to the ability of FCMs to obtain the 

benefit of lower haircuts by utilizing the 

process of establishing credit risk 

proposed in the amendment to the 

SEC’s rule 15c3–1.753 However, the 

Commission has determined that the 

ability of FCMs to utilize haircuts lower 

than the standard deduction of 15% 

otherwise applicable under SEC rule 

15c3–1 should be equally available to 

FCMs along with jointly registered BD/ 

FCMs under the Commission’s adopted 

amendment to the net capital rule at 

§ 1.17, to promote equity and fairness of 

competition between FCMs and joint 

BD/FCMs and to maintain uniformity 

with the capital rule of the SEC for the 

treatment of securities as much as 

practicable. The Commission believes, 

despite the CFA’s comments indicating 

the haircut could be manipulated, that 

the collateral value haircut for the same 

security for the purpose of securing net 

deficits should also be determined by 

reference to the net capital haircut for 

the same security, and notes both have 

always been determined by the SEC’s 

net capital haircuts for securities. The 

Commission believes the benefits of 

continuing to have such uniformity are 

substantial. The alternative, which 

necessarily would be applying a very 

substantial standard haircut to a debt 

security with minimal credit risk 

collateralizing a short term obligation, 

would be overly harsh and not 

accurately reflect the market risk to such 

collateral for the stated purpose of 

valuing the extent to which the 

customer debit is adequately secured. 

The Commission further notes that the 

SEC’s rule, which is the basis for these 

amendments at §§ 1.17, 1.32 and 30.7, 

and the formulation adopted in these 

amendments, still provides a standard, 

although lesser percentage, haircut, not 

a model-based haircut, and also 

provides for an audit trail of the BD/

FCM’s determinations supporting the 

determination of minimal credit risk, 

which should prevent the ability of 

FCMs to manipulate the haircut, as 

suggested by CFA. 

Section 1.52 Self-regulatory 

Organization Adoption and Surveillance 

of Minimum Financial Requirements 

The amendments to 1.52 revise the 

supervisory program that SROs are 

required to create and adopt. In 

addition, for SROs that choose to 

delegate the function to examine FCMs 

that are members of two or more SROs 

to a DSRO, the amended rules require a 

plan that establishes a Joint Audit 

Committee which, in turn, must 

propose, approve, and oversee the 

implementation of a Joint Audit 

Program. The amended rules specify a 

number of additional requirements for 

the SRO supervisory program as well as 

for the Joint Audit Program. 

Costs and Benefits 

The amendments adopted to § 1.52 

provide significant additional protection 

to market participants and customer of 

FCMs by helping to ensure that SRO 

examinations of member FCMs are 

thorough, effective and risk-based, and 

include evaluation and testing of 

internal controls as well as meeting, as 

applicable, other objective criteria from 

related professional audit standards. 

Specifically, an SRO’s audit program 

must be risk-based (e.g., the scope and 

focus of such examinations would be 

determined by the risk profile that the 

SRO develops for each FCM) and 

address ‘‘all areas of risk to which FCM 

can reasonably be foreseen to be 

subject,’’ and that the examination itself 

includes both controls testing as well as 

substantive testing. Requiring regulatory 

examinations by SROs to include testing 

and review of internal controls will help 

ensure that each FCM is not only 

compliant with capital and segregation 

requirements at the time of the 

examination, but that they continue to 

operate in such a manner without 

undetected internal controls 

inadequacies that could jeopardize the 

FCM and its customers. 

By requiring that the supervisory 

program for an SRO to adhere to 

professional standards for auditing as 

applicable, the Commission is provided 

with additional assurance as to 

standards for aspects of an examination 

such as the adequacy of the evaluation 

of evidence obtained supporting 

examination conclusions; the training 

and proficiency of the examinations 

staff; due professional care in the 

performance of the work; consideration 

of fraud, audit risk and materiality in 

conducting an audit; planning and 

supervision; understanding the entity 

and its environment and assessing the 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68605 

754CME, JAC, MGEX, NFA and PWC all 

commented objecting to or raising concern with this 

aspect of the amendment to § 1.52. 

755See PWC letter at 3 (Jan. 15, 2013). 756See NFA Comment Letter at 5 (Feb. 15, 2013). 757CME Comment Letter at 11 (Feb. 15, 2013). 758 Id. 759 Id. 760 Id. 761See CME Comment Letter at 12–13 (Feb. 15, 

2013). 762See MGEX letter at 4 (Feb. 18, 2013). 

763See JAC Comment Letter at 3–4 (July 25, 

2013). 

764See NFA Comment Letter at 5, n.2 (Feb. 15, 

2013). 

risk of material misstatement; 

communication with those charged with 

governance of the examined entity; and 

communicating internal control matters 

identified in an examination. These 

benefits are obtained by requiring SRO 

supervisory programs to include 

consideration of specific issues and be 

carried out in compliance with 

professional standards as may be 

applicable to non-financial audits. The 

Commission believes more rigorous 

requirements and the application of 

professional standards in carrying out 

such requirements will add additional 

protection to an FCM’s counterparties 

and customers. 

The Commission also proposed to 

require SROs and as applicable the JAC, 

to obtain an evaluation of the SRO’s or 

JAC’s supervisory program at least once 

every two years from an examinations 

expert, defined as a nationally 

recognized accounting and auditing firm 

with substantial expertise in audits of 

FCMs, risk assessment and internal 

control reviews, and that is an 

accounting and auditing firm that is 

acceptable to the Commission (as 

delegated to the Director of the Division 

of Swap Dealer and Intermediary 

Oversight). The benefits of such 

evaluation by examinations experts 

were expected to be that the 

Commission would ensure that the 

supervisory program and SRO audits 

continue to build on best practices, 

which further promotes thorough and 

effective audits of FCMs. The 

Commission quantitatively estimated 

costs for making incremental changes to 

the requirements of the supervisory 

program for each SRO and members of 

the JAC in the NPRM. The Commission 

did not quantitatively estimate the 

ongoing costs of obtaining an evaluation 

by an examinations expert or requiring 

examinations to comply with 

professional standards, although the 

Commission did consider that requiring 

such an evaluation and requiring 

compliance with such standards and 

coverage of additional risks would add 

costs to examinations by SROs and 

members of the JAC. 

The Commission received many 

comment letters regarding the changes 

proposed to § 1.52. Several of the 

commenters objected to the 

requirements for having a review of the 

examination program by an 

examinations expert.754 Specifically, 

PWC raised concern with the ability of 

nationally recognized accounting and 

auditing firms to be able to issue any 

type of assurance without a reporting 

framework.755 NFA, MGEX, and CME 

all commented that costs would be 

prohibitive and that benefits would be 

reduced because such an evaluation 

would be duplicative to the functions of 

the Commission in review of the Joint 

Audit Program. NFA commented that it 

attempted to obtain cost estimates from 

a few nationally recognized firms but 

that such firms represented that they 

were unable to provide cost information 

without a better understanding of the 

type of review the Commission was 

proposing.756 CME commented that the 

quantitative estimates of the 

Commission for revising the program 

were grossly underestimated.757 CME 

analogized that requiring adherence to 

professional standards would result in 

examination requirements similar to the 

average man hours applicable to private 

and public company audits, which were 

represented at 1,951 and 17,457 

respectively.758 CME represented that 

the costs of compliance with 

professional standards and expanding 

the program were prohibitively 

expensive and requested that only 

applicable provisions should be carried 

into JAC protocols.759 CME commented 

that any benefit from obtaining an 

evaluation from an examinations expert 

could be obtained at a much reduced 

cost by including representatives from 

such nationally recognized firms in the 

JAC meetings and in the current process 

to develop JAC protocols, without 

obtaining a formal assessment, which 

such firms would more likely to be 

willing to do.760 CME further posited 

that if such alternative was not adopted, 

the timeframe should be lengthened 

from two to three and a half years.761

MGEX further commented that if such 

report were to be required, highly 

qualified regional firms should be 

considered as well as nationally 

recognized firms, as more competition 

would likely result in more manageable 

costs.762

In consideration of the concerns of 

commenters, the Commission has 

adopted revised amendments to the 

examinations expert requirement to 

§ 1.52, which extend the time between 

evaluations required to three years, and 

clarify that the standard for such 

evaluation should be that of a 

consulting services report. The 

Commission also has considered the 

comments of CME and others with 

respect to the costs and inapplicability 

of many aspects of the PCAOB auditing 

standards to regulatory examination and 

has adopted, in the revised amendments 

to the professional standards 

requirements, that only such standards 

as would be analogous to non-financial 

statement audits would be applicable. 

The JAC also filed an additional 

comment letter positing that the 

requirements of proposed § 1.52, 

requiring review of risk management, 

would be duplicative to risk reviews 

required to be performed by DCOs.763

Although the Commission agrees there 

may be overlapping responsibilities 

between oversight performed by DCOs 

and SROs which could result in 

duplicated costs, the primary focus of 

DCO requirements are the protection of 

the DCO, not the protection of 

customers and market participants. The 

Commission notes that the same 

duplication could exist if an FCM were 

examined by each SRO of which it was 

a member. The Commission already 

permits the Joint Audit Committee, the 

Joint Audit Plan and the DSRO structure 

for the purpose of mitigating duplicative 

examination work and costs. As stated 

in the preamble, a DSRO may be able to 

fulfill parts of its examination program 

by incorporating aspects of risk reviews 

and work already performed by a DCO, 

but the DSRO would be responsible for 

ensuring any such work was adequately 

and specifically incorporated into the 

DSRO program, and oriented to 

ensuring the protection of customers 

and risks to the FCM. 

Additionally, the Commission notes it 

was not feasible to quantify any costs 

associated with utilizing an 

examinations expert. This is largely 

because several nationally recognized 

accounting firms expressed their 

reluctance to provide such 

information.764 Such a response is not 

surprising given the fact that reviewing 

a DSRO’s examination program is likely 

a unique and limited engagement for 

any firm, which would require fully 

understanding the scope and 

requirements of the review. Yet, the 

Commission notes there are several 

capable firms which would meet the 

definition of ‘‘examinations expert’’ and 

could perform the type of review 

required by the regulation. Thus, the 

costs for performing such a service will 

likely be competitive. 


TKELleY on DSK3SPTVN1PROD with RULES2
68606 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

765The material risks addressed must include, 

without limitation, ‘‘the nature of investments made 

by the futures commission merchant (including 

credit quality, weighted average maturity, and 

weighted average coupon); the futures commission 

merchant’s creditworthiness, leverage, capital, 

liquidity, principal liabilities, balance sheet 

leverage and other lines of business; risks to the 

futures commission merchant created by its 

affiliates and their activities, including investment 

of customer funds in an affiliated entity; and any 

significant liabilities, contingent or otherwise, and 

material commitments.’’ 

Section 1.55 Public Disclosures by 

Futures Commission Merchants 

Amended § 1.55 significantly revises 

the disclosures that FCMs are required 

to provide to prospective customers and 

the public, detailed in § 1.55(b). The 

new required provisions include a 

statement that: (1) Customer funds are 

not protected by insurance in the event 

of the bankruptcy or insolvency of the 

FCM, or if customer funds are 

misappropriated; (2) customer funds are 

not protected by SIPC, even if the FCM 

is a BD registered with the SEC; (3) 

customer funds are not insured by a 

DCO in the event of the bankruptcy or 

insolvency of the FCM holding the 

customer funds; (4) each customer’s 

funds are not held in an individual 

segregated account by an FCM, but 

rather are commingled in one or more 

accounts; (5) FCMs may invest funds 

deposited by customers in investments 

listed in § 1.25; and (6) funds deposited 

by customers may be deposited with 

affiliated entities of the FCM, including 

affiliated banks and brokers. The 

required additional disclosures must be 

provided as an addition to the generic 

risk disclosure statement if used by an 

FCM as permitted under Appendix A to 

§ 1.55. 

In addition, the amendments at 

§ 1.55(i), (j) and (k) require each FCM to 

provide a Firm Specific Disclosure 

Document that would address firm 

specific information regarding its 

business, operations, risk profile, and 

affiliates that would be material to a 

customer’s decision to entrust funds to 

and do business with the FCM. 

The Firm Specific Disclosure 

Document is required to be made 

available electronically, which may be a 

link to the FCM’s Web site, but must be 

provided in paper form upon request, 

and would provide material information 

about: (1) General firm contact 

information; (2) the names, business 

contacts, and backgrounds for the FCM’s 

senior management and members of the 

FCM’s board of directors; (3) a 

discussion of the significant types of 

business activities and product lines 

that the FCM engages in and the 

approximate percentage of the FCM’s 

assets and capital devoted to each line 

of business; (4) the FCM’s business on 

behalf of its customers, including types 

of accounts, markets traded, 

international businesses, and 

clearinghouses and carrying brokers 

used, and the FCM’s policies and 

procedures concerning the choice of 

bank depositories, custodians, and other 

counterparties; (5) a discussion of the 

material risks of entrusting funds to the 

FCM and an explanation of how such 

risks may be material to its 

customers 765; (6) the name and Web site 

address of the FCM’s DSRO and the 

location of annual audited financial 

statements; (7) a discussion of any 

material administrative, civil, criminal, 

or enforcement actions pending or any 

enforcement actions taken in the last 

three years; (8) a basic overview of 

customer fund segregation, FCM 

collateral management and investments, 

and of FCMs and joint FCM/BDs; (9) 

information regarding how customers 

may file complaints about the FCM with 

the Commission or appropriate DSRO; 

(10) certain financial data from the most 

recent month-end when the disclosure 

document is prepared; and (11) a 

summary of the FCMs’ current risk 

practices, controls and procedures. 

FCMs are required to update the Firm 

Specific Disclosure Document as and 

when necessary to make the information 

accurate and complete, but at least 

annually. 

The newly adopted § 1.55(l) also 

requires FCMs to adopt policies and 

procedures reasonably designed to 

ensure that advertising and solicitation 

activities of such FCMs and any 

introducing brokers associated with the 

FCMs are not misleading in connection 

with their decision to entrust funds and 

do business with such FCMs. 

FCMs are further required by § 1.55(o) 

to disclose on their Web sites their daily 

Segregation Schedule, daily Secured 

Amount Schedule, and daily Cleared 

Swaps Segregation Schedule. Each FCM 

must maintain 12 months of such 

schedules on its Web site. Each FCM 

must disclose on its Web site summary 

schedules of its adjusted net capital, net 

capital, and excess net capital for the 12 

most recent month-end dates, as well as 

the Statement of Financial Condition, 

Segregation Schedule, Secured Amount 

Schedule, Cleared Swaps Segregation 

Schedule, and all footnotes related to 

the above statements and schedules 

from its most current year-end annual 

report that is certified by an 

independent public accountant. 

Costs and Benefits 

Current regulations require FCMs to 

provide a risk disclosure to potential 

customers before accepting customer 

funds, which existing risk disclosure 

statement primarily provides a customer 

with disclosure of the market risks of 

engaging in futures trading. The revised 

disclosure requirements of § 1.55 

provide customers with additional 

information regarding certain non-firmspecific risks that have been relevant in 

recent FCM bankruptcies and that could 

be relevant in the event of future FCM 

bankruptcies or insolvencies. 

The Firm Specific Disclosure 

Document required by this amendments 

address firm-specific risk, which will 

give potential customers additional 

information that they may use when 

conducting due diligence and selecting 

an FCM. By requiring that the disclosure 

address several specific topics, the 

public comparability of information on 

such topics will be available, to 

potential customers conducting due 

diligence on potential FCMs. The nonfirm specific additional disclosures will 

provide a significant benefit to the 

protection of market participants as 

many customers in the aftermath of 

recent FCM bankruptcies revealed 

fundamental misconceptions about the 

protection of their funds. Specifically, 

certain customers did not fully 

understand how FCMs held customer 

funds or the protections extended to 

such funds. Consequently, certain 

customers did not make informed 

choices to help themselves or to provide 

market discipline to their FCMs. 

In the NPRM, the Commission 

described how each additional specific 

risk disclosure was expected to benefit 

the protection of market participants by 

providing more transparency and equal 

access to information among all 

customers and the public, enhancing 

customer’s ability to make comparisons 

in choosing the FCMs with which they 

do business. The specific benefits of 

each disclosure required by the 

amendments were described in the 

NPRM, but the essential benefits 

derived from each additional required 

disclosure, and the aggregate of all the 

additional disclosures, are that they will 

result in more educated consumers of 

FCM services, and that such consumers 

will, through the greater transparency 

resulting from the additional 

disclosures, be better able to enforce 

market discipline on aspects of FCM 

business that are directly relevant to the 

risks customers accept in dealing with 

and depositing funds with FCMs. 

The Commission quantitatively 

estimated expected costs of providing 

the additional general and firm specific 

disclosures in the NPRM and did not 

receive any comments about its specific 

estimates. However, the Commission 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68607 

766See FHLB Comment Letter at 3 (Feb. 15, 2013). 767See ACLI Comment Letter at 2 (Feb. 15, 2013); 

Commercial Energy Working Group Comment 

Letter at 2 (Feb. 13, 2013). 768See FIA Comment Letter at 43 (Feb. 15, 2013). 769 Id. at 44. 770Newedge Comment Letter at 4 (Feb. 15, 2013). 

771See FCStone Comment Letter at 4 (Feb. 15, 

2013); Phillip Futures Inc. Comment Letter at 2 

(Feb. 14, 2013); CHS Hedging Comment Letter at 2 

(Feb. 15, 2013); RJ O’Brien Comment Letter at 6– 

9 (Feb. 15, 2013); TD Ameritrade Comment Letter 

at 4 (Feb. 15, 2013); Advantage Comment Letter at 

4 (Feb. 15, 2013); RCG Comment Letter at 5–6 (Feb. 

12, 2013). 

772As noted in section II.Q. above, the revisions 

to §§ 22.2(a) and (f) merely clarify that the 

calculation set forth therein is the Net Liquidating 

Equity Method and thus, the revision is not 

intended to, and should not be read to, change 

current practice with respect to an FCM’s residual 

interest requirements for Cleared Swaps as set forth 

in Commission regulations and JAC Update 12–03, 

and consistent with Staff Interpretation 12–31. 

did receive many comments that 

supported the amendments to § 1.55 

reiterating the benefits perceived from 

transparency resulting from the 

additional disclosures as are described 

at section II.P. and noting that these 

amendments were particularly cost 

effective at providing such benefits. 

FHLB stated ‘‘[p]erhaps the most 

compelling argument for additional 

public disclosure of certain information 

addressed in the Proposed Customer 

Protection Rules is that the benefits 

should far exceed the additional cost 

associated with mandating such public 

disclosures.’’ 766 ACLI and the 

Commercial Energy Working Group 

both stated ‘‘the Proposed Customer 

Protection Rules represent a very costeffective approach/means to making 

FCMs more accountable to their 

customers by providing current 

information that will enable customers 

to conduct appropriate due diligence 

regarding prospective FCMs and to 

actively monitor the financial condition 

and regulatory compliance of the FCMs 

to which they have entrusted funds.’’ 767

FIA specifically commented with 

respect to the disclosures required 

under § 1.55(k) that FCMs that are part 

of public companies, or dually 

registered BDs, or are part of a bank 

holding company, already have 

disclosure requirements and that the 

Commission should confirm that such 

an FCM may comply with this rule by 

making the annual reports and 

amendments thereto available on its 

Web site, in order to avoid duplicative 

or conflicting disclosure 

requirements.768 FIA further 

commented that the level of detail 

required of privately owned FCM’s 

disclosure should be consistent with 

that provided in the annual reports of 

publicly-traded companies.769 Newedge 

commented that all FCMs should be 

required to disclose similar information 

in a standard format, and the proposal 

of FIA to satisfy disclosure requirements 

by linking to the annual report of a 

public company places firms without 

annual report preparation requirements 

at a competitive disadvantage and 

discriminates against smaller to midsize FCMs.770

In the preamble discussion at section 

II.P., the Commission clarified both that 

disclosures could be satisfied by linking 

to appropriate existing relevant 

disclosures that were already required 

for the same matters, but that the 

disclosures required by the amendments 

are specific to the FCM and cannot be 

satisfied with more general disclosure at 

a holding company level. The 

Commission believes this clarification 

addresses the duplication concern 

raised by commenters. 

Several commenters posited concerns 

regarding the benefit of various aspects 

of the mandated disclosures. The 

comments addressed the disclosures of 

leverage, the targeted residual interest, 

customer write-offs, and that such 

disclosures could in certain 

circumstances be potentially misleading 

to customers.771 With respect to these 

comments the Commission notes that 

with all aspects of the mandated 

additional disclosures, appropriate 

explanations and additional information 

to ensure sufficient context should be 

provided if necessary to clarify anything 

that an FCM may regard as otherwise 

being misleading. Concerns raised by 

commenters that customers may 

inadequately assess risks particular to 

their FCM by inappropriately focusing 

on only one aspect of disclosure, such 

as leverage, or targeted residual interest, 

cannot be mitigated by declining 

wholesale to make relevant information 

publicly available. Furthermore, FCMs 

are free to supply additional context and 

information when they believe that any 

Firm Specific Disclosure is misleading. 

Certain commenters have requested 

that the Commission consider the 

alternative to further require all § 1.12 

notices to be made publicly available, 

which the Commission has declined to 

do as is discussed in the costs and 

benefits discussion of § 1.12. By 

requiring FCMs to update the 

disclosures annually, as well as any 

time there is a ‘‘material change to its 

business operation, financial condition 

and other factors material to the 

customer’s decision to entrust the 

customer’s funds and otherwise do 

business with the futures commission 

merchant,’’ and requiring the FCM to 

provide each updated disclosure to its 

customers, § 1.55(i) makes FCMs 

responsible to communicate with 

customers whenever such events occur. 

The Commission notes that there may 

be overlap in circumstances which give 

rise to notice obligations under § 1.12 

and which require updated public 

disclosure, although the two are distinct 

and separate requirements. This 

requirement helps to ensure that the 

FCM’s financial condition, business 

operations, or other important factors do 

not change in material ways without 

customers being able to ascertain such 

changes, and would likely prompt some 

customers to conduct additional due 

diligence in such situations in order to 

determine whether their funds are at 

risk, which would provide additional 

accountability for FCMs. 

By requiring each FCM to adopt 

policies and procedures reasonably 

designed to ensure that its advertising 

and solicitation activities are not 

misleading to its FCM customers under 

§ 1.55(l), the Commission is 

strengthening accountability for 

communication related to an FCM’s 

sales and solicitation activities which 

helps to ensure the purposes of the 

other requirements for disclosure are 

not frustrated. 

By requiring FCMs to provide their 

daily Segregation Schedules, daily 

Secured Amount Schedules, and daily 

Cleared Swaps Segregation Schedules, 

as well as the same schedules from the 

most recent certified annual report, the 

requirements under § 1.55(o) facilitate 

transparency. Requiring each FCM to 

post the above schedules and data on its 

Web site will help to ensure that market 

participants are aware that it is 

available, and will improve the speed 

and efficiency of obtaining it. Similarly, 

by requiring FCMs to provide a link to 

the Web site of the NFA’s Basic System 

facilitate transparency by promoting 

awareness of the additional information 

that is public regarding each FCM’s 

investment of customer funds and by 

reducing the search costs for obtaining 

that information. 

Section 22.2 Futures Commission 

Merchants: Treatment of Cleared Swaps 

and Associated Cleared Swap Customer 

Collateral 

The adopted amendments to § 22.2 

incorporate changes with respect to 

protection of funds for customers 

trading cleared swaps that are identical 

to the changes proposed for protection 

of futures customer funds.772 Those 

changes include: (1) Incorporating the 

same change to haircutting procedures 

as adopted in § 1.17 and § 1.32 but for 

Cleared Swaps; (2) requiring the FCM to 


TKELleY on DSK3SPTVN1PROD with RULES2
68608 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

773The additional specificity incorporates the 

same requirements for acknowledgment and 

agreement that are contained in the templates in the 

appendices of §§ 1.20 and 1.26. 

774The same requirements as are adopted for 

futures customers’ funds and Cleared Swaps 

Customers’ Collateral, including a requirement for 

the FCM to abide by its policies and procedures 

required by new § 1.11. 

send daily Segregation Calculations for 

Cleared Swaps to the Commission and 

DSROs; and (3) requiring that segregated 

investment detail reports be produced 

twice per month, listing assets on 

deposit at each depository, and sent to 

Commission and DSROs electronically 

by 11:59 p.m. the following business 

day. Records of both reports are 

required to be maintained in accordance 

with § 1.31. 

Costs and Benefits 

As discussed above, amendments to 

§ 22.2(a) and (f) are not intended to 

change existing practice and thus do not 

introduce new costs. The other 

amendments to § 22.2 noted above are 

substantively similar to amendments to 

corresponding part 1 regulations and the 

relevant costs and benefits are similar to 

the costs and benefits discussed in those 

sections. 

The amendments to § 22.2 have the 

benefits of harmonizing the protection 

of customer funds between Cleared 

Swaps and futures and clarifying further 

the regulatory requirements for Cleared 

Swaps. 

Section 22.17 Policies and Procedures 

Governing Disbursements of Cleared 

Swaps Customer Collateral From 

Cleared Swap Customer Accounts 

The newly adopted § 22.17 imposes 

restrictions on an FCM’s withdrawal of 

its residual interest, and requires that if 

a withdrawal of residual interest not for 

the benefit of customers causes the FCM 

to fall below its targeted residual 

interest, that the funds be replenished 

the following business day or the 

residual interest target be lowered in 

accordance with its policies and 

procedures established under § 1.11. 

Costs and Benefits 

The costs and benefits are similar to 

those created by §§ 1.23 and 1.11 but 

apply to customer funds in Cleared 

Swaps Customer Accounts rather than 

customer segregated accounts, and 

therefore are as described in §§ 1.23 and 

1.11, but incremental thereto with 

respect to Cleared Swaps Customer 

Accounts. 

Section 30.1 Definitions 

Amendments adopted to § 30.1 

establishes new definitions for ‘‘30.7 

customer,’’ ‘‘30.7 account,’’ and ‘‘30.7 

customer funds.’’ The first is defined as 

any foreign futures or foreign option 

customer, together with any foreigndomiciled person who trades in foreign 

futures or foreign options trough an 

FCM. ‘‘30.7 account’’ and ‘‘30.7 

customer funds’’ are then defined 

accordingly. These definitions relate to 

the existing terms ‘‘foreign futures or 

foreign options customer,’’ ‘‘foreign 

futures or foreign options customer 

account,’’ and ‘‘foreign futures or 

foreign options customer funds,’’ 

respectively. The term ‘‘foreign futures 

or foreign options customer’’ only 

includes U.S.-domiciled customers that 

deposit funds with an FCM for use in 

trading foreign futures or foreign 

options. The new definitions, on the 

other hand, include both U.S. and 

foreign-domiciled customers that 

deposit funds with an FCM for use in 

trading foreign futures or foreign 

options. 

Costs and Benefits 

These definitions play a ‘gatekeeping’ 

function with respect to other rules by 

determining what customers are 

included as ‘‘30.7 customers.’’ However, 

the costs and benefits of these changes 

are attributable to the substantive 

requirements related to the definitions, 

and therefore are discussed in the cost 

benefit considerations related to § 30.7. 

Section 30.7 Treatment of Foreign 

Futures or Foreign Options Secured 

Amount 

The adopted amendments to § 30.7 (1) 

Incorporate the funds of foreigndomiciled investors deposited with an 

FCM for investment in foreign futures 

and foreign options within the 

protections provided in § 30.7; (2) 

eliminate the Alternative Method and 

require the Net Equity Liquidation 

Method for calculating 30.7 customer 

segregation requirements; (3) add 

specificity to the written 

acknowledgments that FCMs and DCOs 

must obtain from their depositories by 

providing required templates; 773 (4) add 

restrictions on withdrawing from 

residual interest not for the benefit of 

customers; 774 (5) require that 30.7 

customer funds deposited in a bank 

must be available for immediate 

withdrawal at the request of the FCM; 

(6) clarify that the FCM is responsible 

for any losses related to investing 30.7 

customer funds in investments that 

comply with § 1.25; (7) add a 

prohibition against making unsecured 

loans to customers or using the funds in 

the customer’s trading account as 

security for a loan; (8) require daily 

segregation reports and a detailed list of 

depositories to be submitted to the 

Commission and DSRO, and that 

targeted residual interest be included in 

both of those reports; (9) allow FCMs 

that are not dual registrants to use the 

BD procedure for assigning a smaller net 

capital haircut to investments of 30.7 

customer funds in certain types of 

instruments with low default risk; (10) 

establish a limit on the amount of funds 

in a 30.7 account that can be held 

outside the U.S.; and (11) require FCMs 

to, at a specified point in time, maintain 

residual interest in 30.7 accounts that is 

at least equal to the sum of all 

undermargined amounts for 30.7 

customers. With the exception of the 

requirements with respect to limiting 

funds held outside the U.S., the 

permissibility of certain depositories 

outside the U.S., and the requirement 

that FCMs comply with the highest 

equivalent custody requirement relevant 

in a different country, these 

requirements are substantially similar to 

equivalent requirements adopted in 

§§ 1.20, 1.22, 1.23, 1.29, 1.30, 1.32 and 

22.2 and 22.17. As a result of the 

adopted changes with the noted 

exceptions, the rules in § 30.7 for the 

protection of 30.7 customer funds are 

substantially similar to the rules for the 

protection of segregated customer funds 

under 4d(a) and §§ 1.11–1.32, and the 

rules for the protection of cleared swaps 

customer funds under 4d(f) and in part 

22. However, portions of § 30.7 are 

notably different from rules protecting 

futures customer funds and cleared 

swap customer funds. These are: (1) the 

definition of the minimum amount that 

must be deposited in a 30.7 account for 

each 30.7 customer is different than in 

the corresponding requirements in 

§§ 1.20 and 22.2, due to the possibility 

of a higher requirement under a foreign 

regulatory regime; (2) the list of 

acceptable depositories for 30.7 

customer funds includes banks or trusts 

outside of the U.S. with more than $1 

billion in regulatory capital, and various 

other participants of foreign boards of 

trade and their depositories; (3) § 30.7 

limits the amount of funds from a 30.7 

account that can be held outside the 

U.S; and (4) the Residual Interest 

Deadline for 30.7 funds is 6:00 p.m. 

Eastern Time, whereas the Residual 

Interest Deadline for futures customer 

funds will, after the phase-in period and 

absent further Commission action, move 

back to the time of the daily settlement. 

The third and fourth are the only 

substantive differences in the custody 

regime created by the adopted 

amendments compared to the custody 

regimes put in place in the 

corresponding sections for domestic 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68609 

775See NFA Interpretive Notice 9066 (Revised, 

July 1, 2013). 

776See, e.g., Lehman, MFGI. 

777FIA Comment Letter at 36–37 (Feb. 15, 2013); 

RJ O’Brien Comment Letter at 11 (Feb. 15, 2013). 

778 Jefferies Comment Letter at 6 (Feb. 15, 2013); 

Advantage Comment Letter at 9 (Feb. 15, 2013). 

779See http://www.cftc.gov/MarketReports/

FinancialDataforFCMs/HistoricalFCMReports/

index.htm. 

780See id. 

781See id. 

782As discussed in the analysis of § 1.22(c) above, 

ISDA estimated the excess to be between $40 and 

$70 billion and employed the midpoint of this 

range, $55 billion in its calculations. $55 billion is 

31% of the total 177.1 billion held in both section 

4d(a)(2) and part 30 secured accounts. 

futures customer funds and cleared 

swaps customer funds. 

Costs and Benefits 

In the NPRM, the Commission stated 

it believed a significant benefit of the 

amendments adopted to § 30.7 would be 

the likelihood that in an FCM 

insolvency, the full amount owed to 

customers trading foreign futures and 

foreign options, whether such customers 

were foreign or domestic domiciled, 

would be intact as required to be held 

separately in 30.7 accounts. The 

Commission did not receive comments 

objecting to the changes to the 

calculations or the required inclusion of 

foreign-domiciled customers. The 

adopted changes also established new 

regulations for the protection of 

customer funds deposited for trading in 

foreign futures and options that, with 

limited exceptions, are substantively 

identical to the new protections adopted 

for futures customer funds and cleared 

swaps customer funds. Therefore, many 

of the costs and benefits of the changes 

that are proposed are identical to those 

described above in the cost-benefit 

considerations related to §§ 1.11–1.32 

and part 22. 

Various regulations designed to 

ensure that the new calculation 

requirement for the segregation of 30.7 

funds is met at all times would also 

apply, including the § 30.7(g) 

restrictions on an FCM’s withdrawal of 

its residual interest which is 

commingled with 30.7 customer funds, 

and policies and procedures developed 

by the FCM pursuant to § 1.11 that are 

designed to ensure safe handling of such 

funds. Application of the additional 

protections designed for customer funds 

will further ensure the protection of 

market participants and provide, as 

much as possible, equivalent 

protections between domestic and 

foreign futures trading with respect to 

the treatment of funds held by the 

FCMs. The Commission did not 

quantitatively estimate costs of the 

amendments to § 30.7, but requested 

comment as to any costs to FCMs, 

including whether FCMs would need to 

obtain additional capital or obtain 

additional liquidity as a result of 

formally foreclosing their abilities to 

utilize the Alternative Method versus 

the Net Liquidating Equity segregation 

method in funding operations. The 

Commission did not receive comments 

addressing these questions, or 

addressing its analysis that costs and 

benefits would be incremental to the 

costs and benefits analyzed with respect 

to the same substantive provisions 

applicable to both 4d(a) (futures) and 

4d(f) (Cleared Swaps) segregated funds. 

Moreover, the Commission believes any 

incremental costs associated with 

complying with these changes to be 

minimal, since much of the industry is 

already held to these standards as a 

result of previous rule changes made by 

NFA to its rulebook.775

In the NPRM, the Commission 

proposed in § 30.7(c) a limitation on the 

amount of funds from a 30.7 account 

that can be held outside the U.S. Funds 

held overseas are subject to different 

regulatory and bankruptcy regimes that 

may not offer comparable protections 

for customer funds, creating additional 

repatriation risks to those funds. For 

example, if an FCM carrying 30.7 funds, 

some of which were held in depositories 

outside the U.S., were to default, it is 

possible that the Trustee would not be 

able to promptly recover sufficient 

funds to repay all the FCM’s obligations 

to 30.7 customers. As noted above, this 

is especially true if the funds are 

deposited with a foreign affiliate of the 

FCM, as the likelihood of coincident 

bankruptcies of affiliated financial firms 

has been observed to be exceedingly 

high.776 In such an event, the funds held 

at the foreign affiliate would be 

distributed in accordance with the 

insolvency rules of the foreign 

jurisdiction. In such a case each 30.7 

customer would likely receive a pro-rata 

share of the funds that the Trustee is 

able recover, when the Trustee is able to 

recover them. The proposed limit on the 

amount of funds that can be held 

outside the U.S. was intended to assure 

that as much of the customers’ funds as 

possible remain subject to the U.S. 

regulatory and bankruptcy regimes, 

eliminating repatriation risk to those 

funds. By eliminating this risk for a 

larger percentage of the 30.7 funds, the 

proposed rule promotes higher recovery 

rates for 30.7 account funds if the FCM 

defaults, which helps ensure that 30.7 

customers receive the largest (and most 

prompt) pro rata distribution possible. 

The Commission received comments 

from FIA, as well as others, that the 

proposed percentage limitation of 10% 

of required margin was not adequate in 

light of account volatility and other 

factors, and that the limitation should 

only be applicable to funds deposited 

with foreign brokers and that otherwise 

FCMs should be permitted to hold funds 

in a bank or trust company outside the 

U.S. to the same extent that an FCM 

may hold other customer segregated and 

Cleared Swaps Customer collateral 

outside the U.S.777 Commenters 

including Jefferies and Advantage stated 

that the limitations may inhibit FCMs 

from trading foreign futures and that 

customers may need to utilize non-U.S. 

brokers for their foreign futures business 

as a result, because they would not be 

able to accept customer securities 

outside the U.S. and customers would 

have to pre-fund with cash instead.778

In response to commenters and upon 

consideration, the Commission is 

increasing the limitation from 10% to 

20%, but is declining to further expand 

the permissibility of holding 30.7 funds 

outside the U.S. due to the increased 

repatriation risk applicable to excess 

margin deposited outside the U.S. for 

30.7 funds for foreign futures and 

foreign options. 

For 30.7 accounts, an FCM must 

maintain residual interest that is at least 

equal to undermargined amounts by 

6:00 p.m. Eastern Time on the following 

business day, which is substantively 

similar to the Industry Commenters’ 

Alternative discussed above in the cost 

and benefit considerations related to 

§ 1.22. As noted there, FIA and ISDA 

estimated that more than 90% of 

customer’s margin deficits are collected 

by FCMs by 6:00 p.m. Eastern Time on 

the next trading day. 

Thus, the Commission estimates the 

additional requisite residual interest 

needed for 30.7 accounts using the 

analysis described above for futures 

customer accounts. As of November 30, 

2012, there was approximately $30 

billion in 30.7 accounts (excluding, 

here, and in the following amounts, 

excess amounts contributed by 

FCMs).779 At the top-10 FCMs, there 

was approximately $27.7 billion in 30.7 

accounts.780 For the remaining FCMs, 

there was approximately $2.3 billion in 

30.7 accounts.781 Using ISDA’s point 

estimate for excess collateral deposited 

by customers,782 the Commission 

estimates that there was, at the top-10 

FCMs, approximately $8.6 billion (31% 

of $27.7 billion) of existing customer 

excess in 30.7 accounts. Similarly, for 

the remaining FCMs, the Commission 

estimates that there was approximately 


TKELleY on DSK3SPTVN1PROD with RULES2
68610 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

784 5 U.S.C. 601 et seq. 

785 47 FR 18618 (Apr. 30, 1982). 

786 Id. at 18619. 

787 Id. 

788See 66 FR 45605, 45609 (Aug. 29, 2001). 

789 44 U.S.C. 3501 et seq. 

790See 44 U.S.C. 3507(d)(1)(A), providing for an 

agency to forward to the Director of OMB or his or 

her designee a notice of proposed rulemaking with 

a collection of information subject to notice and 

comment pursuant to the provisions of 44 U.S.C. 

3506(c)(2)(B), on or before the date that the 

proposed rulemaking is published in the Federal 

Register, together with the ICR in the form required 

by OMB in 5 CFR 1320.8 and 1320.9. 

791See 44 U.S.C. 3507(d)(1)(B), cross-referencing 

44 U.S.C. 3508. See also 5 CFR 1320.11(c). 

792See 44 U.S.C. 3507(3). 

793See 5 CFR 1320.11(i), implementing 44 U.S.C. 

3507(d)(3). 

$0.7 billion (31% of $2.3 billion) of 

customer excess corresponding to 30.7 

accounts. 

For the top-10 FCMs, the Commission 

subtracts $8.6 billion (existing customer 

excess for these accounts) from $27.7 

billion (total funds held in these 

accounts) leaving approximately $19.1 

billion in required margin for 30.7 

accounts for these FCMs. Multiplying 

ISDA’s 60% required margin estimate 

(which assumed that the residual 

interest requirement applies at all times) 

by 10% (i.e., 1–90%) gives 6% of the 

required margin being needed in 

residual interest, or $1.1 billion for 

these FCMs. As of November 30, 2012, 

the top-10 FCMs were holding 

approximately $3.3 billion in residual 

interest in 30.7 accounts.783 Thus, it 

would appear that the top-10 FCMs are 

already holding sufficient residual 

interest for 30.7 accounts. For the 

remaining FCMs, the Commission 

subtracts $0.7 billion (existing customer 

excess for these accounts) from $2.3 

billion (total funds held in these 

accounts) giving approximately $1.6 

billion in required margin. Multiplying 

$1.6 billion by 6% gives approximately 

$96 million, but FCMs already maintain 

over $1 billion in residual interest. 

Consequently, it would appear that the 

remaining FCMs also already maintain 

enough residual interest for 30.7 

accounts. 

V. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) 784 requires Federal agencies, in 

promulgating regulations, to consider 

the impact of those regulations on small 

entities. As stated in the NPRM, 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.785 The proposed regulations 

would affect FCMs and DCOs. 

The Commission previously has 

determined that FCMs are not small 

entities for purposes of the RFA, and, 

thus, the requirements of the RFA do 

not apply to FCMs.786 The 

Commission’s determination was based, 

in part, upon the obligation of FCMs to 

meet the minimum financial 

requirements established by the 

Commission to enhance the protection 

of customers’ segregated funds and 

protect the financial condition of FCMs 

generally.787 The Commission also has 

previously determined that DCOs are 

not small entities for the purpose of the 

RFA.788 Accordingly, the Chairman, on 

behalf of the Commission, certified 

pursuant to 5 U.S.C. 605(b) that the 

proposed regulations would not have a 

significant economic impact on a 

substantial number of small entities. 

The Commission then invited public 

comment on this determination. The 

Commission received no comments. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act 

(‘‘PRA’’) provides that a federal 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 issued by the Office of 

Management and Budget (‘‘OMB’’).789

This final rulemaking contains several 

collections of information that were 

submitted to OMB in the form of 

proposed amendments to existing 

collection 3038–0024 and proposed 

revisions thereto, as well as pre-existing 

collections 3038–0052 and 3038–0091. 

There have been no substantive changes 

from the proposed rulemaking to this 

final rulemaking that would require any 

adjustment to the information collection 

burdens as they were originally 

proposed. As required by OMB 

regulations, the Commission shall 

submit to OMB this final rulemaking, 

together with ICRs that have been 

updated to include the comment 

summary contained herein. 

The collections contained in this 

rulemaking are mandatory collections. 

In formulating burden estimates for the 

collections in this rulemaking, to avoid 

double accounting of information 

collections that already have been 

assigned control numbers by OMB, or 

are covered as burden hours in 

collections of information pending 

before OMB, the PRA analysis provided 

in the proposed rulemaking, along with 

the information collection request 

(‘‘ICR’’) with burden estimates that were 

incorporated into the rulemaking by 

reference and submitted to OMB, 

accounted only burden estimates for 

collections of information that have not 

previously been submitted to OMB. The 

Commission sought comment on the 

collections of information contained in 

the proposed rulemaking only to the 

extent that the collections in the 

proposed rulemaking would increase 

the burden hours contained with respect 

to each of the related currently valid or 

proposed collections. 

The Commission received over 120 

written submissions on the proposed 

rulemaking. Many of these comments 

discussed in general the need for, 

effectiveness of, and practicality of 

various proposed rules. However, none 

of the commenters questioned the 

burden estimates provided in the 

proposed rulemaking or the ICR that 

was submitted. To the extent that there 

were comments on the need for, 

effectiveness and practicality of various 

proposed rules, they related to the 

rulemaking as a whole rather than the 

collections in particular. Accordingly, 

those comments were addressed above, 

in the sections of the preamble of this 

final rulemaking that relate specifically 

to the proposed rules at issue. 

As required by the PRA, the 

Commission submitted the proposed 

amendments, in the form of information 

collection requests related to collections 

3038–0024, 3038–0052, and 3038–0091 

on November 14, 2012, the same date 

that the proposed rulemaking was 

published in the Federal Register.790

The Commission did not receive public 

comments on any of the proposed 

collections from OMB on or before 

January 13, 2013, within the 60 days 

established for such comments in the 

PRA after the notice of proposed 

rulemaking and the submission of the 

certified ICR to OMB.791 Accordingly, 

the proposed amendments to collections 

3038–0024, 3038–0052, and 3038–0091 

are deemed to be approved by operation 

of the PRA.792 The Commission 

therefore, pursuant to OMB 

regulations,793 requests the assignment 

of OMB control numbers to the 

proposed amendments to collections 

3038–0024, 3038–0052, and 3038–0091, 

which were submitted to OMB for 

approval on November 14, 2012. 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68611 

APPENDIX 1 TO SUPPLEMENTARY INFORMATION—TABLE OF COMMENT LETTERS

Abbreviation used 

(if applicable) Full name 

Advantage .......................... Advantage Futures LLC. 

AFMP Group ...................... Agricultural Futures Market Participants: AMCOT, American Cotton Shippers Association, American Farm Bureau 

Federation, American Feed Industry Association, American Soybean Association, CoBank, Commodity Markets 

Council, National Association of Wheat Growers, National Barley Growers Association, National Cattlemen’s 

Beef Association, National Corn Growers Association, National Cotton Council, National Council of Farmer Cooperatives, National Grain and Feed Association, National Pork Producers Council, National Sorghum Producers, National Sunflower Association, North American Millers Association, USA Rice Federation, US Canola 

Association, US Dry Bean Council. 

AIMA ................................... Alternative Investment Management Association. 

Amarillo ............................... Amarillo Brokerage Co. 

ACLI .................................... American Council of Life Insurers. 

AFBF .................................. American Farm Bureau Federation. 

AICPA ................................. American Institute of Certified Public Accountants. 

AIM ..................................... American Iron & Metal. 

BlackRock ........................... BlackRock, Inc. 

Depository Bank Group ...... BMO Harris Bank, Barclays Bank, The Bank of New York Mellon and Brown Brothers Harriman & Co. 

Center for Audit Quality ...... Center for Audit Quality. 

CFA .................................... CFA Institute. 

Chris Barnard ..................... Chris Barnard. 

CHS Hedging ..................... CHS Hedging, Inc. 

CME .................................... CME Group Inc. 

CoBank ............................... CoBank. 

Commercial Energy Working Group.Commercial Energy Working Group. 

CIEBA ................................. Committee on Investment of Employee Benefit Assets. 

CCC .................................... Commodity Customer Coalition. 

Congressional Committees Congress of the United States: Frank D. Lucas, House Committee on Agricultural; Debbie Stabenow, Senate 

Committee on Agriculture, Nutrition, and Forestry. 

Deloitte ............................... Deloitte & Touche. 

Ernst & Young .................... Ernst & Young LLP. 

Eurex .................................. Eurex Clearing AG. 

FHLB .................................. Federal Home Loan Banks. 

Federal Reserve Banks ...... Federal Reserve Banks of New York and Chicago. 

FXCM ................................. Forex Capital Markets LLC. 

Franklin ............................... Franklin Templeton Investments. 

Frontier Futures .................. Frontier Futures, Inc. 

FIA ...................................... Futures Industry Association (Collectively—Barclays, State Street, Goldman Sachs, others). 

Global Commodity .............. Global Commodity Analytics & Consulting LLC. 

ISRI ..................................... Institute of Scrap Recycling Industries, Inc. 

ISDA ................................... International Swap Dealers Association, Inc. 

FCStone ............................. INTL FCStone, Inc. 

ICI ....................................... Investment Company Institute. 

ICA ...................................... Iowa Cattlemen’s Association. 

Jefferies .............................. Jefferies Bache, LLC. 

JSA ..................................... John Stewart and Associates. 

JAC ..................................... Joint Audit Committee. 

Katten-FIA .......................... Katten Muchin Rosenman LLP on behalf of the Futures Industry Association. 

KPMG ................................. KPMG LLP. 

Kripke Enterprises .............. Kripke Enterprises. 

LCH.Clearnet ...................... LCH.Clearnet Group Limited. 

MFA .................................... Managed Funds Association. 

Manitoba ............................. Manitoba Corporation. 

MGEX ................................. Minneapolis Grain Exchange, Inc. 

NCBA .................................. National Cattlemen’s Beef Association. 

NCFC .................................. National Council of Farmer Cooperatives. 

NFA .................................... National Futures Association. 

NGFA .................................. National Grain and Feed Association. 

NIBA ................................... National Introducing Brokers Association. 

NPPC .................................. National Pork Producers Council. 

NEFI/PMAA ........................ New England Fuel Institute Petroleum Marketers Association of America. 

NYPC .................................. New York Portfolio Clearing, LLC. 

Newedge ............................ Newedge USA, LLC. 

Nodal .................................. Nodal Exchange, LLC. 

Paul/Weiss .......................... Paul, Weiss, Rifkind, Wharton & Garrison LLP. 

Phillip Futures Inc. .............. Phillip Futures Inc. 

Pilot Flying J ....................... Pilot Travel Centers, LLC. 

Premier Metal Services ...... Premier Metal Services, LLC. 

Prudential ........................... The Prudential Insurance Company of America. 

PWC ................................... PWC LLP. 

Randy Fritsche ................... Randy Fritsche. 

Rice Dairy LLC ................... Rice Dairy LLC. 


TKELleY on DSK3SPTVN1PROD with RULES2
68612 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

APPENDIX 1 TO SUPPLEMENTARY INFORMATION—TABLE OF COMMENT LETTERS—Continued 

Abbreviation used 

(if applicable) Full name 

RJ O’Brien .......................... R.J. O’Brien & Associates, LLC. 

RCG .................................... Rosenthal Collins Group. 

Schippers ............................ Schippers Trading. 

Schwartz & Ballen .............. Schwartz & Ballen LLP. 

Security Benefit .................. Security Benefit Life Insurance Company. 

SIFMA ................................. SIFMA Asset Management Group. 

Solomon Metals Corp. ........ Solomon Metals Corp. 

State Street ........................ State Street Corporation. 

Steve Jones ........................ Steve Jones. 

SUNY Buffalo ..................... State University of New York at Buffalo Law School. 

TD Ameritrade .................... TD Ameritrade, Inc. 

TCFA .................................. Texas Cattle Feeder Association. 

TIAA–CREF ........................ TIAA–CREF. 

Strelitz/California Metal X ... Tim Strelitz/California Metal X. 

Vanguard ............................ Vanguard. 

BILLING CODE 6351–01–P 


TKELleY on DSK3SPTVN1PROD with RULES2

ER14NO13.000</GPH>TKELleY on DSK3SPTVN1PROD with RULES2

 

TIn, im m 

rn 00 fj] mlru i1 m Il' m I I! Iii 

'0 10 I 01 01 01 0 

.. 

0' 01<>' "flo 01010 

IIII I ID IU liJ \l1 00 

JO r 

o. 0 10 Ie> Ie> I e> 010.010 '''r 01 0 I '" I e> 

i _ i i. c 1 t ! q] $\1 f 

j i I ! i 1 " ! § 

... z ; ,; I" i i . .. 'I .. 

i t It iii iii f f 1 tI f il. t i.i i t IfJill J <= ell" t j If "1 lit I § H!!! I U!t!! Ii!!!! I!!! 

,.; N I'f ... >II <til ,.: 

j 

1 

ii: Jilt 

jft 

J«IIIU 

at 
68614 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 


TKELleY on DSK3SPTVN1PROD with RULES2ER14NO13.001</GPH>

9. ftecIIvabieellan lradel'soo U.S. ecmmC!dity~ 

A 0UlIIcmer debit and detliitteCOll!ltt 

8. Noncustomerand P!tIPlietary IltlClOUms 

C .. 011« 

0:. AIIOWII!I»foI'd~ ~ 

10,. Recleivables1,aYlltadn a'l toteIgn 

bOlllllsof hde. 

A O.!slomenlebltlWldello;/tllCOCUlll5 

1.\:~Il"d~~ 

Q OM· 

1>. AIIowanoefol" dOll)N ~ 

11. lnIIentorieI;OfccslHDmmodllles,1'lrIOI II!IIItrt.Is. 

work In progress and lInilihed goods 

A Covered 

a Not~ 

12. Se<:ureddemlndnotes 

vaJue ofCOllalel'al $'--___ -'--_1415 

SIIteiy,.. $ 14:21) 

1& 0IbIIrl'lll:elVlbll$8I1dat1YanC8s 

A. M~IiCOoUIitS~ •. 

8, NoInm:ailllltlle 

C. CommlsslonS:8I1d1lrokeraQa receI\IabIe 

D. ~lrOrnempkl'feU8I1d 

~peniIOIlS 

E AdVl!II'IC$$ 00 l:88h commodlles 

F. DI"ldaiIdUndlntenlsl 

G.T_~ 

H. RecelVables!tom sub.dlarleelllld alllli8tes 

I. OIher(ltlllllllZea'la~page) 

J. AllClfiVllllci!i for dCllb1M IlcCOurlt$ 

14. ~glimsonfolWlIIl:I QOIlIracIs 

IIIld commillllilnls 

1£ EXI:fnInge lll!imblllhlj)s lIIC01it 

MaII<et I/IlIUII $ 1600 

1'7. Plant, property, eqlipmenl and CIlfIlalNd \eases. 

CQstnet ofa«llMlI$I6d depMlIIlon 

end iIInoI1I2iatiOI of $ 1$215 

i rmo 

!'29~ 

1305 1.310 

$ - ;sr 

1300 

1315 

1.320 1325 

~ 'i3i5 1345 1350 

1360 1365 

131$ 

1370. 

~. 1«10 t=1 

'14251 11430 I 

:::::::::: 1!:I::::::::::~El:::5j 11 

'i4ii rmr 1& 1505 

rmr 

't~o 

= 

tllZO 

1530 1535 

154i 1550 

~ 1555 

1525 

540 

1555 

1510 

!,575 15110 

~ 11590 I .,595 I 

11605 I 11810 I 

P8121 M1 f1i!iD 

11830' 11635 I '1840 I 

1'I6is I 

~ I!fl 

'

,67ot 11675 I '1610 I 
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68615 


TKELleY on DSK3SPTVN1PROD with RULES2ER14NO13.002</GPH>

21. ~101>lIIIk$ 

A. SeQnclI_ 

8. Un&GcUredtOllllll 

O. 0\ferG'a1Is 

CFTC fORM HR-I'CM 

STATEMENT OF FINANCIAl. OOHDmON 

ASOF-1-1_ 

lIZ. EqId_ItI_IICIIy ... t<IIIlII .. 1IId ddtefSWl/)lA. OIIo1an_lrad~onU~$._madll)'~ 

B. OIIoIan_tnKIfnllonI<HQn-..... ... 

C. 

0. NaMuolan 

CUstarniits' ..... d ...... 

__ 

apIlOn ~ 

E. Gllnal ptrIntrI' will mtmblll'$'lIUIng _nt.(1101 tncIuOclln 0iIfIiII!Ij 

F. CutIOm .... lJadlnv "looI ... d ~ 

2): I'aya!lklIOU.$. 

Inclllding ttIolt apIlOll 

~¢lelllnll 

\lliue' 

~ 

0 

24. PQablelOforeilIncotnmodlY dearingcwganiZllllOllS 

lIi_gWlrtopllOll\lli!lue$ 0 

.. PQabIe IOl'ItIIlstered ltb.iIe$ _mInion m;;;a;uj; 

ltI. ~,..r.I"IICOIUI!<I""P.m ..... n"clhorpa)'lbln 

A. "--,..r.leand ......... ecIUpentl1i1 

a. $ada.., ~ _mlUl""" and """"-poplilit 

C: T_,..r.'" 

D. DofwmII_ .. 1M8. 

E. $eCI\IrtIy c:IoII>oe!l$!lt!cI 

F. ~lIi!IlIInoit_OIlU. 

Go Unrealized ~ OIl IOIWI1d ~"'"" CCII1II!1ilment. 

H. Dwlo ..,lHkIIIrleund d_ 

I. NCIe$. m~.rtdotl!«l111~ Ga'IiINI~ months 

J. 0\!IIpU0rt 10 RIllaII I'XQ,IsIOmn 

It; 0Ihw (lt1ll!liH on IHpnl1i PIIiIIt) 

28. 1IIoIta. mll\Olges; .. d other PlPIYIblft 1101 GaWIINn""lIIO!Ib of'" lID ofWC1lleb!m1ll'lt 

A. I..InHCured 

8. s.curect 

Nl'A·IONo: 

----1=1 

___ [!!J 

----~ 

-----.;-~ 

____ [!!J 

2210 

--f;:J 
68616 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 


TKELleY on DSK3SPTVN1PROD with RULES2ER14NO13.003</GPH>

CFlC FORM 1.FR..j::CM 

STATEMENT OF SEGREGATION REQUIREMENTSANO FUI'IOS IN SEGREGATION 

FOR CUStOMERS TRADING ON U.S. COMMODIlYEXCHANGES 

1. N«I«!getbldlnce 

A Cull 

8. &l«nUles~..uQ 

AS OF:ot.IJoolrlOoc 

2. N«IN1IUIIiIed pnft(IoM}1n opcMumOGllftclll bded on it OGIIftct mNket 

3. exChanaewdId IIjIIIaIII A MalIcIt ... of __ c~punba_on. ~mllll<et 

a MalIcIt_of_ apIlon"""~(oaId)""a __ .... rbI 

4. Nlta/llllll/(dlfdl)(llIIIllnn 1. 2. .3) 

5. Accou ...... lddlllto. ddclt8nd_ ... will 

deblbalan_· '-amount 

8. ~ntreqlllled"'tJe~{add_'Ulld5) 

MOt! t! Slm!!E!3AIEJjACCOONIS 1. ~iII~lIlId$banka/lCOl!lD 

A. Cult 

It !locurilles ........ llllnv.-nt;of_ .... (lIIm.rbI) 

C. SeeudilHlIoIdlDrpanloullr_orapllon ou_IrlIIeu,ofCHh (OIIl11i1l1iaj 

II. MIOitiJoo .............. __ .ro.mU~Of...-.;tm_ 

A Cull 

J; $HQdtID~nalnv ..... f1f~fullllt(1I1111rb1) 

C. S.....wHIIoId bpol1icullrcu_orapllon __ In lleuofou/l (alinarbl} 

e.. Nat ... emfttom(!O) ........ ·ckoIIIIII .......... 'eclllhetmtlltl. 

1 

A Vidue of open I0I\l opIlon--' 

8 . .". ... ofopc ... "" ........ _ 

11. Nat«ll'III.nthOlMl:~_ 

A Netllqul~«II'1IY 

It SMudIfQ ~lnvelJlmenl$ of_tlnde(almodce\) 

C. SeouriIInlIoId IDrporil ... Ior .................................. In lieu of ou/I (IIIm.lIia) 

14. ~(~oy)liIndeilu.~ (SubhcthOiumb 13) 

15. MlnlpnlllllTQljltAmoulllfat exo-lHIdllll ~ 

$ 

1&. ex_ {doftC!I!ncWfun4tlnAJJ1lllilllllitIW"'~ MonogenIenlTaIgeIAmoIinlEl«lesit 

o I_I 

II IW101 

NPA ID No: 

0 1::1 0 [!![] 

0 

6 ~ $ Q 15OSII1 

, [!!J 

$ 0 .. -I 

$ II 

U 

~ no 

0 '20 

0 53 0 '''' 0 , 

EEl 

c ;E 

i3 II 200 

B 2'0 

0 I!!:J 

$ II I!D 

I 0 eo 

$ Ii l!![J 

$ II E.J 
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68617 


TKELleY on DSK3SPTVN1PROD with RULES2ER14NO13.004</GPH>

NFAIOHo: 

CFTe FORM 1·FR-FCM. 

STATEMeNT OF SECUReD AMOUNTS AND FUNOS HelD IN SEPARATE ACOOUNTS 

PURSUANTTO COMMISSION REGULATION 30.7 

AS OF u.Jxxtxxxx 

FOBSGNfUWflES8ID FOREIGN OpngNS SECURipAMoUNI§ 

'--__ ~, ~!A.nClUnl fll(Jlillld lObe set aside pu!IIUlInlto 1ft, rUle III" reGIlIlItIOn 

ah\~~ar.naQfa~OI'fI8J1IzatlM 

aulharindlhonunder 

t. Net~biafallce. Fcnil'\FllllltanndFaraigltOpllomTradlnO-AjJ Cu$lamllf$ 

AC.sli 

a S!aIJIIes(lltmll1u!l) 

3, ~lI'aI::IedcptlOn$ 

A. MaIl«!!VlIlue OfGfll!ll aptiOjICIlIIlraCis p!InjIIased on It f«aIgn boerd fA trade· 

8, Mall«!! VlIlued GflI!II opIiqIl CIlIIlraIllt IJ'II)Ied ($Old) on a foreIlIn bOard dllUe· 

4, Neteqflily(~(acldln.1,2 •• n63) 

5. Aocoulllt1lquldlllllg 10 .. ddcit IIId 1IlGGUIII$. 

dellitbelam:el- .-_1 

6. AmCIum ~mlO be .. aide ulhaltl:llftd~· Net I.k'IUlcldnQ EilJl,lilyMolh«l 

(add l1li. 4 endS) 

$ 17 

o B 

CJ 

17 

17 B ~$ ___ ..;.D D 

...;..-_,.;..-.......;;.0 D ___ ......;;.0 0 _____ 0 D 

$ o D ~$ ___ .;.O D 
68618 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 


TKELleY on DSK3SPTVN1PROD with RULES2ER14NO13.005</GPH>

~IONo: NI'A 10 No: 

CFTC FORM 1-FR-FCM 

STATeMENT OF SECUAeOAMOUH'TS AND FUNDS HeLD lit SEPARATeAeCOUH'TS 

PURSUANT TO COMMiSSION REGULATION 3tH 

AS OF lOIbodloooI:. 

fYN£I§ peeosllJPlN SEPARATE REGllLATIC!III3!I.7AGC01lNTs 

1. catII in Bank5 

A. IllllIIIIOcatelI in lIIe Unilell SWM 

.. QIIIII' a,nlll qudIIII ... lllrllqUlalilln 30.7 

lIam.): [!!J 

2. SlcudlH 

A. II! ~VoIIII bIInllllOcatellIII lIIeUnlIad SlM 

B. In~VoIIIIQlllerbllnllJ""edunderRIlQllIlliDn30;7 

II~.~ 10.1 

:t £qulllu VoIIII~""" CIOIIIII'IIaIan IIIIl'CIwdI 

a. ~ 

C. UnreaIacI_ (1IlIS) on open tdures CIInImI!I 

O. VllueOflanllaplan_ 

E, VW.Of tllOit G\lIiGII CIInImI!I 

.( Amou ... hId:.., dnrinlJ .... 1ntIansotfilnd .. boanIs.Ofhde 

11-<$): r!1 "". catII B Se<:UIihs 

C. Amwnt dull to (tom) ~ OIginlatiOIHIIIJyvllridDll 

O. Vlluoilanllaplon_ 

E. VWeOftilOltG\lliGll_ 

S. AmIIu ... held.., III..,.Ofilnllln bUIIII Oflftlla 

Nam«s): 

A. 00II 

B. SRUIIIM 

c. !J1INI!IIed pin (\HI) 011 open tdures CIInImI!I 

D. V8J\IeOftangaplan~ 

E. VW.OftilOltaplonCllnlml!l 

e. ~VoIIII QIII"~ IfNIljnIted"'lIfWligltllalllOflmt 

Nam«.~ !i!j1 

7.~1UmIa.on_!l(demibe: 

.. T*fUn.ln~"*,,30.7~(lo~t3.lIIe2) 

$ 

$ 

a ex-~SelAIide Fumla f«s.curedAinOlml (su1IINiltlne 111ocur114~ .... ' tomLflla8) 

111. ~enlTwtIII AmGuIItfilr E'xcen ..... In ~M@" 3O.1_nl1 

11. Eroets(ildtllcy)tmds in aparaIe HdIoII30.7 _ ... over(1lII1IaI/ l\Inagel'lltlll Tupt 

eo-. 

0 I!!J 

0: I!!l -=- I __ ~o I_I 

I [!!!J 

0: 10.1 ___ ....:;.0 'mol 

i 

:~ 11 

o $ _ __ ~Q I!!!J 

v 

~ 

6 

0: 

II 

0: ___ -:.0 I!!J 

I) 

~ 

6 

0 

II 

II ___ -:.0 l!!!J 

___ -:..0 1- I 

______ 0 I!!::J 

..1'=:==:;0 I-I 

."' _____ 0D ...::'"--__ .:.0 t:::l 

_· ____ °0 
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68619 

BILLING CODE 6351–01–C 

List of Subjects 

17 CFR Part 1 

Brokers, Commodity futures, 

Consumer protection, Reporting and 

recordkeeping requirements. 

17 CFR Part 3 

Associated persons, Brokers, 

Commodity futures, Customer 

protection, Major swap participants, 

Registration, Swap dealers. 

17 CFR Part 22 

Brokers, Clearing, Consumer 

protection, Reporting and recordkeeping 

requirements, Swaps. 

17 CFR Part 30 

Commodity futures, Consumer 

protection, Currency, Reporting and 

recordkeeping requirements. 

17 CFR Part 140 

Authority delegations (Government 

agencies), Organization and functions 

(Government agencies). 

For the reasons stated in the 

preamble, the Commodity Futures 

Trading Commission amends 17 CFR 

parts 1, 3, 22, 30, and 140 as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

■ 1. The authority citation for part 1 is 

revised to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 

6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 

6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12, 

12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and 

24, as amended by Title VII of the DoddFrank Wall Street Reform and Consumer 

Protection Act, Pub. L. 111–203, 124 Stat. 

1376 (2010). 

■ 2. Amend § 1.3 to revise paragraph (rr) 

to read as follows: 

§ 1.3 Definitions. 

* * * * * 

(rr) Foreign futures or foreign options 

secured amount. This term means all 

money, securities and property received 

by a futures commission merchant from, 

for, or on behalf of 30.7 customers as 

defined in § 30.1 of this chapter: 

(1) To margin, guarantee, or secure 

foreign futures contracts and all money 

accruing to such 30.7 customers as the 

result of such contracts; 

(2) In connection with foreign options 

transactions representing premiums 

payable or premiums received, or to 

guarantee or secure performance on 

such transactions; and 

(3) All money accruing to such 30.7 

customers as the result of trading in 


TKELleY on DSK3SPTVN1PROD with RULES2ER14NO13.006</GPH>
68620 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

foreign futures contracts or foreign 

options. 

* * * * * 

■ 3. Amend § 1.10 to: 

■ a. Revise paragraph (b)(1)(ii); 

■ b. Add paragraph (b)(5); and 

■ c. Revise paragraphs (c)(1), (c)(2)(i), 

(d)(1)(v), (d)(2)(iv), (d)(2)(vi), and 

(g)(2)(ii). 

The revisions and addition read as 

follows: 

§ 1.10 Financial reports of futures 

commission merchants and introducing 

brokers. 

* * * * * 

(b) * * * 

(1) * * * 

(ii) In addition to the monthly 

financial reports required by paragraph 

(b)(1)(i) of this section, each person 

registered as a futures commission 

merchant must file a Form 1–FR–FCM 

as of the close of its fiscal year, which 

must be certified by an independent 

public accountant in accordance with 

§ 1.16, and must be filed no later than 

60 days after the close of the futures 

commission merchant’s fiscal year: 

Provided, however, that a registrant 

which is registered with the Securities 

and Exchange Commission as a 

securities broker or dealer must file this 

report not later than the time permitted 

for filing an annual audit report under 

§ 240.17a–5(d)(5) of this title. 

* * * * * 

(5) Each futures commission merchant 

must file with the Commission the 

measure of the future commission 

merchant’s leverage as of the close of 

the business each month. For purpose of 

this section, the term ‘‘leverage’’ shall be 

defined by a registered futures 

association of which the futures 

commission merchant is a member. The 

futures commission merchant is 

required to file the leverage information 

with the Commission within 17 

business days of the close of the futures 

commission merchant’s month end. 

(c) Where to file reports. (1) Form 1– 

FR filed by an introducing broker 

pursuant to paragraph (b)(2) of this 

section need be filed only with, and will 

be considered filed when received by, 

the National Futures Association. Other 

reports or information provided for in 

this section will be considered filed 

when received by the Regional office of 

the Commission with jurisdiction over 

the state in which the registrant’s 

principal place of business is located (as 

set forth in § 140.02 of this chapter) and 

by the designated self-regulatory 

organization, if any; and reports or other 

information required to be filed by this 

section by an applicant for registration 

will be considered filed when received 

by the National Futures Association. 

Any report or information filed with the 

National Futures Association pursuant 

to this paragraph shall be deemed for all 

purposes to be filed with, and to be the 

official record of, the Commission. 

(2)(i) All filings or other notices 

prepared by a futures commission 

merchant pursuant to this section must 

be submitted to the Commission in 

electronic form using a form of user 

authentication assigned in accordance 

with procedures established by or 

approved by the Commission, and 

otherwise in accordance with 

instructions issued by or approved by 

the Commission, if the futures 

commission merchant or a designated 

self-regulatory organization has 

provided the Commission with the 

means necessary to read and to process 

the information contained in such 

report. A Form 1–FR required to be 

certified by an independent public 

accountant in accordance with § 1.16 

which is filed by a futures commission 

merchant must be filed electronically. 

* * * * * 

(d) * * * 

(1) * * * 

(v) For a futures commission 

merchant only, the statements of 

segregation requirements and funds in 

segregation for customers trading on 

U.S. commodity exchanges and for 

customers’ dealer options accounts, the 

statement of secured amounts and funds 

held in separate accounts for 30.7 

customers (as defined in § 30.1 of this 

chapter) in accordance with § 30.7 of 

this chapter, and the statement of 

cleared swaps customer segregation 

requirements and funds in cleared 

swaps customer accounts under section 

4d(f) of the Act as of the date for which 

the report is made; and 

* * * * * 

(2) * * * 

(iv) For a futures commission 

merchant only, the statements of 

segregation requirements and funds in 

segregation for customers trading on 

U.S. commodity exchanges and for 

customers’ dealer options accounts, the 

statement of secured amounts and funds 

held in separate accounts for 30.7 

customers (as defined in § 30.1 of this 

chapter) in accordance with § 30.7 of the 

chapter, and the statement of cleared 

swaps customers segregation 

requirements and funds in cleared 

swaps customer accounts under section 

4d(f) of the Act as of the date for which 

the report is made; 

* * * * * 

(vi) A reconciliation, including 

appropriate explanations, of the 

statement of the computation of the 

minimum capital requirements pursuant 

to § 1.17 and, for a futures commission 

merchant only, the statements of 

segregation requirements and funds in 

segregation for customers trading on 

U.S. commodity exchanges and for 

customers’ dealer option accounts, the 

statement of secured amounts and funds 

held in separate accounts for 30.7 

customers (as defined in § 30.1 of this 

chapter) in accordance with § 30.7 of 

this chapter, and the statement of 

cleared swaps customer segregation 

requirements and funds in cleared 

swaps customer accounts under section 

4d(f) of the Act, in the certified Form 1– 

FR with the applicant’s or registrant’s 

corresponding uncertified most recent 

Form 1–FR filing when material 

differences exist or, if no material 

differences exist, a statement so 

indicating; and 

* * * * * 

(g) * * * 

(2) * * * 

(ii) The following statements and 

footnote disclosures thereof: the 

Statement of Financial Condition in the 

certified annual financial reports of 

futures commission merchants and 

introducing brokers; the Statements (to 

be filed by a futures commission 

merchant only) of Segregation 

Requirements and Funds in Segregation 

for customers trading on U.S. 

commodity exchanges and for 

customers’ dealer options accounts, the 

Statement (to be filed by a futures 

commission merchant only) of Secured 

Amounts and Funds held in Separate 

Accounts for 30.7 Customers (as defined 

in § 30.1 of this chapter) in accordance 

with § 30.7 of this chapter, and the 

Statement (to be filed by futures 

commission merchants only) of Cleared 

Swaps Customer Segregation 

Requirements and Funds in Cleared 

Swaps Customer Accounts under 

section 4d(f) of the Act. 

* * * * * 

■ 4. Add § 1.11 to read as follows: 

§ 1.11 Risk Management Program for 

futures commission merchants. 

(a) Applicability. Nothing in this 

section shall apply to a futures 

commission merchant that does not 

accept any money, securities, or 

property (or extend credit in lieu 

thereof) to margin, guarantee, or secure 

any trades or contracts that result from 

soliciting or accepting orders for the 

purchase or sale of any commodity 

interest. 

(b) Definitions. For purposes of this 

section: 

(1) Business unit means any 

department, division, group, or 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68621 

personnel of a futures commission 

merchant or any of its affiliates, whether 

or not identified as such that: 

(i) Engages in soliciting or in 

accepting orders for the purchase or sale 

of any commodity interest and that, in 

or in connection with such solicitation 

or acceptance of orders, accepts any 

money, securities, or property (or 

extends credit in lieu thereof) to margin, 

guarantee, or secure any trades or 

contracts that result or may result 

therefrom; or 

(ii) Otherwise handles segregated 

funds, including managing, investing, 

and overseeing the custody of 

segregated funds, or any documentation 

in connection therewith, other than for 

risk management purposes; and 

(iii) Any personnel exercising direct 

supervisory authority of the 

performance of the activities described 

in paragraph (b)(1)(i) or (ii) of this 

section. 

(2) Customer means a futures 

customer as defined in § 1.3, Cleared 

Swaps Customer as defined in § 22.1 of 

this chapter, and 30.7 customer as 

defined in § 30.1 of this chapter. 

(3) Governing body means the 

proprietor, if the futures commission 

merchant is a sole proprietorship; a 

general partner, if the futures 

commission merchant is a partnership; 

the board of directors if the futures 

commission merchant is a corporation; 

the chief executive officer, the chief 

financial officer, the manager, the 

managing member, or those members 

vested with the management authority if 

the futures commission merchant is a 

limited liability company or limited 

liability partnership. 

(4) Segregated funds means money, 

securities, or other property held by a 

futures commission merchant in 

separate accounts pursuant to § 1.20 for 

futures customers, pursuant to § 22.2 of 

this chapter for Cleared Swaps 

Customers, and pursuant to § 30.7 of 

this chapter for 30.7 customers. 

(5) Senior management means, any 

officer or officers specifically granted 

the authority and responsibility to fulfill 

the requirements of senior management 

by the governing body. 

(c) Risk Management Program. (1) 

Each futures commission merchant shall 

establish, maintain, and enforce a 

system of risk management policies and 

procedures designed to monitor and 

manage the risks associated with the 

activities of the futures commission 

merchant as such. For purposes of this 

section, such policies and procedures 

shall be referred to collectively as a 

‘‘Risk Management Program.’’ 

(2) Each futures commission merchant 

shall maintain written policies and 

procedures that describe the Risk 

Management Program of the futures 

commission merchant. 

(3) The Risk Management Program 

and the written risk management 

policies and procedures, and any 

material changes thereto, shall be 

approved in writing by the governing 

body of the futures commission 

merchant. 

(4) Each futures commission merchant 

shall furnish a copy of its written risk 

management policies and procedures to 

the Commission and its designated selfregulatory organization upon 

application for registration and 

thereafter upon request. 

(d) Risk management unit. As part of 

the Risk Management Program, each 

futures commission merchant shall 

establish and maintain a risk 

management unit with sufficient 

authority; qualified personnel; and 

financial, operational, and other 

resources to carry out the risk 

management program established 

pursuant to this section. The risk 

management unit shall report directly to 

senior management and shall be 

independent from the business unit. 

(e) Elements of the Risk Management 

Program. The Risk Management 

Program of each futures commission 

merchant shall include, at a minimum, 

the following elements: 

(1) Identification of risks and risk 

tolerance limits. (i) The Risk 

Management Program shall take into 

account market, credit, liquidity, foreign 

currency, legal, operational, settlement, 

segregation, technological, capital, and 

any other applicable risks together with 

a description of the risk tolerance limits 

set by the futures commission merchant 

and the underlying methodology in the 

written policies and procedures. The 

risk tolerance limits shall be reviewed 

and approved quarterly by senior 

management and annually by the 

governing body. Exceptions to risk 

tolerance limits shall be subject to 

written policies and procedures. 

(ii) The Risk Management Program 

shall take into account risks posed by 

affiliates, all lines of business of the 

futures commission merchant, and all 

other trading activity engaged in by the 

futures commission merchant. The Risk 

Management Program shall be 

integrated into risk management at the 

consolidated entity level. 

(iii) The Risk Management Program 

shall include policies and procedures 

for detecting breaches of risk tolerance 

limits set by the futures commission 

merchant, and alerting supervisors 

within the risk management unit and 

senior management, as appropriate. 

(2) Periodic Risk Exposure Reports. (i) 

The risk management unit of each 

futures commission merchant shall 

provide to senior management and to its 

governing body quarterly written reports 

setting forth all applicable risk 

exposures of the futures commission 

merchant; any recommended or 

completed changes to the Risk 

Management Program; the 

recommended time frame for 

implementing recommended changes; 

and the status of any incomplete 

implementation of previously 

recommended changes to the Risk 

Management Program. For purposes of 

this section, such reports shall be 

referred to as ‘‘Risk Exposure Reports.’’ 

The Risk Exposure Reports also shall be 

provided to the senior management and 

the governing body immediately upon 

detection of any material change in the 

risk exposure of the futures commission 

merchant. 

(ii) Furnishing to the Commission. 

Each futures commission merchant shall 

furnish copies of its Risk Exposure 

Reports to the Commission within five 

(5) business days of providing such 

reports to its senior management. 

(3) Specific risk management 

considerations. The Risk Management 

Program of each futures commission 

merchant shall include, but not be 

limited to, policies and procedures 

necessary to monitor and manage the 

following risks: 

(i) Segregation risk. The written 

policies and procedures shall be 

reasonably designed to ensure that 

segregated funds are separately 

accounted for and segregated or secured 

as belonging to customers as required by 

the Act and Commission regulations 

and must, at a minimum, include or 

address the following: 

(A) A process for the evaluation of 

depositories of segregated funds, 

including, at a minimum, documented 

criteria that any depository that will 

hold segregated funds, including an 

entity affiliated with the futures 

commission merchant, must meet, 

including criteria addressing the 

depository’s capitalization, 

creditworthiness, operational reliability, 

and access to liquidity. The criteria 

should further consider the extent to 

which segregated funds are 

concentrated with any depository or 

group of depositories. The criteria also 

should include the availability of 

deposit insurance and the extent of the 

regulation and supervision of the 

depository; 

(B) A program to monitor an approved 

depository on an ongoing basis to assess 

its continued satisfaction of the futures 

commission merchant’s established 


TKELleY on DSK3SPTVN1PROD with RULES2
68622 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

criteria, including a thorough due 

diligence review of each depository at 

least annually; 

(C) An account opening process for 

depositories, including documented 

authorization requirements, procedures 

that ensure that segregated funds are not 

deposited with a depository prior to the 

futures commission merchant receiving 

the acknowledgment letter required 

from such depository pursuant to § 1.20, 

and §§ 22.2 and 30.7 of this chapter, and 

procedures that ensure that such 

account is properly titled to reflect that 

it is holding segregated funds pursuant 

to the Act and Commission regulations; 

(D) A process for establishing a 

targeted amount of residual interest that 

the futures commission merchant seeks 

to maintain as its residual interest in the 

segregated funds accounts and such 

process must be designed to reasonably 

ensure that the futures commission 

merchant maintains the targeted 

residual amounts and remains in 

compliance with the segregated funds 

requirements at all times. The policies 

and procedures must require that senior 

management, in establishing the total 

amount of the targeted residual interest 

in the segregated funds accounts, 

perform appropriate due diligence and 

consider various factors, as applicable, 

relating to the nature of the futures 

commission merchant’s business 

including, but not limited to, the 

composition of the futures commission 

merchant’s customer base, the general 

creditworthiness of the customer base, 

the general trading activity of the 

customers, the types of markets and 

products traded by the customers, the 

proprietary trading of the futures 

commission merchant, the general 

volatility and liquidity of the markets 

and products traded by customers, the 

futures commission merchant’s own 

liquidity and capital needs, and the 

historical trends in customer segregated 

fund balances, including 

undermargined amounts and net deficit 

balances in customers’ accounts. The 

analysis and calculation of the targeted 

amount of the future commission 

merchant’s residual interest must be 

described in writing with the specificity 

necessary to allow the Commission and 

the futures commission merchant’s 

designated self-regulatory organization 

to duplicate the analysis and calculation 

and test the assumptions made by the 

futures commission merchant. The 

adequacy of the targeted residual 

interest and the process for establishing 

the targeted residual interest must be 

reassessed periodically by Senior 

Management and revised as necessary; 

(E) A process for the withdrawal of 

cash, securities, or other property from 

accounts holding segregated funds, 

where the withdrawal is not for the 

purpose of payments to or on behalf of 

the futures commission merchant’s 

customers. Such policies and 

procedures must satisfy the 

requirements of § 1.23, § 22.17 of this 

chapter, or § 30.7 of this chapter, as 

applicable; 

(F) A process for assessing the 

appropriateness of specific investments 

of segregated funds in permitted 

investments in accordance with § 1.25. 

Such policies and procedures must take 

into consideration the market, credit, 

counterparty, operational, and liquidity 

risks associated with such investments, 

and assess whether such investments 

comply with the requirements in § 1.25 

including that the futures commission 

merchant manage the permitted 

investments consistent with the 

objectives of preserving principal and 

maintaining liquidity; 

(G) Procedures requiring the 

appropriate separation of duties among 

individuals responsible for compliance 

with the Act and Commission 

regulations relating to the protection 

and financial reporting of segregated 

funds, including the separation of duties 

among personnel that are responsible 

for advising customers on trading 

activities, approving or overseeing cash 

receipts and disbursements (including 

investment operations), and recording 

and reporting financial transactions. 

The policies and procedures must 

require that any movement of funds to 

affiliated companies and parties are 

properly approved and documented; 

(H) A process for the timely recording 

of all transactions, including 

transactions impacting customers’ 

accounts, in the firm’s books of record; 

(I) A program for conducting annual 

training of all finance, treasury, 

operations, regulatory, compliance, 

settlement, and other relevant officers 

and employees regarding the segregation 

requirements for segregated funds 

required by the Act and regulations, the 

requirements for notices under § 1.12, 

procedures for reporting suspected 

breaches of the policies and procedures 

required by this section to the chief 

compliance officer, without fear of 

retaliation, and the consequences of 

failing to comply with the segregation 

requirements of the Act and regulations; 

and 

(J) Policies and procedures for 

assessing the liquidity, marketability 

and mark-to-market valuation of all 

securities or other non-cash assets held 

as segregated funds, including permitted 

investments under § 1.25, to ensure that 

all non-cash assets held in the customer 

segregated accounts, both customerowned securities and investments in 

accordance with § 1.25, are readily 

marketable and highly liquid. Such 

policies and procedures must require 

daily measurement of liquidity needs 

with respect to customers; assessment of 

procedures to liquidate all non-cash 

collateral in a timely manner and 

without significant effect on price; and 

application of appropriate collateral 

haircuts that accurately reflect market 

and credit risk. 

(ii) Operational risk. The Risk 

Management Program shall include 

automated financial risk management 

controls reasonably designed to prevent 

the placing of erroneous orders, 

including those that exceed pre-set 

capital, credit, or volume thresholds. 

The Risk Management Program shall 

ensure that the use of automated trading 

programs is subject to policies and 

procedures governing the use, 

supervision, maintenance, testing, and 

inspection of such programs. 

(iii) Capital risk. The written policies 

and procedures shall be reasonably 

designed to ensure that the futures 

commission merchant has sufficient 

capital to be in compliance with the Act 

and the regulations, and sufficient 

capital and liquidity to meet the 

reasonably foreseeable needs of the 

futures commission merchant. 

(4) Supervision of the Risk 

Management Program. The Risk 

Management Program shall include a 

supervisory system that is reasonably 

designed to ensure that the policies and 

procedures required by this section are 

diligently followed. 

(f) Review and testing. (1) The Risk 

Management Program of each futures 

commission merchant shall be reviewed 

and tested on at least an annual basis, 

or upon any material change in the 

business of the futures commission 

merchant that is reasonably likely to 

alter the risk profile of the futures 

commission merchant. 

(2) The annual reviews of the Risk 

Management Program shall include an 

analysis of adherence to, and the 

effectiveness of, the risk management 

policies and procedures, and any 

recommendations for modifications to 

the Risk Management Program. The 

annual testing shall be performed by 

qualified internal audit staff that are 

independent of the business unit, or by 

a qualified third party audit service 

reporting to staff that are independent of 

the business unit. The results of the 

annual review of the Risk Management 

Program shall be promptly reported to 

and reviewed by the chief compliance 

officer, senior management, and 

governing body of the futures 

commission merchant. 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68623 

(3) Each futures commission merchant 

shall document all internal and external 

reviews and testing of its Risk 

Management Program and written risk 

management policies and procedures 

including the date of the review or test; 

the results; any deficiencies identified; 

the corrective action taken; and the date 

that corrective action was taken. Such 

documentation shall be provided to 

Commission staff, upon request. 

(g) Distribution of risk management 

policies and procedures. The Risk 

Management Program shall include 

procedures for the timely distribution of 

its written risk management policies 

and procedures to relevant supervisory 

personnel. Each futures commission 

merchant shall maintain records of the 

persons to whom the risk management 

policies and procedures were 

distributed and when they were 

distributed. 

(h) Recordkeeping. (1) Each futures 

commission merchant shall maintain 

copies of all written approvals required 

by this section. 

(2) All records or reports, including, 

but not limited to, the written policies 

and procedures and any changes thereto 

that a futures commission merchant is 

required to maintain pursuant to this 

regulation shall be maintained in 

accordance with § 1.31 and shall be 

made available promptly upon request 

to representatives of the Commission. 

■ 5. Amend § 1.12 to: 

■ a. Revise paragraphs (a)(1) and (a)(2); 

(b)(1), (b)(2), and (b)(4); (c); (d); (e); (f)(2) 

through (f)(4) and (f)(5)(i); (g); (h); and 

(i); and 

■ b. Add paragraphs (j), (k), (l), (m), and 

(n). 

The revisions and additions read as 

follows: 

§ 1.12 Maintenance of minimum financial 

requirements by futures commission 

merchants and introducing brokers. 

(a) * * * 

(1) Give notice, as set forth in 

paragraph (n) of this section, that the 

applicant’s or registrant’s adjusted net 

capital is less than required by § 1.17 or 

by other capital rule, identifying the 

applicable capital rule. The notice must 

be given immediately after the applicant 

or registrant knows or should have 

known that its adjusted net capital is 

less than required by any of the 

aforesaid rules to which the applicant or 

registrant is subject; and 

(2) Provide together with such notice 

documentation, in such form as 

necessary, to adequately reflect the 

applicant’s or registrant’s capital 

condition as of any date on which such 

person’s adjusted net capital is less than 

the minimum required; Provided, 

however, that if the applicant or 

registrant cannot calculate or otherwise 

immediately determine its financial 

condition, it must provide the notice 

required by paragraph (a)(1) of this 

section and include in such notice a 

statement that the entity cannot 

presently calculate its financial 

condition. The applicant or registrant 

must provide similar documentation of 

its financial condition for other days as 

the Commission may request. 

(b) * * * 

(1) 150 percent of the minimum dollar 

amount required by § 1.17(a)(1)(i)(A); 

(2) 110 percent of the amount 

required by § 1.17(a)(1)(i)(B); 

* * * * * 

(4) For securities brokers or dealers, 

the amount of net capital specified in 

Rule 17a-11(c) of the Securities and 

Exchange Commission (17 CFR 240.17a11(c)), must file notice to that effect, as 

set forth in paragraph (n) of this section, 

as soon as possible and no later than 

twenty-four (24) hours of such event. 

(c) If an applicant or registrant at any 

time fails to make or keep current the 

books and records required by these 

regulations, such applicant or registrant 

must, on the same day such event 

occurs, provide notice of such fact as 

specified in paragraph (n) of this 

section, specifying the books and 

records which have not been made or 

which are not current, and as soon as 

possible, but not later than forty-eight 

(48) hours after giving such notice, file 

a report as required by paragraph (n) of 

this section stating what steps have been 

and are being taken to correct the 

situation. 

(d) Whenever any applicant or 

registrant discovers or is notified by an 

independent public accountant, 

pursuant to § 1.16(e)(2), of the existence 

of any material inadequacy, as specified 

in § 1.16(d)(2), such applicant or 

registrant must give notice of such 

material inadequacy, as provided in 

paragraph (n) of this section, as soon as 

possible but not later than twenty-four 

(24) hours of discovering or being 

notified of the material inadequacy. The 

applicant or registrant must file, in the 

manner provided for under paragraph 

(n) of this section, a report stating what 

steps have been and are being taken to 

correct the material inadequacy within 

forty-eight (48) hours of filing its notice 

of the material inadequacy. 

(e) Whenever any self-regulatory 

organization learns that a member 

registrant has failed to file a notice or 

report as required by this section, that 

self-regulatory organization must 

immediately report this failure by 

notice, as provided in paragraph (n) of 

this section. 

(f) * * * 

(2) Whenever a registered futures 

commission merchant determines that 

any position it carries for another 

registered futures commission merchant 

or for a registered leverage transaction 

merchant must be liquidated 

immediately, transferred immediately or 

that the trading of any account of such 

futures commission merchant or 

leverage transaction merchant shall be 

only for purposes of liquidation, 

because the other futures commission 

merchant or the leverage transaction 

merchant has failed to meet a call for 

margin or to make other required 

deposits, the carrying futures 

commission merchant must 

immediately give notice, as provided in 

paragraph (n) of this section, of such a 

determination. 

(3) Whenever a registered futures 

commission merchant determines that 

an account which it is carrying is 

undermargined by an amount which 

exceeds the futures commission 

merchant’s adjusted net capital 

determined in accordance with § 1.17, 

the futures commission merchant must 

immediately provide notice, as provided 

in paragraph (n) of this section, of such 

a determination to the designated selfregulatory organization and the 

Commission. This paragraph (f)(3) shall 

apply to any account carried by the 

futures commission merchant, whether 

a customer, noncustomer, omnibus or 

proprietary account. For purposes of 

this paragraph, if any person has an 

interest of 10 percent or more in 

ownership or equity in, or guarantees, 

more than one account, or has 

guaranteed an account in addition to its 

own account, all such accounts shall be 

combined. 

(4) A futures commission merchant 

shall provide immediate notice, as 

provided in paragraph (n) of this 

section, whenever any commodity 

interest account it carries is subject to a 

margin call, or call for other deposits 

required by the futures commission 

merchant, that exceeds the futures 

commission merchant’s excess adjusted 

net capital, determined in accordance 

with § 1.17, and such call has not been 

answered by the close of business on the 

day following the issuance of the call. 

This applies to all accounts carried by 

the futures commission merchant, 

whether customer, noncustomer, or 

omnibus, that are subject to margining, 

including commodity futures, cleared 

swaps, and options. In addition to 

actual margin deposits by an account 

owner, a futures commission merchant 

may also take account of favorable 

market moves in determining whether 


TKELleY on DSK3SPTVN1PROD with RULES2
68624 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

the margin call is required to be 

reported under this paragraph. 

(5)(i) A futures commission merchant 

shall provide immediate notice, as 

provided in paragraph (n) of this 

section, whenever its excess adjusted 

net capital is less than six percent of the 

maintenance margin required by the 

futures commission merchant on all 

positions held in accounts of a 

noncustomer other than a noncustomer 

who is subject to the minimum financial 

requirements of: 

(A) A futures commission merchant, 

or 

(B) The Securities and Exchange 

Commission for a securities broker or 

dealer. 

* * * * * 

(g) A futures commission merchant 

shall provide notice, as provided in 

paragraph (n) of this section, of a 

substantial reduction in capital as 

compared to that last reported in a 

financial report filed with the 

Commission pursuant to § 1.10. This 

notice shall be provided as follows: 

(1) If any event or series of events, 

including any withdrawal, advance, 

loan or loss cause, on a net basis, a 

reduction in net capital (or, if the 

futures commission merchant is 

qualified to use the filing option 

available under § 1.10(h), tentative net 

capital as defined in the rules of the 

Securities and Exchange Commission) 

of 20 percent or more, notice must be 

provided as provided in paragraph (n) of 

this section within two business days of 

the event or series of events causing the 

reduction stating the reason for the 

reduction and steps the futures 

commission merchant will be taking to 

ensure an appropriate level of net 

capital is maintained by the futures 

commission merchant; and 

(2) If equity capital of the futures 

commission merchant or a subsidiary or 

affiliate of the futures commission 

merchant consolidated pursuant to 

§ 1.17(f) (or 17 CFR 240.15c3–1e) would 

be withdrawn by action of a stockholder 

or a partner or a limited liability 

company member or by redemption or 

repurchase of shares of stock by any of 

the consolidated entities or through the 

payment of dividends or any similar 

distribution, or an unsecured advance or 

loan would be made to a stockholder, 

partner, sole proprietor, limited liability 

company member, employee or affiliate, 

such that the withdrawal, advance or 

loan would cause, on a net basis, a 

reduction in excess adjusted net capital 

(or, if the futures commission merchant 

is qualified to use the filing option 

available under § 1.10(h), excess net 

capital as defined in the rules of the 

Securities and Exchange Commission) 

of 30 percent or more, notice must be 

provided as provided in paragraph (n) of 

this section at least two business days 

prior to the withdrawal, advance or loan 

that would cause the reduction: 

Provided, however, That the provisions 

of paragraphs (g)(1) and (g)(2) of this 

section do not apply to any futures or 

securities transaction in the ordinary 

course of business between a futures 

commission merchant and any affiliate 

where the futures commission merchant 

makes payment to or on behalf of such 

affiliate for such transaction and then 

receives payment from such affiliate for 

such transaction within two business 

days from the date of the transaction. 

(3) Upon receipt of such notice from 

a futures commission merchant, or upon 

a reasonable belief that a substantial 

reduction in capital has occurred or will 

occur, the Director of the Division of 

Swap Dealer and Intermediary 

Oversight or the Director’s designee may 

require that the futures commission 

merchant provide or cause a Material 

Affiliated Person (as that term is defined 

in § 1.14(a)(2)) to provide, within three 

business days from the date of request 

or such shorter period as the Division 

Director or designee may specify, such 

other information as the Division 

Director or designee determines to be 

necessary based upon market 

conditions, reports provided by the 

futures commission merchant, or other 

available information. 

(h) Whenever a person registered as a 

futures commission merchant knows or 

should know that the total amount of its 

funds on deposit in segregated accounts 

on behalf of customers trading on 

designated contract markets, or the 

amount of funds on deposit in 

segregated accounts for customers 

transacting in Cleared Swaps under part 

22 of this chapter, or the total amount 

set aside on behalf of customers trading 

on non-United States markets under 

part 30 of this chapter, is less than the 

total amount of such funds required by 

the Act and the regulations to be on 

deposit in segregated or secured amount 

accounts on behalf of such customers, 

the registrant must report such 

deficiency immediately by notice to the 

registrant’s designated self-regulatory 

organization and the Commission, as 

provided in paragraph (n) of this 

section. 

(i) A futures commission merchant 

must provide immediate notice, as set 

forth in paragraph (n) of this section, 

whenever it discovers or is informed 

that it has invested funds held for 

futures customers trading on designated 

contract markets pursuant to § 1.20, 

Cleared Swaps Customer Collateral, as 

defined in § 22.1 of this chapter, or 30.7 

customer funds, as defined in § 30.1 of 

this chapter, in instruments that are not 

permitted investments under § 1.25, or 

has otherwise violated the requirements 

governing the investment of funds 

belonging to customers under § 1.25. 

(j) A futures commission merchant 

must provide immediate notice, as 

provided in paragraph (n) of this 

section, whenever the futures 

commission merchant does not hold a 

sufficient amount of funds in segregated 

accounts for futures customers under 

§ 1.20, in segregated accounts for 

Cleared Swaps Customers under part 22 

of this chapter, or in secured amount 

accounts for customers trading on 

foreign markets under part 30 of this 

chapter to meet the futures commission 

merchant’s targeted residual interest in 

the segregated or secured amount 

accounts pursuant to its policies and 

procedures required under § 1.11, or 

whenever the futures commission 

merchant’s amount of residual interest 

is less than the sum of the 

undermargined amounts in its customer 

accounts as determined at the point in 

time that the firm is required to 

maintain the undermargined amounts 

under § 1.22, and §§ 22.2 and 30.7 of 

this chapter. 

(k) A futures commission merchant 

must provide immediate notice, as 

provided in paragraph (n) of this 

section, whenever the futures 

commission merchant, or the futures 

commission merchant’s parent or 

material affiliate, experiences a material 

adverse impact to its creditworthiness 

or ability to fund its obligations, 

including any change that could 

adversely impact the firm’s liquidity 

resources. 

(l) A futures commission merchant 

must provide prompt notice, but in no 

event later than 24 hours, as provided 

in paragraph (n) of this section, 

whenever the futures commission 

merchant experiences a material change 

in its operations or risk profile, 

including a change in the senior 

management of the futures commission 

merchant, the establishment or 

termination of a line of business, or a 

material adverse change in the futures 

commission merchant’s clearing 

arrangements. 

(m) A futures commission merchant 

must provide notice, if the futures 

commission merchant has been notified 

by the Securities and Exchange 

Commission, a securities self-regulatory 

organization, or a futures self-regulatory 

organization, that it is the subject of a 

formal investigation. A futures 

commission merchant must provide a 

copy of any examination report issued 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68625 

to the futures commission merchant by 

the Securities and Exchange 

Commission or a securities selfregulatory organization. A futures 

commission merchant must provide the 

Commission with notice of any 

correspondence received from the 

Securities and Exchange Commission or 

a securities self-regulatory organization 

that raises issues with the adequacy of 

the futures commission merchant’s 

capital position, liquidity to meet its 

obligations or otherwise operate its 

business, or internal controls. The 

notices and examination reports 

required by this section must be filed in 

a prompt manner, but in no event later 

than 24 hours of the reportable event, 

and must be filed in accordance with 

paragraph (n) of the section; Provided, 

however, that a futures commission 

merchant is not required to file a notice 

or copy of an examination report with 

the Securities and Exchange 

Commission, a securities self-regulatory 

organization, or a futures self-regulatory 

organization if such entity originally 

provided the communication or report 

to the futures commission merchant. 

(n) Notice. (1) Every notice and report 

required to be filed by this section by a 

futures commission merchant or a selfregulatory organization must be filed 

with the Commission, with the 

designated self-regulatory organization, 

if any, and with the Securities and 

Exchange Commission, if such registrant 

is a securities broker or dealer. Every 

notice and report required to be filed by 

this section by an applicant for 

registration as a futures commission 

merchant must be filed with the 

National Futures Association (on behalf 

of the Commission), with the designated 

self-regulatory organization, if any, and 

with the Securities and Exchange 

Commission, if such applicant is a 

securities broker or dealer. Every notice 

or report that is required to be filed by 

this section by a futures commission 

merchant or a self-regulatory 

organization must include a discussion 

of how the reporting event originated 

and what steps have been, or are being 

taken, to address the reporting event. 

(2) Every notice and report which an 

introducing broker or applicant for 

registration as an introducing broker is 

required to file by paragraphs (a), (c), 

and (d) of this section must be filed with 

the National Futures Association (on 

behalf of the Commission), with the 

designated self-regulatory organization, 

if any, and with every futures 

commission merchant carrying or 

intending to carry customer accounts for 

the introducing broker or applicant for 

registration as an introducing broker. 

Any notice or report filed with the 

National Futures Association pursuant 

to this paragraph shall be deemed for all 

purposes to be filed with, and to be the 

official record of, the Commission. 

Every notice or report that is required to 

be filed by this section by an 

introducing broker or applicant for 

registration as an introducing broker 

must include a discussion of how the 

reporting event originated and what 

steps have been, or are being taken, to 

address the reporting event. 

(3) Every notice or report that is 

required to be filed by a futures 

commission merchant with the 

Commission or with a designated selfregulatory organization under this 

section must be in writing and must be 

filed via electronic transmission using a 

form of user authentication assigned in 

accordance with procedures established 

by or approved by the Commission, and 

otherwise in accordance with 

instructions issued by or approved by 

the Commission; Provided, however, 

that if the registered futures commission 

merchant cannot file the notice or report 

using the electronic transmission 

approved by the Commission due to a 

transmission or systems failure, the 

futures commission merchant must 

immediately contact the Commission’s 

regional office with jurisdiction over the 

futures commission merchant as 

provided in § 140.02 of this chapter, and 

by email to FCMNotice@CFTC.gov. Any 

such electronic submission must clearly 

indicate the futures commission 

merchant on whose behalf such filing is 

made and the use of such user 

authentication in submitting such filing 

will constitute and become a substitute 

for the manual signature of the 

authorized signer. 

■ 6. Amend § 1.15 to revise paragraph 

(a)(4) to read as follows: 

§ 1.15 Risk assessment reporting 

requirements for futures commission 

merchants. 

(a) * * * 

(4) The reports required to be filed 

pursuant to paragraphs (a)(1) and (2) of 

this section must be filed via electronic 

transmission using a form of user 

authentication assigned in accordance 

with procedures established by or 

approved by the Commission, and 

otherwise in accordance with 

instructions issued by or approved by 

the Commission. Any such electronic 

submission must clearly indicate the 

registrant on whose behalf such filing is 

made and the use of such user 

authentication in submitting such filing 

will constitute and become a substitute 

for the manual signature of the 

authorized signer. 

* * * * * 

■ 7. Amend § 1.16 to: 

■ a. Revise paragraphs (a)(4), (b)(1), 

(c)(1) and (c)(2), and (f)(1)(i)(C); and 

■ b. Add paragraph (b)(4). 

The revisions and addition read as 

follows: 

§ 1.16 Qualifications and reports of 

accountants. 

(a) * * * 

(4) Customer. The term ‘‘customer’’ 

means customer, as defined in § 1.3, and 

30.7 customer, as defined in § 30.1 of 

this chapter. 

(b) Qualifications of accountants. (1) 

The Commission will recognize any 

person as a certified public accountant 

who is duly registered and in good 

standing as such under the laws of the 

place of his residence or principal 

office; Provided, however, that a 

certified public accountant engaged to 

conduct an examination of a futures 

commission merchant must be 

registered with the Public Company 

Accounting Oversight Board and must 

have undergone an examination by the 

Public Company Accounting Oversight 

Board, and may not be subject to a 

permanent or temporary bar to engage in 

the examination of public issuers or 

brokers or dealers registered with the 

Securities and Exchange Commission as 

a result of a Public Company 

Accounting Oversight Board 

disciplinary hearing. 

* * * * * 

(4) The governing body of each 

futures commission merchant must 

ensure that the certified public 

accountant engaged is duly qualified to 

perform an audit of the futures 

commission merchant. Such an 

evaluation of the qualifications of the 

certified public accountant should 

include, among other issues, the 

certified public accountant’s experience 

in auditing futures commission 

merchants, the depth of the certified 

public accountant’s staff, the certified 

public accountant’s knowledge of the 

Act and Regulations, the size and 

geographic location of the futures 

commission merchant, and the 

independence of the certified public 

accountant. The governing body should 

also review and consider the inspection 

reports issued by the Public Company 

Accounting Oversight Board as part of 

the assessment of the qualifications of 

the public accountant to perform an 

audit of the futures commission 

merchant. 

(c) * * * 

(1) Technical requirements. The 

accountant’s report must: 

(i) Be dated; 

(ii) Indicate the city and State where 

issued; and 


TKELleY on DSK3SPTVN1PROD with RULES2
68626 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

(iii) Identify without detailed 

enumeration the financial statements 

covered by the report. 

(2) Representations as to the audit. 

The accountant’s report must state 

whether the audit was made in 

accordance with the auditing standards 

adopted by the Public Company 

Accounting Oversight Board, and must 

designate any auditing procedures 

deemed necessary by the accountant 

under the circumstances of the 

particular case which have been omitted 

and the reasons for their omission. 

However, nothing in this paragraph 

shall be construed to imply authority for 

the omission of any procedure which 

independent accountants would 

ordinarily employ in the course of an 

audit made for the purposes of 

expressing the opinion required by 

paragraph (c)(3) of this section. 

* * * * * 

(f)(1) * * * 

(i) * * * 

(C) Any copy that under this 

paragraph is required to be filed with 

the Commission must be filed via 

electronic transmission using a form of 

user authentication assigned in 

accordance with procedures established 

by or approved by the Commission, and 

otherwise in accordance with 

instructions issued by or approved by 

the Commission. Any such electronic 

submission must clearly indicate the 

registrant on whose behalf such filing is 

made and the use of such user 

authentication in submitting such filing 

will constitute and become a substitute 

for the manual signature of the 

authorized signer. 

* * * * * 

■ 8. Amend § 1.17 to revise paragraphs 

(a)(4), (b)(2), (b)(7), (c)(5)(v), (c)(5)(viii), 

and (c)(5)(ix) to read as follows: 

§ 1.17 Minimum financial requirements for 

futures commission merchants and 

introducing brokers. 

(a) * * * 

(4) A futures commission merchant 

who is not in compliance with this 

section, or is unable to demonstrate 

such compliance as required by 

paragraph (a)(3) of this section, or who 

cannot certify to the Commission 

immediately upon request and 

demonstrate with verifiable evidence 

that it has sufficient access to liquidity 

to continue operating as a going 

concern, must transfer all customer 

accounts and immediately cease doing 

business as a futures commission 

merchant until such time as the firm is 

able to demonstrate such compliance; 

Provided, however, The registrant may 

trade for liquidation purposes only 

unless otherwise directed by the 

Commission and/or the designated selfregulatory organization; And, Provided 

further, That if such registrant 

immediately demonstrates to the 

satisfaction of the Commission or the 

designated self-regulatory organization 

the ability to achieve compliance, the 

Commission or the designated selfregulatory organization may in its 

discretion allow such registrant up to a 

maximum of 10 business days in which 

to achieve compliance without having 

to transfer accounts and cease doing 

business as required above. Nothing in 

this paragraph shall be construed as 

preventing the Commission or the 

designated self-regulatory organization 

from taking action against a registrant 

for non-compliance with any of the 

provisions of this section. 

* * * * * 

(b) * * * 

(2) Customer. This term means a 

futures customer as defined in § 1.3, a 

cleared over the counter customer as 

defined in paragraph (b)(10) of this 

section, and a 30.7 customer as defined 

in § 30.1 of this chapter. 

* * * * * 

(7) Customer account. This term 

means an account in which commodity 

futures, options or cleared over the 

counter derivative positions are carried 

on the books of the applicant or 

registrant which is an account that is 

included in the definition of customer 

as defined in § 1.17(b)(2). 

* * * * * 

(c) * * * 

(5) * * * 

(v) In the case of securities and 

obligations used by the applicant or 

registrant in computing net capital, and 

in the case of a futures commission 

merchant that invests funds deposited 

by futures customers as defined in § 1.3, 

Cleared Swaps Customers as defined in 

§ 22.1 of this chapter, and 30.7 

customers as defined in § 30.1 of this 

chapter in securities as permitted 

investments under § 1.25, the 

deductions specified in Rule 240.15c3– 

1(c)(2)(vi) or Rule 240.15c3–1(c)(2)(vii) 

of the Securities and Exchange 

Commission (17 CFR 240.15c3– 

1(c)(2)(vi) and 17 CFR 240.15c3– 

1(c)(2)(vii)) (‘‘securities haircuts’’). 

Futures commission merchants that 

establish and enforce written policies 

and procedures to assess the credit risk 

of commercial paper, convertible debt 

instruments, or nonconvertible debt 

instruments in accordance with Rule 

240.15c3–1(c)(2)(vi) of the Securities 

and Exchange Commission (17 CFR 

240.15c3–1(c)(2)(vi)) may apply the 

lower haircut percentages specified in 

Rule 240.15c3–1(c)(2)(vi) for such 

commercial paper, convertible debt 

instruments and nonconvertible debt 

instruments. Futures commission 

merchants must maintain their written 

policies and procedures in accordance 

with § 1.31; 

* * * * * 

(viii) In the case of a futures 

commission merchant, for 

undermargined customer commodity 

futures accounts and commodity option 

customer accounts the amount of funds 

required in each such account to meet 

maintenance margin requirements of the 

applicable board of trade or if there are 

no such maintenance margin 

requirements, clearing organization 

margin requirements applicable to such 

positions, after application of calls for 

margin or other required deposits which 

are outstanding no more than one 

business day. If there are no such 

maintenance margin requirements or 

clearing organization margin 

requirements, then the amount of funds 

required to provide margin equal to the 

amount necessary, after application of 

calls for margin or other required 

deposits outstanding no more than one 

business day, to restore original margin 

when the original margin has been 

depleted by 50 percent or more: 

Provided, To the extent a deficit is 

excluded from current assets in 

accordance with paragraph (c)(2)(i) of 

this section such amount shall not also 

be deducted under this paragraph. In 

the event that an owner of a customer 

account has deposited an asset other 

than cash to margin, guarantee or secure 

his account, the value attributable to 

such asset for purposes of this 

subparagraph shall be the lesser of: 

(A) The value attributable to the asset 

pursuant to the margin rules of the 

applicable board of trade, or 

(B) The market value of the asset after 

application of the percentage 

deductions specified in paragraph (c)(5) 

of this section; 

(ix) In the case of a futures 

commission merchant, for 

undermargined commodity futures and 

commodity option noncustomer and 

omnibus accounts the amount of funds 

required in each such account to meet 

maintenance margin requirements of the 

applicable board of trade or if there are 

no such maintenance margin 

requirements, clearing organization 

margin requirements applicable to such 

positions, after application of calls for 

margin or other required deposits which 

are outstanding no more than one 

business day. If there are no such 

maintenance margin requirements or 

clearing organization margin 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68627 

requirements, then the amount of funds 

required to provide margin equal to the 

amount necessary after application of 

calls for margin or other required 

deposits outstanding no more than one 

business day to restore original margin 

when the original margin has been 

depleted by 50 percent or more: 

Provided, To the extent a deficit is 

excluded from current assets in 

accordance with paragraph (c)(2)(i) of 

this section such amount shall not also 

be deducted under this paragraph. In 

the event that an owner of a 

noncustomer or omnibus account has 

deposited an asset other than cash to 

margin, guarantee or secure his account 

the value attributable to such asset for 

purposes of this paragraph shall be the 

lesser of the value attributable to such 

asset pursuant to the margin rules of the 

applicable board of trade, or the market 

value of such asset after application of 

the percentage deductions specified in 

paragraph (c)(5) of this section; 

* * * * * 

■ 9. Revise § 1.20 to read as follows: 

§ 1.20 Futures customer funds to be 

segregated and separately accounted for. 

(a) General. A futures commission 

merchant must separately account for 

all futures customer funds and segregate 

such funds as belonging to its futures 

customers. A futures commission 

merchant shall deposit futures customer 

funds under an account name that 

clearly identifies them as futures 

customer funds and shows that such 

funds are segregated as required by 

sections 4d(a) and 4d(b) of the Act and 

by this part. A futures commission 

merchant must at all times maintain in 

the separate account or accounts money, 

securities and property in an amount at 

least sufficient in the aggregate to cover 

its total obligations to all futures 

customers as computed under paragraph 

(i) of this section. The futures 

commission merchant must perform 

appropriate due diligence as required by 

§ 1.11 on any and all locations of futures 

customer funds, as specified in 

paragraph (b) of this section, to ensure 

that the location in which the futures 

commission merchant has deposited 

such funds is a financially sound entity. 

(b) Location of futures customer 

funds. A futures commission merchant 

may deposit futures customer funds, 

subject to the risk management policies 

and procedures of the futures 

commission merchant required by 

§ 1.11, with the following depositories: 

(1) A bank or trust company; 

(2) A derivatives clearing 

organization; or 

(3) Another futures commission 

merchant. 

(c) Limitation on the holding of 

futures customer funds outside of the 

United States. A futures commission 

merchant may hold futures customer 

funds with a depository outside of the 

United States only in accordance with 

§ 1.49. 

(d) Written acknowledgment from 

depositories. (1) A futures commission 

merchant must obtain a written 

acknowledgment from each bank, trust 

company, derivatives clearing 

organization, or futures commission 

merchant prior to or contemporaneously 

with the opening of an account by the 

futures commission merchant with such 

depositories; provided, however, that a 

written acknowledgment need not be 

obtained from a derivatives clearing 

organization that has adopted and 

submitted to the Commission rules that 

provide for the segregation of futures 

customer funds in accordance with all 

relevant provisions of the Act and the 

rules and orders promulgated 

thereunder. 

(2) The written acknowledgment must 

be in the form as set out in Appendix 

A to this part. 

(3)(i) A futures commission merchant 

shall deposit futures customer funds 

only with a depository that agrees to 

provide the director of the Division of 

Swap Dealer and Intermediary 

Oversight, or any successor division, or 

such director’s designees, with direct, 

read-only electronic access to 

transaction and account balance 

information for futures customer 

accounts. 

(ii) The written acknowledgment must 

contain the futures commission 

merchant’s authorization to the 

depository to provide direct, read-only 

electronic access to futures customer 

account transaction and account balance 

information to the director of the 

Division of Swap Dealer and 

Intermediary Oversight, or any 

successor division, or such director’s 

designees, without further notice to or 

consent from the futures commission 

merchant. 

(4) A futures commission merchant 

shall deposit futures customer funds 

only with a depository that agrees to 

provide the Commission and the futures 

commission merchant’s designated selfregulatory organization with a copy of 

the executed written acknowledgment 

no later than three business days after 

the opening of the account or the 

execution of a new written 

acknowledgment for an existing 

account, as applicable. The Commission 

must receive the written 

acknowledgment from the depository 

via electronic means, in a format and 

manner determined by the Commission. 

The written acknowledgment must 

contain the futures commission 

merchant’s authorization to the 

depository to provide the written 

acknowledgment to the Commission 

and to the futures commission 

merchant’s designated self-regulatory 

organization without further notice to or 

consent from the futures commission 

merchant. 

(5) A futures commission merchant 

shall deposit futures customer funds 

only with a depository that agrees that 

accounts containing customer funds 

may be examined at any reasonable time 

by the director of the Division of Swap 

Dealer and Intermediary Oversight or 

the director of the Division of Clearing 

and Risk, or any successor divisions, or 

such directors’ designees, or an 

appropriate officer, agent or employee of 

the futures commission merchant’s 

designated self-regulatory organization. 

The written acknowledgment must 

contain the futures commission 

merchant’s authorization to the 

depository to permit any such 

examination to take place without 

further notice to or consent from the 

futures commission merchant. 

(6) A futures commission merchant 

shall deposit futures customer funds 

only with a depository that agrees to 

reply promptly and directly to any 

request from the director of the Division 

of Swap Dealer and Intermediary 

Oversight or the director of the Division 

of Clearing and Risk, or any successor 

divisions, or such directors’ designees, 

or an appropriate officer, agent or 

employee of the futures commission 

merchant’s designated self-regulatory 

organization for confirmation of account 

balances or provision of any other 

information regarding or related to an 

account. The written acknowledgment 

must contain the futures commission 

merchant’s authorization to the 

depository to reply promptly and 

directly as required by this paragraph 

without further notice to or consent 

from the futures commission merchant. 

(7) The futures commission merchant 

shall promptly file a copy of the written 

acknowledgment with the Commission 

in the format and manner specified by 

the Commission no later than three 

business days after the opening of the 

account or the execution of a new 

written acknowledgment for an existing 

account, as applicable. 

(8) A futures commission merchant 

shall obtain a new written 

acknowledgment within 120 days of any 

changes in the following: 

(i) The name or business address of 

the futures commission merchant; 

(ii) The name or business address of 

the bank, trust company, derivatives 


TKELleY on DSK3SPTVN1PROD with RULES2
68628 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

clearing organization or futures 

commission merchant receiving futures 

customer funds; or 

(iii) The account number(s) under 

which futures customer funds are held. 

(9) A futures commission merchant 

shall maintain each written 

acknowledgment readily accessible in 

its files in accordance with § 1.31, for as 

long as the account remains open, and 

thereafter for the period provided in 

§ 1.31. 

(e) Commingling. (1) A futures 

commission merchant may for 

convenience commingle the futures 

customer funds that it receives from, or 

on behalf of, multiple futures customers 

in a single account or multiple accounts 

with one or more of the depositories 

listed in paragraph (b) of this section. 

(2) A futures commission merchant 

shall not commingle futures customer 

funds with the money, securities or 

property of such futures commission 

merchant, or with any proprietary 

account of such futures commission 

merchant, or use such funds to secure 

or guarantee the obligation of, or extend 

credit to, such futures commission 

merchant or any proprietary account of 

such futures commission merchant; 

provided, however, a futures 

commission merchant may deposit 

proprietary funds in segregated accounts 

as permitted under § 1.23. 

(3) A futures commission merchant 

may not commingle futures customer 

funds with funds deposited by 30.7 

customers as defined in § 30.1 of this 

chapter and set aside in separate 

accounts as required by part 30 of this 

chapter, or with funds deposited by 

Cleared Swaps Customers as defined in 

§ 22.1 of this chapter and held in 

segregated accounts pursuant to section 

4d(f) of the Act; provided, however, that 

a futures commission merchant may 

commingle futures customer funds with 

funds deposited by 30.7 customers or 

Cleared Swaps Customers if expressly 

permitted by a Commission regulation 

or order, or by a derivatives clearing 

organization rule approved in 

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

chapter. 

(f) Limitation on use of futures 

customer funds. (1) A futures 

commission merchant shall treat and 

deal with the funds of a futures 

customer as belonging to such futures 

customer. A futures commission 

merchant shall not use the funds of a 

futures customer to secure or guarantee 

the commodity interests, or to secure or 

extend the credit, of any person other 

than the futures customer for whom the 

funds are held. 

(2) A futures commission merchant 

shall obligate futures customer funds to 

a derivatives clearing organization, a 

futures commission merchant, or any 

depository solely to purchase, margin, 

guarantee, secure, transfer, adjust or 

settle trades, contracts or commodity 

option transactions of futures 

customers; provided, however, that a 

futures commission merchant is 

permitted to use the funds belonging to 

a futures customer that are necessary in 

the normal course of business to pay 

lawfully accruing fees or expenses on 

behalf of the futures customer’s 

positions including commissions, 

brokerage, interest, taxes, storage and 

other fees and charges. 

(3) No person, including any 

derivatives clearing organization or any 

depository, that has received futures 

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 futures customers of the 

futures commission merchant which 

deposited such funds. 

(g) Derivatives clearing organizations. 

(1) General. All futures customer funds 

received by a derivatives clearing 

organization from a member to 

purchase, margin, guarantee, secure or 

settle the trades, contracts or commodity 

options of the clearing member’s futures 

customers and all money accruing to 

such futures customers as the result of 

trades, contracts or commodity options 

so carried shall be separately accounted 

for and segregated as belonging to such 

futures customers, and a derivatives 

clearing organization shall not hold, use 

or dispose of such futures customer 

funds except as belonging to such 

futures customers. A derivatives 

clearing organization shall deposit 

futures customer funds under an 

account name that clearly identifies 

them as futures customer funds and 

shows that such funds are segregated as 

required by sections 4d(a) and 4d(b) of 

the Act and by this part. 

(2) Location of futures customer 

funds. A derivatives clearing 

organization may deposit futures 

customer funds with a bank or trust 

company, which may include a Federal 

Reserve Bank with respect to deposits of 

a derivatives clearing organization that 

is designated by the Financial Stability 

Oversight Council to be systemically 

important. 

(3) Limitation on the holding of 

futures customer funds outside of the 

United States. A derivatives clearing 

organization may hold futures customer 

funds with a depository outside of the 

United States only in accordance with 

§ 1.49. 

(4) Written acknowledgment from 

depositories. (i) A derivatives clearing 

organization must obtain a written 

acknowledgment from each depository 

prior to or contemporaneously with the 

opening of a futures customer funds 

account. 

(ii) The written acknowledgment must 

be in the form as set out in Appendix 

B to this part; provided, however, that a 

derivatives clearing organization shall 

obtain from a Federal Reserve Bank only 

a written acknowledgment that: 

(A) The Federal Reserve Bank was 

informed that the customer funds 

deposited therein are those of customers 

who trade commodities, options, swaps, 

and other products and are being held 

in accordance with the provisions of 

section 4d of the Act and Commission 

regulations thereunder; and 

(B) The Federal Reserve Bank agrees 

to reply promptly and directly to any 

request from the director of the Division 

of Clearing and Risk or the director of 

the Division of Swap Dealer and 

Intermediary Oversight, or any 

successor divisions, or such directors’ 

designees, for confirmation of account 

balances or provision of any other 

information regarding or related to an 

account. 

(iii) A derivatives clearing 

organization shall deposit futures 

customer funds only with a depository 

that agrees to provide the Commission 

with a copy of the executed written 

acknowledgment no later than three 

business days after the opening of the 

account or the execution of a new 

written acknowledgment for an existing 

account, as applicable. The Commission 

must receive the written 

acknowledgment from the depository 

via electronic means, in a format and 

manner determined by the Commission. 

The written acknowledgment must 

contain the derivatives clearing 

organization’s authorization to the 

depository to provide the written 

acknowledgment to the Commission 

without further notice to or consent 

from the derivatives clearing 

organization. 

(iv) A derivatives clearing 

organization shall deposit futures 

customer funds only with a depository 

that agrees to reply promptly and 

directly to any request from the director 

of the Division of Clearing and Risk or 

the director of the Division of Swap 

Dealer and Intermediary Oversight, or 

any successor divisions, or such 

directors’ designees, for confirmation of 

account balances or provision of any 

other information regarding or related to 

an account. The written 

acknowledgment must contain the 

derivatives clearing organization’s 

authorization to the depository to reply 

promptly and directly as required by 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68629 

this paragraph without further notice to 

or consent from the derivatives clearing 

organization. 

(v) A derivatives clearing organization 

shall promptly file a copy of the written 

acknowledgment with the Commission 

in the format and manner specified by 

the Commission no later than three 

business days after the opening of the 

account or the execution of a new 

written acknowledgment for an existing 

account, as applicable. 

(vi) A derivatives clearing 

organization shall obtain a new written 

acknowledgment within 120 days of any 

changes in the following: 

(A) The name or business address of 

the derivatives clearing organization; 

(B) The name or business address of 

the depository receiving futures 

customer funds; or 

(C) The account number(s) under 

which futures customer funds are held. 

(vii) A derivatives clearing 

organization shall maintain each written 

acknowledgment readily accessible in 

its files in accordance with § 1.31, for as 

long as the account remains open, and 

thereafter for the period provided in 

§ 1.31. 

(5) Commingling. (i) A derivatives 

clearing organization may for 

convenience commingle the futures 

customer funds that it receives from, or 

on behalf of, multiple futures 

commission merchants in a single 

account or multiple accounts with one 

or more of the depositories listed in 

paragraph (g)(2) of this section. 

(ii) A derivatives clearing organization 

shall not commingle futures customer 

funds with the money, securities or 

property of such derivatives clearing 

organization or with any proprietary 

account of any of its clearing members, 

or use such funds to secure or guarantee 

the obligations of, or extend credit to, 

such derivatives clearing organization or 

any proprietary account of any of its 

clearing members. 

(iii) A derivatives clearing 

organization may not commingle funds 

held for futures customers with funds 

deposited by clearing members on 

behalf of their 30.7 customers as defined 

in § 30.1 of this chapter and set aside in 

separate accounts as required by part 30 

of this chapter, or with funds deposited 

by clearing members on behalf of their 

Cleared Swaps Customers as defined in 

§ 22.1 of this chapter and held in 

segregated accounts pursuant section 

4d(f) of the Act; provided, however, that 

a derivatives clearing organization may 

commingle futures customer funds with 

funds deposited by clearing members on 

behalf of their 30.7 customers or Cleared 

Swaps Customers if expressly permitted 

by a Commission regulation or order, or 

by a derivatives clearing organization 

rule approved in accordance with 

§ 39.15(b)(2) of this chapter. 

(h) Immediate availability of bank 

and trust company deposits. All futures 

customer funds deposited by a futures 

commission merchant or a derivatives 

clearing organization with a bank or 

trust company must be immediately 

available for withdrawal upon the 

demand of the futures commission 

merchant or derivatives clearing 

organization. 

(i) Requirements as to amount. (1) For 

purposes of this paragraph (i), the term 

‘‘account’’ shall mean the entries on the 

books and records of a futures 

commission merchant pertaining to the 

futures customer funds of a particular 

futures customer. 

(2) The futures commission merchant 

must reflect in the account that it 

maintains for each futures customer the 

net liquidating equity for each such 

customer, calculated as follows: The 

market value of any futures customer 

funds that it receives from such 

customer, as adjusted by: 

(i) Any uses permitted under 

paragraph (f) of this section; 

(ii) Any accruals on permitted 

investments of such collateral under 

§ 1.25 that, pursuant to the futures 

commission merchant’s customer 

agreement with that customer, are 

creditable to such customer; 

(iii) Any gains and losses with respect 

to contracts for the purchase or sale of 

a commodity for future delivery and any 

options on such contracts; 

(iv) Any charges lawfully accruing to 

the futures customer, including any 

commission, brokerage fee, interest, tax, 

or storage fee; and 

(v) Any appropriately authorized 

distribution or transfer of such 

collateral. 

(3) If the market value of futures 

customer funds in the account of a 

futures customer is positive after 

adjustments, then that account has a 

credit balance. If the market value of 

futures customer funds in the account of 

a futures customer is negative after 

adjustments, then that account has a 

debit balance. 

(4) The futures commission merchant 

must maintain in segregation an amount 

equal to the sum of any credit balances 

that the futures customers of the futures 

commission merchant have in their 

accounts. This balance may not be 

reduced by any debit balances that the 

futures customers of the futures 

commission merchants have in their 

accounts. 

Appendix A to § 1.20—Futures 

Commission Merchant 

Acknowledgment Letter for CFTC 

Regulation 1.20 Customer Segregated 

Account 

[Date] 

[Name and Address of Bank, Trust Company, 

Derivatives Clearing Organization or 

Futures Commission Merchant] 

We refer to the Segregated Account(s) 

which [Name of Futures Commission 

Merchant] (‘‘we’’ or ‘‘our’’) have opened or 

will open with [Name of Bank, Trust 

Company, Derivatives Clearing Organization 

or Futures Commission Merchant] (‘‘you’’ or 

‘‘your’’) entitled: 

[Name of Futures Commission Merchant] [if 

applicable, add ‘‘FCM Customer Omnibus 

Account’’] CFTC Regulation 1.20 Customer 

Segregated Account under Sections 4d(a) 

and 4d(b) of the Commodity Exchange Act 

[and, if applicable, ‘‘, Abbreviated as [short 

title reflected in the depository’s electronic 

system]’’] 

Account Number(s): [ ] 

(collectively, the ‘‘Account(s)’’). 

You acknowledge that we have opened or 

will open the above-referenced Account(s) 

for the purpose of depositing, as applicable, 

money, securities and other property 

(collectively the ‘‘Funds’’) of customers who 

trade commodities, options, swaps, and other 

products, as required by Commodity Futures 

Trading Commission (‘‘CFTC’’) Regulations, 

including Regulation 1.20, as amended; that 

the Funds held by you, hereafter deposited 

in the Account(s) or accruing to the credit of 

the Account(s), will be separately accounted 

for and segregated on your books from our 

own funds and from any other funds or 

accounts held by us in accordance with the 

provisions of the Commodity Exchange Act, 

as amended (the ‘‘Act’’), and Part 1 of the 

CFTC’s regulations, as amended; and that the 

Funds must otherwise be treated in 

accordance with the provisions of Section 4d 

of the Act and CFTC regulations thereunder. 

Furthermore, you acknowledge and agree 

that such Funds may not be used by you or 

by us to secure or guarantee any obligations 

that we might owe to you, and they may not 

be used by us to secure or obtain credit from 

you. You further acknowledge and agree that 

the Funds in the Account(s) shall not be 

subject to any right of offset or lien for or on 

account of any indebtedness, obligations or 

liabilities we may now or in the future have 

owing to you. This prohibition does not 

affect your right to recover funds advanced 

in the form of cash transfers, lines of credit, 

repurchase agreements or other similar 

liquidity arrangements you make in lieu of 

liquidating non-cash assets held in the 

Account(s) or in lieu of converting cash held 

in the Account(s) to cash in a different 

currency. 

In addition, you agree that the Account(s) 

may be examined at any reasonable time by 

the director of the Division of Swap Dealer 

and Intermediary Oversight of the CFTC or 

the director of the Division of Clearing and 

Risk of the CFTC, or any successor divisions, 

or such directors’ designees, or an 

appropriate officer, agent or employee of our 


TKELleY on DSK3SPTVN1PROD with RULES2
68630 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

designated self-regulatory organization 

(‘‘DSRO’’), [Name of DSRO], and this letter 

constitutes the authorization and direction of 

the undersigned on our behalf to permit any 

such examination to take place without 

further notice to or consent from us. 

You agree to reply promptly and directly 

to any request for confirmation of account 

balances or provision of any other 

information regarding or related to the 

Account(s) from the director of the Division 

of Swap Dealer and Intermediary Oversight 

of the CFTC or the director of the Division 

of Clearing and Risk of the CFTC, or any 

successor divisions, or such directors’ 

designees, or an appropriate officer, agent, or 

employee of [Name of DSRO], acting in its 

capacity as our DSRO, and this letter 

constitutes the authorization and direction of 

the undersigned on our behalf to release the 

requested information without further notice 

to or consent from us. 

You further acknowledge and agree that, 

pursuant to authorization granted by us to 

you previously or herein, you have provided, 

or will promptly provide following the 

opening of the Account(s), the director of the 

Division of Swap Dealer and Intermediary 

Oversight of the CFTC, or any successor 

division, or such director’s designees, with 

technological connectivity, which may 

include provision of hardware, software, and 

related technology and protocol support, to 

facilitate direct, read-only electronic access 

to transaction and account balance 

information for the Account(s). This letter 

constitutes the authorization and direction of 

the undersigned on our behalf for you to 

establish this connectivity and access if not 

previously established, without further 

notice to or consent from us. 

The parties agree that all actions on your 

part to respond to the above information and 

access requests will be made in accordance 

with, and subject to, such usual and 

customary authorization verification and 

authentication policies and procedures as 

may be employed by you to verify the 

authority of, and authenticate the identity of, 

the individual making any such information 

or access request, in order to provide for the 

secure transmission and delivery of the 

requested information or access to the 

appropriate recipient(s). We will not hold 

you responsible for acting pursuant to any 

information or access request from the 

director of the Division of Swap Dealer and 

Intermediary Oversight of the CFTC or the 

director of the Division of Clearing and Risk 

of the CFTC, or any successor divisions, or 

such directors’ designees, or an appropriate 

officer, agent, or employee of [Name of 

DSRO], acting in its capacity as our DSRO, 

upon which you have relied after having 

taken measures in accordance with your 

applicable policies and procedures to assure 

that such request was provided to you by an 

individual authorized to make such a 

request. 

In the event that we become subject to 

either a voluntary or involuntary petition for 

relief under the U.S. Bankruptcy Code, we 

acknowledge that you will have no obligation 

to release the Funds held in the Account(s), 

except upon instruction of the Trustee in 

Bankruptcy or pursuant to the Order of the 

respective U.S. Bankruptcy Court. 

Notwithstanding anything in the foregoing 

to the contrary, nothing contained herein 

shall be construed as limiting your right to 

assert any right of offset or lien on assets that 

are not Funds maintained in the Account(s), 

or to impose such charges against us or any 

proprietary account maintained by us with 

you. Further, it is understood that amounts 

represented by checks, drafts or other items 

shall not be considered to be part of the 

Account(s) until finally collected. 

Accordingly, checks, drafts and other items 

credited to the Account(s) and subsequently 

dishonored or otherwise returned to you or 

reversed, for any reason, and any claims 

relating thereto, including but not limited to 

claims of alteration or forgery, may be 

charged back to the Account(s), and we shall 

be responsible to you as a general endorser 

of all such items whether or not actually so 

endorsed. 

You may conclusively presume that any 

withdrawal from the Account(s) and the 

balances maintained therein are in 

conformity with the Act and CFTC 

regulations without any further inquiry, 

provided that, in the ordinary course of your 

business as a depository, you have no notice 

of or actual knowledge of a potential 

violation by us of any provision of the Act 

or the CFTC regulations that relates to the 

segregation of customer funds; and you shall 

not in any manner not expressly agreed to 

herein be responsible to us for ensuring 

compliance by us with such provisions of the 

Act and CFTC regulations; however, the 

aforementioned presumption does not affect 

any obligation you may otherwise have under 

the Act or CFTC regulations. 

You may, and are hereby authorized to, 

obey the order, judgment, decree or levy of 

any court of competent jurisdiction or any 

governmental agency with jurisdiction, 

which order, judgment, decree or levy relates 

in whole or in part to the Account(s). In any 

event, you shall not be liable by reason of any 

action or omission to act pursuant to any 

such order, judgment, decree or levy, to us 

or to any other person, firm, association or 

corporation even if thereafter any such order, 

decree, judgment or levy shall be reversed, 

modified, set aside or vacated. 

The terms of this letter agreement shall 

remain binding upon the parties, their 

successors and assigns and, for the avoidance 

of doubt, regardless of a change in the name 

of either party. This letter agreement 

supersedes and replaces any prior agreement 

between the parties in connection with the 

Account(s), including but not limited to any 

prior acknowledgment letter agreement, to 

the extent that such prior agreement is 

inconsistent with the terms hereof. In the 

event of any conflict between this letter 

agreement and any other agreement between 

the parties in connection with the 

Account(s), this letter agreement shall govern 

with respect to matters specific to Section 4d 

of the Act and the CFTC’s regulations 

thereunder, as amended. 

This letter agreement shall be governed by 

and construed in accordance with the laws 

of [Insert governing law] without regard to 

the principles of choice of law. 

Please acknowledge that you agree to abide 

by the requirements and conditions set forth 

above by signing and returning to us the 

enclosed copy of this letter agreement, and 

that you further agree to provide a copy of 

this fully executed letter agreement directly 

to the CFTC (via electronic means in a format 

and manner determined by the CFTC) and to 

[Name of DSRO], acting in its capacity as our 

DSRO. We hereby authorize and direct you 

to provide such copies without further notice 

to or consent from us, no later than three 

business days after opening the Account(s) or 

revising this letter agreement, as applicable. 

[Name of Futures Commission Merchant] 

By: 

Print Name: 

Title: 

ACKNOWLEDGED AND AGREED: 

[Name of Bank, Trust Company, Derivatives 

Clearing Organization or Futures 

Commission Merchant] 

By: 

Print Name: 

Title: 

Contact Information: [Insert phone number 

and email address] 

DATE: 

Appendix B to § 1.20—Derivatives 

Clearing Organization 

Acknowledgment Letter for CFTC 

Regulation 1.20 Customer Segregated 

Account 

[Date] 

[Name and Address of Bank or Trust 

Company] 

We refer to the Segregated Account(s) 

which [Name of Derivatives Clearing 

Organization] (‘‘we’’ or ‘‘our’’) have opened 

or will open with [Name of Bank or Trust 

Company] (‘‘you’’ or ‘‘your’’) entitled: 

[Name of Derivatives Clearing Organization] 

Futures Customer Omnibus Account, CFTC 

Regulation 1.20 Customer Segregated 

Account under Sections 4d(a) and 4d(b) of 

the Commodity Exchange Act [and, if 

applicable, ‘‘, Abbreviated as [short title 

reflected in the depository’s electronic 

system]’’] 

Account Number(s): [ ] 

(collectively, the ‘‘Account(s)’’). 

You acknowledge that we have opened or 

will open the above-referenced Account(s) 

for the purpose of depositing, as applicable, 

money, securities and other property 

(collectively the ‘‘Funds’’) of customers who 

trade commodities, options, swaps, and other 

products, as required by Commodity Futures 

Trading Commission (‘‘CFTC’’) Regulations, 

including Regulation 1.20, as amended; that 

the Funds held by you, hereafter deposited 

in the Account(s) or accruing to the credit of 

the Account(s), will be separately accounted 

for and segregated on your books from our 

own funds and from any other funds or 

accounts held by us in accordance with the 

provisions of the Commodity Exchange Act, 

as amended (the ‘‘Act’’), and Part 1 of the 

CFTC’s regulations, as amended; and that the 

Funds must otherwise be treated in 

accordance with the provisions of Section 4d 

of the Act and CFTC regulations thereunder. 

Furthermore, you acknowledge and agree 

that such Funds may not be used by you or 

by us to secure or guarantee any obligations 

that we might owe to you, and they may not 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68631 

be used by us to secure or obtain credit from 

you. You further acknowledge and agree that 

the Funds in the Account(s) shall not be 

subject to any right of offset or lien for or on 

account of any indebtedness, obligations or 

liabilities we may now or in the future have 

owing to you. This prohibition does not 

affect your right to recover funds advanced 

in the form of cash transfers, lines of credit, 

repurchase agreements or other similar 

liquidity arrangements you make in lieu of 

liquidating non-cash assets held in the 

Account(s) or in lieu of converting cash held 

in the Account(s) to cash in a different 

currency. 

You agree to reply promptly and directly 

to any request for confirmation of account 

balances or provision of any other 

information regarding or related to the 

Account(s) from the director of the Division 

of Clearing and Risk of the CFTC or the 

director of the Division of Swap Dealer and 

Intermediary Oversight of the CFTC, or any 

successor divisions, or such directors’ 

designees, and this letter constitutes the 

authorization and direction of the 

undersigned on our behalf to release the 

requested information without further notice 

to or consent from us. 

The parties agree that all actions on your 

part to respond to the above information 

requests will be made in accordance with, 

and subject to, such usual and customary 

authorization verification and authentication 

policies and procedures as may be employed 

by you to verify the authority of, and 

authenticate the identity of, the individual 

making any such information request, in 

order to provide for the secure transmission 

and delivery of the requested information to 

the appropriate recipient(s). We will not hold 

you responsible for acting pursuant to any 

information request from the director of the 

Division of Clearing and Risk of the CFTC or 

the director of the Division of Swap Dealer 

and Intermediary Oversight of the CFTC, or 

any successor divisions, or such directors’ 

designees, upon which you have relied after 

having taken measures in accordance with 

your applicable policies and procedures to 

assure that such request was provided to you 

by an individual authorized to make such a 

request. 

In the event that we or any of our futures 

commission merchant clearing members 

become(s) subject to either a voluntary or 

involuntary petition for relief under the U.S. 

Bankruptcy Code, we acknowledge that you 

will have no obligation to release the Funds 

held in the Account(s), except upon 

instruction of the Trustee in Bankruptcy or 

pursuant to the Order of the respective U.S. 

Bankruptcy Court. 

Notwithstanding anything in the foregoing 

to the contrary, nothing contained herein 

shall be construed as limiting your right to 

assert any right of offset or lien on assets that 

are not Funds maintained in the Account(s), 

or to impose such charges against us or any 

proprietary account maintained by us with 

you. Further, it is understood that amounts 

represented by checks, drafts or other items 

shall not be considered to be part of the 

Account(s) until finally collected. 

Accordingly, checks, drafts and other items 

credited to the Account(s) and subsequently 

dishonored or otherwise returned to you or 

reversed, for any reason, and any claims 

relating thereto, including but not limited to 

claims of alteration or forgery, may be 

charged back to the Account(s), and we shall 

be responsible to you as a general endorser 

of all such items whether or not actually so 

endorsed. 

You may conclusively presume that any 

withdrawal from the Account(s) and the 

balances maintained therein are in 

conformity with the Act and CFTC 

regulations without any further inquiry, 

provided that, in the ordinary course of your 

business as a depository, you have no notice 

of or actual knowledge of a potential 

violation by us of any provision of the Act 

or the CFTC regulations that relates to the 

segregation of customer funds; and you shall 

not in any manner not expressly agreed to 

herein be responsible to us for ensuring 

compliance by us with such provisions of the 

Act and CFTC regulations; however, the 

aforementioned presumption does not affect 

any obligation you may otherwise have under 

the Act or CFTC regulations. 

You may, and are hereby authorized to, 

obey the order, judgment, decree or levy of 

any court of competent jurisdiction or any 

governmental agency with jurisdiction, 

which order, judgment, decree or levy relates 

in whole or in part to the Account(s). In any 

event, you shall not be liable by reason of any 

action or omission to act pursuant to any 

such order, judgment, decree or levy, to us 

or to any other person, firm, association or 

corporation even if thereafter any such order, 

decree, judgment or levy shall be reversed, 

modified, set aside or vacated. 

The terms of this letter agreement shall 

remain binding upon the parties, their 

successors and assigns and, for the avoidance 

of doubt, regardless of a change in the name 

of either party. This letter agreement 

supersedes and replaces any prior agreement 

between the parties in connection with the 

Account(s), including but not limited to any 

prior acknowledgment letter agreement, to 

the extent that such prior agreement is 

inconsistent with the terms hereof. In the 

event of any conflict between this letter 

agreement and any other agreement between 

the parties in connection with the 

Account(s), this letter agreement shall govern 

with respect to matters specific to Section 4d 

of the Act and the CFTC’s regulations 

thereunder, as amended. 

This letter agreement shall be governed by 

and construed in accordance with the laws 

of [Insert governing law] without regard to 

the principles of choice of law. 

Please acknowledge that you agree to abide 

by the requirements and conditions set forth 

above by signing and returning to us the 

enclosed copy of this letter agreement, and 

that you further agree to provide a copy of 

this fully executed letter agreement directly 

to the CFTC (via electronic means in a format 

and manner determined by the CFTC). We 

hereby authorize and direct you to provide 

such copy without further notice to or 

consent from us, no later than three business 

days after opening the Account(s) or revising 

this letter agreement, as applicable. 

[Name of Derivatives Clearing Organization] 

By: 

Print Name: 

Title: 

ACKNOWLEDGED AND AGREED: 

[Name of Bank or Trust Company] 

By: 

Print Name: 

Title: 

Contact Information: [Insert phone number 

and email address] 

DATE: 

■ 10. Revise § 1.22 to read as follows: 

§ 1.22 Use of futures customer funds 

restricted. 

(a) No futures commission merchant 

shall use, or permit the use of, the 

futures customer funds of one futures 

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 

futures customer. 

(b) Futures customer funds shall not 

be used to carry trades or positions of 

the same futures customer other than in 

contracts for the purchase of sale of any 

commodity for future delivery or for 

options thereon traded through the 

facilities of a designated contract 

market. 

(c)(1) The undermargined amount for 

a futures customer’s account is the 

amount, if any, by which: 

(i) The total amount of collateral 

required for that futures customer’s 

positions in that account, at the time or 

times referred to in paragraph (c)(2) of 

this section, exceeds 

(ii) The value of the futures customer 

funds for that account, as calculated in 

§ 1.20(i)(2). 

(2) Each futures commission merchant 

must compute, based on the information 

available to the futures commission 

merchant as of the close of each 

business day, 

(i) The undermargined amounts, 

based on the clearing initial margin that 

will be required to be maintained by 

that futures commission merchant for its 

futures customers, at each derivatives 

clearing organization of which the 

futures commission merchant is a 

member, at the point of the daily 

settlement (as described in § 39.14 of 

this chapter) that will complete during 

the following business day for each such 

derivatives clearing organization less 

(ii) Any debit balances referred to in 

§ 1.20(i)(4) included in such 

undermargined amounts. 

(3)(i) Prior to the Residual Interest 

Deadline, such futures commission 

merchant must maintain residual 

interest in segregated funds that is at 

least equal to the computation set forth 

in paragraph (c)(2) of this section. 

Where a futures commission merchant 

is subject to multiple Residual Interest 


TKELleY on DSK3SPTVN1PROD with RULES2
68632 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

Deadlines, prior to each Residual 

Interest Deadline, such futures 

commission merchant must maintain 

residual interest in segregated funds that 

is at least equal to the portion of the 

computation set forth in paragraph (c)(2) 

of this section attributable to the 

clearing initial margin required by the 

derivatives clearing organization making 

such settlement. 

(ii) A futures commission merchant 

may reduce the amount of residual 

interest required in paragraph (c)(3)(i) of 

this section to account for payments 

received from or on behalf of 

undermargined futures customers (less 

the sum of any disbursements made to 

or on behalf of such customers) between 

the close of the previous business day 

and the Residual Interest Deadline. 

(4) For purposes of paragraph (c)(2) of 

this section, a futures commission 

merchant should include, as clearing 

initial margin, customer initial margin 

that the futures commission merchant 

will be required to maintain, for that 

futures commission merchant’s futures 

customers, at another futures 

commission merchant. 

(5) Residual Interest Deadline defined. 

(i) Except as provided in paragraph 

(c)(5)(ii) of this section, the Residual 

Interest Deadline shall be the time of the 

settlement referenced in paragraph 

(c)(2)(i) or, as appropriate, (c)(4), of this 

section. 

(ii) Starting on November 14, 2014 

and during the phase-in period 

described in paragraph (c)(5)(iii) of this 

section, the Residual Interest Deadline 

shall be 6:00 p.m. Eastern Time on the 

date of the settlement referenced in 

paragraph (c)(2)(i) or, as appropriate, 

(c)(4), of this section. 

(iii)(A) No later than May 16, 2016, 

the staff of the Commission shall 

complete and publish for public 

comment a report addressing, to the 

extent information is practically 

available, the practicability (for both 

futures commission merchants and 

customers) of moving that deadline from 

6:00 p.m. Eastern Time on the date of 

the settlement referenced in paragraph 

(c)(2)(i) or, as appropriate, (c)(4), of this 

section to the time of that settlement (or 

to some other time of day), including 

whether and on what schedule it would 

be feasible to do so, and the costs and 

benefits of such potential requirements. 

Staff shall, using the Commission’s Web 

site, solicit public comment and shall 

conduct a public roundtable regarding 

specific issues to be covered by such 

report. 

(B) Nine months after publication of 

the report required by paragraph 

(c)(5)(iii)(A) of this section, the 

Commission may (but shall not be 

required to) do either or both of the 

following: 

(1) Terminate the phase-in period, in 

which case the phase-in period shall 

end as of a date established by order 

published in the Federal Register, 

which date shall be no less than one 

year after the date such order is 

published; or 

(2) Determine that it is necessary or 

appropriate in the public interest to 

propose through rulemaking a different 

Residual Interest Deadline. In that 

event, the Commission shall establish, 

by order published in the Federal 

Register, a phase-in schedule. 

(C) If the phase-in schedule has not 

been amended pursuant to paragraph 

(c)(5)(iii)(B) of this section, then the 

phase-in period shall end on December 

31, 2018. 

■ 11. Revise § 1.23 to read as follows: 

§ 1.23 Interest of futures commission 

merchant in segregated futures customer 

funds; additions and withdrawals. 

(a)(1) The provision in sections 

4d(a)(2) and 4d(b) of the Act and the 

provision in § 1.20 that prohibit the 

commingling of futures 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 futures customer funds segregated 

as required by the Act and the 

regulations in this part and set apart for 

the benefit of futures customers; nor 

shall such provisions be construed to 

prevent a futures commission merchant 

from adding to such segregated futures 

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 of this part, as it may deem 

necessary to ensure any and all futures 

customers’ accounts from becoming 

undersegregated at any time. 

(2) If a futures commission merchant 

discovers at any time that it is holding 

insufficient funds in segregated 

accounts to meet its obligations under 

§§ 1.20 and 1.22, the futures 

commission merchant shall 

immediately deposit sufficient funds 

into segregation to bring the account 

into compliance. 

(b) A futures commission merchant 

may not withdraw funds, except 

withdrawals that are made to or for the 

benefit of futures customers, from an 

account or accounts holding futures 

customer funds unless the futures 

commission merchant has prepared the 

daily segregation calculation required 

by § 1.32 as of the close of business on 

the previous business day. A futures 

commission merchant that has 

completed its daily segregation 

calculation may make withdrawals, in 

addition to withdrawals that are made 

to or for the benefit of futures 

customers, to the extent of its actual 

residual financial interest in funds held 

in segregated futures accounts, adjusted 

to reflect market activity and other 

events that may have decreased the 

amount of the firm’s residual financial 

interest since the close of business on 

the previous business day, including the 

withdrawal of securities held in 

segregated safekeeping accounts held by 

a bank, trust company, derivatives 

clearing organization or other futures 

commission merchant. Such 

withdrawal(s), however, shall not result 

in the funds of one futures customer 

being used to purchase, margin or carry 

the trades, contracts or commodity 

options, or extend the credit of any 

other futures customer or other person. 

(c) Notwithstanding paragraphs (a) 

and (b) of this section, each futures 

commission merchant shall establish a 

targeted residual interest (i.e., excess 

funds) that is in an amount that, when 

maintained as its residual interest in the 

segregated funds accounts, reasonably 

ensures that the futures commission 

merchant shall remain in compliance 

with the segregated funds requirements 

at all times. Each futures commission 

merchant shall establish policies and 

procedures designed to reasonably 

ensure that the futures commission 

merchant maintains the targeted 

residual amounts in segregated funds at 

all times. The futures commission 

merchant shall maintain sufficient 

capital and liquidity, and take such 

other appropriate steps as are necessary, 

to reasonably ensure that such amount 

of targeted residual interest is 

maintained as the futures commission 

merchant’s residual interest in the 

segregated funds accounts at all times. 

In determining the amount of the 

targeted residual interest, the futures 

commission merchant shall analyze all 

relevant factors affecting the amounts in 

segregated funds from time to time, 

including without limitation various 

factors, as applicable, relating to the 

nature of the futures commission 

merchant’s business including, but not 

limited to, the composition of the 

futures commission merchant’s 

customer base, the general 

creditworthiness of the customer base, 

the general trading activity of the 

customers, the types of markets and 

products traded by the customers, the 

proprietary trading of the futures 

commission merchant, the general 

volatility and liquidity of the markets 

and products traded by customers, the 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68633 

futures commission merchant’s own 

liquidity and capital needs, and the 

historical trends in customer segregated 

fund balances and debit balances in 

customers’ and undermargined 

accounts. The analysis and calculation 

of the targeted amount of the future 

commission merchant’s residual interest 

must be described in writing with the 

specificity necessary to allow the 

Commission and the futures 

commission merchant’s designated selfregulatory organization to duplicate the 

analysis and calculation and test the 

assumptions made by the futures 

commission merchant. The adequacy of 

the targeted residual interest and the 

process for establishing the targeted 

residual interest must be reassessed 

periodically by the futures commission 

merchant and revised as necessary. 

(d) Notwithstanding any other 

paragraph of this section, a futures 

commission merchant may not 

withdraw funds, in a single transaction 

or a series of transactions, that are not 

made to or for the benefit of futures 

customers from futures accounts if such 

withdrawal(s) would exceed 25 percent 

of the futures commission merchant’s 

residual interest in such accounts as 

reported on the daily segregation 

calculation required by § 1.32 and 

computed as of the close of business on 

the previous business day, unless: 

(1) The futures commission 

merchant’s chief executive officer, chief 

finance officer or other senior official 

that is listed as a principal of the futures 

commission merchant on its Form 7–R 

and is knowledgeable about the futures 

commission merchant’s financial 

requirements and financial position preapproves in writing the withdrawal, or 

series of withdrawals; 

(2) The futures commission merchant 

files written notice of the withdrawal or 

series of withdrawals, with the 

Commission and with its designated 

self-regulatory organization immediately 

after the chief executive officer, chief 

finance officer or other senior official as 

described in paragraph (c)(1) of this 

section pre-approves the withdrawal or 

series of withdrawals. The written 

notice must: 

(i) Be signed by the chief executive 

officer, chief finance officer or other 

senior official as described in paragraph 

(c)(1) of this section that pre-approved 

the withdrawal, and give notice that the 

futures commission merchant has 

withdrawn or intends to withdraw more 

than 25 percent of its residual interest 

in segregated accounts holding futures 

customer funds; 

(ii) Include a description of the 

reasons for the withdrawal or series of 

withdrawals; 

(iii) List the amount of funds provided 

to each recipient and each recipient’s 

name; 

(iv) Include the current estimate of the 

amount of the futures commission 

merchant’s residual interest in the 

futures accounts after the withdrawal; 

(v) Contain a representation by the 

chief executive officer, chief finance 

officer or other senior official as 

described in paragraph (c)(1) of this 

section that pre-approved the 

withdrawal, or series of withdrawals, 

that, after due diligence, to such 

person’s knowledge and reasonable 

belief, the futures commission merchant 

remains in compliance with the 

segregation requirements after the 

withdrawal. The chief executive officer, 

chief finance officer or other senior 

official as described in paragraph (c)(1) 

of this section must consider the daily 

segregation calculation as of the close of 

business on the previous business day 

and any other factors that may cause a 

material change in the futures 

commission merchant’s residual interest 

since the close of business the previous 

business day, including known 

unsecured futures customer debits or 

deficits, current day market activity and 

any other withdrawals made from the 

futures accounts; and 

(vi) Any such written notice filed 

with the Commission must be filed via 

electronic transmission using a form of 

user authentication assigned in 

accordance with procedures established 

by or approved by the Commission, and 

otherwise in accordance with 

instruction issued by or approved by the 

Commission. Any such electronic 

submission must clearly indicate the 

registrant on whose behalf such filing is 

made and the use of such user 

authentication in submitting such filing 

will constitute and become a substitute 

for the manual signature of the 

authorized signer. Any written notice 

filed must be followed up with direct 

communication to the Regional office of 

the Commission that has supervisory 

authority over the futures commission 

merchant whereby the Commission 

acknowledges receipt of the notice; and 

(3) After making a withdrawal 

requiring the approval and notice 

required in paragraphs (c)(1) and (2) of 

this section, and before the completion 

of its next daily segregated funds 

calculation, no futures commission 

merchant may make any further 

withdrawals from accounts holding 

futures customer funds, except to or for 

the benefit of futures customers, 

without, for each withdrawal, obtaining 

the approval required under paragraph 

(c)(1) of this section and filing a written 

notice in the manner specified under 

paragraph (c)(2) of this section with the 

Commission and its designated selfregulatory organization signed by the 

chief executive officer, chief finance 

officer, or other senior official. The 

written notice must: 

(i) List the amount of funds provided 

to each recipient and each recipient’s 

name; 

(ii) Disclose the reason for each 

withdrawal; 

(iii) Confirm that the chief executive 

officer, chief finance officer, or other 

senior official (and identify of the 

person if different from the person who 

signed the notice) pre-approved the 

withdrawal in writing; 

(iv) Disclose the current estimate of 

the futures commission merchant’s 

remaining total residual interest in the 

segregated accounts holding futures 

customer funds after the withdrawal; 

and 

(v) Include a representation that, after 

due diligence, to the best of the notice 

signatory’s knowledge and reasonable 

belief the futures commission merchant 

remains in compliance with the 

segregation requirements after the 

withdrawal. 

(e) If a futures commission merchant 

withdraws funds from futures accounts 

that are not made to or for the benefit 

of futures customers, and the 

withdrawal causes the futures 

commission merchant to not hold 

sufficient funds in the futures accounts 

to meet its targeted residual interest, as 

required to be computed under § 1.11, 

the futures commission merchant 

should deposit its own funds into the 

futures accounts to restore the account 

balance to the targeted residual interest 

amount by the close of business on the 

next business day, or, if appropriate, 

revise the futures commission 

merchant’s targeted amount of residual 

interest pursuant to the policies and 

procedures required by § 1.11. 

Notwithstanding the foregoing, if a the 

futures commission merchant’s residual 

interest in customer accounts is less 

than the amount required by § 1.22 at 

any particular point in time, the futures 

commission merchant must 

immediately restore the residual interest 

to exceed the sum of such amounts. Any 

proprietary funds deposited in the 

futures accounts must be unencumbered 

and otherwise compliant with § 1.25, as 

applicable. 

■ 12. Amend § 1.25 to: 

■ a. Remove paragraph (b)(6); and 

■ b. Revise paragraphs (b)(3)(v), (c)(3), 

(d)(7), (d)(11), and (e). 

The revisions read as follows: 

§ 1.25 Investment of customer funds. 

* * * * * 


TKELleY on DSK3SPTVN1PROD with RULES2
68634 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

(b) * * * 

(3) * * * 

(v) Counterparty concentration limits. 

Securities purchased by a futures 

commission merchant or derivatives 

clearing organization from a single 

counterparty, or from one or more 

counterparties under common 

ownership or control, subject to an 

agreement to resell the securities to the 

counterparty or counterparties, shall not 

exceed 25 percent of total assets held in 

segregation or under § 30.7 of this 

chapter by the futures commission 

merchant or derivatives clearing 

organization. 

* * * * * 

(c) * * * 

(3) A futures commission merchant or 

derivatives clearing organization shall 

maintain the confirmation relating to 

the purchase in its records in 

accordance with § 1.31 and note the 

ownership of fund shares (by book-entry 

or otherwise) in a custody account of 

the futures commission merchant or 

derivatives clearing organization in 

accordance with § 1.26. The futures 

commission merchant or the derivatives 

clearing organization shall obtain the 

acknowledgment letter required by 

§ 1.26 from an entity that has substantial 

control over the fund shares purchased 

with customer funds and has the 

knowledge and authority to facilitate 

redemption and payment or transfer of 

the customer funds. Such entity may 

include the fund sponsor or depository 

acting as custodian for fund shares. 

* * * * * 

(d) * * * 

(7) Securities transferred to the 

futures commission merchant or 

derivatives clearing organization under 

the agreement are held in a safekeeping 

account with a bank as referred to in 

paragraph (d)(2) of this section, a 

Federal Reserve Bank, a derivatives 

clearing organization, or the Depository 

Trust Company in an account that 

complies with the requirements of 

§ 1.26. 

* * * * * 

(11) The transactions effecting the 

agreement are recorded in the record 

required to be maintained under § 1.27 

of investments of customer funds, and 

the securities subject to such 

transactions are specifically identified 

in such record as described in paragraph 

(d)(1) of this section and further 

identified in such record as being 

subject to repurchase and reverse 

repurchase agreements. 

* * * * * 

(e) Deposit of firm-owned securities 

into segregation. A futures commission 

merchant may deposit unencumbered 

securities of the type specified in this 

section, which it owns for its own 

account, into a customer account. A 

futures commission merchant must 

include such securities, transfers of 

securities, and disposition of proceeds 

from the sale or maturity of such 

securities in the record of investments 

required to be maintained by § 1.27. All 

such securities may be segregated in 

safekeeping only with a bank, trust 

company, derivatives clearing 

organization, or other registered futures 

commission merchant in accordance 

with the provisions of § 1.20 part. For 

purposes of this section and §§ 1.27, 

1.28, 1.29, and 1.32, securities of the 

type specified by this section that are 

owned by the futures commission 

merchant and deposited into a customer 

account shall be considered customer 

funds until such investments are 

withdrawn from segregation in 

accordance with the provisions of 

§ 1.23. Investments permitted by § 1.25 

that are owned by the futures 

commission merchant and deposited 

into a futures customer account 

pursuant to § 1.26 shall be considered 

futures customer funds until such 

investments are withdrawn from 

segregation in accordance with § 1.23. 

Investments permitted by § 1.25 that are 

owned by the futures commission 

merchant and deposited into a Cleared 

Swaps Customer Account, as defined in 

§ 22.1 of this chapter, shall be 

considered Cleared Swaps Customer 

Collateral, as defined in § 22.1 of this 

chapter, until such investments are 

withdrawn from segregation in 

accordance with § 22.17 of this chapter. 

* * * * * 

■ 13. Revise § 1.26 to read as follows: 

§ 1.26 Deposit of instruments purchased 

with futures customer funds. 

(a) Each futures commission merchant 

who invests futures customer funds in 

instruments described in § 1.25, except 

for investments in money market 

mutual funds, shall separately account 

for such instruments as futures 

customer funds and segregate such 

instruments as funds belonging to such 

futures customers in accordance with 

the requirements of § 1.20. Each 

derivatives clearing organization which 

invests money belonging or accruing to 

futures customers of its clearing 

members in instruments described in 

§ 1.25, except for investments in money 

market mutual funds, shall separately 

account for such instruments as 

customer funds and segregate such 

instruments as customer funds 

belonging to such futures customers in 

accordance with § 1.20. 

(b) Each futures commission merchant 

or derivatives clearing organization 

which invests futures customer funds in 

money market mutual funds, as 

permitted by § 1.25, shall separately 

account for such funds and segregate 

such funds as belonging to such futures 

customers. Such funds shall be 

deposited under an account name that 

clearly shows that they belong to futures 

customers and are segregated as 

required by sections 4d(a) and 4d(b) of 

the Act and by this part. Each futures 

commission merchant or derivatives 

clearing organization, upon opening 

such an account, shall obtain and 

maintain readily accessible in its files in 

accordance with § 1.31, for as long as 

the account remains open, and 

thereafter for the period provided in 

§ 1.31, a written acknowledgment and 

shall file such acknowledgment in 

accordance with the requirements of 

§ 1.20. In the event such funds are held 

directly with the money market mutual 

fund or its affiliate, the written 

acknowledgment shall be in the form as 

set out in Appendix A or B to this 

section. In the event such funds are held 

with a depository, the written 

acknowledgment shall be in the form as 

set out in Appendix A or B to § 1.20. In 

either case, the written acknowledgment 

shall be obtained, provided to the 

Commission and designated selfregulatory organizations, and retained as 

required under § 1.20. 

Appendix A to § 1.26—Futures 

Commission Merchant 

Acknowledgment Letter for CFTC 

Regulation 1.26 Customer Segregated 

Money Market Mutual Fund Account 

[Date] 

[Name and Address of Money Market Mutual 

Fund] 

We propose to invest funds held by [Name 

of Futures Commission Merchant] (‘‘we’’ or 

‘‘our’’) on behalf of our customers in shares 

of [Name of Money Market Mutual Fund] 

(‘‘you’’ or ‘‘your’’) under account(s) entitled 

(or shares issued to): 

[Name of Futures Commission Merchant] [if 

applicable, add ‘‘FCM Customer Omnibus 

Account’’] CFTC Regulation 1.26 Customer 

Segregated Money Market Mutual Fund 

Account under Sections 4d(a) and 4d(b) of 

the Commodity Exchange Act [and, if 

applicable, ‘‘, Abbreviated as [short title 

reflected in the depository’s electronic 

system]’’] 

Account Number(s): [ ] 

(collectively, the ‘‘Account(s)’’). 

You acknowledge that we are holding these 

funds, including any shares issued and 

amounts accruing in connection therewith 

(collectively, the ‘‘Shares’’), for the benefit of 

customers who trade commodities, options, 

swaps and other products (‘‘Commodity 

Customers’’), as required by Commodity 

Futures Trading Commission (‘‘CFTC’’) 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68635 

Regulation 1.26, as amended; that the Shares 

held by you, hereafter deposited in the 

Account(s) or accruing to the credit of the 

Account(s), will be separately accounted for 

and segregated on your books from our own 

funds and from any other funds or accounts 

held by us in accordance with the provisions 

of the Commodity Exchange Act, as amended 

(the ‘‘Act’’), and part 1 of the CFTC’s 

regulations, as amended; and that the Shares 

must otherwise be treated in accordance with 

the provisions of Section 4d of the Act and 

CFTC regulations thereunder. 

Furthermore, you acknowledge and agree 

that such Shares may not be used by you or 

by us to secure or guarantee any obligations 

that we might owe to you, and they may not 

be used by us to secure or obtain credit from 

you. You further acknowledge and agree that 

the Shares in the Account(s) shall not be 

subject to any right of offset or lien for or on 

account of any indebtedness, obligations or 

liabilities we may now or in the future have 

owing to you. 

In addition, you agree that the Account(s) 

may be examined at any reasonable time by 

the director of the Division of Swap Dealer 

and Intermediary Oversight of the CFTC or 

the director of the Division of Clearing and 

Risk of the CFTC, or any successor divisions, 

or such directors’ designees, or an 

appropriate officer, agent or employee of our 

designated self-regulatory organization 

(‘‘DSRO’’), [Name of DSRO], and this letter 

constitutes the authorization and direction of 

the undersigned on our behalf to permit any 

such examination to take place without 

further notice to or consent from us. 

You agree to reply promptly and directly 

to any request for confirmation of account 

balances or provision of any other account 

information regarding or related to the 

Account(s) from the director of the Division 

of Swap Dealer and Intermediary Oversight 

of the CFTC or the director of the Division 

of Clearing and Risk of the CFTC, or any 

successor divisions, or such directors’ 

designees, or an appropriate officer, agent, or 

employee of [Name of DSRO], acting in its 

capacity as our DSRO, and this letter 

constitutes the authorization and direction of 

the undersigned on our behalf to release the 

requested information without further notice 

to or consent from us. 

You further acknowledge and agree that, 

pursuant to the authorization granted by us 

to you previously or herein, you have 

provided, or will provide following the 

opening of the Account(s), the director of the 

Division of Swap Dealer and Intermediary 

Oversight of the CFTC, or any successor 

division, or such director’s designees, with 

technological connectivity, which may 

include provision of hardware, software, and 

related technology and protocol support, to 

facilitate direct, read-only electronic access 

to transaction and account balance 

information for the Account(s). This letter 

constitutes the authorization and direction of 

the undersigned on our behalf for you to 

establish this connectivity and access if not 

previously established, without further 

notice to or consent from us. 

The parties agree that all actions on your 

part to respond to the above information and 

access requests will be made in accordance 

with, and subject to, such usual and 

customary authorization verification and 

authentication policies and procedures as 

may be employed by you to verify the 

authority of, and authenticate the identity of, 

the individual making any such information 

or access request, in order to provide for the 

secure transmission and delivery of the 

requested information or access to the 

appropriate recipient(s). 

We will not hold you responsible for acting 

pursuant to any information or access request 

from the director of the Division of Swap 

Dealer and Intermediary Oversight of the 

CFTC or the director of the Division of 

Clearing and Risk of the CFTC, or any 

successor divisions, or such directors’ 

designees, or an appropriate officer, agent, or 

employee of [Name of DSRO], acting in its 

capacity as our DSRO, upon which you have 

relied after having taken measures in 

accordance with your applicable policies and 

procedures to assure that such request was 

provided to you by an individual authorized 

to make such a request. 

In the event we become subject to either a 

voluntary or involuntary petition for relief 

under the U.S. Bankruptcy Code, we 

acknowledge that you will have no obligation 

to release the Shares held in the Account(s), 

except upon instruction of the Trustee in 

Bankruptcy or pursuant to the Order of the 

respective U.S. Bankruptcy Court. 

Notwithstanding anything in the foregoing 

to the contrary, nothing contained herein 

shall be construed as limiting your right to 

assert any right of offset or lien on assets that 

are not Shares maintained in the Account(s), 

or to impose such charges against us or any 

proprietary account maintained by us with 

you. Further, it is understood that amounts 

represented by checks, drafts or other items 

shall not be considered to be part of the 

Account(s) until finally collected. 

Accordingly, checks, drafts and other items 

credited to the Account(s) and subsequently 

dishonored or otherwise returned to you or 

reversed, for any reason and any claims 

relating thereto, including but not limited to 

claims of alteration or forgery, may be 

charged back to the Account(s), and we shall 

be responsible to you as a general endorser 

of all such items whether or not actually so 

endorsed. 

You may conclusively presume that any 

withdrawal from the Account(s) and the 

balances maintained therein are in 

conformity with the Act and CFTC 

regulations without any further inquiry, 

provided that, in the ordinary course of your 

business as a depository, you have no notice 

of or actual knowledge of a potential 

violation by us of any provision of the Act 

or the CFTC regulations that relates to the 

segregation of customer funds; and you shall 

not in any manner not expressly agreed to 

herein be responsible to us for ensuring 

compliance by us with such provisions of the 

Act and CFTC regulations; however, the 

aforementioned presumption does not affect 

any obligation you may otherwise have under 

the Act or CFTC regulations. 

You may, and are hereby authorized to, 

obey the order, judgment, decree or levy of 

any court of competent jurisdiction or any 

governmental agency with jurisdiction, 

which order, judgment, decree or levy relates 

in whole or in part to the Account(s). In any 

event, you shall not be liable by reason of any 

action or omission to act pursuant to such 

order, judgment, decree or levy, to us or to 

any other person, firm, association or 

corporation even if thereafter any such order, 

decree, judgment or levy shall be reversed, 

modified, set aside or vacated. 

We are permitted to invest customers’ 

funds in money market mutual funds 

pursuant to CFTC Regulation 1.25. That rule 

sets forth the following conditions, among 

others, with respect to any investment in a 

money market mutual fund: 

(1) The net asset value of the fund must be 

computed by 9:00 a.m. of the business day 

following each business day and be made 

available to us by that time; 

(2) The fund must be legally obligated to 

redeem an interest in the fund and make 

payment in satisfaction thereof by the close 

of the business day following the day on 

which we make a redemption request except 

as otherwise specified in CFTC Regulation 

1.25(c)(5)(ii); and, 

(3) The agreement under which we invest 

customers’ funds must not contain any 

provision that would prevent us from 

pledging or transferring fund shares. 

The terms of this letter agreement shall 

remain binding upon the parties, their 

successors and assigns, and for the avoidance 

of doubt, regardless of a change in the name 

of either party. This letter agreement 

supersedes and replaces any prior agreement 

between the parties in connection with the 

Account(s), including but not limited to any 

prior acknowledgment letter agreement, to 

the extent that such prior agreement is 

inconsistent with the terms hereof. In the 

event of any conflict between this letter 

agreement and any other agreement between 

the parties in connection with the 

Account(s), this letter agreement shall govern 

with respect to matters specific to Section 4d 

of the Act and the CFTC’s regulations 

thereunder, as amended. 

This letter agreement shall be governed by 

and construed in accordance with the laws 

of [Insert governing law] without regard to 

the principles of choice of law. 

Please acknowledge that you agree to abide 

by the requirements and conditions set forth 

above by signing and returning to us the 

enclosed copy of this letter agreement, and 

that you further agree to provide a copy of 

this fully executed letter agreement directly 

to the CFTC (via electronic means in a format 

and manner determined by the CFTC) and to 

[Name of DSRO], acting in its capacity as our 

DSRO, in accordance with CFTC Regulation 

1.20. We hereby authorize and direct you to 

provide such copies without further notice to 

or consent from us, no later than three 

business days after opening the Account(s) or 

revising this letter agreement, as applicable. 

[Name of Futures Commission Merchant] 

By: 

Print Name: 

Title: 

ACKNOWLEDGED AND AGREED: 

[Name of Money Market Mutual Fund] 

By: 

Print Name: 

Title: 


TKELleY on DSK3SPTVN1PROD with RULES2
68636 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

Contact Information: [Insert phone number 

and email address] 

Date: 

Appendix B to § 1.26—Derivatives 

Clearing Organization 

Acknowledgment Letter for CFTC 

Regulation 1.26 Customer Segregated 

Money Market Mutual Fund Account 

[Date] 

[Name and Address of Money Market Mutual 

Fund] 

We propose to invest funds held by [Name 

of Derivatives Clearing Organization] (‘‘we’’ 

or ‘‘our’’) on behalf of customers in shares of 

[Name of Money Market Mutual Fund] 

(‘‘you’’ or ‘‘your’’) under account(s) entitled 

(or shares issued to): 

[Name of Derivatives Clearing Organization] 

Futures Customer Omnibus Account, CFTC 

Regulation 1.26 Customer Segregated 

Money Market Mutual Fund Account 

under Sections 4d(a) and 4d(b) of the 

Commodity Exchange Act [and, if 

applicable, ‘‘, Abbreviated as [short title 

reflected in the depository’s electronic 

system]’’] 

Account Number(s): [ ] 

(collectively, the ‘‘Account(s)’’). 

You acknowledge that we are holding these 

funds, including any shares issued and 

amounts accruing in connection therewith 

(collectively, the ‘‘Shares’’), for the benefit of 

customers who trade commodities, options, 

swaps and other products, as required by 

Commodity Futures Trading Commission 

(‘‘CFTC’’) Regulation 1.26, as amended; that 

the Shares held by you, hereafter deposited 

in the Account(s) or accruing to the credit of 

the Account(s), will be separately accounted 

for and segregated on your books from our 

own funds and from any other funds or 

accounts held by us in accordance with the 

provisions of the Commodity Exchange Act, 

as amended (the ‘‘Act’’), and part 1 of the 

CFTC’s regulations, as amended; and that the 

Shares must otherwise be treated in 

accordance with the provisions of Section 4d 

of the Act and CFTC regulations thereunder. 

Furthermore, you acknowledge and agree 

that such Shares may not be used by you or 

by us to secure or guarantee any obligations 

that we might owe to you, and they may not 

be used by us to secure or obtain credit from 

you. You further acknowledge and agree that 

the Shares in the Account(s) shall not be 

subject to any right of offset or lien for or on 

account of any indebtedness, obligations or 

liabilities we may now or in the future have 

owing to you. 

You agree to reply promptly and directly 

to any request for confirmation of account 

balances or provision of any other account 

information regarding or related to the 

Account(s) from the director of the Division 

of Clearing and Risk of the CFTC or the 

director of the Division of Swap Dealer and 

Intermediary Oversight of the CFTC, or any 

successor divisions, or such directors’ 

designees, and this letter constitutes the 

authorization and direction of the 

undersigned on our behalf to release the 

requested information without further notice 

to or consent from us. 

The parties agree that all actions on your 

part to respond to the above information 

requests will be made in accordance with, 

and subject to, such usual and customary 

authorization verification and authentication 

policies and procedures as may be employed 

by you to verify the authority of, and 

authenticate the identity of, the individual 

making any such information request, in 

order to provide for the secure transmission 

and delivery of the requested information to 

the appropriate recipient(s). 

We will not hold you responsible for acting 

pursuant to any information request from the 

director of the Division of Clearing and Risk 

of the CFTC or the director of the Division 

of Swap Dealer and Intermediary Oversight 

of the CFTC, or any successor divisions, or 

such directors’ designees, upon which you 

have relied after having taken measures in 

accordance with your applicable policies and 

procedures to assure that such request was 

provided to you by an individual authorized 

to make such a request. 

In the event that we or any of our futures 

commission merchant clearing members 

become(s) subject to either a voluntary or 

involuntary petition for relief under the U.S. 

Bankruptcy Code, we acknowledge that you 

will have no obligation to release the Shares 

held in the Account(s), except upon 

instruction of the Trustee in Bankruptcy or 

pursuant to the Order of the respective U.S. 

Bankruptcy Court. 

Notwithstanding anything in the foregoing 

to the contrary, nothing contained herein 

shall be construed as limiting your right to 

assert any right of offset or lien on assets that 

are not Shares maintained in the Account(s), 

or to impose such charges against us or any 

proprietary account maintained by us with 

you. Further, it is understood that amounts 

represented by checks, drafts or other items 

shall not be considered to be part of the 

Account(s) until finally collected. 

Accordingly, checks, drafts and other items 

credited to the Account(s) and subsequently 

dishonored or otherwise returned to you, or 

reversed, for any reason and any claims 

relating thereto, including but not limited to 

claims of alteration or forgery, may be 

charged back to the Account(s), and we shall 

be responsible to you as a general endorser 

of all such items whether or not actually so 

endorsed. 

You may conclusively presume that any 

withdrawal from the Account(s) and the 

balances maintained therein are in 

conformity with the Act and CFTC 

regulations without any further inquiry, 

provided that, in the ordinary course of your 

business as a depository, you have no notice 

of or actual knowledge of a potential 

violation by us of any provision of the Act 

or the CFTC regulations that relates to the 

segregation of customer funds; and you shall 

not in any manner not expressly agreed to 

herein be responsible to us for ensuring 

compliance by us with such provisions of the 

Act and CFTC regulations; however, the 

aforementioned presumption does not affect 

any obligation you may otherwise have under 

the Act or CFTC regulations. 

You may, and are hereby authorized to, 

obey the order, judgment, decree or levy of 

any court of competent jurisdiction or any 

governmental agency with jurisdiction, 

which order, judgment, decree or levy relates 

in whole or in part to the Account(s). In any 

event, you shall not be liable by reason of any 

action or omission to act pursuant to any 

such order, judgment, decree or levy, to us 

or to any other person, firm, association or 

corporation even if thereafter any such order, 

decree, judgment or levy shall be reversed, 

modified, set aside or vacated. 

We are permitted to invest customers’ 

funds in money market mutual funds 

pursuant to CFTC Regulation 1.25. That rule 

sets forth the following conditions, among 

others, with respect to any investment in a 

money market mutual fund: 

(1) The net asset value of the fund must be 

computed by 9:00 a.m. of the business day 

following each business day and be made 

available to us by that time; 

(2) The fund must be legally obligated to 

redeem an interest in the fund and make 

payment in satisfaction thereof by the close 

of the business day following the day on 

which we make a redemption request except 

as otherwise specified in CFTC Regulation 

1.25(c)(5)(ii); and, 

(3) The agreement under which we invest 

customers’ funds must not contain any 

provision that would prevent us from 

pledging or transferring fund shares. 

The terms of this letter agreement shall 

remain binding upon the parties, their 

successors and assigns, and for the avoidance 

of doubt, regardless of a change in the name 

of either party. This letter agreement 

supersedes and replaces any prior agreement 

between the parties in connection with the 

Account(s), including but not limited to any 

prior acknowledgment letter agreement, to 

the extent that such prior agreement is 

inconsistent with the terms hereof. In the 

event of any conflict between this letter 

agreement and any other agreement between 

the parties in connection with the 

Account(s), this letter agreement shall govern 

with respect to matters specific to Section 4d 

of the Act and the CFTC’s regulations 

thereunder, as amended. 

This letter agreement shall be governed by 

and construed in accordance with the laws 

of [Insert governing law] without regard to 

the principles of choice of law. 

Please acknowledge that you agree to abide 

by the requirements and conditions set forth 

above by signing and returning to us the 

enclosed copy of this letter agreement, and 

you further agree to provide a copy of this 

fully executed letter agreement directly to the 

CFTC (via electronic means in a format and 

manner determined by the CFTC) in 

accordance with CFTC Regulation 1.20. We 

hereby authorize and direct you to provide 

such copies without further notice to or 

consent from us, no later than three business 

days after opening the Account(s) or revising 

this letter agreement, as applicable. 

[Name of Derivatives Clearing Organization] 

By: 

Print Name: 

Title: 

ACKNOWLEDGED AND AGREED: 

[Name of Money Market Mutual Fund] 

By: 

Print Name: 

Title: 

Contact Information: [Insert phone number 

and email address] 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68637 

Date: 

■ 14. Revise § 1.29 to read as follows: 

§ 1.29 Gains and losses resulting from 

investment of customer funds. 

(a) The investment of customer funds 

in instruments described in § 1.25 shall 

not prevent the futures commission 

merchant or derivatives clearing 

organization so investing such funds 

from receiving and retaining as its own 

any incremental income or interest 

income resulting therefrom. 

(b) The futures commission merchant 

or derivatives clearing organization, as 

applicable, shall bear sole responsibility 

for any losses resulting from the 

investment of customer funds in 

instruments described in § 1.25. No 

investment losses shall be borne or 

otherwise allocated to the customers of 

the futures commission merchant and, if 

customer funds are invested by a 

derivatives clearing organization in its 

discretion, to the futures commission 

merchant. 

■ 15. Revise § 1.30 to read as follows: 

§ 1.30 Loans by futures commission 

merchants; treatment of proceeds. 

Nothing in the regulations in this 

chapter shall prevent a futures 

commission merchant from lending its 

own funds to customers on securities 

and property pledged by such 

customers, or from repledging or selling 

such securities and property pursuant to 

specific written agreement with such 

customers. The proceeds of such loans 

used to purchase, margin, guarantee, or 

secure the trades, contracts, or 

commodity options of customers shall 

be treated and dealt with by a futures 

commission merchant as belonging to 

such customers, in accordance with and 

subject to the provisions of the Act and 

these regulations. A futures commission 

merchant may not loan funds on an 

unsecured basis to finance customers’ 

trading, nor may a futures commission 

merchant loan funds to customers 

secured by the customer accounts of 

such customers. 

■ 16. Amend § 1.32 to: 

■ a. Revise the section heading; 

■ b. Revise paragraphs (b) and (c); and 

■ c. Add paragraphs (d), (e), (f), (g), (h), 

(i), (j), and (k). 

The revisions and additions to read as 

follows: 

§ 1.32 Reporting of segregated account 

computation and details regarding the 

holding of futures customer funds 

* * * * * 

(b) In computing the amount of 

futures customer funds required to be in 

segregated accounts, a futures 

commission merchant may offset any 

net deficit in a particular futures 

customer’s account against the current 

market value of readily marketable 

securities, less applicable 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 

futures customer’s account. Futures 

commission merchants that establish 

and enforce written policies and 

procedures to assess the credit risk of 

commercial paper, convertible debt 

instruments, or nonconvertible debt 

instruments in accordance with Rule 

240.15c3–1(c)(2)(vi) of the Securities 

and Exchange Commission (17 CFR 

240.15c3–1(c)(2)(vi)) may apply the 

lower haircut percentages specified in 

Rule 240.15c3–1(c)(2)(vi) for such 

commercial paper, convertible debt 

instruments and nonconvertible debt 

instruments. 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, 

derivatives clearing organization, 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)). 

(c) Each futures commission merchant 

is required to document its segregation 

computation required by paragraph (a) 

of this section by preparing a Statement 

of Segregation Requirements and Funds 

in Segregation for Customers Trading on 

U.S. Commodity Exchanges contained 

in the Form 1–FR–FCM as of the close 

of each business day. Nothing in this 

paragraph shall affect the requirement 

that a futures commission merchant at 

all times maintain sufficient money, 

securities and property to cover its total 

obligations to all futures customers, in 

accordance with § 1.20. 

(d) Each futures commission 

merchant is required to submit to the 

Commission and to the firm’s 

designated self-regulatory organization 

the daily Statement of Segregation 

Requirements and Funds in Segregation 

for Customers Trading on U.S. 

Commodity Exchanges required by 

paragraph (c) of this section by noon the 

following business day. 

(e) Each futures commission merchant 

shall file the Statement of Segregation 

Requirements and Funds in Segregation 

for Customers Trading on U.S. 

Commodity Exchanges required by 

paragraph (c) of this section in an 

electronic format using a form of user 

authentication assigned in accordance 

with procedures established or 

approved by the Commission. 

(f) Each futures commission merchant 

is required to submit to the Commission 

and to the firm’s designated selfregulatory organization a report listing 

the names of all banks, trust companies, 

futures commission merchants, 

derivatives clearing organizations, or 

any other depository or custodian 

holding futures customer funds as of the 

fifteenth day of the month, or the first 

business day thereafter, and the last 

business day of each month. This report 

must include: 

(1) The name and location of each 

entity holding futures customer funds; 

(2) The total amount of futures 

customer funds held by each entity 

listed in paragraph (f)(1) of this section; 

and 

(3) The total amount of cash and 

investments that each entity listed in 

paragraph (f)(1) of this section holds for 

the futures commission merchant. The 

futures commission merchant must 

report the following investments: 

(i) Obligations of the United States 

and obligations fully guaranteed as to 

principal and interest by the United 

States (U.S. government securities); 

(ii) General obligations of any State or 

of any political subdivision of a State 

(municipal securities); 

(iii) General obligation issued by any 

enterprise sponsored by the United 

States (government sponsored enterprise 

securities); 

(iv) Certificates of deposit issued by a 

bank; 

(v) Commercial paper fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation; 

(vi) Corporate notes or bonds fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation; and 

(vii) Interests in money market mutual 

funds. 

(g) Each futures commission merchant 

must report the total amount of futures 

customer-owned securities held by the 

futures commission merchant as margin 

collateral and must list the names and 

locations of the depositories holding 

such margin collateral. 

(h) Each futures commission 

merchant must report the total amount 

of futures customer funds that have 

been used to purchase securities under 

agreements to resell the securities 

(reverse repurchase transactions). 


TKELleY on DSK3SPTVN1PROD with RULES2
68638 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

(i) Each futures commission merchant 

must report which, if any, of the 

depositories holding futures customer 

funds under paragraph (f)(1) of this 

section are affiliated with the futures 

commission merchant. 

(j) Each futures commission merchant 

shall file the detailed list of depositories 

required by paragraph (f) of this section 

by 11:59 p.m. the next business day in 

an electronic format using a form of user 

authentication assigned in accordance 

with procedures established or 

approved by the Commission. 

(k) Each futures commission merchant 

shall retain its daily segregation 

computation and the Statement of 

Segregation Requirements and Funds in 

Segregation for Customers Trading on 

U.S. Commodity Exchanges required by 

paragraph (c) of this section, and its 

detailed list of depositories required by 

paragraph (f) of this section, together 

with all supporting documentation, in 

accordance with the requirements of 

§ 1.31. 

■ 17. Revise § 1.52 to read as follows: 

§ 1.52 Self-regulatory organization 

adoption and surveillance of minimum 

financial requirements. 

(a) For purposes of this section, the 

following terms are defined as follows: 

(1) Examinations expert is defined as 

a Nationally recognized accounting and 

auditing firm with substantial expertise 

in audits of futures commission 

merchants, risk assessment and internal 

control reviews, and is an accounting 

and auditing firm that is acceptable to 

the Commission; and 

(2) Self-regulatory organization means 

a contract market (as defined in § 1.3(h)) 

or a registered futures association under 

section 17 of the Act. The term ‘‘selfregulatory organization’’ for purpose of 

this section does not include a swap 

execution facility (as defined in 

§ 1.3(rrrr)). 

(b)(1) Each self-regulatory 

organization must adopt rules 

prescribing minimum financial and 

related reporting requirements for 

members who are registered futures 

commission merchants or registered 

retail foreign exchange dealers. Each 

self-regulatory organization other than a 

contract market must adopt rules 

prescribing minimum financial and 

related reporting requirements for 

members who are registered introducing 

brokers. The self-regulatory 

organization’s minimum financial and 

related reporting requirements must be 

the same as, or more stringent than, the 

requirements contained in §§ 1.10 and 

1.17, for futures commission merchants 

and introducing brokers, and §§ 5.7 and 

5.12 of this chapter for retail foreign 

exchange dealers; provided, however, 

that a self-regulatory organization may 

permit its member registrants that are 

registered with the Securities and 

Exchange Commission as securities 

brokers or dealers to file (in accordance 

with § 1.10(h)) a copy of their Financial 

and Operational Combined Uniform 

Single Report under the Securities 

Exchange Act of 1934 (‘‘FOCUS 

Report’’), Part II, Part IIA, or Part II CSE, 

as applicable, in lieu of Form 1–FR; 

provided, further, that such selfregulatory organization must require 

such member registrants to provide all 

information in Form 1–FR that is not 

included in the FOCUS Report Part II, 

Part IIA, or Part CSE provided by such 

member registrant. The definition of 

adjusted net capital must be the same as 

that prescribed in § 1.17(c) for futures 

commission merchants and introducing 

brokers, and § 5.7(b)(2) of this chapter 

for futures commission merchants 

offering or engaging in retail forex 

transactions and for retail foreign 

exchange dealers. 

(2) In addition to the requirements set 

forth in paragraph (b)(1) of this section, 

each self-regulatory organization that 

has a futures commission merchant 

member registrant must adopt rules 

prescribing risk management 

requirements for futures commission 

merchant member registrants that shall 

be the same as, or more stringent than, 

the requirements contained in § 1.11. 

(c)(1) Each self-regulatory 

organization must establish and operate 

a supervisory program that includes 

written policies and procedures 

concerning the application of such 

supervisory program in the examination 

of its member registrants for the purpose 

of assessing whether each member 

registrant is in compliance with the 

applicable self-regulatory organization 

and Commission regulations governing 

minimum net capital and related 

financial requirements, the obligation to 

segregate customer funds, risk 

management requirements, financial 

reporting requirements, recordkeeping 

requirements, and sales practice and 

other compliance requirements. The 

supervisory program also must address 

the following elements: 

(i) Adequate levels and independence 

of examination staff. A self-regulatory 

organization must maintain staff of an 

adequate size, training, and experience 

to effectively implement a supervisory 

program. Staff of the self-regulatory 

organization, including officers, 

directors, and supervising committee 

members, must maintain independent 

judgment and its actions must not 

impair its independence nor appear to 

impair its independence in matters 

related to the supervisory program. The 

self-regulatory organization must 

provide annual ethics training to all 

staff with responsibilities for the 

supervisory program. 

(ii) Ongoing surveillance. A selfregulatory organization’s ongoing 

surveillance of member registrants must 

include the review and analysis of 

financial reports and regulatory notices 

filed by member registrants with the 

designated self-regulatory organization. 

(iii) High-risk firms. A self-regulatory 

organization’s supervisory program 

must include procedures for identifying 

member registrants that are determined 

to pose a high degree of potential 

financial risk, including the potential 

risk of loss of customer funds. High-risk 

member registrants must include firms 

experiencing financial or operational 

difficulties, failing to meet segregation 

or net capital requirements, failing to 

maintain current books and records, or 

experiencing material inadequacies in 

internal controls. Enhanced monitoring 

for high risk firms should include, as 

appropriate, daily review of net capital, 

segregation, and secured calculations, to 

assess compliance with self-regulatory 

organization and Commission 

requirements. 

(iv) On-site examinations. (A) A selfregulatory organization must conduct 

routine periodic on-site examinations of 

member registrants. Member futures 

commission merchants and retail 

foreign exchange dealers must be 

subject to on-site examinations no less 

frequently than once every eighteen 

months. A self-regulatory organization 

shall establish a risk-based method of 

establishing the scope of each on-site 

examination; provided, however, that 

the scope of each on-site examination of 

a futures commission merchant or retail 

foreign exchange dealer must include an 

assessment of whether the registrant is 

in compliance with applicable 

Commission and self-regulatory 

organization minimum capital, 

customer fund protection, 

recordkeeping, and reporting 

requirements. 

(B) A self-regulatory organization 

other than a contract market must 

establish the frequency of on-site 

examinations of member introducing 

brokers that do not operate pursuant to 

guarantee agreements with futures 

commission merchants or retail foreign 

exchange dealers using a risk-based 

approach, which takes into 

consideration the time elapsed since the 

self-regulatory organization’s previous 

examination of the introducing broker. 

(C) A self-regulatory organization 

must conduct on-site examinations of 

member registrants in accordance with 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68639 

uniform examination programs and 

procedures that have been submitted to 

the Commission. 

(v) Adequate documentation. A selfregulatory organization must adequately 

document all aspects of the operation of 

the supervisory program, including the 

conduct of risk-based scope setting and 

the risk-based surveillance of high-risk 

member registrants, and the imposition 

of remedial and punitive action(s) for 

material violations. 

(2) In addition to the requirements set 

forth in paragraph (c)(1) of this section, 

the supervisory program of a selfregulatory organization that has a 

registered futures commission merchant 

member must satisfy the following 

requirements: 

(i) The supervisory program must set 

forth in writing the examination 

standards that the self-regulatory 

organization must apply in its 

examination of its registered futures 

commission merchant member. The 

supervisory program must be based on 

controls testing and substantive testing, 

and must address all areas of risk to 

which the futures commission merchant 

can reasonably be foreseen to be subject. 

The supervisory program must be based 

on an understanding of the internal 

control environment to determine the 

nature, timing and extent of the controls 

and substantive testing to be performed. 

The determination as to which elements 

of the supervisory program are to be 

performed on any examination must be 

based on the risk profile of each 

registered futures commission merchant 

member. 

(ii) All aspects of the supervisory 

program, including the standards 

pursuant to paragraph (c)(2)(iii) of this 

section, must, at minimum, conform to 

auditing standards issued by the Public 

Company Accounting Oversight Board 

as such standards would be applicable 

to a non-financial statement audit. 

These standards would include the 

training and proficiency of the auditor, 

due professional care in the 

performance of work, consideration of 

fraud in an audit, audit risk and 

materiality in conducting an audit, 

planning and supervision, 

understanding the entity and its 

environment and assessing the risks of 

material misstatement, performing audit 

procedures in response to assessed risk 

and evaluating the audit evidence 

obtained, auditor’s communication with 

those charged with governance, and 

communicating internal control matters 

identified in an audit. 

(iii) The supervisory program must, at 

a minimum, have standards addressing 

the following: 

(A) The ethics of an examiner; 

(B) The independence of an examiner; 

(C) The supervision, review, and 

quality control of an examiner’s work 

product; 

(D) The evidence and documentation 

to be reviewed and retained in 

connection with an examination; 

(E) The sampling size and techniques 

used in an examination; 

(F) The examination risk assessment 

process; 

(G) The examination planning 

process; 

(H) Materiality assessment; 

(I) Quality control procedures to 

ensure that the examinations maintain 

the level of quality expected; 

(J) Communications between an 

examiner and the regulatory oversight 

committee, or the functional equivalent 

of the regulatory oversight committee, of 

the self-regulatory organization of which 

the futures commission merchant is a 

member; 

(K) Communications between an 

examiner and a futures commission 

merchant’s audit committee of the board 

of directors or other similar governing 

body; 

(L) Analytical review procedures; 

(M) Record retention; and 

(N) Required items for inclusion in 

the examination report, such as repeat 

violations, material items, and high risk 

issues. The examination report is 

intended solely for the information and 

use of the self-regulatory organizations 

and the Commission, and is not 

intended to be and should not be used 

by any other person or entity. 

(iv) A self-regulatory organization 

must cause an examinations expert to 

evaluate the supervisory program and 

such self-regulatory organization’s 

application of the supervisory program 

at least once every three years. 

(A) The self-regulatory organization 

must obtain from such examinations 

expert a written report on findings and 

recommendations issued under the 

consulting services standards of the 

American Institute of Certified Public 

Accountants that includes the 

following: 

(1) A statement that the examinations 

expert has evaluated the supervisory 

program, including the sufficiency of 

the risk-based approach and the internal 

controls testing thereof, and comments 

and recommendations in connection 

with such evaluation from such 

examinations expert; 

(2) A statement that the examinations 

expert has evaluated the application of 

the supervisory program by the selfregulatory organization, and comments 

and recommendations in connection 

with such evaluation from such 

examinations expert; and 

(3) The examinations expert’s report 

should include an analysis of the 

supervisory program’s design to detect 

material weaknesses in an entity’s 

internal control environment; 

(4) A discussion and recommendation 

of any new or best practices as 

prescribed by industry sources, 

including, but not limited to, those from 

the American Institute of Certified 

Public Accountants, the Public 

Company Accounting Oversight Board, 

the Institute of Internal Auditors, and 

The Risk Management Association. 

(B) The self-regulatory organization 

must provide the written report to the 

Commission no later than thirty days 

following the receipt thereof. The selfregulatory organization may also 

provide to the Commission a response, 

in writing, to any of the findings, 

comments or recommendations made by 

the examinations expert. Upon 

resolution of any questions or comments 

raised by the Commission, and upon 

written notice from the Commission that 

it has no further comments or questions 

on the supervisory program as amended 

(by reason of the examinations expert’s 

proposals, considerations of the 

Commission’s questions or comments, 

or otherwise), the self-regulatory 

organization shall commence applying 

such supervisory program as the 

standard for examining its registered 

futures commission merchant members 

for all examinations conducted with an 

‘‘as-of’’ date later than the date of the 

Commission’s written notification. 

(v) The supervisory program must 

require the self-regulatory organization 

to report to its risk and/or audit 

committee of the board of directors, or 

a functional equivalent committee, with 

timely reports of the activities and 

findings of the supervisory program to 

assist the risk and/or audit committee of 

the board of directors, or a functional 

equivalent committee, to fulfill its 

responsibility of overseeing the 

examination function. 

(vi) The initial supervisory program 

shall be established as follows. Within 

180 days following the effective date of 

this section, or such other time as the 

Commission may approve, the selfregulatory organization shall submit a 

proposed supervisory program to the 

Commission for its review and 

comment, together with a written report 

that includes the elements found in 

paragraphs (c)(2)(iv)(A)(1) and (3) of this 

section from an examinations expert 

who has evaluated the supervisory 

program. The self-regulatory 

organization may provide the 

Commission a written response to any 

findings, comments or 

recommendations made by the 


TKELleY on DSK3SPTVN1PROD with RULES2
68640 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

examinations expert. Upon resolution of 

any questions or comments raised by 

the Commission, and upon written 

notice from the Commission that it has 

no further comments or questions on the 

proposed supervisory program as 

amended (by reason of the 

considerations of the Commission’s 

questions or comments or otherwise), 

the self-regulatory organizations shall 

commence applying such supervisory 

program as the standard for examining 

its members that are registered as 

futures commission merchants for all 

examinations conducted with an ‘‘as-of’’ 

date later than the date of the 

Commission’s written notification. 

(vii) The examinations expert’s report, 

the self-regulatory organization’s 

response, as well as any information 

concerning the supervisory program or 

any review conducted pursuant to the 

program that is obtained by the 

examinations expert, is confidential. 

Except as expressly provided for in this 

section, such information may not be 

disclosed to anyone not involved in the 

review process. 

(d)(1) Any two or more self-regulatory 

organizations may file with the 

Commission a plan for delegating to a 

designated self-regulatory organization, 

for any registered futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker that is a 

member of more than one such selfregulatory organization, the function of: 

(i) Monitoring and examining for 

compliance with the minimum financial 

and related reporting requirements and 

risk management requirements, 

including policies and procedures 

relating to the receipt, holding, 

investing and disbursement of customer 

funds, adopted by such self-regulatory 

organizations and the Commission in 

accordance with paragraphs (b) and (c) 

of this section; and 

(ii) Receiving the financial reports and 

notices necessitated by such minimum 

financial and related reporting 

requirements; provided, however, that 

the self-regulatory organization that 

delegates the functions set forth in this 

paragraph (d)(1) shall remain 

responsible for its member registrants’ 

compliance with the regulatory 

obligations, and if such self-regulatory 

organization becomes aware that a 

delegated function is not being 

performed as required under this 

section, the self-regulatory organization 

shall promptly take any necessary steps 

to address any noncompliance. 

(2) If a plan established pursuant to 

paragraph (d)(1) of this section applies 

to any registered futures commission 

merchant, then such plan must include 

the following elements: 

(i) The Joint Audit Committee. The 

self-regulatory organizations that choose 

to participate in the plan shall form a 

Joint Audit Committee, consisting of all 

self-regulatory organizations in the plan 

as members. The members of the Joint 

Audit Committee shall establish, 

operate and maintain a Joint Audit 

Program in accordance with the 

requirements of this section to ensure an 

effective and a high quality program for 

examining futures commission 

merchants, to designate the designated 

self-regulatory organizations that will be 

responsible for the examinations of 

futures commission merchants pursuant 

to the Joint Audit Program, and to 

satisfy such additional obligations set 

forth in this section in order to facilitate 

the examinations of futures commission 

merchants by their respective 

designated self-regulatory organizations. 

(ii) The Joint Audit Program. The Joint 

Audit Program must, at minimum, 

satisfy the following requirements. 

(A) The purpose of the Joint Audit 

Program must be to assess whether each 

registered futures commission merchant 

member of the Joint Audit Committee 

self-regulatory organization members is 

in compliance with the Joint Audit 

Program and Commission regulations 

governing minimum net capital and 

related financial requirements, the 

obligation to segregate customer funds, 

risk management requirements, 

including policies and procedures 

relating to the receipt, holding, 

investment, and disbursement of 

customer funds, financial reporting 

requirements, recordkeeping 

requirements, and sales practice and 

other compliance requirements. 

(B) The Joint Audit Program must 

include written policies and procedures 

concerning the application of the Joint 

Audit Program in the examination of the 

registered futures commission merchant 

members of the Joint Audit Committee 

self-regulatory organization members. 

(C)(1) Adequate levels and 

independence of examination staff. A 

designated self-regulatory organization 

must maintain staff of an adequate size, 

training, and experience to effectively 

implement the Joint Audit Program. 

Staff of the designated self-regulatory 

organization, including officers, 

directors, and supervising committee 

members, must maintain independent 

judgment and its actions must not 

impair its independence nor appear to 

impair its independence in matters 

related to the Joint Audit Program. The 

designated self-regulatory organization 

must provide annual ethics training to 

all staff with responsibilities for the 

Joint Audit Program. 

(2) Ongoing surveillance. A 

designated self-regulatory organization’s 

ongoing surveillance of futures 

commission merchant member 

registrants over which it has oversight 

responsibilities must include the review 

and analysis of financial reports and 

regulatory notices filed by such member 

registrants with the designated selfregulatory organization. 

(3) High-risk firms. The Joint Audit 

Program must include procedures for 

identifying futures commission 

merchant member registrants over 

which it has oversight responsibilities 

that are determined to pose a high 

degree of potential financial risk, 

including the potential risk of loss of 

customer funds. High-risk member 

registrants must include firms 

experiencing financial or operational 

difficulties, failing to meet segregation 

or net capital requirements, failing to 

maintain current books and records, or 

experiencing material inadequacies in 

internal controls. Enhanced monitoring 

for high risk firms should include, as 

appropriate, daily review of net capital, 

segregation, and secured calculations, to 

assess compliance with self-regulatory 

and Commission requirements. 

(4) On-site examinations. A 

designated self-regulatory organization 

must conduct routine periodic on-site 

examinations of futures commission 

merchant member registrants over 

which it has oversight responsibilities. 

Such member registrants must be 

subject to on-site examinations no less 

frequently than once every eighteen 

months. A designated self-regulatory 

organization shall establish a risk-based 

method of establishing the scope of each 

on-site examination, provided, however, 

that the scope of each on-site 

examination of a futures commission 

merchant must include an assessment of 

whether the registrant is in compliance 

with applicable Commission and selfregulatory organization minimum 

capital, customer fund protection, 

recordkeeping, and reporting 

requirements. A designated selfregulatory organization must conduct 

on-site examinations of futures 

commission merchant registrants in 

accordance with the Joint Audit 

Program. 

(D) The Joint Audit Committee 

members must adequately document all 

aspects of the operation of the Joint 

Audit Program, including the conduct of 

risk-based scope setting and the riskbased surveillance of high-risk member 

registrants, and the imposition of 

remedial and punitive action(s) for 

material violations. 

(E) The Joint Audit Program must set 

forth in writing the examination 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68641 

standards that a designated selfregulatory organization must apply in 

its examination of a registered futures 

commission merchant. The Joint Audit 

Program must be based on controls 

testing and substantive testing, and 

must address all areas of risk to which 

the futures commission merchant can 

reasonably be foreseen to be subject. 

The Joint Audit Program must be based 

on an understanding of the internal 

control environment to determine the 

nature, timing and extent of the controls 

and substantive testing to be performed. 

The determination as to which elements 

of the Joint Audit Program are to be 

performed on any examination must be 

based on the risk profile of each 

registered futures commission 

merchant. 

(F) All aspects of the Joint Audit 

Program, including the standards 

required pursuant to paragraph 

(d)(2)(ii)(G) of this section, must, at 

minimum, conform to auditing 

standards issued by the Public Company 

Accounting Oversight Board as such 

standards would be applicable to a nonfinancial statement audit. These 

standards would include the training 

and proficiency of the auditor, due 

professional care in the performance of 

work, consideration of fraud in an audit, 

audit risk and materiality in conducting 

an audit, planning and supervision, 

understanding the entity and its 

environment and assessing the risks of 

material misstatement, performing audit 

procedures in response to assessed risk 

and evaluating the audit evidence 

obtained, auditor’s communication with 

those charged with governance, and 

communicating internal control matters 

identified in an audit. 

(G) The Joint Audit Program must 

have standards addressing those items 

listed in paragraph (c)(2)(iii) of this 

section. 

(H) The initial Joint Audit Program 

shall be established as follows. Within 

180 days following the effective date of 

this section, or such other time as the 

Commission may approve, the Joint 

Audit Committee members shall submit 

a proposed initial Joint Audit Program 

to the Commission for its review and 

comment, together with a written report 

that includes the elements found in 

paragraphs (d)(2)(ii)(I)(1) and 

(d)(2)(ii)(I)(3) of this section from an 

examinations expert who has evaluated 

the Joint Audit Program. The Joint Audit 

Committee members may also provide 

to the Commission a response, in 

writing, to any of the findings, 

comments or recommendations made by 

the examinations expert. Upon 

resolution of any questions or comments 

raised by the Commission, and upon 

written notice from the Commission that 

it has no further comments or questions 

on the proposed Joint Audit Program as 

amended (by reason of the 

considerations of the Commission’s 

questions or comments or otherwise), 

the designated self-regulatory 

organizations shall commence applying 

such Joint Audit Program as the 

standard for examining their respective 

registered futures commission 

merchants for all examinations 

conducted with an ‘‘as-of’’ date later 

than the date of the Commission’s 

written notification. 

(I) Following the establishment of the 

Joint Audit Program, no less frequently 

than once every three years, the Joint 

Audit Committee members must cause 

an examinations expert to evaluate the 

Joint Audit Program and each 

designated self-regulatory organization’s 

application of the Joint Audit Program. 

The Joint Audit Committee members 

must obtain from such examinations 

expert a written report, and must 

provide the written report to the 

Commission no later than forty-five 

days prior to the annual meeting of the 

members of the Joint Audit Committee 

to be held in that year pursuant to 

paragraph (d)(2)(iii)(A) of this section. 

The Joint Audit Committee members 

may also provide to the Commission a 

response, in writing, to any of the 

findings, comments or 

recommendations made by the 

examinations expert. The examinations 

expert’s written report must include the 

following: 

(1) A statement that the examinations 

expert has evaluated the Joint Audit 

Program, including the sufficiency of 

the risk-based approach and the internal 

controls testing thereof, and comments 

and recommendations in connection 

with such evaluation from such 

examinations expert; 

(2) A statement that the examinations 

expert has evaluated the application of 

the Joint Audit Program by each 

designated self-regulatory organization, 

and comments and recommendations in 

connection with such evaluation from 

such examinations expert; 

(3) The examinations expert’s report 

on findings and recommendations 

issued under the consulting services 

standards of the American Institute of 

Certified Public Accountants and 

should include an analysis of the 

supervisory program’s design to detect 

material weaknesses in an entities 

internal control environment; and 

(4) A discussion and recommendation 

of any new or best practices as 

prescribed by industry sources, 

including, but not limited to, those from 

the American Institute of Certified 

Public Accountants, the Public 

Company Accounting Oversight Board, 

the Internal Audit Association and The 

Risk Management Association. 

(J) The examinations expert’s report, 

the Joint Audit Committee’s response, as 

well as any information concerning the 

supervisory program or any review 

conducted pursuant to the program that 

is obtained by the examinations expert, 

is confidential. Except as expressly 

provided for in paragraphs (d)(2)(ii)(G) 

or (d)(2)(ii)(H) of this section, such 

information may not be disclosed to 

anyone not involved in the review 

process. 

(K) The Joint Audit Program must 

require each Joint Audit Committee 

member to provide to its risk and/or 

audit committee of the board of 

directors, or a functionally equivalent 

committee, with timely reports of the 

activities and findings of the Joint Audit 

Program to assist the risk and/or audit 

committee of the board of directors, or 

a functionally equivalent committee, in 

fulfilling its responsibility of overseeing 

the examination function. 

(iii) Meetings of the Joint Audit 

Committee. (A) No less frequently than 

once every year, the Joint Audit 

Committee members must meet to 

consider whether changes to the Joint 

Audit Program are appropriate, and in 

considering such, in meetings 

corresponding to the written report 

obtained from an examinations expert 

pursuant to paragraph (d)(2)(ii)(I) of this 

section, the Joint Audit Committee 

members must consider such written 

report, including the results of the 

examinations expert’s assessment of the 

Joint Audit Program and any additional 

recommendations. The Commission’s 

questions, comments and proposals 

must also be considered. Upon written 

notice from the Commission that it has 

no further comments or questions on the 

Joint Audit Program as amended (by 

reason of the examinations expert’s 

proposals, considerations of the 

Commission’s questions, comments and 

proposals, or otherwise), the designated 

self-regulatory organizations shall 

commence applying such Joint Audit 

Program as the standard for examining 

their respective registered futures 

commission merchants for all 

examinations conducted with an ‘‘as-of’’ 

date later than the date of the 

Commission’s written notification. 

(B) In addition to the items 

considered in paragraph (d)(2)(iii)(A) of 

this section, the Joint Audit Committee 

members must consider the following 

items during the annual meeting: 

(1) The role of the Joint Audit 

Committee and its members as it relates 


TKELleY on DSK3SPTVN1PROD with RULES2
68642 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

to self-regulatory organization 

responsibilities; 

(2) Developing and maintaining the 

Joint Audit Program for all designated 

self-regulatory organizations to follow 

with no exceptions; 

(3) Coordinating self-regulatory 

organization responsibilities with those 

of independent certified public 

accountants, the Commission and other 

regulators and self-regulatory 

organizations (e.g., the Securities and 

Exchange Commission, the Financial 

Industry Regulatory Authority, and 

others, as the case may be for futures 

commission merchants subject to 

regulation by multiple regulators and 

self-regulatory organizations); 

(4) Coordinating and sharing 

information between the Joint Audit 

Committee members, including issues 

and industry concerns in connection 

with examinations of futures 

commission merchants; 

(5) Identifying industry regulatory 

reporting issues and financial and 

operational internal control issues and 

modifying the Joint Audit Program 

accordingly; 

(6) Issuing risk alerts for futures 

commission merchants and/or 

designated self-regulatory organization 

examiners on an as-needed basis as 

issues arise; 

(7) Issuing an annual examination 

alert for certified public accountants 

and designated self-regulatory 

organization examiners; 

(8) Responding to industry issues; 

(9) Providing industry feedback to 

Commission proposals; and 

(10) Developing and maintaining a 

standard of ethics and independence 

with which all examination units of the 

Joint Audit Committee members must 

comply. 

(C) Minutes must be taken of all 

meetings and distributed to all members 

on a timely basis. 

(D) The Commission must receive 

timely prior notice of each meeting, 

have to right to attend and participate in 

each meeting and receive written copies 

of the reports and minutes required 

pursuant to paragraphs (d)(2)(ii)(J) and 

(d)(2)(iii)(C) of this section, respectively. 

(3) The plan referenced in paragraph 

(d)(1) of this section shall not be 

effective without Commission approval 

pursuant to paragraph (h) of this 

section. 

(e) Any plan filed under this section 

may contain provisions for the 

allocation of expenses reasonably 

incurred by designated self-regulatory 

organizations among the self-regulatory 

organizations participating in such a 

plan. 

(f) A plan’s designated self-regulatory 

organizations must report to: 

(1) That plan’s other self-regulatory 

organizations any violation of such 

other self-regulatory organizations’ rules 

and regulations for which the 

responsibility to monitor or examine has 

been delegated to such designated selfregulatory organization under this 

section; and 

(2) The Director of the Division of 

Swap Dealer and Intermediary 

Oversight of the Commission any 

violation of a self-regulatory 

organization’s rules and regulations or 

any violation of the Commission’s 

regulations for which the responsibility 

to monitor, audit, or examine has been 

delegated to such designated selfregulatory organization under this 

section. 

(g) The Joint Audit Committee 

members may, among themselves, 

establish programs to provide access to 

any necessary financial or related 

information. 

(h) After appropriate notice and 

opportunity for comment, the 

Commission may, by written notice, 

approve such a plan, or any part of the 

plan, if it finds that the plan, or any part 

of it: 

(1) Is necessary or appropriate to serve 

the public interest; 

(2) Is for the protection and in the 

interest of customers; 

(3) Reduces multiple monitoring and 

multiple examining for compliance with 

the minimum financial rules of the 

Commission and of the self-regulatory 

organizations submitting the plan of any 

futures commission merchant, retail 

foreign exchange dealer, or introducing 

broker that is a member of more than 

one self-regulatory organization; 

(4) Reduces multiple reporting of the 

financial information necessitated by 

such minimum financial and related 

reporting requirements by any futures 

commission merchant, retail foreign 

exchange dealer, or introducing broker 

that is a member of more than one selfregulatory organization; 

(5) Fosters cooperation and 

coordination among the self-regulatory 

organizations; and 

(6) Does not hinder the development 

of a registered futures association under 

section 17 of the Act. 

(i) After the Commission has 

approved a plan, or part thereof, under 

paragraph (h) of this section, a selfregulatory organization delegating the 

functions described in paragraph (d)(1) 

of this section must notify each of its 

members that are subject to such a plan: 

(1) Of the limited scope of the 

delegating self-regulatory organization’s 

responsibility for such a member’s 

compliance with the Commission’s and 

self-regulatory organization’s minimum 

financial and related reporting 

requirements; and 

(2) Of the identity of the designated 

self-regulatory organization that has 

been delegated responsibility for such a 

member; provided, however, that the 

self-regulatory organization that 

delegates, pursuant to paragraph (d) of 

this section, the functions set forth in 

paragraphs (b) and (c) of this section 

shall remain responsible for its member 

registrants’ compliance with the 

regulatory obligations, and if such selfregulatory organization becomes aware 

that a delegated function is not being 

performed as required under this 

section, the self-regulatory organization 

shall promptly take any necessary steps 

to address any noncompliance. 

(j) The Commission may at any time, 

after appropriate notice and opportunity 

for hearing, withdraw its approval of 

any plan, or part thereof, established 

under this section, if such plan, or part 

thereof, ceases to adequately effectuate 

the purposes of section 4f(b) of the Act 

or of this section. 

(k) Whenever a registered futures 

commission merchant, a registered retail 

foreign exchange dealer, or a registered 

introducing broker holding membership 

in a self-regulatory organization ceases 

to be a member in good standing of that 

self-regulatory organization, such selfregulatory organization must, on the 

same day that event takes place, give 

electronic notice of that event to the 

Commission at its Washington, DC, 

headquarters and send a copy of that 

notification to such futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker. 

(l) Nothing in this section shall 

preclude the Commission from 

examining any futures commission 

merchant, retail foreign exchange 

dealer, or introducing broker for 

compliance with the minimum financial 

and related reporting requirements, and 

the risk management requirements, as 

applicable, to which such futures 

commission merchant, retail foreign 

exchange dealer, or introducing broker 

is subject. 

(m) In the event a plan is not filed 

and/or approved for each registered 

futures commission merchant, retail 

foreign exchange dealer, or introducing 

broker that is a member of more than 

one self-regulatory organization, the 

Commission may design and, after 

notice and opportunity for comment, 

approve a plan for those futures 

commission merchants, retail foreign 

exchange dealers, or introducing brokers 

that are not the subject of an approved 

plan (under paragraph (h) of this 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68643 

section), delegating to a designated selfregulatory organization the 

responsibilities described in paragraph 

(d) of this section. 

■ 18. Amend § 1.55 to: 

■ a. Revise the section heading; 

■ b. Revise paragraphs (b)(2) through 

(b)(8) and (c); and 

■ c. Add paragraphs (b)(9) through 

(b)(14), (i), (j), (k), (l), (m), (n), and (o). 

The revisions and additions to read as 

follows: 

§ 1.55 Public disclosures by futures 

commission merchants. 

* * * * * 

(b) * * * 

(2) The funds you deposit with a 

futures commission merchant for 

trading futures positions are not 

protected by insurance in the event of 

the bankruptcy or insolvency of the 

futures commission merchant, or in the 

event your funds are misappropriated. 

(3) The funds you deposit with a 

futures commission merchant for 

trading futures positions are not 

protected by the Securities Investor 

Protection Corporation even if the 

futures commission merchant is 

registered with the Securities and 

Exchange Commission as a broker or 

dealer. 

(4) The funds you deposit with a 

futures commission merchant are 

generally not guaranteed or insured by 

a derivatives clearing organization in 

the event of the bankruptcy or 

insolvency of the futures commission 

merchant, or if the futures commission 

merchant is otherwise unable to refund 

your funds. Certain derivatives clearing 

organizations, however, may have 

programs that provide limited insurance 

to customers. You should inquire of 

your futures commission merchant 

whether your funds will be insured by 

a derivatives clearing organization and 

you should understand the benefits and 

limitations of such insurance programs. 

(5) The funds you deposit with a 

futures commission merchant are not 

held by the futures commission 

merchant in a separate account for your 

individual benefit. Futures commission 

merchants commingle the funds 

received from customers in one or more 

accounts and you may be exposed to 

losses incurred by other customers if the 

futures commission merchant does not 

have sufficient capital to cover such 

other customers’ trading losses. 

(6) The funds you deposit with a 

futures commission merchant may be 

invested by the futures commission 

merchant in certain types of financial 

instruments that have been approved by 

the Commission for the purpose of such 

investments. Permitted investments are 

listed in Commission Regulation 1.25 

and include: U.S. government securities; 

municipal securities; money market 

mutual funds; and certain corporate 

notes and bonds. The futures 

commission merchant may retain the 

interest and other earnings realized from 

its investment of customer funds. You 

should be familiar with the types of 

financial instruments that a futures 

commission merchant may invest 

customer funds in. 

(7) Futures commission merchants are 

permitted to deposit customer funds 

with affiliated entities, such as affiliated 

banks, securities brokers or dealers, or 

foreign brokers. You should inquire as 

to whether your futures commission 

merchant deposits funds with affiliates 

and assess whether such deposits by the 

futures commission merchant with its 

affiliates increases the risks to your 

funds. 

(8) You should consult your futures 

commission merchant concerning the 

nature of the protections available to 

safeguard funds or property deposited 

for your account. 

(9) Under certain market conditions, 

you may find it difficult or impossible 

to liquidate a position. This can occur, 

for example, when the market reaches a 

daily price fluctuation limit (‘‘limit 

move’’). 

(10) All futures positions involve risk, 

and a ‘‘spread’’ position may not be less 

risky than an outright ‘‘long’’ or ‘‘short’’ 

position. 

(11) The high degree of leverage 

(gearing) that is often obtainable in 

futures trading because of the small 

margin requirements can work against 

you as well as for you. Leverage 

(gearing) can lead to large losses as well 

as gains. 

(12) In addition to the risks noted in 

the paragraphs enumerated above, you 

should be familiar with the futures 

commission merchant you select to 

entrust your funds for trading futures 

positions. The Commodity Futures 

Trading Commission requires each 

futures commission merchant to make 

publicly available on its Web site firm 

specific disclosures and financial 

information to assist you with your 

assessment and selection of a futures 

commission merchant. Information 

regarding this futures commission 

merchant may be obtained by visiting 

our Web site, www.[Web site address]. 

ALL OF THE POINTS NOTED ABOVE 

APPLY TO ALL FUTURES TRADING 

WHETHER FOREIGN OR DOMESTIC. 

IN ADDITION, IF YOU ARE 

CONTEMPLATING TRADING FOREIGN 

FUTURES OR OPTIONS CONTRACTS, 

YOU SHOULD BE AWARE OF THE 

FOLLOWING ADDITIONAL RISKS: 

(13) Foreign futures transactions 

involve executing and clearing trades on 

a foreign exchange. This is the case even 

if the foreign exchange is formally 

‘‘linked’’ to a domestic exchange, 

whereby a trade executed on one 

exchange liquidates or establishes a 

position on the other exchange. No 

domestic organization regulates the 

activities of a foreign exchange, 

including the execution, delivery, and 

clearing of transactions on such an 

exchange, and no domestic regulator has 

the power to compel enforcement of the 

rules of the foreign exchange or the laws 

of the foreign country. Moreover, such 

laws or regulations will vary depending 

on the foreign country in which the 

transaction occurs. For these reasons, 

customers who trade on foreign 

exchanges may not be afforded certain 

of the protections which apply to 

domestic transactions, including the 

right to use domestic alternative dispute 

resolution procedures. In particular, 

funds received from customers to 

margin foreign futures transactions may 

not be provided the same protections as 

funds received to margin futures 

transactions on domestic exchanges. 

Before you trade, you should familiarize 

yourself with the foreign rules which 

will apply to your particular 

transaction. 

(14) Finally, you should be aware that 

the price of any foreign futures or option 

contract and, therefore, the potential 

profit and loss resulting therefrom, may 

be affected by any fluctuation in the 

foreign exchange rate between the time 

the order is placed and the foreign 

futures contract is liquidated or the 

foreign option contract is liquidated or 

exercised. 

THIS BRIEF STATEMENT CANNOT, 

OF COURSE, DISCLOSE ALL THE 

RISKS AND OTHER ASPECTS OF THE 

COMMODITY MARKETS. 

I hereby acknowledge that I have 

received and understood this risk 

disclosure statement. 

lllllllllllllllllllll

Date 

lllllllllllllllllllll

Signature of Customer 

(c) The Commission may approve for 

use in lieu of the risk disclosure 

document required by paragraph (b) of 

this section a risk disclosure statement 

approved by one or more foreign 

regulatory agencies or self-regulatory 

organizations if the Commission 

determines that such risk disclosure 

statement is reasonably calculated to 

provide the disclosure required by 

paragraph (b) of this section. Notice of 


TKELleY on DSK3SPTVN1PROD with RULES2
68644 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

risk disclosure statements that may be 

used to satisfy Commission disclosure 

requirements, what requirements such 

statements meet and the jurisdictions 

which accept each format will be set 

forth in appendix A to this section; 

Provided, however, that an FCM also 

provides a customer with the risk 

disclosure statement required by 

paragraph (b) of this section and obtains 

the customer’s acknowledgment that it 

has read and understands the disclosure 

document. 

* * * * * 

(i) Notwithstanding any other 

provision of this section, no futures 

commission merchant may enter into a 

customer account agreement or first 

accept funds from a customer, unless 

the futures commission merchant 

discloses to the customer all 

information about the futures 

commission merchant, including its 

business, operations, risk profile, and 

affiliates, that would be material to the 

customer’s decision to entrust such 

funds to and otherwise do business with 

the futures commission merchant and 

that is otherwise necessary for full and 

fair disclosure. In connection with the 

disclosure of such information, the 

futures commission merchant shall 

provide material information about the 

topics described in paragraph (k) of this 

section, expanding upon such 

information as necessary to keep such 

disclosure from being misleading, 

whether through omission or otherwise. 

The futures commission merchant shall 

also disclose the same information 

required by this paragraph to all 

customers existing on the effective date 

of this paragraph even if the futures 

commission merchant and such existing 

customers have previously entered into 

a customer account agreement or the 

futures commission merchant has 

already accepted funds from such 

existing customers. The futures 

commission merchant shall update the 

information required by this section as 

and when necessary, but at least 

annually, to keep such information 

accurate and complete and shall 

promptly disclose such updated 

information to all of its customers. In 

connection with such obligation to 

update information, the futures 

commission merchant shall take into 

account any material change to its 

business operation, financial condition 

and other factors material to the 

customer’s decision to entrust the 

customer’s funds and otherwise do 

business with the futures commission 

merchant since its most recent 

disclosure pursuant to this paragraph, 

and for this purpose shall without 

limitation consider events that require 

periodic reporting required to be filed 

pursuant to § 1.12. For purposes of this 

section, the disclosures required 

pursuant to this paragraph will be 

referred to as the ‘‘Disclosure 

Documents.’’ The Disclosure Documents 

shall provide a detailed table of contents 

referencing and describing the 

Disclosure Documents. 

(j)(1) Each futures commission 

merchant shall make the Disclosure 

Documents available to each customer 

to whom disclosure is required pursuant 

to paragraph (i) of this section (for 

purposes of this section, its ‘‘FCM 

Customers’’) and to the general public. 

(2) A futures commission merchant 

shall make the Disclosure Documents 

available to FCM Customers and to the 

general public by posting a copy of the 

Disclosure Documents on the futures 

commission merchant’s Web site. A 

futures commission merchant, however, 

may use an electronic means other than 

its Web site to make the Disclosure 

Documents available to its FCM 

Customers; provided that: 

(i) The electronic version of the 

Disclosure Documents shall be 

presented in a format that is readily 

communicated to the FCM Customers. 

Information is readily communicated to 

the FCM Customers if it is accessible to 

the ordinary computer user by means of 

commonly available hardware and 

software and if the electronically 

delivered document is organized in 

substantially the same manner as would 

be required for a paper document with 

respect to the order of presentation and 

the relative prominence of information; 

and 

(ii) A complete paper copy of the 

Disclosure Documents shall be provided 

to an FCM Customer upon request. 

(k) Specific topics. The futures 

commission merchant shall provide 

material information about the 

following specific topics: 

(1) The futures commission 

merchant’s name, address of its 

principal place of business, phone 

number, fax number, and email address; 

(2) The name, title, business address, 

business background, areas of 

responsibility, and the nature of the 

duties of each person that is defined as 

a principal of the futures commission 

merchant pursuant to § 3.1 of this 

chapter; 

(3) The significant types of business 

activities and product lines engaged in 

by the futures commission merchant, 

and the approximate percentage of the 

futures commission merchant’s assets 

and capital that are used in each type of 

activity; 

(4) The futures commission 

merchant’s business on behalf of its 

customers, including types of 

customers, markets traded, international 

businesses, and clearinghouses and 

carrying brokers used, and the futures 

commission merchant’s policies and 

procedures concerning the choice of 

bank depositories, custodians, and 

counterparties to permitted transactions 

under § 1.25; 

(5) The material risks, accompanied 

by an explanation of how such risks 

may be material to its customers, of 

entrusting funds to the futures 

commission merchant, including, 

without limitation, the nature of 

investments made by the futures 

commission merchant (including credit 

quality, weighted average maturity, and 

weighted average coupon); the futures 

commission merchant’s 

creditworthiness, leverage, capital, 

liquidity, principal liabilities, balance 

sheet leverage and other lines of 

business; risks to the futures 

commission merchant created by its 

affiliates and their activities, including 

investment of customer funds in an 

affiliated entity; and any significant 

liabilities, contingent or otherwise, and 

material commitments; 

(6) The name of the futures 

commission merchant’s designated selfregulatory organization and its Web site 

address and the location where the 

annual audited financial statements of 

the futures commission merchant is 

made available; 

(7) Any material administrative, civil, 

enforcement, or criminal complaints or 

actions filed against the FCM where 

such complaints or actions have not 

concluded, and any enforcement 

complaints or actions filed against the 

FCM during the last three years; 

(8) A basic overview of customer fund 

segregation, futures commission 

merchant collateral management and 

investments, futures commission 

merchants, and joint futures 

commission merchant/broker dealers; 

(9) Information on how a customer 

may obtain information regarding filing 

a complaint about the futures 

commission merchant with the 

Commission or with the firm’s 

designated self-regulatory organization; 

and 

(10) The following financial data as of 

the most recent month-end when the 

Disclosure Document is prepared: 

(i) The futures commission 

merchant’s total equity, regulatory 

capital, and net worth, all computed in 

accordance with U.S. Generally 

Accepted Accounting Principles and 

§ 1.17, as applicable; 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68645 

(ii) The dollar value of the futures 

commission merchant’s proprietary 

margin requirements as a percentage of 

the aggregate margin requirement for 

futures customers, Cleared Swaps 

Customers, and 30.7 customers; 

(iii) The smallest number of futures 

customers, Cleared Swaps Customers, 

and 30.7 customers that comprise 50 

percent of the futures commission 

merchant’s total funds held for futures 

customers, Cleared Swaps Customers, 

and 30.7 customers, respectively; 

(iv) The aggregate notional value, by 

asset class, of all non-hedged, principal 

over-the-counter transactions into 

which the futures commission merchant 

has entered; 

(v) The amount, generic source and 

purpose of any committed unsecured 

lines of credit (or similar short-term 

funding) the futures commission 

merchant has obtained but not yet 

drawn upon; 

(vi) The aggregated amount of 

financing the futures commission 

merchant provides for customer 

transactions involving illiquid financial 

products for which it is difficult to 

obtain timely and accurate prices; and 

(vii) The percentage of futures 

customer, Cleared Swaps Customer, and 

30.7 customer receivable balances that 

the futures commission merchant had to 

write-off as uncollectable during the 

past 12-month period, as compared to 

the current balance of funds held for 

futures customers, Cleared Swaps 

Customers, and 30.7 customers; and 

(11) A summary of the futures 

commission merchant’s current risk 

practices, controls and procedures. 

(l) In addition to the foregoing, each 

futures commission merchant shall 

adopt policies and procedures 

reasonably designed to ensure that 

advertising and solicitation activities by 

each such futures commission merchant 

and any introducing brokers associated 

with such futures commission merchant 

are not misleading to its FCM Customers 

in connection with their decision to 

entrust funds to and otherwise do 

business with such futures commission 

merchant. 

(m) The Disclosure Document 

required by paragraph (i) of this section 

is in addition to the Risk Disclosure 

Statement required under paragraph (a) 

of this section. 

(n) All Disclosure Documents, with 

each Disclosure Document dated the 

date of first use, shall be maintained in 

accordance with § 1.31 and shall be 

made available promptly upon request 

to representatives of its designated selfregulatory organization, representatives 

of the Commission, and representatives 

of applicable prudential regulators. 

(o)(1) Each futures commission 

merchant shall make the following 

financial information publicly available 

on its Web site: 

(i) The daily Statement of Segregation 

Requirements and Funds in Segregation 

for Customers Trading on U.S. 

Exchanges for the most current 12- 

month period; 

(ii) The daily Statement of Secured 

Amounts and Funds Held in Separate 

Accounts for 30.7 Customers Pursuant 

to Commission Regulation 30.7 for the 

most current 12-month period; 

(iii) The daily Statement of Cleared 

Swaps Customer Segregation 

Requirements and Funds in Cleared 

Swaps Customer Accounts Under 

Section 4d(f) of the Act for the most 

current 12-month period; 

(iv) A summary schedule of the 

futures commission merchant’s adjusted 

net capital, net capital, and excess net 

capital, all computed in accordance 

with § 1.17 and reflecting balances as of 

the month-end for the 12 most recent 

months; 

(v) The Statement of Financial 

Condition, the Statement of Segregation 

Requirements and Funds in Segregation 

for Customers Trading on U.S. 

Exchanges, the Statement of Secured 

Amounts and Funds Held in Separate 

Accounts for 30.7 Customers Pursuant 

to Commission Regulation 30.7, the 

Statement of Cleared Swaps Customer 

Segregation Requirements and Funds in 

Cleared Swaps Customer Accounts 

Under Section 4d(f) of the Act, an all 

related footnotes to the above schedules 

that are part of the futures commission 

merchant’s most current certified 

annual report pursuant to § 1.16; and 

(vi) The Statement of Segregation 

Requirements and Funds in Segregation 

for Customers Trading on U.S. 

Exchanges, the Statement of Secured 

Amounts and Funds Held in Separate 

Accounts for 30.7 Customers Pursuant 

to Commission Regulation30.7, and the 

Statement of Cleared Swaps Customer 

Accounts Under Section 4d(f) of the Act 

that are part of the futures commission 

merchant’s unaudited Form 1–FR–FCM 

or Financial and Operational Combined 

Uniform Single Report under the 

Securities Exchange Act of 1934 

(‘‘FOCUS Report’’) for the most current 

12-month period. 

(2) To the extent any of the financial 

data identified in paragraph (1) of this 

section is amended, the FCM must 

clearly notate that the data has been 

amended. 

(3) Each futures commission merchant 

must include a statement on its Web site 

that is available to the public that 

financial information regarding the 

futures commission merchant, including 

how the futures commission merchant 

invests and holds customer funds, may 

be obtained from the National Futures 

Association and include a link to the 

Web site of the National Futures 

Association’s Basic System where 

information regarding the futures 

commission merchant’s investment of 

customer funds is maintained. 

(4) Each futures commission merchant 

must include a statement on its Web site 

that is available to the public that 

additional financial information on all 

futures commission merchants is 

available from the Commodity Futures 

Trading Commission, and include a link 

to the Commodity Futures Trading 

Commission’s Web page for financial 

data for futures commission merchants. 

PART 3—REGISTRATION 

■ 19. The authority citation for part 3 

continues to read as follows: 

Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 

2, 6a, 6b, 6b–1, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 

6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 13b, 13c, 

16a, 18, 19, 21, 23. 

■ 20. Amend § 3.3 to revise paragraph 

(f)(2) to read as follows: 

§ 3.3 Chief compliance officer. 

* * * * * 

(f) * * * 

(2) The annual report shall be 

furnished electronically to the 

Commission not more than 60 days after 

the end of the fiscal year of the futures 

commission merchant, swap dealer, or 

major swap participant, simultaneously 

with the submission of Form 1–FR– 

FCM, as required under § 1.10(b)(2)(ii) 

of this chapter, simultaneously with the 

Financial and Operational Combined 

Uniform Single Report, as required 

under § 1.10(h) of this chapter, or 

simultaneously with the financial 

condition report, as required under 

section 4s(f) of the Act, as applicable. 

* * * * * 

PART 22—CLEARED SWAPS 

■ 21. The authority citation for part 22 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 6d, 7a–1 as 

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

■ 22. Amend § 22.2 to: 

■ a. Revise paragraphs (d)(1), (e)(1), 

(f)(2), (f)(4), (f)(5)(iii)(B), and (g)(2); and 

■ c. Add paragraphs (f)(6) and (g)(3) 

through (g)(10). 

The revisions and additions read as 

follows: 

§ 22.2 Futures Commission Merchants: 

Treatment of Cleared Swaps and 

Associated Cleared Swaps Customer 

Collateral. 

* * * * * 


TKELleY on DSK3SPTVN1PROD with RULES2
68646 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

(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. 

* * * * * 

(e) * * * 

(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 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; Provided, 

however, that the futures commission 

merchant shall bear sole responsibility 

for any losses resulting from the 

investment of customer funds in 

instruments described in § 1.25 of this 

chapter. No investment losses shall be 

borne or otherwise allocated to Cleared 

Swaps Customers of the futures 

commission merchant. 

* * * * * 

(f) * * * 

(2) The futures commission merchant 

must reflect in the account that it 

maintains for each Cleared Swaps 

Customer, the net liquidating equity for 

each such Cleared Swaps Customer, 

calculated as follows: The market value 

of any Cleared Swaps Customer 

Collateral that it receives from such 

customer, as adjusted by: 

(i) Any uses permitted under 

paragraph (d) of this section; 

(ii) Any accruals on permitted 

investments of such collateral under 

paragraph (e) of this section that, 

pursuant to the futures commission 

merchant’s customer agreement with 

that customer, are creditable to such 

customer; 

(iii) Any gains and losses with respect 

to Cleared Swaps; 

(iv) Any charges lawfully accruing to 

the Cleared Swaps Customer, including 

any commission, brokerage fee, interest, 

tax, or storage fee; and 

(v) Any appropriately authorized 

distribution or transfer of such 

collateral. 

* * * * * 

(4) The futures commission merchant 

must, at all times, 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. This balance may not be 

reduced by any debit balances that the 

Cleared Swaps Customers of the futures 

commission merchants have in their 

accounts. 

(5) * * * 

(iii) * * * 

(B) Reduce such market value by 

applicable percentage deductions (i.e., 

‘‘securities haircuts’’) as set forth in 

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

and Exchange Commission (§ 240.15c3– 

1(c)(2)(vi) of this title). Futures 

commission merchants that establish 

and enforce written policies and 

procedures to assess the credit risk of 

commercial paper, convertible debt 

instruments, or nonconvertible debt 

instruments in accordance with Rule 

240.15c3–1(c)(2)(vi) of the Securities 

and Exchange Commission (§ 240.15c3– 

1(c)(2)(vi) of this title) may apply the 

lower haircut percentages specified in 

Rule 240.15c3–1(c)(2)(vi) for such 

commercial paper, convertible debt 

instruments and nonconvertible debt 

instruments. The portion of the debit 

balance, not exceeding 100 percent, 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. 

(6)(i) The undermargined amount for 

a Cleared Swaps Customer Account is 

the amount, if any, by which: 

(A) The total amount of collateral 

required for that Cleared Swaps 

Customer’s Cleared Swaps, at the time 

or times referred to in paragraph 

(f)(6)(ii) of this section, exceeds— 

(B) The value of the Cleared Swaps 

Customer Collateral for that account, as 

calculated in paragraph (f)(2) of this 

section. 

(ii) Each futures commission 

merchant must compute, based on the 

information available to the futures 

commission merchant as of the close of 

each business day, 

(A) The undermargined amounts, 

based on the clearing initial margin that 

will be required to be maintained by 

that futures commission merchant for its 

Cleared Swaps Customers, at each 

derivatives clearing organization of 

which the futures commission merchant 

is a member, at the point of the daily 

settlement (as described in § 39.14 of 

this chapter) that will complete during 

the following business day for each such 

derivatives clearing organization less 

(B) Any debit balances referred to in 

paragraph (f)(4) of this section included 

in such undermargined amounts. 

(iii)(A) Prior to the time of settlement 

referenced in paragraph (f)(6)(ii)(A) of 

this section such futures commission 

merchant must maintain residual 

interest in segregated funds that is equal 

to or exceeds the portion of the 

computation set forth in paragraph 

(f)(6)(ii) of this section attributable to 

the clearing initial margin required by 

the derivatives clearing organization 

making such settlement. 

(B) A futures commission merchant 

may reduce the amount of residual 

interest required in paragraph 

(f)(6)(iii)(A) of this section to account for 

payments received from or on behalf of 

undermargined Cleared Swaps 

Customers (less the sum of any 

disbursements made to or on behalf of 

such customers) between the close of 

the previous business day and the time 

of settlement. 

(iv) For purposes of paragraph 

(f)(6)(ii) of this section, a Depositing 

Futures Commission Merchant should 

include, as clearing initial margin, 

customer initial margin that the 

Depositing Futures Commission 

Merchant will be required to maintain, 

for that Depositing Futures Commission 

Merchant’s Cleared Swaps Customers, at 

a Collecting Futures Commission 

Merchant, and, for purposes of 

paragraph (f)(6)(iii) of this section, must 

do so prior to the time it must settle 

with that Collecting Futures 

Commission Merchant. 

(g) * * * 

(2) Each futures commission merchant 

is required to document its segregation 

computation required by paragraph 

(g)(1) of this section by preparing a 

Statement of Cleared Swaps Customer 

Segregation Requirements and Funds in 

Cleared Swaps Customer Accounts 

Under 4d(f) of the CEA contained in the 

Form 1–FR–FCM as of the close of 

business each business day. 

(3) Each futures commission merchant 

is required to submit to the Commission 

and to the firm’s designated selfregulatory organization the daily 

Statement of Cleared Swaps Customer 

Segregation Requirements and Funds in 

Cleared Swaps Customer Accounts 

Under 4d(f) of the CEA required by 

paragraph (g)(2) of this section by noon 

the following business day. 

(4) Each futures commission merchant 

shall file the Statement of Cleared 

Swaps Customer Segregation 

Requirements and Funds in Cleared 

Swaps Customer Accounts Under 4d(f) 

of the CEA required by paragraph (g)(2) 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68647 

of this section in an electronic format 

using a form of user authentication 

assigned in accordance with procedures 

established or approved by the 

Commission. 

(5) Each futures commission merchant 

is required to submit to the Commission 

and to the firm’s designated selfregulatory organization a report listing 

the names of all banks, trust companies, 

futures commission merchants, 

derivatives clearing organizations, or 

any other depository or custodian 

holding Cleared Swaps Customer 

Collateral as of the fifteenth day of the 

month, or the first business day 

thereafter, and the last business day of 

each month. This report must include: 

(i) The name and location of each 

entity holding Cleared Swaps Customer 

Collateral; 

(ii) The total amount of Cleared 

Swaps Customer Collateral held by each 

entity listed in paragraph (g)(5) of this 

section; and 

(iii) The total amount of cash and 

investments that each entity listed in 

paragraph (g)(5) of this section holds for 

the futures commission merchant. The 

futures commission merchant must 

report the following investments: 

(A) Obligations of the United States 

and obligations fully guaranteed as to 

principal and interest by the United 

States (U.S. government securities); 

(B) General obligations of any State or 

of any political subdivision of a State 

(municipal securities); 

(C) General obligation issued by any 

enterprise sponsored by the United 

States (government sponsored enterprise 

securities); 

(D) Certificates of deposit issued by a 

bank; 

(E) Commercial paper fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation; 

(F) Corporate notes or bonds fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation; and 

(G) Interests in money market mutual 

funds. 

(6) Each futures commission merchant 

must report the total amount of 

customer owned securities held by the 

futures commission merchant as Cleared 

Swaps Customer Collateral and must list 

the names and locations of the 

depositories holding customer owned 

securities. 

(7) Each futures commission merchant 

must report the total amount of Cleared 

Swaps Customer Collateral that has 

been used to purchase securities under 

agreements to resell the securities 

(reverse repurchase transactions). 

(8) Each futures commission merchant 

must report which, if any, of the 

depositories holding Cleared Swaps 

Customer Collateral under paragraph 

(g)(5) of this section are affiliated with 

the futures commission merchant. 

(9) Each futures commission merchant 

shall file the detailed list of depositories 

required by paragraph (g)(5) of this 

section by 11:59 p.m. the next business 

day in an electronic format using a form 

of user authentication assigned in 

accordance with procedures established 

or approved by the Commission. 

(10) Each futures commission 

merchant shall retain its daily 

segregation computation and the 

Statement of Cleared Swaps Customer 

Segregation Requirements and Funds in 

Cleared Swaps Customer Accounts 

under section 4d(f) of the CEA required 

by paragraph (g)(2) of this section and 

the detailed listing of depositories 

required by paragraph (g)(5) of this 

section, together with all supporting 

documentation, in accordance with 

§ 1.31 of this chapter. 

■ 23. Add § 22.17 to read as follows: 

§ 22.17 Policies and procedures governing 

disbursements of Cleared Swaps Customer 

Collateral from Cleared Swaps Customer 

Accounts. 

(a) The provision in section 4d(f)(2) of 

the Act that prohibits the commingling 

of Cleared Swaps Customer Collateral 

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 funds segregated as required by 

the Act and the regulations in this part 

and set apart for the benefit of Cleared 

Swaps Customers; nor shall such 

provisions be construed to prevent a 

futures commission merchant from 

adding to such segregated 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 of this chapter, as it may 

deem necessary to ensure any and all 

Cleared Swaps Customer Accounts are 

not undersegregated at any time. 

(b) A futures commission merchant 

may not withdraw funds, except 

withdrawals that are made to or for the 

benefit of Cleared Swaps Customers, 

from a Cleared Swaps Customer 

Account unless the futures commission 

merchant has prepared the daily 

segregation calculation required by 

§ 22.2 as of the close of business on the 

previous business day. A futures 

commission merchant that has 

completed its daily segregation 

calculation may make withdrawals, in 

addition to withdrawals that are made 

to or for the benefit of Cleared Swaps 

Customers, to the extent of its actual 

residual financial interest in funds held 

in segregated accounts, including the 

withdrawal of securities held in 

segregated safekeeping accounts held by 

a bank, trust company, derivatives 

clearing organization or other futures 

commission merchant. Such 

withdrawal(s) shall not result in the 

funds of one Cleared Swaps Customer 

being used to purchase, margin or carry 

the trades, contracts or swaps positions, 

or extend the credit of any other Cleared 

Swaps Customer or other person. 

(c) A futures commission merchant 

may not withdraw funds, in a single 

transaction or a series of transactions, 

that are not made to or for the benefit 

of Cleared Swaps Customers from 

Cleared Swaps Customer Accounts if 

such withdrawal(s) would exceed 25 

percent of the futures commission 

merchant’s residual interest in such 

accounts as reported on the daily 

segregation calculation required by 

§ 22.2 and computed as of the close of 

business on the previous business day, 

unless: 

(1) The futures commission 

merchant’s chief executive officer, chief 

finance officer or other senior official 

that is listed as a principal of the futures 

commission merchant on its Form 7–R 

and is knowledgeable about the futures 

commission merchant’s financial 

requirements and financial position preapproves in writing the withdrawal, or 

series of withdrawals; 

(2) The futures commission merchant 

files written notice of the withdrawal or 

series of withdrawals, with the 

Commission and with its designated 

self-regulatory organization immediately 

after the chief executive officer, chief 

finance officer or other senior official 

pre-approves the withdrawal or series of 

withdrawals. The written notice must: 

(i) Be signed by the chief executive 

officer, chief finance officer or other 

senior official that pre-approved the 

withdrawal, and give notice that the 

futures commission merchant has 

withdrawn or intends to withdraw more 

than 25 percent of its residual interest 

in such accounts holding Cleared Swaps 

Customer Accounts funds; 

(ii) Include a description of the 

reasons for the withdrawal or series of 

withdrawals; 

(iii) List the amount of funds provided 

to each recipient and the name of each 

recipient; 

(iv) Include the current estimate of the 

amount of the futures commission 

merchant’s residual interest in the 


TKELleY on DSK3SPTVN1PROD with RULES2
68648 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

swaps customer funds after the 

withdrawal; 

(v) Contain a representation by the 

chief executive officer, chief finance 

officer or other senior official that preapproved the withdrawal, or series of 

withdrawals, that, after due diligence, to 

such person’s knowledge and 

reasonable belief, the futures 

commission merchant remains in 

compliance with the segregation 

requirements after the withdrawal. The 

chief executive officer, chief finance 

officer or other senior official must 

consider the daily segregation 

calculation as of the close of business on 

the previous business day and any other 

factors that may cause a material change 

in the futures commission’s residual 

interest since the close of business the 

previous business day, including known 

unsecured customer debits or deficits, 

current day market activity and any 

other withdrawals made from the 

Cleared Swaps Customer Accounts; and 

(vi) Any such written notice filed 

with the Commission must be filed via 

electronic transmission using a form of 

user authentication assigned in 

accordance with procedures established 

by or approved by the Commission, and 

otherwise in accordance with 

instruction issued by or approved by the 

Commission. Any such electronic 

submission must clearly indicate the 

registrant on whose behalf such filing is 

made and the use of such user 

authentication in submitting such filing 

will constitute and become a substitute 

for the manual signature of the 

authorized signer. Any written notice 

filed must be followed up with direct 

communication to the Regional office of 

Commission which has supervisory 

authority over the futures commission 

merchant whereby the Commission 

acknowledges receipt of the notice; and 

(3) After making a withdrawal 

requiring the approval and notice 

required in paragraphs (c)(1) and (c)(2) 

of this section, and before the next daily 

segregated funds calculation, no futures 

commission merchant may make any 

further withdrawals from accounts 

holding Cleared Swaps Customer 

Account funds, except to or for the 

benefit of Cleared Swaps Customers, 

without complying with paragraph 

(c)(1) of this section and filing a written 

notice with the Commission under 

paragraph (c)(2)(vi) of this section and 

its designated self-regulatory 

organization signed by the chief 

executive officer, chief finance officer, 

or other senior official. The written 

notice must: 

(i) List the amount of funds provided 

to each recipient and each recipient’s 

name; 

(ii) Disclose the reason for each 

withdrawal; 

(iii) Confirm that the chief executive 

officer, chief finance officer, or other 

senior official (and identify of the 

person if different from the person who 

signed the notice) pre-approved the 

withdrawal in writing; 

(iv) Disclose the current estimate of 

the futures commission merchant’s 

remaining total residual interest in the 

segregated accounts holding Cleared 

Swaps Customer Account funds after 

the withdrawal; and 

(v) Include a representation that to the 

best of the notice signatory’s knowledge 

and reasonable belief the futures 

commission merchant remains in 

compliance with the segregation 

requirements after the withdrawal. 

(d) If a futures commission merchant 

withdraws funds that are not for the 

benefit of Cleared Swaps Customers 

from Cleared Swaps Customer 

Accounts, and the withdrawal causes 

the futures commission merchant to not 

hold sufficient funds in Cleared Swaps 

Customer Accounts to meet its targeted 

residual interest, as required to be 

computed under § 1.11 of this chapter, 

the futures commission merchant must 

deposit its own funds into the Cleared 

Swaps Customer Accounts to restore the 

targeted amount of residual interest on 

the next business day, or, if appropriate, 

revise the futures commission 

merchant’s targeted amount of residual 

interest pursuant to the policies and 

procedures required by § 1.11 of this 

chapter. Notwithstanding the foregoing, 

if the futures commission merchant’s 

residual interest in Cleared Swaps 

Customer Accounts is less than the 

amount required to be maintained by 

§ 22.2 at any particular point in time, 

the futures commission merchant must 

immediately restore the residual interest 

to exceed the sum of such amounts. Any 

proprietary funds deposited in Cleared 

Swaps Customer Accounts must be 

unencumbered and otherwise compliant 

with § 1.25 of this chapter, as 

applicable. 

(e) Notwithstanding any other 

provision of this part, a futures 

commission merchant may not 

withdraw funds that are not for the 

benefit of Cleared Swaps Customers 

from a Cleared Swaps Customer 

Account unless the futures commission 

merchant follows its policies and 

procedures required by § 1.11 of this 

chapter. 

PART 30—FOREIGN FUTURES AND 

FOREIGN OPTIONS TRANSACTIONS 

■ 24. The authority citation for part 30 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6c, and 12a, 

unless otherwise noted. 

■ 25. Amend § 30.1 to add paragraphs 

(f), (g), and (h) to read as follows: 

§ 30.1 Definitions. 

* * * * * 

(f) 30.7 customer means any foreign 

futures or foreign options customer as 

defined in paragraph (c) of this section 

as well as any foreign-domiciled person 

who trades in foreign futures or foreign 

options through a futures commission 

merchant; Provided, however, that an 

owner or holder of a proprietary account 

as defined in § 1.3(y) of this chapter 

shall not be deemed to be a 30.7 

customer. 

(g) 30.7 account means any account 

maintained by a futures commission 

merchant for or on behalf of 30.7 

customers to hold money, securities, or 

other property to margin, guarantee, or 

secure foreign futures or foreign option 

positions. 

(h) 30.7 customer funds means any 

money, securities, or other property 

received by a futures commission 

merchant from, for, or on behalf of 30.7 

customers to margin, guarantee, or 

secure foreign futures or foreign option 

positions, or money, securities, or other 

property accruing to 30.7 customers as 

a result of foreign futures and foreign 

option positions. 

■ 26. Revise § 30.7 to read as follows: 

§ 30.7 Treatment of foreign futures or 

foreign options secured amount. 

(a) General. Except as provided in this 

section, a futures commission merchant 

must at all times maintain in a separate 

account or accounts money, securities 

and property in an amount at least 

sufficient to cover or satisfy all of its 

obligations to 30.7 customers 

denominated as the foreign futures or 

foreign options secured amount. In 

computing the foreign futures or foreign 

options secured amount, a futures 

commission merchant may offset any 

net deficit in a particular 30.7 

customer’s account against the current 

market value of readily marketable 

securities held for the same particular 

30.7 customer’s account as provided for 

in paragraph (l) of this section. The 

amount that must be deposited in such 

separate account or accounts for 30.7 

customers must be no less than the 

amount required to be held in a separate 

account or accounts for or on behalf of 

30.7 customers pursuant to any law, or 

rule, regulation or order thereunder, or 

any rule of any self-regulatory 

organization authorized thereunder, in 

the jurisdiction in which the depository 

or the 30.7 customer, as appropriate, is 

located. 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68649 

(b) Location of 30.7 customer funds. A 

futures commission merchant shall 

deposit the foreign futures or foreign 

options secured amount under an 

account name that clearly identifies the 

funds as belonging to 30.7 customers 

and shows that the foreign futures or 

foreign options secured amount is set 

aside as required by this part. A futures 

commission merchant may deposit 

funds set aside as the foreign futures or 

foreign options secured amount with the 

following depositories: 

(1) A bank or trust company located 

in the United States; 

(2) A bank or trust company located 

outside the United States that has in 

excess of $1 billion of regulatory capital; 

(3) A futures commission merchant 

registered as such with the Commission; 

(4) A derivatives clearing 

organization; 

(5) The clearing organization of any 

foreign board of trade; 

(6) A member of any foreign board of 

trade; or 

(7) Such member’s or clearing 

organization’s designated depositories. 

(c) Limitation on holding foreign 

futures or foreign options secured 

amount outside of the United States. A 

futures commission merchant may not 

deposit or hold the foreign futures or 

foreign options secured amount in 

accounts maintained outside of the 

United States with any of the 

depositories listed in paragraph (b) of 

this section except to meet margin 

requirements, including prefunding 

margin requirements, established by 

rule, regulation, or order of foreign 

boards of trade or foreign clearing 

organizations, or to meet margin calls 

issued by foreign brokers carrying the 

30.7 customers’ foreign futures and 

foreign option positions; Provided, 

however, that a futures commission 

merchant may deposit an additional 

amount of up to 20 percent of the total 

amount of funds necessary to meet 

margin and prefunding margin 

requirements to avoid daily transfers of 

funds between the futures commission 

merchant’s 30.7 accounts maintained in 

the United States and those maintained 

outside of the United States. A futures 

commission merchant must deposit 30.7 

customer funds under the laws and 

regulations of the foreign jurisdiction 

that provide the greatest degree of 

protection to such funds. A futures 

commission merchant may not by 

contract or otherwise waive any of the 

protections afforded customer funds 

under the laws of the foreign 

jurisdiction. 

(d) Written acknowledgment from 

depositories. (1) A futures commission 

merchant must obtain a written 

acknowledgment from each depository 

prior to or contemporaneously with the 

opening of an account by the futures 

commission merchant with such 

depository. 

(2) The written acknowledgment must 

be in the form as set out in appendix E 

to this part; Provided, however, that if 

the futures commission merchant 

invests funds set aside as the foreign 

futures or foreign options secured 

amount in money market mutual funds 

as a permitted investment under 

paragraph (h) of this section and in 

accordance with the terms and 

conditions of § 1.25(c) of this chapter, 

the written acknowledgment with 

respect to such investment must be in 

the form as set out in appendix F to this 

part. 

(3)(i) A futures commission merchant 

shall deposit 30.7 customer funds only 

with a depository that agrees to provide 

the director of the Division of Swap 

Dealer and Intermediary Oversight, or 

any successor division, or such 

director’s designees, with direct, readonly electronic access to transaction and 

account balance information for 30.7 

customer accounts. 

(ii) The written acknowledgment must 

contain the futures commission 

merchant’s authorization to the 

depository to provide direct, read-only 

electronic access to 30.7 customer 

account transaction and account balance 

information to the director of the 

Division of Swap Dealer and 

Intermediary Oversight, or any 

successor division, or such director’s 

designees, without further notice to or 

consent from the futures commission 

merchant. 

(4) A futures commission merchant 

shall deposit 30.7 customer funds only 

with a depository that agrees to provide 

the Commission and the futures 

commission merchant’s designated selfregulatory organization with a copy of 

the executed written acknowledgment 

no later than three business days after 

the opening of the account or the 

execution of a new written 

acknowledgment for an existing 

account, as applicable. The Commission 

must receive the written 

acknowledgment from the depository 

via electronic means, in a format and 

manner determined by the Commission. 

The written acknowledgment must 

contain the futures commission 

merchant’s authorization to the 

depository to provide the written 

acknowledgment to the Commission 

and to the futures commission 

merchant’s designated self-regulatory 

organization without further notice to or 

consent from the futures commission 

merchant. 

(5) A futures commission merchant 

shall deposit 30.7 customer funds only 

with a depository that agrees that 

accounts containing 30.7 customer 

funds may be examined at any 

reasonable time by the director of the 

Division of Swap Dealer and 

Intermediary Oversight or the director of 

the Division of Clearing and Risk, or any 

successor divisions, or such directors’ 

designees, or an appropriate officer, 

agent or employee of the futures 

commission merchant’s designated selfregulatory organization. The written 

acknowledgment must contain the 

futures commission merchant’s 

authorization to the depository to 

permit any such examination to take 

place without further notice to or 

consent from the futures commission 

merchant. 

(6) A futures commission merchant 

shall deposit 30.7 customer funds only 

with a depository that agrees to reply 

promptly and directly to any request 

from the director of the Division of 

Swap Dealer and Intermediary 

Oversight or the director of the Division 

of Clearing and Risk, or any successor 

divisions, or such directors’ designees, 

or an appropriate officer, agent or 

employee of the futures commission 

merchant’s designated self-regulatory 

organization for confirmation of account 

balances or provision of any other 

information regarding or related to an 

account. The written acknowledgment 

must contain the futures commission 

merchant’s authorization to the 

depository to reply promptly and 

directly as required by this paragraph 

without further notice to or consent 

from the futures commission merchant. 

(7) A futures commission merchant 

shall promptly file a copy of the written 

acknowledgment with the Commission 

in the format and manner specified by 

the Commission no later than three 

business days after the opening of the 

account or the execution of a new 

written acknowledgment for an existing 

account, as applicable. 

(8) A futures commission merchant 

shall obtain a new written 

acknowledgment within 120 days of any 

changes in the following: 

(i) The name or business address of 

the futures commission merchant; 

(ii) The name or business address of 

the depository; or 

(iii) The account number(s) under 

which the foreign futures or foreign 

options secured amount are held. 

(9) A futures commission merchant 

shall maintain each written 

acknowledgment readily accessible in 

its files in accordance with § 1.31 of this 

chapter, for as long as the account 

remains open, and thereafter for the 


TKELleY on DSK3SPTVN1PROD with RULES2
68650 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

period provided in § 1.31 of this 

chapter. 

(e) Commingling. (1) A futures 

commission merchant may commingle 

the funds set aside as the foreign futures 

or foreign options secured amount that 

it receives from, or on behalf of, 

multiple 30.7 customers in a single 

account or multiple accounts with one 

or more of the depositories listed in 

paragraph (b) of this section. 

(2) A futures commission merchant 

may not commingle the funds set aside 

as the foreign futures or foreign options 

secured amount held for 30.7 customers 

with the money, securities or property 

of such futures commission merchant, 

with any proprietary account of such 

futures commission merchant, or use 

such funds to secure or guarantee the 

obligations of, or extend credit to, such 

futures commission merchant or any 

proprietary account of such futures 

commission merchant; Provided, 

however, a futures commission 

merchant may deposit proprietary funds 

into 30.7 customer accounts as 

permitted under paragraph (g) of this 

section. 

(3) A futures commission merchant 

may not commingle 30.7 customer 

funds with funds deposited by futures 

customers as defined in § 1.3 of this 

chapter and held in segregated accounts 

pursuant to section 4d(a) and 4d(b) of 

the Act or with funds deposited by 

Cleared Swap Customers as defined in 

§ 22.1 of this chapter and held in 

segregated accounts pursuant to section 

4d(f) of the Act, or with funds of any 

account holders of the futures 

commission merchant unrelated to 

trading foreign futures or foreign 

options; Provided, however, that a 

futures commission merchant may 

commingle 30.7 customer funds with 

funds deposited by futures customers or 

Cleared Swaps Customers pursuant to 

the terms of a Commission regulation or 

order authorizing such commingling. 

(f) Limitations on use of 30.7 customer 

funds. (1)(i) A futures commission 

merchant shall not use, or permit the 

use of, the funds of one 30.7 customer 

to purchase, margin or settle the trades, 

contracts, or commodity options of, or 

to secure or extend credit to, any person 

other than such 30.7 customer. 

(ii)(A) The undermargined amount for 

a 30.7 customer’s account is the amount, 

if any, by which 

(1) The total amount of collateral 

required for that 30.7 customer’s 

positions in that account, at the time or 

times referred to in paragraph 

(f)(1)(ii)(B) of this section, exceeds 

(2) The value of the 30.7 customer 

funds for that account, as calculated in 

paragraph (f)(2)(ii) of this section. 

(B) Each futures commission 

merchant must compute, based on the 

information available to the futures 

commission merchant as of the close of 

each business day, 

(1) The undermargined amounts, 

based on the clearing initial margin that 

will be required to be maintained by 

that futures commission merchant for its 

30.7 customers, at each clearing 

organization of which the futures 

commission merchant is a member, at 

6:00 p.m. Eastern on the following 

business day for each such clearing 

organization less 

(2) Any debit balances referred to in 

paragraph (f)(2)(iv) of this section 

included in such undermargined 

amounts. 

(C)(1) Prior to 6:00 p.m. Eastern Time 

on the date of the settlement referenced 

in paragraph (f)(1)(ii)(B)(1) of this 

section, such futures commission 

merchant must maintain residual 

interest in segregated funds that is at 

least equal to the computation set forth 

in paragraph (f)(1)(ii)(B) of this section. 

(2) A futures commission merchant 

may reduce the amount of residual 

interest required in paragraph 

(f)(1)(ii)(C)(1) of this section to account 

for payments received from or on behalf 

of undermargined 30.7 customers (less 

the sum of any disbursements made to 

or on behalf of such customers) between 

the close of the previous business day 

and 6:00 p.m. Eastern Time on the 

following business day. 

(D) For purposes of paragraph 

(f)(1)(ii)(B) of this section, a futures 

commission merchant should include, 

as clearing initial margin, customer 

initial margin that the futures 

commission merchant will be required 

to maintain, for that futures commission 

merchant’s 30.7 customers, at a foreign 

broker, and, for purposes of paragraph 

(f)(1)(ii)(C) of this section, must do so 

prior to 6:00 p.m. Eastern Time on the 

date referenced in paragraph 

(f)(1)(ii)(B)(1) of this section. 

(2) Requirements as to amount. (i) For 

purposes of this paragraph (f)(2), the 

term ‘‘account’’ shall mean the entries 

on the books and records of a futures 

commission merchant pertaining to the 

30.7 customer funds of a particular 30.7 

customer. 

(ii) The futures commission merchant 

must reflect in the account that it 

maintains for each 30.7 customer the net 

liquidating equity for each such 

customer, calculated as follows: The 

market value of any 30.7 customer funds 

it receives from such customer, as 

adjusted by: 

(A) Any uses permitted under 

paragraph (e) of this section; 

(B) Any accruals on permitted 

investments of such collateral under 

§ 1.25 of this chapter that, pursuant to 

the futures commission merchant’s 

customer agreement with that customer, 

are creditable to such customer; 

(C) Any gains and losses with respect 

to contracts for the purchase or sale of 

foreign futures or foreign option 

positions; 

(D) Any charges lawfully accruing to 

the 30.7 customer, including any 

commission, brokerage fee, interest, tax, 

or storage fee; and 

(E) Any appropriately authorized 

distribution or transfer of such 

collateral. 

(iii) If the market value of 30.7 

customer funds in the account of a 30.7 

customer is positive after adjustments, 

then that account has a credit balance. 

If the market value of 30.7 customer 

funds in the account of a 30.7 customer 

is negative after adjustments, then that 

account has a debit balance. 

(iv) The futures commission merchant 

must maintain in segregation an amount 

equal to the sum of any credit balances 

that 30.7 customers of the futures 

commission merchant have in their 

accounts. This balance may not be 

reduced by any debit balances that the 

30.7 customers of the futures 

commission merchants have in their 

accounts. 

(3) A futures commission merchant 

may not impose or permit the 

imposition of a lien on any funds set 

aside as the foreign futures or foreign 

options secured amount, including any 

residual financial interest of the futures 

commission merchant in such funds. 

(4) A futures commission merchant 

may not include in funds set aside as 

the foreign futures or foreign options 

secured amount any money invested in 

securities, memberships, or obligations 

of any clearing organization or board of 

trade. A futures commission merchant 

may not include in funds set aside as 

the foreign futures or foreign options 

secured amount any other money, 

securities, or property held by a member 

of a foreign board of trade, board of 

trade, or clearing organization, except if 

the funds are deposited to margin, 

secure, or guarantee 30.7 customers’ 

foreign futures or foreign options 

positions and the futures commission 

merchant obtains the written 

acknowledgment from the member of 

the foreign board of trade, board of 

trade, or clearing organization as 

required by paragraph (d) of this 

section. 

(g) Futures commission merchant’s 

residual financial interest and 

withdrawal of funds. (1) The provision 

in paragraph (e) of this section, which 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68651 

prohibits the commingling of funds set 

aside as the foreign futures or foreign 

options secured amount 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 funds 

set aside as required by the regulations 

in this part for the benefit of 30.7 

customers; nor shall such provisions be 

construed to prevent a futures 

commission merchant from adding to 

such set aside 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 of this chapter, as it may deem 

necessary to ensure any and all 30.7 

accounts from becoming undersecured 

at any time. 

(2) A futures commission merchant 

may not withdraw funds, except 

withdrawals that are made to or for the 

benefit of 30.7 customers, from an 

account or accounts holding the foreign 

futures and foreign options secured 

amount unless the futures commission 

merchant has prepared the daily 30.7 

calculation required by paragraph (l) of 

this section as of the close of business 

on the previous business day. A futures 

commission merchant that has 

completed its daily 30.7 calculation may 

make withdrawals, in addition to 

withdrawals that are made to or for the 

benefit of 30.7 customers, to the extent 

of its actual residual financial interest in 

funds held in 30.7 accounts, including 

the withdrawal of securities held in 

secured amount safekeeping accounts 

held by a bank, trust company, contract 

market, clearing organization, member 

of a foreign board of trade, or other 

futures commission merchant. Such 

withdrawal(s) shall not result in the 

funds of one 30.7 customer being used 

to purchase, margin or guarantee the 

foreign futures or foreign options 

positions, or extend the credit of any 

other 30.7 customer or other person. 

(3) A futures commission merchant 

may not withdraw funds, in a single 

transaction or a series of transactions, 

that are not made for the benefit of 30.7 

customers from an account or accounts 

holding 30.7 customer funds if such 

withdrawal(s) would exceed 25 percent 

of the futures commission merchant’s 

residual interest in such accounts as 

reported on the daily secured amount 

calculation required by paragraph (l) of 

this section and computed as of the 

close of business on the previous 

business day, unless the futures 

commission merchant’s chief executive 

officer, chief finance officer or other 

senior official that is listed as a 

principal of the futures commission 

merchant on its Form 7–R and is 

knowledgeable about the futures 

commission merchant’s financial 

requirements and financial position preapproves in writing the withdrawal, or 

series of withdrawals. 

(4) A futures commission merchant 

must file written notice of the 

withdrawal or series of withdrawals that 

exceed 25 percent of the futures 

commission merchant’s residual interest 

in 30.7 customer funds as computed 

under paragraph (h)(2) of this section 

with the Commission and with its 

designated self-regulatory organization 

immediately after the chief executive 

officer, chief finance officer or other 

senior official as described in paragraph 

(g)(2) of this section pre-approves the 

withdrawal or series of withdrawals. 

The written notice must: 

(i) Be signed by the chief executive 

officer, chief finance officer or other 

senior official that pre-approved the 

withdrawal, and give notice that the 

futures commission merchant has 

withdrawn or intends to withdraw more 

than 25 percent of its residual interest 

in accounts holding 30.7 customer 

funds; 

(ii) Include a description of the 

reasons for the withdrawal or series of 

withdrawals; 

(iii) List the amount of funds provided 

to each recipient and the name of each 

recipient; 

(iv) Include the current estimate of the 

amount of the futures commission 

merchant’s residual interest in the 30.7 

customer funds after the withdrawal; 

(v) Contain a representation by the 

chief executive officer, chief finance 

officer or other senior official as 

described in paragraph (g)(3) of this 

section that pre-approved the 

withdrawal, or series of withdrawals, 

that to such person’s knowledge and 

reasonable belief, the futures 

commission merchant remains in 

compliance with the secured amount 

requirements after the withdrawal. The 

chief executive officer, chief finance 

officer or other appropriate senior 

official as described in paragraph (g)(2) 

of this section must consider the daily 

30.7 calculation as of the close of 

business on the previous business day 

and any other factors that may cause a 

material change in the futures 

commission’s residual interest since the 

close of business the previous business 

day, including known unsecured 

customer debits or deficits, current day 

market activity and any other 

withdrawals made from the 30.7 

customer accounts; and 

(vi) Any such written notice filed 

with the Commission must be filed via 

electronic transmission using a form of 

user authentication assigned in 

accordance with procedures established 

by or approved by the Commission, and 

otherwise in accordance with 

instruction issued by or approved by the 

Commission. Any such electronic 

submission must clearly indicate the 

registrant on whose behalf such filing is 

made and the use of such user 

authentication in submitting such filing 

will constitute and become a substitute 

for the manual signature of the 

authorized signer. Any written notice 

filed must be followed up with direct 

communication to the regional office of 

Commission which has supervisory 

authority over the futures commission 

merchant whereby the Commission 

acknowledges receipt of the notice. 

(5) After making a withdrawal 

requiring the approval and notice 

required in paragraphs (c)(1) and (c)(2) 

of this section, and before the next daily 

secured amount calculation, no futures 

commission merchant may make any 

further withdrawals from accounts 

holding 30.7 customer funds, except to 

or for the benefit of 30.7 customers, 

without, for each withdrawal, obtaining 

the approval required under paragraph 

(c)(1) of this section and filing a written 

notice with the Commission under 

paragraph (g)(4)(vi) of this section and 

its designated self-regulatory 

organization signed by the chief 

executive officer, chief finance officer, 

or other senior official. The written 

notice must: 

(i) List the amount of funds provided 

to each recipient and each recipient’s 

name; 

(ii) Disclose the reason for each 

withdrawal; 

(iii) Confirm that the chief executive 

officer, chief finance officer, or other 

senior official (and the identity of the 

person if different from the person who 

signed the notice) pre-approved the 

withdrawal in writing; 

(iv) Disclose the current estimate of 

the futures commission merchant’s 

remaining total residual interest in the 

secured accounts holding 30.7 customer 

funds after the withdrawal; and 

(v) Include a representation that to the 

best of the notice signatory’s knowledge 

and reasonable belief the futures 

commission merchant remains in 

compliance with the secured amount 

requirements after the withdrawal. 

(6) If a futures commission merchant 

withdraws funds that are not for the 

benefit of 30.7 customers from the 

separate accounts holding 30.7 customer 

funds, and the withdrawal causes the 

futures commission merchant to not 

hold sufficient funds in the separate 

accounts for the benefit of the 30.7 

customers to meet its targeted residual 

interest, as required to be computed 


TKELleY on DSK3SPTVN1PROD with RULES2
68652 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

under § 1.11 of this chapter, the futures 

commission merchant must deposit its 

own funds into the separate accounts for 

the benefit of 30.7 customers to restore 

the account balance to the targeted 

residual interest amount on the next 

business day, or, if appropriate, revise 

the futures commission merchant’s 

targeted amount of residual interest 

pursuant to the policies and procedures 

required by § 1.11 of this chapter. 

Notwithstanding the foregoing, if the 

futures commission merchant’s residual 

interest in separate accounts for the 

benefit of 30.7 customers is less than the 

amount required to be maintained by 

paragraph (f) of this section at any 

particular point in time, the futures 

commission merchant must 

immediately restore the residual interest 

to exceed the sum of such amounts. Any 

proprietary funds deposited in the 30.7 

customer accounts must be 

unencumbered and otherwise compliant 

with § 1.25 of this chapter, as 

applicable. 

(7) Notwithstanding any other 

provision of this part, a futures 

commission merchant may not 

withdraw funds from 30.7 accounts, 

except withdrawals that are made for 

the benefit of 30.7 customers, unless the 

futures commission merchant follows 

its policies and procedures required by 

§ 1.11 of this chapter. 

(h) Permitted investments and 

deposits of 30.7 customer funds. (1) A 

futures commission merchant may 

invest 30.7 customer funds subject to, 

and in compliance with, the terms and 

conditions of § 1.25 of this chapter. 

Regulation 1.25 of this chapter shall 

apply to the investment of 30.7 

customer funds as if such funds 

comprised customer funds or customer 

money subject to segregation pursuant 

to section 4d of the Act and the 

regulations thereunder. 

(2) Each futures commission merchant 

that invests money, securities or 

property on behalf of 30.7 customers 

must keep a record showing the 

following: 

(i) The date on which such 

investments were made; 

(ii) The name of the person through 

whom such investments were made; 

(iii) The amount of money or current 

market value of securities so invested; 

(iv) A description of the obligations in 

which such investments were made, 

including CUSIP or ISIN numbers; 

(v) The identity of the depositories or 

other places where such investments are 

maintained; 

(vi) The date on which such 

investments were liquidated or 

otherwise disposed of and the amount 

of money received or current market 

value of securities received as a result 

of such disposition; 

(vii) The name of the person to or 

through whom such investments were 

disposed of; and 

(viii) A daily valuation for each 

instrument and readily available 

documentation supporting the daily 

valuation for each instrument. Such 

supporting documentation must be 

sufficient to enable third parties to 

verify the valuations and the accuracy of 

any information from external sources 

used in those valuations. 

(3) Any 30.7 customer funds 

deposited in a bank or trust company 

located in the United States or in a 

foreign jurisdiction must be available for 

immediate withdrawal upon the 

demand of the futures commission 

merchant. 

(4) Futures commission merchants 

that invest 30.7 customer funds in 

instruments described in § 1.25 of this 

chapter shall include such instruments 

in the computation of its secured 

amount requirements, required under 

paragraph (l) of this section, at values 

that at no time exceed current market 

value, determined as of the close of the 

market on the date for which such 

computation is made. 

(i) Responsibility for § 1.25 investment 

losses. A futures commission merchant 

shall bear sole financial responsibility 

for any losses resulting from the 

investment of 30.7 customer funds in 

instruments described in § 1.25 of this 

chapter. No investment losses shall be 

borne or otherwise allocated to the 30.7 

customers of the futures commission 

merchant. 

(j) Loans by futures commission 

merchants; treatment of proceeds. A 

futures commission merchant may lend 

its own funds to 30.7 customers on 

securities and property pledged, or from 

repledging or selling such securities and 

property pursuant to specific written 

agreement with such 30.7 customers. 

The proceeds of such loans used to 

purchase, margin, guarantee, or secure 

the trades, contracts, or commodity 

options of 30.7 customers shall be 

treated and dealt with by a futures 

commission merchant as belonging to 

such 30.7 customers. A futures 

commission merchant may not loan 

funds on an unsecured basis to finance 

a 30.7 customer’s foreign futures and 

foreign options trading, nor may a 

futures commission merchant loan 

funds to a 30.7 customer secured by the 

30.7 customer’s trading account. 

(k) Permitted withdrawals. A futures 

commission merchant may withdraw 

funds from 30.7 customer accounts in 

an amount necessary in the normal 

course of business to margin, guarantee, 

secure, transfer, or settle 30.7 customers’ 

foreign futures or foreign option 

positions with a foreign broker or 

clearing organization. A futures 

commission merchant also may 

withdraw funds from 30.7 customer 

accounts to pay commissions, 

brokerage, interest, taxes, storage, and 

other charges lawfully accruing in 

connection with the 30.7 customers’ 

foreign futures and foreign options 

positions. 

(l) Daily computation of 30.7 

customer secured amount requirement 

and details regarding the holding and 

investing of 30.7 customer funds. (1) 

Each futures commission merchant is 

required to prepare a Statement of 

Secured Amounts and Funds Held in 

Separate Accounts for 30.7 Customers 

Pursuant to Commission Regulation 

30.7 contained in the Form 1–FR–FCM 

as of the close of each business day. 

Futures commission merchants that 

invest funds set aside as the foreign 

futures or foreign options secured 

amount in instruments described in 

§ 1.25 of this chapter shall include such 

instruments in the computation of its 

secured amount requirements at values 

that at no time exceed current market 

value, determined as of the close of the 

market on the date for which such 

computation is made. Nothing in this 

paragraph shall affect the requirement 

that a futures commission merchant at 

all times maintain sufficient money, 

securities and property to cover its total 

obligations to all 30.7 customers, in 

accordance with paragraph (a) of this 

section. 

(2) A futures commission merchant 

may offset any net deficit in a particular 

30.7 customer’s account against the 

current market value of readily 

marketable securities, less deductions 

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

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

and Exchange Commission (17 CFR 

240.15c3–1(c)(2)(vi)), held for the same 

particular 30.7 customer’s account in 

computing the daily Foreign Futures 

and Foreign Options Secured Amount. 

Futures commission merchants that 

establish and enforce written policies 

and procedures to assess the credit risk 

of commercial paper, convertible debt 

instruments, or nonconvertible debt 

instruments in accordance with Rule 

240.15c3–1(c)(2)(vi) of the Securities 

and Exchange Commission (17 CFR 

240.15c3–1(c)(2)(vi)) may apply the 

lower haircut percentages specified in 

Rule 240.15c3–1(c)(2)(vi) for such 

commercial paper, convertible debt 

instruments and nonconvertible debt 

instruments. The futures commission 

merchant must maintain a security 

interest in the securities, including a 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68653 

written authorization to liquidate the 

securities at the futures commission 

merchant’s discretion, and must set 

aside the securities in a safekeeping 

account compliant with paragraph (c) of 

this section. 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)). 

(3) Each futures commission merchant 

is required to submit to the Commission 

and to the firm’s designated selfregulatory organization the daily 

Statement of Secured Amounts and 

Funds Held in Separate Accounts for 

30.7 Customers pursuant to Commission 

Regulation 30.7 required by paragraph 

(l)(1) of this section by noon the 

following business day. 

(4) Each futures commission merchant 

shall file the Statement of Secured 

Amounts and Funds Held in Separate 

Accounts for 30.7 Customers pursuant 

to Commission Regulation 30.7 required 

by paragraph (l)(1) of this section in an 

electronic format using a form of user 

authentication assigned in accordance 

with procedures established or 

approved by the Commission. 

(5) Each futures commission merchant 

is required to submit to the Commission 

and to the firm’s designated selfregulatory organization a report listing 

the names of all banks, trust companies, 

futures commission merchants, 

derivatives clearing organizations, 

foreign brokers, foreign clearing 

organizations, or any other depository or 

custodian holding 30.7 customer funds 

as of the fifteenth day of the month, or 

the first business day thereafter, and the 

last business day of each month. This 

report must include: 

(i) The name and location of each 

depository holding 30.7 customer funds; 

(ii) The total amount of 30.7 customer 

funds held by each depository listed in 

paragraph (l)(5) of this section; and 

(iii) The total amount of cash and 

investments that each depository listed 

in paragraph (l)(5) of this section holds 

for the futures commission merchant. 

The futures commission merchant must 

report the following investments: 

(A) Obligations of the United States 

and obligations fully guaranteed as to 

principal and interest by the United 

States (U.S. government securities); 

(B) General obligations of any State or 

of any political subdivision of a State 

(municipal securities); 

(C) General obligation issued by any 

enterprise sponsored by the United 

States (government sponsored enterprise 

securities); 

(D) Certificates of deposit issued by a 

bank; 

(E) Commercial paper fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation; 

(F) Corporate notes or bonds fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation; and 

(G) Interests in money market mutual 

funds. 

(6) Each futures commission merchant 

must report the total amount of 

customer-owned securities held by the 

futures commission merchant as 30.7 

customer funds and must list the names 

and locations of the depositories 

holding customer-owned securities. 

(7) Each futures commission merchant 

must report the total amount of 30.7 

customer funds that have been used to 

purchase securities under agreements to 

resell the securities (reverse repurchase 

transactions). 

(8) Each futures commission merchant 

must report which, if any, of the 

depositories holding 30.7 customer 

funds under paragraph (l)(5) of this 

section are affiliated with the futures 

commission merchant. 

(9) Each futures commission merchant 

shall file the detailed list of depositories 

required by paragraph (l)(5) of this 

section by 11:59 p.m. the next business 

day in an electronic format using a form 

of user authentication assigned in 

accordance with procedures established 

or approved by the Commission. 

(10) Each futures commission 

merchant shall retain its daily secured 

amount computation, the Statement of 

Secured Amounts and Funds Held in 

Separate Accounts for 30.7 Customers 

pursuant to Commission Regulation 

30.7 required by paragraph (l)(1) of this 

section, and the detailed list of 

depositories required by paragraph (l)(5) 

of this section, together with all 

supporting documentation, in 

accordance with the requirements of 

§ 1.31 of this chapter. 

■ 27. Add appendix E to part 30 to read 

as follows: 

Appendix E to Part 30— 

Acknowledgment Letter for CFTC 

Regulation 30.7 Customer Secured 

Account 

[Date] 

[Name and Address of Depository] 

We refer to the Secured Amount 

Account(s) which [Name of Futures 

Commission Merchant] (‘‘we’’ or ‘‘our’’) have 

opened or will open with [Name of 

Depository] (‘‘you’’ or ‘‘your’’) entitled: 

[Name of Futures Commission Merchant] [if 

applicable, add ‘‘FCM Customer Omnibus 

Account’’] CFTC Regulation 30.7 Customer 

Secured Account under Section 4(b) of the 

Commodity Exchange Act [and, if 

applicable, ‘‘, Abbreviated as [short title 

reflected in the depository’s electronic 

system]’’] 

Account Number(s): [ ] 

(collectively, the ‘‘Account(s)’’). 

You acknowledge that we have opened or 

will open the above-referenced Account(s) 

for the purpose of depositing, as applicable, 

money, securities and other property 

(collectively ‘‘Funds’’) of customers who 

trade foreign futures and/or foreign options 

(as such terms are defined in U.S. 

Commodity Futures Trading Commission 

(‘‘CFTC’’) Regulation 30.1, as amended); that 

the Funds held by you, hereafter deposited 

in the Account(s) or accruing to the credit of 

the Account(s), will be kept separate and 

apart and separately accounted for on your 

books from our own funds and from any 

other funds or accounts held by us, in 

accordance with the provisions of the 

Commodity Exchange Act, as amended (the 

‘‘Act’’), and Part 30 of the CFTC’s regulations, 

as amended; that the Funds may not be 

commingled with our own funds in any 

proprietary account we maintain with you; 

and that the Funds must otherwise be treated 

in accordance with the provisions of Section 

4(b) of the Act and CFTC Regulation 30.7. 

Furthermore, you acknowledge and agree 

that such Funds may not be used by you or 

by us to secure or guarantee any obligations 

that we might owe to you, and they may not 

be used by us to secure or obtain credit from 

you. You further acknowledge and agree that 

the Funds in the Account(s) shall not be 

subject to any right of offset or lien for or on 

account of any indebtedness, obligations or 

liabilities we may now or in the future have 

owing to you. This prohibition does not 

affect your right to recover funds advanced 

in the form of cash transfers, lines or credit, 

repurchase agreements or other similar 

liquidity arrangements you make in lieu of 

liquidating non-cash assets held in the 

Account(s) or in lieu of converting cash held 

in the Account(s) to cash in a different 

currency. 

In addition, you agree that the Account(s) 

may be examined at any reasonable time by 

the director of the Division of Swap Dealer 

and Intermediary Oversight of the CFTC or 

the director of the Division of Clearing and 

Risk of the CFTC, or any successor divisions, 

or such directors’ designees, or an 

appropriate officer, agent or employee of our 

designated self-regulatory organization 

(‘‘DSRO’’), [Name of DSRO], and this letter 

constitutes the authorization and direction of 

the undersigned on our behalf to permit any 

such examination to take place without 

further notice or consent from us. 

You agree to reply promptly and directly 

to any request for confirmation of account 

balances or provision of any other 

information regarding or related to the 

Account(s) from the director of the Division 

of Swap Dealer and Intermediary Oversight 

of the CFTC or the director of the Division 


TKELleY on DSK3SPTVN1PROD with RULES2
68654 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

of Clearing and Risk of the CFTC, or any 

successor divisions, or such directors’ 

designees, or an appropriate officer, agent, or 

employee of [Name of DSRO], acting in its 

capacity as our DSRO, and this letter 

constitutes the authorization and direction of 

the undersigned on our behalf to release the 

requested information without further notice 

to or consent from us. 

You further acknowledge and agree that, 

pursuant to authorization granted by us to 

you previously or herein, you have provided, 

or will promptly provide following the 

opening of the Account(s), the director of the 

Division of Swap Dealer and Intermediary 

Oversight of the CFTC, or any successor 

division, or such director’s designees, with 

technological connectivity, which may 

include provision of hardware, software, and 

related technology and protocol support, to 

facilitate direct, read-only electronic access 

to transaction and account balance 

information for the Account(s). This letter 

constitutes the authorization and direction of 

the undersigned on our behalf for you to 

establish this connectivity and access if not 

previously established, without further 

notice to or consent from us. 

The parties agree that all actions on your 

part to respond to the above information and 

access requests will be made in accordance 

with, and subject to, such usual and 

customary authorization verification and 

authentication policies and procedures as 

may be employed by you to verify the 

authority of, and authenticate the identity of, 

the individual making any such information 

or access request, in order to provide for the 

secure transmission and delivery of the 

requested information or access to the 

appropriate recipient(s). 

We will not hold you responsible for acting 

pursuant to any information or access request 

from the director of the Division of Swap 

Dealer and Intermediary Oversight of the 

CFTC or the director of the Division of 

Clearing and Risk of the CFTC, or any 

successor divisions, or such directors’ 

designees, or an appropriate officer, agent, or 

employee of [Name of DSRO], acting in its 

capacity as our DSRO, upon which you have 

relied after having taken measures in 

accordance with your applicable policies and 

procedures to assure that such request was 

provided to you by an individual authorized 

to make such a request. 

In the event we become subject to either a 

voluntary or involuntary petition for relief 

under the U.S. Bankruptcy Code, we 

acknowledge that you will have no obligation 

to release the Funds held in the Account(s), 

except upon instruction of the Trustee in 

Bankruptcy or pursuant to the Order of the 

respective U.S. Bankruptcy Court. 

Notwithstanding anything in the foregoing 

to the contrary, nothing contained herein 

shall be construed as limiting your right to 

assert any right of offset or lien on assets that 

are not 30.7 customer funds maintained in 

the Account(s), or to impose such charges 

against us or any proprietary account 

maintained by us with you. Further, it is 

understood that amounts represented by 

checks, drafts or other items shall not be 

considered to be part of the Account(s) until 

finally collected. Accordingly, checks, drafts 

and other items credited to the Account(s) 

and subsequently dishonored or otherwise 

returned to you or reversed, for any reason, 

and any claims relating thereto, including but 

not limited to claims of alteration or forgery, 

may be charged back to the Account(s), and 

we shall be responsible to you as a general 

endorser of all such items whether or not 

actually so endorsed. 

You may conclusively presume that any 

withdrawal from the Account(s) and the 

balances maintained therein are in 

conformity with the Act and CFTC 

regulations without any further inquiry, 

provided that, in the ordinary course of your 

business as a depository, you have no notice 

of or actual knowledge of a potential 

violation by us of any provision of the Act 

or Part 30 of the CFTC regulations that relates 

to the holding of customer funds; and you 

shall not in any manner not expressly agreed 

to herein be responsible to us for ensuring 

compliance by us with such provisions of the 

Act and CFTC regulations; however, the 

aforementioned presumption does not affect 

any obligation you may otherwise have under 

the Act or CFTC regulations. 

You may, and are hereby authorized to, 

obey the order, judgment, decree or levy of 

any court of competent jurisdiction or any 

governmental agency with jurisdiction, 

which order, judgment, decree or levy relates 

in whole or in part to the Account(s). In any 

event, you shall not be liable by reason of any 

action or omission to act pursuant to any 

such order, judgment, decree or levy, to us 

or to any other person, firm, association or 

corporation even if thereafter any such order, 

decree, judgment or levy shall be reversed, 

modified, set aside or vacated. 

The terms of this letter agreement shall 

remain binding upon the parties, their 

successors and assigns and, for the avoidance 

of doubt, regardless of a change in the name 

of either party. This letter agreement 

supersedes and replaces any prior agreement 

between the parties in connection with the 

Account(s), including but not limited to any 

prior acknowledgment letter agreement, to 

the extent that such prior agreement is 

inconsistent with the terms hereof. In the 

event of any conflict between this letter 

agreement and any other agreement between 

the parties in connection with the 

Account(s), this letter agreement shall govern 

with respect to matters specific to Section 

4(b) of the Act and the CFTC’s regulations 

thereunder, as amended. 

This letter agreement shall be governed by 

and construed in accordance with the laws 

of [Insert governing law] without regard to 

the principles of choice of law. 

Please acknowledge that you agree to abide 

by the requirements and conditions set forth 

above by signing and returning to us the 

enclosed copy of this letter agreement, and 

that you further agree to provide a copy of 

this fully executed letter agreement directly 

to the CFTC (via electronic means in a format 

and manner determined by the CFTC) and to 

[Name of DSRO], acting in its capacity as our 

DSRO. We hereby authorize and direct you 

to provide such copies without further notice 

to or consent from us, no later than three 

business days after opening the Account(s) or 

revising this letter agreement, as applicable. 

[Name of Futures Commission Merchant] 

By: 

Print Name: 

Title: 

ACKNOWLEDGED AND AGREED: 

[Name of Depository] 

By: 

Print Name: 

Title: 

Contact Information: [Insert phone number 

and email address] 

Date: 

■ 28. Add appendix F to part 30 to read 

as follows: 

Appendix F to Part 30— 

Acknowledgment Letter for CFTC 

Regulation 30.7 Customer Secured 

Money Market Mutual Fund Account 

[Date] 

[Name and Address of Money Market Mutual 

Fund] 

We propose to invest funds held by [Name 

of Futures Commission Merchant] (‘‘we’’ or 

‘‘our’’) on behalf of our customers in shares 

of [Name of Money Market Mutual Fund] 

(‘‘you’’ or ‘‘your’’) under account(s) entitled 

(or shares issued to): 

[Name of Futures Commission Merchant] [if 

applicable, add ‘‘FCM Customer Omnibus 

Account’’] CFTC Regulation 30.7 Customer 

Secured Money Market Mutual Fund 

Account under Section 4(b) of the 

Commodity Exchange Act [and, if 

applicable, ‘‘, Abbreviated as [short title 

reflected in the depository’s electronic 

system]’’] 

Account Number(s): [ ] 

(collectively, the ‘‘Account(s)’’). 

You acknowledge that we are holding these 

funds, including any shares issued and 

amounts accruing in connection therewith 

(collectively, the ‘‘Shares’’), for the benefit of 

customers who trade foreign futures and/or 

foreign options (as such terms are defined in 

U.S. Commodity Futures Trading 

Commission (‘‘CFTC’’) Regulation 30.1, as 

amended); that the Shares held by you, 

hereafter deposited in the Account(s) or 

accruing to the credit of the Account(s), will 

be kept separate and apart and separately 

accounted for on your books from our own 

funds and from any other funds or accounts 

held by us in accordance with the provisions 

of the Commodity Exchange Act, as amended 

(the ‘‘Act’’), and Part 30 of the CFTC’s 

regulations, as amended; and that the Shares 

must otherwise be treated in accordance with 

the provisions of Section 4(b) of the Act and 

CFTC Regulations 1.25 and 30.7. 

Furthermore, you acknowledge and agree 

that such Shares may not be used by you or 

by us to secure or guarantee any obligations 

that we might owe to you, and they may not 

be used by us to secure or obtain credit from 

you. You further acknowledge and agree that 

the Shares in the Account(s) shall not be 

subject to any right of offset or lien for or on 

account of any indebtedness, obligations or 

liabilities we may now or in the future have 

owing to you. 

In addition, you agree that the Account(s) 

may be examined at any reasonable time by 

the director of the Division of Swap Dealer 

and Intermediary Oversight of the CFTC or 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68655 

the director of the Division of Clearing and 

Risk of the CFTC, or any successor divisions, 

or such directors’ designees, or an 

appropriate officer, agent or employee of our 

designated self-regulatory organization 

(‘‘DSRO’’), [Name of DSRO], and this letter 

constitutes the authorization and direction of 

the undersigned on our behalf to permit any 

such examination to take place without 

further notice to or consent from us. 

You agree to reply promptly and directly 

to any request for confirmation of account 

balances or provision of any other 

information regarding or related to the 

Account(s) from the director of the Division 

of Swap Dealer and Intermediary Oversight 

of the CFTC or the director of the Division 

of Clearing and Risk of the CFTC, or any 

successor divisions, or such directors’ 

designees, or an appropriate officer, agent, or 

employee of [Name of DSRO], acting in its 

capacity as our DSRO, and this letter 

constitutes the authorization and direction of 

the undersigned on our behalf to release the 

requested information, without further notice 

to or consent from us. 

You further acknowledge and agree that, 

pursuant to authorization granted by us to 

you previously or herein, you have provided, 

or will promptly provide following the 

opening of the Account(s), the director of the 

Division of Swap Dealer and Intermediary 

Oversight of the CFTC, or any successor 

division, or such director’s designees, with 

technological connectivity, which may 

include provision of hardware, software, and 

related technology and protocol support, to 

facilitate direct, read-only electronic access 

to transaction and account balance 

information for the Account(s). This letter 

constitutes the authorization and direction of 

the undersigned on our behalf for you to 

establish this connectivity and access if not 

previously established, without further 

notice to or consent from us. 

The parties agree that all actions on your 

part to respond to the above information and 

access requests will be made in accordance 

with, and subject to, such reasonable and 

customary authorization verification and 

authentication policies and procedures as 

may be employed by you to verify the 

authority of, and authenticate the identity of, 

the individual making any such information 

or access request, in order to provide for the 

secure transmission and delivery of the 

requested information or access to the 

appropriate recipient(s). 

We will not hold you responsible for acting 

pursuant to any information or access request 

from the director of the Division of Swap 

Dealer and Intermediary Oversight of the 

CFTC or the director of the Division of 

Clearing and Risk of the CFTC, or any 

successor divisions, or such directors’ 

designees, or an appropriate officer, agent, or 

employee of [Name of DSRO], acting in its 

capacity as our DSRO, upon which you have 

relied after having taken measures in 

accordance with your applicable policies and 

procedures to assure that such request was 

provided to you by an individual authorized 

to make such a request. 

In the event we become subject to either a 

voluntary or involuntary petition for relief 

under the U.S. Bankruptcy Code, we 

acknowledge that you will have no obligation 

to release the Shares held in the Account(s), 

except upon instruction of the Trustee in 

Bankruptcy or pursuant to the Order of the 

respective U.S. Bankruptcy Court. 

Notwithstanding anything in the foregoing 

to the contrary, nothing contained herein 

shall be construed as limiting your right to 

assert any right of offset or lien on assets that 

are not Shares maintained in the Account(s), 

or to impose such charges against us or any 

proprietary account maintained by us with 

you. Further, it is understood that amounts 

represented by checks, drafts or other items 

shall not be considered to be part of the 

Account(s) until finally collected. 

Accordingly, checks, drafts and other items 

credited to the Account(s) and subsequently 

dishonored or otherwise returned to you or 

reversed, for any reason and any claims 

relating thereto, including but not limited to 

claims of alteration or forgery, may be 

charged back to the Account(s), and we shall 

be responsible to you as a general endorser 

of all such items whether or not actually so 

endorsed. 

You may conclusively presume that any 

withdrawal from the Account(s) and the 

balances maintained therein are in 

conformity with the Act and CFTC 

regulations without any further inquiry, 

provided that, in the ordinary course of your 

business as a depository, you have no notice 

of or actual knowledge of a potential 

violation by us of any provision of the Act 

or Part 30 of the CFTC regulations that relates 

to the holding of customer funds; and you 

shall not in any manner not expressly agreed 

to herein be responsible to us for ensuring 

compliance by us with such provisions of the 

Act and CFTC regulations; however, the 

aforementioned presumption does not affect 

any obligation you may otherwise have under 

the Act or CFTC regulations. 

You may, and are hereby authorized to, 

obey the order, judgment, decree or levy of 

any court of competent jurisdiction or any 

governmental agency with jurisdiction, 

which order, judgment, decree or levy relates 

in whole or in part to the Account(s). In any 

event, you shall not be liable by reason of any 

action or omission to act pursuant to any 

such order, judgment, decree or levy, to us 

or to any other person, firm, association or 

corporation even if thereafter any such order, 

decree, judgment or levy shall be reversed, 

modified, set aside or vacated. 

We are permitted to invest customers’ 

funds in money market mutual funds 

pursuant to CFTC Regulation 1.25. That rule 

sets forth the following conditions, among 

others, with respect to any investment in a 

money market mutual fund: 

(1) The net asset value of the fund must be 

computed by 9:00 a.m. of the business day 

following each business day and be made 

available to us by that time; 

(2) The fund must be legally obligated to 

redeem an interest in the fund and make 

payment in satisfaction thereof by the close 

of the business day following the day on 

which we make a redemption request except 

as otherwise specified in CFTC Regulation 

1.25(c)(5)(ii); and, 

(3) The agreement under which we invest 

customers’ funds must not contain any 

provision that would prevent us from 

pledging or transferring fund shares. 

The terms of this letter agreement shall 

remain binding upon the parties, their 

successors and assigns and, for the avoidance 

of doubt, regardless of a change in the name 

of either party. This letter agreement 

supersedes and replaces any prior agreement 

between the parties in connection with the 

Account(s), including but not limited to any 

prior acknowledgment letter agreement, to 

the extent that such prior agreement is 

inconsistent with the terms hereof. In the 

event of any conflict between this letter 

agreement and any other agreement between 

the parties in connection with the 

Account(s), this letter agreement shall govern 

with respect to matters specific to Section 

4(b) of the Act and the CFTC’s regulations 

thereunder, as amended. 

This letter agreement shall be governed by 

and construed in accordance with the laws 

of [Insert governing law] without regard to 

the principles of choice of law. 

Please acknowledge that you agree to abide 

by the requirements and conditions set forth 

above by signing and returning to us the 

enclosed copy of this letter agreement, and 

that you further agree to provide a copy of 

this fully executed letter agreement directly 

to the CFTC (via electronic means in a format 

and manner determined by the CFTC) and to 

[Name of DSRO], acting in its capacity as our 

DSRO. We hereby authorize and direct you 

to provide such copies without further notice 

to or consent from us, no later than three 

business days after opening the Account(s) or 

revising this letter agreement, as applicable. 

[Name of Futures Commission Merchant] 

By: 

Print Name: 

Title: 

ACKNOWLEDGED AND AGREED: 

[Name of Money Market Mutual Fund] 

By: 

Print Name: 

Title: 

Contact Information: [Insert phone number 

and email address] 

DATE: 

PART 140—ORGANIZATION, 

FUNCTIONS, AND PROCEDURES OF 

THE COMMISSION 

■ 29. The authority citation for part 140 

is revised to read as follows: 

Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 

13(d), 13(e), and 16(b). 

■ 30. Amend § 140.91 to: 

■ a. Revise the section heading; 

■ b. Redesignate paragraph (a)(8) as 

paragraph (a)(12), and paragraph (a)(7) 

as paragraph (a)(8); 

■ c. Add new paragraphs (a)(7), (a)(9), 

(a)(10), and (a)(11); and 

■ d. Revise paragraph (b). 

The revisions and additions read as 

follows: 

§ 140.91 Delegation of authority to the 

Director of the Division of Clearing and Risk 

and to the Director of the Division of Swap 

Dealer and Intermediary Oversight. 

(a) * * * 


TKELleY on DSK3SPTVN1PROD with RULES2
68656 Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 

1 ‘‘Customer Protection Rules’’ 

2 In this regard, I applaud the efforts of the 

Chicago Mercantile Exchange Inc. (CME) and the 

National Futures Association (NFA) to protect 

customer accounts by introducing daily electronic 

confirmation services. This new technology allows 

CME and NFA to review balances held at bank 

depositories and compare the balances with 

customer account information provide by futures 

commission merchants (FCMs). 

(7) All functions reserved to the 

Commission in § 1.20 of this chapter. 

* * * * * 

(9) All functions reserved to the 

Commission in § 1.26 of this chapter. 

(10) All functions reserved to the 

Commission in § 1.52 of this chapter. 

(11) All functions reserved to the 

Commission in § 30.7 of this chapter. 

* * * * * 

(b) The Director of the Division of 

Clearing and Risk and the Director of 

the Division of Swap Dealer and 

Intermediary Oversight may submit any 

matter which has been delegated to him 

or her under paragraph (a) of this 

section to the Commission for its 

consideration. 

Issued in Washington, DC, on November 1, 

2013, by the Commission. 

Melissa D. Jurgens, 

Secretary of the Commission. 

Appendices to Enhancing Protections 

Afforded Customers and Customer 

Funds Held by Futures Commission 

Merchants and Derivatives Clearing 

Organizations—Commission Voting 

Summary and Statements of 

Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Chilton and Wetjen voted in 

the affirmative. Commissioner O’Malia voted 

in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support this final set of customer 

protection reforms, which comprehensively 

enhances the protection around the handling 

and segregation of futures and swaps 

customer funds. 

Segregation of customer funds is the core 

foundation of the commodity futures and 

swaps markets. Segregation must be 

maintained at all times. That means every 

moment of every day. 

Market events, though, of these last two 

years highlighted that the Commission must 

do everything within our authorities and 

resources to strengthen oversight programs 

and protection of customer funds. 

These reforms are the sixth set of rules 

finalized by this Commission during a twoyear process to ensure that customers have 

confidence that their funds are segregated 

and protected. These reforms benefit from the 

Commission’s thorough review of existing 

customer protection rules—looking for any 

gaps in those rules and the oversight of these 

markets. 

They benefit from significant public input, 

including staff roundtables, the Technology 

Advisory Committee, the Agricultural 

Advisory Committee and numerous reports 

submitted by market participants. 

They also benefit from input through a 

coordinated effort of the CFTC with other 

regulators; the self-regulatory organizations 

(SROs), such as the CME and the National 

Futures Association (NFA); as well as 

congressional reports and input on these 

matters. I support these rules, in summary, 

for at least six reasons: 

• First, FCMs and clearing members must 

significantly enhance their supervision of 

and accounting for customer funds. They will 

have to put in place additional policies and 

procedures for these new protections. 

• Second, significant enhancements 

around outside accounting and auditing— 

regarding the actual accountants or certified 

public accountants that audit futures 

commission merchants (FCMs), and also 

regarding the SROs and how they audit the 

FCMs. 

• Third, significant customer fund 

protections with regard to how funds are 

moved around. Basically, when a firm moves 

money within a firm, how can they move that 

money around? Some of these reforms were 

adopted by SROs last year, such as requiring 

senior management signoff, and the preapproval of moving those monies. There are 

also significant new changes to required 

acknowledgement letters from the banks and 

custodians. 

• Fourth, reforms related to investing in 

foreign futures accounts. Our Part 30 regime 

really had not kept pace with protections for 

domestic futures accounts. With these 

reforms and the reforms that the NFA had 

put in place last year, investing in foreign 

futures accounts will be significantly aligned 

with the domestic protections. 

• Fifth, there’s significant new 

transparency. Transparency to the 

regulators—we will be able to see 

electronically custodial accounts and cash 

accounts on a daily basis. There is 

transparency to customers, as well, with the 

twice-a-month statements regarding the 

details of their funds in the investment 

accounts. These reforms also have been put 

in place by the SROs, but it is important that 

we do this at the federal level as well, and 

put them in our rules. 

• Sixth, the final rules include provisions 

on capital and residual interest of the FCMs 

themselves. This was quite possibly the most 

debated feature of these reforms, but I think 

they are important. In response to 

commenters on this provision, we are 

phasing in compliance to smooth 

implementation. This section calls for studies 

and roundtables, and provides for a five-year 

phase in on these matters. 

It is important that we look very closely at 

the law and work to ensure that one 

customer’s funds or property are not used in 

some way to secure or guarantee other 

customer’s positions. 

Prior to this final rule set, the Commission 

already had made important improvements 

to protections for customers: 

• Amendments to rule 1.25 regarding the 

investment of funds that bring customers 

back to protections they had prior to 

exemptions the Commission granted between 

2000 and 2005. Importantly, this prevents 

use of customer funds for in-house lending 

through repurchase agreements; 

• Clearinghouses have to collect margin on 

a gross basis and FCMs are no longer able to 

offset one customer’s collateral against 

another and then send only the net to the 

clearinghouse; 

• The so-called ‘‘LSOC rule’’ (legal 

segregation with operational comingling) for 

swaps ensures customer money is protected 

individually all the way to the clearinghouse; 

• The Commission included customer 

protection enhancements in the final rule for 

designated contract markets. These 

provisions codify into rules staff guidance on 

minimum requirements for SROs regarding 

their financial surveillance of FCMs; and 

• Rules enhancing the protection of 

customer funds when entering into uncleared 

swap transactions. These reforms fulfill 

Congress’ mandate that counterparties of 

swap dealers be given a choice regarding 

whether or not they get the protections that 

come from segregation of monies and 

collateral they post as initial margin. 

Appendix 3—Dissenting Statement of 

Commissioner Scott D. O’Malia— 

Enhancing Protections Afforded 

Customers and Customer Funds Held by 

Futures Commission Merchants and 

Derivatives Clearing Organizations 1

I respectfully dissent from the 

Commission’s approval today of the final 

Customer Protection Rules. 

I supported the proposed rules because I 

wanted to solicit public comment and engage 

market participants in an open discussion 

about how the Commission should improve 

its customer protection regulatory oversight. 

In the wake of the global financial crisis, 

it is extremely important to intensify 

regulatory efforts to strengthen customer 

protection policies in order to promote the 

financial stability of the derivatives markets. 

There is no dispute customer protection must 

be the cornerstone of the Commission’s 

oversight. Sound customer protection 

policies and measures, such as the electronic 

customer verification confirmation services 

will improve the efficiency and transparency 

of financial markets.2

The Commission must promulgate 

workable regulations that provide clear 

guidance to industry participants and ensure 

cost-effective access to markets. Such 

regulations must be designed to address real 

weaknesses in the current regulatory regime 

and allow industry participants to continue 

with well-established industry practices that 

had nothing to do with the financial crisis or 

the recent bankruptcies of MF Global and 

Peregrine Financial. 

Unfortunately, the Commission’s customer 

protection rules fall short of these objectives. 

Instead of mitigating customer risk, the rules 


TKELleY on DSK3SPTVN1PROD with RULES2
Federal Register / Vol. 78, No. 220 / Thursday, November 14, 2013 / Rules and Regulations 68657 

3See e.g.; National Grain and Feed Association 

Comment Letter at 2 (Dec. 28, 2012) (stating that the 

Commission’s proposed changes ‘‘could have the 

unintended impact of disadvantaging smaller and 

mid-size FCMs that provide ‘hands-on’ service to 

many of the relatively smaller hedgers in 

agribusiness’’); Texas Cattle Feeders Association 

Comment Letter (Jan. 14, 2013) (warning that such 

changes ‘‘could have the potential to cause 

unintended consequences such as added costs 

eventually borne by customers’’); Iowa Cattlemen’s 

Association Comment Letter (Feb. 15, 2013) (‘‘it is 

imperative that the CFTC understand all sizes of 

businesses . . . [in order to have] . . . a better 

opportunity to write rules that provide a logical fit. 

Our fear is that if this rule is put in place, we will 

have members who will not take advantage of the 

risk management tools . . . .’’). 

4CEA § 4d(a)(2). 

5Futures Industry Association Comment Letter at 

16 (Feb. 15, 2013). 

6Customer Protection Rules at 313. 

7 § 1.52(c)(2). 8 § 1.52. 

create a false sense of security by imposing 

broad and ambiguous requirements and 

introducing another layer of governmental 

oversight. Even worse, they force a change in 

a longstanding and generally accepted 

industry practice that will likely result in 

seriously harmful consequences for small 

FCMs and their end-user customers. 

I do support several provisions that allow 

customers greater insight into the operations 

of an FCM. These provisions include: An 

improved FCM disclosure regime that will 

give customers new and critical information 

about their FCM exposures, elimination of 

the alternative method of calculating 

segregation requirements for § 30.7 funds 

(treatment of foreign futures or foreign 

options), improved reporting of segregated 

fund balances, and enhancements to risk 

management procedures. However, I am 

unable to support the final rule for the 

reasons stated below. 

Reinterpretation of the Residual Interest 

Deadline Will Result in Costly Prefunding of 

Margin Payments 

My main concern with the final rules is 

their radical reinterpretation of the 

longstanding residual interest deadline. This 

reinterpretation decreases the time in which 

customers’ margin calls must arrive to their 

FCM from the current three days to just one 

day. 

Such a change would mean a drastic 

increase in pre-funding of margin, perhaps 

nearly double the amounts currently 

required. As a result, many small 

agribusiness hedgers will have to consider 

alternative risk management tools or, even 

worse, will be forced out of the market.3 I am 

disappointed that yet again the Commission 

has rushed to implement a rule that 

disregards the express Congressional 

directive to protect end-users. 

I recognize that the Commodity Exchange 

Act (CEA) does not permit an FCM to use the 

money or property of one customer to margin 

the futures or option positions of another 

customer.4 Despite this fact, it has been the 

prevailing industry practice authorized by 

the Commission for decades. 

To the extent that the Commission must 

reinterpret this statutory provision, I believe 

this reinterpretation must be based on the 

thorough analysis of the market data and the 

full evaluation of the costs of strict 

compliance with the statute before 

implementing policy changes, and not after 

as is the case with the residual interest 

deadline. 

The residual interest deadline rule makes 

no effort to respond to the commenters’ 

concerns that the residual interest deadline 

would be especially costly for smaller FCMs 

and end-users.5 Given the express 

Congressional directive to protect end-users, 

I would have expected the Commission to 

conduct meaningful cost-benefit analysis to 

justify the costs when compared to the actual 

risk to customer accounts and the derivatives 

markets and to explain why the Commission 

could not have adopted an alternative 

approach. Regrettably, the Commission has 

failed to do so. 

Even the Commission’s own cost benefit 

analysis points out, while significantly 

understating the impact, that: 

‘‘Smaller FCMs may have more difficulty 

than large FCMs in absorbing the additional 

cost created by the requirements of the rules 

(particularly § 1.22). It is possible that some 

smaller FCMs may elect to stop operating as 

FCMs as a result of these costs.’’ 6

I cannot support a rule that will impose 

such onerous costs and compliance burdens 

on the smallest FCMs and small, nonsystemically relevant customers. 

Finally, although I support a phase-in 

compliance schedule for the residual interest 

deadline, I am disappointed that the 

Commission, in deciding whether to change 

the deadline at a future time, is not required 

to make such a decision based on data. 

Instead, the Commission will simply come 

up with another arbitrary residual interest 

deadline that has nothing to do with 

customer or FCM risk exposure. 

Yet again, the Commission has chosen to 

avoid fact-based analysis. I strongly believe 

that the Commission should utilize facts and 

data to make an informed decision about the 

appropriate time for the residual interest 

deadline. 

The Rules Fail To Provide a Clear Standard 

for Compliance. 

In addition to my serious concerns about 

the final rules’ treatment of the residual 

interest deadline, I am concerned that the 

rules unreasonably expand the scope of the 

new regulatory compliance regime without 

providing a clear regulatory objective. 

For example, the rules require that a SelfRegulatory Organization (SRO) supervisory 

program ‘‘address all areas of risk to which 

[FCMs] can reasonably be foreseen to be 

subject (emphasis added).’’ 7 This broad 

language requires the SRO to guess at what 

criteria the programs would be measured 

against, and under what framework the SRO 

would make this determination. In short, the 

new language does nothing but adds more 

ambiguity to the SRO’s customer protection 

program and increases the cost of compliance 

with vague requirements. 

Examination Experts do not add Value to the 

Customer Protection Regime 

I also have concerns about the requirement 

that each SRO supervisory program of its 

member FCMs be reviewed by an 

‘‘examinations expert.’’ 8 I question the 

benefit of this requirement given the fact that 

the Joint Audit Committee (JAC) currently 

performs this function. The JAC’s primary 

responsibility is to oversee the practices and 

procedures that each SRO must follow when 

it conducts audits and financial reviews of 

FCMs. This regulatory task is already in place 

and implemented in a less costly and more 

efficient manner than set forth in the final 

rules. 

Moreover, in light of the Commission’s 

regulatory oversight of all SROs and the 

Commission’s review of all JAC examination 

programs, this additional layer of review 

does not provide any benefit except for 

isolating the Commission from its primary 

responsibility to oversee customer protection 

programs. 

Customers Deserve Better Protections in 

Bankruptcy Proceedings 

Going forward, the Commission should 

address key customer protections in the areas 

of bankruptcy. Congress should make 

changes to the Bankruptcy Code to ensure 

that certain bankruptcy protections are 

afforded to FCM customers. Specifically, 

Congress should amend the pro-rata 

distribution rules in bankruptcy. Despite the 

Commission’s customer segregation 

requirements, individual customer accounts 

are still subject to a pro-rata distribution in 

bankruptcy. In addition to these changes to 

the Bankruptcy Code, the Commission 

should amend its rules to allow the 

Commission to appoint a trustee to oversee 

derivatives customers’ accounts in the 

bankruptcy of a broker-dealer FCM. 

Conclusion 

I support implementation of a rigorous 

customer protection program that provides 

clear and meaningful mechanisms for 

mitigating customer risks. However, the 

customer protection rules approved today 

have missed the mark. 

In sum, many of the new rules impose 

overly broad and nonsensical regulatory 

requirements and, in doing so, impede the 

industry’s ability to operate in an efficient 

manner. Regrettably, the negative effects will 

be felt most by farmers and other end-users, 

whose ability to hedge risk in a cost-effective 

manner will be hampered if not eliminated 

altogether. This is contrary to the 

Congressional directive, and I cannot support 

rules that result in such an outcome. 

[FR Doc. 2013–26665 Filed 11–13–13; 8:45 am] 

BILLING CODE 6351–01–P 


TKELleY on DSK3SPTVN1PROD with RULES2