This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

286 

Vol. 89, No. 2 

Wednesday, January 3, 2024 

FEDERAL TRADE COMMISSION 

16 CFR Part 1 

[File No. R407000] 

Petition for Rulemaking of PIRG and 

iFixit 

AGENCY: Federal Trade Commission. 

ACTION: Receipt of petition; request for 

comment. 

SUMMARY: Please take notice that the 

Federal Trade Commission 

(‘‘Commission’’) received a petition for 

rulemaking from the U.S. Public Interest 

Research Group Education Fund and 

iFixit. This petition requests that the 

Commission initiate a rulemaking to 

protect consumers’ right to repair 

products they have purchased. The 

Commission invites written comments 

concerning the petition. Publication of 

this petition is pursuant to the 

Commission’s Rules of Practice and 

Procedure and does not affect the legal 

status of the petition or its final 

disposition. 

DATES: Comments must identify the 

petition docket number and be filed by 

February 2, 2024. 

ADDRESSES: You may view the petition, 

identified by docket number FTC–2023– 

0077, and submit written comments 

concerning its merits by using the 

Federal eRulemaking Portal at https://

www.regulations.gov. Follow the online 

instructions for submitting comments. 

Do not submit sensitive or confidential 

information. You may read background 

documents or comments received at 

https://www.regulations.gov at any time. 

FOR FURTHER INFORMATION CONTACT: Joel 

Christie (phone: 202–468–4593, email: 

jchristie@ftc.gov), Office of the 

Secretary, Federal Trade Commission, 

600 Pennsylvania Avenue NW, 

Washington, DC 20580. 

SUPPLEMENTARY INFORMATION: Pursuant 

to Section 18(a)(1)(B) of the Federal 

Trade Commission Act, 15 U.S.C. 

57a(1)(B), and FTC Rule 1.31(f), 16 CFR 

1.31(f), notice is hereby given that the 

above-captioned petition has been filed 

with the Secretary of the Commission 

and has been placed on the public 

record for a period of 30 days. Any 

person may submit comments in 

support of or in opposition to the 

petition. All timely and responsive 

comments submitted in connection with 

this petition will become part of the 

public record. 

The Commission will not consider the 

petition’s merits until after the comment 

period closes. It may grant or deny the 

petition in whole or in part, and it may 

deem the petition insufficient to warrant 

commencement of a rulemaking 

proceeding. The purpose of this 

document is to facilitate public 

comment on the petition to aid the 

Commission in determining what, if 

any, action to take regarding the request 

contained in the petition. This 

document is not intended to start, stop, 

cancel, or otherwise affect rulemaking 

proceedings in any way. 

Because your comment will be placed 

on the publicly accessible website at 

https://www.regulations.gov, you are 

solely responsible for making sure your 

comment does not include any sensitive 

or confidential information. In 

particular, your comment should not 

include any sensitive personal 

information, such as your or anyone 

else’s Social Security number; date of 

birth; driver’s license number or other 

state identification number, or foreign 

country equivalent; passport number; 

financial account number; or credit or 

debit card number. You are also solely 

responsible for making sure your 

comment does not include any sensitive 

health information, such as medical 

records or other individually 

identifiable health information. In 

addition, your comment should not 

include any ‘‘trade secret or any 

commercial or financial information 

which . . . is privileged or 

confidential’’—as provided by Section 

6(f) of the FTC Act, 15 U.S.C. 46(f), and 

FTC Rule 4.10(a)(2), 16 CFR 4.10(a)(2). 

(Authority: 15 U.S.C. 46; 15 U.S.C. 57a; 5 

U.S.C. 601 note.) 

Joel Christie, 

Acting Secretary. 

[FR Doc. 2023–28874 Filed 1–2–24; 8:45 am] 

BILLING CODE 6750–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 39 

RIN 3038–AF39 

Protection of Clearing Member Funds 

Held by Derivatives Clearing 

Organizations 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (CFTC or 

Commission) is proposing regulations to 

ensure clearing member funds and 

assets receive the proper treatment in 

the event the derivatives clearing 

organization (DCO) enters bankruptcy 

by requiring, among other things, that 

clearing member funds be segregated 

from the DCO’s own funds and held in 

a depository that acknowledges in 

writing that the funds belong to clearing 

members, not the DCO. In addition, the 

Commission is proposing to permit 

DCOs to hold customer and clearing 

member funds at foreign central banks 

subject to certain requirements. Finally, 

the Commission is proposing to require 

DCOs to conduct a daily calculation and 

reconciliation of the amount of funds 

owed to customers and clearing 

members and the amount actually held 

for customers and clearing members. 

DATES: Comments must be received by 

February 16, 2024. 

ADDRESSES: You may submit comments, 

identified by RIN 3038–AF39, by any of 

the following methods: 

• CFTC Comments Portal: https://

comments.cftc.gov. Select the ‘‘Submit 

Comments’’ link for this rulemaking and 

follow the instructions on the Public 

Comment Form. 

• Mail: Send to Christopher 

Kirkpatrick, Secretary of the 

Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW, 

Washington, DC 20581. 

• Hand Delivery/Courier: Follow the 

same instructions as for Mail, above. 

Please submit your comments using 

only one of these methods. Submissions 

through the CFTC Comments Portal are 

encouraged. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 


ddrumheller on DSK120RN23PROD with PROPOSALS1
Federal Register / Vol. 89, No. 2 / Wednesday, January 3, 2024 / Proposed Rules 287 

1 17 CFR 145.9. Commission regulations referred 

to herein are found at 17 CFR chapter I (2022), and 

are accessible on the Commission’s website at 

https://www.cftc.gov/LawRegulation/ 

CommodityExchangeAct/index.htm. 

2 7 U.S.C. 6d; 17 CFR 1.20–1.39. See also 17 CFR 

22.1–22.17, and 30.7 (establishing similar regimes 

for cleared swaps customer collateral and foreign 

futures customer funds). 

3 17 CFR 1.3. 

4 17 CFR 1.20(a). 

5 17 CFR 1.20, 22.5, and 30.7 (requiring an 

acknowledgment letter for futures customer funds, 

cleared swaps customer collateral, and foreign 

futures customer funds, respectively). 

6 17 CFR 1.32, 1.33. 

7 17 CFR 1.25. 

8 17 CFR 1.49. 

9 17 CFR 1.20(g)(1); 17 CFR 39.15 (b); 17 CFR 

22.3(b)(1). 

10 17 CFR 1.20(g)(1). 

11 17 CFR 1.20(g)(4); 17 CFR 22.5. 

12 17 CFR 39.15(e). 

13 17 CFR 1.20(g)(2), (3); 17 CFR 22.3(b) (crossreferencing 17 CFR 22.4). 

14This definition of proprietary funds is only for 

explanatory purposes in the background section. As 

discussed further below, the Commission is 

proposing a definition of ‘‘proprietary funds’’ that 

is referred to throughout the remainder of this 

proposed rulemaking. 

15 7 U.S.C. 7a–1(c)(2)(F); 17 CFR 39.15. 16 Id. 

17 7 U.S.C. 12a(5). 

18Currently, CBOE Clear Digital, LLC; CX 

Clearinghouse, L.P.; LedgerX, LLC; and North 

American Derivatives Exchange Inc. allow 

individuals to be direct clearing members. Further, 

ICE NGX Canada Inc. clears physically delivered 

energy contracts directly for clearing members with 

a net worth exceeding CAD $5,000,000 or assets 

exceeding CAD $25,000,000. 

19The U.S. Bankruptcy Code requires a 

bankruptcy trustee to distribute clearing members’ 

cash and other assets held by a debtor DCO ratably 

among all clearing members. 11 U.S.C. 766(i)(2); 11 

U.S.C. 761(9)(D), (10), (16). Therefore, the 

Commission cannot effectively create multiple 

account classes for the clearing members of a 

DCO—e.g., one for FCM proprietary funds and one 

for non-FCM proprietary funds—because the 

different account classes would not be recognized 

by a bankruptcy court. 

20CEA section 5b(c)(2)(F), 7 U.S.C. 7a–1(c)(2)(F). 

posted as received to https://

comments.cftc.gov. You should submit 

only information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that you believe is exempt from 

disclosure under the Freedom of 

Information Act (FOIA), a petition for 

confidential treatment of the exempt 

information may be submitted according 

to the procedures established in § 145.9 

of the Commission’s regulations.1

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from https://comments.cftc.gov that it 

may deem to be inappropriate for 

publication, such as obscene language. 

All submissions that have been redacted 

or removed that contain comments on 

the merits of the rulemaking will be 

retained in the public comment file and 

will be considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the FOIA. 

FOR FURTHER INFORMATION CONTACT: 

Eileen A. Donovan, Deputy Director, 

202–418–5096, edonovan@cftc.gov, 

Division of Clearing and Risk, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW, Washington, DC 

20581; Theodore Z. Polley, Associate 

Director, 312–596–0551, tpolley@

cftc.gov; or Scott Sloan, Special 

Counsel, 312–596–0708, ssloan@

cftc.gov; Division of Clearing and Risk, 

Commodity Futures Trading 

Commission, 77 West Jackson 

Boulevard, Suite 800, Chicago, Illinois 

60604. 

SUPPLEMENTARY INFORMATION: 

I. Background 

A. Proprietary Funds 

Section 4d of the Commodity 

Exchange Act (CEA) and part 1 of the 

Commission’s regulations establish a 

comprehensive regime to safeguard the 

funds belonging to customers of a 

futures commission merchant (FCM).2

Commission regulations define a 

‘‘customer’’ as any person who uses an 

FCM, introducing broker, commodity 

trading advisor, or commodity pool 

operator as an agent in connection with 

trading in any commodity interest, and 

therefore, this customer protection 

regime does not apply to the funds of 

any person who clears trades directly 

through a DCO, who is a ‘‘clearing 

member.’’ 3 At the most general level, 

the customer protection regime requires 

FCMs to segregate customer funds from 

their own funds, deposit customer funds 

under an account name that clearly 

identifies them as customer funds,4 and 

obtain a written acknowledgment from 

each depository that holds customer 

funds.5 These acknowledgment letters, 

which must adhere to specific templates 

contained in the Commission’s 

regulations, require a depository to 

acknowledge, among other things, that 

the accounts opened by the FCM hold 

funds that belong to the FCM’s 

customers. The customer protection 

regime also establishes accounting and 

reporting requirements applicable to 

customer funds,6 and limits both the 

types of investments that can be made 

with customer funds 7 and the type of 

depositories that can hold customer 

funds.8

Many of the customer protection 

requirements that apply to FCMs also 

apply to DCOs that receive customer 

funds from their FCM clearing members. 

DCOs must segregate the customer 

funds of their FCM clearing members 

from their own funds,9 deposit customer 

funds under an account name that 

identifies the funds as customer funds,10

obtain acknowledgment letters from 

depositories,11 limit the investment of 

customer funds to instruments listed in 

§ 1.25,12 and limit depositories for 

customer funds to those listed in §§ 1.20 

and 1.49.13 These protections, however, 

do not extend to clearing members of 

DCOs. Only section 5b(c)(2)(F) of the 

CEA (Core Principle F) and § 39.15 

apply to the treatment of clearing 

members’ funds and assets held by a 

DCO in relation to cleared contracts 

(proprietary funds).14 These provisions 

require DCOs to establish standards and 

procedures that are designed to protect 

and ensure the safety of proprietary 

funds and require DCOs to hold 

proprietary funds in a manner that will 

minimize the risk of loss or delay in 

access by the DCO to the proprietary 

funds.15 These provisions further 

require any investment of proprietary 

funds to be in instruments with minimal 

credit, market, and liquidity risks.16

Section 8a(5) of the CEA grants the 

Commission authority to adopt rules it 

determines are reasonably necessary to 

effectuate, among other things, the DCO 

core principles.17 The Commission’s 

initial focus in implementing Core 

Principle F was on the custody and 

safeguarding of customer funds, 

consistent with section 4d of the CEA. 

This approach was largely responsive to 

the historical prevailing model in which 

all or nearly all clearing members of a 

DCO are FCMs. However, the 

Commission has since granted 

registration to a number of DCOs that 

clear directly for market participants 

without the intermediation of FCMs, 

including, in most cases, market 

participants who are natural persons 

(i.e., individuals).18 Additionally, many 

DCOs that use the traditional FCM 

clearing model have at least some nonFCM clearing members. The 

Commission therefore is proposing 

safeguards for proprietary funds to 

provide protections for clearing 

members comparable to those 

applicable to customers.19 The 

Commission has preliminarily 

determined that each of these additional 

safeguards is reasonably necessary to 

effectuate DCO Core Principle F.20

Specifically, the Commission is 

proposing to require a DCO to hold 

proprietary funds separately from the 

DCO’s own funds, in accounts that are 

named to clearly identify the funds as 

belonging to clearing members. The 


ddrumheller on DSK120RN23PROD with PROPOSALS1
288 Federal Register / Vol. 89, No. 2 / Wednesday, January 3, 2024 / Proposed Rules 

21See 17 CFR 1.20 App. B. 

22See 11 U.S.C. 761(16) (defining ‘‘member 

property’’ as cash, a security, or other property, or 

proceeds of such cash, security, or property, held 

by a DCO for a clearing member’s proprietary 

account). 

23See 11 U.S.C. 766(i) (providing that member 

property is distributed ratably to clearing members 

on the basis and to the extent of their allowed net 

equity claims based on their proprietary accounts, 

and in priority to all other claims, except claims 

related to the administration of member property). 

24See 17 CFR 190.00–190.19. 

25 ‘‘Central bank’’ is the term used to describe the 

authority responsible for policies that affect a 

country’s supply of money and credit. See, e.g., 

https://www.clevelandfed.org/publications/ 

economic-commentary/2007/ec-20071201-a-briefhistory-of-central-banks. 26Enhancing Protections Afforded Customers and 

Customer Funds Held by Futures Commission 

Merchants and Derivatives Clearing Organizations, 

78 FR 68506, 68535 (Nov. 14, 2013). 27 Id. at 68536. 28See, e.g., CFTC Letter No. 14–124 (Oct. 8, 2014) 

(related to customer accounts held at the Bank of 

England); CFTC Letter No. 16–05 (Feb. 1, 2016) 

(related to customer accounts held at the Deutsche 

Bundesbank). 

29Enhancing Protections Afforded Customers and 

Customer Funds, 78 FR at 68628. In 2016, the 

Commission issued an order under section 4(c) of 

the CEA conditionally exempting Federal Reserve 

Banks from section 4d of the CEA (Order Exempting 

the Federal Reserve Banks from Sections 4d and 22 

of the Commodity Exchange Act, 81 FR 53467 (Aug. 

12, 2016)). The conditions of the order require 

Federal Reserve Banks to keep customer funds 

segregated and respond to information requests 

from the Commission, making a separate written 

acknowledgment from a Federal Reserve Bank 

unnecessary. The Commission therefore repealed 

the 2013 provision (then § 1.20(g)(4)(ii)) concerning 

written acknowledgments from Federal Reserve 

Banks and adopted current § 1.20(g)(4)(i), which 

excludes Federal Reserve Banks from the written 

acknowledgment requirement. 

30See Denomination of Customer Funds and 

Location of Depositories, 68 FR at 5546–5547 (Mar. 

6, 2003). 

31 Id. 

Commission is further proposing to 

prohibit a DCO or any depository from 

using proprietary funds in any way 

other than as belonging to the clearing 

member. 

Additionally, the proposed rules 

include requirements for a DCO to 

review, on a daily basis, the amount of 

funds owed to each clearing member 

with respect to each of its accounts, 

both customer (including, as relevant, 

futures and cleared swaps) and 

proprietary, and to reconcile those 

figures to the amount of funds held in 

aggregate in each such type of account 

across all of the DCO’s depositories. 

The Commission is also proposing to 

require a DCO to obtain a letter from the 

depository for each account holding 

proprietary funds (proprietary funds 

letter) acknowledging, among other 

things, that the funds belong to clearing 

members and cannot be used by the 

DCO for any other purpose. The 

proposed proprietary funds letter is 

based on the template acknowledgment 

letter that a DCO is required to use in 

connection with customer funds.21

In addition to preventing the misuse 

of proprietary funds, the proposed 

requirements would help ensure that 

proprietary funds are appropriately 

protected in the event of a DCO 

bankruptcy. The U.S. Bankruptcy Code 

establishes that in the event of a DCO 

bankruptcy, member property, which 

includes funds held for clearing 

members’ proprietary accounts,22 is 

repaid to clearing members pro rata 

based on their claims for such funds, 

and ahead of most other claims against 

the DCO’s estate.23 Further, part 190 of 

the Commission’s regulations 

establishes how clearing members’ 

claims against the DCO’s estate should 

be determined and how payments 

should be allocated among clearing 

members.24 By requiring proprietary 

funds to be held separately from the 

DCO’s funds and easily identified in a 

proprietary funds letter, the proposed 

rules will enable a bankruptcy court or 

trustee to more clearly identify these 

funds as member property. Further, the 

proposed rules will require the DCO to 

verify, on a regular basis, that it is 

holding the proper amount of 

proprietary funds, thus ensuring that 

these funds would be available for 

distribution in the event of a DCO 

bankruptcy. 

B. Central Bank Depositories 

The Commission is also proposing 

requirements specific to obtaining 

written acknowledgments from central 

banks holding customer or proprietary 

funds.25 When the Commission adopted 

the template acknowledgment letter for 

depositories holding customer funds in 

2013, it did not require use of the 

template letter by Federal Reserve 

Banks, due to the ‘‘unique role’’ of the 

U.S. central bank.26 The Commission 

also recognized that there may be valid 

reasons why some foreign depositories 

would require modifications to the letter 

and stated that, in such circumstances, 

the Commission would consider 

‘‘alternative approaches’’ on a case-bycase basis.27

Since then, the Commission’s 

Division of Clearing and Risk (DCR) has 

issued several no-action letters in which 

the Division confirmed that it would not 

recommend that the Commission take 

enforcement action against a DCO for 

making certain modifications to the 

template acknowledgment letter in 

connection with customer accounts 

maintained at a foreign central bank.28

To encourage the use of central bank 

accounts, which can provide a superior 

alternative to holding funds at a 

commercial bank from the perspective 

of credit and liquidity risk, the 

Commission is proposing to allow a 

DCO to hold customer and proprietary 

funds at certain central banks without 

obtaining the template acknowledgment 

letter for customer funds or the 

proposed proprietary funds letter. 

Instead, a DCO would need to obtain 

only a written acknowledgment that the 

central bank was informed that the 

funds deposited with the bank are 

customer or proprietary funds (as 

applicable) held in accordance with 

section 4d or 5b of the CEA, and that the 

central bank agrees to respond to 

requests from specified Commission 

staff for information about the account, 

including the account balance (modified 

written acknowledgments). These 

proposed requirements are based on the 

requirements the Commission adopted 

in 2013 with regard to written 

acknowledgments from Federal Reserve 

Banks.29

The Commission is proposing to 

allow use of the modified written 

acknowledgment only by a DCO that 

holds customer or proprietary funds at 

the central bank of a ‘‘money center 

country’’ as defined in § 1.49—Canada, 

France, Germany, Italy, Japan, and the 

United Kingdom—to limit risks to 

customer and proprietary funds. Along 

with the United States, these countries 

comprise the Group of Seven (G7). 

Representatives from the G7 countries 

meet several times each year to 

coordinate their cooperation on issues 

of economic policy, and the United 

States and its financial regulatory 

agencies have a history of successful 

cooperation with the respective 

financial regulatory agencies of these 

countries. When the definition of 

‘‘money center country’’ was first 

proposed in connection with the 

adoption of § 1.49, a commenter 

suggested that the definition include 

‘‘other locations with stable currencies 

and other indicia that customer funds 

will be relatively secure.’’ 30 The 

Commission rejected this proposal as 

difficult to apply and noted that it 

would require the Commission to 

expend significant resources to conduct 

a broad evaluation of, among other 

things, a country’s banking, monetary, 

and economic policies and systems.31

The Commission believes that limiting 

the proposed change to central banks of 

money center countries appropriately 

considers security for customer and 

proprietary funds, flexibility for DCOs, 

and creating a system that is workable 

in practice. 

Further, the Commission is not 

proposing to require a DCO to obtain an 


ddrumheller on DSK120RN23PROD with PROPOSALS1
Federal Register / Vol. 89, No. 2 / Wednesday, January 3, 2024 / Proposed Rules 289 

32Enhancing Protections Afforded Customers and 

Customer Funds, 78 FR at 68535. 33 Denomination of Customer Funds and Location 

of Depositories, 68 FR at 53468 (Mar. 6, 2003). 34 17 CFR 39.33(d)(5). 35 17 CFR 1.3. 36 17 CFR 22.1. 37See 17 CFR 1.3 (defining ‘‘proprietary account’’ 

as a commodity futures, commodity options, or 

swaps trading account, for the clearing member 

itself, or for certain owners and affiliates of the 

clearing member). 

38These guaranty fund contributions include 

those received pursuant to an assessment for 

additional guaranty fund contributions when 

permitted by a DCO’s rules. 

39See, e.g., CFTC Letter No. 14–124 (Oct. 8, 

2014); CFTC Letter No. 16–05 (Feb. 1, 2016) 

(regarding modifications to the template 

acknowledgment letter to enable certain central 

banks to hold customer funds). 

40See, e.g., CFTC Letter No. 14–124 (Oct. 8, 

2014); CFTC Letter No. 16–05 (Feb. 1, 2016) 

(granting exemptive relief from § 1.49 to permit 

certain central banks to act as a depository for 

customer funds). 

41 17 CFR 1.29(b). 

42 17 CFR 1.25(a); see also Investment of 

Customer Funds by [FCMs] and [DCOs], 88 FR 

81236 (Nov. 21, 2023) (proposing, among other 

changes, to add certain foreign sovereign debt and 

certain U.S. Treasury exchange traded funds, both 

subject to limitations, to the list of permitted 

investments and to limit the types of money market 

funds that are permitted investments). 

43 17 CFR 1.25(b). 

44 17 CFR 1.25(c), (d). 

acknowledgment letter from a Federal 

Reserve Bank holding proprietary funds. 

This is consistent with § 1.20(g)(4), 

which states that a DCO does not need 

a written acknowledgment to hold 

customer funds held at a Federal 

Reserve Bank. Federal Reserve Banks 

have previously expressed an inability 

to agree to all of the terms in the 

template acknowledgment letter.32

Because Federal Reserve Banks are the 

source of liquidity for U.S. dollar 

deposits, a DCO would face lower credit 

and liquidity risk with a deposit at a 

Federal Reserve Bank than it would 

with a deposit at a commercial bank. In 

the context of customer funds, the 

Commission determined that it would 

not require a written acknowledgment 

from Federal Reserve Banks in order to 

facilitate use of these accounts and help 

obtain these benefits that ultimately 

serve market participants and the 

integrity of the financial markets.33 The 

Commission believes that the same 

rationale applies with respect to 

proprietary funds. Further, the 

Commission has required DCOs with 

access to accounts and services at a 

Federal Reserve Bank to use such 

accounts and services where practical,34

and as a policy matter seeks to facilitate 

use of those accounts. 

II. Definitions—§ 39.2 

The Commission is proposing to add 

in § 39.2 a definition for ‘‘money center 

country’’ that is identical to the 

definition currently in § 1.49. Under the 

proposed definition, ‘‘money center 

country’’ means Canada, France, 

Germany, Italy, Japan, and the United 

Kingdom. 

The Commission is also proposing a 

definition for ‘‘proprietary funds.’’ The 

definition uses language similar to that 

included in the current definitions of 

‘‘futures customer funds’’ in § 1.3 35 and 

‘‘cleared swaps customer collateral’’ in 

§ 22.1.36 The proposed definition 

includes all money, securities, and 

property held in a proprietary account 37

on behalf of clearing members used to 

margin, guarantee, or secure futures, 

foreign futures and swaps contracts, as 

well as option premiums and other 

funds held in relation to options 

contracts. The proposed definition also 

includes clearing member contributions 

to a guaranty fund to mutualize the 

losses resulting from a default by a 

clearing member.38

For the avoidance of doubt, a 

proprietary account may be the ‘‘house’’ 

account of a clearing member that is an 

FCM, where the clearing member may 

also maintain a futures customer and/or 

cleared swaps customer account. The 

term also would include the account of 

a direct clearing member (that may or 

may not be a natural person) that does 

not intermediate transactions for anyone 

else. 

III. Treatment of Funds—§ 39.15 

A. Holding Customer Funds at Central 

Banks—§ 39.15(b)(3) 

The Commission is proposing to 

amend § 39.15(b) to allow a DCO to hold 

customer funds at the central bank of a 

money center country. The proposed 

amendment would supplement the list 

of permissible depositories in § 1.49 and 

§§ 22.4 and 22.9. Currently, § 1.49 and 

§ 22.9 limit foreign depositories for 

customer funds to a bank or trust 

company that has in excess of $1 billion 

of regulatory capital, an FCM, or a DCO. 

Foreign central banks, as independent 

government entities, are not structured 

to meet regulatory capital requirements 

and are therefore excluded from holding 

customer funds under § 1.49. 

The Commission believes a DCO 

holding customer funds at a central 

bank can be a superior alternative to 

holding commercial bank deposits 

because it limits the DCO’s credit and 

liquidity risks. The Commission is 

therefore proposing new § 39.15(b)(3) to 

permit a DCO to hold customer funds at 

the central bank of a money center 

country if the DCO obtains a modified 

written acknowledgment, rather than 

the template acknowledgment letter 

required by §§ 1.20 and 22.5, to which 

some central banks have objected.39 The 

proposed rule would require the central 

bank of a money center country only to 

acknowledge that it was informed that 

the funds deposited with the bank are 

customer funds held in accordance with 

section 4d of the CEA and to agree to 

respond to requests from the 

Commission for information about the 

account, including the account balance. 

The Commission believes the proposed 

rule would facilitate the holding of 

customer funds at the central banks of 

money center countries while ensuring 

appropriate customer protections. 

The Commission believes that central 

banks are often the safest place to 

deposit customer funds and has 

provided exemptions from § 1.49 to 

permit customer funds to be held at 

foreign central banks in money center 

countries.40 The proposed rule would 

codify those exemptions and permit 

DCOs to hold customer funds with the 

central bank of a money center country. 

As previously discussed, the 

Commission is proposing to limit the 

permissible central bank depositories to 

those of money center countries after 

considering security for customer funds, 

flexibility for DCOs, and the need to 

create a system that is workable in 

practice. 

B. Permitted Investments—§ 39.15(e) 

The Commission is proposing to 

amend § 39.15(e) to permit a DCO to 

invest proprietary funds only as 

permitted for investment of customer 

funds under § 1.25. The proposed 

regulation specifies that the DCO would 

bear any losses from investments, as is 

the case with customer funds.41 The list 

of investments in § 1.25 is a 

conservative list, and the Commission 

believes it is appropriate for all types of 

clearing members. Currently, 

permissible investments under § 1.25 

include, among other investments, 

general obligations of the U.S. 

government, general obligations of any 

U.S. state or municipality, certificates of 

deposit, and interests in money market 

funds.42 Further, § 1.25 specifies a 

number of terms and conditions with 

which permitted investments must 

comply, including limits on the features 

that an investment can contain, 

concentration limits, and time to 

maturity limits.43 Regulation § 1.25 also 

includes specific requirements for 

investments in money market funds and 

repurchase agreements.44 By limiting 

investments of proprietary funds to 

investments that meet the requirements 


ddrumheller on DSK120RN23PROD with PROPOSALS1
290 Federal Register / Vol. 89, No. 2 / Wednesday, January 3, 2024 / Proposed Rules 

45Proposed § 39.15(e) cross-references § 1.25, 

which provides that an FCM or DCO may invest 

‘‘customer money’’ in certain instruments. The 

regulatory text of § 1.25, however, does not refer to 

‘‘proprietary funds.’’ The Commission recently 

approved proposed amendments to § 1.25. Based on 

comments received on those proposed 

amendments, if appropriate, the Commission may 

consider further amending § 1.25 either in the final 

rule or as a re-proposed rule to ensure that the 

regulatory text provides clarity on the application 

of § 1.25 to a DCO’s investment of ‘‘proprietary 

funds,’’ as permitted under § 39.15(e). 

46 7 U.S.C. 7a–1(c)(2)(F); 17 CFR 39.15(e). 47See 17 CFR 1.20 App. B. 

of § 1.25,45 the proposed rule will 

ensure that any investment of 

proprietary funds will have minimal 

credit, market, and liquidity risk as 

required by Core Principle F.46

C. Additional Protections for Proprietary 

Funds—§ 39.15(f) 

The Commission is proposing new 

§ 39.15(f) to establish additional 

protections for proprietary funds. 

1. Segregation of Proprietary Funds— 

§ 39.15(f)(1) 

Proposed § 39.15(f)(1) is based on 

§ 1.20(a) and would require a DCO to 

account for proprietary funds separately 

from its own funds, and to hold 

proprietary funds in accounts that are 

named to clearly identify the funds 

being held as belonging to clearing 

members. The Commission believes this 

would prevent misuse of proprietary 

funds by a DCO, and would help a 

bankruptcy trustee or judge to easily 

identify the funds that should be treated 

as member property in the unlikely 

event of a DCO bankruptcy. The 

proposed rule also would require the 

DCO to, at all times, maintain in the 

accounts holding proprietary funds 

enough resources to cover the total 

value of proprietary funds owed to its 

clearing members. The proposed rule 

would prevent a DCO from 

rehypothecating or otherwise using 

proprietary funds for its own benefit, 

thus ensuring that the funds are 

available when needed by clearing 

members or the DCO for permitted uses. 

2. Written Acknowledgment from 

Depositories—§ 39.15(f)(2) 

The Commission is proposing to 

require a DCO to obtain from any 

depository holding proprietary funds a 

written acknowledgment that the funds 

belong to the DCO’s clearing members 

and cannot be used by the DCO for any 

other purpose. The Commission is 

proposing a template proprietary funds 

letter that DCOs would be required to 

use, which would be contained in 

proposed appendix D to part 39. The 

proposed template proprietary funds 

letter is substantively the same as the 

current template acknowledgment letter 

for DCO accounts holding futures 

customer funds required by § 1.20, and 

requires a depository to acknowledge, 

among other things, that the accounts 

referenced in the letter hold funds that 

belong to the DCO’s clearing members, 

that the funds should be accounted for 

separately from those belonging to the 

DCO, and that the funds cannot be used 

to cover the DCO’s obligations to the 

depository.47 Further, the template 

proprietary funds letter would require 

the depository to respond to a request 

from the director of DCR, or any 

successor division, or the director’s 

designees, for information about the 

account, including the account balance. 

Proposed § 39.15(f)(2) also includes the 

same procedural requirements as those 

in § 1.20. Specifically, it would require 

a DCO to file a proprietary funds letter 

with the Commission within three days 

of opening an account, to update a letter 

when certain information it contains 

changes, and to maintain a copy of the 

letter in accordance with § 1.31. 

The Commission believes that 

requiring a proprietary funds letter 

would ensure that a depository holding 

proprietary funds would know that the 

funds belong to the DCO’s clearing 

members and cannot be used by the 

DCO for any other purpose, which will 

help prevent the misuse of funds by the 

DCO or an employee of the DCO. 

Further, having a letter for each 

proprietary funds account would help a 

bankruptcy court or trustee easily 

identify those funds that constitute 

member property in the event of a DCO 

bankruptcy. 

The Commission is proposing to 

exclude accounts at Federal Reserve 

Banks from the requirement to obtain a 

proprietary funds letter. This is 

consistent with § 1.20(g)(4), which states 

that a DCO does not need a written 

acknowledgment to hold customer 

funds at a Federal Reserve Bank. As 

discussed above, the Commission 

believes that Federal Reserve Banks 

would be unable to sign the template 

proprietary funds letter, and wants to 

promote the use of Federal Reserve 

Bank accounts by DCOs when possible. 

The Commission is also proposing a 

simpler written acknowledgment 

requirement for accounts held at the 

central bank of a money center country. 

Although a DCO holding proprietary 

funds at the central bank of a money 

center country would have to comply 

with the same procedural requirements 

applicable to other depositories, it 

would not have to use the template 

proprietary funds letter. The DCO 

would only have to obtain a written 

acknowledgment stating that: (1) the 

central bank was informed that the 

funds deposited with the bank are 

proprietary funds held in accordance 

with section 5b(c)(2)(F) of the CEA and 

Commission regulations; and (2) the 

bank agrees to respond to requests from 

the Commission for information about 

the account, including the account 

balance. As was the case with the 

acknowledgment letter used for 

accounts holding customer funds, the 

Commission believes many central 

banks would have issues with the 

proposed template proprietary funds 

letter. The Commission believes the 

proposed rule would allow DCOs to 

gain the benefits of holding funds at 

central banks while adequately 

safeguarding those funds and ensuring 

that the Commission has the 

information it needs to conduct 

oversight of DCOs. 

3. Commingling of Proprietary Funds— 

§ 39.15(f)(3) 

Proposed § 39.15(f)(3) is based on 

§ 1.20(e) and (g) applicable to customer 

funds, and would permit a DCO to 

commingle proprietary funds from 

multiple clearing members in a single 

account at a depository, but would not 

permit a DCO to commingle proprietary 

funds with the DCO’s own funds or 

customer funds. Having a clear 

separation between proprietary funds 

and a DCO’s own funds will make it 

more difficult for funds to be misused, 

and will provide additional clarity in 

the event of a DCO bankruptcy 

regarding the funds that should be 

treated as member property rather than 

part of the debtor’s estate. Further, the 

ability to commingle proprietary funds 

from multiple clearing members in one 

account allows DCOs to limit 

operational risks by simplifying their 

banking processes and procedures. 

4. Use of Proprietary Funds— 

§ 39.15(f)(4) 

Proposed § 39.15(f)(4) is based on 

§ 1.20(f) and would require a DCO and 

any depository holding proprietary 

funds to treat all proprietary funds as 

belonging to the clearing members of the 

DCO. The Commission believes the 

proposed rule will help ensure that 

proprietary funds are not 

rehypothecated or otherwise used by a 

DCO and are readily available if needed 

either by the clearing member directly, 

or for a permitted clearing member use 

by the DCO. However, the Commission 

does not intend for this requirement to 

interfere with or alter DCOs’ risk 

management programs. Proposed 

§ 39.15(f)(4)(i)(A) therefore would 

clarify that the proprietary funds of a 


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48See Statement on Auditing Standards 145, 

Appendix C, ¶ 21 (‘‘Segregation of duties is 

intended to reduce the opportunities to allow any 

person to be in a position to both perpetrate and 

conceal errors or fraud in the normal course of the 

person’s duties’’). See also 17 CFR 1.11(e)(3)(i)(G) 

(requiring each FCM’s Risk Management Program to 

include 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.) 

49For example, one would expect that the 

haircuts the DCO applies to currency mismatches 

with respect to its obligations to clearing members 

here would be no smaller than the haircuts the DCO 

applies to currency mismatches with respect to 

collateral posted by a clearing member. 

50See 17 CFR 1.20(i)(4). 

51The Commission may, in light of ongoing and 

future developments with respect to clearing 

models at such DCOs, including with respect to the 

participation of U.S. market participants 

(particularly such market participants who are 

natural persons) reconsider these decisions (both 

with respect to part 39 and to part 190) in a future 

rulemaking. 

52The U.S. Bankruptcy Code defines ‘‘foreign 

proceeding’’ as a collective judicial or 

Continued 

clearing member could be used to 

satisfy obligations of that clearing 

member’s customers, to the extent that 

use is permitted by the DCO’s rules and 

the DCO’s agreement(s) with the 

clearing member. In addition, proposed 

§ 39.15(f)(4)(i)(B) further would clarify 

that a DCO use contributions of nondefaulting clearing members to a 

guaranty fund to cover losses stemming 

from a default, to the extent that use is 

permitted by the DCO’s rules and its 

agreement(s) with its clearing members. 

Nothing in the proposed rule would 

prevent a DCO from holding guaranty 

fund contributions in a separate 

proprietary funds account from 

proprietary funds held as initial margin. 

Moreover, proposed § 39.15(f)(4)(ii) 

would provide that a depository 

receiving proprietary funds from a DCO 

for deposit in a segregated account may 

not hold, dispose of, or use such funds 

as belonging to any person other than 

the clearing members of the depositing 

DCO. Unlike the DCO, which is 

responsible for separately considering 

the proprietary funds owed to each 

individual clearing member, a 

depository is only responsible for 

considering the proprietary funds it has 

received as belonging to the clearing 

members as a group. 

D. Daily Reconciliation—§ 39.15(g) 

The Commission is proposing new 

§ 39.15(g), which would require a DCO 

to conduct a daily reconciliation for 

each type of segregated account (futures 

customer funds, cleared swaps customer 

collateral, and proprietary funds) it 

holds for its clearing members. This 

proposal is based on the requirement 

applicable to FCMs in § 1.32. Under 

proposed § 39.15(g), by noon of each 

business day, the DCO would have to 

perform these reconciliations on 

balances held as of the close of the 

previous business day. The proposed 

requirement is intended to verify, each 

business day, that the DCO maintains 

sufficient funds in each relevant 

account type to cover its aggregate 

obligations to clearing members. The 

Commission believes that the required 

daily calculation and reconciliation and 

independent review requirements in the 

proposed rule would help a DCO to 

identify quickly any misuse or loss of 

proprietary or customer funds. 

Proposed § 39.15(g)(1), (2), and (3) 

would require a DCO to calculate the 

amount of, respectively, futures 

customer funds, cleared swaps customer 

collateral, and proprietary funds owed 

to each clearing member. These 

provisions would further require the 

DCO to reconcile the total amount, 

aggregated across all clearing members, 

of each of futures customer funds, 

cleared swaps customer collateral, and 

proprietary funds, with the amount of 

each respective type of funds held in 

separate accounts across all 

depositories. This reconciliation is 

intended to confirm, each business day, 

that the DCO maintains, in each type of 

account, an adequate value of segregated 

funds to meet its obligations to clearing 

members. 

Requirements for the method of 

conducting these calculations are 

contained in proposed § 39.15(g)(4). 

Proposed § 39.15(g)(4)(i) would require 

segregation of duties, consistent with 

generally accepted auditing standards.48

Each of the DCO’s calculations and 

reconciliations would need to be 

approved by a person who did not 

prepare the initial calculation or the 

related reconciliation, and who does not 

report to the person who prepared them. 

Proposed § 39.15(g)(4)(ii)(A) would 

address the valuation of securities in the 

required calculations of amounts owed 

and held. Securities would have to be 

valued at their current market value, 

with haircuts applied in accordance 

with existing § 39.11(d)(1). 

Proposed § 39.15(g)(4)(ii)(B) would 

address mismatches in currencies in the 

same account type by permitting a 

deficit in one currency to be offset by a 

surplus in another currency, with 

conversion based on publicly available 

exchange rates, and with surpluses 

subject to haircuts reasonably 

determined by the DCO, applied 

consistently.49

Proposed § 39.15(g)(4)(ii)(C) would 

address situations in which customer 

funds of one type are commingled in a 

different type of customer account (e.g., 

futures customer funds in a cleared 

swaps customer account). In these 

instances, the proposed rule would 

require DCOs to treat all funds in a 

futures customer account as futures 

customer funds and all funds in a 

cleared swaps customer account as 

cleared swaps customer collateral, both 

in terms of funds owed and funds held, 

for purposes of the calculation and 

reconciliation required by proposed 

§ 39.15(g). 

Proposed § 39.15(g)(4)(iii) would 

address the process by which a DCO 

would calculate the amounts owed to 

clearing members for each account type 

by requiring the DCO to apply, for each 

account type, the approach set forth for 

FCMs in § 1.20(i). This would include 

calculating the net liquidating equity for 

each clearing member (in each account 

type), taking into account the market 

value of funds it receives from the 

clearing member, gains and losses on 

futures contracts, options, and swaps 

(applying this approach to cleared 

swaps), fees lawfully accruing in the 

normal course of business (which, in the 

case of a DCO, would include 

transaction fees), and authorized 

distributions or transfers of collateral. In 

aggregating amounts owed, the DCO 

would not reduce the sum of credit 

balances owed to clearing members with 

debit balances owed by other clearing 

members.50

Finally, proposed § 39.15(g)(5) would 

require the DCO to immediately report 

to the Commission any discrepancy in 

any of the relevant calculations or any 

one or more of the reconciliations that 

reveals that the DCO did not, at the 

close of the previous business day, 

maintain in separate segregated 

accounts money, securities, and 

property in an amount sufficient in the 

aggregate to cover the total value of 

funds owed to all clearing members. 

E. Exclusions for Foreign Derivatives 

Clearing Organizations—§ 39.15(h) 

The Commission is not, at this time,51

proposing to apply the new member 

property protections in proposed 

§ 39.15(e)(3) (permitted investment of 

proprietary funds), (f) (proprietary 

funds), and (g)(3) (daily reconciliation of 

proprietary funds) to certain DCOs 

organized outside the United States 

(foreign DCOs). Specifically, proposed 

§ 39.15(h) would provide that proposed 

§ 39.15(e)(3), (f) and (g)(3) do not apply 

to a foreign DCO that would, in the 

event of its insolvency, be subject to a 

foreign proceeding, as defined in the 

U.S. Bankruptcy Code, in the 

jurisdiction in which it is organized.52


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administrative proceeding in a foreign country, 

including an interim proceeding, under a law 

relating to insolvency or adjustment of debt in 

which proceeding the assets and affairs of the 

debtor are subject to control or supervision by a 

foreign court, for the purpose of reorganization or 

liquidation. 11 U.S.C. 101(23). Further, the U.S. 

Bankruptcy Code defines ‘‘foreign court’’ as a 

judicial or other authority competent to control or 

supervise a foreign proceeding (emphasis added). 

11 U.S.C. 1502(3). Because the definition includes 

non-judicial authorities, a resolution proceeding 

where the assets and affairs of a foreign DCO are 

controlled by a resolution authority would 

constitute a foreign proceeding under 11 U.S.C. 

101(23), and thus a DCO that is subject to such a 

resolution proceeding would fall within the 

exclusion of such paragraphs. (See, e.g., In re 

Tradex Swiss AG, 384 B.R. 34, 42 (Bankr. D.Mass. 

2008) (Swiss Federal Banking Commission ‘‘is an 

administrative agency’’ and qualifies as a foreign 

court under 1502(3)), In re ENNIA Caribe Holding 

N.V., 594 B.R. 631, 639–40 & n. 11(Bankr. S.D.N.Y. 

2018) (where the Central Bank of Curac ̧ao and St. 

Maarten, as a regulator, controls the affairs of the 

foreign debtor, an insurance company, it constitutes 

a foreign court under 11 U.S.C. 1502(3)). 

53See 17 CFR 190.11(b). 54As the Commission noted in revising its part 

190 bankruptcy regulations in 2020, in the context 

of certain DCOs organized outside the United 

States, the Commission has traditionally focused its 

efforts on the protection of the customers of FCM 

members of such foreign DCOs. Bankruptcy 

Regulations, 86 FR 19324, 19366 (April 13, 2021). 

In promulgating those regulations, the Commission 

attempted to avoid conflicts with insolvency 

proceedings in the jurisdiction where a foreign DCO 

is organized. Id. Thus, pursuant to 17 CFR 

190.11(b), the Commission’s part 190 bankruptcy 

regulations are limited to protecting contracts 

cleared on behalf of FCM customers at such foreign 

DCOs and the property margining or securing such 

contracts. The foreign DCOs to which this 

limitation applies are those DCOs organized outside 

the United States that are subject to a foreign 

proceeding, as defined in 11 U.S.C. 101(23), in the 

jurisdiction in which it is organized. 55 5 U.S.C. 601 et seq. 

56Policy Statement and Establishment of 

Definitions of ‘‘Small Entities’’ for Purposes of the 

Regulatory Flexibility Act, 47 FR 18618 (Apr. 30, 

1982). 

57See A New Regulatory Framework for Clearing 

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

58 44 U.S.C. 3501 et seq. 

59See 44 U.S.C. 3507(a)(3); 5 CFR 1320.5(a)(3). 

60See 44 U.S.C. 3501. 

61See 44 U.S.C. 3502(3). 

Member property held at most foreign 

DCOs would not be protected under part 

190 in the event the DCO enters 

bankruptcy,53 and the Commission 

wants to avoid potential conflicts with 

requirements concerning protection of 

member property under the applicable 

law in a foreign DCO’s home 

jurisdiction.54

IV. Reporting—§ 39.19 

The Commission is proposing new 

§ 39.19(c)(4)(xxvi) to include, together 

with the other event-specific reporting 

requirements applicable to DCOs, the 

requirement in proposed § 39.15(g)(5) 

that a DCO report any discrepancies in 

the amount of proprietary or customer 

funds it holds. The Commission 

believes that including all reporting 

requirements applicable to DCOs in 

§ 39.19 may assist DCOs in tracking 

their reporting obligations. 

V. Request for Comment 

The Commission is requesting 

comments on all aspects of its proposal. 

Additionally, the Commission 

specifically requests comment on the 

following: 

Would classification of guaranty fund 

contributions as proprietary funds 

inhibit DCOs’ current guaranty fund 

programs? The Commission has 

proposed to specifically include 

guaranty fund deposits in the definition 

of proprietary funds, and does not 

intend for the inclusion to prevent 

DCOs from continuing to use guaranty 

funds as one of their default resources. 

Should the Commission require DCOs 

to report to the Commission the daily 

calculations and reconciliations 

required by proposed § 39.15(g)? 

Anti-money laundering (AML) and 

know-your-client (KYC) programs are 

required for many entities registered 

with the Commission, including 

intermediaries such as FCMs. In the 

context of intermediated DCOs, FCMs 

perform this critical role of assisting 

U.S. government agencies in detecting 

and preventing money laundering. 

However, in the context of nonintermediated DCOs, in the absence of 

an FCM, DCOs may be exploited by 

actors seeking to engage in illegal and 

illicit activities. How might the 

Commission ensure AML and KYC 

compliance for DCOs that offer direct 

clearing services (a market structure that 

would not include FCMs or other 

intermediaries that are typically 

directed to create Bank Secrecy Act 

compliance programs)? Should DCOs 

offering direct-to-customer services to 

non-eligible contract participants or 

retail customers be required to comply 

with AML and KYC requirements? 

Should the Commission require any 

additional written acknowledgments (to 

those contained in proposed 

§ 39.15(b)(3) or § 39.15(f)(2)(vi) as 

applicable) from central banks of money 

center countries in order for a DCO to 

use them to hold futures customer 

funds, cleared swaps customer 

collateral, or proprietary funds? 

VI. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires that agencies consider whether 

the regulations they propose will have 

a significant economic impact on a 

substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis on the impact.55 The 

amendments proposed by the 

Commission will affect only DCOs. The 

Commission has previously established 

certain definitions of ‘‘small entities’’ to 

be used by the Commission in 

evaluating the impact of its regulations 

on small entities in accordance with the 

RFA.56 The Commission has previously 

determined that DCOs are not small 

entities for the purpose of the RFA.57

Accordingly, the Chairman, on behalf of 

the Commission, hereby certifies 

pursuant to 5 U.S.C. 605(b) that the 

proposed regulations will not have a 

significant economic impact on a 

substantial number of small entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(PRA) 58 imposes certain requirements 

on federal agencies, including the 

Commission, in connection with 

conducting or sponsoring any 

‘‘collection of information,’’ as defined 

by the PRA. Under the PRA, an agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a currently valid control 

number from the Office of Management 

and budget (OMB).59 The PRA is 

intended, in part, to minimize the 

paperwork burden created for 

individuals, businesses, and other 

persons as a result of the collection of 

information by federal agencies, and to 

ensure the greatest possible benefit and 

utility of information created, collected, 

maintained, used, shared, and 

disseminated by or for the Federal 

Government.60 The PRA applies to all 

information, regardless of form or 

format, whenever the Federal 

Government is obtaining, causing to be 

obtained, or soliciting information, and 

includes required disclosure to third 

parties or the public, of facts or 

opinions, when the information 

collection calls for answers to identical 

questions posed to, or identical 

reporting or recordkeeping requirements 

imposed on, ten or more persons.61

This proposal, if adopted, would 

result in a collection of information 

within the meaning of the PRA, as 

discussed below. This proposed 

rulemaking contains collections of 

information for which the Commission 

has previously received a control 

number from OMB. The title for this 

existing collection of information is 

OMB control number 3038–0076, 

Requirements for Derivatives Clearing 

Organizations (‘‘OMB Collection 3038– 

0076’’). 


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62See 44 U.S.C. 3507(d) 5 CFR 1320.11. 

63See 5 U.S.C. 552; see also 17 CFR part 145 

(Commission Records and Information). 

64 7 U.S.C. 12(a)(1). 

65 5 U.S.C. 552a. 

66For the previously approved estimates for this 

collection, see ICR Reference No. 202207–3038–001 

(conclusion date Aug. 23, 2022, available at https:// 

www.reginfo.gov/public/do/PRAViewICR?ref_

nbr=202207-3038-001). 

67See 17 CFR 39.20. 

68 Id. 

The Commission therefore is 

submitting this proposal to the OMB for 

its review in accordance with the 

PRA.62 Responses to this collection of 

information would be mandatory. The 

Commission will protect any 

proprietary information according to the 

Freedom of Information Act and part 

145 of the Commission’s regulations.63

In addition, section 8(a)(1) of the CEA 

strictly prohibits the Commission, 

unless specifically authorized by the 

CEA, from making public any data and 

information that would separately 

disclose the business transactions or 

market positions of any person and 

trade secrets or names of customers.64

Finally, the Commission is also required 

to protect certain information contained 

in a government system of records 

according to the Privacy Act of 1974.65

1. OMB Collection 3038–0076— 

Requirements for Derivatives Clearing 

Organizations 

The Commission is proposing a new 

reporting requirement in § 39.15(f)(2) to 

require DCOs based in the United States 

to obtain a template proprietary funds 

letter from each depository that holds 

proprietary funds and to file that letter 

with the Commission. The template 

letter and filing requirements are 

substantially the same as the 

requirement in § 1.20(d) for FCMs to file 

an acknowledgment letter signed by 

each depository holding customer 

funds. In OMB control number 3038– 

0024, ‘‘Regulations and Forms 

Pertaining to Financial Integrity of the 

Market Place; Margin Requirements for 

SDs/MSPs,’’ 66 the Commission 

estimated that each FCM would file 

three acknowledgment letters a year and 

that filing each letter would take two 

hours to complete. Because the 

proposed letter and requirements for 

DCOs are the same as those for FCMs, 

the Commission believes that the 

estimates for FCMs filing 

acknowledgment letters are appropriate 

for DCOs filing proprietary funds letters. 

Therefore, the Commission believes that 

the proposed requirement will require 

each DCO based in the United States to 

expend six hours per year to comply, 

resulting in a total burden of 60 hours 

for DCOs. 

The aggregate burden estimate for 

proprietary funds template letter 

reporting in Collection 3038–0076 is as 

follows: 

Estimated number of respondents: 10. 

Estimated annual reports per 

respondent: 3. 

Estimated total annual responses: 30. 

Estimated average burden hours per 

response: 2. 

Estimated annual burden hours per 

respondent: 6. 

Estimated total annual reporting 

burden for all respondents: 60. 

Finally, the Commission is proposing 

§ 39.15(g) to require DCOs to report in 

accordance with § 39.19(c)(4) any 

discrepancies in the results of the 

required daily calculations and 

reconciliations. This is a new reporting 

requirement and thus the Commission is 

revising its estimate of the burden 

associated with event-specific reporting 

under § 39.19(c)(4) in Collection 3038– 

0076. A discrepancy in one of the 

required calculations or reconciliations 

would mean that the DCO is not holding 

or accounting for the correct amount of 

either customer or proprietary funds, 

i.e., that it is not meeting regulatory 

requirements. The Commission does not 

anticipate DCOs will need to file this 

report often, and ideally not at all, such 

that even one report per year would 

exceed expectations. Nonetheless, to 

avoid under-estimating the burden of 

the proposed regulation, the 

Commission estimates that DCOs will 

file the required report once per year. 

The Commission believes that each 

report will take approximately 30 

minutes to complete. The requirement is 

for DCOs to file immediately upon 

learning of the discrepancy, which will 

necessarily limit the amount of time 

available to prepare a report. The 

current burden estimate in Collection 

3038–0076 for event specific reporting 

under § 39.19(c) is 14 reports a year per 

respondent. Therefore, the Commission 

amending Collection 3038–0076 and s 

estimating that 13 covered DCOs will 

complete an estimated 15 reports per 

year per respondent, resulting in a total 

burden of seven-and-a-half hours for 

event-specific reporting. 

The aggregate burden estimate for 

event-specific reporting under 

§ 39.19(c)(4), as amended by the 

proposal, is updated as follows: 

Estimated number of respondents: 13. 

Estimated annual reports per 

respondent: 15. 

Estimated total annual responses: 

195. 

Estimated average hours per response: 

0.5. 

Estimated annual burden hours per 

respondent: 7.5. 

Estimated total annual burden hours 

for all respondents: 97.5. 

The Commission’s existing 

recordkeeping rule will require DCOs to 

maintain records of the information 

generated though compliance with the 

proposed rules.67 Specifically, DCOs 

will need to maintain records related to 

the calculations and reconciliations 

required under proposed § 39.15(g) and 

the proprietary funds letters required 

under proposed § 39.15(f)(2). The 

Commission, however, believes that the 

impact of the proposed regulations on 

the recordkeeping burden in Collection 

3038–0076 will be negligible. DCOs are 

already required to maintain all 

information required to be created, 

generated, or reported under part 39.68

DCOs regularly maintain records of 

items created through their compliance 

with the Commission’s regulations, and 

the proposed rules will not raise unique 

recordkeeping challenges or burdens. 

Therefore, the Commission is retaining 

its existing recordkeeping burden 

estimates for Collection 3038–0076. 

2. Request for Comment 

The Commission invites the public 

and other Federal agencies to comment 

on any aspect of the proposed 

information collection requirements 

discussed above. Pursuant to 44 U.S.C. 

3506(c)(2)(B), the Commission will 

consider public comments on this 

proposed collection of information in: 

(1) Evaluating whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have a 

practical use; 

(2) Evaluating the accuracy of the 

estimated burden of the proposed 

collection of information, including the 

degree to which the methodology and 

the assumptions that the Commission 

employed were valid; 

(3) Enhancing the quality, utility, and 

clarity of the information proposed to be 

collected; and 

(4) Minimizing the burden of the 

proposed information collection 

requirements on registered entities, 

including through the use of appropriate 

automated, electronic, mechanical, or 

other technological information 

collection techniques, e.g., permitting 

electronic submission of responses. 

The Commission specifically invites 

public comment on the accuracy of its 

estimates that the proposed regulations 

will not impose a new recordkeeping 

burden and its determination to retain 


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69 7 U.S.C. 19(a). 70See, e.g. 7 U.S.C. 2(i). 

its existing burden estimates for 

recordkeeping for Collection 3038–0076. 

Copies of the submission from the 

Commission to OMB are available from 

the CFTC Clearance Officer, 1155 21st 

Street NW, Washington, DC 20581, (202) 

418–5714 or from https://RegInfo.gov. 

Organizations and individuals desiring 

to submit comments on the proposed 

information collection requirements 

should send those comments to: 

• The Office of Information and 

Regulatory Affairs, Office of 

Management and Budget, Room 10235, 

New Executive Office Building, 

Washington, DC 20503, Attn: Desk 

Officer of the Commodity Futures 

Trading Commission; 

• (202) 395–6566 (fax); or 

• OIRAsubmissions@omb.eop.gov 

(email). 

Please provide the Commission with 

a copy of submitted comments so that 

all comments can be summarized and 

addressed in the final rulemaking, and 

please refer to the ADDRESSES section of 

this rulemaking for instructions on 

submitting comments to the 

Commission. OMB is required to make 

a decision concerning the proposed 

information collection requirements 

between 30 and 60 days after 

publication of this release in the Federal 

Register. Therefore, a comment to OMB 

is best assured of receiving full 

consideration if OMB receives it within 

30 calendar days of publication of this 

release. Nothing in the foregoing affects 

the deadline enumerated above for 

public comment to the Commission on 

the proposed rules. 

C. Cost-Benefit Considerations 

1. Introduction 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders.69 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 

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) factors (collectively 

referred to herein as Section 15(a) 

factors). 

The Commission recognizes that the 

proposed amendments impose costs. 

The Commission has endeavored to 

assess the anticipated costs and benefits 

of the proposed amendments in 

quantitative terms, including PRArelated costs, where feasible. In 

situations where the Commission is 

unable to quantify the costs and 

benefits, the Commission identifies and 

considers the costs and benefits of the 

applicable proposed amendments in 

qualitative terms. The lack of data and 

information to estimate those costs is 

attributable in part to the nature of the 

proposed amendments. Additionally, 

any initial and recurring compliance 

costs for any particular DCO will 

depend on the size, existing 

infrastructure, level of clearing activity, 

practices, and cost structure of the DCO. 

The Commission generally requests 

comment on all aspects of its costbenefit considerations, including the 

identification and assessment of any 

costs and benefits not discussed herein; 

data and any other information to assist 

or otherwise inform the Commission’s 

ability to quantify or qualitatively 

describe the costs and benefits of the 

proposed amendments; and 

substantiating data, statistics, and any 

other information to support positions 

posited by commenters with respect to 

the Commission’s discussion. The 

Commission welcomes comment on 

such costs, particularly from existing 

DCOs that can provide quantitative cost 

data based on their respective 

experiences. Commenters may also 

suggest other alternatives to the 

proposed approach. 

The Commission notes that this 

consideration is based on its 

understanding that the derivatives 

market regulated by the Commission 

functions internationally with: (1) 

transactions that involve entities 

organized in the United States occurring 

across different international 

jurisdictions; (2) some entities organized 

outside of the United States that are 

prospective Commission registrants; and 

(3) some entities that typically operate 

both within and outside the United 

States and that follow substantially 

similar business practices wherever 

located. Where the Commission does 

not specifically refer to matters of 

location, the discussion of costs and 

benefits below refers to the effects of the 

proposed regulations on all relevant 

derivatives activity, whether based on 

their actual occurrence in the United 

States or on their connection with, or 

effect on U.S. commerce.70

2. Baseline 

The Commission identifies and 

considers the benefits and costs of the 

proposed amendments relative to the 

baseline of the status quo. In particular, 

the baseline for the Commission’s 

consideration of the costs and benefits 

of this proposed rulemaking is the 

existing statutory and regulatory 

framework applicable to DCOs, 

including: (1) the DCO core principles 

set forth in section 5b(c)(2) of the CEA; 

(2) the requirements associated with 

holding clearing member funds for 

positions in futures, foreign futures, and 

swaps under § 39.15; (3) the current 

DCO reporting requirements under 

§ 39.19; and (4) the requirements for 

obtaining an acknowledgment letter 

from a foreign central bank holding 

customer funds, but not member funds. 

3. Proposed Amendments to § 39.15(b) 

a. Summary of Changes 

The Commission is proposing new 

§ 39.15(b)(3), which would allow the 

central banks of money center countries 

to serve as depositories for customer 

funds. The proposed regulation would 

further allow a DCO holding customer 

funds at the central bank of a money 

center country to obtain a modified 

written acknowledgment that is shorter 

and less detailed than the template 

acknowledgment letter in §§ 1.20 and 

22.4. 

b. Benefits 

The Commission believes that central 

banks are often the best option for 

deposit of customer funds. By using a 

central bank, DCOs can minimize the 

credit and liquidity risks they face when 

holding foreign currency cash deposits. 

Many foreign central banks do not fit 

into any of the categories of permissible 

depositories in § 1.49, and some central 

banks have expressed unwillingness to 

sign the template acknowledgment 

letter. By permitting DCOs to deposit 

customer funds at the central banks of 

money center countries and requiring an 

abbreviated written acknowledgment 

suitable for the central bank context, the 

Commission believes that DCOs will be 

able to avail themselves of the risk 

management benefits of holding funds 

at a central bank. 

c. Costs 

The Commission does not believe the 

proposed rule will impose costs on 

DCOs. The proposed rule does not 

require DCOs to hold customer funds at 

any particular central bank and merely 

enables DCOs to hold funds at certain 

central banks. 


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d. Section 15(a) Factors 

In addition to the discussion above, 

the Commission has evaluated the costs 

and benefits of the proposed 

amendments to § 39.15(b)(3) in light of 

the specific considerations identified in 

section 15(a) of the CEA. The 

Commission believes the proposed rule 

would protect market participants by 

allowing their funds to be more easily 

held at foreign central banks. Central 

banks expose depositors to minimal 

credit and liquidity risks and are safe 

depositories for assets belonging to 

market participants. Similarly, the 

proposed rules may improve DCOs’ risk 

management because of the low credit 

and liquidity risks associated with 

holding funds at a central bank. The 

Commission has considered the other 

Section 15(a) factors and believes that 

they are not implicated by the proposed 

amendments to § 39.15(b)(3). 

4. Proposed Amendments to § 39.15(e) 

a. Summary of Changes 

The Commission is proposing rules 

that would limit the investments DCOs 

can make with proprietary funds to 

those that are permissible for customer 

funds under § 1.25. The proposed rule 

also states that DCOs would be 

responsible for investment losses. 

b. Benefits 

The proposed rule would limit 

investments of proprietary funds to the 

safe investments listed in § 1.25. This is 

the same list of investments that can be 

made with customer funds. The 

Commission believes this proposal 

would appropriately protect clearing 

members from risk of loss by ensuring 

that any investment is in instruments 

with minimal credit, market, and 

liquidity risks. 

c. Costs 

The proposed rule may impose some 

costs on DCOs. Some DCOs may have to 

stop investing proprietary funds in 

certain instruments that are currently 

permitted and may incur some 

operational costs in revising the 

investments that are offered to clearing 

members for their proprietary funds. 

Further, to the extent the permitted 

investments earn less yield than what a 

DCO currently invests in, the regulation 

would impose costs in the form of lost 

investment revenue for the DCO and 

clearing member. The total cost of this 

regulation will depend on a number of 

factors including the number of clearing 

members of the DCO and what, if any, 

investments the DCO currently makes 

with proprietary funds. 

a. Section 15(a) Factors 

In addition to the discussion above, 

the Commission has evaluated the costs 

and benefits of the proposed 

amendments to § 39.15(e) in light of the 

specific considerations identified in 

section 15(a) of the CEA. The proposed 

rule would benefit clearing member 

market participants by ensuring their 

funds are invested in instruments that 

minimize the risk of loss. While DCOs 

currently determine what investments 

to make with clearing member funds, 

the proposed rule establishes a list of 

investments that the Commission 

believes is appropriately conservative 

for all clearing members. The 

Commission has considered the other 

Section 15(a) factors and believes that 

they are not implicated by the proposed 

amendments to § 39.15(e). 

5. Proposed Amendments to 

§ 39.15(f)(1) 

a. Summary of Changes 

The Commission is proposing new 

§ 39.15(f)(1), which would require DCOs 

to segregate proprietary funds from their 

own funds, hold the funds in accounts 

clearly labeled as holding proprietary 

funds, and hold at all times an amount 

sufficient in the aggregate to cover the 

total value of proprietary funds held for 

all clearing members. 

b. Benefits 

The proposed rule would benefit 

clearing members by helping to ensure 

that proprietary funds on deposit will 

not be misused. Holding proprietary 

funds in an account that is exclusively 

for proprietary funds and clearly named 

as being for proprietary funds would 

make it difficult for a DCO or any 

employee to use the funds for an 

improper purpose without being 

detected. Further, the requirement that 

accounts hold funds adequate to cover 

the total value of proprietary funds held 

for all clearing members at all times 

would prevent a DCO from 

rehypothecating or otherwise using 

proprietary funds for its own benefit, 

thus ensuring that the funds are 

available when needed by clearing 

members or the DCO for permitted uses. 

The proposed rule would also ensure 

funds are readily identifiable in the 

event of a DCO bankruptcy, which 

would facilitate those funds receiving 

the appropriate preferential treatment. 

c. Costs 

The proposed rule might add some 

costs for DCOs if they need to establish 

new accounts for proprietary funds. 

DCOs would need to establish new 

procedures for regularly confirming that 

the accounts hold funds adequate to 

cover the total value of proprietary 

funds of all clearing members. However, 

as a mitigating factor, the Commission 

believes that most, if not all, DCOs 

currently hold proprietary funds 

separately from their own, and that most 

DCOs do not rehypothecate or otherwise 

use funds for their own purposes. In 

such cases, if there are any costs, they 

would be related to staff time involved 

with renaming current accounts holding 

proprietary funds. The exact costs will 

depend on a number of factors 

including how many accounts a DCO 

maintains for proprietary funds. 

d. Section 15(a) Factors 

In addition to the discussion above, 

the Commission has evaluated the costs 

and benefits of the proposed 

amendments to § 39.15(f)(1) in light of 

the specific considerations identified in 

section 15(a) of the CEA. The 

Commission believes the proposed rule 

would benefit market participants by 

helping to ensure their funds are not 

misused and by helping to make sure 

the funds receive the proper, 

preferential treatment in the event of a 

DCO bankruptcy. The Commission also 

believes that requiring DCOs to hold the 

total amount of proprietary funds at all 

times would promote sound risk 

management because it would ensure 

that the funds are available to the DCO 

in the event of a clearing member 

default. The Commission has 

considered the other section 15(a) 

factors and believes that they are not 

implicated by the proposed 

amendments to § 39.15(f)(1). 

6. Proposed Amendments to 

§ 39.15(f)(2) 

a. Summary of Changes 

The proposed rule would require 

DCOs to obtain a proprietary funds 

letter in the form prescribed in the 

proposed appendix from each 

depository holding proprietary funds. 

The proposed letter is based on the 

template acknowledgment letter for 

DCOs required by § 1.20, and requires 

depositories to acknowledge, among 

other things, that the funds belong to 

clearing members and cannot be used by 

the DCO for any other purpose. The 

proposed rule would also require a DCO 

to file the letters with the Commission 

and update the letters when certain 

information changes. The proposed rule 

would exclude Federal Reserve Banks 

from the requirement to obtain a 

proprietary funds letter from a 

depository holding proprietary funds. 

Further, the proposed rule would 

require a simpler written 


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acknowledgment from the central bank 

of a money center country that is 

holding proprietary funds than that 

required of other depositories. 

b. Benefits 

The proposed rule would benefit 

clearing members by ensuring that all 

depositories holding proprietary funds 

would know that the funds belong to 

clearing members and cannot be used by 

the DCO for any other purpose, which 

would help prevent the misuse of funds 

by the DCO or an employee of the DCO. 

Further, having a proprietary funds 

letter for each proprietary funds account 

would help a bankruptcy court or 

trustee easily identify that the funds are 

member property in the event of a DCO 

bankruptcy. 

c. Costs 

The proposed rule would impose 

costs on DCOs. DCOs would be required 

to work with depositories to obtain 

proprietary funds letters for existing 

accounts and to file the letters with the 

Commission. Further, DCOs would need 

procedures for obtaining a letter for any 

new account and for updating letters as 

information changes going forward. The 

Commission is attempting to limit the 

costs of obtaining proprietary funds 

letters by proposing to use a template 

that is substantively the same as the 

template letter required for customer 

funds and is thus already in use by 

many DCOs and their depositories. The 

costs each DCO would incur would 

depend, in large part, on the number of 

depositories the DCO uses to hold 

proprietary funds. The Commission has 

estimated that the PRA costs for this 

rule will be $100 per burden hour. 

Based on the burden estimate discussed 

above of six hours annually per DCO, 

the Commission estimates that each 

DCO will spend $600 in PRA costs 

under this proposed rule. 

d. Section 15(a) Factors 

In addition to the discussion above, 

the Commission has evaluated the costs 

and benefits of the proposed 

amendments to § 39.15(f)(2) in light of 

the specific considerations identified in 

section 15(a) of the CEA. The 

Commission believes the proposed rule 

would benefit market participants by 

ensuring that all depositories holding 

proprietary funds know that the funds 

belong to clearing members and cannot 

be used by the DCO for any other 

purpose, thus helping to prevent the 

misuse of funds. Having a proprietary 

funds letter for each proprietary funds 

account would help easily identify 

which funds are member property in the 

event of a DCO bankruptcy. Finally, the 

helping to prevent the misuse of 

proprietary funds would promote sound 

risk management by making it more 

likely that the funds are available if 

needed to cover a clearing member 

default. The Commission has 

considered the other section 15(a) 

factors and believes that they are not 

implicated by the proposed 

amendments to § 39.15(f)(2). 

7. Proposed Amendments to 

§ 39.15(f)(3) 

a. Summary of Changes 

Proposed § 39.15(f)(3) would permit 

DCOs to commingle proprietary funds 

belonging to multiple clearing members 

in the same custodial account. The rule 

would prohibit a DCO from 

commingling proprietary funds with the 

DCO’s own funds or with FCM customer 

funds. 

b. Benefits 

The Commission believes that 

permitting DCOs to commingle 

proprietary funds from multiple clearing 

members in one account would allow 

DCOs to minimize operational risk by 

simplifying their banking processes and 

procedures. Further, the proposed rule 

would ensure that proprietary funds are 

held separately from the DCO’s funds at 

the depository, making it harder for a 

DCO or an employee of the DCO to 

misuse the funds without detection. 

c. Costs 

The Commission does not believe 

permitting the commingling of multiple 

clearing members’ funds in one account 

would impose new costs on DCOs. 

Currently, many DCOs hold clearing 

member funds in a commingled 

account, and the proposed rule would 

only permit, not require, clearing 

member funds to be commingled. 

However, the Commission recognizes 

that a DCO that currently commingles 

clearing member funds with other funds 

would need to segregate such funds and 

establish a separate account for such 

funds, thereby incurring new costs. But 

because the prohibition on commingling 

a DCO’s funds with its clearing 

members’ funds codifies sound 

participant protection and risk 

management principles that most, if not 

all, DCOs already apply, the 

Commission does not believe that it 

would impose significant new costs on 

existing DCOs. Additionally, DCOs are 

currently prohibited by the 

requirements of section 4d of the Act 

and the regulations thereunder from 

commingling customer funds with the 

funds of clearing members. The 

proposed rule would therefore not 

impose new costs with regard to holding 

clearing member funds and customer 

funds separately. 

d. Section 15(a) Factors 

In addition to the discussion above, 

the Commission has evaluated the costs 

and benefits of the proposed 

amendments to § 39.15(f)(3) in light of 

the specific considerations identified in 

section 15(a) of the CEA. The 

Commission believes that prohibiting a 

DCO from commingling its own funds 

with proprietary funds would benefit 

market participants by ensuring a clear 

delineation between the DCO’s funds 

and proprietary funds. This delineation 

would make it more difficult to misuse 

proprietary funds and would make 

proprietary funds readily identifiable in 

the event of a DCO bankruptcy. Further, 

the Commission believes that the 

proposed rule would promote sound 

risk management because ensuring that 

clearing members’ funds are held 

separately from the DCO’s would make 

it more difficult for the funds to be 

misused without detection and would 

therefore make it more likely that the 

funds are available if needed to cover a 

clearing member default. The 

Commission has considered the other 

section 15(a) factors and believes that 

they are not implicated by the proposed 

amendments to § 39.12(f)(3). 

8. Proposed Amendments to 

§ 39.15(f)(4) 

a. Summary of Changes 

The proposed rule would prohibit a 

DCO or any of its depositories from 

using proprietary funds for any reason 

other than as belonging to the DCO’s 

clearing members. The rule would 

specifically provide that an FCM’s funds 

may be used to cover its customers’ 

losses and as part of a DCO’s mutualized 

guaranty fund. 

b. Benefits 

By eliminating any uses for 

proprietary funds other than on behalf 

of clearing members, the proposed rule 

would help ensure that the funds are 

readily available if needed either by the 

clearing member directly, or for a 

permitted use by the DCO. The 

clarifications providing that an FCM’s 

funds may be used by a DCO to cover 

the FCM’s customers’ losses, or as part 

of a clearing member-funded, 

mutualized guaranty fund, ensures that 

the rule would not hamper DCOs’ 

existing risk management programs. 

c. Costs 

Because the proposed rule would 

codify sound participant protection and 

risk management principles, the 

Commission does not believe that it 


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71See 17 CFR 190.11(b). 

would impose significant costs on 

DCOs. The Commission does not believe 

DCOs are currently using clearing 

member funds in a manner that is 

inconsistent with this regulation. 

Further, the proposed rule would not 

require a guaranty fund or any specific 

type of FCM guarantee of its customers’ 

performance, but instead would merely 

permit what is currently common risk 

management practice among DCOs. 

d. Section 15(a) Factors 

In addition to the discussion above, 

the Commission has evaluated the costs 

and benefits of the proposed 

amendments to § 39.15(f)(4) in light of 

the specific considerations identified in 

section 15(a) of the CEA. The proposed 

rule would benefit market participants 

by helping to ensure that their funds are 

protected and available for their use. 

Additionally, the proposed rule would 

promote sound risk management by 

helping to ensure that clearing member 

funds are readily available for permitted 

risk management uses by a DCO, such 

as in the event of a customer shortfall 

or clearing member default. The 

Commission has considered the other 

section 15(a) factors and believes that 

they are not implicated by the proposed 

amendments to § 39.12(f)(3). 

9. Proposed Amendments to §§ 39.15(g) 

and 39.19(c)(4)(xxvi) 

a. Summary of Changes 

Proposed § 39.15(g) would require 

DCOs to, on a daily basis, calculate the 

amount of futures customer funds, 

cleared swaps customer collateral, and 

proprietary funds owed to each clearing 

member, separately for each account 

class and on a currency by currency 

basis. The proposed rule further would 

require DCOs to reconcile, separately for 

each account class, the amount of funds 

owed to all clearing members with the 

amount of funds held in depository 

accounts for that class of funds. Each 

calculation and reconciliation would 

have to be approved by a person who 

did not prepare the initial calculation or 

reconciliation. The calculation and 

reconciliation would have to be 

performed as of the close of each 

business day and completed by noon on 

the following business day. The 

proposed rule also would require 

securities to be valued at their current 

market value, subject to the DCO’s 

haircuts, and calculations of the amount 

owed to be made in a manner consistent 

with the requirements of § 1.20(i). 

Finally, both proposed §§ 39.15(g)(5) 

and 39.19(c)(4)(xxvi) would require 

DCOs to immediately report any 

discrepancy in the calculation or 

reconciliation to the Commission. 

b. Benefits 

By requiring a DCO to verify on a 

daily basis the amount of futures 

customer funds, cleared swaps customer 

collateral, and proprietary funds it is 

holding, for each clearing member and 

across all clearing members, the 

proposed rule would facilitate the 

prompt discovery of any missing futures 

customer funds, cleared swaps customer 

collateral, or proprietary funds. 

Additionally, by requiring the daily 

calculation and reconciliation to be 

approved by an independent employee, 

the proposed rule would help prevent a 

single bad actor at a DCO from misusing 

futures customer funds, cleared swaps 

customer collateral, or proprietary 

funds, and from concealing that misuse. 

The requirement to report any 

discrepancies to the Commission would 

help ensure that the Commission is 

immediately made aware of potentially 

missing funds, and that it can work with 

the DCO to resolve the matter. 

c. Costs 

The Commission understands that the 

daily calculation and reconciliation 

would impose costs on DCOs. DCOs 

would need to develop procedures that 

comply with the timing, valuation, and 

calculation requirements in the 

proposed rule, to calculate the amount 

of funds owed to each clearing member 

for each account class and to reconcile 

the amount of funds owed to all clearing 

members with the amount of funds held 

at depositories for each account class. 

Further, at least two DCO employees 

would have to be involved in the 

process of performing and approving the 

calculations and reconciliations each 

day. DCOs would also need to include 

the new reporting requirement in their 

process and procedures for eventspecific reporting to the Commission. 

The Commission has sought to 

minimize the costs of the proposed 

regulation by only requiring reporting to 

the Commission of discrepancies rather 

than the filing of daily reports. The 

exact costs would depend on the 

account class(es) in which a DCO holds 

funds, and the number of clearing 

members and customer accounts at 

issue. The Commission has estimated 

that the PRA costs for event specific 

reporting are $79 per hour. Based on the 

burden estimate discussed above of .5 

hours annually per DCO, the 

Commission estimates that each DCO 

will spend $39.50 in PRA costs under 

this rule. 

d. Section 15(a) Factors 

In addition to the discussion above, 

the Commission has evaluated the costs 

and benefits of the proposed 

amendments to § 39.15(f)(5) in light of 

the specific considerations identified in 

section 15(a) of the CEA. The proposed 

rule would benefit market participants 

by enabling any loss or theft of funds to 

be discovered by the DCO and reported 

to the Commission quickly. The 

Commission further believes that the 

proposed rule would promote sound 

risk management by helping to ensure 

that the funds are available if needed by 

the DCO to cover a clearing member or 

customer default. The Commission has 

considered the other section 15(a) 

factors and believes that they are not 

implicated by the proposed 

amendments. 

10. Proposed Amendment to § 39.15(h) 

a. Summary of Changes 

The proposed rule would exempt 

foreign DCOs from the requirements of 

proposed § 39.15(e)(3), (f), and (g)(3) 

because in the event of an insolvency, 

the clearing member funds held by a 

foreign DCO would not be subject to 

U.S. bankruptcy law.71

b. Benefits 

The Commission has determined to 

seek to avoid conflicts with insolvency 

proceedings in the jurisdiction where a 

foreign DCO is organized. The 

Commission believes that certainty 

surrounding which insolvency law 

would apply would benefit the clearing 

members of foreign DCOs. 

c. Costs 

The Commission does not believe the 

rule would impose costs on foreign 

DCOs. The proposed rule is preserving 

the baseline, that funds belonging to a 

foreign DCO’s clearing members will be 

treated in accordance with the 

insolvency law of the foreign DCO’s 

home jurisdiction. 

d. Section 15(a) Factors 

In addition to the discussion above, 

the Commission has evaluated the costs 

and benefits of the proposed 

amendments to § 39.15(h) in light of the 

specific considerations identified in 

section 15(a) of the CEA. The proposed 

rule would benefit market participants 

by providing certainty regarding which 

insolvency law would apply to their 

funds in the event a foreign DCO enters 

an insolvency proceeding. The 

Commission has considered the other 

section 15(a) factors and believes that 


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72 7 U.S.C. 19(b). 

they are not implicated by the proposed 

amendments. 

D. Antitrust Considerations 

Section 15(b) of the CEA requires the 

Commission to take into consideration 

the public interest to be protected by the 

antitrust laws and endeavor to take the 

least anticompetitive means of 

achieving the purposes of the CEA, in 

issuing any order or adopting any 

Commission rule or regulation.72

The Commission believes that the 

public interest to be protected by the 

antitrust laws is the promotion of 

competition. The Commission requests 

comment on whether the proposed 

amendments implicate any other 

specific public interest to be protected 

by the antitrust laws. The Commission 

has considered the proposed rulemaking 

to determine whether it is 

anticompetitive and has identified no 

anticompetitive effects. The 

Commission requests comment on 

whether the proposed rulemaking is 

anticompetitive and, if it is, what the 

anticompetitive effects are. 

Because the Commission has 

determined that the proposed rule 

amendments are not anticompetitive 

and have no anticompetitive effects, the 

Commission has not identified any less 

anticompetitive means of achieving the 

purposes of the CEA. The Commission 

requests comment on whether there are 

less anticompetitive means of achieving 

the relevant purposes of the CEA that 

would otherwise be served by adopting 

the proposed rule amendments. 

List of Subjects in 17 CFR Part 39 

Reporting, Treatment of funds. 

For the reasons stated in the 

preamble, the Commodity Futures 

Trading Commission proposes to amend 

17 CFR part 39 as follows: 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

■ 1. The authority citation for part 39 

continues to read as follows: 

Authority: 7 U.S.C. 2, 6(c), 7a–1, and 

12a(5); 12 U.S.C. 5464; 15 U.S.C. 8325; 

Section 752 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, Pub. L. 

111–203, title VII, sec. 752, July 21, 2010, 124 

Stat. 1749. 

■ 2. Amend § 39.2 by adding definitions 

of the terms ‘‘Money center country’’ 

and ‘‘Proprietary funds’’ in alphabetical 

order to read as follows: 

§ 39.2 Definitions. 

* * * * * 

Money center country means Canada, 

France, Germany, Italy, Japan, and the 

United Kingdom. 

* * * * * 

Proprietary funds means all money, 

securities, and property received by a 

derivatives clearing organization from, 

for, or on behalf of, a clearing member 

and held in a proprietary account, as 

defined in § 1.3 of this chapter: 

(1) To margin, guarantee, or secure 

contracts for future delivery on or 

subject to the rules of a contract market, 

derivatives clearing organization, or 

foreign board of trade or a cleared swap 

contract, and all money accruing to a 

clearing member as the result of such 

contracts; 

(2) In connection with a commodity 

option transaction on or subject to the 

rules of a contract market, derivatives 

clearing organization, or foreign board 

of trade: 

(i) To be used as a premium for the 

purchase of a commodity option 

transaction for a clearing member; 

(ii) As a premium payable to a 

clearing member; 

(iii) To guarantee or secure 

performance of a commodity option by 

a clearing member; or 

(iv) Representing accruals (including, 

for purchasers of a commodity option 

for which the full premium has been 

paid, the market value of such 

commodity option) to a clearing 

member; 

(3) That constitutes, if a cleared swap 

is in the form or nature of an option, the 

settlement value of the option; or 

(4) As a contribution to a guaranty 

fund to mutualize the losses resulting 

from a default by a clearing member by 

covering the losses in accordance with 

the derivatives clearing organization’s 

rules and its agreement(s) with its 

clearing members. 

* * * * * 

■ 3. Amend § 39.15 by adding paragraph 

(b)(3), revising paragraph (e), and 

adding paragraphs (f), (g), and (h) to 

read as follows: 

§ 39.15 Treatment of funds. 

* * * * * 

(b) * * * 

(3) Central banks. Notwithstanding 

anything to the contrary in §§ 1.20, 1.49, 

22.4, 22.5, or 22.9 of this chapter, a 

derivatives clearing organization may 

hold futures customer funds or cleared 

swaps customer collateral at the central 

bank of a money center country if it 

obtains from the central bank a written 

acknowledgment that: 

(i) The central 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 applicable 

Commission regulations thereunder; 

and 

(ii) The central 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 

Market Participants Division, 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. 

* * * * * 

(e) Permitted investments. (1) Funds 

and assets belonging to clearing 

members and their customers that are 

invested by a derivatives clearing 

organization shall be held in 

instruments with minimal credit, 

market, and liquidity risks. 

(2) Any investment of customer funds 

or assets by a derivatives clearing 

organization shall comply with § 1.25 of 

this chapter. 

(3) A derivatives clearing organization 

may invest proprietary funds only in a 

manner that would be permitted for 

customer funds under § 1.25 of this 

chapter. The derivatives clearing 

organization shall bear sole 

responsibility for any losses resulting 

from the investment of proprietary 

funds. 

(f) Proprietary funds—(1) Segregation. 

A derivatives clearing organization must 

separately account for and segregate all 

proprietary funds as belonging to its 

clearing members. A derivatives 

clearing organization shall deposit 

proprietary funds under an account 

name that clearly identifies the funds as 

belonging to clearing members and 

shows that the funds are segregated as 

required by this part. A derivatives 

clearing organization must at all times 

maintain in the separate segregated 

account or accounts money, securities 

and property in an amount sufficient in 

the aggregate to cover the total value of 

proprietary funds owed to all clearing 

members. 

(2) 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 an account for proprietary 

funds by the derivatives clearing 

organization with the depositories; 

provided, however, a derivatives 

clearing organization is not required to 

obtain a written acknowledgment from 

a Federal Reserve Bank with which it 

has opened an account for proprietary 

funds. 


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(ii) The written acknowledgment must 

be in the form as set out in Appendix 

D to this part, except as provided in 

paragraph (f)(2)(vi) of this section. 

(iii) 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. 

(iv) 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 proprietary 

funds; or 

(C) The account number(s) under 

which proprietary funds are held. 

(v) A derivatives clearing organization 

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 

period provided in § 1.31 of this 

chapter. 

(vi) Notwithstanding paragraph 

(f)(2)(ii) of this section, a derivatives 

clearing organization may deposit 

proprietary funds with the central bank 

of a money center country if it obtains 

from the central bank a written 

acknowledgment that: 

(A) The central bank was informed 

that the proprietary funds deposited 

therein are those of clearing members 

who trade commodities, options, swaps, 

and other products and are being held 

in accordance with the provisions of 

section 5b(c)(2)(F) of the Act and 

Commission regulations thereunder; 

and 

(B) The central bank agrees to reply 

promptly and directly to any request 

from the director of the Division of 

Clearing and Risk, or any successor 

division, or the director’s designees, for 

confirmation of account balances or 

provision of any other information 

regarding or related to an account. 

(3) Commingling. (i) A derivatives 

clearing organization may for 

convenience commingle the proprietary 

funds that it receives from, or on behalf 

of, clearing members in a single account 

or multiple accounts with one or more 

depositories. 

(ii) A derivatives clearing organization 

shall not commingle proprietary funds 

with the money, securities or property 

of the derivatives clearing organization, 

or a customer account of a clearing 

member of the derivatives clearing 

organization, or use proprietary funds to 

secure or guarantee the obligation of, or 

extend credit to, the derivatives clearing 

organization. 

(4) Limitation on use of proprietary 

funds. (i) A derivatives clearing 

organization shall not hold, use or 

dispose of proprietary funds except as 

belonging to the clearing member that 

deposited the proprietary funds. The 

use of proprietary funds as belonging to 

clearing members may include, but is 

not limited to: 

(A) A derivatives clearing 

organization may use the proprietary 

funds belonging to a clearing member to 

guarantee or cover deficits in a customer 

account of that clearing member in 

accordance with the derivatives clearing 

organization’s rules and its agreement(s) 

with the clearing member; and 

(B) A derivatives clearing organization 

may use non-defaulting clearing 

members’ money, securities, or property 

that is being held as a guaranty fund to 

mutualize the losses resulting from a 

default by a clearing member to cover 

such losses in accordance with the 

derivatives clearing organization’s rules 

and its agreement(s) with its clearing 

members. 

(ii) No person, including any 

derivatives clearing organization or any 

depository, that has received proprietary 

funds for deposit in a segregated 

account, as provided in this section, 

may hold, dispose of, or use any the 

funds as belonging to any person other 

than the clearing members of the 

derivatives clearing organization which 

deposited the funds. 

(g) Daily reconciliation—(1) Futures 

customer funds. By noon of each 

business day, a derivatives clearing 

organization that has received futures 

customer funds from its clearing 

members shall, as of the close of the 

previous business day: 

(i) Calculate the amount of futures 

customer funds owed to each clearing 

member, on a currency by currency 

basis; and 

(ii) Reconcile the total amount of 

futures customer funds owed, on a 

currency by currency basis, aggregated 

across all clearing members, with the 

amount of futures customer funds held 

in separate accounts across all 

depositories. 

(2) Cleared swaps customer funds. By 

noon of each business day, a derivatives 

clearing organization that has received 

cleared swaps customer collateral from 

its clearing members shall, as of the 

close of the previous business day: 

(i) Calculate the amount of cleared 

swaps customer collateral owed to each 

clearing member, on a currency by 

currency basis; and 

(ii) Reconcile the total amount of 

cleared swaps customer collateral owed, 

aggregated across all clearing members, 

with the amount of cleared swaps 

customer collateral held in separate 

accounts across all depositories. 

(3) Proprietary funds. By noon of each 

business day, a derivatives clearing 

organization that has received 

proprietary funds from its clearing 

members shall, as of the close of the 

previous business day: 

(i) Calculate the amount of proprietary 

funds owed to each clearing member, on 

a currency by currency basis; and 

(ii) Reconcile the total amount of 

proprietary funds owed, aggregated 

across all clearing members, with the 

amount of proprietary funds held in 

separate accounts across all 

depositories. 

(4) Calculations. (i) Each calculation 

and reconciliation required by this 

paragraph (g) must be approved by a 

person who did not prepare the 

calculation or reconciliation and who 

does not report to the person that 

prepared the calculation or 

reconciliation. 

(ii) In performing the calculations 

required by this paragraph (g): 

(A) Securities shall be valued at their 

current market value, with haircuts 

applied in accordance with § 39.11(d); 

and 

(B) A reconciliation deficit in a 

particular account type in one currency 

may be offset by a surplus in that same 

account type in another currency, based 

on publicly available exchange rates, 

with the surplus subject to haircuts 

reasonably determined by the 

derivatives clearing organization, 

consistently applied. 

(C) Where customer funds, including 

funds received to margin, guarantee, or 

secure futures, options, foreign futures, 

foreign options, or swaps, are, pursuant 

to an order of the Commission or a DCO 

rule filed pursuant to paragraph (b)(2)of 

this section, received for the purpose of 

holding such funds in a futures account, 

they shall be treated as futures customer 

funds, both for purposes of funds owed 

and funds held. Where such funds are 

received for the purpose of holding such 

funds in a cleared swaps customer 

account, they shall be treated as cleared 

swaps customer collateral, both for 

purposes of funds owed and funds held. 

(iii) Calculations of amounts owed in 

this paragraph (g) shall be made 

consistent with the requirements of 

§ 1.20(i) of this chapter, as applied to 

the accounts of a derivatives clearing 

organization with respect to its 

members’ futures customer, cleared 

swaps customer, and proprietary 

accounts. 


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(5) A derivatives clearing organization 

shall immediately report to the 

Commission, pursuant to § 39.19, any 

discrepancies in the calculation of the 

amount of funds held for each clearing 

member and any one or more of the 

reconciliations that reveals that the 

derivatives clearing organization did 

not, at the close of the previous business 

day, maintain in separate segregated 

accounts money, securities and property 

in an amount sufficient in the aggregate 

to cover the total value of funds owed 

to all clearing members. 

(h) Exclusions for foreign derivatives 

clearing organizations—Paragraphs 

(e)(3), (f) and (g)(3) of this section do not 

apply to a derivatives clearing 

organization organized outside the 

United States that would, in the event 

of its insolvency, be subject to a foreign 

proceeding, as defined in 11 U.S.C. 

101(23), in the jurisdiction in which it 

is organized. 

■ 4. In § 39.19, add paragraph 

(c)(4)(xxvi) to read as follows: 

§ 39.19 Reporting. 

* * * * * 

(c) * * * 

(4) * * * 

(xxvi) Discrepancy in customer or 

proprietary funds. A derivatives clearing 

organization shall immediately report to 

the Commission any discrepancies in 

the calculation of the amount of funds 

held for each clearing member and any 

one or more of the reconciliations 

required pursuant to § 39.15(g) that 

reveals that the derivatives clearing 

organization did not, at the close of the 

previous business day, maintain in 

separate segregated accounts money, 

securities and property in an amount 

sufficient in the aggregate to cover the 

total value of funds owed to all clearing 

members. 

* * * * * 

■ 5. Add appendix D to part 39 to read 

as follows: 

Appendix D to Part 39—Derivatives 

Clearing Organization 

Acknowledgment Letter for CFTC 

Regulation § 39.15 Proprietary Funds 

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] 

Proprietary Funds Account, CFTC 

Regulation § 39.15 Proprietary Funds 

Account under Section 5b(c)(2)(F) 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 clearing 

members who trade commodities, options, 

swaps, and other products, as required by 

Commodity Futures Trading Commission 

(‘‘CFTC’’) Regulations, including Regulation 

§ 39.15, 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 39 of the CFTC’s regulations, 

as amended; and that the Funds constitute 

member property as defined by 11 U.S.C. 

761(16) and CFTC Regulation § 190.01. 

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. 

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 any 

successor divisions, or such director’s 

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 any successor divisions, or 

such director’s 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 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 

account maintained by us with you for the 

purpose of holding our own funds. 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 proprietary 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 


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1See 7 U.S.C. 6d; 17 CFR 1.20 through 1.39. See 

also 17 CFR 22.1 through 22.17, and 30.7 

(establishing similar regimes for cleared swaps 

customer collateral and foreign futures customer 

funds, respectively). DCOs that receive customer 

funds from their FCM clearing members must also 

apply many of these customer protection 

requirements. 

2See also 17 CFR 1.20(a) (requiring FCMs to 

segregate customer funds from their own funds); 17 

CFR 1.20(g)(1), 17 CFR 39.15 (b), 17 CFR 22.3(b)(1) 

(requiring DCOs to segregate the customer funds of 

their FCM clearing members from their own funds). 

3See also 17 CFR 1.20, 22.5, and 30.7 (requiring 

an FCM to obtain an acknowledgment letter for 

futures customer funds, cleared swaps customer 

collateral, and foreign futures customer funds, 

respectively); 17 CFR 1.20(g)(4), 17 CFR 22.5 

(requiring a DCO to obtain an acknowledgment 

letter from depositories). 

4See also 17 CFR 1.20(e) and (g). 

5See also 17 CFR 1.20(f). 

6 17 CFR 1.25. 

7See also 17 CFR 1.32, 1.33. 

8Currently, CBOE Clear Digital, LLC; CX 

Clearinghouse, L.P.; LedgerX, LLC; and North 

American Derivatives Exchange Inc. allow 

individuals to be direct clearing members. See In 

the Matter of the Application of CBOE Clear Digital, 

LLC For Registration as a Derivatives Clearing 

Organization (June 5, 2023), available at https://

www.cftc.gov/IndustryOversight/IndustryFilings/ 

ClearingOrganizations/39855; In the Matter of the 

Application of CX Clearinghouse, L.P. For 

Registration as a Derivatives Clearing Organization 

(Aug. 3, 2018), available at https://www.cftc.gov/ 

IndustryOversight/IndustryFilings/ 

ClearingOrganizations/16767; In the Matter of the 

Application of LedgerX, LLC For Registration as a 

Derivatives Clearing Organization (Sept. 2, 2020), 

available at https://www.cftc.gov/ 

IndustryOversight/IndustryFilings/ 

ClearingOrganizations/30998; In the Matter of the 

Application of the North American Derivatives 

Exchange for Registration as a Derivatives Clearing 

Organization (Jan. 17, 2014), available at https://

www.cftc.gov/IndustryOversight/IndustryFilings/ 

ClearingOrganizations/38. 

9See CFTC Letter No. 16–59 (June 21, 2016), 

available at https://www.cftc.gov/csl/16-59/ 

download (granting an exemption to the Chicago 

Mercantile Exchange, Inc (CME) from the 

requirements of Regulation § 1.49(d)(3) to permit 

CME to hold customer funds at the Bank of Canada 

and permitting the use of a modified 

acknowledgment letter for customer accounts 

maintained by the CME. at the Bank of Canada); 

CFTC Letter No. 16–05 (Feb. 1, 2016), available at 

https://www.cftc.gov/csl/16-05/download (granting 

an exemption to Eurex Clearing AG (Eurex) from 

the requirements of Regulation § 1.49(d)(3) to 

permit Eurex to hold customer funds at Deutsche 

Bundesbank and permitting the use of a modified 

acknowledgment letter for customer accounts 

maintained by Eurex at Deutsche Bundesbank); and 

CFTC Letters No. 14–123 (Oct. 8, 2014), available 

at https://www.cftc.gov/csl/14-123/download and 

14–124 (Oct. 8, 2014), available at https://

www.cftc.gov/csl/14-124/download (granting an 

exemption to ICE Clear Europe Limited and LCH 

Ltd, respectively, from the requirements of 

Regulation § 1.49(d)(3) to permit ICE Clear Europe 

Limited and LCH Ltd to hold customer funds at the 

Bank of England and permitting the use of a 

modified acknowledgment letter for customer 

accounts maintained by ICE Clear Europe Limited 

and LCH Ltd, respectively, at the Bank of England). 

the parties in connection with the 

Account(s), this letter agreement shall govern 

with respect to matters specific to section 

5b(c)(2)(F) of the Act and CFTC Regulation 

§ 39.15, 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: 

Issued in Washington, DC, on December 

26, 2023, by the Commission. 

Christopher Kirkpatrick, 

Secretary of the Commission. 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendices to Protection of Clearing 

Member Funds Held by Derivatives 

Clearing Organizations—Commission 

Voting Summary, Chairman’s 

Statement, and Commissioners’ 

Statements 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Behnam 

and Commissioner Johnson voted in the 

affirmative. Commissioner Pham 

concurred. Commissioners Goldsmith 

Romero and Mersinger voted in the 

negative. 

Appendix 2—Statement of Support of 

Chairman Rostin Behnam 

I support the issuance and publication of 

the proposed rule on the protection of 

clearing member funds held by derivatives 

clearing organizations (DCOs). The 

Commission has longstanding regulations 

that provide comprehensive protections for 

funds belonging to customers of a Futures 

Commission Merchant (FCM).1 Similar 

protections, however, do not exist for funds 

belonging to clearing members of a DCO, 

whether they are individual market 

participants or FCMs themselves. The 

proposed rule would implement a regime for 

the protection of clearing member funds 

largely analogous to the current regime 

applicable to FCM customer funds. 

Specifically, the proposed rule would ensure 

that clearing member funds and assets 

receive proper treatment if a DCO enters 

bankruptcy by requiring segregation of 

clearing member funds from the DCO’s own 

funds 2 and that the funds be held in a 

depository that acknowledges in writing that 

the funds belong to clearing members,3 not 

the DCO. The proposed rule would require 

new regulations regarding the commingling 

of clearing member or proprietary funds; 4

limitations on the use of these funds; 5 and 

limit investments of the funds to the 

investments permitted for customer funds 

under Regulation § 1.25.6 In addition, the 

proposed rule would permit DCOs to hold 

customer and clearing member funds at 

foreign central banks subject to certain 

requirements. Finally, the proposed rule 

would require DCOs to conduct a daily 

calculation and reconciliation of the amount 

of funds owed to customers and clearing 

members and the amount actually held for 

customers and clearing members.7

Commission regulations addressing the 

custody and safeguarding of customer funds 

have historically responded to the 

characteristics of the prevailing model in 

which all, or nearly all, clearing members of 

a DCO were FCMs acting as intermediaries. 

However, as noted in the proposed rule, the 

Commission has granted registration to a 

number of DCOs that clear directly for market 

participants without the intermediation of 

FCMs.8 Additionally, many DCOs that use 

the traditional FCM clearing model have at 

least some non-FCM clearing members. The 

growth and evolution of the nonintermediated clearing model necessitates 

ensuring that our regulations establish a 

regime for the safeguarding and protection of 

clearing member funds that addresses the 

issues and risks presented. 

Lastly, I am pleased that the proposed rule 

would, in effect, codify the no-action and 

exemptive relief previously given to four 

DCOs 9 by permitting DCOs to hold customer 

funds at foreign central banks and use a 

modified acknowledgment letter. The 

proposed rule would also extend these 

amended provisions to clearing member 

funds. Permitting DCOs to hold customer and 

clearing member funds at a central bank 

allows them to take advantage of the credit 

and liquidity risk management benefits that 

central bank accounts provide. This is sound 

policy and risk management. 

I look forward to hearing the public’s 

comments on the proposed rule. The 60-day 

comment period will begin upon the 

Commission’s publication of the proposed 

rule on its website. 

Appendix 3—Statement of 

Commissioner Kristin N. Johnson 

Trust is the core issue that motivates 

today’s notice of proposed rulemaking 

(Proposed Rule) regarding the protection of 

clearing member funds held by derivatives 

clearing organizations (DCOs) advanced by 

the Division of Clearing and Risk. 

On March 30, 2022, I commenced service 

as a Commissioner of the Commodity Futures 

Trading Commission (Commission or CFTC). 

In a hearing before the Senate Agriculture, 

Nutrition, and Forestry Committee a few 

weeks earlier, I committed to promote the 


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302 Federal Register / Vol. 89, No. 2 / Wednesday, January 3, 2024 / Proposed Rules 

1 Kristin N. Johnson, Commissioner, CFTC, 

Statement on Preserving Trust and Preventing the 

Erosion of Customer Protection Regulation (Nov. 3, 

2023), https://www.cftc.gov/PressRoom/ 

SpeechesTestimony/johnstatement110323; Kristin 

N. Johnson, Commissioner, CFTC, Keynote Address 

at the World Federation of Exchanges Annual 

Meeting: Creating Rules of the Road for 

(Dis)Intermediated and (De)Centralized Markets 

(Sept. 21, 2023), https://www.cftc.gov/PressRoom/ 

SpeechesTestimony/opajohnson5; Kristin N. 

Johnson, Commissioner, CFTC, Keynote Address at 

Salzburg Global Finance Forum: Future-Proofing 

Financial Markets Regulation (June 29, 2023), 

https://www.cftc.gov/PressRoom/ 

SpeechesTestimony/opajohnson4; Kristin N. 

Johnson, Commissioner, CFTC, Statement Calling 

for the CFTC to Initiate A Rulemaking Process for 

CFTC-Registered DCOs Engaged in Crypto or Digital 

Asset Clearing Activities (May 30, 2023), https://

www.cftc.gov/PressRoom/SpeechesTestimony/ 

johnsonstatement053023; Kristin N. Johnson, 

Commissioner, CFTC, Keynote Address at Digital 

Assets @Duke Conference, Duke’s Pratt School of 

Engineering and Duke Financial Economics Center: 

Mitigating Crypto-Crises: Applying Lessons Learned 

in Governance, Risk Management, and Compliance 

(Jan. 26, 2023), https://www.cftc.gov/PressRoom/ 

SpeechesTestimony/opajohnson2; Kristin N. 

Johnson, Commissioner, CFTC, Statement in 

Support of Notice of Proposed Amendments to 

Reporting and Information Requirements for 

Derivatives Clearing Organizations (Nov. 10, 2022), 

https://www.cftc.gov/PressRoom/ 

SpeechesTestimony/johnsonstatement111022b. 

2Although the focus of my statement is on direct 

participants in the context of non-intermediated 

clearing models, the Proposed Rule has broader 

implications. It applies to the proprietary funds of 

FCMs in the context of an intermediated model as 

well. 

3The term ‘‘customer’’ is generally reserved for 

the individuals or businesses that rely on an 

intermediary such as an FCM to facilitate a 

transaction. Where a DCO offers direct services, the 

individuals or businesses engaged with the 

clearinghouse are generally described as 

‘‘members.’’ 

4 17 CFR 1.20. 

5 7 U.S.C. 12a(5). 

6 7 U.S.C. 7a–1(c)(2)(F). 

integrity and stability of our markets and 

protect customers, particularly vulnerable 

and marginalized individual retail customers 

who participate in our markets. This 

commitment is among the most compelling 

reasons for my public service. 

Over the last few decades, the Commission 

has adopted and refined protections for 

customers of intermediaries in our markets, 

namely by imposing rigorous obligations on 

intermediaries to segregate the funds of their 

customers, designating specific authorized 

depositories, and outlining permitted 

investments of customer funds. 

Over the course of my tenure as a 

Commissioner, in numerous public speeches, 

statements, and interviews, I have called on 

the Commission to advance parallel customer 

protections for direct participants of nonintermediated clearinghouses registered with 

the Commission as DCOs.1

Today’s Proposed Rule takes the first steps 

to close this gap. I support this Proposed 

Rule that advances the protection of clearing 

member proprietary funds held by a DCO. 

Specifically, the Proposed Rule: 

• Requires a DCO to segregate clearing 

member proprietary funds from the DCO’s 

own funds, hold such funds in an account 

labeled as proprietary funds, and obtain a 

written acknowledgment letter from a 

depository; 

• Requires a DCO to treat clearing member 

proprietary funds as belonging to the clearing 

member while permitting the DCO to use 

clearing member proprietary funds as part of 

the DCO’s default waterfall, consistent with 

the DCO’s rules and agreement with its 

clearing members; 

• Permits the DCO to commingle 

proprietary funds of multiple clearing 

members in a single omnibus account for 

convenience while prohibiting the 

commingling of proprietary funds with the 

DCO’s own funds or futures commission 

merchant (FCM) customer funds; 

• Permits the DCO to invest clearing 

member proprietary funds in highly liquid 

financial instruments pursuant to CFTC 

Regulation § 1.25 and requires DCOs to be 

responsible for investment losses; and 

• Requires the daily reconciliation of 

balances of FCM customers and clearing 

members and segregated funds and the 

reporting of any discrepancies. 

In my capacity as a Commissioner at the 

CFTC, I have strongly advocated for the 

development of these important regulatory 

protections that parallel existing protections 

in intermediated market structures. This 

Proposed Rule reflects the tremendous efforts 

of coordination among the Division of 

Clearing and Risk, the office of the Chairman, 

my office, and my fellow Commissioners’ 

offices and their staff. Our collective 

engagement reflects years of dialogue with 

market participants, CFTC staff, other market 

and prudential regulators and engagement 

with the U.S. Department of the Treasury, 

members of Congress, academics, and public 

interest advocates. 

This Proposed Rule offers a 

transformational reform that brings to 

markets in which clients may interact 

directly with a DCO foundational protections 

currently established in CFTC regulations 

and enforced in markets that rely on 

intermediaries.2

In a direct clearing model (nonintermediated market structure), clearing 

members are not customers of 

intermediaries,3 and therefore, do not qualify 

for the regulatory protections available under 

part 1 of the Commission’s regulations, 

including the requirement to separately 

account for and segregate customer funds as 

belonging to customers, deposit customer 

funds in specific locations, obtain written 

acknowledgment letters from depositories, 

and use customer funds as belonging to such 

customers.4 The Proposed Rule reflects the 

historic development and evolution of 

markets and refers to the assets or funds on 

deposit from a customer of an intermediary 

as ‘‘customer funds.’’ The Proposed Rule 

adopts the term ‘‘clearing member’’ to 

describe those directly interacting with the 

clearinghouse and ‘‘proprietary funds’’ to 

describe clearing members’ assets or funds on 

deposit. 

The Commission acts to ensure parallel 

protections in the market for every asset 

class, adopting and seeking to implement the 

existing, well-tested, and effective regulatory 

framework under certain provisions of part 1 

of the CFTC’s regulation to the preservation 

of clearing member proprietary funds. This 

may be increasingly important as the 

Commission anticipates market participants’ 

introduction of novel financial products. 

In adopting the Proposed Rule, the 

Commission seeks to ensure that clearing 

member proprietary funds are easily 

identified and receive the proper treatment in 

the event the DCO enters an insolvency or 

bankruptcy proceeding. 

Today, the Commission takes a first step to 

ensure that there are parallel protections for 

both the ‘‘customers’’ of intermediaries, and 

the ‘‘clearing members’’ of DCOs who may 

include (in a direct clearing model) 

individual retail market participants. 

Regulatory Gap for Direct Participants in 

Non-Intermediated Clearing Models 

Section 4d of the Commodity Exchange Act 

(CEA) and parts 1, 22 and 30 of the 

Commission’s regulations establish a 

comprehensive regime to safeguard the funds 

belonging to customers of FCMs in the 

context of intermediated DCOs. 

The customer protection regime requires 

FCMs to segregate customer funds from their 

own funds, deposit customer funds under an 

account name that clearly identifies them as 

customer funds, and obtain a written 

acknowledgment from each depository that 

holds customer funds. The customer 

protection regime does not apply to the funds 

of a person that clears trades directly through 

a DCO and is a ‘‘clearing member’’ because 

such market participants do not meet the 

legal and regulatory definitions of the term 

‘‘customer.’’ 

Therefore, direct participants that are not 

‘‘customers’’ of intermediaries may not 

benefit from the Commission’s wellestablished customer protection regime. 

The Commission seeks to offer parallel 

customer protections to direct participants in 

non-intermediated DCOs—clearing 

members—to preserve the value of their 

proprietary funds, mitigate the risk of loss, 

and improve the availability of those funds 

for return to the clearing member should the 

DCO fail. Section 5b(c)(2)(F) of the CEA (Core 

Principle F) and CFTC Regulation § 39.15 

apply to the treatment of clearing members’ 

funds and assets held by a DCO. 

CFTC regulations require DCOs to establish 

standards and procedures designed to protect 

and ensure the safety of proprietary funds 

and require DCOs to hold proprietary funds 

in a manner that will minimize the risk of 

loss or delay in access by the DCO to the 

proprietary funds. Section 8a(5) of the CEA 

grants the Commission authority to adopt 

rules it determines are reasonably necessary 

to effectuate the DCO core principles.5 The 

safeguards in this Proposed Rule are indeed 

reasonably necessary to effectuate DCO Core 

Principle F.6

In light of the lack of parallel protections 

for ‘‘clearing members’’ who directly 

interface with DCOs, there is a significant gap 

in the Commission’s ability to ensure the 

protection and preservation of funds or assets 

of direct participants. This Proposed Rule 

closes the gap. 


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Federal Register / Vol. 89, No. 2 / Wednesday, January 3, 2024 / Proposed Rules 303 

7FTX Demonstrates Need for More Oversight: 

CFTC’s Johnson (Bloomberg TV Nov. 9, 2022), 

https://www.bloomberg.com/news/videos/2022-11- 

09/ftx-demonstrates-need-for-more-oversight-cftc-sjohnson. 

8See Commodity Futures Trading Commission v. 

Samuel Bankman-Fried, FTX Trading Ltd d/b/a 

FTX.com, and Alameda Research LLC (S.D.N.Y. 

2022) (Compl.). 

9Press Release No. 8230–20, CFTC, CFTC 

Approves LedgerX, LLC to Clear FullyCollateralized Futures and Options on Futures 

(Sept. 2, 2020), https://www.cftc.gov/PressRoom/ 

PressReleases/8230-20. 

10LedgerX’s ‘‘customers’’ are clearing members as 

described above and would not otherwise qualify 

for protections under parts 1 and 22 of the 

Commission’s regulations. 

11Currently, CBOE Clear Digital, LLC, CX 

Clearinghouse, L.P.; LedgerX, LLC, and North 

American Derivatives Exchange Inc. allow 

individuals to be direct clearing members. 

Additionally, ICE NGX Canada Inc. clears 

physically delivered energy contracts directly for 

clearing members with a net worth exceeding CAD 

$5,000,000 or assets exceeding CAD $25,000,000. 

12 Kristin N. Johnson, Commissioner, CFTC, 

Keynote Address at the World Federation of 

Exchanges Annual Meeting: Creating Rules of the 

Road for (Dis)Intermediated and (De)Centralized 

Markets (Sept. 21, 2023), https://www.cftc.gov/ 

PressRoom/SpeechesTestimony/opajohnson5. 

13See supra note 1. 

14 I note that the Commission has negotiated the 

inclusion of AML requirements in the registration 

order for several DCOs, including CBOE Clear 

Digital, LLC and LedgerX LLC. I commend DCOs 

that have implemented these conditions. 

The Collapse of the FTX Complex 

The bankruptcy of FTX illustrates the 

magnitude of the losses that customers may 

experience in the absence of regulation that 

prohibits commingling of client assets or 

imposes obligations to segregate client assets 

for the benefit of customers. 

In November 2022, FTX Trading Ltd. d/b/ 

a/FTX.com (FTX), Alameda Research LLC 

(Alameda) and approximately one hundred 

and thirty FTX-affiliated entities filed for 

bankruptcy in the United States. 

Contemporaneous with the bankruptcy filing, 

the Department of Justice (DOJ), Commission, 

and other federal regulators began to 

investigate claims that FTX employed 

omnibus accounts that commingled customer 

funds with the FTX enterprise resources, 

allegedly misappropriating more than $10 

billion in client assets.7

The CFTC has alleged that Mr. BankmanFried and FTX solicited customers on the 

premise that the FTX platform could be 

trusted.8 The CFTC’s complaint alleges that 

despite these statements, FTX permitted 

Alameda to access customer deposits and 

commingle customer assets with Alameda’s 

proprietary assets, which were used for 

Alameda’s and its executives’ own business 

operations, personal purchases, acquisitions 

of other businesses, and risky investments. 

While soliciting customers to trust in the 

integrity of its business, FTX is alleged to 

have siphoned off billions in customer 

deposits. 

The Benefits and Limits of Alternatives to 

Regulation: LedgerX 

LedgerX, a non-intermediated 

clearinghouse registered with the 

Commission as a DCO and owned by parent 

company FTX, illustrates the importance of 

the protections advanced in the proposed 

rulemaking. 

On October 25, 2021, FTX.US acquired 

LedgerX through a Delaware company doing 

business as West Realm Shires Services Inc. 

(West Realm Shires). When parent company 

FTX filed a petition seeking bankruptcy 

protection on November 11, 2022, the 

bankruptcy court declared LedgerX a nondebtor entity. LedgerX was one of the few 

assets within the network of FTX-affiliated 

companies that remained solvent. 

In 2017, years before the acquisition by 

West Realm Shires, LedgerX submitted an 

application with the Commission seeking 

authorization to register as a DCO offering 

fully-collateralized (crypto) derivatives 

contracts. The Commission’s order, amended 

in September 2020, imposed a number of 

important conditions, including a condition 

requiring LedgerX to ‘‘at all times maintain 

funds of its clearing members separate and 

distinct from its own funds.’’ 9

When FTX filed for bankruptcy protection, 

the conditions in the LedgerX order and 

Commission staff’s enforcement of 

compliance with the conditions contributed 

significantly to the preservation of LedgerX’s 

customer property.10 The LedgerX order 

serves as an important precedent for the 

framework the Commission must consider 

when adopting parallel protections for DCO 

direct clients, particularly retail clients, in 

the non-intermediated context. 

In 2022, LedgerX applied to amend its 

order of registration as a DCO to allow it to 

modify its existing non-intermediated model 

to clear margined products for retail 

participants while continuing with a nonintermediated model. 

In May 2022, the Commission held a 

convening to examine the implications of a 

derivatives clearing market structure that 

offers direct-to-client services. The convening 

outlined important issues addressed in this 

Proposed Rule. 

The Rise of Non-Intermediated DCOs 

DCOs play an increasingly important role 

in the financial markets, though DCOs have 

been central to facilitating access to the 

derivatives market since the founding of our 

nation and the futures market. The DoddFrank Act introduced a framework for the 

regulation of swaps that imposed central 

clearing and trade execution requirements, 

registration and comprehensive regulation of 

swap dealers, and recordkeeping and realtime reporting requirements. 

The clearing market structure has evolved 

from a traditional clearing model, where an 

FCM served as an intermediary in 

transactions between a customer and a DCO, 

to a direct clearing model, where the 

transactions are between the customer and 

the DCO directly.11 As I have previously 

stated: 

FCMs solicit and accept orders for 

derivatives transactions on behalf of 

customers and receive customer funds to 

margin, guarantee, or secure derivatives 

transactions. FCMs are subject to significant 

regulatory requirements, including customer 

protection safeguards, safety and soundness 

capital requirements, risk management, 

conflicts of interest requirements, and antimoney laundering and know-your-customer 

programs.12

At the core, in a traditional, intermediated 

model, customer protection rules apply to 

FCMs and require FCMs to segregate 

customer funds, including when such funds 

are held at a DCO, among other safekeeping 

measures. 

In newly emerging disintermediated 

market structures, the absence of an 

intermediary creates a gap in the application 

of the CFTC’s customer protection rules 

because key customer protections are 

triggered by the presence of a ‘‘customer,’’ as 

defined by the CFTC, and an FCM that 

facilitates the clearing of a customer’s 

derivatives transactions at the DCO.13

The Proposed Rule achieves parallel 

protections by applying key aspects of the 

customer protection regime to proprietary 

funds of clearing members and imposing 

parallel asset protection requirements on 

DCOs—both in intermediated and nonintermediated clearing models. 

In addition, the Proposed Rule contains 

important requests for comments, soliciting 

feedback and engagement from the industry 

on a number of potential future actions. 

Future Rulemaking: Anti-Money Laundering 

Requirements for DCOs 

Anti-money laundering (AML) regulations 

ensure that all transactions in our markets are 

subject to identification verification 

standards and prevent illicit activity in our 

markets. 

It is imperative that the Commission 

continue to engage with the U.S. Department 

of Treasury to ensure that AML regulations 

apply to all applicable market structures 

involving activities that create obligations to 

comply with AML regulations. 

The Proposed Rule includes a request for 

comment that asks how might the 

Commission ensure AML and KYC 

compliance for DCOs that offer direct 

clearing services (a market structure that 

would not include FCMs or other 

intermediaries that are typically directed to 

create Bank Secrecy Act compliance 

programs)? Should DCOs offering direct-tocustomer services to non-eligible contract 

participants or retail customers be required to 

comply with AML and KYC requirements? 

Following consultation with the U.S. 

Department of Treasury, the Commission 

may need to engage in a formal rulemaking 

that imposes AML requirements on DCOs.14

Technical Clarifications in CFTC Regulation 

1.25 

The Proposed Rule allows DCOs to invest 

proprietary funds in permitted investments 

pursuant to CFTC Regulation § 1.25. The 

drafting cross-refers to CFTC Regulation 

§ 1.25, but the Commission is currently 

engaged in a proposed rulemaking that 

amends CFTC Regulation § 1.25. My 

supporting statements to amendments to 

CFTC Regulation § 1.25 note that it is 

imperative that the Commission consider an 

equivalent application of CFTC Regulation 


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304 Federal Register / Vol. 89, No. 2 / Wednesday, January 3, 2024 / Proposed Rules 

15 Kristin N. Johnson, Commissioner, CFTC, 

Statement on Preserving Trust and Preventing the 

Erosion of Customer Protection Regulation (Nov. 3, 

2023), https://www.cftc.gov/PressRoom/ 

SpeechesTestimony/johnstatement110323. 

16 In footnote 45 in the Proposed Rule, the 

Commission notes: Proposed § 39.15(e) crossreferences § 1.25, which provides that an FCM or 

DCO may invest ‘‘customer money’’ in certain 

instruments. The regulatory text of § 1.25, however, 

does not refer to ‘‘proprietary funds.’’ The 

Commission recently approved proposed 

amendments to § 1.25. Based on comments received 

on those proposed amendments, if appropriate, the 

Commission may consider further amending § 1.25 

either in the final rule or as a re-proposed rule to 

ensure that the regulatory text provides clarity on 

the application of § 1.25 to a DCO’s investment of 

‘‘proprietary funds,’’ as permitted under § 39.15(e). 

17See supra note 15. 

1See Financial Stability Oversight Council, 

Annual Report 2023, https://home.treasury.gov/ 

system/files/261/FSOC2023AnnualReport.pdf, 

(December 14, 2023). 

2Commissioners received it late Wednesday, the 

day before Thanksgiving, three weeks before the 

meeting, with no prior engagement with 

Commissioners on the content of the rule. Because, 

it raised serious questions, I asked that it be pulled 

from the meeting and that Commissioners would 

have more time. My request was denied with no 

reason given. 

3See CFTC to Hold and Open Commission 

Meeting on December 13, https://

www.youtube.com/watch?v=zANNkH5STzk, 

(December 13, 2023) at 2:12:00. 

4See Id. at 3:07:40–3:08:40; 3:16:52–3:17:40. 

5See Id. at 2:37:45–2:39:10. 

6See Id. at 2:44:20–2:44:55. 

§ 1.25 in the context of a DCO’s investment 

of the member property of retail customers.15

Comments to the Proposed Rule should 

indicate how best to ensure equivalence.16

Periodic Reporting of Daily Reconciliations 

The Proposed Rule requires a DCO to 

notify the CFTC of discrepancies in its daily 

calculations. The Commission exercises 

direct oversight with respect to DCOs, 

meaning DCOs are not supervised by selfregulatory organizations (SRO) or designated 

self-regulatory organizations (DSRO). The 

Commission performs the examination 

functions. DCOs may benefit from a similar 

oversight as FCMs, which involves a regular 

reporting of reconciliation and not just the 

reporting of discrepancies.17 DCOs are 

subject to robust Commission regulations, 

examinations, and oversight. It will be 

important to receive comments from all 

stakeholders regarding the reporting of DCO 

reconciliations. 

Conclusion 

It is my hope that this Proposed Rule will 

move forward so that we can begin to 

introduce greater protections for clearing 

members, including retail customers. I thank 

the Division of Clearing and Risk—Clark 

Hutchinson, Eileen Donovan, Theodore 

Polley, and Scott Sloan—for their 

tremendous efforts in advancing this very 

important, significant, and transformative 

Proposed Rule. 

Appendix 4—Dissenting Statement of 

Commissioner Christy Goldsmith Romero 

This week, the Commission in a split vote, 

on which I dissented, approved the first 

proposed rule related to FTX’s bespoke 

direct-to-retail market structure. That 

structure removed the intermediary (known 

as a futures commission merchant or FCM) 

where the CFTC’s customer protection and 

anti-money laundering regimes sit. I believe 

that before my tenure, the Commission made 

a mistake in approving two clearinghouses 

(LedgerX owned by FTX before FTX’s 

bankruptcy, and Nadex, which is now 

Crypto.com) for this direct-to-retail market 

structure before analyzing and addressing the 

risks of a lack of AML requirements, 

customer protections, and other checks and 

balances. 

After FTX’s bankruptcy, the CFTC is now 

trying to remedy the consequences of its 

mistake, one of which is that retail 

participants do not have customer 

protections under this model because they 

lose their status as ‘‘customers,’’ instead 

becoming ‘‘clearing members.’’ In the open 

meeting, the CFTC staff said that the 

proposed rule was an attempt to provide 

parallel protections to those individuals who 

we would normally consider to be 

‘‘customers,’’ but who now are ‘‘members.’’ 

But it fails to provide parallel protections to 

retail participants. The proposed rule 

attempts to port over to this direct-to-retail 

model one protection (segregation of funds, 

which I support) without the other 

protections, or checks and balances present 

in an intermediated model with an FCM. 

I do not know if it is even possible for the 

CFTC to give parallel protections to retail 

participants under a direct-to-retail model, 

because the Commodity Exchange Act and 

Commission rules contemplate the presence 

of an FCM. Additionally, anti-money 

laundering controls sit with the FCM, and 

clearinghouses have no AML requirements. 

AML is a critical guardrail for national 

security and customer protection. The 

Financial Stability Oversight Council’s 

(FSOC) 2023 Annual Report says, ‘‘Cryptoassets remain susceptible to misuse by 

terrorist organizations and other sanctioned 

individuals’ efforts to move funds in support 

of illicit activities.’’ 1

I do not believe that the rule, which was 

rushed in three weeks at the end of the year, 

is sufficient to remedy that earlier mistake. 

The rule would benefit from more time than 

three weeks.2 We should step back and assess 

the impact of changing the tried and true 

market structure by removing the FCM. 

Without addressing a number of serious 

issues, the rule may give a false sense of 

security about the safety of a direct-to-retail 

model, while hiding the threats. The CFTC 

staff in the open meeting said that there are 

a number of applications pending for this 

model and they expect more. Without an 

assessment, we may just move risk around 

the system, while creating an illusion of 

safety. 

Such an assessment would implement a 

recommendation from the FSOC. In its 

October 2022 Report on Digital Asset 

Financial Stability Risks and Regulation, the 

FSOC recommended that member agencies 

(including the CFTC) ‘‘assess the impact of 

vertical integration (i.e., direct access to 

markets by retail customers) on conflicts of 

interest and market volatility, and whether 

vertically integrated market structures can or 

should be accommodated under existing laws 

and regulations.’’ The CFTC has not 

conducted this analysis, leaving the CFTC 

out of step with FSOC’s recommendation. 

I invite the public to watch this week’s 

CFTC public meeting, which showed that 

there are serious issues that the CFTC should 

assess and address before accommodating 

this crypto industry model.3 The first is 

whether the CFTC can impose AML 

requirements on clearinghouses to prevent 

retail funds from being commingled with 

funds belonging to terrorists, cyber criminals 

and drug cartels—a question on which the 

CFTC is in the middle of its analysis.4 This 

rule also does not require disclosures to 

inform retail participants that they are giving 

up customer protections and bankruptcy 

customer priority, instead taking the status of 

‘‘clearing members,’’ similar to the roles and 

duties that normally falls to an FCM such as 

a large bank.5 The rule also would not limit 

clearinghouses to depositing these ‘‘member’’ 

funds in only banks or trusts, as FCMs are 

required, which would allow the 

clearinghouse to deposit funds with an 

unregulated affiliate.6

Instead of learning the lessons of FTX, I 

worry that rushing to approve this proposal 

leaves the Commission out of step with other 

federal financial regulators that are asking 

whether a direct-to-retail model can or 

should be accommodated under current law, 

and assessing its implications. I also worry 

that this proposed rule will form the basis for 

the CFTC to approve more crypto companies 

for this direct-to-retail model under the false 

impression that this model is safe. I am 

concerned about rushing this rule through at 

the end of the year in three weeks’ time, 

when these are critical post-FTX issues. I 

must dissent. 

The CFTC’s Laws and Regulations Protect 

Customers and Guard Against Illicit Finance 

Through a Market Structure That Has Stood 

the Test of Time 

Clearinghouses play an important public 

interest role—they are critical market 

infrastructure intended to foster financial 

stability, trust, and confidence in U.S. 

markets. Dodd-Frank Act reforms increased 

central clearing, thereby increasing financial 

stability. Those reforms also concentrated 

risk in clearinghouses. With that 

concentrated risk, it is critical that the 

Commission maintain vigilance in its 

oversight over clearinghouses to identify and 

monitor risk and promote financial stability. 

This is most important for the CFTC’s 

monitoring of systemic risk. 

FCMs also play an important role. First, 

they stand as a shock absorber, providing 

additional financial support to the 

clearinghouse to safeguard the financial 

system. Second, because they are customerfacing, they are responsible for providing 

customer protections. The customer 

protection regime under the Commodity 

Exchange Act and CFTC rules are found in 


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7See Financial Stability Oversight Council, 

Report on Digital Asset Financial Stability Risks 

and Regulation, https://home.treasury.gov/news/ 

press-releases/jy0986, (October 3, 2022). 

8The CFTC conditioned LedgerX’s registration on 

the trades being fully collateralized. FTX applied to 

eliminate this condition to issue margined products 

directly to customers. I was not in favor of FTX’s 

application, and signaled that weeks before FTX’s 

failure. See CFTC Commissioner Christy Goldsmith 

Romero, Financial Stability Risks of Crypto Assets: 

Remarks before the International Swaps and 

Derivatives Association’s Crypto Forum 2022, 

https://www.cftc.gov/PressRoom/ 

SpeechesTestimony/oparomero3, (Oct. 26, 2022). 

9See Financial Stability Oversight Council, 

Report on Digital Asset Financial Stability Risks 

and Regulation, https://home.treasury.gov/news/ 

press-releases/jy0986, (October 3, 2022). 

10See CFTC Commissioner Christy Goldsmith 

Romero, Crypto’s Crisis of Trust: Lessons Learned 

from the FTX’s Collapse, https://www.cftc.gov/ 

PressRoom/SpeechesTestimony/oparomero5#_

ftnref10, (Jan 18, 2023) (I warned in the aftermath 

of FTX’s collapse about how commingling presents 

‘‘a significant threat to customers that can leave 

customers in a musical chairs dilemma.’’) 

11All participants, retail or institutional, are 

considered clearinghouse members. This is not 

some technical, legalistic distinction. Our laws will 

treat those retail participants the same as the largest 

financial institution. 

12See Financial Stability Oversight Council, 

Annual Report 2023, https://home.treasury.gov/ 

system/files/261/FSOC2023AnnualReport.pdf, 

(December 14, 2023). 

requirements for FCMs. In its October 2022 

report, the FSOC discussed: 7

The current framework of markets 

regulation is generally structured around the 

requirement or presumption that markets are 

accessed by retail customers through 

intermediaries such as broker-dealers or 

future commission merchants (FCMs). Those 

intermediaries perform many important 

functions, such as processing transactions, 

acting as agent and obtaining best execution 

for customers, extending credit, managing 

custody of customer assets, ensuring 

compliance with federal regulations, and 

guaranteeing performance of contracts. As a 

result of the special role these intermediaries 

play in traditional market structures, they are 

subject to unique regulations often focused 

on customer protections, such as regulations 

around conflicts of interest, suitability, best 

execution, segregation of funds, disclosures, 

and fitness standards for employees. 

Upending this traditional market structure, 

without analysis, can have unintended 

consequences. 

There Are No Customers or Customer 

Protections in a Direct-to-Retail Model 

The CFTC does not require disclosures to 

retail participants about the consequences of 

participating in this model. In the direct-toretail model, customers lose their status as 

‘‘customers,’’ thereby losing all of the 

customer protections in the CFTC’s 

regulatory framework, and instead take the 

status of ‘‘clearing members,’’ raising a host 

of issues. It is unlikely that retail customers 

know and understand that they gave up all 

of their customer protections. It is also 

unlikely that retail customers know and 

understand that in the event of a bankruptcy, 

they lose their ‘‘customer’’ priority in a 

distribution. It is also a question whether 

these retail customers would have to take on 

the FCM’s shock absorbing role. 

When FTX’s application for authority to 

issue margined crypto products 8 was 

pending before us, on May 25, 2022, the 

CFTC held a roundtable on the 

disintermediated model. We heard then and 

later received comments from many 

stakeholders expressing serious concerns 

over this model. 

The FSOC also expressed concerns over 

direct-to-retail models, warning in its 

October 2022 report: 

Financial stability implications may arise 

from vertically integrated platforms’ 

approaches to managing risk . . . Direct 

exposure by retail investors to rapid 

liquidations of this kind also raises investor 

and consumer protection issues. Platforms 

dealing directly with retail investors would 

need to ensure the provision of adequate 

disclosures, responsibilities otherwise taken 

on by intermediaries. The vertically 

integrated model presents conflict of 

interest....9

The CFTC has not conducted the 

assessment that FSOC recommended more 

than one year ago. It is an open question of 

whether the CFTC should accommodate 

these direct-to-retail models given how much 

is lost, including the loss of the CFTC’s 

customer protection regime and AML regime. 

This Rushed Proposed Rule Does Not 

Replace Customer Protections, AML, and 

Other Checks and Balances, Lost by 

Removing the FCM 

The CFTC has had a year to learn the 

lessons from FTX’s application and assess 

direct-to-retail models as FSOC 

recommended. I am strongly in favor of 

strengthening customer protections, 

particularly for retail, including banning 

commingling of customer funds,10 but this 

proposal is not about ‘‘customer’’ funds. In a 

direct-to-retail model, legally, there are no 

customers. I am not in favor of retail losing 

their status as customers and losing customer 

protections.11 The proposed rule would be 

the first post-FTX rule on this model, but it 

was rushed and as a result, lacks sufficient 

analysis. 

The question raised by the FSOC of 

whether we should accommodate this market 

structure from crypto is a critical one to 

answer. The deliberations at last week’s open 

meeting confirmed that it may not be 

possible to give retail participants the same 

protections in a disintermediated model as in 

the intermediated model. And just last week, 

the FSOC Annual Report again warned about 

the vulnerabilities arising from collapsing 

regulatory functions into a single entity, 

including ‘‘conflicts of interest, inappropriate 

use of clients’ funds, and market 

manipulation.’’ 12

This rule would not resolve the FSOC’s 

concerns. It does not contain the assessment 

needed as to risk and what regulatory 

requirements would be required in a directto-retail model to meet a ‘‘same risk, same 

regulatory outcome approach’’ that makes up 

for the checks and balances lost from 

removing the FCM. That would require 

establishing the basic foundation of customer 

protections and guardrails (including against 

illicit finance). Without that analysis, this 

proposal puts the CFTC out of step with 

other federal financial regulators. 

The Direct to Retail Model Raises Many 

Questions the CFTC Has Not Adequately 

Considered 

My concerns about a direct-to-retail model 

include: 

1. Losing status of ‘‘customer’’: Regular 

people lose their protections as ‘‘customer’’ 

under the law in the direct-to-retail model. 

Instead, they are treated as clearinghouse 

‘‘members,’’ a role that traditionally has been 

reserved for FCMs, which include the largest 

financial institutions. The regular person 

trading in bitcoin futures or event contracts 

is not the same as J.P. Morgan or Wells Fargo. 

Clearing members have obligations to the 

clearinghouse to stave off clearinghouse 

failure. This presumably would also be the 

case for retail acting as members. I have 

serious concerns about whether retail 

participants understand what they are giving 

up and that this is the role they are taking 

on. The CFTC should consider requiring 

plain English disclosures delivered in a 

manner that actually informs people of their 

rights and risks, as opposed to a click-wrap 

agreement or lengthy legal document. 

2. No AML/CTF/KYC: Because the 

Commodity Exchange Act envisions the 

presence of an FCM that has significant 

responsibilities, including anti-money 

laundering/Know Your Customer 

requirements, clearinghouses do not have 

currently have any obligation to implement 

Anti-Money Laundering, Countering 

Terrorist Financing or Know Your Customer 

safeguards, opening up our market to illicit 

finance. The Commission staff are still 

analyzing what safeguards the CFTC can 

require. 

3. No requirements to deposit funds in a 

regulated entity: FCMs are required to hold 

customer funds at a bank, trust or a CFTCregulated entity. That requirement is absent 

for member funds and is not added in this 

rule, allowing clearinghouses to place the 

funds anywhere, even an affiliate. That 

means that FTX’s registered clearinghouse 

LedgerX could have deposited retail 

‘‘member’’ funds with Alameda, the trading 

firm involved in the loss of billions of 

customer funds. 

4. No checks and balances: FCMs who 

interface with customers have regulatory 

requirements for customer protections, and 

have incentives to monitor the clearinghouse 

to make sure it is not misusing customer 

funds. This role sits empty in a direct-toretail model. 

5. No customer bankruptcy priority: In the 

case of the clearinghouse bankruptcy under 

this model, the bankruptcy code would not 

consider retail participants to be 

‘‘customers,’’ and they would not receive the 

customer priority in any distribution. 

More Time Is Needed To Analyze New AML 

Requirements for Clearinghouses 

I want to call special attention to the 

proposal’s lack of anti-money laundering 

(AML) and know your customer (KYC) 

requirements for clearinghouses. Without 


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306 Federal Register / Vol. 89, No. 2 / Wednesday, January 3, 2024 / Proposed Rules 

13See Attorney General, U.S. Department of 

Justice, The Role of Law Enforcement in Detecting, 

Investigating, and Prosecuting Criminal Activity 

Related to Digital Assets, https://www.justice.gov/ 

d9/2022-12/The%20Report%20of%20the%20

Attorney%20General%20Pursuant%20

to%20Section.pdf, (Sept. 6, 2022). 

14Wall Street Journal, ‘‘Hamas Needed a New 

Way to Get Money From Iran. It Turned to Crypto,’’ 

https://www.wsj.com/world/middle-east/hamasneeded-a-new-way-to-get-money-from-iran-itturned-to-crypto-739619aa?mg=prod/com-wsj, 

(Nov. 12, 2023). The CFTC has brought enforcement 

actions against two spot crypto exchanges, BitMEX 

and Binance, for failing to follow AML controls. 

Our action against Binance found that instead of 

implementing those controls, Binance turned a 

blind eye and even advised users to circumvent the 

superficial controls it claimed to have. 

15CFTC to Hold and Open Commission Meeting 

on December 13, https://www.youtube.com/ 

watch?v=zANNkH5STzk, (December 13, 2023) at 

3:16:20–3:17:50. 

16 Id. 

17 It would require direct clearing customer funds 

to be held in a separate account from the 

clearinghouse’s funds, in an account identifying 

them as belonging to the customers. Those funds 

could only be used on behalf of the customer, not 

on behalf of the company or its affiliates. The funds 

would need to be accounted for daily, and 

reconciled with the total amount the clearinghouse 

owes its customers. It would also limit what 

clearinghouses can invest those funds in, with the 

same limits that apply to brokers today under 

Commission Regulation § 1.25. These protections 

are largely in line with the representations made by 

FTX about LedgerX’s rules in its application. 

18See Commissioner Christy Goldsmith Romero, 

Crypto’s Crisis of Trust: Lessons Learned from the 

FTX’s Collapse, https://www.cftc.gov/PressRoom/ 

SpeechesTestimony/oparomero5#_ftnref10, (Jan 18, 

2023). 

19CFTC to Hold and Open Commission Meeting 

on December 13, https://www.youtube.com/ 

watch?v=zANNkH5STzk, (December 13, 2023) at 

2:42:40–2:46:08. 

20Called ‘‘customer funds other than member 

property.’’ See CFTC, Bankruptcy Regulations, 86 

FR 19324 at 19365 (April 13, 2021). 

21 Id. at 19378. There are also rules allocating 

customer property among account classes. 

these protections, retail funds may be at 

serious risk of seizure if they are commingled 

with funds of terrorist organizations, drug 

cartels, or other illicit actors. It is well known 

that cryptocurrency transactions are used to 

finance cybercrime, terrorism, sanctions 

avoidance, and the drug trade.13 News 

reports suggest that Hamas used 

cryptocurrency to receive significant funding 

preceding its October 7th attacks.14

FCMs have regulatory responsibilities to 

implement AML and KYC procedures, to 

perform standardized diligence, to verify 

customer identify and to assess whether 

customers may be known or suspected 

terrorists or sanctioned individuals. That 

AML/CTF/KYC responsibility puts them at 

the front lines of combating illicit finance. 

The legal requirement also means the CFTC 

and the National Futures Association can 

examine how FCMs are implementing 

required anti-money laundering controls. 

That makes it more likely we will identify 

material weaknesses before an FCM becomes 

a conduit for illicit funds. Reporting 

requirements also may make it easier for law 

enforcement to identify suspicious patterns 

and investigate them. 

The proposed rule would not impose any 

AML responsibilities for clearinghouses. 

Under the proposal, retail participants could 

have their funds commingled with those 

deposited by terrorist or cybercriminals, 

including state-sponsored cybercrime gangs. 

In a seizure, the FBI, other law enforcement 

or Treasury would seize all of the funds. I 

would consider that a very serious risk to 

member funds, one that the proposal does 

not address. 

At the open meeting, when I asked whether 

the CFTC could impose AML requirements 

on clearinghouses, the CFTC’s General 

Counsel said that they had not completed 

their analysis, but had not foreclosed the 

possibility that the CFTC has authority to 

impose AML requirements on clearinghouses 

and that ‘‘it has some promise.’’ 15 The 

proposed rule contained no analysis of this 

issue. That was one of the reasons why I 

asked that this proposed rule be pulled off of 

the meeting, so that the CFTC could continue 

to work on that analysis and include AML 

requirements. My request was denied. At the 

open meeting, the Office of the General 

Counsel said that while the analysis was 

ongoing, ‘‘it was decided on a policy basis 

that we save that for another day.’’ 16 That 

was not a policy decision made by a majority 

of the Commission as that was never before 

us. 

More Analysis Is Needed To Determine 

Whether Other Customer Protections and 

Other Checks and Balances Can Be Provided 

to Clearinghouses in the Direct-to-Retail 

Model 

This proposal would impose some 

safeguards for member funds held at a 

disintermediated clearinghouse by banning 

commingling and imposing certain limits on 

how funds can be used.17 But it is narrowly 

targeted, and serious gaps remain, leaving the 

proposed requirements far from the same 

regulatory outcome as the traditional model. 

Location of Deposits 

FCMs and clearinghouses in the traditional 

model are only permitted to deposit customer 

funds with regulated entities—a bank or 

trust, a clearinghouse, or another FCM— 

giving the CFTC visibility into customer 

funds, and layering customer protections. 

This proposal would not have the same 

limitation because these would not be 

‘‘customer’’ funds. This proposed rule could 

benefit from adding in the same requirement. 

Otherwise, member funds could be deposited 

with an unregulated entity, including an 

unregulated affiliate with conflicts of 

interest, that introduces more risk, leaving 

the CFTC blind to risk.18 At the meeting, the 

Commission heard from staff that they were 

concerned about whether the current 

requirement for where FCM’s can deposit 

funds provided sufficient protections for 

customers.19 The proposal does not have any 

analysis of these concerns, likely because it 

was rushed. 

Oversight From Checks and Balances 

The proposal also does not replicate 

another important guardrail of traditional 

market structure: checks and balances. 

Separate clearinghouses and brokers (FCMs) 

create natural bumper guards not present in 

the direct-to-retail model. However, the 

proposed rule contains no analysis of the 

impacts of moving forward with this nontraditional model. Instead, at the open 

meeting, comments were made to the effect 

about how certain companies have 

determined that they prefer this market 

structure, and the staff expect there to be 

more applications for this model. It is 

concerning to me that this rushed rule may 

be used to facilitate expanding the use of this 

model, which is not responsible without 

further assessment as FSOC recommended. 

Bankruptcy Priority for Customers 

The failures of FTX and Celsius show 

bankruptcy priority is a serious issue, 

especially in the retail space. Retail 

participants do not have the same ability as 

institutions to withstand losses or delay. 

Existing bankruptcy law assumes a 

traditional market structure.20 Customers 

take priority over FCMs in distributions.21

Retail participants in a disintermediated 

clearing model may not realize that they are 

losing bankruptcy priority as customers 

because the CFTC requires no disclosures. 

This loss of priority is not discussed in the 

proposal. We should consider requiring clear 

disclosures. 

Conclusion 

It is not responsible to rush our first postFTX rule on direct-to-retail models in three 

weeks at the end of the year, without 

conducting the necessary assessment of the 

impact of this model as FSOC recommended 

more than one year ago. I asked for this 

proposed rule to be pulled off this open 

meeting. I am concerned about the lack of 

that assessment, including but not limited to 

specific analysis of: (1) whether the CFTC 

should require disclosures to inform retail 

participants that they are losing their 

customer status in this direct-to-retail model, 

disclosures that describes their rights and 

risks; (2) whether it is possible to take a same 

risk, same regulatory outcome approach on 

issues such as where funds can be deposited 

and other concerns raised in comments to the 

FTX application about these models; and (3) 

whether the CFTC can require clearinghouses 

to conduct AML/CTF/KYC. Although there 

are some existing retail participants currently 

in this model, at the open meeting, the staff 

said that they were already ensuring that the 

two crypto direct-to-retail clearing houses 

were taking steps aligned with the proposed 

rule. 

Thirteen months after the collapse of FTX, 

I am glad that we are starting to address the 

direct-to-retail model as I have serious 

concerns about it, and remain concerned 

about any expansion of that model. However, 

the risks to retail, financial stability, market 

integrity and our national security, are too 

great to rush this in three weeks without 

analysis as FSOC recommended. Therefore, I 

must dissent. 

Appendix 5—Concurring Statement of 

Commissioner Caroline D. Pham 

I concur on the Notice of Proposed 

Rulemaking on Protection of Clearing 


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Federal Register / Vol. 89, No. 2 / Wednesday, January 3, 2024 / Proposed Rules 307 

1Commodity Exchange Act (CEA) section 4d, 7 

U.S.C. 6d, and Regulations §§ 1.20 through 1.39, 17 

CFR 1.20 through 1.39 (futures customer funds), 

22.1–22.17, 17 CFR 22.1 through 22.17 (cleared 

swaps customer collateral) and 30.7, 17 CFR 30.7 

(foreign futures) establish a comprehensive 

customer protection regime to safeguard the funds 

belonging to customers of FCMs. 

2See 17 CFR 1.20, 22.5, and 30.7. The 

acknowledgment letters must adhere to specific 

templates in the Commission’s regulations, and 

require a depository to acknowledge, among other 

things, that the accounts opened by the FCM hold 

funds that belong to the FCM’s customers. 

3See 17 CFR 1.32, 1.33, 1.25, and 1.49. 

4Regulation § 1.3, 17 CFR 1.3, defines a 

‘‘customer’’ as ‘‘any person who uses [an FCM], 

introducing broker, [CTA or CPO] as an agent in 

connection with trading in any commodity 

interest.’’ DCOs have to apply many of the customer 

protection requirements that apply to FCMs to the 

customer funds DCOs receive from FCM clearing 

members. DCOs must segregate the customer funds 

of their FCM clearing members from their own 

funds, deposit customer funds under an account 

name that identifies the funds as customer funds, 

obtain acknowledgment letters from depositories, 

limit the investment of customer funds to 

instruments listed in Regulation § 1.25, and limit 

depositories for customer funds to those listed in 

Regulations §§ 1.20 and 1.49. See 17 CFR 1.20(g)(1), 

39.15 (b), 22.3(b)(1), 1.20(g)(1) and (g)(4), and 22.5. 

However, these protections do not apply to DCO 

clearing members (i.e., those that are not FCMs). 

5See CEA section 5b(c)(2)(F), 7 U.S.C. 7a– 

1(c)(2)(F) (Core Principle F), and 17 CFR 39.15. 

6 Id. 

7For instance, the Commission is proposing to 

require a DCO to hold proprietary funds separately 

from the DCO’s own funds, in accounts that are 

named to clearly identify the funds as belonging to 

clearing members, to prohibit a DCO or any 

depository from using proprietary funds in any way 

other than as belonging to the clearing member, to 

have DCOs review, on a daily basis, the amount of 

funds owed to each clearing member with respect 

to each of its accounts, both customer (including, 

as relevant, futures and cleared swaps) and 

proprietary, and to reconcile those figures to the 

amount of funds held in aggregate in each such type 

of account across all of the DCO’s depositories, and, 

to have DCOs obtain proprietary funds 

acknowledgment letters. 

8The Commission provided exemptions from the 

current regulations for these DCOs in 2020. See 

Derivatives Clearing Organization General 

Provisions and Core Principles, 85 FR 4800 (Jan. 27, 

2020). However, I am suggesting a more holistic 

assessment of these DCOs and their clearing 

members. 

9 Keynote Address by Commissioner Caroline D. 

Pham at CordaCon 2022 (Sept. 27, 2022), available 

at https://www.cftc.gov/PressRoom/ 

SpeechesTestimony/opapham5. 

10 31 U.S.C. 5311 et seq. 

Member Funds Held by Derivatives Clearing 

Organizations (DCOs) (Proposed 

Amendments to Clearing Member Funds 

Requirements or Proposal) because it seeks to 

protect the proprietary funds of futures 

commission merchants (FCMs), and I 

understand that it essentially codifies the 

existing good practices most of the CFTC’s 

registered DCOs already follow. However, 

with respect to retail participants, I believe 

that the Commission should consider 

whether there should be a new registration 

category for direct clearing retail DCOs. I also 

renew my call for an Office of the Retail 

Advocate. Both of these steps would better 

ensure customer protection in our regulated 

markets. 

I would like to thank Scott Sloan, Tad 

Polley, Eileen Donovan, and Clark Hutchison 

in the Division of Clearing and Risk for their 

work on the Proposal. I appreciate the time 

staff took to answer my questions. 

Existing Protections for Both House 

Accounts and Customer Funds Have Worked 

Well for Decades Without Issues 

First, to be clear, the Commission already 

has extensive rules in place for protecting 

FCM customer funds.1 Arguably, it is one 

thing the CFTC is best-known for. For these 

FCM customers, FCMs must segregate 

customer funds from their own funds, 

deposit customer funds under an account 

name that clearly identifies them as customer 

funds, and obtain a written acknowledgment 

from each depository that holds customer 

funds.2 This customer protection regime also 

establishes accounting and reporting 

requirements applicable to customer funds, 

and limits both the types of investments that 

can be made with customer funds and the 

type of depositories that can hold customer 

funds.3

With respect to clearing member 

proprietary funds or house accounts,4

consistent with our system of self-regulation 

set forth in the Commodity Exchange Act, 

DCOs have to establish standards and 

procedures designed to protect and ensure 

the safety of proprietary funds, and hold 

them in a manner that will minimize the risk 

of loss or delay in access by the DCO to the 

funds.5 DCOs also have to invest clearing 

member proprietary funds in instruments 

with minimal credit, market, and liquidity 

risks.6

Today, the Commission is proposing new 

regulations for the protection of clearing 

member funds, based largely on the customer 

segregation requirements for FCMs and DCOs 

in Regulation § 1.20.7 The Proposal explains 

that new safeguards are needed for the direct 

participants at DCOs because (1) the 

Commission has registered a number of DCOs 

that clear directly for market participants 

without the involvement of FCMs (i.e., these 

DCOs are only clearing for individuals), and 

(2) many DCOs that use the traditional FCM 

clearing model have at least some non-FCM 

clearing members. 

While I appreciate the intent of today’s 

Proposal, with respect to DCOs that have 

FCMs as clearing members, I believe we must 

be careful in changing a regulatory 

framework that has served our markets 

without any real issues for decades. I believe 

that the Commission must have had a good 

reason when it originally distinguished 

between house accounts and customer funds. 

There have been a lot of spectres raised today 

that have nothing to do with our actual 

regulated markets. Speaking from a practical 

perspective, I worry that ‘‘if it ain’t broke, 

don’t fix it.’’ For example, we should 

recognize that DCOs might have operational 

reasons for the accounts distinction in our 

current rules. I encourage the public to 

comment on whether the Proposal is 

workable for DCOs in that regard. 

There Should Be a New Registration 

Category for Direct Clearing Retail DCOs 

and an Office of the Retail Advocate To 

Ensure Customer Protection 

I share the concerns where DCOs clear 

directly for retail participants without FCMs. 

I would go further and state that I am 

concerned that the Proposal’s targeted 

approach may miss larger issues. When a 

DCO faces direct retail participants that our 

rules categorize as clearing members, we 

effectively allow a model that eliminates 

intermediaries and the protections that they 

provide for customers. Intermediaries 

perform critical functions, and that is why 

markets all over the world require registered 

brokers and stringent protections for 

customers. 

If the Commission anticipates this type of 

DCO clearing model to proliferate, we should 

step back and consider all issues that these 

direct clearing retail DCOs raise.8 These 

types of concerns around retail participants 

are why I have proposed that the 

Commission needs an Office of the Retail 

Advocate.9 I continue to believe that having 

an Office of the Retail Advocate is a triedand-true way to advance customer 

protection, and may be especially effective in 

the area raised by today’s Proposal. 

For example, perhaps there should be a 

distinct registration category and 

requirements for direct clearing retail DCOs 

because they raise singular issues, risks, and 

concerns—foremost, who provides retail 

customer protection when there are no 

brokers or intermediaries. 

Frankly, I dislike a model where DCOs 

have clearing members that are retail. To 

achieve the same market structure outcome, 

I think it is better that a DCO has an affiliated 

FCM that only provides services for its retail 

participants on an affiliated DCM and DCO 

and would provide customer protections 

required under our rules. This would, 

therefore, not disrupt our existing regulatory 

framework and the current scope and 

application of the Bank Secrecy Act.10

Conclusion 

I believe the Commission should further 

study the direct clearing model for retail 

participants, together with the increase in 

retail binary option contracts. I hope that my 

proposal for an Office of the Retail Advocate 

comes to fruition, and that this is one of the 

first issues that we tackle. 

Again, I thank staff for the hard work on 

the Proposal. I look forward to the public’s 

comments on the Proposed Amendments to 

Clearing Member Funds Requirements. 

Thank you. 

[FR Doc. 2023–28767 Filed 1–2–24; 8:45 am] 

BILLING CODE 6351–01–P 


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