```

[Federal Register Volume 77, Number 25 (Tuesday, February 7, 2012)]
[Rules and Regulations]
[Pages 6336-6409]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1033]

[[Page 6335]]

Vol. 77

Tuesday,

No. 25

February 7, 2012

Part III

Commodity Futures Trading Commission

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17 CFR Parts 22 and 190

Protection of Cleared Swaps Customer Contracts and Collateral; 
Conforming Amendments to the Commodity Broker Bankruptcy Provisions; 
Final Rule

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

[[Page 6336]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 22 and 190

RIN Number 3038-AC99

Protection of Cleared Swaps Customer Contracts and Collateral; 
Conforming Amendments to the Commodity Broker Bankruptcy Provisions

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'') 
is adopting final regulations to implement new statutory provisions 
enacted by Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the ``Dodd-Frank Act''). Specifically, these 
regulations impose requirements on futures commission merchants 
(``FCMs'') and derivatives clearing organizations (``DCOs'') regarding 
the treatment of cleared swaps customer contracts (and related 
collateral), and make conforming amendments to bankruptcy provisions 
applicable to commodity brokers under the Commodity Exchange Act (the 
``CEA'').

DATES: The rules will become effective April 9, 2012. All parties must 
comply with the Part 22 rules by November 8, 2012. All parties must 
comply with the Part 190 rules by April 9, 2012. Prior to the 
compliance date for the Part 22 rules, the definition of 190.01(pp) 
(``Cleared Swap'') shall be limited to transactions where the rules or 
bylaws of a derivatives clearing organization require that such 
transactions, along with the money, securities, and other property 
margining, guaranteeing or securing such transactions, be held in a 
separate account for Cleared Swaps only.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Chief Counsel, 
Division of Clearing and Risk (DCR), at 202-418-5092 or 
rwasserman@cftc.gov; M. Laura Astrada, Associate Chief Counsel, DCR, at 
202-418-7622 or lastrada@cftc.gov; Alicia Lewis, Special Counsel, DCR, 
at 202-418-5862 or alewis@cftc.gov; or Martin White, Assistant General 
Counsel, Office of the General Counsel, at 202-418-5129 or 
mwhite@cftc.gov, in each case, at the Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. Segregation Requirements.
    B. Overview of the Clearing Process as it Relates to the 
Segregation Requirements.
    C. Segregation Alternatives.
    D. Operation of the Segregation Models in an FCM Bankruptcy.
    E. Solicitation of Public Input.
    F. Clarification of the Application of Financial and Segregation 
Interpretation No. 10 to Cleared Swaps.
II. The Final Rules
III. Segregation Model for Cleared Swaps Customer Collateral
    A. Summary of the Comments.
    B. Discussion of the Comments.
IV. Section by Section Analysis: Regulation Part 22
    A. Regulation 22.1: Definitions.
    B. Regulation 22.2--Futures Commission Merchants: Treatment of 
Cleared Swaps Customer Collateral.
    C. Regulation 22.3--Derivatives Clearing Organizations: 
Treatment of Cleared Swaps Customer Collateral.
    D. Regulation 22.4--Futures Commission Merchants and Derivatives 
Clearing Organizations: Permitted Depositories.
    E. Regulation 22.5--Futures Commission Merchants and Derivatives 
Clearing Organizations: Written Acknowledgment.
    F. Regulation 22.6--Futures Commission Merchants and Derivatives 
Clearing Organizations: Naming of Cleared Swaps Customer Accounts.
    G. Regulation 22.7--Permitted Depositories: Treatment of Cleared 
Swaps Customer Collateral.
    H. Regulation 22.8--Situs of Cleared Swaps Customer Accounts.
    I. Regulation 22.9--Denomination of Cleared Swaps Customer 
Collateral and Location of Depositories.
    J. Regulation 22.10--Application of other Regulatory Provisions.
    K. Regulation 22.11--Information to be Provided Regarding 
Customers and Their Cleared Swaps.
    L. Regulation 22.12--Information to be Maintained Regarding 
Cleared Swaps Customer Collateral.
    M. Regulation 22.13--Additions to Cleared Swaps Customer 
Collateral.
    N. Regulation 22.14--Futures Commission Merchant Failure to Meet 
a Customer Margin Call in Full.
    O. Regulation 22.15--Treatment of Cleared Swaps Customer 
Collateral on an Individual Basis.
    P. Regulation 22.16--Disclosures to Customers.
V. Section by Section Analysis: Amendments to Regulation Part 190
    A. Background.
    B. Definitions.
    C. Amendments to Regulation 190.02--Operation of the Debtor's 
Estate Subsequent to the Filing Date and Prior to the Primary 
Liquidation Date.
    D. Amendments to Regulation 190.03--Operation of the Debtor's 
Estate Subsequent to the Primary Liquidation Date.
    E. Amendments to Regulation 190.04--Operation of the Debtor's 
Estate--General.
    F. Amendments to Regulation 190.05--Making and Taking Delivery 
on Commodity Contracts.
    G. Amendments to Regulation 190.06--Transfers.
    H. Amendments to Regulation 190.07--Calculation of Allowed Net 
Equity.
    I. Amendments to Regulation 190.09--Member Property.
    J. Amendments to Regulation 190.10--General.
    K. Amendments to Appendix A to Part 190--Bankruptcy Forms, 
Bankruptcy.
    L. Amendments to Appendix B to Part 190--Special Bankruptcy 
Distributions.
VI. Effective Date
VII. Consideration of Costs and Benefits
    A. Introduction.
    B. Benefits and Costs of Complete Legal Segregation Model 
Relative to Futures Model.
    C. Conclusion.
VIII. Related Matters.
    A. Paperwork Reduction Act.
    B. Regulatory Flexibility Act.
IX. Text of Proposed Rules

I. Background

A. Segregation Requirements

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\ 
Title VII of the Dodd-Frank Act \2\ amended the CEA \3\ to establish a 
comprehensive new regulatory framework for swaps and certain security-
based swaps. The legislation was enacted to reduce risk, increase 
transparency, and promote market integrity within the financial system 
by, among other things: (1) Providing for the registration and 
comprehensive regulation of swap dealers and major swap participants; 
\4\ (2) imposing mandatory clearing and trade execution requirements on 
clearable swap contracts; (3) creating rigorous recordkeeping and real-
time reporting regimes; and (4) enhancing the Commission's rulemaking 
and enforcement authorities with respect to, among others, all 
registered entities and intermediaries subject to the Commission's 
oversight.
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    \1\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 
(2010). The text of the Dodd-Frank Act may be accessed at http://www.cftc.gov./LawRegulation/OTCDERIVATIVES/index.htm.
    \2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \3\ 7 U.S.C. 1 et seq.
    \4\ In this release, the terms ``swap dealer'' and ``major swap 
participant'' shall have the meanings set forth in section 721(a) of 
the Dodd-Frank Act, which added sections 1a(49) and (33) of the CEA. 
However, as directed by section 721(c) of the Dodd-Frank Act, the 
Commission is in the process of promulgating rules to further 
define, among other terms, ``swap dealer'' and ``major swap 
participant.'' See 75 FR 80173, Dec. 21, 2010.
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    Section 724 of the Dodd-Frank Act prescribes the manner in which 
Cleared

[[Page 6337]]

Swaps (and related collateral) \5\ must be treated prior to and after 
bankruptcy. Section 724(a) of the Dodd-Frank Act amends section 4d of 
the CEA to add a new paragraph (f), which imposes the following 
requirements on an FCM, as well as any depository thereof (including, 
without limitation, a DCO):
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    \5\ Regulation 22.1 defines ``Cleared Swap'' and ``Cleared Swaps 
Customer Collateral.''
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    1. The FCM must treat and deal with all collateral (including 
accruals thereon) deposited by a customer \6\ to margin its Cleared 
Swaps as belonging to such customer;
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    \6\ Regulation 22.1 defines ``Cleared Swaps Customer.''
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    2. The FCM must separately account for and may not commingle such 
collateral with its own property and may not, with certain exceptions, 
use such collateral to margin the Cleared Swaps of any person other 
than the customer depositing such collateral;
    3. A DCO may not hold or dispose of the collateral that an FCM 
receives from a customer to margin Cleared Swaps in any manner that 
would indicate that such collateral belonged to the FCM or any person 
other than the customer; and
    4. The FCM and the DCO may only invest such collateral in 
enumerated investments.
    In other words, the FCM and the DCO (i) must hold such customer 
collateral in an account (or location) that is separate from the 
property belonging to the FCM or DCO, and (ii) must not use the 
collateral of one customer to (A) cover the obligations of another 
customer or (B) the obligations of the FCM or DCO. These basic 
requirements that Cleared Swaps Customer Collateral be treated as the 
property of customers and maintained in segregated accounts (or 
locations) are imposed by the statute and have the force of law 
regardless of the Commission's particular implementing regulations. 
Moreover, by the terms of the statute, these requirements would apply 
even if the Commission promulgated no implementing regulations.
    Section 724(b) of the Dodd-Frank Act governs bankruptcy treatment 
of Cleared Swaps by clarifying that Cleared Swaps are ``commodity 
contracts'' within the meaning of section 761(4)(F) of the Bankruptcy 
Code.\7\ Therefore, in the event of an FCM or DCO insolvency, Cleared 
Swaps Customers may invoke the protections of Subchapter IV of Chapter 
7 of the Bankruptcy Code (``Subchapter IV''). Such protections include: 
(i) protected transfers of Cleared Swaps and related collateral; \8\ 
and (ii) if Cleared Swaps are subject to liquidation, preferential 
distribution of remaining collateral.\9\ However, section 766(h) of the 
Bankruptcy Code (``Section 766(h)'') subjects customers to mutualized 
risk by requiring that customer property be distributed ``ratably to 
customers on the basis and to the extent of such customers' allowed net 
equity claims.'' This requirement, in turn, limits the Commission's 
flexibility in designing a model for the protection of customer 
collateral.
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    \7\ 11 U.S.C. 761(4)(F).
    \8\ See, e.g., 11 U.S.C. 764.
    \9\ See, e.g., 11 U.S.C. 766(h) and (i).
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B. Overview of the Clearing Process as It Relates to the Segregation 
Requirements

1. Central Counterparties/Derivatives Clearing Organizations
    One of the primary objectives of the Dodd-Frank Act was to promote 
the central clearing of swaps and to establish the regulatory 
infrastructure for the clearing of swaps.\10\ Clearing is the process 
by which transactions in derivatives are processed, guaranteed, and 
settled by a central counterparty, also known as a DCO. In accordance 
with this overall Congressional purpose, section 724 of the Dodd-Frank 
Act amends the CEA to provide the statutory foundation for the 
protection of Cleared Swaps Customer Collateral.
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    \10\ See supra n. 1; S. Rep. No. 111-176, at 33 (2010) (``[w]ith 
appropriate collateral and margin requirements, a central clearing 
organization can substantially reduce counterparty risk and provide 
an organized mechanism for clearing transactions''); Process for 
Review of Swaps for Mandatory Clearing, 76 FR 44464, July 26, 2011 
(final rule); Derivatives Clearing Organizations General Provisions 
and Core Principles, 76 FR 69334, Nov. 8, 2011 (final rule).
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    A DCO has members (``Clearing Members'') who clear derivatives 
transactions (e.g., swaps) through the DCO and who are subject to the 
DCO's rules. Clearing Members may clear transactions on their own 
behalf (i.e., ``proprietary transactions'') or on behalf of customers 
(i.e., ``customer transactions''). Clearing members that clear swaps 
for customers must be registered as futures commission merchants 
(``FCMs'').\11\
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    \11\ Section 4d(f)(1) of the CEA, 7 U.S.C. 6d(f)(1).
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    The term ``central counterparty'' means, conceptually, that the DCO 
becomes the seller to every buyer, and the buyer to every seller. More 
specifically, the DCO novates swap transactions initially entered into 
between various market participants, such as swaps users, dealers, or 
end users, and cleared either directly (if the market participant is 
itself a Clearing Member) or indirectly (through an FCM that is a 
Clearing Member) . The contractual obligations between the original 
parties (``A'' and ``B'') \12\ are replaced by sets of equivalent 
obligations: between the Clearing Member FCMs acting for the original 
parties and the DCO and between the Clearing Member FCMs and their 
individual customers. Thus, if the original swap agreement would 
require a certain payment from A to B, as a result of the clearing 
process this obligation becomes (1) a duty by A's clearing FCM to pay 
the DCO, (2) a corresponding claim by A's FCM to recompense from A, (3) 
a duty by the DCO to pay B's clearing FCM, and (4) a corresponding duty 
by B's FCM to pay B.
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    \12\ For purposes of this example, neither A nor B is a Clearing 
Member.
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    In economic effect, the DCO serves as a guarantor that every 
Clearing Member party to a cleared swap receives performance according 
to the terms of the swap, while the clearing FCM serves as a guarantor 
of its customers' swaps obligations to the DCO.
2. Variation
    To avoid the accumulation of large obligations, the DCO conducts a 
variation payment and collection cycle at least once a day, and in the 
case of many DCOs, twice a day. The DCO will first calculate the gain 
(and corresponding loss) on each contract through a process known as 
``marking to market,'' using reported market prices where available, or 
other means (such as surveys of Clearing Members). The DCO will then 
aggregate and net the gains and losses for each Clearing Member 
(separately for proprietary and customer accounts), collect from those 
Clearing Members with net losses, and pay those Clearing Members with 
net gains. This process is highly time sensitive: The Clearing Member 
typically has only one or a few hours between the demand for payment 
and the time payment is due. Similarly, the Clearing Member FCMs will 
debit the accounts of those customers who have losses on their 
transactions, and credit the accounts of those customers who have 
gained.
3. Margin (Collateral)
    To secure the prompt payment of variation obligations, the DCO will 
require each Clearing Member to post collateral (often referred to as 
``margin'') for the transactions it clears (separately for customer 
positions and proprietary positions). If the Clearing Member does not 
promptly make a variation payment to the DCO--referred to as a 
default--the collateral may immediately be liquidated and applied to 
the obligation. Margin may only be used to meet the

[[Page 6338]]

default of the Clearing Member posting that margin. While proprietary 
margin may be used to meet obligations in either the Clearing Member's 
proprietary account or customer account, the reverse is not true: A 
Clearing Member's customer margin may not be used to meet a default in 
the Clearing Member's proprietary account.
    Similarly, FCMs will--indeed, are required to--collect collateral 
from each of their customers, based on each customer's portfolio of 
positions, to secure the prompt payment of the customer's variation 
obligations.\13\ If a customer fails to fulfill an obligation to the 
FCM arising out of a swap agreement the FCM clears for the customer, 
the FCM may use some or all of the value of the collateral that 
customer has posted to meet that obligation--that is the purpose of the 
collateral.
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    \13\ See regulation 39.13(g)(8)(ii) (stating that ``[a] 
derivatives clearing organization shall require its clearing members 
to collect customer initial margin, as defined in Sec.  1.3 of this 
chapter, from their customers, for nonhedge positions, at a level 
that is greater than 100 percent of the derivatives clearing 
organization's initial margin requirements with respect to each 
product and swap portfolio.''). 76 FR at 69439.
    The purpose of this rulemaking is to protect Cleared Swaps 
Customer Collateral in the event that an FCM defaults to a DCO due 
to ``Fellow-Customer Risk'' (as such term is defined in section 
I(B)(6) herein). However, as section III(B) explores in greater 
detail, the segregation model selected in this rulemaking provides 
limited protection from operational and investment risks.
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    The DCO will generally set minimum collateral levels for each type 
of swap, and will prescribe a ``margin methodology'' to determine the 
minimum margin level for portfolios of swaps. The DCO's margin 
methodology will be designed to estimate the amount of loss a portfolio 
of swap positions may incur, calculated at a statistical confidence 
level no less than 99%, over a holding period generally between one and 
ten days, depending on the time it is estimated to take to liquidate 
the swaps in the portfolio.\14\ The FCM will, in turn, use the same or 
similar methodology in determining the minimum level of collateral it 
must collect from each customer.\15\
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    \14\ See generally, 76 FR 69334. See specifically regulation 
39.13(g)(2)(ii) (setting forth a one-day minimum liquidation time 
for agricultural, energy, and metals swaps, and a five-day minimum 
liquidation time for all other swaps). 76 FR 69438.
    \15\ The FCM is required to collect a higher level of collateral 
from its customers than that prescribed for Clearing Members (see 
id.) and may, in its discretion, collect a yet higher level. See 
regulation 22.13(a)(1).
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4. Default Resources
    As noted above, the margin collateral collected by a DCO is 
designed to cover most (e.g., 99%), but not all, potential losses 
incurred by a Clearing Member. DCOs cover the ``tail risk'' (i.e., the 
risk that a Clearing Member will incur, and default on, a loss in 
excess of the margin collected) by means of what is sometimes referred 
to as a default resources package, or ``waterfall.'' Elements of the 
waterfall may include a contribution of a specified amount of the DCO's 
own capital, pre-funded contributions from Clearing Members (a 
``guaranty fund''),\16\ or (to a limited extent), a power by the DCO to 
assess additional contributions from Clearing Members. Unlike margin, a 
Clearing Member's contribution to the guaranty fund will generally be 
usable to meet the default of another Clearing Member. In other words, 
the guaranty fund is ``mutualized.'' Elements of the waterfall are 
applied in an order pre-determined by the DCO's rules. Such rules will 
often apply the guaranty fund contribution of the defaulter before the 
DCO's own capital, and the remainder of the guaranty fund (i.e., the 
guaranty fund contributions of the non-defaulting Clearing Members) 
thereafter.
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    \16\ See also infra at n. 250.
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    Though seemingly complex, centralized clearing has important 
advantages in terms of transparency, risk management, netting out of 
countervailing obligations, and reduced exposure of market participants 
to each other's credit risk (by effectively substituting the DCO's 
credit risk).
5. Customer Accounts
    Generally, a clearing FCM will have two different types of Cleared 
Swaps Customer Accounts in connection with collateral provided to it by 
Cleared Swaps Customers. One account is maintained (generally at a 
bank) by the FCM on behalf of its Cleared Swaps Customers (the ``FCM 
Customer Account''). The FCM Customer Account holds assets provided by 
customers, or other assets of equivalent value, that are not currently 
posted with the DCO to support swaps positions cleared by the FCM on 
behalf of its Cleared Swaps Customers. The other account is maintained 
by the DCO for the FCM on behalf of the FCM's Cleared Swaps Customers 
(the ``DCO Customer Account''). The DCO Customer Account holds customer 
assets, or assets of equivalent value, that the FCM has posted to the 
DCO as collateral for swaps positions that have been established and 
cleared by the FCM for its Cleared Swaps Customers.
    The collateral posted by each Cleared Swaps Customer is, however, 
potentially exposed to risks that do not arise out of the obligations 
that a Cleared Swaps Customer has directly incurred by assuming his or 
her swaps position. \17\ The most important impact of such risks would 
occur in the case of an insolvency on the part of the FCM through which 
the Cleared Swaps Customer clears. As discussed in more detail below, 
the new CEA section 4d(f), and the Commission's implementing 
regulations, are designed to provide protection for Cleared Swaps 
Customer Collateral against certain risks that may arise during an 
insolvency on the part of the FCM through which the Cleared Swaps 
Customer clears.
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    \17\ Examples of other risks include the possibility of misuse 
or misallocation of a Cleared Swaps Customer's assets by a dishonest 
or negligent FCM.
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6. Fellow-Customer Risk
    ``Fellow-Customer Risk'' is the risk that a DCO would need to 
access the collateral of non-defaulting Cleared Swaps Customers to cure 
an FCM default. Fellow-Customer Risk arises in circumstances in which a 
Cleared Swaps Customer (the ``defaulting customer'') of a clearing FCM 
suffers a (significant) loss in connection with a cleared swap.\18\ The 
loss will result in a call by the DCO for a variation payment from the 
clearing FCM that carries that Cleared Swaps Customer's Cleared 
Swaps.\19\ The clearing FCM may demand expedited payment from the 
defaulting Cleared Swaps Customer, but is in any event directly 
obligated promptly to meet the payment obligation to the DCO.
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    \18\ See also supra n. 13.
    \19\ As noted above, the amount the DCO will call for or pay to 
the FCM in respect of its Cleared Swaps Customers is the net of the 
gains and losses computed on a customer-by-customer basis.
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    If the loss is great enough, it may exceed the sum of the FCM's 
available liquid assets, the swaps collateral posted by the Cleared 
Swaps Customer, and any additional payments immediately available from 
the Cleared Swaps Customer. In this situation, sometimes called a 
``double default,'' the defaulting Cleared Swaps Customer will have 
defaulted on its obligation to the clearing FCM which, in turn, will 
default on its obligation to the DCO. In such circumstances, the FCM 
will likely have to file for protection in bankruptcy. Meanwhile, the 
defaulting Cleared Swaps Customer's loss will translate to a gain by 
one or more other market participants. Notwithstanding the default by 
the clearing FCM, the DCO, in its capacity as central counterparty, is 
required to pay out these gains. The DCO will thus be faced with a 
potentially significant loss.
    A potential resource for the DCO to apply to this loss in a double 
default

[[Page 6339]]

situation is the collateral held in the Cleared Swaps Customer Account 
maintained by the DCO for the defaulting FCM on behalf of the FCM's 
Cleared Swaps Customers. Under the current rules applicable to futures 
clearing, a DCO is permitted to use all of the collateral in the 
Clearing Member's customer account to meet a loss in that account, 
without regard to which customer(s) in fact supplied that collateral. 
Thus, in this case, the non-defaulting customers of the defaulting FCM 
clearing member would be exposed to loss due to ``Fellow-Customer 
Risk.''

C. Segregation Alternatives

    In implementing new CEA section 4d(f), the Commission considered 
five alternative segregation models for Cleared Swaps Customer 
Collateral in the notice of proposed rulemaking issue by the Commission 
on June 9, 2011 (the ``NPRM'').\20\
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    \20\ See Notice of Proposed Rulemaking on the Protection of 
Cleared Swaps Customer Contracts and Collateral; Conforming 
Amendments to the Commodity Broker Bankruptcy Provisions, 76 FR 
33818, 33822, June 9, 2011.
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1. Legal Segregation With Operational Commingling Model
    The first alternative explored by the Commission was legal 
segregation with operational commingling (the ``LSOC Model'' or 
``Complete Legal Segregation Model''). Under the LSOC Model, each FCM 
and DCO would enter (or ``segregate''), in its books and records, the 
Cleared Swaps of each individual customer and relevant collateral. Each 
FCM and DCO would ensure that such entries are separate from entries 
indicating (i) FCM or DCO obligations, or (ii) the obligations of non-
cleared swaps customers. Operationally, however, each FCM and DCO would 
be permitted to hold (or ``commingle'') the relevant collateral in one 
account. Each FCM and DCO would ensure that such account is separate 
from any account holding FCM or DCO property or holding property 
belonging to non-cleared swaps customers.
    Prior to the simultaneous default of an FCM and one of its Cleared 
Swaps Customers (as discussed above, a ``double default''), the FCM 
would ensure that the DCO does not use the collateral of one Cleared 
Swaps Customer to support the obligations of another customer by making 
certain that the value of the Cleared Swaps Customer Collateral that 
the DCO holds equals or exceeds the value of all Cleared Swaps Customer 
Collateral that it has received to secure the contracts of the FCM's 
customers. Following a double default, the DCO would be permitted to 
access the collateral of the defaulting Cleared Swaps Customers, but 
not the collateral of the non-defaulting Cleared Swaps Customers. Thus 
while, even under the LSOC Model, Section 766(h) requires the pro rata 
distribution of customer property, the collateral attributable to the 
non-defaulting Cleared Swaps Customers would be available to be 
distributed.
2. Legal Segregation With Recourse Model
    Second, the Commission contemplated the Legal Segregation with 
Recourse Model (together with the LSOC Model, the ``Legal Segregation 
Models''). As with the LSOC Model, under the Legal Segregation with 
Recourse Model, each FCM and DCO would segregate the Cleared Swaps of 
each individual customer and relevant collateral in its books and 
records. However, each FCM and DCO would be permitted to commingle the 
relevant collateral in one account, provided that such account is 
separate from any proprietary accounts or accounts property belonging 
to non-cleared swaps customers.
    Again, as with the LSOC Model, prior to a double default, the FCM 
would ensure that the DCO does not use the collateral of one Cleared 
Swaps Customer to support the obligations of another customer by making 
certain that the value of the Cleared Swaps Collateral that the DCO 
holds equals or exceeds the value of all Cleared Swaps Collateral that 
it has received to secure the contracts of the FCM's customers. 
However, unlike the LSOC Model, following a double default, the Legal 
Segregation with Recourse Model would not prohibit a DCO from accessing 
the collateral of the non-defaulting Cleared Swaps Customers, after the 
DCO applies its own capital to cure the default, as well as the 
guaranty fund contributions of its non-defaulting FCM members.
3. Physical Segregation Model
    The Commission also explored the possibility of full physical 
segregation (the ``Physical Segregation Model'') for Cleared Swaps 
Customer Collateral. The Physical Segregation Model primarily differs 
from the Legal Segregation Models operationally. In the ordinary course 
of business (i.e., prior to a double default), as with the Legal 
Segregation Models, each FCM and DCO would enter (or ``segregate''), in 
its books and records, the Cleared Swaps of each individual customer 
and relevant collateral. However, unlike the Legal Segregation Models, 
each FCM and DCO would maintain separate individual accounts for the 
relevant collateral. Hence, the FCM would ensure that the DCO does not 
use the collateral of one Cleared Swaps Customer to support the 
obligations of another customer by making certain that the DCO does not 
mistakenly transfer collateral in (i) the account belonging to the 
former to (ii) the account belonging to the latter.
    Following a double default, the Physical Segregation Model would 
lead to the same result as the Complete Legal Segregation Model. 
Specifically, the DCO would be permitted to access the collateral of 
the defaulting Cleared Swaps Customers, but not the collateral of the 
non-defaulting customers.
    As discussed above, one important limitation on the effectiveness 
of the Physical Segregation Model is section 766(h) of the Bankruptcy 
Code, which requires that customer property be distributed ratably. 
Thus, if because of Physical Segregation, certain Cleared Swaps 
Customer Collateral was better protected than the property of other 
Cleared Swaps Customers, it would not be permissible to pay Cleared 
Swaps Customers in the first group a higher proportion (i.e., a higher 
cents-on-the-dollar distribution) of their net equity claims than 
Cleared Swaps Customers in the second group. Rather, Cleared Swaps 
Customers in both groups would receive the same proportion of their 
allowed net equity claims. In other words, in spite of incurring 
greater cost under the Physical Segregation Model, a Cleared Swaps 
Customer would essentially receive the same level of protection for its 
Cleared Swaps Customer Collateral under the Physical Segregation Model 
as it would under the LSOC Model.
4. Futures Model
    The Commission also considered replicating the segregation 
requirement currently applicable to futures (the ``Futures Model''). 
Under this model, DCOs treat each FCM's customer account on an omnibus 
basis, that is, as belonging to an undifferentiated group of customers.
    Prior to a double default, the Futures Model shares certain 
similarities with the Legal Segregation Models. Specifically, each FCM 
would enter (or ``segregate''), in its books and records, the Cleared 
Swaps of each individual customer and relevant collateral. Each DCO, 
however, would recognize, in its books and records, the Cleared Swaps 
that an FCM intermediates on a collective (or ``omnibus'') basis. Each 
FCM and DCO would be permitted to hold (or ``commingle'') all Cleared 
Swaps Customer Collateral in one account.

[[Page 6340]]

    Following a double default, the Futures Model shares certain 
similarities with the Legal Segregation with Recourse Model. 
Specifically, the Futures Model would not prohibit a DCO from accessing 
the collateral of the non-defaulting Cleared Swaps Customers. However, 
unlike the Legal Segregation with Recourse Model, under the Futures 
Model the DCO would be permitted to access such collateral before 
applying its own capital or the guaranty fund contributions of non-
defaulting FCM members.\21\
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    \21\ For a more detailed discussion regarding the operation of 
the segregation models in an FCM bankruptcy, see section I.D.
---------------------------------------------------------------------------

5. Optionality
    Finally, the Commission explored permitting a DCO to choose between 
(i) the Legal Segregation Models (whether Complete or with Recourse), 
(ii) the Physical Segregation Model, and (iii) the Futures Model, 
rather than mandating any particular alternative.

D. Operation of the Segregation Models in an FCM Bankruptcy

    When discussing the issues surrounding an FCM bankruptcy under the 
Bankruptcy Code, analytically there are several scenarios to consider: 
(1) The bankruptcy is unrelated to the loss of customer funds, and 
there is no such loss; (2) The bankruptcy involves shortfalls in 
customer funds due to operational risks; (3) The bankruptcy involves 
losses due to customer risk (i.e., a customer incurs a loss in excess 
of the FCM's financial ability to cover); or (4) the bankruptcy 
involves shortfalls in customer funds due to operational risk and 
losses due to customer risk.
1. Bankruptcy Unrelated to Loss of Customer Funds
    An FCM bankruptcy that is unrelated to the loss of customer funds 
may arise because of financial difficulties in the FCM, financial 
difficulties in the proprietary accounts, or because of the impact of 
difficulties at a corporate parent or affiliate. Under this scenario, 
all models share important characteristics: Customer positions and 
related collateral, whether at a DCO or at the FCM, can be transferred 
to one or more willing transferee FCMs, or may be liquidated and 
returned to the trustee. With respect to fostering transfer, however, 
the Legal Segregation Models (whether Complete or with Recourse) and 
the Physical Segregation Model do have a significant advantage compared 
to the Futures Model: In each of them, information about the customers 
as a whole, and about each individual customer's positions, are 
transmitted to the DCO every day, an information flow (and store) that 
is not present in the Futures Model. Thus, each DCO will have important 
customer information on a customer by customer basis that can be used 
to facilitate and implement transfers, and is thus less reliant upon 
the FCM for that information.
2. Bankruptcy With Shortfalls Due to Operational Risks or Investment 
Risks
    An FCM bankruptcy with shortfalls due to operational risks would 
arise because of a shortfall in segregated funds due to, e.g., 
negligence, theft or other mishap. An FCM may also have shortfalls due 
to investment risks resulting from extraordinary losses on the set of 
investments permitted under regulation 1.25 (as included in new 
regulation 22.2(e)(3)). Under this scenario, all models again share 
important characteristics: Customer positions and related collateral at 
a DCO may be delivered to the Trustee, or may transferred by the DCO, 
but only to the extent of each customer's pro rata share. Under all of 
the segregation models, to the extent there is a shortfall, each 
customer will ultimately receive the same cents-on-the-dollar 
proportion of the value of the customer's account.
    However, with respect to fostering transfer, the other models again 
have a significant advantage compared to the Futures Model: In each of 
them, information about the customers as a whole, and about each 
individual customer's positions, are transmitted to the DCO every day, 
an information flow (and store) that is not present in the Futures 
Model. Thus, each DCO will have important customer information on a 
customer by customer basis that can be used to facilitate and implement 
transfers, and accordingly is less reliant upon the FCM for that 
information.
3. Bankruptcy With Shortfalls Due to Customer Risk
    An FCM bankruptcy with shortfalls due to customer risk would arise 
because a customer incurs a loss that exceeds both the customer's 
collateral and the FCM's ability to pay.
    Under the Futures Model, the DCO could use the entirety of the 
FCM's customer account (or as much of it as necessary) to meet the 
entire loss created by the default. Transfer of customer positions 
would be difficult, in that the DCO would lack information as to which 
customers were in default, and which positions belonged to defaulting 
customers (and, presumably, would not be transferred) and which did 
not.\22\ The DCO would be permitted to liquidate customer positions, a 
process that might take between one and ten days.\23\ Once the loss was 
crystalized, the DCO would be able to turn over the collateral (less 
that used to meet the default) to the Trustee for use in the pro rata 
distribution.
---------------------------------------------------------------------------

    \22\ See generally, CME Group, Inc. (``CME'') at 14-15 
(discussing information deficits at bankrupt FCM).
    \23\ See 76 FR at 69366-68.
---------------------------------------------------------------------------

    Under the LSOC Model, the DCO could only use the collateral 
attributable to defaulting customers (those whose positions suffered 
losses) to meet the loss. Thus, all collateral attributable to 
customers whose net positions gained or were ``flat'' (neither gained 
nor lost), and much of the collateral attributable to customers whose 
net positions lost, would be immediately available for transfer. 
Moreover, the DCO would have information that is no more than one 
business day old tying customers to portfolios of positions, and the 
DCO itself would maintain the margining methodology that would tie such 
portfolios of positions to the collateral requirement associated with 
such portfolios. Even if the DCO decided to liquidate all customer 
positions, the collateral of non-defaulting customers would be exposed 
to less loss than under the Futures Model because the DCO would not 
have the right to access it.
    The Physical Segregation Model would work in a manner similar to 
the LSOC Model. Again, all collateral attributable to customers whose 
net positions gained or were ``flat'' (neither gained nor lost), and 
the remaining collateral attributable to customers whose net positions 
lost, would be immediately available for transfer. The DCO would have 
specific information on how much collateral was, in fact, attributable 
to each customer. However, because of the ratable distribution 
requirement, any losses that did exist would be shared ratably among 
all customers.
    Under the Legal Segregation with Recourse, the DCO could only use 
the collateral attributable to defaulting customers (those whose 
positions suffered losses) to meet the loss--at first. It would also 
use the defaulting clearing member FCM's own contribution to the 
guaranty fund, its own contribution to the guaranty fund, as well as 
the contributions of non-defaulting clearing members. However, if those 
resources were insufficient to cover the default, the DCO would have 
``recourse'' to the collateral of non-defaulting customers. While such

[[Page 6341]]

recourse is much less likely under the Legal Segregation with Recourse 
Model than under the Futures Model--because the fellow-customer 
collateral would not be reached unless the loss was great enough to 
consume the entire guaranty fund--until the amount of loss from the 
default was crystalized (through liquidation or transfer), the DCO 
might be reluctant or unable to release the collateral of non-
defaulting customers. Accordingly, while Legal Segregation with 
Recourse would (in most cases) provide customers superior recovery in a 
liquidation, it would be much less well-suited to a prompt transfer of 
positions.

E. Solicitation of Public Input

    The Commission sought public comment on the segregation 
alternatives mentioned above, and on the advisability of permitting the 
DCO to choose between alternatives. First, the Commission, through its 
staff, held extensive external meetings with three segments of 
stakeholders (i.e., DCOs, FCMs, and swaps customers).\24\ Second, on 
October 22, 2010, the Commission, through its staff, held a roundtable 
(the ``First Roundtable'').\25\ Third, on November 19, 2010, the 
Commission issued an Advance Notice of Proposed Rulemaking for 
Protection of Cleared Swaps Customers Before and After Commodity Broker 
Bankruptcies (the ``ANPR''). Fourth, on June 3, 2011, the Commission, 
through its staff, held a second roundtable (the ``Second 
Roundtable'').\26\ Fifth, after careful consideration of the comments 
the Commission received on the ANPR, the Commission issued the NPRM.
---------------------------------------------------------------------------

    \24\ A list of external meetings is available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_6_SegBankruptcy/index.htm.
    \25\ The transcript from the First Roundtable (the ``First 
Roundtable Tr.'') is available at: http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission6_102210-transcrip.pdf.
    \26\ The transcript from the Second Roundtable (the ``Second 
Roundtable Tr.'') is available at: http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission6_060311-transcri.pdf.
---------------------------------------------------------------------------

1. First Roundtable
    As the ANPR describes, the First Roundtable revealed that 
stakeholders had countervailing concerns regarding the alternative 
segregation models that the Commission set forth. On the one hand, a 
number of swaps customers argued that the Commission should focus on 
effectively eliminating Fellow-Customer Risk \27\ and Investment 
Risk.\28\ Such swaps customers emphasized that (i) They currently 
transact in uncleared swaps, (ii) they are able to negotiate for 
individual segregation at independent third parties for collateral 
supporting such uncleared swaps, and therefore (iii) they are currently 
subject to neither Fellow-Customer Risk nor Investment Risk. Such 
customers found it inappropriate that, under certain alternatives set 
forth by the Commission, they should be subject to Fellow-Customer Risk 
and Investment Risk when they transact in Cleared Swaps.
---------------------------------------------------------------------------

    \27\ As noted in section I.B.1, an FCM functions as a guarantor 
of customer transactions with a DCO. Section 4d(f) of the CEA 
prohibits an FCM from using the collateral deposited by one Cleared 
Swaps Customer to support the swap transactions of another Cleared 
Swaps Customer. Therefore, if one Cleared Swaps Customer owes money 
to the FCM (i.e., the Cleared Swaps Customer has a debit balance), 
the FCM, acting as guarantor, must deposit its own capital with the 
DCO to settle obligations attributable to such customer. If the 
Cleared Swaps Customer defaults to the FCM, and the Cleared Swaps 
Customer's obligations are so significant that the FCM does not have 
sufficient capital to meet them, then the FCM would default to the 
DCO.
    As discussed in Section I.B.4, the financial resources DCOs 
maintain to cover Clearing Member defaults with respect to customer 
positions in excess of collateral provided by the Clearing Member 
include property of the defaulting Clearing Member (i.e., collateral 
deposited to support FCM proprietary transactions and contributions 
to the DCO guaranty fund). Other elements of such packages may 
include: (i) The collateral that the FCM deposited to support the 
transactions of non-defaulting customers; (ii) a portion of the 
capital of the DCO; and (iii) contributions to the guaranty fund 
from other DCO Clearing Members. Typically, a DCO would exhaust one 
element before moving onto the next element. Therefore, the risk 
that the DCO would use any one element depends on the position of 
that element in the package.
    \28\ ``Investment Risk'' is the risk that each Cleared Swaps 
Customer would share pro rata in any decline in the value of FCM or 
DCO investments of Cleared Swaps Customer Collateral. Section 4d(f) 
of the CEA permits an FCM to invest Cleared Swaps Customer 
Collateral in certain enumerated instruments. The Commission is 
proposing to expand such instruments to include those referenced in 
regulation 1.25 (as it may be amended from time to time). Even 
though (i) such investments are ``consistent with the objectives of 
preserving principal and maintaining liquidity,'' and (ii) both the 
FCM, as well as the DCO, value such investments conservatively (by, 
e.g., applying haircuts), the value of such investments may decline 
to less than the value of the collateral originally deposited. See 
regulation 1.25(b) (as amended in Investment of Customer Funds and 
Funds Held in an Account for Foreign Futures and Foreign Options 
Transactions, 76 FR 78776, December 19, 2011). In such a situation, 
all customers would share in the decline pro rata, even if the 
invested collateral belonged to certain customers and not others.
---------------------------------------------------------------------------

    On the other hand, a number of FCMs and DCOs argued that the 
benefits of effectively eliminating Fellow-Customer Risk and Investment 
Risk are outweighed by the costs. With respect to benefits, these FCMs 
and DCOs noted that the Futures Model has served the futures industry 
well for many decades. With respect to costs, these FCMs and DCOs 
described two potential sources. First, FCMs and DCOs stated that, 
depending on the manner in which the Commission proposes to eliminate 
or mitigate Fellow-Customer Risk and Investment Risk, they may 
experience substantial increases to operational costs (e.g., costs 
associated with transaction fees, reconciliations, recordkeeping, 
reporting). Second, and more significantly, FCMs and DCOs stated that 
they may incur additional risk costs due to proposed financial 
resources requirements.\29\
---------------------------------------------------------------------------

    \29\ As described below, the term ``Risks Costs'' refers to the 
costs associated with the allocation of loss in the event of a 
default under the Complete Legal Segregation Model relative to the 
Futures Model. For a more detailed explanation of these costs, see 
the discussion in section VII.B.2.b., under the heading titled 
```Risk Costs' and potential effects on margin levels and DCO 
guaranty fund levels in response to complete legal segregation.''
---------------------------------------------------------------------------

    In addition, some DCOs may have anticipated including collateral 
from non-defaulting Cleared Swaps Customers as an element in their 
financial resources packages. If DCOs no longer have access to such 
collateral, then those DCOs would need to obtain additional financial 
resources to meet proposed Commission requirements. Both FCMs and DCOs 
averred that the costs associated with obtaining such additional 
financial resources may be substantial, and would ultimately be borne 
by Cleared Swaps Customers.\30\
---------------------------------------------------------------------------

    \30\ 75 FR at 75163. For example, one DCO estimated that it 
would have to increase the amount of collateral that each Cleared 
Swaps Customer must provide by 60 percent, if it could no longer 
access the collateral of non-defaulting Cleared Swaps Customers to 
cure certain defaults. See infra n. 258.
---------------------------------------------------------------------------

2. ANPR
    Given the concerns that stakeholders expressed at the First 
Roundtable, the Commission decided to seek further comment through the 
ANPR on the potential benefits and costs of (i) The Legal Segregation 
Models (whether Complete or with Recourse), (ii) the Physical 
Segregation Model, and (iii) the Futures Model. As the ANPR explicitly 
stated, ``[t]he Commission [was] seeking to achieve two basic goals: 
Protection of customers and their collateral, and minimization of costs 
imposed on customers and on the industry as a whole.'' \31\ In 
addition, the Commission requested comment on the impact of each model 
on behavior, as well as whether Congress evinced intent for the 
Commission to adopt any one or more of these models.
---------------------------------------------------------------------------

    \31\ Id.

---------------------------------------------------------------------------

[[Page 6342]]

    As described in the NPRM, the Commission received thirty-one 
comments from twenty-nine commenters.\32\ The comments were generally 
divided by the nature of the commenter: Most (though not all) of the 
comments from current or potential Cleared Swaps Customers favored 
either the Legal Segregation Models (whether Complete or with Recourse) 
or the Physical Segregation Model, manifesting a willingness to bear 
the added costs.\33\ Most of the FCMs and DCOs favored the Futures 
Model, though one commenter favored the Complete Legal Segregation 
Model.\34\ Finally, another commenter, in its supplemental comment, 
opined that the most important factor that the Commission should 
consider is the extent to which a model fostered the portability \35\ 
of Cleared Swaps belonging to non-defaulting customers.\36\ This 
commenter noted that the Physical Segregation Model and what is now 
referred to as the Complete Legal Segregation Model were most conducive 
to that goal.\37\
---------------------------------------------------------------------------

    \32\ All comment letters are available through the Commission's 
Web site at: http://www.cftc.gov/LawRegulation/FederalRegister/ProposedRules/2010-29836.
    \33\ See id.
    \34\ See id.
    \35\ The terms ``portability,'' ``port,'' and ``porting'' refer 
to the ability to reliably transfer the swaps (and related 
collateral) of a non-defaulting customer from an insolvent FCM to a 
solvent FCM, without the necessity of liquidating and re-
establishing the swaps.
    \36\ See ISDA comment letters on ANPR.
    \37\ See id.
---------------------------------------------------------------------------

    After careful consideration of the First Roundtable discussion and 
the comments received in response to the ANPR, the Commission issued 
the NPRM on June 9, 2011.
3. Second Roundtable
    Discussions during the Second Roundtable generally reflected the 
conflicting concerns expressed by market participants regarding the 
alternative segregation models set forth by the Commission. Swaps 
customers continued to state that the Commission should focus on 
mitigating Fellow-Customer Risk, with some also advocating for the 
elimination of Investment Risk, while FCMs and DCOs reiterated that the 
Commission should select the Futures Model as the segregation model for 
Cleared Swaps Customer Collateral because the Futures Model has served 
the futures industry well for many decades. Pension funds, and a few 
investment managers, remained concerned about their potential exposure 
to Fellow-Customer Risk and Investment Risk and continued to press the 
Commission to adopt the Physical Segregation Model either outright or 
on an optional basis.
    In addition, participants discussed various cost and benefits 
issues arising in relation to the Futures and the Legal Segregation 
Models. Specifically, several participants believed that the 
operational costs would not be significantly different between the 
Futures Model and the Complete Legal Segregation Model.\38\ Moreover, 
although some participants projected that risk costs would 
significantly increase if the Commission were to select the Complete 
Legal Segregation Model,\39\ one participant argued that these risk 
costs would not be incremental risk costs; rather they are risk costs 
that exist in the Futures Model that would most likely ultimately be 
borne by customers.\40\ Finally, one participant argued that any model 
that facilitates the ability to port ``is superior to one that 
doesn't'' because ``the closeout cost in the future's model was the 
most expensive,'' meaning that ``closing out a client account and rates 
could be extremely devastating to the market, and * * * be really 
significant losses * * * [and] any way [the losses] can be avoided 
would be beneficial to every participant in the market.'' \41\
---------------------------------------------------------------------------

    \38\ See Second Roundtable Tr. at 250, l.2 (In response to 
whether the Complete Legal Segregation Model would impose 
operational costs over the Futures Model, Ms. Bregasi stated that 
``[t]here is no additional cost between LSOC and the futures 
model;'' Mr. Prager stated that ``[w]e don't see them incurring 
other than the start-up costs, the one time that everyone will have 
to incur to set up, the running cost. We don't see any incremental 
cost;'' and Mr. MacFarlane stated that ``I would agree there are no 
additional operational costs.''). See also, Second Roundtable Tr. at 
239, l.8 (Mr. Frankel explaining that operational costs resulting 
from passing ``the client identity and * * * some other multiplier 
that explains how much excess there is in the seg account for the 
client * * * [is] a small build.''); Second Roundtable Tr. at 243, 
l.22 (Mr. Kahn stating that ``in terms of the cost, the fact is OTC 
is a little different than futures because there is a tremendous 
build that everyone is doing in the case of OTC so if we need to 
build LSOC which in essence we've done in the LCH European model, 
there is a cost of that but I can't really define what it is. It's 
relatively small and not material.'').
    \39\ See Second Roundtable Tr. at 255, l.12 (Mr. Frankel arguing 
that ``Moving to a 99.9 percent confidence of coverage we think will 
increase margins by about 60 percent [for rates] * * * I think for 
CDS it could be more than double.''). See also Second Roundtable Tr. 
at 262, l.2 (Mr. Diplas arguing that ``not having the additional 
pool of funds that are associated with the fellow customers means 
that we definitely need to actually margin from a CCP perspective, 
the higher confidence interval. That will differ depending on the 
asset class we're looking at. Some of them, at least based on the 
existing pool of trades, it could be manageable like at 60, 70 
percent in rates. We'll talk about three to four times the amount 
that--in credit--and the more we get to instruments with fatter 
tails the higher the number is going to be. I think that is 
something that clients need to be cognizant of.'').
    \40\ See, e.g., Second Roundtable Tr. at 257, l.6 (Mr. 
MacFarlane stating that ``what's being said, if our transactions had 
to be margined on an individual basis it would require that we put 
up 60 to 70 percent more, which says that then the real risk of that 
transaction is 75 percent more than what we're collateralizing. So 
in the event of a default, not by us but by another counterparty 
potentially, they will be under-collateralized relative to what 
their individual transaction would require, and then that 
potentially could work its way back to us.'').
    \41\ See, e.g., Second Roundtable Tr. at 259, l.6 (quoting Mr. 
Frankel). For a more detailed discussion of cost and benefit 
considerations, please see discussion below in section VII.
---------------------------------------------------------------------------

4. NPRM
    After carefully considering all comments to the ANPR and statements 
made during the First Roundtable discussion, the Commission proposed in 
the NPRM the Complete Legal Segregation Model as the segregation model 
for Cleared Swaps Collateral because the Complete Legal Segregation 
Model provided the best balance between benefits and costs in order to 
protect market participants and the public. Nonetheless, due in part to 
the strong opposing views expressed by market participants, the NPRM 
made clear that the Commission was still considering whether to adopt, 
in the alternative, the Legal Segregation with Recourse Model, and was 
continuing to assess the feasibility of an optional approach and the 
Futures Model.
    Commenters to the ANPR generally observed that customers ultimately 
would bear the costs of implementing whatever segregation model was 
selected by the Commission. Nonetheless, most (though not all) of the 
buy-side commenters favored individual protection for Cleared Swaps 
Customer Collateral. These commenters generally viewed the Complete 
Legal Segregation Model as the minimum level of protection necessary 
for Cleared Swaps Customer Collateral. Because it was largely 
recognized that customers would ultimately bear the costs of 
implementing the selected segregation model, the Commission believed it 
appropriate to give weight to the views of market participants who 
would bear those costs, and found it compelling that most buy-side 
commenters favored adoption of either the LSOC Model or the Physical 
Segregation Model. The Commission noted that the Legal Segregation 
Models and the Physical Segregation Model would provide greater 
individualized protection to Cleared Swaps Customer Collateral than the 
Futures Model, and was in accordance with section 4d(f) of the CEA. In 
addition, the Commission noted that the LSOC Model and the Physical 
Segregation Model may provide substantial benefits in the form of (i)

[[Page 6343]]

Decreased Fellow-Customer Risk, (ii) increased likelihood of 
portability, (iii) decreased systemic risk, and (iv) positive impact on 
portfolio margining, and asked for comment as to whether and why 
commenters favor or oppose adoption of the Futures Model.
    In choosing between the Legal Segregation Models and the Physical 
Segregation Model, the Commission noted that the operational costs for 
the Physical Segregation Model would be substantially higher than the 
operational costs for the Legal Segregation Models (whether Complete or 
with Recourse). With respect to benefits, the Commission believed that 
the Physical Segregation Model would provide only incremental 
advantages over the Complete Legal Segregation Model with respect to 
the mitigation of Fellow-Customer Risk. In addition, the Commission 
noted that while the Physical Segregation Model does eliminate 
Investment Risk, (i) the Commission was in the process of further 
addressing Investment Risk by proposing amendments to regulation 1.25, 
and (ii) each FCM and DCO already values investments conservatively. 
Finally, the Commission observed that the Physical Segregation Model 
would generally enhance portability to the same extent as the Complete 
Legal Segregation Model, and therefore would have similar effects on 
systemic risk. In addition, the Commission stated that the Physical 
Segregation Model and the Complete Legal Segregation Model would likely 
enhance portfolio margining to the same extent. Therefore, the 
Commission chose not to propose the Physical Segregation Model in the 
NPRM.
    In choosing between the Complete Legal Segregation Model and the 
Legal Segregation with Recourse Model, the Commission noted that 
commenters argued that implementing the former would result in 
significant Risk Costs,\42\ whereas implementing the latter would 
result in no Risk Costs. In addition, the Commission believes that 
comments to the ANPR that question the assumptions underlying the upper 
estimates of Risk Costs for the Complete Legal Segregation Model have 
raised credible issues regarding the accuracy of those estimates. 
Nevertheless, the Commission recognized that such assumptions formed an 
area of divergence between commenters, and therefore asked for 
additional comment on the Risk Costs for the Complete Legal Segregation 
Model. The Commission also observed that operational costs for the 
Complete Legal Segregation Model and the Legal Segregation with 
Recourse Model were approximately the same. With respect to benefits, 
the Commission noted that the Complete Legal Segregation Model would 
(i) Mitigate Fellow-Customer Risk even in extreme FCM defaults, unlike 
the Legal Segregation with Recourse Model, (ii) enhance portability 
(and therefore mitigate systemic risk) to a significantly greater 
extent than the Legal Segregation with Recourse Model, and (iii) have 
an incremental advantage over the Legal Segregation with Recourse Model 
with respect to impact on portfolio margining.\43\ Consequently, the 
Commission chose not to propose the Legal Segregation with Recourse 
Model in the NPRM, but stated that it was still considering this model 
as an alternative.
---------------------------------------------------------------------------

    \42\ For a more detailed discussion regarding risk costs, see 
section VII.B.2.b., infra.
    \43\ See 33818 FR at 33828.
---------------------------------------------------------------------------

F. Clarification of the Application of Financial and Segregation 
Interpretation No. 10 to Cleared Swaps

    In response to the Commission's NPRM, clarification was requested 
\44\ regarding the applicability to the cleared swaps market of the 
Commission's 2005 Amendment to Financial and Segregation Interpretation 
No. 10 on the Treatment of Funds Deposited in Safekeeping Accounts 
(``Segregation Interpretation 10-1'').\45\ The commenter noted that 
``[u]ntil 2005, the CFTC permitted the use of third-party custodial 
accounts for futures margin by pension plans and investment companies 
registered under the 1940 Act * * *. In 1984, the CFTC issued Financial 
and Segregation Interpretation No. 10 * * *, permitting the use of 
third party custodial accounts for the holding of customer property 
subject to certain conditions ensuring that an FCM would have immediate 
and unfettered access to customer funds.'' \46\ However, Segregation 
Interpretation 10-1 made it clear that, with limited exceptions, FCMs 
would not be in compliance with the requirements of section 4d(a)(2) of 
the CEA if they hold customer funds in a third-party custodial account.
---------------------------------------------------------------------------

    \44\ See Committee on Investment of Employee Benefit Assets 
(``CIEBA'') December 22, 2011 letter (``CIEBA Supplemental'') at 2.
    \45\ Amendment of Interpretation, 70 FR 24768, May 11, 2005 
(Notice) The underlying Financial and Segregation Interpretation No. 
10 (``Segregation Interpretation 10'') was issued on May 23, 1984, 
and can be found at Comm. Fut. L. Rep. (CCH) ]7120.
    \46\ CIEBA Supplemental at 4.
---------------------------------------------------------------------------

    The Commission agrees that Segregation Interpretation 10-1 does not 
apply to Cleared Swaps. Accordingly, and subject to the conditions 
described below, Cleared Swaps Customer Collateral may be deposited at 
a bank in a third-party safekeeping account, in lieu of posting such 
collateral directly to the FCM, without the FCM being deemed in 
violation of section 4d(f) of the CEA, and FCMs are permitted to 
allowed Cleared Swaps Customers to elect to have their Cleared Swaps 
Customer Collateral held in such accounts.
    However, if an FCM uses, or allows the use of, a third-party 
safekeeping account, that FCM must comply with all of the conditions 
for such accounts set forth in Segregation Interpretation 10 as 
originally issued in 1984.\47\ In addition, as noted in Segregation 
Interpretation 10, though the use of third-party safekeeping accounts 
is not prohibited, such collateral constitutes customer property within 
the meaning of the Bankruptcy Code. As such, positions and collateral 
held in third-party custodial accounts are subject to the U.S. 
Bankruptcy Code and applicable provisions in the CEA, which provide for 
the pro rata share of available customer property.
---------------------------------------------------------------------------

    \47\ These conditions include limitations regarding the titling 
and location of the third-party safekeeping account, and 
requirements concerning the FCM's rights to promptly liquidate 
positions and access collateral.
---------------------------------------------------------------------------

    The commenter also requested that the Commission revise or repeal 
Segregation Interpretation 10-1 to allow futures and options customers 
to have their collateral held in third-party safekeeping accounts.\48\ 
However, while the Commission does not believe it would be appropriate 
to address this request at this time, as it is beyond the scope of this 
rulemaking, the Commission may address this concern in the future.
---------------------------------------------------------------------------

    \48\ See CIEBA Supplemental at 12
---------------------------------------------------------------------------

    The Commission also notes that a number of commenters\49\ have 
proposed alternative arrangements that would provide individual 
protection for collateral belonging to cleared swaps market 
participants (and, in some cases, futures customers) that are willing 
and able to bear the associated costs. However, these proposals raise 
important risk management and cost externality issues, particularly 
with respect to ensuring that collateral is promptly available to DCOs 
in the event of a default, ensuring proper capital treatment for the 
relevant market participants, and protecting all customers.
---------------------------------------------------------------------------

    \49\ See generally CIEBA August 8, 2011 letter (``CIEBA 
Original'') at 1-5; Salzman at 1-9; CME at 18; State Street at 2-4.
---------------------------------------------------------------------------

    The Commission has directed staff to carefully analyze these 
proposals with the goal of developing proposed rules that provide 
additional protection for

[[Page 6344]]

collateral belonging to market participants.\50\
---------------------------------------------------------------------------

    \50\ The Commission also notes that any market participant may 
become a clearing member of a DCO, consistent with the DCO's 
membership eligibility requirements and the CEA and Commission 
regulations, with all the rights and responsibilities associated 
therewith.
---------------------------------------------------------------------------

    The Commission agrees with the comment that ``swap margin is not 
meant to enhance the swap dealers' bottom line, but to protect the 
system against counterparty failure,'' \51\ and remains committed to 
protecting the market and market participants.
---------------------------------------------------------------------------

    \51\ See CIEBA Supplemental at 14.
---------------------------------------------------------------------------

II. The Final Rules

    In determining the scope and content of the final rules, the 
Commission has taken into account issues raised by commenters, 
including those issues with respect to the costs and benefits 
associated with the proposed segregation model for Cleared Swaps 
Customer Collateral. The Commission received twenty-eight (28) comment 
letters on the proposed rules,\52\ twenty-five (25) of which addressed 
the issue of which segregation model the Commission should adopt for 
Cleared Swaps Customer Collateral. Of these twenty-five (25), the 
strong weight of the commenters rested in favor of individual 
protection for Cleared Swaps Customer Collateral, with twenty (20) 
comment letters supporting implementation of the Complete Legal 
Segregation Model, the Physical Segregation Model or some combination 
thereof.\53\ Four (4) comment letters supported adoption of the current 
Futures Model,\54\ with one (1) comment letter, from the FIA, showing 
support for both the Complete Legal Segregation Model and the Futures 
Model.
---------------------------------------------------------------------------

    \52\ All comment letters are available through the Commission's 
Web site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1038. Comments addressing the proposed rules 
were received from: APG Algemene Pensioen Groep N.V. and the 
European Federation Retirement Provision (``APG/EFRP''), American 
Council of Life Insurers (``ACLI''), Association of Institutional 
Investors (``AII''), Bank of America, N.A., BlackRock, Inc. 
(``BlackRock''), Chris Barnard, CME, CIEBA, Federal Home Loan Banks 
(``FHLB''), Fidelity Management & Research Co. (``Fidelity''), 
Freddie Mac, Futures Industry Association (``FIA''), 
IntercontinentalExchange, Inc. (``ICE''), Investment Company 
Institute (``ICI''), International Swaps and Derivatives 
Association, Inc. (``ISDA''), LCH.Clearnet Group Limited (``LCH''), 
Managed Funds Association (``MFA''), Natural Gas Exchange, Inc. 
(``NGX''), Newedge USA, LLC (``Newedge''), Och-Ziff Capital 
Management Group (``Och-Ziff''), Jerrold E. Salzman, Securities 
Industry and Financial Markets Association (``SIFMA''), Tudor 
Investment Corporation (``Tudor''), and Vanguard. Note, CIEBA, 
Fidelity and the MFA each submitted two comment letters.
    \53\ The following commenters support the Complete Legal 
Segregation Model outright: ACLI, AII, BlackRock, Mr. Barnard, 
Freddie Mac, ICI, ISDA, LCH, SIFMA, and Vanguard. APG/EFRP, CIEBA, 
Fidelity, MFA, Tudor and FHLB support implementation of the Physical 
Segregation Model.
    \54\ The commenters in favor of adoption of the Futures Model 
were CME, ICE, Newedge, and Mr. Salzman.
---------------------------------------------------------------------------

    After carefully considering all comments, the Commission has 
selected the Complete Legal Segregation Model as the most appropriate 
segregation model for Cleared Swaps Customer Collateral under section 
4d(f) of the CEA. The Commission believes this model provides the best 
balance between benefits and costs in order to protect market 
participants and the public. The Commission has adopted a number of 
clarifications and corrections suggested in the comment letters. In 
other cases the final rules are adopted as proposed. The discussion 
below provides a more detailed analysis of the issues raised by the 
comment letters.

III. Segregation Model for Cleared Swaps Customer Collateral

    In the NPRM, the Commission proposed the Complete Legal Segregation 
Model but made clear that, because the costs and benefits associated 
with the Complete Legal Segregation Model were still being evaluated, 
the Commission was considering whether to adopt the Legal Segregation 
with Recourse Model as an alternative, and was continuing to assess the 
feasibility of the Futures Model and a clearinghouse-by-clearinghouse 
Optional Approach. Below is a summary of the comments the Commission 
received regarding the alternative segregation models for Cleared Swaps 
Customer Collateral.

A. Summary of the Comments

1. Complete Legal Segregation Model
    As mentioned above, the majority of the comment letters supported 
adoption of the Complete Legal Segregation Model either outright or as 
a viable alternative to the Physical Segregation Model, with most 
arguing that the Complete Legal Segregation Model presents the best 
balance between costs and adequacy of collateral protections,\55\ and 
several calling it a ``significant improvement over the'' Futures 
Model.\56\ Several commenters also opined that the Complete Legal 
Segregation Model is supported by the statutory language and purposes 
of the Dodd-Frank Act.\57\
---------------------------------------------------------------------------

    \55\ See ACLI at 2; AII at 1; BlackRock at 1; Barnard at 2; 
Fidelity at 2; Freddie Mac at 2; LCH at 1-2; SIFMA at 3; Vanguard at 
8.
    \56\ CIEBA at 1; and FHLB at 1.
    \57\ See BlackRock at 3; Fidelity at 5-6; FIA at 3, n. 10; ICI 
at 2; Mr. Barnard at 1; and SIFMA at 3, n. 7.
---------------------------------------------------------------------------

    In addition, many of the comment letters asserted that the Complete 
Legal Segregation Model largely mitigates Fellow-Customer Risk and 
enhances the portability of cleared swap positions and associated 
collateral.\58\ One commenter stated that the Complete Legal 
Segregation Model is ``the most cost effective framework to adequately 
protect the margin customers post to cleared swap transactions'' 
because it effectively mitigates Fellow-Customer Risk, avoids the costs 
associated with establishing the Physical Segregation Model by allowing 
margin to be held in an omnibus account, and enhances the portability 
of cleared swap positions and related margin.\59\ Another commenter 
stated that the Complete Legal Segregation Model ``provides the most 
operationally efficient framework to manage risk on a daily basis or 
port portfolios especially in periods of stress.'' \60\ And yet other 
commenters argued that there has been little substantiation of the 
``increased costs'' that would arise from implementation of the 
Complete Legal Segregation Model, especially with respect to costs 
surrounding the reporting requirements associated with maintaining 
separate legal accounts given that ``other regulatory rulemakings that 
require similar reporting will likely result in many of these 
incremental operational costs being incurred regardless of which model 
is chosen.'' \61\
---------------------------------------------------------------------------

    \58\ See, e.g., AII at 3 (stating that the Complete Legal 
Segregation Model effectively eliminates Fellow-Customer Risk, 
enhances portability of positions and related margin, and largely 
avoids the costs associated with establishing individually 
segregated accounts); BlackRock at 2 (arguing that the Complete 
Legal Segregation Model ``eliminates Fellow-Customer Risk and 
facilitates `immediate' portability of customer positions if 
required''); CIEBA Original at 5 (acknowledging that the Complete 
Legal Segregation Model could eliminate Fellow-Customer Risk); FHLB 
at 3 (agreeing that the Complete Legal Segregation Model greatly 
reduces Fellow-Customer Risk); ICI at 3 (stating that the Complete 
Legal Segregation Model mitigates Fellow-Customer Risk); ISDA at 1-2 
(agreeing that Complete Legal Segregation Model facilitates post-
default portability); MFA at 3-4 (stating that the Complete Legal 
Segregation Model eliminates Fellow-Customer Risk and enhances the 
portability of customer positions); Vanguard at 4-6 (arguing that 
the Complete Legal Segregation Model addresses counterparty risk and 
Fellow-Customer Risk); and SIFMA at 5 (stating that Complete Legal 
Segregation Model minimizes Fellow-Customer Risk and facilitates the 
ability of Cleared Swaps Customers to port their positions to a non-
defaulting FCM).
    \59\ AII at 1.
    \60\ BlackRock at 6.
    \61\ Fidelity at 6. See also LCH at 2-3. The Commission has 
adopted a gross margining requirement. See 76 FR at 69374-76.

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[[Page 6345]]

    Several commenters also argued that, in selecting a segregation 
model for Cleared Swaps Customer Collateral, the Commission should take 
into account the differences between the risk profiles of futures and 
over the counter (``OTC'') swaps.\62\
---------------------------------------------------------------------------

    \62\ BlackRock at 2-4; Fidelity at 4; SIFMA at 2; Vanguard at 3-
4.
---------------------------------------------------------------------------

    Furthermore, commenters argued that, unlike the Futures Model, the 
Complete Legal Segregation Model would not degrade the collateral 
protections that currently exist in the OTC swaps market.\63\ In 
addition, one commenter indicated that the Complete Legal Segregation 
Model is ``the model that most closely parallels the protections that 
[LCH] understand[s] will be required in Europe under the European 
Commission's proposal for a European Market Infrastructure Regulation 
(``EMIR'').'' \64\
---------------------------------------------------------------------------

    \63\ See Fidelity at 2-4; Freddie Mac at 1; and LCH at 1. See 
also Tudor at 2 (arguing that the segregation model selected by the 
Commission should not provide a lesser degree of protection for 
Cleared Swaps Customer Collateral).
    \64\ LCH at 1.
---------------------------------------------------------------------------

    Commenters who did not support adoption of the Complete Legal 
Segregation Model largely argued that (1) The costs of implementing the 
Complete Legal Segregation Model outweigh any of the purported benefits 
of such model; \65\ (2) the Complete Legal Segregation Model would, in 
the view of the commenter, fail to work operationally or legally,\66\ 
and does not take into account the operational complexities of multi-
tiered and multi-DCO clearing; \67\ (3) individualized segregation 
potentially introduces systemic costs because it impedes timely market 
settlements during periods of market stress; \68\ (4) since the Futures 
Model has served the industry well during times of stress in the 
futures market, it should be the segregation model for Cleared Swaps 
Customer Collateral; \69\ (5) the Complete Legal Segregation Model 
introduces moral hazard; \70\ or (6) the Complete Legal Segregation 
Model does not provide enough protection of Cleared Swaps Customer 
Collateral because there is some residual Fellow-Customer Risk,\71\ and 
it does not protect against fraud-related risks,\72\ record-keeping/
operational risk, and Investment Risks.\73\ Moreover, several 
commenters disagreed with the Commission's interpretation of the 
statutory language in the Dodd-Frank Act, and argued that the statutory 
language cited by the Commission does not indicate Congressional intent 
for individual protection for Cleared Swaps Customer Collateral.\74\
---------------------------------------------------------------------------

    \65\ See, e.g., ICE at 11.
    \66\ See CME at 5 (stating that ``the framework established by 
the [Complete Legal Segregation Model] concept and the proposed 
regulations will be wholly inadequate to achieve the Commission's 
desired objectives: Namely, in an FCM default, the preservation of 
non-defaulting cleared swaps customers' collateral and the ability 
to port their positions and collateral to another FCM.'').
    \67\ See, e.g., CME at 6-8. See also Mr. Salzman at 7 (stating 
that ``the benefits promised by the proponents of the [Complete 
Legal Segregation Model] are illusory,'' and arguing that the 
Commission's authority to adopt, and a bankruptcy court's 
willingness to respect, such model are questionable).
    \68\ See ICE at 3.
    \69\ See, e.g., Newedge at 8; and CME at 23.
    \70\ See, e.g., Newedge at 4-5.
    \71\ See, e.g., CME at 7.
    \72\ Fraud-related risks are risks associated to an FCM's 
fraudulent activity with respect to the cleared swap margin account.
    \73\ See, e.g., Tudor at 4; CIEBA Original at 1; and FHLB at 3-6 
(each advocating for the adoption and implementation, either 
outright or on an optional basis, of the Physical Segregation Model, 
though acknowledging that the Complete Legal Segregation Model is 
preferable to the Futures Model).
    \74\ See CME at 21-22 (arguing that if Congress intended to 
change the framework for the protection of customer collateral it 
would have explicitly done so); FIA at 3, n. 10 (agreeing that the 
complete legal segregation model is permitted by the language of 
section 4d(f), but arguing that Commission reliance on the 
differences between sections 4d(a) and 4d(b) are misplaced); and ICE 
at 5 (arguing that the Commission should not rely on the language in 
section 4d(f) because there is no legislative history interpreting 
the statutory language).
---------------------------------------------------------------------------

2. Physical Segregation Model
    Comments with respect to the Physical Segregation Model were mixed, 
with some commenters advocating the adoption of the Physical 
Segregation Model outright,\75\ others advocating for its adoption on 
an optional basis,\76\ and others arguing that the Physical Segregation 
Model should not be adopted because the increased costs and operational 
burdens associated with adoption of the Physical Segregation Model 
outweigh the benefits.\77\
---------------------------------------------------------------------------

    \75\ FHLB at 1; Tudor at 1-2.
    \76\ ACLI at 2; CIEBA at 2; MFA at 2; Mr. Salzman at 8.
    \77\ BlackRock at 6; Vanguard at 6.
---------------------------------------------------------------------------

    Two commenters requested that the Commission reconsider adoption of 
the Physical Segregation Model on the basis that (i) Customer 
collateral should be individually segregated at both the FCM and the 
DCO to provide the same level of customer collateral protection that 
currently exists in the OTC swaps market, (ii) none of the other models 
are sufficient to fully protect customer collateral from recordkeeping/
operational, investment and fraud-related risks, (iii) the Physical 
Segregation Model facilitates porting more than the other models, and 
(iv) the commenters would be willing to bear any increased costs 
associated with the adoption of the Physical Segregation Model.\78\
---------------------------------------------------------------------------

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

    In addition, though several commenters supported the Complete Legal 
Segregation Model as the best alternative under consideration, these 
commenters urged the Commission to develop a framework for the adoption 
of the Physical Segregation Model because (i) The protections offered 
by the Physical Segregation Model are greater than those offered by the 
Complete Legal Segregation Model, (ii) the Physical Segregation Model 
facilitates porting more than the other models, and (iii) the costs 
assertions resulting from implementing the Physical Segregation Model 
have either not been substantiated or are costs that the commenters are 
willing to bear.\79\
---------------------------------------------------------------------------

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

    Commenters that opposed adoption of the Physical Segregation Model 
generally did so on the basis that implementation of the model would 
give rise to substantial increased costs with little increased benefit, 
as compared with the Complete Legal Segregation Model.\80\
---------------------------------------------------------------------------

    \80\ See, e.g., AII at 2; ICE at 9; FIA at 6; SIFMA at 4 n. 9; 
and Vanguard at 6.
---------------------------------------------------------------------------

3. Futures Model
    As mentioned above, four comment letters supported adoption of the 
Futures Model, with one commenter supporting adoption of both the 
Complete Legal Segregation Model and the Futures Model.
    CME argued that the Futures Model provides the best balance of 
costs versus industry risk as a whole and is ``the only approach that 
provides both legal and operational certainty to all parties in the 
event of an FCM default.'' \81\ According to CME, the Complete Legal 
Segregation Model imperfectly protects customer collateral and thus, 
``the Commission [should] not rush [sic] to implement a `solution' that 
gives superficial comfort, but may not work either operationally or 
legally in the event of an actual default.'' \82\ CME encouraged the 
Commission to ``engage in further study, and establish a review process 
that includes a representative group of interested parties with 
expertise in the area, in order to evaluate alternative approaches.'' 
\83\ Because the Futures Model has effectively protected customer 
interests in the futures market, CME recommended that, in the interim, 
the Commission implement swaps clearing employing the Futures

[[Page 6346]]

Model.\84\ Moreover, CME suggests that the Commission support a new 
industry effort to, at some point in the future, develop and implement 
a guaranteed clearing participant relationship that would allow a 
client, on an optional basis, to have a direct relationship with a DCO, 
with the client's positions guaranteed by a guaranteeing clearing 
member of the DCO and the client's Cleared Swaps Customer Collateral 
held in an outside account by a third party custodian.
---------------------------------------------------------------------------

    \81\ CME at 23.
    \82\ Id. at 2.
    \83\ Id.
    \84\ See id. at 23.
---------------------------------------------------------------------------

    Mr. Salzman supported adoption of the Futures Model with optional 
full physical segregation of Cleared Swaps Customer Collateral.
    ICE advocated adoption of the Futures Model, arguing against 
fundamentally changing a clearinghouse's existing operations, and 
positing that customers that wish to avoid Fellow-Customer Risk might 
explore becoming direct clearing participants once they ``fully 
appreciate[e] the substantial costs * * * associated with implementing 
and maintaining [the Complete Legal Segregation Model].'' \85\ However, 
ICE also proposed, as a middle ground, a model that appears to be based 
on the Futures Model but that provides some protection against Fellow-
Customer Risk. ICE explained that its ICE Clear Credit affiliate had 
adopted a model under which, ``customers are exposed to `fellow-
customer risk' only with respect to the customer's pro-rata share of 
the net customer-related margin requirement of its clearing member.'' 
\86\ ICE Clear Credit considers ``the difference between a customer's 
gross margin requirement and the customer's net margin requirement'' to 
be ``Excess Margin.'' \87\ ICE stated that a customer's Excess Margin 
is segregated and held by ICE Clear Credit on a custodial basis and is 
therefore not exposed to Fellow-Customer Risk. ICE argued that this 
model would provide some protection against Fellow-Customer Risk but 
would be more cost-effective than the proposed Complete Legal 
Segregation Model. In addition, ICE stated that individual segregation 
should be offered to customers at the option of a DCO, and also 
advanced the notion that the Commission should ``carefully consider and 
weigh the costs and benefits of potential customer-related OTC clearing 
models by asset class * * *.'' \88\
---------------------------------------------------------------------------

    \85\ ICE at 3.
    \86\ Id.
    \87\ Id. at 3, n. 3.
    \88\ ICE at 1-2.
---------------------------------------------------------------------------

    Newedge, which submitted a comment on behalf of itself, DRW Trading 
Group and nine ``Customers,'' supported adoption of the Futures Model 
on the basis that the Futures Model ``is the model most consistent with 
the general purposes of Title VII of Dodd-Frank as well as least likely 
to add moral hazard to the industry.'' \89\ Newedge argued that Title 
VII is about the reduction of systemic risk through the mutualization 
of risk, and that by mutualizing credit risk the Futures Model promotes 
the purpose of the Dodd-Frank Act because such mutualization encourages 
the creation and maintenance of well-capitalized FCMs. In addition, 
Newedge argued that the loss of customer off-sets would increase moral 
hazard because it would encourage FCMs to maintain less excess capital. 
Furthermore, Newedge suggested that, as an alternative to the adoption 
of the Complete Legal Segregation Model, the Commission should require 
greater FCM disclosure to allow customers to better assess Fellow-
Customer Risk.\90\
---------------------------------------------------------------------------

    \89\ Newedge at 2.
    \90\ Newedge argues that such disclosure be provided in ``plain 
English'' on an annual basis, and include the following data:
    The FCM's total equity, regulatory capital and net worth;
    The dollar value of the FCM's proprietary margin requirements as 
a percentage of its segregated and secured customer margin 
requirements;
    What number of the FCM's customers comprise an agreed 
significant percentage of its customer segregated funds;
    The aggregate notional value of non-hedged, principal OTC 
transactions into which the FCM has entered;
    The amount, generic source and purpose of any unsecured and 
uncommitted short-term funding the FCM is using;
    The aggregate amount of financing the FCM provides for customer 
transactions involving illiquid financial products for which it is 
difficult to obtain timely and accurate prices;
    The percentage of customer ``bad debts'' the FCM had during the 
prior year compared to its year-end segregated and secured customer 
funds; and
    A summary of the FCM's current risk practices, controls and 
procedures.
    Newedge at 7. See also FHLB at 7, n. 14 (encouraging the 
Commission, in response to a question in the NPRM regarding 
additional disclosure of FCM financial information, to make such 
information publicly available on a real time basis); and MFA at 5 
(arguing that ``if the Commission mandates the disclosure by FCMs of 
certain financial information, customers will be in a better 
position than they are today to evaluate the financial strength of 
their FCM.'').
---------------------------------------------------------------------------

    Comment letters supporting individual protection for customer 
collateral over the Futures Model generally did so on the basis that 
the Futures Model (i) does not protect Cleared Swaps Customer 
Collateral from Fellow-Customer Risk, Investment Risk, operational risk 
or fraud-related risk, and (ii) does not facilitate the portability of 
customer positions and associated collateral in the event of an FCM's 
default.\91\
---------------------------------------------------------------------------

    \91\ See, e.g., AII at 1-2; BlackRock at 2, 7-8; CIEBA Original 
at 5; FHLB at 6-7; Fidelity at 3; Freddie Mac at 1-2; SIFMA at 5; 
and Vanguard at 4-5.
---------------------------------------------------------------------------

    BlackRock argued that not only does the Futures Model fail to 
address the core risk differences between futures and OTC swaps, but 
because of the buffer created by the mutualized risk provided by the 
customer collateral, the Futures Model may result in less stringent 
selection and oversight of customers by FCMs.\92\ In addition, 
BlackRock argued that the moral hazard argument advocated by proponents 
of the Futures Model presumes that futures customers have access to 
information that allows them to make informed decisions regarding their 
fellow customers. However, BlackRock stated that access to such 
information is currently lacking, there are no requirements or 
incentives for a DCO or FCM to inform a customer when a fellow customer 
is in a stress or potential default situation and, as a result, 
customers are forced to rely on DCOs and regulators for protection.\93\
---------------------------------------------------------------------------

    \92\ Blackrock at 8.
    \93\ Id.
---------------------------------------------------------------------------

    Freddie Mac argued that by allowing DCOs to access the collateral 
of non-defaulting customers to cover the losses of defaulting 
customers, the Futures Model provides a ``subsidy to DCOs, FCMs and 
their riskiest customers at the expense of customers that present less 
risk[, and] this non-transparent shifting of risk would create moral 
hazard and inefficient credit decisions.'' \94\
---------------------------------------------------------------------------

    \94\ Freddie Mac at 2.
---------------------------------------------------------------------------

    Similarly, FHLB argued that DCOs and FCMs should bear all Fellow-
Customer Risk as they are in a superior position to conduct analyses of 
other cleared swap customers.\95\ In addition, FHLB indicated that if 
the Commission adopts the Futures Model as the segregation model for 
Cleared Swaps Customer Collateral, it would be anomalous for market 
participants to have the initial margin they post for Cleared Swaps 
face greater risk than the initial margin they post for uncleared 
swaps.\96\ Moreover, the Futures Model would impede portability because 
the collateral posted for Cleared Swaps ``could be tied up in the 
omnibus account indefinitely.'' \97\
---------------------------------------------------------------------------

    \95\ FHLB at 6-7.
    \96\ FHLB at 7. FHLB also states that market participants have a 
statutory right to segregate initial margin they post for uncleared 
swaps with an independent custodian. Id. at 6.
    \97\ FHLB at 7.
---------------------------------------------------------------------------

    SIFMA stated that avoiding Fellow-Customer Risk presented by the 
Futures Model should be the most important

[[Page 6347]]

objective in selecting a segregation model for Cleared Swaps Customer 
Collateral and, as such, none of the members of the Asset Management 
Group supports the Futures Model.\98\ In addition, SIFMA argued that 
the Futures Model does not facilitate portability to the same extent as 
the Complete Legal Segregation Model and, therefore, is not as 
effective at reducing systemic risk.\99\
---------------------------------------------------------------------------

    \98\ SIFMA at 3.
    \99\ See SIFMA at 4-6.
---------------------------------------------------------------------------

    Vanguard asserted that the Futures Model exposes market 
participants to Fellow-Customer Risk and because this risk is not a 
factor in the OTC swaps markets, the magnitude of such risk is not 
something that a customer could ever assess, especially given the 
``complete lack of transparency with respect to [an] FCM's other 
customers and their trading positions.'' \100\ Furthermore, Vanguard 
stated that mutualization of customer losses effectively allows ``less 
sophisticated analysis of the risk presented by individual customers 
and their trading portfolios as such individual risk can ultimately be 
covered by the overall pool of margin posted by all of the FCM's 
customers,'' with the result that ``riskier customers (and trading 
portfolios) [are] likely to be under margined and safer clients (and 
trading portfolios) [are] likely to be over margined relative to their 
actual level of risk presented to the system.'' \101\ In sum, Vanguard 
stated that, given the differences between the swaps and futures 
markets, the Futures Model could expose a Cleared Swaps Customer to 
significantly greater and potentially unlimited risk.\102\
---------------------------------------------------------------------------

    \100\ Vanguard at 5.
    \101\ Id.
    \102\ Id.
---------------------------------------------------------------------------

4. Legal Segregation With Recourse Model
    None of the comment letters received by the Commission appeared to 
support the Legal Segregation with Recourse Model. Commenters that 
discussed this model generally stated that the Commission should not 
adopt the Legal Segregation with Recourse Model because either (1) by 
failing to mitigate Fellow-Customer Risk, it is substantially inferior 
to the Complete Legal Segregation Model \103\ or (2) it suffers from 
the same shortcomings as the Complete Legal Segregation Model since it 
is costly to implement and fails to mitigate investment and operational 
risks.\104\
---------------------------------------------------------------------------

    \103\ See BlackRock at 7; FHLB at 7; Freddie Mac at 2; FIA at 6-
7; MFA at 2; and Vanguard at 4.
    \104\ See, e.g., CME at 16.
---------------------------------------------------------------------------

5. Optional Approach
    Though some commenters expressed a desire to have optional full 
physical segregation of Cleared Swaps Customer Collateral, none of the 
commenters supported the Optional Approach outlined by the 
Commission.\105\ Under this approach, each DCO would choose the level 
of customer collateral protection it chooses to offer.\106\ The 
Commission noted that this approach might be reconciled with section 
766(h) of the Bankruptcy Code by permitting DCOs to require that FCMs 
establish separate legal entities, each of which is limited to clearing 
at DCOs that use only the same customer collateral protection 
model.\107\
---------------------------------------------------------------------------

    \105\ See, e.g., MFA at 3 n. 11 (stating ``[t]he Commission 
should allow market participants to elect the Physical Segregation 
Model but only to the extent that it is compatible with the Complete 
Legal Segregation Model. We are not advocating that the Commission 
adopt the ``Optional Approach'' set forth in the Proposing Release, 
because we believe that approach would be very difficult to 
implement.''); ACLI at 2 (supporting the option to negotiate and 
select the Physical Segregation Model); BlackRock at 5 (stating that 
BlackRock would support an optional approach if the Commission 
believes such an approach would be prudent, but cautions that 
optionality may present implementation challenges and result in 
portability delays); CIEBA Original at 1 (promoting optional 
individual segregation of Cleared Swaps Customer Collateral); CME at 
17-20 (arguing that the Commission should support efforts to 
establish programs that would permit individuals to physically 
segregate the collateral associated with their Cleared Swaps 
positions on an optional basis); and Tudor at 6 (arguing that if the 
Commission does not adopt the Physical Segregation Model, the 
Commission should ``require DCOs to offer various segregation models 
to their cleared swaps customers, including full physical 
segregation.'').
    \106\ See 76 FR at 33825.
    \107\ See 76 FR at 33829.
---------------------------------------------------------------------------

    One commenter stated that it is ``likely that the benefits of 
creating such a regulatory structure would be illusory,'' \108\ while 
another argued that ``[o]ptionality will produce complexity and expense 
that might be tolerable when the cleared swaps market is well 
established, but that will be burdensome to a developing market.'' 
\109\ In addition, one commenter expressed concern regarding the 
appropriateness of the Commission adopting a segregation regime ``that 
provides protection to customers based on their ability and willingness 
to pay.'' \110\
---------------------------------------------------------------------------

    \108\ CME at 20.
    \109\ ISDA at 2.
    \110\ FIA at 6.
---------------------------------------------------------------------------

B. Discussion of the Comments

    After careful analysis of the issues raised by the comment letters 
with respect to the selection of a segregation model for Cleared Swaps 
Customer Collateral, the Commission is adopting the Complete Legal 
Segregation Model. As described above, the majority of market 
participants supported adoption of either the Complete Legal 
Segregation Model or the Physical Segregation Model. In addition, while 
certain technical corrections/clarifications were requested, none of 
the commenters identified material new information with respect to 
costs or benefits associated with the adoption of the Complete Legal 
Segregation Model or any other model under consideration. Some 
commenters did, however, re-iterate their view that their business 
model depended upon receiving stronger protection for their Cleared 
Swaps Customer Collateral than what exists under the Futures Model. 
These commenters are accustomed to paying for the higher costs implicit 
in separate accounting in the current bilateral market.
    On the other hand, CME, ICE, and Mr. Salzman identified a number of 
issues with the Complete Legal Segregation Model, including a number of 
limitations on the protection it provides to customers. They did not, 
however, provide reason to reject the conclusion that the Complete 
Legal Segregation Model provides substantially greater protection 
against Fellow-Customer Risk than the Futures Model.
    CME notes \111\ that a portion of the Cleared Swaps Customer 
Collateral will be held at the FCM, not the DCO, and that this 
collateral will not be protected by Complete Legal Segregation in the 
event that an FCM becomes insolvent. This proposition is true \112\ but 
is of little or no relevance to the comparison of Complete Legal 
Segregation with the Futures Model favored by these commenters. 
Complete Legal Segregation is intended to protect against Fellow-
Customer Risk. As discussed in the NPRM and above,\113\ Fellow-Customer 
Risk is the risk that the collateral of one customer will be used to 
compensate a DCO for market losses resulting from the swaps of another 
customer.\114\ In other words, Fellow-Customer Risk arises in 
connection with collateral maintained in an FCM's customer account 
posted with a DCO because, under the Futures Model, the DCO is 
potentially entitled to take all of the collateral in this account to 
cover losses created by the swaps of any customer. However, Cleared 
Swaps Customer Collateral held at the FCM (or at a location other than 
at the DCO, such as a bank) is not accessible to the DCO. Thus, such

[[Page 6348]]

collateral is not subject to Fellow-Customer Risk.\115\ While Cleared 
Swaps Customer Collateral in the customer account at the FCM is 
available to meet customers' swaps-related obligations to the FCM, the 
FCM is prohibited by statute from using one customer's Cleared Swaps 
Customer Collateral as margin or security for another customer's 
swaps.\116\
---------------------------------------------------------------------------

    \111\ CME at 6.
    \112\ See supra note 13.
    \113\ See supra at Section 1.B.6.
    \114\ 76 FR at 33821 n. 21.
    \115\ As explained above, FCMs typically maintain two separate 
Cleared Swaps Customer Accounts. One is maintained at the DCO and 
contains collateral required by the DCO to secure current swaps 
positions. The second is maintained by the FCM itself, typically at 
a bank, and contains collateral provided to the FCM by customers but 
not currently posted to the account at the DCO.
    \116\ Section 4d(f)(2)(B) of the CEA, 7 U.S.C. 6d(f)(2)(B).
---------------------------------------------------------------------------

    To be sure, Cleared Swaps Customer Collateral is subject to 
operational risk--the risk that, due to fraud, incompetence, or other 
mishap, customer funds that are required to be segregated are lost. 
Operational risk, however, is common to all of the segregation models 
for Cleared Swaps Customer Collateral, including the Physical 
Segregation Model.\117\ Collateral at the FCM is also subject to a 
modicum of Investment Risk. But Commission regulation 1.25, upon which 
regulation 22.2(e)(1) is based, is designed to ensure that customer 
segregated funds are invested in a manner that minimizes their exposure 
to credit, liquidity, and market risks both to preserve their 
availability to customers and DCOs and to enable investments to be 
quickly converted to cash at a predictable value in order to avoid 
systemic risk. Towards these ends, regulation 1.25 establishes a 
general prudential standard by requiring that all permitted investments 
be ``consistent with the objectives of preserving principal and 
maintaining liquidity.'' \118\
---------------------------------------------------------------------------

    \117\ Moreover, as noted above (see supra section I.D.2), while 
the LSOC Model does not protect against operational risk any more 
than the Futures Model, it is superior in that it enhances the 
ability to transfer collateral after an insolvency caused by 
operational risk.
    \118\ See regulation 1.25(b).
---------------------------------------------------------------------------

    CME also provides a detailed description of how, due to the ``the 
extended operational timeline for derivatives clearing and the netting 
of payments,'' a customer could default on a payment on Tuesday, but 
the DCO would, due to a countervailing gain by a different customer or 
customers of the same clearing member, not see such a default until 
after Wednesday's clearing cycle (payments for which may not be due 
until Thursday morning).\119\ This analysis elides the fact that, 
pursuant to the calculations required under regulation 22.2(f), an FCM 
with a customer who incurred a loss in excess of that customer's 
Cleared Swaps Customer Collateral would, unless and until that customer 
posted additional collateral, be required to have covered such loss 
with the FCM's own capital deposited into the Cleared Swaps Customer 
Account. If, at any moment, such customer loss was not covered by the 
FCM's own capital, then the FCM would be in violation of its 
segregation requirements. Pursuant to Commission regulation 1.12(h),
---------------------------------------------------------------------------

    \119\ CME at 9.

    [w]henever a person registered as a futures commission merchant 
knows or should know that the total amount of its funds on deposit 
in segregated accounts on behalf of customers * * * is less than the 
total amount of such funds required by the Act and the Commission's 
rules to be on deposit in segregated * * * accounts on behalf of 
such customers, the registrant must report such deficiency 
immediately by telephonic notice * * * to the registrant's 
designated self-regulatory organization and the principal office of 
the Commission in Washington, DC * * *.\120\
---------------------------------------------------------------------------

    \120\ Commission regulation 1.12(h) emphasis added.

    Thus, an FCM whose customer suffers such a loss which is not 
covered by the FCM's own capital on deposit in the Cleared Swaps 
Customer Account will certainly know of such deficiency no later than 
noon the next day (Wednesday in CME's example), when it will be 
required, pursuant to regulation 22.2(g), to compute its segregated 
funds requirements and the amount of segregated funds it has on deposit 
to meet such requirements. Moreover, the Commission believes that an 
FCM carrying a customer account that suffers losses in excess of that 
firm's ability to cover ``should know'' of such losses by the end of 
that trading day (Tuesday in CME's example).
    Such notice will permit the Commission to act to notify the 
relevant clearing organizations and to ensure that prompt action is 
taken to either bring capital in to enable the FCM to meet its 
segregated funds requirements or to otherwise act to minimize customer 
losses.
    CME implies that a successful porting of customer accounts requires 
information that is ``100% accurate,'' \121\ and that an FCM is 
unlikely to meet that standard each day. CME also notes that there may 
be portfolio changes in customer accounts on the day of default.\122\ 
Moreover, CME notes that a defaulting FCM may have systems that 
fail.\123\ CME notes that in the case of Lehman Brothers,\124\ there 
was a ``rushed, confused, uncertain and near-panic atmosphere,'' as 
described in the report of the SIPA Trustee.\125\
---------------------------------------------------------------------------

    \121\ CME at 13.
    \122\ Id. at 12.
    \123\ Id. at 14.
    \124\ The Lehman Brothers FCM was placed into a Securities 
Investor Protection Corporation liquidation on Friday, September 19, 
2008.
    \125\ CME at 14 (citation omitted).
---------------------------------------------------------------------------

    Recent experience demonstrates, however, that transfers can occur 
despite less than perfect information. For example, in the case of the 
bankruptcy of Lehman Brothers the commodity customer accounts were 
effectively transferred to Barclays over the weekend of September 20-
21, 2008, immediately following the commencement of the liquidation of 
the firm,\126\ and any discrepancies were resolved, despite the 
difficulties described. Indeed, the key issue will be to identify the 
collateral attributable to the defaulting customer, as distinguished 
from the collateral attributable to all other customers, as 
discrepancies between non-defaulting customers can be resolved either 
as transferred accounts are reconciled, or through the claims process.
---------------------------------------------------------------------------

    \126\ This transfer was authorized in the hours immediately 
following the commencement of Lehman's liquidation, and was 
implemented in the hours immediately thereafter.
---------------------------------------------------------------------------

    Thus, while CME is correct in stating that ``the risk of ultimate 
financial loss to customers due to a fellow-customer default is reduced 
but certainly not eliminated under CLSM,'' \127\ the Commission 
concludes, based on its experience with its rules in general and with 
FCM bankruptcies in particular, that the probability and probable 
amount of such loss is far less than CME implies.
---------------------------------------------------------------------------

    \127\ CME at 15.
---------------------------------------------------------------------------

    Moreover, the swift portability of collateral associated with 
customer positions in the event of an FCM's default remains problematic 
under the Futures Model where there is a customer default. Furthermore, 
many of the imperfections of the Complete Legal Segregation Model and 
the residual Fellow-Customer Risk associated therewith that were 
highlighted by CME arise from the ``last-day risk'' that results from 
the fact that information about each customer's positions is only 
provided once each day. However, the NPRM made clear in relevant 
portions of sections 22.11 and 22.12, and the Commission reiterates 
herein, that information must be provided and calculations must be made 
at least once a business day. In other words, many of the imperfections 
discussed by CME are not inherent to the Complete Legal Segregation 
Model. Rather, each DCO is free to make improvements to that

[[Page 6349]]

minimum regulatory standard if the DCO finds such improvements to be 
technologically feasible and economically justifiable. For example, a 
DCO could require its clearing members to identify the customer 
associated with each swap as it is cleared, and the DCO could use this 
information to associate gains and losses more tightly with each 
customer, thereby minimizing ``last-day risk.'' The NPRM and this final 
rule simply set a minimum threshold for daily tracking.
    With respect to costs associated with evaluating the credit risks 
of individual customers, CME noted that it calculates, ``at the end of 
each trading day * * * for each FCM's cleared swaps customer account * 
* * the net position of each customer in the account [and] the net 
margin requirement for each customer in the account.'' \128\ Thus, 
based on CME's description of its current clearing practices, it would 
appear that CME already undertakes an individualized evaluation of the 
sufficiency of the collateral posted by each customer of an FCM.\129\ 
In addition, as CME notes, ``FCMs are subject to compliance audits that 
are conducted for each FCM by the DCO serving as its ``designated self-
regulatory organization.'' \130\ It would therefore seem that at least 
some of the costs associated with evaluating the credit risk of 
individual customers are already being incurred by DCOs.
---------------------------------------------------------------------------

    \128\ Id. at 9 (emphasis supplied).
    \129\ In addition, during the Second Roundtable, Ms. Taylor of 
CME stated that with respect to risk management, CME is ``set up to 
do it in the over-the-counter business at the individual customer 
level.'' See Second Roundtable Tr. at168, l. 10.
    \130\ See also Second Roundtable Tr. at 171, l. 18 (Ms. Taylor 
stating that ``on a day-to-day basis we don't see the collateral 
that's in the account of a customer at an FCM, but we do have 
transparency into the efficacy of the practices of holding margin 
and holding it in segregated accounts through the financial 
supervision and audit functions so that there is ongoing monitoring 
of that * * *'').
---------------------------------------------------------------------------

    With respect to ICE's proposal, the Commission notes that it would 
provide less Fellow-Customer Risk protection than the Complete Legal 
Segregation Model. The fact that swap customers seem to overwhelmingly 
favor at least as much Fellow-Customer Risk protection as afforded to 
them under the Complete Legal Segregation Model, notwithstanding the 
potential costs, weighs in favor of the Complete Legal Segregation 
Model rather than ICE's proposal.
    With respect to Newedge's suggestion for increased disclosure of 
FCM information, additional disclosure is often beneficial, and the 
Commission will consider additional disclosure requirements as a means 
of enhancing protection for collateral belonging to market 
participants. However, because of confidentiality concerns, any 
feasible enhanced disclosure is insufficient for quantifying risk 
exposure to Fellow-Customer Risk and, thus, insufficient for providing 
Cleared Swaps Customers with the ability to effectively manage such 
exposure.\131\ Moreover, even if it were practical to provide Cleared 
Swaps Customers with information sufficient to assess Fellow-Customer 
Risk, that task is better left to the DCO since (1) DCOs have a 
concentrated ability to ensure adequate risk mitigation, and (2) having 
each Cleared Swaps Customer effectively risk-manage each FCM would 
likely entail duplication with resulting cost.
---------------------------------------------------------------------------

    \131\ See Second Roundtable at p. 183, 1.12-p. 184, 1.10 (In 
reference to the disclosure of additional FCM information, Mr. Kahn 
stating ``Barclays does agree and would be willing to show our risk-
management procedures and policies, and we do talk to our buy side 
clients about that * * * [but] if Barclays is providing clearing 
services for any of the individual firms on the other side of the 
table, we do not say that, nor would we ever give out any position 
level information. It is very important to us that in whatever 
paradigm it's set up and how you evaluate from a risk-management 
standpoint that the buy side and their trades that they've put on 
that we are serving remains confidential and does not leak to the 
market in any side.''); and Second Roundtable at p. 185, 1.6 (Ms. 
Taylor stating that ``when we know when people clear, that's very 
confidential information and I'm very sympathetic to the fear about 
fellow customer risk, but I'm also very sympathetic to the fact that 
none of you would want your information disclosed so that there is a 
balance on the other side * * *''). See also In re Stotler and Co., 
144 B.R. 385, 393 (Bankr.N.D.Ill. 1992) (``[T]he legislative history 
of 11 U.S.C. 766 emphasizes that the risk of a broker's bankruptcy 
is not to be borne by the customer * * *.'' Individual customers 
``face a formidable task in researching the relative solvency, 
reputation, and success of competing FCMs.'').
---------------------------------------------------------------------------

    Thus, after careful analysis of the comments, the Commission 
believes that the Complete Legal Segregation Model provides the most 
appropriate framework for the protection of Cleared Swaps Customer 
Collateral at this time. None of the segregation models the Commission 
considered provides perfect protection for Cleared Swaps Customer 
Collateral, and the degree of imperfection of any of the models is 
influenced by ``the facts and circumstances'' of an FCM default. 
However, as CME notes, the Complete Legal Segregation Model ``would, on 
its face, lead to greater protection of cleared swaps customer 
collateral against Fellow-Customer Risk than the Futures Model'' \132\ 
and is ``more likely to facilitate portability of cleared swaps 
customer positions than the Futures Model, in the event of an FCM 
default in its cleared swaps customer account * * *.'' \133\ 
Furthermore, the Complete Legal Segregation Model provides the best 
balance between benefits and costs in order to protect market 
participants and the public.
---------------------------------------------------------------------------

    \132\ CME at 16.
    \133\ Id.
---------------------------------------------------------------------------

    Finally, while the Complete Legal Segregation Model is a critical 
step in the efforts to protect customers and their collateral, as noted 
above, the Commission is actively considering seeking notice and 
comment on a proposal to allow individual protection of client assets. 
In addition, the Commission is directing staff to look into the 
possibility of adopting the Complete Legal Segregation Model for the 
futures market. The Commission remains committed to protecting market 
participants.

IV. Section by Section Analysis: Regulation Part 22

A. Regulation 22.1: Definitions

    Proposed regulation 22.1 established definitions for, inter alia, 
the following terms: ``cleared swap,'' ``cleared swaps customer,'' 
``cleared swaps customer account,'' ``cleared swaps customer 
collateral,'' ``cleared swaps proprietary account,'' ``clearing 
member,'' \134\ ``collecting futures commission merchant,'' 
``commingle,'' ``customer,'' ``depositing futures commission 
merchant,'' ``permitted depository,'' \135\ and ``segregate.''
---------------------------------------------------------------------------

    \134\ Under the Commission's proposal, the term ``clearing 
member'' means ``any person that has clearing privileges such that 
it can process, clear and settle trades through a derivatives 
clearing organization on behalf of itself or others. The derivatives 
clearing organization need not be organized as a membership 
organization.''
    \135\ The Commission proposed to define ``permitted depository'' 
as a depository that is a bank located in the United States, a trust 
company located in the United States, a Collecting Futures 
Commission Merchant registered with the Commission (but only with 
respect to a Depositing Futures Commission Merchant providing 
Cleared Swaps Customer Collateral), or a derivatives clearing 
organization registered with the Commission. In addition, the FCM or 
the DCO must hold a written acknowledgment letter from the 
depository as required by proposed regulation 22.5.
---------------------------------------------------------------------------

1. ``Segregate'' and ``Commingle''
    Regulation 22.1 proposed definitions for the terms ``segregate'' 
and ``commingle'' that are intended to codify the common meaning of 
such terms under the part 1 of the Commission's regulations (the ``Part 
1 Provisions''). Pursuant to the proposal, to ``segregate'' two or more 
items means to keep them in separate accounts and to avoid combining 
them in the same transfer between accounts. In contrast, ``commingle'' 
means to hold two or more items in the same account, or to combine such 
items in a transfer between accounts. The Commission did not receive 
comments on these

[[Page 6350]]

proposed definitions and is, therefore, adopting them as proposed.
2. ``Cleared Swap''
    Regulation 22.1 proposed a definition of the term ``Cleared Swap'' 
that (i) excludes, for purposes of Part 22 only, cleared swaps (and 
related collateral) that, pursuant either to a Commission rule, 
regulation, or order (including an order under section 4d(a) of the 
CEA) or to a DCO rule approved in accordance with regulation 
39.15(b)(2),\136\ are commingled with futures contracts (and related 
collateral) in a customer account established for the futures 
contracts, but (ii) includes, for purposes of Part 22 only, futures 
contracts or foreign futures contracts (and, in each case, related 
collateral) that, pursuant to either a Commission rule, regulation, or 
order (including an order under section 4d(f) of the CEA) or to a DCO 
rule approved in accordance with regulation 39.15(b)(2),\137\ are 
commingled with cleared swaps (and related collateral) in a customer 
account established for the cleared swaps. The Commission did not 
receive comments on the proposed definition of ``Cleared Swap'' and is 
adopting it as proposed with one change. The Commission finalized 
regulation 39.15 on October 18, 2011.\138\ That final regulation 
requires a DCO seeking to commingle Cleared Swaps (and related 
collateral) with futures contracts (and related collateral) in a 
futures account to petition for a Commission order under section 4d(a) 
of the CEA. Thus, the final definition of ``Cleared Swap'' in this 
rulemaking removes the reference to DCO rule approval procedures 
relevant to such commingling.
---------------------------------------------------------------------------

    \136\ Section 4d(a) of the CEA, 7 U.S.C. 6d(a).
    \137\ Section 4d(f) of the CEA, 7 U.S.C. 6d(f).
    \138\ 76 FR 69441.
---------------------------------------------------------------------------

3. ``Cleared Swaps Customer'' and ``Customer''
    Regulation 22.1 proposed definitions of ``Cleared Swaps Customer'' 
and ``Customer.'' The Commission is adopting the definitions of 
``Cleared Swaps Customer'' and ``Customer'' essentially as proposed, 
except that a technical amendment is made to the definition of Cleared 
Swaps Customer to clarify that a clearing member of a DCO is not a 
Cleared Swaps Customer with respect to Cleared Swaps cleared on that 
DCO.
4. ``Cleared Swaps Customer Collateral''
    Proposed regulation 22.1 defined Cleared Swaps Customer Collateral 
to include (i) money, securities, or other property that an FCM or a 
DCO receives, from, for, or on behalf of a Cleared Swaps Customer that 
is intended to or does margin, guarantee, or secure a Cleared Swap 
\139\ or, if the Cleared Swap is in the form or nature of an option, 
constitutes the settlement value of such option and (ii) ``accruals,'' 
which are the money, securities, or other property that an FCM or DCO 
receives, either directly or indirectly, as incident to or resulting 
from a Cleared Swap that the FCM intermediates for a Cleared Swaps 
Customer. The proposed definition explicitly included a Cleared Swap in 
the form or nature of an option as Cleared Swaps Customer Collateral, 
but did not explicitly include option premiums as Cleared Swaps 
Customer Collateral. The proposed definition also explicitly included 
in ``accruals'' the money, securities, or other property that a DCO may 
receive relating to the Cleared Swap that an FCM intermediates for a 
Cleared Swap Customer.
---------------------------------------------------------------------------

    \139\ Proposed regulation 22.1 provides that ``Cleared Swaps 
Customer Collateral'' includes collateral that an FCM or a DCO 
receives from, for, or on behalf of a Cleared Swaps Customer that 
either (i) is actually margining, guaranteeing, or securing a 
Cleared Swap or (ii) is intended to margin, guarantee, or secure a 
Cleared Swap. This provision is a clarification of ``customer 
funds'' as defined in regulation 1.3, which includes ``all money, 
securities, and property received by a futures commission merchant 
or by a clearing organization from, for, or on behalf of, customers 
or option customers * * * to margin, guarantee, or secure futures 
contracts.''
---------------------------------------------------------------------------

    FIA suggested that the Commission confirm that the term Cleared 
Swaps Customer Collateral includes all assets provided by a Cleared 
Swaps Customer, including any sums required by an FCM to margin a 
Cleared Swap, even if that sum is in excess of the amount required by 
the relevant DCO, as well as collateral ``voluntarily'' deposited by a 
Cleared Swaps Customer in a Cleared Swaps Customer Account.\140\ In 
response, the Commission is clarifying that the definition of Cleared 
Swaps Customer Collateral includes any sums required by an FCM that is 
intended to, or does, margin a Cleared Swap as well as collateral 
``voluntarily'' deposited by, or on behalf of, a Cleared Swaps Customer 
in a Cleared Swaps Customer Account. Moreover, in response to this 
comment, the Commission is adding a new section 22.13(c), which states 
that collateral posted by a Cleared Swaps Customer in excess of the 
amount required by a DCO (the ``excess collateral'') may be transmitted 
by the Cleared Swaps Customer's FCM to the DCO if, but only if, (i) the 
FCM is permitted to do so by DCO rule and (ii) the DCO provides a 
mechanism by which the FCM can identify the amount of such excess 
collateral attributable to each Cleared Swaps Customer, and such 
mechanism is employed effectively to accomplish that goal.
---------------------------------------------------------------------------

    \140\ See FIA at 7-8.
---------------------------------------------------------------------------

5. ``Cleared Swaps Customer Account'' and ``Cleared Swaps Proprietary 
Account''
    As proposed, regulation 22.1 defined a ``Cleared Swaps Customer 
Account'' as (i) an account that an FCM maintains at a Permitted 
Depository for the Cleared Swaps (and related collateral) of its 
Cleared Swaps Customers, or (ii) an account that a DCO maintains at a 
Permitted Depository for collateral related to Cleared Swaps that the 
FCM members intermediate for their Cleared Swaps Customers. Regulation 
22.1 also proposed a definition for ``Cleared Swaps Proprietary 
Account'' that is substantially similar to regulation 1.3, which 
defines ``Proprietary Account'' for futures contracts. The Commission 
requested comment on whether the proviso in paragraph (b)(8), which 
states that ``an account owned by any shareholder or member of a 
cooperative association of producers, within the meaning of section 6a 
of the Act, which association is registered as an FCM and carries such 
account on its records, shall be deemed to be a Cleared Swaps Customer 
Account and not a Cleared Swaps Proprietary Account of such 
association, unless the shareholder or member is an officer, director, 
or manager of the association,'' remains relevant, particularly with 
respect to Cleared Swaps. The Commission did not receive comments on 
these proposed definitions and is, therefore, adopting the definitions 
of ``Cleared Swaps Customer Account'' and ``Cleared Swaps Proprietary 
Account'' as proposed.
6. ``Clearing Member''
    Regulation 22.1 proposed a definition of ``Clearing Member.'' The 
Commission did not receive comments on this proposed definition. 
Therefore, the Commission is adopting the definition of ``Clearing 
Member'' as proposed.
7. ``Collecting Futures Commission Merchant'' and ``Depositing Futures 
Commission Merchant''
    Proposed regulation 22.1 defined a ``Collecting Futures Commission 
Merchant'' or ``Collecting FCM'' as one that carries Cleared Swaps on 
behalf of another FCM and the Cleared Swaps Customers of that other FCM 
and, as part of doing so, collects Cleared Swaps

[[Page 6351]]

Customer Collateral.\141\ In contrast, a ``Depositing Futures 
Commission Merchant'' or ``Depositing FCM'' was defined as one that 
carries Cleared Swaps on behalf of its Cleared Swaps Customers through 
a Collecting FCM, and, as part of doing so, deposits Cleared Swaps 
Customer Collateral with such Collecting FCM. The Commission did not 
receive comments on these proposed definitions and is adopting the 
definitions of ``Collecting Futures Commission Merchant'' and 
``Depositing Futures Commission Merchant'' as proposed.
---------------------------------------------------------------------------

    \141\ For the avoidance of doubt, an FCM does not become a 
Collecting FCM simply by intermediating the proprietary transactions 
of another FCM. An FCM only becomes a Collecting FCM by 
intermediating, on behalf of another FCM, Cleared Swaps belonging to 
Cleared Swaps Customers (and the relevant collateral).
---------------------------------------------------------------------------

8. ``Permitted Depository''
    Regulation 22.1 proposed a definition of ``Permitted Depository.'' 
The Commission did not receive comments on this proposed definition and 
is, therefore, adopting the definition of ``Permitted Depository'' as 
proposed.

B. Regulation 22.2--Futures Commission Merchants: Treatment of Cleared 
Swaps Customer Collateral

    Regulation 22.2 proposed requirements for an FCM's treatment of 
Cleared Swaps Customer Collateral, as well as the associated Cleared 
Swaps.
1. In General
    Proposed regulation 22.2(a) required an FCM to treat and deal with 
the Cleared Swaps of Cleared Swaps Customers, as well as associated 
Cleared Swaps Customer Collateral, as belonging to the Cleared Swaps 
Customers. The Commission did not receive any comments on regulation 
22.2(a) and is therefore adopting regulation 22.2(a) as proposed.
2. Location of Collateral
    Proposed regulation 22.2(b) required that an FCM segregate all 
Cleared Swaps Customer Collateral that it receives. Additionally, 
proposed regulation 22.2(b) required that an FCM adopt one of two 
methods to hold segregated Cleared Swaps Customer Collateral, which 
parallel either implicit assumptions or explicit provisions of 
regulation 1.20(a).
    The Commission did not receive any comments on regulation 22.2(b) 
and is therefore adopting regulation 22.2(b) as proposed.
3. Commingling
    Proposed regulation 22.2(c) permitted an FCM to commingle the 
Cleared Swaps Customer Collateral of multiple Cleared Swaps Customers, 
while prohibiting the FCM from commingling Cleared Swaps Customer 
Collateral with:
     FCM property, except as permitted under proposed 
regulation 22.2(e) (as discussed below); or
     ``customer funds'' (as regulation 1.3 defines such term) 
for futures contracts or the ``foreign futures or foreign options 
secured amount'' (as regulation 1.3 defines such term), except as 
permitted by a Commission rule, regulation or order (or a derivatives 
clearing organization rule approved pursuant to regulation 
39.15(b)(2)).\142\
---------------------------------------------------------------------------

    \142\ As the discussion on the proposed definition of ``Cleared 
Swaps'' highlights, if the Commission adopts a rule or regulation or 
issues an order pursuant to section 4d(a) of the CEA, or if the 
Commission approves DCO rules pursuant to regulation 39.15(b)(2) 
permitting such commingling, the Commission would apply the 
corresponding provisions and Part 190 to the Cleared Swap (and 
related collateral) as if the swap constituted a futures contract 
(and related collateral).
    In contrast, if the Commission adopts a rule or regulation or 
issues an order pursuant to section 4d(f) of the CEA, or if the 
Commission approves DCO rules pursuant to regulation 39.15(b)(2) 
permitting such commingling, the proposed definition of ``Cleared 
Swap'' would operate to apply Part 22 and Part 190 to (i) the 
futures contract (and related collateral) or (ii) the foreign 
futures contract (and related collateral) as if such contracts 
constituted Cleared Swaps (and related collateral).
---------------------------------------------------------------------------

    The Commission did not receive any comments on regulation 22.2(c) 
and is therefore adopting regulation 22.2(c) as proposed.
4. Limitations on Use
    Proposed regulation 22.2(d) prohibited an FCM from (i) using, or 
permitting the use of, the Cleared Swaps Customer Collateral of one 
Cleared Swaps Customer to purchase, margin, or settle the Cleared 
Swaps, or any other transaction, of a person other than the Cleared 
Swaps Customer; (ii) using Cleared Swaps Customer Collateral to margin, 
guarantee, or secure the non-Cleared Swap contracts (e.g., futures or 
foreign futures contracts) of the entity constituting the Cleared Swaps 
Customer; \143\ (iii) imposing, or permitting the imposition of, a lien 
on Cleared Swaps Customer Collateral, including on any FCM residual 
financial interest therein; and (iv) claiming that any of the following 
constitutes Cleared Swaps Customer Collateral:
---------------------------------------------------------------------------

    \143\ As mentioned above, an entity may simultaneously transact 
(i) Futures contracts, (ii) foreign futures contracts, (iii) Cleared 
Swaps, and (iv) uncleared swaps. Such entity would constitute a 
Cleared Swaps Customer only with respect to its Cleared Swaps.
---------------------------------------------------------------------------

     Money invested in the securities, memberships, or 
obligations of any DCO, designated contract market (``DCM''), swap 
execution facility (``SEF''), or swap data repository (``SDR''); or
     Money, securities, or other property that any DCO holds 
and may use for a purpose other than to margin, guarantee, secure, 
transfer, adjust or settle the obligations incurred by the FCM on 
behalf of its Cleared Swaps Customers.
    ISDA argued that these proposed rules could prevent or inhibit 
portfolio margining, even where netting itself is legally enforceable, 
and stated that the Commission should ``acknowledge in rule that excess 
collateral may be managed and applied so as to facilitate portfolio 
based-margining (including to the benefit of uncleared swaps).'' \144\ 
FIA requested that the Commission confirm that regulation 22.2(d) will 
permit FCMs to take security interests in their Cleared Swaps 
Customers' Cleared Swaps Customer Accounts in support of other 
positions held by such customers at the FCM, or for other entities 
(including affiliates of FCMs) to take such security interests in 
support of financing the Cleared Swaps Customer's margin obligations. 
MFA asked the Commission to ensure that Cleared Swaps Customers are 
able to grant liens on Cleared Swaps Customer Collateral (subordinate 
to a DCO's rights) to be able to continue entering into cross-product, 
and other multilateral, netting agreements. MFA also argued that the 
Commission should either (i) modify proposed regulation 22.2(d)(2) to 
limit application of the rule to ``prohibiting an FCM's creditors from 
obtaining a lien on [Cleared Swaps Customer Collateral]'' or (ii) 
clarify in the final rule release or in interpretive guidance that the 
language of proposed regulation 22.2(d) is not intended to limit a 
Cleared Swaps Customer's ability ``to grant liens on entitlements to 
cleared swap positions and related collateral as contemplated by UCC 9-
102(14), 102(15), 9-102(16), 9-102(17), 9-102(49);'' provided such lien 
does not impair a DCO's first priority interests to such 
collateral.\145\
---------------------------------------------------------------------------

    \144\ ISDA at 4-5.
    \145\ See MFA at 5-6.
---------------------------------------------------------------------------

    As explained above, ``excess'' collateral refers to the collateral 
that a Cleared Swaps Customer deposits with an FCM or DCO that is more 
than the amount required by the FCM or DCO to margin such customer's 
Cleared Swaps portfolio. Since the ``excess'' collateral belongs to the 
Cleared Swaps Customer, and is not required by the FCM or DCO, it is 
entirely proper for the Cleared Swaps Customer to manage the 
collateral. The Cleared Swaps Customer may manage ``excess'' collateral 
by giving instructions to the FCM to,

[[Page 6352]]

among other things, transfer such collateral from one account (e.g., a 
Cleared Swaps Customer Account) to another account (e.g., a futures 
account).\146\ However, it is less clear how collateral that is not 
``excess''--namely, collateral margining cleared positions (for which 
the counterparty is the DCO, through the FCM)--can also be used to 
margin uncleared positions (for which the counterparty is, by 
definition, other than a DCO). Accordingly, while the Commission 
supports the benefits of portfolio margining, the Commission does not 
believe it would be prudent to permit collateral margining cleared 
positions to simultaneously be used to margin uncleared positions.
---------------------------------------------------------------------------

    \146\ Regulation Part 22 creates the presumption that all money, 
securities, and other property deposited in a Cleared Swaps Customer 
Account constitutes Cleared Swaps Customer Collateral. Therefore, in 
order for a Cleared Swaps Customer to use ``excess'' collateral to 
margin, e.g., uncleared swaps, such customer must direct the 
transfer of such collateral from the Cleared Swaps Customer Account.
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    In addition, the Commission clarifies that an FCM may not, under 
any circumstances, grant a lien to any person (other than to a DCO) on 
its Cleared Swaps Customer Account, or on the FCM's residual interest 
in its Cleared Swaps Customer Account. On the other hand, a Cleared 
Swaps Customer may grant a lien on the Cleared Swaps Customer's 
individual cleared swaps account (an ``FCM customer account'') that is 
held and maintained at the Cleared Swaps Customer's FCM.\147\ The 
Commission notes that by permitting a Cleared Swaps Customer to grant a 
lien on that Cleared Swaps Customer's FCM customer account, an FCM is 
not permitting the grant of a lien on Cleared Swaps Customer 
Collateral. Furthermore, the Commission confirms that regulation 
22.2(d) permits (i) FCMs to take a security interest in a Cleared Swaps 
Customer's FCM customer account in support of other positions held by 
such customer at the FCM, and (ii) other entities (including affiliates 
of FCMs) to take a security interest in a Cleared Swaps Customer's FCM 
customer account in support of financing the Cleared Swaps Customer's 
margin obligations.
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    \147\ An FCM customer account is an account maintained by the 
FCM on behalf of a specific Cleared Swaps Customer that holds assets 
provided by that Cleared Swaps Customer, or other assets of 
equivalent value, that are not currently posted with the DCO to 
support swaps positions cleared by the FCM on behalf of such Cleared 
Swaps Customer. Typically, an FCM customer account constitutes a 
notation in the books and records of the FCM, and not a separate 
account at a depository. For a more detailed discussion of FCM 
customer accounts, see the discussion in section I.B.5.
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5. Exceptions
    Regulation 22.2(e) proposed certain exceptions to the 
abovementioned requirements and limitations. Specifically, proposed 
regulation 22.2(e)(1) allowed an FCM to invest Cleared Swaps Customer 
Collateral in accordance with regulation 1.25, as such regulation may 
be amended from time to time. Proposed regulation 22.2(e)(2) permitted 
an FCM to withdraw Cleared Swaps Customer Collateral for such purposes 
as meeting margin calls at a DCO or a Collecting FCM, or to meet 
charges lawfully accruing in connection with a cleared swap, such as 
brokerage or storage charges. Proposed regulation 22.2(e)(3) permitted 
an FCM (i) to place its own property in an FCM Physical Location or 
(ii) to deposit its own property in a Cleared Swaps Customer 
Account.\148\ Finally, as proposed, regulation 22.2(e)(4) clarified 
that, if an FCM places or deposits its own property in an FCM Physical 
Location or a Cleared Swaps Customer Account, as applicable, then that 
property becomes Cleared Swaps Customer Collateral. However, an FCM 
would be permitted to retain a residual financial interest in property 
in excess of that necessary.
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    \148\ Regulation 22.2(e)(3) proposes to permit an FCM to deposit 
only those securities that are unencumbered and are of the types 
specified in regulation 1.25. Such proposal accords with regulation 
1.23. See regulation 1.23. The Commission notes, however, that this 
proposal does not, and is not meant to, require a DCO to accept all 
of the types of securities or other property specified in regulation 
1.25.
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    SIFMA and Vanguard argued that the Commission should require an FCM 
to identify when it has used its own capital to meet a Cleared Swap 
Customer's margin obligation and whether such capital can be used by a 
DCO to cure a defaulting Cleared Swap Customer's margin 
obligations.\149\ To address this comment, the Commission is amending 
regulation 22.2(e)(3) to distinguish between (a) cases where an FCM 
uses its own capital to cure a Cleared Swaps Customer's undermargined 
or deficit account and (b) cases where an FCM uses its own capital to 
create a ``buffer'' in the Cleared Swaps Customer Account. The 
Commission notes that in case (a), the FCM has, in essence, provided an 
advance to the Cleared Swaps Customer, and the DCO should be able to 
use such collateral to meet a default by that Cleared Swaps Customer to 
the same extent as if that Cleared Swaps Customer provided the 
collateral. However, in case (b) the FCM has provided collateral that 
does not belong to any specific Cleared Swaps Customer, and thus there 
is no reason to restrict the use of that collateral to any specific 
Cleared Swaps Customer. The Commission also notes that, to the extent 
the DCO permits the FCM to post ``excess'' collateral, the DCO must, 
through its own rules, require that the FCM separately account for the 
separately identified ``buffer collateral'' (which originated from the 
FCM's own capital) and the collateral attributed (at the DCO) to the 
FCM's Cleared Swaps Customers (which belongs to those customers).
---------------------------------------------------------------------------

    \149\ See SIFMA at 10; and Vanguard at 7.
---------------------------------------------------------------------------

    ISDA noted that the use of ``such'' in regulation 22.2(e)(4)(ii) is 
ambiguous and could imply that an FCM has a residual interest only in 
the particular account (i.e., cash versus securities) into which it has 
deposited property. ISDA argued that this might cause unintended 
consequences if the customer deposits a security and the FCM, faced 
with a need to advance variation margin on behalf such customer in 
cash, does not liquidate the security but rather deposits cash secured 
by that security. ISDA suggested that the Commission clarify the 
language by making clear that the FCM has a residual interest in all 
property in Cleared Swaps Customer Accounts in excess of that required 
by the regulation 22.2(f)(4) segregation requirement.\150\ In response, 
the Commission clarifies that an FCM has a residual interest in all 
property in Cleared Swaps Customer Accounts in excess of that required 
by the regulation 22.2(f)(4) segregation requirements.
---------------------------------------------------------------------------

    \150\ See ISDA at 8-9.
---------------------------------------------------------------------------

e. Requirements As to Amount
    As proposed, regulation 22.2(f) set forth an explicit calculation 
for the amount of Cleared Swaps Customer Collateral that an FCM must 
maintain in segregation, which did not materially differ in the Form 1-
FR-FCM from the calculation for ``customer funds'' of futures 
customers. First, proposed regulation 22.2(f) defined ``account'' to 
reference an FCM's books and records pertaining to the Cleared Swaps 
Customer Collateral of a particular Cleared Swaps Customer. Second, 
proposed regulation 22.2(f) required an FCM to reflect in its account 
for each Cleared Swaps Customer the market value of any Cleared Swaps 
Collateral that it receives from such customer, as adjusted for:
     Any uses that proposed regulation 22.2(d) permits;
     Any accruals or losses on investments permitted by 
proposed regulation 22.2(e) that, pursuant to the applicable FCM 
customer agreement,

[[Page 6353]]

are creditable or chargeable to such Cleared Swaps Customer;
     Any charges lawfully accruing to the Cleared Swaps 
Customer, including any commission, brokerage fee, interest, tax, or 
storage fee; and
     Any appropriately authorized distribution or transfer of 
the Cleared Swaps Collateral.
    Third, proposed regulation 22.2(f) categorized accounts of Cleared 
Swaps Customers as having credit or debit balances. Accounts where the 
market value of Cleared Swaps Customer Collateral is positive after 
adjustments have credit balances. Conversely, accounts where the market 
value of Cleared Swaps Customer Collateral is negative after 
adjustments have debit balances. Fourth, proposed regulation 22.2(f) 
required an FCM to maintain in segregation, in its FCM Physical 
Location and/or its Cleared Swaps Customer Accounts at Permitted 
Depositories, an amount equal to the sum of any credit balances that 
Cleared Swaps Customers have in their accounts, excluding from such sum 
any debit balances that Cleared Swaps Customers have in their accounts 
(the ``Collateral Requirement''). Finally, regulation 22.2(f) proposed 
an exception to the exclusion of debit balances. Specifically, to the 
extent that a Cleared Swaps Customer deposited ``readily marketable 
securities'' with the FCM to secure a debit balance in its account, 
then the FCM must include such balance in the Collateral Requirement. 
``Readily marketable'' was defined as having a ``ready market'' as such 
latter term is defined in rule 15c3-1(c)(11) of the Securities and 
Exchange Commission (Sec.  241.15c3-1(c)(11) of this title). Proposed 
regulation 22.2(f) deemed a debit balance ``secured'' only if the FCM 
maintains a security interest in the ``readily marketable securities,'' 
and holds a written authorization to liquidate such securities in its 
discretion. To determine the amount of the debit balance that the FCM 
must include in the Collateral Requirement, proposed regulation 22.2(f) 
required the FCM (i) to determine the market value of such securities, 
and (ii) to reduce such market value by applicable percentage 
deductions (i.e., ``securities haircuts'') as set forth in rule 15c3-
1(c)(2)(vi) of the Securities and Exchange Commission. The FCM would 
include in the Collateral Requirement that portion of the debit 
balance, not exceeding 100 percent, which is secured by such reduced 
market value. The Commission requested comment on the Collateral 
Requirement proposed in regulation 22.2(f). Specifically, the 
Commission requested comment on whether the explicit calculation of 
such Collateral Requirement materially differs from the implicit 
calculation in the Part 1 Provisions for segregated ``customer funds'' 
of futures customers.
    ISDA expressed concern that the definition of Cleared Swaps 
Customer Collateral may sweep in investment returns, which may be 
inconsistent with regulation 22.10 that allows DCOs and FCMs to keep 
investment returns unless otherwise agreed and regulation 
22.2(f)(2)(ii) that refers to investment returns creditable to a 
customer by agreement.\151\ FIA asked the Commission to clarify whether 
the definition of Cleared Swaps Customer Collateral included the 
interest earned on investments of customer funds, which FCMs have 
traditionally been permitted to retain.\152\ In addition, FIA stated 
that because an FCM is required to include accruals or losses on 
investments of customer collateral under proposed regulation 22.3, the 
provision appears to state that customers can agree to assume all or a 
portion of the losses incurred in connection with the investment of 
customer collateral. FIA ``does not believe that a customer may agree 
to share in losses incurred in connection with investments under Rule 
1.25.'' \153\ The Commission confirms that investment returns are 
includable in Cleared Swaps Customer Collateral only to the extent 
creditable pursuant to the customer agreement. As such, the Commission 
is deleting the words ``or losses'' and ``or chargeable,'' from 
regulation Sec.  22.2(f)(2)(ii). To be clear, Cleared Swaps Customers 
are not responsible for losses on investments made pursuant to, and in 
accordance with, regulation 1.25.
---------------------------------------------------------------------------

    \151\ ISDA at 6-7.
    \152\ See FIA at 7-8 & nn. 25-30.
    \153\ The FIA cited to a number of cases where courts have 
stated that ``Congress intended that futures commission merchants be 
entitled to any and all interest on their investment of customer 
margin funds.'' See id. at n. 29 (citing Marchese v. Shearson Hayden 
Stone, Inc. 644 F.Supp. 1381 (C.D. Cal. 1986), aff'd, 822 F.2d 876 
(9th Cir. 1987); Craig v. Refco, 624 F.Supp 944 (N.D. Ill. 1983), 
aff'd. 816 F.2d 347 (7th Cir. 1987) (confirming that ``the FCM, not 
the customer, bears the risk of any decline in the value of 
investments purchased with customer funds''); and Bibbo v. Dean 
Witter Reynolds, Inc., 151 F.3d 559 (6th Cir. 1998). See also id. at 
8-9 & n. 31.
---------------------------------------------------------------------------

    AII requested that the Commission ``ensure that swaps customers may 
direct the investments in which initial margin is invested, as is done 
today through bilateral agreements with dealer counterparties.'' \154\ 
While Cleared Swaps Customers in the Cleared Swaps Customer Account 
Class would share in Investment Risk, the Commission notes that these 
comments are beyond the limited scope of these regulations, and it will 
consider how to address them outside of this rulemaking. However, 
nothing contained herein would limit an FCM from adopting as a policy--
and commit itself by contract with its customers--to further limit its 
investments of customer funds for all customers of one or more account 
classes (i.e., futures, foreign futures, Cleared Swaps).\155\
---------------------------------------------------------------------------

    \154\ AII at 4. The term ``initial margin'' is defined in 
regulation 1.3(ccc) and means ``money, securities, or property 
posted by a party to a futures, option, or swap as performance bond 
to cover potential future exposures arising from changes in the 
market value of the position.'' The term ``variation margin'' is 
defined in regulation 1.3(fff) and means ``a payment made by a party 
to a futures, option, or swap to cover the current exposure arising 
from changes in the market value of the position since the trade was 
executed or the previous time the position was marked to market.''
    \155\ Because of pro rata distribution, limiting the investments 
of customer funds attributable to individual customers would be 
insufficient to protect such customers from Investment Risk 
attributable to the investment of customer funds attributable to 
other customers within the same account class.
---------------------------------------------------------------------------

    FIA argued that the calculation requirements set forth in 
regulation 22.2 pose an excessive burden because an FCM cannot offset 
negative and positive balances in different currencies. Thus, if a 
Cleared Swaps Customer has a positive balance in USD but a negative 
balance in Euro, the FCM would need to deposit its own capital to cover 
the negative balance in Euro without respect to the Cleared Swaps 
Customer's positive balance in USD. FIA noted that though proposed 
regulation 22.2(g) mirrors existing regulation 1.32(a), there is an 
important difference in circumstances that warrants different treatment 
of the two cases: while relatively few futures contracts traded on U.S. 
DCMs are denominated in a foreign currency, a significant number of 
Cleared Swaps are expected to be denominated in foreign 
currencies.\156\ In response, the Commission recognizes the concerns 
expressed by the FIA. However, efforts to provide that an FCM may, in 
making its segregation calculations, include a debit balance to the 
extent such balance is secured by funds in other currencies, subject to 
appropriate haircuts, are beyond the limited scope of this rulemaking. 
The Commission will, therefore, consider how to address these issues 
outside of this rulemaking.
---------------------------------------------------------------------------

    \156\ See FIA at 10-11.
---------------------------------------------------------------------------

f. Segregated Account; Daily Computation and Record
    Proposed regulation 22.2(g) required an FCM to compute, as of the 
close of

[[Page 6354]]

each business day, on a currency-by-currency basis:
     The aggregate market value of the Cleared Swaps Customer 
Collateral in all FCM Physical Locations and all Cleared Swaps Customer 
Accounts at Permitted Depositories (the ``Collateral Value'');
     The Collateral Requirement; and
     The amount of the residual financial interest that the FCM 
holds in such Cleared Swaps Customer Collateral (i.e., the difference 
between the Collateral Value and the Collateral Requirement).
    Proposed regulation 22.2(g) also required the FCM to complete the 
abovementioned computation prior to noon\157\ on the next business day, 
and to keep all computations, together with supporting data, in 
accordance with regulation 1.31.
---------------------------------------------------------------------------

    \157\ ``Noon'' refers to noon in the time zone where the FCM's 
principal office is located.
---------------------------------------------------------------------------

    The Commission did not receive any comments on regulation 22.2(g) 
and is therefore adopting regulation 22.2(g) as proposed.

C. Regulation 22.3--Derivatives Clearing Organizations: Treatment of 
Cleared Swaps Customer Collateral

    Regulation 22.3 proposed requirements for DCO treatment of Cleared 
Swaps Customer Collateral from FCMs, as well as the associated Cleared 
Swaps. Specifically, regulation 22.3(a) required a DCO to treat Cleared 
Swaps Customer Collateral deposited by an FCM as belonging to the 
Cleared Swaps Customers of that FCM and not other persons. Moreover, 
regulation 22.3(b) required DCOs to segregate all Cleared Swaps 
Customer Collateral either with itself or a Permitted Depository. 
Proposed regulation 22.3(c) allowed a DCO to commingle the Cleared 
Swaps Customer Collateral that it receives from multiple FCMs on behalf 
of their Cleared Swaps Customers, while prohibiting the DCO from 
commingling Cleared Swaps Customer Collateral with (i) The money, 
securities, or other property belonging to the DCO, (ii) the money, 
securities, or other property belonging to any FCM, or (iii) other 
categories of funds that it receives from an FCM on behalf of 
Customers, including ``customer funds'' (as regulation 1.3 defines such 
term) for futures contracts or the ``foreign futures or foreign options 
secured amount'' (as regulation 1.3 defines such term), except as 
permitted by a Commission rule, regulation or order (or by a 
derivatives clearing organization rule approved pursuant to regulation 
39.15(b)(2)).\158\ Regulations 22.3(d) and (e), on the other hand, 
proposed certain exceptions to the abovementioned requirements and 
limitations. Regulation 22.3(d) as proposed (i) allowed a DCO to place 
money, securities, or other property belonging to an FCM in a DCO 
Physical Location, or deposit such money, securities, or other property 
in the relevant Cleared Swaps Customer Account, pursuant to an 
instruction from the FCM, and (ii) to permit FCM withdrawals of money, 
securities, or other property from a DCO Physical Location or Cleared 
Swaps Customer Account. Proposed regulation 22.3(d) is being deleted 
consistent with the changes to regulation 22.2(e)(3), which require 
delineation between cases where an FCM posts collateral on behalf of a 
particular customer and cases where an FCM posts collateral on behalf 
of its customer account in general. Proposed regulation 22.3(e) (now, 
regulation 22.3(d)) allowed a DCO to invest Cleared Swaps Customer 
Collateral in accordance with regulation 1.25, as such regulation may 
be amended from time to time.
---------------------------------------------------------------------------

    \158\ See 76 FR at 69390-92.
---------------------------------------------------------------------------

    The Commission requested comment on what, if any, changes to 
proposed regulation 22.3 may be appropriate to accommodate the 
possibility that a depository registered with either domestic or 
foreign banking regulators may seek to become a DCO, and that such 
depository may seek to hold Cleared Swaps Customer Collateral, as well 
as other forms of customer property. Specifically, the Commission 
requested comment on (i) whether a DCO that is also a registered 
depository should be permitted to hold both tangible and intangible 
forms of Cleared Swaps Customer Collateral from FCMs itself, (ii) the 
challenges that a DCO holding tangible and intangible forms of Cleared 
Swaps Customer Collateral pose to the protection (including effective 
segregation) of Cleared Swaps Customer Collateral (as well as other 
forms of customer property), and (iii) how any challenges identified in 
(ii) might be addressed.
    ISDA stated that the definition of Cleared Swaps Customer 
Collateral does not distinguish between initial and variation margin. 
Both FIA and ISDA expressed concerns that, if variation margin is 
considered as collateral, regulations 22.3(a) and 22.3(b) would prevent 
a DCO from taking Cleared Swaps Customer Collateral received from one 
FCM as variation margin ``and transferring it to an FCM whose customers 
are on the opposite side of the relevant trades.'' \159\ FIA asked the 
Commission to confirm that a DCO may pass variation margin to the 
receiving party ``if such variation is characterized as collateral and 
not as a settlement payment by the parties to the swap.'' \160\ 
Similarly, ICE requested clarification that a DCO that has received 
``variation or mark-to-market margin (as opposed to initial margin)'' 
may be used to settle variation for offsetting swaps. ICE argues that 
without an amendment permitting DCOs to treat ``variation or mark-to-
market'' margin as a pass-through, ``clearinghouses could effectively 
be prohibited from clearing much of the OTC swaps market as it 
transacts today.'' \161\ The Commission is adopting regulation 22.3 as 
proposed. The Commission recognizes the concerns expressed by 
commenters and confirms that regulation 22.3 is intended to permit DCOs 
to use variation margin collected from Cleared Swaps Customers to pay 
variation margin to, among others, Cleared Swaps Customers.
---------------------------------------------------------------------------

    \159\ ISDA at 5. See FIA at 9.
    \160\ FIA at 9 (emphasis supplied).
    \161\ ICE at 10.
---------------------------------------------------------------------------

    ISDA also observed that a variation margin payment ``may be 
considered as a settlement payment--a realized profit/loss--as in the 
case of listed futures; or as collateralizing current exposure, a 
payment representing unrealized profit/loss, as in the case of 
bilateral (uncleared) swap contracts.'' \162\ ISDA argued that Cleared 
Swaps Customers would be subject to a ``mark-to-market'' tax regime, 
paying ordinary income on swap returns, if a DCO were to treat as a 
contract settlement, a variation margin payment made with respect to a 
Cleared Swap.\163\ Accordingly, ISDA noted that recording daily mark-
to-market income on swaps would poorly match the periodic realized 
coupon income on the bonds hedged by such swaps.\164\ Similarly, FIA 
noted that it has ``been advised that, because cleared swaps are not 
subject to section 1256 of the Internal Revenue Code, the 
characterization of such payments as settlement payments may have tax 
consequences that may impair the ability of certain financial end-users 
* * * to enter into cleared swaps transactions.'' \165\ ISDA suggested 
that Congress did not intend to change the tax treatment of swaps, 
because section 1601 of the Dodd-Frank Act explicitly exempts Cleared 
Swaps from being treated as ``section 1256 contracts.'' \166\ As such, 
ISDA requested that the

[[Page 6355]]

Commission clarify that DCOs can treat variation margin as collateral 
rather than settlement payments.\167\ These comments are beyond the 
limited scope of these regulations and outside the scope of the 
Commission's authority. The Commission does not take any view on the 
proper treatment of variation margin associated with swaps for tax 
purposes. Rather, the Commission believes that the Internal Revenue 
Service is the regulatory body best equipped to address the identified 
taxation issue.
---------------------------------------------------------------------------

    \162\ ISDA at 5.
    \163\ Id.
    \164\ Id. at 6.
    \165\ FIA at 9, n. 33.
    \166\ ISDA at 6.
    \167\ Id.
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D. Regulation 22.4--Futures Commission Merchants and Derivatives 
Clearing Organizations: Permitted Depositories

    Proposed regulation 22.4 listed depositories permitted to hold 
Cleared Swaps Customer Collateral (the ``Permitted 
Depositories''),\168\ and noted that an FCM could serve as a Permitted 
Depository, but only if it is a Collecting FCM carrying the Cleared 
Swaps (and related Cleared Swaps Customer Collateral) of a Depositing 
FCM. The Commission sought public comment regarding the appropriateness 
of allowing an FCM to serve as a Permitted Depository only if the FCM 
is a ``Collecting FCM.'' The Commission did not receive any comments in 
response thereto or on regulation 22.4 generally. The Commission is, 
therefore, adopting regulation 22.4 as proposed.
---------------------------------------------------------------------------

    \168\ As proposed, for a DCO or an FCM, a Permitted Depository 
must (subject to regulation 22.9) be: (i) A bank located in the 
United States; (ii) a trust company located in the United States; or 
(iii) a DCO.
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E. Regulation 22.5--Futures Commission Merchants and Derivatives 
Clearing Organizations: Written Acknowledgement

    As proposed, regulation 22.5 required a DCO or FCM to obtain 
written acknowledgement letters from depositories (including, by 
implication, depositories located outside the United States) before 
opening a Cleared Swaps Customer Account.\169\ Proposed regulation 22.5 
also set forth substantive requirements for such acknowledgement 
letter. The Commission requested comment on the appropriateness of the 
following: (i) the addition of regulation 1.20 (as the Commission may 
choose to amend such regulation) in proposed regulation 22.5, and (ii) 
the adaptation of any form letter that the Commission may choose to 
promulgate under regulation 1.20 to accommodate Cleared Swaps Customer 
Collateral under regulation 22.5.
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    \169\ The function of a written acknowledgment letter is to 
ensure and provide evidence that a potential Permitted Depository is 
aware that (i) The FCM or DCO is opening a Cleared Swaps Customer 
Account, (ii) the funds deposited in such account constitute Cleared 
Swaps Customer Collateral, and (iii) such Cleared Swaps Customer 
Collateral is subject to the requirements of section 4d(f) of the 
CEA and Part 22 (when finalized).
---------------------------------------------------------------------------

    ISDA stated that an acknowledgement letter from a foreign 
depository ``may be difficult to get and of little purpose, if 
obtained'' because the letter would not alter the fact that the foreign 
depository would be subject to local bankruptcy jurisdiction.\170\ The 
Commission is adopting regulation 22.5 as proposed. The Commission 
notes that under regulation 1.49(d)(1) depositories in the futures 
market must provide the depositing FCM or DCO with the appropriate 
written acknowledgements required under regulations 1.20 and 1.26. The 
requirements set forth in regulation 22.5 parallel the requirements set 
forth under regulations 1.20 and 1.26. The Commission has no reason to 
believe that written acknowledgements from foreign depositories would 
be any more difficult to obtain in the swaps market than they would be 
in the futures market. Moreover, the written acknowledgment is intended 
to clearly establish the commercial expectations of the parties before 
a bankruptcy or insolvency event. In addition, the written 
acknowledgements could aid a bankruptcy judge's or trustee's allocation 
of assets to the extent a bankruptcy court or other insolvency regime 
finds the commercial expectations of the parties to be helpful 
information.
---------------------------------------------------------------------------

    \170\ ISDA at 8.
---------------------------------------------------------------------------

F. Regulation 22.6--Futures Commission Merchants and Derivatives 
Clearing Organizations: Naming of Cleared Swaps Customer Accounts

    Proposed regulation 22.6 required an FCM or DCO to ensure that the 
name of each Cleared Swaps Customer Account that it maintains with a 
Permitted Depository (i) clearly identifies the account as a ``Cleared 
Swaps Customer Account,'' and (ii) clearly indicates that the 
collateral therein is ``Cleared Swaps Customer Collateral'' subject to 
segregation in accordance with section 4d(f) of the CEA and Part 22. 
The Commission did not receive any comments on this regulation and is, 
therefore, adopting regulation 22.6 as proposed.

G. Regulation 22.7--Permitted Depositories: Treatment of Cleared Swaps 
Customer Collateral

    As proposed, under regulation 22.7 a Permitted Depository is (i) 
required to treat all funds in a Cleared Swaps Customer Account as 
Cleared Swaps Customer Collateral and (ii) prohibited from holding, 
disposing of, or using any Cleared Swaps Customer Collateral as 
belonging to any person other than the Cleared Swaps Customers of the 
FCM maintaining such Cleared Swaps Customer Account or the Cleared 
Swaps Customers of the FCMs for which the DCO maintains such Cleared 
Swaps Customer Account. The Commission did not receive any comments on 
this proposed rule and is adopting regulation 22.7 as proposed.

H. Regulation 22.8--Situs of Cleared Swaps Customer Accounts

1. Proposed Requirements
    Proposed regulation 22.8 required (i) each FCM to designate the 
United States as the site (i.e., the legal situs) of the FCM Physical 
Location and the ``account'' (as regulation 22.2(f)(1) defines such 
term) that the FCM maintains for each Cleared Swaps Customer, and (ii) 
each DCO to designate the United States as the site (i.e., the legal 
situs) of the DCO Physical Location and the Cleared Swaps Customer 
Account that the DCO maintains on its books and records for the Cleared 
Swaps Customers of each FCM. The Commission sought comment on whether, 
as proposed, regulation 22.8 ensured that Cleared Swaps Customer 
Collateral be treated in accordance with the U.S. Bankruptcy Code, to 
the extent possible, and if it did not achieve this purpose, what 
alternatives the Commission should consider to achieve such purpose. 
Additionally, the Commission requested comment on the benefits and 
costs of proposed regulation 22.8, as well as any alternatives.
    NGX states that the requirement of U.S. situs for a customer 
account may increase legal uncertainty with respect to the insolvency 
regime that would apply to a bankruptcy, and such uncertainty may slow 
down resolution of a clearing participant's default and bankruptcy. 
Moreover, NGX argues that ``it is unclear how the U.S. account situs 
requirement will interact with the choice of law provision'' \171\ of a 
non-U.S. DCO that chooses to apply its home country insolvency regime. 
In light of this uncertainty, NGX recommends that the Commission adopt 
the approach it proposed for foreign non-U.S. clearinghouses seeking 
DCO registration; namely, that the DCO registration application include 
a ``memorandum of local law analyzing

[[Page 6356]]

insolvency issues in the [relevant] foreign jurisdiction * * * and 
describing how the applicant has addressed any conflict of law issues, 
which jurisdiction's law is intended to apply to each aspect of the 
applicant's clearing house's operations, and the enforceability of the 
choice of law in the relevant jurisdictions.'' \172\ However, NGX 
requested that the Commission provide greater guidance regarding the 
operation of the proposed rule if it opts to retain the account situs 
requirements, specifically making clear that ``a DCO choice of law rule 
should be able to include both choice of forum as well as the 
substantive law to be applied'' with respect to a clearinghouse's 
insolvency and the remedies available to a clearinghouse in the event 
of a clearing member's default or insolvency.\173\
---------------------------------------------------------------------------

    \171\ NGX at 4.
    \172\ Id. at 5 (citing to the ``Risk Management Requirements for 
Derivative Clearing Organizations,'' 76 FR. 3698, 3742, Jan. 20, 
2011).
    \173\ Id. at 4-5.
---------------------------------------------------------------------------

    The Commission notes that, in the event of an FCM's bankruptcy, the 
legal situs provision is intended to make clear that the insolvency 
regime that will apply to the customers of the FCM is the U.S. 
insolvency regime embodied in Subchapter IV of Chapter 7 of the U.S. 
Bankruptcy Code and Part 190 of the Commission's regulations.\174\ 
While a DCO is free to make the choice that local law applies to all 
other aspects of a DCO's relationships with its members, the Commission 
has historically required, and intends to continue requiring, that 
customers of FCMs in bankruptcy be treated in accordance with U.S. 
bankruptcy law.
---------------------------------------------------------------------------

    \174\ As discussed in the NPRM, the Commission does not intend 
for regulation 22.8 to affect the actual location in which an FCM or 
DCO may keep Cleared Swaps Customer Collateral. Though the legal 
situs of an ``account'' (as regulation 22.2(f)(1) defines the term) 
and a Cleared Swaps Customer Account must be in the United States, 
the Commission recognizes that Cleared Swaps Customer Collateral 
may, in actuality, be kept outside the United States in certain 
circumstances. However, the Commission notes that regulation 22.8 
does not override other Commission regulations regarding the 
location of customer funds. Specifically, regulation 22.9, which 
applies regulation 1.49 to Cleared Swaps, requires, among other 
things, FCMs and DCOs to hold, in a segregated account on behalf of 
Cleared Swaps Customers, sufficient United States dollars in the 
United States to meet all United States dollar obligations.
---------------------------------------------------------------------------

I. Regulation 22.9--Denomination of Cleared Swaps Customer Collateral 
and Location of Depositories

    Proposed regulation 22.9 applies regulation 1.49 to Cleared Swaps 
Customer Collateral. Regulation 1.49 sets forth rules determining the 
permitted denominations of customer funds (i.e., permitted currencies 
and amounts in each currency), permitted locations of customer funds 
(i.e., permitted countries and amounts in each country), and 
qualifications that entities outside of the United States must meet to 
become Permitted Depositories (e.g., minimum regulatory capital). 
Specifically, regulation 1.49(b)(1)(iii) permits an FCM's obligations 
to a customer to be denominated in ``a currency in which funds have 
accrued to the customer as a result of trading conducted on a 
designated contract market or registered derivatives transaction 
execution facility,'' while regulation 1.49(d)(3) requires depositories 
that are located outside the United States to be (i) A bank or trust 
company that meets certain financial requirements, (ii) an FCM, or 
(iii) a DCO. In addition, regulation 22.9 proposed to allow an FCM to 
serve as a Permitted Depository only if the FCM was a Collecting FCM 
carrying the Cleared Swaps, and associated Cleared Swaps Customer 
Collateral, for the Cleared Swaps Customers of a Depositing FCM.
    ISDA stated that regulation 1.49(b)(1)(iii) should be amended to 
reflect the wider scope of execution methods available for Cleared 
Swaps.\175\ In response, the Commission is amending regulation 22.9 to 
allow the FCM's obligations to a Cleared Swaps Customer to be 
denominated in the currency in which funds have accrued to the Cleared 
Swaps Customer as a result of a Cleared Swap carried through such FCM, 
to the extent of such accruals. However, the Commission notes that it 
cannot amend regulation 1.49(b)(1)(iii) at this time because such an 
amendment was not part of the NPRM.
---------------------------------------------------------------------------

    \175\ ISDA at 8.
---------------------------------------------------------------------------

    ISDA also requested that the Commission make plain that central 
securities depositories are acceptable depositories.\176\ Similarly, 
FIA argued that Euroclear, a central securities depository for Euro-
denominated securities, should be permitted to act as a depository 
under Commission regulations.\177\ The Commission notes that although 
the notion of a central securities depository as an acceptable 
depository for securities has considerable intuitive appeal, CEA Sec.  
4d(f)(3)(A)(i) limits acceptable depositories for commingled funds to 
``any bank or trust company or * * * a derivatives clearing 
organization.'' \178\ Because these comments are beyond the limited 
scope of these regulations, the Commission will consider how to address 
them outside of this rulemaking.
---------------------------------------------------------------------------

    \176\ Id.
    \177\ See FIA at 11.
    \178\ Section 4d(f)(3)(A)(ii) of the CEA permits customer 
property to be used to margin a cleared swap with a member of a DCO, 
i.e., a collecting FCM. However, the Commission notes that a foreign 
bank that meets the requirements of regulation 1.49(d)(3)(i) is a 
good depository, and such a foreign bank may itself hold foreign 
securities in an account at a foreign central securities depository.
---------------------------------------------------------------------------

    Finally, FHLB argued that ``customer collateral should only be held 
in banks or trust companies located in the United States.'' \179\ The 
Commission does not believe it would be appropriate to address this 
comment at this time, as it is beyond the scope of this rulemaking.
---------------------------------------------------------------------------

    \179\ FHLB at 9.
---------------------------------------------------------------------------

J. Regulation 22.10--Application of Other Regulatory Provisions

    Proposed regulation 22.10 applies 1.27 (Record of 
investments),\180\ 1.28 (Appraisal of obligations purchased with 
customer funds),\181\ 1.29 (Increment or interest resulting from 
investment of customer funds),\182\ and 1.30 (Loans by futures 
commission merchants; treatment of proceeds) \183\ to Cleared Swaps 
Customers and Cleared Swaps Customer Collateral.
---------------------------------------------------------------------------

    \180\ Regulation 1.27 requires FCMs and DCOs investing customer 
funds to maintain specified records concerning such investments.
    \181\ Regulation 1.28 requires FCMs investing customer funds to 
record and report such investment at no greater than market value.
    \182\ Regulation 1.29 permits FCMs and DCOs investing customer 
funds to receive and retain any increment or interest thereon.
    \183\ Regulation 1.30 permits FCMs to loan their own funds to 
customers on a secured basis, and to repledge or sell such security 
pursuant to agreement with such customers. However, regulation 1.30 
does make clear that the proceeds of such loans, when used to 
purchase, margin, guarantee, or secure futures contracts, shall be 
treated as customer funds.
---------------------------------------------------------------------------

    While several commenters cited regulation 22.10, they did so in the 
context of discussion of other regulations. Because the Commission did 
not receive any comments regarding the substance of regulation 22.10, 
it is adopting regulation 22.10 as proposed.

K. Regulation 22.11--Information To Be Provided Regarding Customers and 
Their Cleared Swaps

    Proposed regulation 22.11 required that (i) each Depositing FCM 
provide to its Collecting FCM and (ii) each FCM member provide to its 
DCO, in each case, information sufficient to identify Cleared Swaps 
Customers on a one-time basis, and information sufficient to identify 
the portfolio of rights and obligations belonging to such customers 
with respect to their Cleared Swaps ``at least once each business 
day.'' If a Depositing FCM or FCM member also serves as a Collecting 
FCM, then it must

[[Page 6357]]

provide the specified information with respect to each individual 
Cleared Swaps Customer for which it acts (on behalf of a Depositing 
FCM) as a Collecting FCM. As proposed, regulation 22.11 also held the 
DCO responsible for taking appropriate steps to confirm that the 
information that it receives is accurate and complete, and ensure that 
the information is being produced on a timely basis. However, because 
the DCO may not have a direct relationship with, e.g., a Depositing 
FCM, the regulation required the DCO to take ``appropriate steps'' to 
ensure that its FCM members enter into suitable arrangements with, 
e.g., a Depositing FCM to verify the accuracy and timeliness of 
information. The Commission requested comment on whether (i) The 
proposed requirement in regulation 22.11 for a Depositing FCM to 
provide a Collecting FCM with information sufficient to identify its 
Cleared Swaps Customers raises any competitive concerns, (ii) such 
concerns, if any, could be resolved if the identities of the Cleared 
Swaps Customers are coded, with the DCO, but not the Collecting FCM, 
receiving a copy of such code, and (iii) other methods were available 
to resolve any such concerns.
    ISDA requested that the Commission further clarify the language of 
regulation 22.11 to make explicit that an FCM must provide identifying 
information to the DCO or to the Collecting FCM the first time the FCM 
intermediates a swap for a Cleared Swaps Customer with the particular 
relevant DCO or collecting FCM.\184\ In response, the Commission is 
amending the language of regulation 22.11 to make clear that an FCM 
must provide identifying information to a DCO or Collecting FCM the 
first time it intermediates a Cleared Swap with that DCO or Collecting 
FCM.
---------------------------------------------------------------------------

    \184\ See ISDA at 9.
---------------------------------------------------------------------------

    In addition, a number of commenters raised concerns regarding the 
need for specific recordkeeping and reporting requirements.\185\ These 
commenters requested that the Commission mandate reporting and 
recordkeeping requirements for DCOs and require DCOs to implement rules 
requiring their clearing members to comply with such reporting and 
recordkeeping requirements. FHLB argued that, at a minimum, an FCM 
should have to identify (i) collateral posted by an individual customer 
as cash or securities and (ii) with respect to identifiable securities, 
which customer posted such securities.\186\ CME, by contrast, stated 
that auditing for accuracy of ``a full breakdown of all forms of 
collateral at all levels of clearing for each end customer, allocated 
specifically to each DCO * * * will increase costs exponentially.'' 
\187\ CIEBA, CME, ICE, FHLB, SIFMA, BlackRock, and Vanguard stated that 
it is important to be able to ensure that an FCM's books and records 
are accurate in order to support implementation of Cleared Swaps 
Customer Collateral in bankruptcy. The preferred means of addressing 
this problem ranged from increasing recordkeeping and monitoring 
burdens on FCMs and DCOs to abandoning the Complete Legal Segregation 
Model. On the other hand, CME complained that the phrase ``portfolio of 
rights and obligations arising from the Cleared Swaps that such futures 
commission merchant intermediates for such customer'' is unclear as to 
whether it covers the collateral supporting such positions.\188\ CME 
stated that it ``read[s] the proposed regulations as requiring a DCO to 
allocate to each non-defaulting customer its specific required margin 
only * * *,'' and that it intends to ``allocate to any defaulting 
customer the difference between its specific required margin and the 
collateral within the DCO's access and control * * * .''\189\
---------------------------------------------------------------------------

    \185\ See, e.g., ICI at 5; SIFMA at 8; and FHLB at 4.
    \186\ FHLB also argues that this information should be provided 
to Cleared Swaps Customers on a daily basis so that they can correct 
any discrepancies in the records, which would, in turn, reduce 
operational risk. See FHLB at 4.
    \187\ CME at 15, n. 30. Cf. FHLB at 3, n. 2 (stating FHLB's 
understanding that LCH has the technology necessary to track 
individual customer collateral on a real-time basis, but 
acknowledging that it is ``not in a position to calculate the costs 
associated with such technology.'').
    \188\ CME at 6-7.
    \189\ Id. at 7 (emphasis in original).
---------------------------------------------------------------------------

    AII, SIFMA, and Vanguard requested that the Commission require DCOs 
to carefully monitor clearing member compliance with DCO rules, 
including through periodic audits, by amending regulation 22.11(e) to 
provide specific and concrete examples of the steps a DCO must take to 
confirm that information from an FCM is accurate, complete and timely. 
In addition, AII, SIFMA, and Vanguard requested that the words 
``appropriate steps'' in regulation 22.11(e) be replaced with ``all 
steps necessary.'' \190\ CME argued that regulation 22.11 should 
specify the contents of the daily FCM report to the DCO,\191\ and that 
the Commission should clarify the intent behind the language ``take 
additional steps,'' specifically with respect to what the Commission 
``intends each DCO to accomplish under the verification requirement.'' 
\192\
---------------------------------------------------------------------------

    \190\ See AII at 3; SIFMA at 8; and Vanguard at 6.
    \191\ See CME at 3-4, and 13-15.
    \192\ CME at 15.
---------------------------------------------------------------------------

    FIA noted that the proposed rule does not require the information 
to be provided by any specific time each business day, and recommended 
that the Commission specify such a deadline.\193\ Vanguard, SIFMA and 
AII also suggested that the Commission consider requiring information 
to be provided ``as frequently as necessary'' rather than ``at least 
once each business day.'' \194\ Finally, CME stated that it 
``presume[d] that the Commission's intention is to continue to treat 
omnibus accounts of a foreign broker clearing through an FCM as a 
single `customer' for purposes of the requirements of Part 22.''\195\
---------------------------------------------------------------------------

    \193\ See FIA at 12. FIA cites to ``Proposed Rule 22.12,'' but 
it is regulation Sec.  22.11 that requires FCMs to provide 
information to a clearing FCM or DCO.
    \194\ AII at 3; SIFMA at 8; and Vanguard at 6-7.
    \195\ CME at 8, n. 20.
---------------------------------------------------------------------------

    The Commission notes that under the Complete Legal Segregation 
Model, DCOs must, in the event of the insolvency of a clearing member 
carrying Cleared Swaps Customer positions, either return to the 
Trustee, or transfer to another FCM, the value of the collateral 
associated with each Cleared Swaps Customer's positions (as adjusted in 
accordance with Commission regulations). This requirement corresponds 
to the margin required for the Cleared Swaps Customer's swaps cleared 
through that DCO, including any individualized surcharge or voluntary 
contribution.\196\ Thus, a DCO has no responsibility to monitor the 
nature or amount of collateral each Cleared Swaps Customer actually 
posts with the FCM, or the provenance of the specific items of 
collateral the DCO receives from the FCM. Rather, the DCO should take 
the steps appropriate, in the professional judgment of its staff, to 
verify that FCM members have and are using systems and appropriate 
procedures to track accurately, and to provide to the DCO accurately, 
the positions of each customer. Furthermore, the Commission is 
clarifying that the responsibilities of a DCO under Part 22 are 
analogous to the responsibilities of a DCM under regulation 1.52 with 
respect to margin (the calculation of which requires an accurate 
accounting of the customer's positions). As noted by one commenter, 
FCMs are already subject to DSRO

[[Page 6358]]

audits on an approximately annual basis.\197\
---------------------------------------------------------------------------

    \196\ See regulation 22.13(a)(1)(C).
    \197\ See CME at 15.
---------------------------------------------------------------------------

    At this time, the Commission is not requiring that information be 
provided ``as frequently as necessary'' or by a specific time. 
Regulation 22.11 requires information to be provided ``at least once a 
day,'' thereby permitting DCOs to require by rule the collection of 
this information more frequently. If more frequent collection of such 
information becomes an industry standard at a later point in time, the 
Commission might then consider increasing the frequency of this 
reporting requirement. In addition, the Commission notes that a DCO may 
set, by rule, the time or times by which such information must be 
provided.
    Finally, the Commission confirms the presumption ``that the 
Commission's intention is to continue to treat omnibus accounts of a 
foreign broker clearing through an FCM as a single `customer' for 
purposes of the requirements of Part 22.'' \198\ However, to the extent 
a foreign broker is required to provide individual protection for swaps 
customer collateral under the laws of another jurisdiction, the 
Commission intends that the regulations under Part 22 foster compliance 
with such other laws.
---------------------------------------------------------------------------

    \198\ See id. at 8, n. 20.
---------------------------------------------------------------------------

L. Regulation 22.12--Information To Be Maintained Regarding Cleared 
Swaps Customer Collateral

    As proposed, regulation 22.12 required DCOs and Collecting FCMs to 
use the information provided pursuant to proposed regulation 22.11 to 
calculate and record, no less frequently than once each business day, 
the amount of collateral required (i) for each relevant Cleared Swaps 
Customer (including each such customer of a Depositing FCM), based on 
the portfolio of rights and obligations arising from its Cleared Swaps; 
and (ii) for all relevant Cleared Swaps Customers.
    SIFMA argued that DCOs and FCMs should be required to perform the 
calculations specified in regulation 22.12 ``as frequently as 
technologically possible'' rather than ``no less frequently than once 
each business day.'' \199\ The Commission is adopting regulation 22.12 
as proposed. The calculations required by regulation 22.12 are based on 
information provided under regulation 22.11, which is sent to the DCOs 
and FCMs ``at least once each business day.'' It would be anomalous for 
the Commission to require a more frequent calculation of collateral 
requirements when the information on which such calculation is based is 
only required to be provided once each business day. However, if more 
frequent collection of such information becomes an industry standard at 
a later point in time, the Commission might then consider requiring 
more frequent calculation of collateral requirements by regulation.
---------------------------------------------------------------------------

    \199\ SIFMA at 9. See also AII at 3.
---------------------------------------------------------------------------

    FIA and ISDA observed that the reference in the NPRM in the 
discussion of regulation 22.12 to an advance by the FCM to a Cleared 
Swaps Customer as a ``loan'' combined with regulation 22.10, which, 
among other things, prohibits an FCM from granting unsecured loans to 
customers, could be read to prohibit unsecured short-term advances of 
margin funds to Cleared Swaps Customers by FCMs. They asked that the 
Commission clarify that unsecured short term advances of margin are 
permissible.\200\ The Commission clarifies that, consistent with 
current practice, unsecured short term advances of margin are not 
considered ``loans'' for purposes of existing regulation 1.30, or new 
regulation 22.10. The Commission notes, however, that such advances 
should be either promptly repaid or promptly replaced with a secured 
loan.
---------------------------------------------------------------------------

    \200\ See ISDA at 9; FIA at 11-12.
---------------------------------------------------------------------------

M. Regulation 22.13--Additions to Cleared Swaps Customer Collateral

    Regulation 22.13 proposed two tools that DCOs or Collecting FCMs 
may use to manage the risk they incur with respect to individual 
Cleared Swaps Customers. Because the proposed tools were not intended 
to be mandatory or exclusive, the Commission sought comment on how it 
could enable DCOs or Collecting FCMs to use other tools to manage such 
risk. In addition, proposed regulation 22.13(a) clarified that a DCO or 
Collecting FCM could increase the collateral required of a particular 
Cleared Swaps Customer or group of such customers, based on an 
evaluation of the credit risk posed by such customer(s). The proposed 
clarification was not intended to interfere with the right of any FCM 
to increase the collateral requirements with respect to any of its 
customers, and the Commission requested comment regarding whether a DCO 
or a Collecting FCM wished to increase the collateral required for any 
reason other than credit risk. Similarly, proposed regulation 22.13(b) 
provided that collateral deposited by an FCM that is identified as 
collateral in which such FCM has a residual financial interest (i.e., 
the FCM's own funds) may, to the extent of such residual financial 
interest, be used by the DCO or Collecting FCM to secure the Cleared 
Swaps of any or all Cleared Swaps Customers.
    ISDA suggests that the final rule attribute the collateral 
deposited by an FCM that is identified as collateral in which such FCM 
has a residual financial interest to individual Cleared Swaps Customers 
to determine which Cleared Swaps Customers have a credit balance and 
which have a debit balance.\201\ The Commission notes that collateral 
attributable to an FCM's residual financial interest is, by definition, 
not the property of any Cleared Swaps Customer. Accordingly, there is 
no customer-protection-based reason to deny a DCO or Collecting FCM the 
ability to use such collateral to meet the default of any Cleared Swaps 
Customer. In addition, as mentioned above, the Commission is adding a 
new section 22.13(c), which states that, subject to certain 
requirements, collateral posted by a Cleared Swaps Customer in excess 
of the amount required by a DCO (the ``excess collateral'') may be 
transmitted by the Cleared Swaps Customer's FCM to the DCO.\202\
---------------------------------------------------------------------------

    \201\ See ISDA at 9-10.
    \202\ For further detail, see the discussion above in section 
IV.A.4. under the definition of ``Cleared Swaps Customer 
Collateral.''
---------------------------------------------------------------------------

N. Regulation 22.14--Futures Commission Merchant Failure To Meet a 
Customer Margin Call in Full

    Proposed regulation 22.14 required a defaulting FCM to transmit to 
the DCO or Collecting FCM, as applicable, Cleared Swaps Customer 
Collateral on deposit at the FCM for each Cleared Swaps Customer whose 
swaps contributed to the call, and the identity and the amount 
transmitted on behalf of, each such customer. Regulation 22.14 also 
proposed a detailed sequence of events following an FCM's default. 
Specifically, proposed regulations 22.14(e) and (f) addressed the issue 
of allocation of the loss of value of collateral (also known as 
Investment Risk) \203\ despite the application of haircuts. The 
Commission sought comment on the proposed allocation of Investment 
Risk.
---------------------------------------------------------------------------

    \203\ See supra at n. 28.
---------------------------------------------------------------------------

    FIA suggested that the regulations make clear that the DCO or 
Collecting FCM may reasonably rely on the information provided by the 
defaulting FCM (or on information previously provided if the defaulting 
FCM does not promptly provide information on the day of the 
default).\204\ In response, the Commission is amending regulation 22.14 
to add subsection (2) to specifically permit such reliance on

[[Page 6359]]

information provided by a defaulting FCM.
---------------------------------------------------------------------------

    \204\ See FIA at 12; SIFMA at 10.
---------------------------------------------------------------------------

    Vanguard and SIFMA requested clarification regarding how a DCO 
should handle simultaneous defaults in a futures and Cleared Swaps 
Customer Account, and how the FCM and DCO resources should be allocated 
between the two accounts.\205\ The Commission notes that defaults in 
multiple accounts are already addressed in the Commission's regulations 
and, in particular, Part 190, which treats account classes separately. 
For example, in the event of a default in a futures customer account, 
the default would be treated in accordance with the Futures Model, and 
the FCM would be permitted to apply all customer collateral to meet 
that default and would, after liquidation of positions, return any 
remaining customer collateral to the Trustee for distribution as above. 
A default in the Cleared Swaps Customer Account, on the other hand, 
would be treated in accordance with the Complete Legal Segregation 
Model, with remaining positions and collateral either transferred to 
another FCM or returned to the Trustee. Thus, swaps customer accounts 
and futures customer accounts are treated separately by the DCO, with 
balances that are not transferred being returned to the Trustee for 
distribution.\206\ The Trustee would distribute customer property, 
including collateral received from a DCO, pari passu within each 
account class. Any surplus in any account class would be re-distributed 
in accordance with regulation 190.08. In addition, the Commission notes 
that a separate proprietary account for swaps is not required under 
Commission regulations. Thus, a clearing member's own swaps and futures 
(and related collateral) may be held together in a proprietary account 
and a default in such account should proceed in accordance with 
existing Commission regulations. For example, if there is a default 
only in the proprietary account, property in either customer account 
will not be liable for that default, and such customer property will 
either be transferred along with customer positions to another FCM or, 
after the liquidation of customer positions, would be returned to the 
Trustee for distribution as part of the appropriate account classes 
pursuant to regulation 190.08.
---------------------------------------------------------------------------

    \205\ See Vanguard at 7.
    \206\ Pursuant to regulation 190.06(b)(3)(iii), for a particular 
customer, a negative equity balance in one account class must be 
offset against a positive equity balance in any other account class.
---------------------------------------------------------------------------

    With respect to the application of DCO resources, the Commission 
notes that if there is a shortfall in more than one account class, 
after the application of collateral as permitted in the proposed and 
existing rules, the DCO would apply its default resources to the 
remaining shortfalls in each account in accordance with its then-
existing rules.

O. Regulation 22.15: Treatment of Cleared Swaps Customer Collateral on 
an Individual Basis

    As proposed, regulation 22.15 set forth the basic principle of 
individual collateral protection. It required each DCO and each 
Collecting FCM to treat the amount of collateral required with respect 
to the portfolio of rights and obligations arising out of the Cleared 
Swaps intermediated for each Cleared Swaps Customer as belonging to 
that customer, which amount could not be used to margin, guarantee or 
secure the Cleared Swaps, or any other obligations, of an FCM, or of 
any other customer.
    FIA urged the Commission to confirm that, in the event of an FCM 
default, clearing FCMs and DCOs have flexibility to liquidate all 
positions in an omnibus account (with the restriction that proceeds of 
positions of non-defaulting customers may not be used to offset sums 
owed by defaulting customers to the FCM or by the clearing FCM to the 
DCO).\207\ SIFMA stated that proposed regulation 22.15 required that 
``any temporary misallocation of non-defaulting customer property due 
to [intra-day price movements on the day of a default] * * * be 
rectified as promptly as possible so that the property of non-
defaulting customers is fully restored.'' \208\ ICI argued that if at 
the time of an FCM default there is a misallocation of Cleared Swaps 
Customer Collateral, the Commission should require such misallocation 
to be corrected as soon as practicable.\209\ Similarly, Vanguard 
requested that the Commission clarify that any initial misallocation 
related to delayed recordkeeping be rectified as promptly as possible 
such that the property of the non-defaulting parties is fully 
restored.\210\ CME cautioned that errors in the Sec.  22.11 information 
from an FCM could heighten the risk of misallocating Cleared Swaps 
Customer Collateral in a default scenario, because a DCO will not have 
the time or legal ability to resolve discrepancies in a portfolio.\211\ 
CME asked the Commission to clarify the allocation of this risk among 
Cleared Swaps Customers.\212\ In addition, CME questioned how to 
allocate excess collateral that is posted to a DCO for purposes of 
daily reporting and in response to customer default, \213\ and sought 
confirmation that the Commission intended to preserve the finality of 
the clearing cycle.\214\
---------------------------------------------------------------------------

    \207\ See FIA at 12-13.
    \208\ SIFMA at 10.
    \209\ See ICI at 5.
    \210\ See Vanguard at 7.
    \211\ See CME at 14.
    \212\ See id.
    \213\ See id. at 7-8.
    \214\ See id. at 9.
---------------------------------------------------------------------------

    The Commission has amended regulation 22.15 to make clear that 
clearing FCMs and DCOs have the flexibility to liquidate all positions 
in an omnibus account in the event of the default of a depositing FCM 
or clearing member respectively. In addition, the Commission notes that 
there will not be any unallocated excess collateral because such 
collateral is either collateral in which the FCM has a residual 
interest and does not belong to a customer, or collateral that must be 
attributed to individual Cleared Swaps Customers. Furthermore, any 
temporary misallocation of non-defaulting Cleared Swaps Customer 
property or excess collateral would be resolved by the Trustee, in 
computing the claims by such customers against the estate (or, where 
appropriate, by the estate against such customers). In addition, these 
discrepancies would not be the responsibility of the DCO, even if the 
DCO transferred an amount on behalf of a Cleared Swaps Customer that 
was later found to be too much, nor would such a transfer be subject to 
avoidance.\215\ Finally, it is not the Commission's intent to disrupt 
or unwind a complete and final settlement cycle, and northing in these 
regulations should be construed to do so.
---------------------------------------------------------------------------

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

P. Regulation 22.16--Disclosures to Customers

    As proposed, regulation 22.16 requires each FCM to disclose, to 
each of its Cleared Swaps Customers, the governing provisions of each 
DCO (or the provisions of the customer agreement with respect to a 
Collecting FCM) relating to use of Cleared Swaps Customer Collateral 
and related matters.
    The FIA advocated that these FCM disclosures be the subject of a 
uniform disclosure document prepared by the industry, subject to 
Commission approval.\216\ Given the diversity of industry practice in 
the swaps market, the Commission is reluctant to mandate the use of a 
uniform disclosure document. Nonetheless, the Commission sees no reason 
to object to an FCM's use of a document prepared

[[Page 6360]]

by a committee, so long as the document accurately provides the 
required information for each DCO on which the customer's positions are 
cleared.
---------------------------------------------------------------------------

    \216\ See FIA at 12.
---------------------------------------------------------------------------

V. Section by Section Analysis: Amendments to Regulation Part 190

A. Background

    In April of 2010, prior to the enactment of the Dodd-Frank Act, the 
Commission promulgated rules to establish an account class for cleared 
OTC derivatives (and related collateral).\217\ At that time, there were 
questions concerning the Commission's authority to require the 
segregation of cleared OTC derivatives (and related collateral) or to 
establish a separate account class for cleared OTC derivatives in a DCO 
insolvency. As a result, protection for cleared OTC derivatives (and 
related) collateral was limited to those cases where such derivatives 
and collateral were required to be segregated pursuant to the rules of 
a DCO, and the reach of the account class was limited to cases of the 
bankruptcy of a commodity broker that is an FCM. Moreover, while 
section 4d(a)(2) of the CEA permitted the inclusion in the domestic 
futures account class of transactions and related collateral from 
outside that class, there was no similar provision permitting the 
inclusion in the cleared OTC account class of transactions and related 
collateral from outside that latter class.
---------------------------------------------------------------------------

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

    Section 724 of the Dodd-Frank Act has resolved these questions. As 
mentioned above, section 4d(f) of the CEA, as amended by the Dodd-Frank 
Act, requires, among other things, segregation of Cleared Swaps and 
Cleared Swaps Customer Collateral. Section 4d(f)(3)(B) of the CEA 
permits the inclusion of positions in other contracts (such as 
exchange-traded futures) and related collateral with Cleared Swaps and 
Cleared Swaps Customer Collateral. Section 724(b) of the Dodd-Frank Act 
amends the Bankruptcy Code to include in the definition of ``commodity 
contracts'' Cleared Swaps with respect to both FCMs and DCOs. Thus, 
this section V proposes amendments to regulation Part 190, pursuant to 
Commission authority under section 20 of the CEA, in order to give 
effect to section 724 of the Dodd-Frank Act, to implement Public Law 
111-16, the Statutory Time-Periods Technical Amendments Act of 2009, 
and to provide technical clarifications. Such amendments conform to 
proposed Part 22.

B. Definitions

1. Proposed Amendment to Regulation 190.01(a)--Account Class
    The Commission proposed amendments to regulation 190.01(a) to 
change the definition of account class to include a class for cleared 
swaps accounts, delete commodity option accounts from the definition, 
make clear that options on futures and options on commodities should 
not be grouped into one account class, clarify that Commission orders 
putting futures contracts and related collateral in the cleared swaps 
account class (pursuant to new section 4d(f)(3)(B) of the CEA) are 
treated, for bankruptcy purposes, in a manner analogous to orders 
putting Cleared Swaps and related collateral in the futures account 
class (pursuant to CEA section 4d(a)(2)), and clarify that if, pursuant 
to a Commission rule, regulation or order (or a DCO rule approved 
pursuant to regulation 39.15(b)(2)), positions or transactions that 
would otherwise belong to one class are associated with positions and 
related collateral in commodity contracts in another account class, 
then the former positions and related collateral shall be treated as 
part of the latter account class. The Commission did not receive any 
comments on proposed regulation 190.01(a) and is adopting regulation 
190.01(a) as proposed.
2. Proposed New Regulation 190.01(e)--Calendar Day
    The Commission proposed defining the term ``calendar day'' to 
include the time from midnight to midnight. The Commission did not 
receive any comments on proposed regulation 190.01(e) and is adopting 
regulation 190.01(e) as proposed.
3. Proposed Amendment to Regulation 190.01(f)--Clearing Organization
    The Commission proposed to amend the definition of clearing 
organization to remove, as unnecessary, the reference to commodity 
options traded on or subject to the rules of a contract market or board 
of trade. The Commission did not receive any comments on proposed 
regulation 190.01(f) and is adopting regulation 190.01(f) as proposed.
4. Proposed Amendment to Regulation 190.01(cc)--Non-Public Customer
    The Commission proposed to amend the definition of non-public 
customer to include references to non-public customers under regulation 
30.1(c) (with respect to foreign futures and options customers) and in 
the definition of Cleared Swaps Proprietary Aaccount. The Commission 
did not receive any comments on proposed regulation 190.01(cc) and is 
adopting regulation 190.01(cc) as proposed.
5. Proposed Amendment to Regulation 190.01(hh)--Principal Contract
    The Commission proposed to amend the definition of principal 
contract to include an exclusion for cleared swaps contracts. The 
Commission did not receive any comments on proposed regulation 
190.01(hh) and is adopting regulation 190.01(hh) as proposed.
6. Proposed Amendment to Regulation 190.01(ll)--Specifically 
Identifiable Property
    The Commission proposed to amend the definition of specifically 
identifiable property to update references and change terms to conform 
to other proposed changes to Part 190 and other business practices. The 
Commission did not receive any comments on proposed regulation 
190.01(ll) and is adopting regulation 190.01(ll) as proposed.
7. Proposed Amendment to Regulation 190.01 (pp)--Cleared Swap
    Proposed regulation 190.01(pp) replaced the definition of ``Cleared 
OTC Derivative'' that the Commission previously adopted with a 
definition of cleared swap that includes the definition of that term in 
regulation 22.1. The Commission did not receive any comments on 
proposed regulation 190.01(pp) and is adopting regulation 190.01(pp) as 
proposed.

C. Proposed Amendments to Regulation 190.02--Operation of the Debtor's 
Estate Subsequent to the Filing Date and Prior to the Primary 
Liquidation Date

    The Commission proposed certain clarifications as well as technical 
amendments to Sec.  190.02 to (1) expand the regulation to apply to 
Cleared Swaps (and related collateral) and (2) change references to 
``business days'' to ``calendar days,'' and require transfer 
instructions by the sixth calendar day after the order for relief and 
instruct transfers to be completed by the seventh calendar day after 
the order for relief, in order to fall within the protection of section 
764(b) of the U.S. Bankruptcy Code. The Commission did not receive any 
comments on proposed regulation 190.02. However, in light of a recent 
demonstration of the efficiency of transfer arrangements, it appears 
that a full calendar day may not be necessary to execute such 
instructions. Accordingly, the Commission is changing the amendment to 
require transfer instructions to be provided by the seventh calendar 
day after the order

[[Page 6361]]

for relief, at an hour to be specified by the trustee.

D. Proposed Amendments to Regulation 190.03--Operation of the Debtor's 
Estate Subsequent to the Primary Liquidation Date

    The Commission proposed certain technical amendments to regulation 
190.03 to clarify that maintenance margin refers to the maintenance 
margin requirements of the applicable designated contract market or 
swap execution facility. The Commission did not receive any comments on 
proposed regulation 190.03 and is adopting regulation 190.03 as 
proposed.

E. Proposed Amendments to Regulation 190.04--Operation of the Debtor's 
Estate--General

    Proposed amendments to regulation 190.04 would extend the 
liquidation of open commodity contracts to commodity contracts traded 
on swap execution facilities.\218\ These commodity contracts would be 
liquidated in accordance with the rules of the relevant SEF or DCM. 
Open commodity contracts that are liquidated by book entry may also be 
offset using the settlement price as calculated by the relevant 
clearing organization pursuant to its rules, which rules are required 
to be submitted to the Commission for approval pursuant to section 
5c(c) of the CEA, or approved by the Commission (or its delegate) 
pursuant to regulation 190.10(d). The Commission did not receive any 
comments on proposed regulation 190.04 and is adopting regulation 
190.04 as proposed.
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    \218\ Open commodity contracts traded on a designated contract 
market would continue to be liquidated in accordance with the rules 
of the relevant designated contract market.
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F. Proposed Amendments to Regulation 190.05--Making and Taking Delivery 
on Commodity Contracts

    The Commission proposed technical amendments to regulation 190.05 
to change a reference to ``contract market'' to ``designated contract 
market, swap execution facility, or clearing organization,'' and 
require the submission of rules for approval subject to section 5c(c) 
of the CEA. The Commission did not receive any comments on proposed 
regulation 190.05 and is adopting regulation 190.05 as proposed.

G. Proposed Amendments to Regulation 190.06--Transfers

    The Commission proposed amendments to regulation 190.06 to (i) 
Clarify that nothing in subparagraph (a) would constrain the 
contractual right of the DCO to liquidate open commodity contracts, 
(ii) permit the trustee to transfer accounts with no open commodity 
contracts, as the Commission has permitted in a number of recent FCM 
bankruptcies, (iii) prohibit the trustee from avoiding pre-petition 
transfers made by a clearing organization as long as the money, 
securities, or other property accompanying such transfer would not 
exceed the funded balance of accounts held for or on behalf of 
customers based on information available as of the close of business on 
the calendar day immediately preceding such transfer minus the value on 
the date of return or transfer of any property previously returned or 
transferred thereto, and (iv) change ``business day'' to ``calendar 
day.'' The Commission did not receive any comments on proposed 
regulation 190.06 and is adopting regulation 190.06 as proposed.

H. Proposed Amendments to Regulation 190.07--Calculation of Allowed Net 
Equity

    Proposed amendments to regulation 190.07 clarify that individual 
Cleared Swaps Customer Accounts within an omnibus account are to be 
treated individually, correct a typographical error, change the 
valuation of an open commodity contract so that the value of the 
commodity contract would be derived from the settlement price as 
calculated by the relevant clearing organization pursuant to its rules, 
and change references to securities traded over-the-counter pursuant to 
the National Association of Securities Dealers Automated Quotation 
System to securities not traded on an exchange. The Commission did not 
receive any comments on proposed regulation 190.07. However, the 
Commission is adding ``paragraph (c)'' before ``(1)(ii)'' in regulation 
190.7(c)(1)(i)(A) to clarify the cross reference.

I. Proposed Amendments to Regulation 190.09--Member Property

    The Commission proposed amendments to regulation 190.09 to include 
references to an account excluded pursuant to the proviso in regulation 
30.1(c) (referring to proprietary accounts in the context of foreign 
futures and options) and to the Cleared Swaps Proprietary Account. The 
Commission did not receive any comments on proposed regulation 190.09 
and is adopting regulation 190.09 as proposed.

J. Proposed Amendments to Regulation 190.10--General

    Proposed amendments to regulation 190.10 have been made to require 
notice by email and overnight mail. The Commission did not receive any 
comments on proposed regulation 190.10. However, the Commission is 
changing the reference to the ``Division of Clearing and Intermediary 
Oversight'' to the ``Division of Clearing and Risk'' in regulation 
190.10(a) to reflect changes based on a structural reorganization 
within the Commission.

K. Proposed Amendments to Appendix A to Part 190--Bankruptcy Forms, 
Bankruptcy

    The Commission proposed changes to appendix A, form 1 to include 
references to ``transfers'' generally, and to make certain technical 
amendments to (i) Reflect the addition of section 4d(f) of the CEA by 
section 724 of the Dodd-Frank Act, (ii) clarify that Commission 
approval with respect to the rules of a registered entity that require 
Commission approval means Commission approval under section 5c(c) of 
the CEA, and (iii) conform certain time periods to the proposed changes 
made by the Commission to implement Public Law 111-16, the Statutory 
Time-Periods Technical Amendments Act of 2009. The Commission did not 
receive any comments on the proposed amendments to appendix A and is 
adopting appendix A as proposed.

L. Proposed Amendments to Appendix B to Part 190--Special Bankruptcy 
Distributions

    The Commission proposed amendments to Framework 1 of Appendix B to 
clarify that the cross margining program is intended to apply only to 
futures customers and customer funds for futures contracts, and to 
Framework 2 of Appendix B to address shortfalls in Cleared Swaps 
Customer Collateral. The Commission did not receive any comments on the 
proposed amendments to appendix B. However, the Commission is making 
certain technical corrections to bring the language of the appendix in 
line with current statutory language.

VI. Effective Date

    The Commission asked for comment, in the NPRM and at the Second 
Roundtable, on the appropriate timing of effectiveness for the final 
rules, and whether six months after the promulgation of final rules 
would be sufficient.
    At the Second Roundtable, several panelists stated that it would 
take

[[Page 6362]]

approximately 18 months to 2 years after finalization of the 
segregation rules to complete all of the documentation and other 
infrastructure work that would be necessary to implement the 
segregation regime selected by the Commission.\219\ These commenters 
indicated that this lead time would be the same for the Legal 
Segregation Models and the Full Physical Segregation Model, but may be 
longer if the Commission were to select the Futures Model.\220\ In 
other words, this 18 month to 2 year time period is ``a cost of moving 
to the cleared world regardless of how it's done.'' Another panelist, 
however, did state that six months did not seem to provide sufficient 
time to complete all of the work that would need to be completed,\221\ 
though this commenter acknowledged that ``the real constraining factor 
* * * is getting that final documentation with the clients.'' \222\
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    \219\ Second Roundtable Tr. at 58, 1.14 to 61, 1.17.
    \220\ Id.
    \221\ Second Roundtable Tr. at 62, 1.11 to 62, 1.19 (Mr. Diplas 
stating that six months ``seems to live within the low side from the 
standpoint in terms of the work, the IT work that needs to take 
place between, like, FCMs and DCOs, the testing, et cetera, and also 
even the agreements that we might have to do in terms of 
consistency, of how these reports should look, and how the client 
IDs should be done, et cetera, so that we don't have--each DCO have 
a different methodology in that respect.'').
    \222\ Second Roundtable Tr. at 63, 1.2 to 63, 1.4.
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    Comments to the NPRM generally reinforced the need for additional 
time. ISDA recommended that there be a minimum of 18 months between 
final promulgation of the rules and effectiveness.\223\ In addition, 
FIA stated that, according to certain representatives from investment 
management firms, it would take one to two years to implement whatever 
model is chosen by the Commission.\224\ ICE requested that, if a model 
other than the Futures Model is adopted, the Commission provide 
sufficient time to FCMs and DCOs to allow them ``to analyze, develop 
and implement the necessary systems and processes relating to'' the 
selected segregation model.\225\ In addition, ICI stated that market 
participants need time to develop ``the operational and systems 
infrastructure necessary to facilitate a smooth transition to 
clearing.'' \226\
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    \223\ See ISDA at 11.
    \224\ See FIA at 6.
    \225\ ICE at 11.
    \226\ ICI at 2.
---------------------------------------------------------------------------

    As acknowledged by some commenters, the 18 month to 2 year time 
period is the time period needed to transition to clearing. It is not 
the time period necessary to implement the Complete Legal Segregation 
Model. Because the Commission did not receive any specific comments 
regarding the time period needed to implement the Complete Legal 
Segregation model, the Commission considered adopting the effective 
date that was proposed in the NPRM. However, given representations from 
market participants regarding the amount and tenor of the work that 
would need to be completed to implement clearing, the Commission is 
extending the compliance date for the Part 22 rules to November 8, 
2012, the compliance date set forth in the rules implementing DCO Core 
Principles for the gross margining requirement of Regulation 
39.13(g)(8)(i).
    Given the importance of implementing the time period changes in 
Part 190 as soon as possible, and because the implementation issues 
raised by Part 22 do not apply to Part 190, which imposes obligations 
primarily on bankruptcy trustees, the compliance date for the Part 190 
rules is the effective date of these rules. However, during the period 
between the compliance date for Part 190 and the compliance date for 
Part 22, Commission rules will not require segregation of Cleared Swaps 
or Cleared Swaps Collateral. Accordingly, consistent with the approach 
applicable under current Part 190, where protection for cleared OTC 
derivatives (and related) collateral is limited to those cases where 
such derivatives and collateral are required to be segregated pursuant 
to the rules of a DCO, during that period, the definition of 190.01(pp) 
(``Cleared Swap'') shall be limited to transactions where the rules or 
bylaws of a derivatives clearing organization require that such 
transactions, along with the money, securities, and other property 
margining, guaranteeing or securing such transactions, be held in a 
separate account for Cleared Swaps only.

VII. Consideration of Costs and Benefits

A. Introduction

    Section 15(a) of the CEA \227\ requires the Commission to consider 
the costs and benefits of its actions before issuing a rulemaking under 
the CEA. Section 15(a) further specifies that the costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: (1) Protection of market participants and the public; (2) 
efficiency, competitiveness, and financial integrity of futures 
markets; (3) price discovery; (4) sound risk management practices; and 
(5) other public interest considerations. To the extent that these new 
rules reflect the statutory requirements of the Dodd-Frank Act, they 
will not create costs and benefits beyond those mandated by Congress in 
passing the legislation. However, the rules may generate costs and 
benefits attributable to the Commission's determinations regarding 
implementation of the Dodd-Frank Act's statutory requirements. The 
costs and benefits of the Commission's determinations are considered in 
light of the five factors set forth in CEA section 15(a).
---------------------------------------------------------------------------

    \227\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

1. Business and Legal Context of the Segregation Requirement for 
Cleared Swaps Customer Collateral
    The Commission's Part 22 rules are one component of the regulatory 
infrastructure for clearing \228\ swaps transactions mandated by the 
Dodd-Frank Act. Though a significant fraction of swaps transactions may 
be required to be cleared through DCOs, many swaps transactions may 
voluntarily be cleared though DCOs. Swaps users and some swap dealers 
transact with the DCO through FCMs that the DCO admits as ``clearing 
members'' and who are subject to DCO rules. As described above in 
detail, for every transaction received by or matched through its 
facilities, a DCO acts as the buyer to every seller and the seller to 
every buyer, essentially guaranteeing financial performance.\229\
---------------------------------------------------------------------------

    \228\ As described above, clearing is the process by which 
transactions in derivatives are processed, guaranteed, and settled 
by a central clearing organization, the DCO. See section I.B.
    \229\ For a detailed discussion of clearing as it pertains to 
swap transactions, see section I.B.
---------------------------------------------------------------------------

2. Overview of the Statute and Regulation
    Proposed Part 22 implements the requirement of the newly enacted 
CEA section 4d(f) that property provided by Cleared Swaps Customers to 
FCMs to serve as collateral for Cleared Swaps transactions be treated 
as the property of the customers, not the FCM or DCO; and that such 
property be maintained in accounts separate from the property of the 
FCM or DCO, although such accounts can hold the commingled collateral 
of more than one Cleared Swaps Customer ``for convenience.'' \230\ 
These basic requirements that Cleared

[[Page 6363]]

Swaps Customer Collateral be treated as the property of customers and 
maintained in segregated accounts are imposed by the statute 
independently of the Commission's particular implementing regulations 
and, by the terms of the statute, would apply even if the Commission 
promulgated no implementing regulations. Generally, the core statutory 
segregation requirements serve two functions: (1) They help ensure that 
FCMs, DCOs, and other depositories of assets deposited by swaps 
customers to serve as collateral for their Cleared Swaps transactions 
treat such customer collateral as the property of the customers and not 
use it for their own proprietary business purposes; and (2) in 
conjunction with Subchapter IV of Chapter 7 of the Bankruptcy Code, 
they provide protection of Cleared Swaps Customer Collateral from the 
claims of other creditors in the event of the bankruptcy of an FCM.
---------------------------------------------------------------------------

    \230\ Though treating futures customer collateral on a 
collective basis may, at one time, have been practically necessary 
``for convenience,'' such practice is not standard in the current 
swaps market nor is it as critical in an era where account 
information is stored and processed on an automated basis. For 
example, and as noted above, DCOs are already assessing risks posed 
by clearing members' customers at the individual customer level. See 
supra n.122.
---------------------------------------------------------------------------

    Sections 22.2 through 22.10 implement the basic architecture of a 
system of segregation for swaps customer funds roughly comparable to 
the system used for customer funds for futures contracts under CEA 
sections 4d(a)(2) and 4d(b) and Commission regulations 1.20 through 
1.30 and 1.49.\231\ Some provisions of sections 22.2 through 22.10 
essentially restate the statutory requirements. Other provisions of 
these sections set forth requirements intended to (a) ensure that the 
objectives of the statute are met and (b) clarify FCMs' and DCOs' 
duties under the statute and facilitate carrying out those duties in an 
efficient manner.\232\ The basic architecture established by sections 
22.2 through 22.10 is supplemented by section 22.16, a disclosure 
requirement designed to inform swaps customers of DCO and FCM policies 
regarding the handling of their collateral in case of default and by 
amendments to part 190 of the Commission's rules intended to ensure 
that cleared swaps customer accounts of the sort required by Part 22 
are treated as a separate account class under bankruptcy law in the 
event the relevant FCM files for bankruptcy.\233\
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    \231\ See discussion in sections IV.B through IV.J.
    \232\ See id.
    \233\ See discussion above in section IV.P and section V.B.1.
---------------------------------------------------------------------------

    Proposed sections 22.11 through 22.15 add to this basic segregation 
architecture provisions designed to implement the Complete Legal 
Segregation Model for protecting swaps customer funds against Fellow-
Customer Risk.\234\ Proposed sections 22.11, 22.12, and 22.14 are 
intended to ensure that DCOs have available information that will 
enable them to attribute the value of assets in an FCM's customer 
account to individual customers in the event of an FCM's default on 
obligations to the DCO arising in connection with swaps transactions 
cleared for customers.\235\ Section 22.14 also requires certain 
transfers of customer collateral among FCMs in response to margin 
calls.\236\ Section 22.5 prohibits the DCO from using asset value in an 
FCM's customer account attributable to one customer to margin, 
guarantee, or secure the Cleared Swaps or other obligations of the 
relevant FCM or of other customers.\237\ Section 22.13 clarifies that 
DCO's have the right, at their election, to require (on the grounds of 
risk management) larger amounts of collateral from selected 
customers.\238\
---------------------------------------------------------------------------

    \234\ See discussion above in section IV.K through section IV.O.
    \235\ See discussion above in sections IV.K., IV.L. and IV.N. 
Having such information at the DCO can be quite valuable in a 
situation where the FCM is bankrupt.
    \236\ See discussion above in section IV.N.
    \237\ See discussion above in section IV.E.
    \238\ See discussion above in section IV.M.
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3. Organization and Focus of the Consideration of Costs and Benefits
    Section VII.B presents the Commission's considerations regarding 
the costs and benefits arising from the Commission's choice of the 
Complete Legal Segregation Model as set forth in sections 22.11 through 
22.15.\239\ The costs and benefits of the Commission's choice of model 
for addressing Fellow-Customer Risk are, in the view of the Commission, 
the most significant cost-benefit issues in this final rulemaking, as 
is reflected in the fact that discussions of cost-benefit issues in 
comments to the NPRM focused almost exclusively on the choice of model. 
This section of the discussion employs the Futures Model--in essence, 
the rule without sections 22.11 through 22.15--as a baseline for 
comparison because this model was favored by several commenters and 
because comparison with this model provides a useful and appropriate 
methodology for isolating, to the extent possible, the relative costs 
and benefits of the alternative models presented by the commenters and 
considered by the Commission.\240\
---------------------------------------------------------------------------

    \239\ As discussed above, in addition to the Futures Model and 
the Complete Legal Segregation Model, the Commission gave 
consideration to other alternatives: the Legal Segregation with 
Recourse Model and the Physical Segregation Model. No commenters 
supported the Legal Segregation with Recourse Model on grounds that 
it involved the same costs as the Legal Segregation Model, but with 
fewer benefits. Accordingly, its costs and benefits are not 
considered further in this analysis. Several commenters did support 
the Physical Segregation Model; however, as noted above, the 
effectiveness of the Physical Segregation Model is limited due to 
the application of the ratable distribution requirements of section 
766(h) of the Bankruptcy Code. As such, these limitations were 
disqualifying.
    \240\ CIEBA, FHLB, SIFMA, and Fidelity argue that the correct 
baseline for making cost and benefit comparisons should be the 
current practice in the uncleared swaps markets rather than the 
Futures Model (See CIEBA Original at 12; FHLB at 9; SIFMA at 7; and 
Fidelity at 7). In principle, using this benchmark rather than the 
Futures Model would change the absolute level of costs and benefits 
of the alternatives under consideration but would not change the 
relative ranking of those alternatives so long as comparisons to the 
benchmark were made in a consistent fashion. There are, however, 
practical advantages to using the Futures Model as a benchmark 
because current practice with regard to protection of collateral in 
the uncleared swaps market is unregulated and the level of 
protection provided varies considerably across transactions. 
Moreover, CEA, as amended by the Dodd-Frank Act, does not permit the 
Commission to retain the current practice regarding uncleared swaps. 
Because the appropriate baseline for the consideration of costs and 
benefits is the Futures Model rather than the uncleared swaps model, 
the costs and benefits of the basic requirement that swaps customer 
collateral be kept in segregated accounts and treated as the 
property of customers rather than the property of FCMs or DCOs are 
included within the baseline and not evaluated separately.
---------------------------------------------------------------------------

    Notably, this comparative analysis pivots, in the first instance, 
on who bears the cost of the most significant cost driver--Fellow-
Customer Risk. Where the risk is assigned to one constituency (e.g., 
swap users in the Futures Model baseline) a virtually mirror image risk 
mitigation benefit is conferred on others (e.g., DCOs and clearing 
members in the Futures Model baseline).
    Under any model, however, once such risks are initially assigned, 
the affected entities and market participants, may then attempt to re-
allocate or shift such assigned risks or costs to other entities or 
market participants. The LSOC Model, in the first instance places 
fellow risk on DCOs and clearing members with corresponding mitigation 
of risk to swaps users. However, as explained in detail below, market 
participants can be expected to adapt to the direct allocation of risk 
associated with one or another of the models in a variety of ways, and 
the ultimate costs and benefits of the rule will reflect both its 
direct allocation of risk and the effect of adaptations to that 
allocation.
    For example, as described below, some, though not all, DCOs 
commented that they would be likely to adapt to the LSOC Model by 
increasing margin levels. To the extent that this occurs, the rule 
would have the effect of reducing the risks of losses to the DCO and 
the FCM because there would be a reduced

[[Page 6364]]

likelihood of any given customer incurring losses that exceed the 
margin posted by that customer. In return for the benefit of reduced 
fellow customer risk and legal allocation of the residual risk to DCOs 
and their members, swaps users would incur the opportunity cost of 
having to use more capital as collateral for their Cleared Swaps. Thus, 
to the extent that DCOs adapt to the LSOC Model in this fashion, the 
rule would function in a manner analogous to insurance, with swaps 
users incurring somewhat higher costs in their routine use of swaps in 
return for a lower risk of wholesale loss of collateral as a result of 
some other swaps user's market losses. As also described below, the 
LSOC Model is expected to alter behavioral incentives for market 
participants relative to the Futures Model in variety of other ways 
that will create costs and benefits but that the Commission believes 
will lead to a net increase in monitoring of risky behavior by FCMs and 
that, on balance, will facilitate transfer of customer positions and 
collateral in the event of the simultaneous default of an FCM and one 
or more customers.

B. Benefits and Costs of Complete Legal Segregation Model Relative to 
Futures Model

1. Introduction
    As noted above, the Complete Legal Segregation Model is intended to 
provide swaps customers with protection against Fellow-Customer 
Risk.\241\
---------------------------------------------------------------------------

    \241\ For a discussion of Fellow-Customer Risk, see supra 
section I.B.6.
---------------------------------------------------------------------------

    The basic difference between the Complete Legal Segregation Model 
and the Futures Model thus relates to a difference in the allocation of 
loss arising out of a double default of both a customer and the 
customer's FCM. Under the Futures Model, this risk is borne by 
customers in the form of ``Fellow-Customer Risk''-- the risk that a 
customer will lose some or all of the value of its collateral due to 
the default of some other swaps customer or customers of the clearing 
FCM. Under the LSOC Model, this risk to customers is substantially, 
though not completely, eliminated. However, the corresponding loss, in 
the event of a double default, falls on the DCO and, through the 
guaranty fund, its non-defaulting members. In practice, under the LSOC 
Model, DCOs can be expected to take measures to protect themselves 
against the risk of loss from a double default, and some of the 
material benefits and costs are likely to flow from a DCO's adaptations 
to the rule.
    The next section reviews, respectively, the material benefits and 
costs that the Commission believes will arise from the Commission's 
selection of the LSOC Model.
2. Material Benefits and Costs Arising From the Complete Legal 
Segregation Model
a. Benefits to Customers of Protection Against Fellow-Customer Risk
    The primary benefit of the Complete Legal Segregation Model to 
customers is the protection of non-defaulting Cleared Swaps Customers 
against loss of the value of their collateral due to the use of such 
value by the relevant DCO in the event of a double default.\242\ The 
associated cost to those customers is the payment they will be required 
to make for protection against this risk, where this payment will 
likely originate from some combination of the capital cost of posting 
higher initial margins and/or higher fees for swaps transactions (see 
subsection b below).
---------------------------------------------------------------------------

    \242\ According to comments on the ANPR, the direct benefit to 
customers in the form of reduced risk of loss of collateral stemming 
from the activities of fellow customers may generate indirect 
benefits. For example, commenters indicated that increased security 
for collateral could increase their ability to use swaps for 
business purposes, although this effect could be counterbalanced by 
increased dollar costs. Commenters also stated that the increased 
protection against Fellow-Customer Risk would reduce their need to 
incur costs to protect against the effects of loss of Cleared Swaps 
Customer Collateral.
---------------------------------------------------------------------------

    Comments regarding this rulemaking have indicated that, as a result 
of the statutory clearing requirements in the Dodd-Frank Act, once the 
cleared swaps market has matured, Cleared Swaps Customers would be 
posting upwards of $500 billion in collateral to secure their Cleared 
Swaps positions.\243\ The Commission notes that the precise amount will 
depend on how the market evolves and can be expected to change over 
time.\244\ Under the Futures Model, the value of this collateral will 
be exposed to greater Fellow-Customer Risk than under the other models 
considered. In addition, it does not appear possible to reliably 
quantify the probability of the actual loss of value of collateral by a 
given customer due to Fellow-Customer Risk for a number of reasons. By 
their nature, double defaults are rare events, though potentially 
important if they involve major FCMs. Because the mandatory clearing of 
swaps under the Dodd-Frank Act has not yet gone into effect, there is, 
as yet no body of experience with such clearing in practice, and a 
fortiori no experience with FCM defaults under the Dodd-Frank clearing 
regime.\245\ There has been experience with FCM default in the futures 
industry, but the numbers are too small to permit reliable 
extrapolation.\246\ In addition, a number of commenters suggested that 
Fellow-Customer Risk may be greater in the cleared swaps market than in 
the futures market because swaps are less liquid than exchange-traded 
futures (thereby resulting in greater volatility of prices, 
particularly in times of financial stress) and because the aggregate 
value of transactions in the swaps market is many times greater than 
the aggregate value of transactions in the futures market.\247\ The 
Commission notes these commenters requested increased protection for 
their funds to guard against Fellow-Customer Risk.
---------------------------------------------------------------------------

    \243\ CME Comment on ANPR at 7 (estimated $500 billion in 
collateral for swaps expected to be cleared by CME); ISDA February 
16, 2011 Comment on ANPR at 2 (estimated $833 billion industry-
wide).
    \244\ Id.
    \245\ Several clearing houses do, however, have experience 
clearing swaps on a voluntary basis. For example, LCH has been 
clearing interest rate swaps for over a decade, and ICE actively 
clears credit default swaps. In addition, while there are examples 
of FCM defaults related to clearing futures (e.g., Griffin Trading 
Co., Klein Futures, Inc. and Lehman Brothers, Inc.), there have been 
no FCM failures related to the clearing of swaps transactions.
    \246\ In the past two decades, there have been only two cases of 
double defaults in the futures markets: Griffin Trading Co. and 
Klein Futures, Inc. See Trustee v. Griffin, 440 B.R. 148 (2010); 
CFTC Division of Trading and Markets, Report on Lessons Learned from 
the Failure of Klein & Co. Futures, Inc., July 2001, available at 
http://www.cftc.gov/files/tm/tmklein_report071101.pdf. With respect 
to FCM defaults generally in the futures markets, one commenter 
observed, ``The United States, fortunately has seen only a handful 
of FCM failures in recent decades. As a result, the FCM liquidation 
process, including the availability of porting, has not been tested 
under a wide variety of circumstances.'' ISDA at 3.
    \247\ See, e.g., Second Roundtable Tr. at 165, 283-84 
(characteristics of swaps may make it more difficult to liquidate or 
transfer customer positions in case of an FCM insolvency than for 
futures).
---------------------------------------------------------------------------

    Notwithstanding its inability to reasonably quantify the value of 
benefits associated with Fellow-Customer Risk elimination, the 
Commission, in light of comments received in response to both the ANPR 
and NPRM, believes that the Complete Legal Segregation Model confers 
benefits to swaps users. In fact, buy-side commenters represented that 
they desired the protection afforded through the Complete Legal 
Segregation Model, notwithstanding the costs associated with that 
protection.\248\ The

[[Page 6365]]

ability of a swaps customer to determine Fellow-Customer Risk at a 
particular FCM is limited, because confidentiality restraints 
inherently limit the amount of information that an FCM can provide 
customers with respect to the creditworthiness, swaps positions, and, 
in some cases, even identity of its other customers.\249\ This, in 
turn, impairs (if not completely precludes) the customer's ability to 
evaluate Fellow-Customer Risk, hindering their ability to manage it, 
insure against it, or appropriately account for it in business 
decision-making.\250\
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    \248\ E.g. MFA at 7-8; BlackRock at 7; Fidelity at 6; LCH at 2. 
The numerical estimates of higher margin and guaranty fund levels 
for Complete Legal Segregation relative to the Futures Model 
described in the text below were also described in the NPRM so swaps 
users who commented in response to the NPRM presumably were aware of 
them. However, some commenters who supported Complete Legal 
Segregation indicated that they did not give full credence to the 
higher of the cost estimates. E.g., MFA at 7-8.
    \249\ Id. See also Second Roundtable Tr. at 183-185.
    \250\ E.g., Tudor at 2; Fidelity at 3; MFA at 3-8. See also 
supra at 50-51.
---------------------------------------------------------------------------

    Both the benefit to customers of greater protection for their 
collateral provided under the Complete Legal Segregation Model as well 
as the associated costs depends, to an extent, on customer behavior in 
advance of a double default. Prior to an FCM insolvency, customers have 
the right to find another FCM to carry their accounts, and to have 
their existing FCM transfer their positions and collateral to that 
clearing FCM.\251\ Under the extreme assumption that all customers 
costlessly anticipate the default and move their positions to another 
FCM before the default occurs, the Complete Legal Segregation Model 
offers no apparent greater benefit to customers over the Futures Model. 
However, on this assumption the Complete Legal Segregation model also 
imposes no additional losses to the DCO compared with the Futures Model 
since, in this instance, under neither model is the collateral of non-
defaulting customers available to the DCO to cure the default. As a 
result, the extent to which customers can anticipate a fellow-customer 
default will tend to decrease both the benefits and the costs of the 
Complete Legal Segregation Model.
---------------------------------------------------------------------------

    \251\ See 76 FR at 69442.
---------------------------------------------------------------------------

b. ``Risk Costs'' and Potential Effects on Margin Levels and DCO 
Guaranty Fund Levels in Response To Complete Legal Segregation.
    Risk Costs refer to the costs associated with the allocation of 
loss in the event of a default under the Complete Legal Segregation 
Model relative to the Futures Model. This can usefully be divided into 
direct and indirect costs (and associated benefits). The direct cost of 
the Complete Legal Segregation Model is the increased risk the DCO will 
face when a Cleared Swaps Customer and its FCM default, which equals 
the probability of a default by a Cleared Swaps Customer and its FCM, 
multiplied by the expected contribution that fellow customers would 
have provided toward the uncovered loss. (As discussed in the previous 
section, there is a corresponding gain to Cleared Swaps Customers which 
is the value they place on avoiding this same cost, i.e., the value of 
having the equivalent of insurance against Fellow-Customer Risk.) \252\ 
Thus, the Complete Legal Segregation Model will potentially result in a 
decrease in the financial resources package available to the DCO in the 
event of default. Maintaining the same assurance of performance of the 
DCO's function as central counterparty in the circumstances of a double 
default may require the DCO to, therefore, raise additional financial 
resources.\253\ The comments submitted to the Commission by DCOs and 
others have suggested two possible ways by which DCO's default resource 
structure under the Complete Legal Segregation Model might differ from 
the Futures Model: Either through higher initial customer margins or by 
increasing the size of the DCO's guaranty fund.\254\ Of course, actual 
DCOs could use a mixture of adjustments to margins and guaranty funds. 
Commenters who estimated higher costs resulting from Complete Legal 
Segregation therefore estimated potential effects on margins and 
guaranty funds in isolation, while generally recognizing that this is a 
simplification of what actual practice is likely to be.\255\
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    \252\ In addition, as discussed in section VII.B.3.b.iv., there 
are efficiency gains in centralizing FCM monitoring in a small 
number of parties. Moreover, because of confidentiality 
considerations, among other things, DCOs have greater access to 
information from their Clearing Members than Cleared Swaps Customers 
do. As a result of this greater access to information and because of 
the increased incentive on DCOs to actively monitor the risks posed 
by their Clearing Member FCMs and Cleared Swaps Customers, the 
overall effectiveness of risk management may be increased.
    \253\ Section 725(c)(2)(B)(ii) of the Dodd-Frank Act requires 
that a DCO possess financial resources that, at a minimum, would 
allow the DCO to meet its financial obligations notwithstanding a 
default by the member or participant creating the largest financial 
exposure for that organization in extreme but plausible market 
conditions. See also 76 FR at 69344-45. In determining what 
financial resources are needed to comply with section 
725(c)(2)(B)(ii) and its implementing regulations, a DCO will need 
to evaluate and take into consideration the effect of Complete Legal 
Segregation. However, within limits, the statute and regulations 
permit the exercise of judgment by the DCO as to the methods it will 
use to do this. As is indicated in the discussion in the text below, 
in comments to the proposed rulemaking, different DCOs have 
suggested that they may differ in their evaluation of the practical 
effects of Complete Legal Segregation, in the value they ascribe to 
fellow-customer collateral as a resource, and in the steps they will 
take to maintain adequate financial resources in light of their 
evaluation.
    \254\ A guaranty fund is a fund created by a DCO to which the 
clearing members contribute, in proportion generally set by DCO 
rule. See supra section I.B.4 and n. 27. The assets in the fund are 
then available to cover losses resulting from defaults by one or 
more clearing members, whether in their proprietary capacity or due 
to customer accounts, to the extent those losses are not covered by 
available collateral provided by the defaulting Clearing Member 
(limited to proprietary collateral for a default in the clearing 
member's proprietary account, or including customer collateral for a 
customer default). In addition, a DCO may retain by rule the right 
to call upon the members to contribute additional assets, up to a 
defined amount, if the pre-funded default resources are insufficient 
(referred to as an ``assessment power'').
    \255\ ICE contends that DCOs will choose to adjust to Complete 
Legal Segregation entirely by increasing margins rather than 
guaranty funds because Complete Legal Segregation increases the risk 
that assets in guaranty funds will actually be used to cover losses 
in the event of a double default. According to ICE, excessive 
reliance on margin is undesirable because guaranty funds offer the 
DCO more flexibility in responding to defaults and may be more 
liquid than assets used as margin. See ICE at 6-7. However, while 
ICE may be correct that clearing member FCMs, all other things being 
equal, would prefer less risk of loss of assets contributed to 
guaranty funds, there may be counterbalancing factors. For example, 
clearing customers may prefer a DCO with a larger guaranty fund and 
lower margin levels. Similarly, if a structure of default resources 
with an excessive ratio of margin to guaranty fund is, in fact, less 
effective or efficient for dealing with FCM defaults, a DCO that 
employs such a structure might be at a competitive disadvantage.
---------------------------------------------------------------------------

    Assuming no change in guaranty fund levels, ISDA suggested that the 
Complete Legal Segregation Model would require an increase of roughly 
60% in initial margins relative to the Futures Model.\256\ A number of 
other participants in the Commission's roundtables thought that the 
method used to arrive at the estimate was a reasonable way to roughly 
model the effect of Complete Legal Segregation on margin levels.\257\
---------------------------------------------------------------------------

    \256\ ISDA January 18, 2011 Comment on ANPR at 9. The assumption 
that DCOs would use a 99.9% confidence level under Complete Legal 
Segregation was based on ``suggestions'' made at the Commission's 
First Roundtable. See First Roundtable Tr. at 110-111.
    \257\ See, e.g., First Roundtable Tr. at 110-114; Second 
Roundtable Tr. at 255-57.
---------------------------------------------------------------------------

    CME estimated that Complete Legal Segregation would require an 
increase in margin in the range of 60% to 90%.\258\ CME did not specify 
the quantitative assumptions underlying its estimate.\259\ To 
illustrate effects on margin in dollar terms, CME made the assumption 
that, in a mature swaps market, it might expect to clear interest rate 
swaps with a notional value of $200 trillion. On this assumption, CME 
projected required margin from

[[Page 6366]]

customers clearing through CME of $500 billion under the Futures Model 
and $800-900 billion under Complete Legal Segregation.\260\ ISDA 
estimated that, industry-wide, Complete Legal Segregation would require 
$581 billion more margin than the Futures Model (a 69.75% increase over 
a baseline, for the Futures Modal, of $833 billion). ISDA made clear 
that this estimate was based on a number of assumptions about future 
market activity and on data obtained from only four FCMs. Therefore, 
this figure is best construed as an estimate of the general magnitude 
of the effects expected by ISDA and not as a precise predicted dollar 
figure.\261\ Nonetheless and notwithstanding this estimate of higher 
initial margin, ISDA concluded that Complete Legal Segregation was 
``the most appropriate choice of holding model for cleared swaps 
collateral'' of the models proposed in the NPRM and supported this 
approach because it facilitated porting of customer positions in the 
event of an FCM default.\262\
---------------------------------------------------------------------------

    \258\ CME Comment on ANPR at 7-8.
    \259\ See CME Comment on ANPR at 8 (describing methodology used 
in general terms).
    \260\ CME Comment on ANPR at 7-8.
    \261\ ISDA January 18, 2011 Comment on ANPR at 10.
    \262\ ISDA at 1. For a more detailed discussion of the benefits 
of Complete Legal Segregation for porting, see section VII.B.3.b.ii.
---------------------------------------------------------------------------

    Although the above estimates were based on data for interest rate 
swaps, commenters and participants in roundtable discussions indicated 
that somewhat higher margin levels might be needed to maintain adequate 
default resources in connection with credit default swaps because of 
the high volatility and idiosyncratic risks associated with this type 
of swap.\263\ Using data concerning credit default swaps it currently 
clears, albeit not under the Dodd-Frank legal regime, ICE estimated 
that the required initial margin increases would range from 40% to 
371%.
---------------------------------------------------------------------------

    \263\ Second Roundtable Tr. at 255.
---------------------------------------------------------------------------

    These estimates assume that the entire default resource shortfall 
resulting from the DCO's lost reliance on collateral posted as margin 
by non-defaulting customers is reflected in higher initial margins. To 
illustrate the other extreme, CME estimated the cost of responding to 
Complete Legal Segregation purely by means of an increase in its 
guaranty fund. According to CME, it would be necessary to double the 
size of the guaranty fund using this approach, although their comment 
indicates that this should be taken as a rough estimate likely to be 
adjusted based on experience in the future.\264\ Under its assumption 
that in the future it might clear a notional value of $200 trillion in 
interest rate swaps, CME estimates that it would require a guaranty 
fund of $50 billion under the Futures Model and $100 billion under 
Complete Legal Segregation. CME also stated that it might prove 
possible to adapt to Complete Legal Segregation using ``what is 
traditionally called `concentration' margin whereby the DCO sets a 
level of risk at which it would begin to charge higher margins based on 
indicative stress-test levels.'' According to CME, if it proved 
possible to implement such a system, likely ``concentration charges'' 
would fall in the range of $50-$250 billion.\265\ However, CME stated 
that it currently lacked sufficient information to precisely assess an 
appropriate methodology using this approach and that this approach 
could have disadvantages which would need to be addressed before it was 
considered as a practical approach.\266\ ISDA estimated that industry-
wide guaranty funds under the Futures Model would come to $128 
billion.\267\ ISDA apparently did not independently estimate the effect 
of Complete Legal Segregation on guaranty funds, but, relying upon DCO 
estimates that they would approximately double, estimated an increment 
of an additional $128 billion for Complete Legal Segregation industry-
wide.\268\ If guaranty funds are larger as a result of Complete Legal 
Segregation, it is likely that some or all of the cost would be passed 
on by FCMs to their customers in the form of higher fees. However, in 
the absence of more information about future competitive conditions in 
the cleared swaps market and similar matters, it is not possible to 
reliably estimate the extent to which this would occur.
---------------------------------------------------------------------------

    \264\ CME Comment on ANPR at 7-8. The comment states that under 
Complete Legal Segregation CME, in determining the size of the 
guaranty fund ``would likely change [from an approach treating 
customer margin accounts as diversified unitary pools] to an 
approach geared toward assessing the largest loss associated with a 
certain number of the largest individual customer accounts. 
Currently, we presume that five such customer accounts would be our 
target, although experience and prudence would be our guide. In any 
event, our stress-test loss profile of the largest customer accounts 
would almost certainly generate larger `worst loss' results [under 
Complete Legal Segregation] than under [the Futures Model].'' Id.
    \265\ Id. at 8-9.
    \266\ Id.
    \267\ ISDA January 18, 2011 Comment on ANPR at 10. ISDA stated 
that this estimate referred to the funded component of guaranty 
funds and did not include DCO's right to call for more assets from 
member FCMs when needed.
    \268\ ISDA January 18, 2011 Comment on ANPR at 9-10 and n.8 
(referring to CME estimate).
---------------------------------------------------------------------------

    By contrast to CME, ICE, and ISDA, LCH stated that it is not 
appropriate to attribute higher margins and/or guaranty funds to the 
Complete Legal Segregation Model than to the Futures Model and that the 
appropriate level of default resources for DCOs, is the same under both 
models.\269\ LCH has a more than a decade's worth of experience 
clearing OTC swaps. LCH states that a methodology in which no 
diversification of customer collateral is assumed represents their 
current practice, and is appropriately ``conservative'' in terms of 
capital adequacy.\270\ LCH maintains that, even if it is legally 
permissible for a DCO to take advantage of fellow customer collateral, 
it is imprudent to assume that any funds in the omnibus Cleared Swaps 
Customer Account will remain at the time of default.\271\ In the event 
that default occurs not as a sudden shock, but rather, as the end of a 
process of credit deterioration taking place over a number of days 
(potentially a number of weeks), the Cleared Swaps Customers may have 
time (and, if subject to Fellow-Customer Risk, strong incentive) to 
port (i.e., transfer) their Cleared Swaps Contracts and associated 
collateral away from the defaulting FCM.\272\ CME also has noted that 
an FCM default is likely to be preceded by a period of financial 
turmoil: ``In a situation where an FCM has defaulted on its obligations 
to one or more DCOs, it is entirely possible that the FCM or its parent 
company has been under severe financial stress for some period of 
time.'' \273\
---------------------------------------------------------------------------

    \269\ Evaluating the Costs of Complete Legal Segregation, Aug. 
2011, at 6-11 (``LCH White Paper'').
    \270\ 76 FR at 33847, n. 177.
    \271\ LCH White Paper at 8.
    \272\ LCH at 3.
    \273\ CME at 14. See also id. (describing a situation where ``an 
increasing number of customers were removing their assets and 
accounts.'').
---------------------------------------------------------------------------

    Thus, according to the logic of LCH's approach, the size of the 
guaranty fund and/or initial margin levels would need to be as high 
under the Futures Model as under the Complete Legal Segregation 
Model.\274\
---------------------------------------------------------------------------

    \274\ LCH White Paper at 8.
---------------------------------------------------------------------------

    The divergence in the approaches of LCH and the other two 
clearinghouse commenters is due in part to different implicit 
assumptions about fellow customer behavior, and how such behavior 
should affect a DCO's design of default resources. Under Complete Legal 
Segregation, such an approach likely requires an assessment of the 
largest stressed loss on a small (or concentrated) number of the 
largest customers of the given FCM since, in this instance, the DCO 
would not have access to the collateral of non-defaulting customers. 
Under the Futures Model, by contrast, consideration of the largest

[[Page 6367]]

stressed loss might occur over an expanded (and, to a degree, more 
diversified) pool of customers because the DCO is permitted to use the 
mutualized pool of customer collateral. Hence, the Complete Legal 
Segregation Model effectively prohibits the DCO from using the 
mutualized pool of customer deposits as a resource in the event of 
double default. It follows that the extent to which the Complete Legal 
Segregation Model actually affects the DCO's resources relative to the 
Futures Model depends upon the degree to which non-defaulting Cleared 
Swaps Customers collateral will be present following a default. If all 
Cleared Swaps Customer Contracts remained with the defaulting FCM 
through the default, then the DCO could potentially measure the 
adequacy of guaranty funds based on a fully diversified pool of 
customer positions. Conversely, if all customers would transfer their 
positions to a different FCM in anticipation of the default, then the 
diversification (and its consequence for the DCO's financial resources 
package) would be eliminated.
    More generally, the extent to which the Complete Legal Segregation 
Model leads to a higher guaranty fund or higher levels of margin per 
customer than the Futures Model depends on the extent to which Cleared 
Swaps Customer Contracts can be expected to remain with the defaulting 
FCM during the period immediately preceding a default. Since the 
circumstances of particular FCM defaults will vary, DCOs, in 
determining their financial resources package, should be expected to 
take into consideration the possibility that, at least for some FCM 
defaults, there will be warning signs, resulting in a portion of 
Cleared Swaps Customer Collateral being transferred out of the Cleared 
Swaps Customer Account maintained by the defaulting FCM.
    While determining the appropriate assumptions regarding customer 
behavior under the Futures Model is central to the issue of the 
adequacy of a DCO's default resources, it may prove less central to the 
consideration of relative costs and benefits under this rule, since 
both of those costs and benefits depend on the extent to which Cleared 
Swaps Customers will transfer their Cleared Swaps Contracts. In 
general, the greater the extent to which customers will move their 
positions, the lower the benefits of the Complete Legal Segregation 
Model over the Futures Model. However, this benefit afforded the 
customer needs to be balanced against the cost to the DCO of insuring 
against the uncertainty.\275\ Both the capital costs and associated 
benefits of the LSOC Model relative to the Futures Model will tend to 
be lower to the extent customers are likely to move their positions in 
advance of an FCM default and higher to the extent customers are 
unlikely to be able to do so. Differing assumptions about customer 
mobility in advance of default are, therefore, likely to have smaller 
implications for the relative costs and benefits between approaches 
than they do for the Risk Costs considered in isolation.
---------------------------------------------------------------------------

    \275\ In addition, and as discussed above, section 724(a) of the 
Dodd-Frank Act added a new paragraph (f) to section 4(d) of the CEA, 
which requires that neither an FCM nor a DCO may not use the 
collateral of one customer to cover the obligations of another 
customer or the obligations of the FCM or the DCO.
---------------------------------------------------------------------------

    A distinct question in evaluating Risk Cost is how to translate a 
margin or guaranty fund increase into a cost increase. A customer that 
is required to post an additional $100 of margin is not adversely 
affected in the amount of $100. Moreover, the cost to the customer is, 
at least in part, offset by the benefit to the DCO. The cost to a 
customer of a margin increase of $100 is the difference between the 
gain he or she would have received by retaining that $100, and the 
return he or she will receive on the asset while it is on deposit with 
the FCM or DCO. For example, the customer might invest the $100 in 
buying and holding grain over the pendency of the swap if the initial 
margin were not increased, while he or she is limited to the return on 
assets the DCO will accept as margin payment (e.g., the T-bill rate) 
under the new, higher margins. The exact difference in rate of returns 
is dependent on the individual customer's investment options as well as 
his/her risk tolerance, and hence is difficult to calculate precisely. 
Offsetting this cost are the statutory goal of protecting customer 
funds and the gain to the DCO of having additional assets available in 
the event of a combined Cleared Swaps Customer and FCM default, which 
may enable it to obtain a higher rate of return on some of its other 
assets.\276\ Similarly, the cost to an FCM of a guaranty fund 
contribution increase is equal to the difference in return between 
acceptable instruments for deposit to the guaranty fund and the FCM's 
potential return on those additional funds if they were not deposited 
to the guaranty fund.\277\
---------------------------------------------------------------------------

    \276\ An additional offset to this cost is the value that 
customers assign to the increased safety of their collateral from 
Fellow-Customer Risk, as discussed in section VII.B.2.
    \277\ There will also be an implicit cost to the FCM reflecting 
the risk that the contributed assets will need to be used by the DCO 
to cover losses in a default situation.
---------------------------------------------------------------------------

c. Effects on Likelihood That Customer Swaps Positions Will Be 
``Ported'' to New FCMs Rather Than Liquidated in the Event of an FCM 
Default
    According to several commenters, a central issue to consider when 
designing a customer collateral protection regime is the ability of 
customers to ``port,'' i.e., transfer, their swaps positions to a 
solvent FCM in the event that their current FCM defaults.\278\ 
Following a default by an FCM, the swaps positions of the FCM's 
customers either have to be moved to another FCM, or closed. Moving a 
position to another FCM allows the DCO to maintain its net position in 
that contract at zero, which is generally a goal of a DCO. It also 
relieves the customer of the necessity of reestablishing a position, 
which potentially can be costly, especially in a stressed economic 
state.\279\ Finally, according to commenters, the ability to port 
rather than liquidate customer positions can have important systematic 
benefits for the market at large, because the forced liquidation of the 
swaps cleared by a major FCM could have severe disruptive effects on 
prices and market conditions.\280\
---------------------------------------------------------------------------

    \278\ Black Rock at 2; Fidelity at 5; FIA at 4; MFA at 4.
    \279\ See ISDA February 16, 2011 Comment on ANPR at 2.
    \280\ See, e.g., id. at 2-4; and MFA at 4.
---------------------------------------------------------------------------

    Rules governing customer collateral accounts have an indirect, but 
potentially important, effect on the likelihood of successful porting 
in the event of an FCM default. If swaps positions are transferred to a 
new FCM, the new FCM will have to add to its customer account with the 
DCO enough collateral to secure the ``ported'' swaps. The most ready 
source of such collateral is the customer account of the defaulting 
FCM, which already contains collateral securing the relevant swaps. 
However, if collateral from the defaulting FCM's customer account 
cannot be transferred, then porting of market positions requires 
customers to, at least temporarily, provide the new FCM with new 
collateral. This is, at best, a burden, and may, in some cases, make 
porting infeasible--particularly the prompt porting of numerous 
customers with varied financial resources and liquidity.
    From the perspective of porting, the Complete Legal Segregation 
Model has several related advantages over the Futures Model in 
circumstances of a double default. As discussed above, under the 
Futures Model, if even a

[[Page 6368]]

single customer is in default, the DCO is entitled to as much of the 
customer account as is necessary to make up its loss. As a result, the 
DCO has incentives to postpone transfer of the customer account until 
the full ramifications of the customer default--and thus the size of 
the DCO's claim against the account--are resolved. By contrast, under 
Complete Legal Segregation, the DCOs claim against the customer account 
is limited by law to that portion of the account attributable to 
individual customers in default. The DCO will therefore have little or 
no incentive to resist transfer of that portion of the account 
attributable to other customers. At the same time, the Complete Legal 
Segregation Model, unlike the Futures Model, provides a legal framework 
for attributing the value of the customer account to individual 
customers. Further, it requires that FCMs provide DCOs with the 
necessary information and that DCOs make the attribution at least once 
daily, so as to be prepared for a possible FCM default. As a result, 
the Complete Legal Segregation Model, has clear advantages over the 
Futures Model in terms of facilitating the transfer of the collateral 
of non-defaulting customers in circumstances where one or more 
customers have defaulted.\281\
---------------------------------------------------------------------------

    \281\ For a more detailed discussion of the operation of the 
segregation models in an FCM bankruptcy, see supra section I.D.
---------------------------------------------------------------------------

    Because of the infrequent occurrence of double default situations 
it is not possible to predict how frequently Complete Legal Segregation 
will permit porting in circumstances where porting would not be 
possible, or would be delayed, under the Futures Model. Nevertheless, 
the structural advantages of Complete Legal Segregation for purposes of 
facilitating porting, and the analysis in ISDA's comment, imply that 
this is an important benefit of this model.
d. Effects on Incentives for DCOs and Customers to Monitor and Control 
Risky Behavior by FCMs
    CME and other commenters have argued that the Complete Legal 
Segregation Model could potentially reduce the incentives of individual 
customers to carefully evaluate clearing FCMs and only do business with 
the least risky.\282\ In effect, they argue that because the financial 
condition of the FCM, and of the FCM's other customers, will be less 
relevant to the customer's exposure to loss in the event of a fellow 
customer's default than under the Futures Model, the customer will 
devote less effort to monitoring the FCM and its other customers.
---------------------------------------------------------------------------

    \282\ Second Roundtable Tr. at 253, l.17; FIA at 5; Newedge at 
4. Cf. MFA at 4-5; BlackRock at 8.
---------------------------------------------------------------------------

    However, while it is possible that the protection against Fellow-
Customer Risk provided by the Complete Legal Segregation Model may 
cause customers, on average, to devote less effort to monitoring the 
activities of their respective FCMs than under the Futures Model, that 
incentive is not removed. For example, customers remain exposed to 
Operational Risk.
    Moreover, the Complete Legal Segregation Model creates offsetting 
increased monitoring incentives on the DCO and its member FCMs, to the 
benefit of customers. Because of the increased likelihood that a 
customer default would impact the guaranty fund under the Complete 
Legal Segregation Model, increased incentives exist to protect that 
fund through more careful monitoring by the suppliers of the guaranty 
fund and their agent (the DCO). Indeed, commenters observe that the 
availability of fellow-customer collateral as a buffer reduces the 
incentives of DCOs to provide vigorous oversight.\283\ The net effect 
of these incentive changes on the incentive to monitor is difficult to 
quantify. However, the basic economics of monitoring suggest that there 
are efficiency gains to centralizing monitoring in a small number of 
parties.\284\ This is because of ``free rider'' effects associated with 
diffuse exposure to risk of loss. When the risk of loss from the 
activities of a firm, such as an FCM, is spread over a large number of 
agents, each individual agent gains little from devoting resources to 
monitoring the firm relative to the total potential benefit of 
monitoring to the affected agents as a group.\285\ This effect is 
compounded by an information effect; even if the incentive exists, it 
is difficult for individual customers to gain access to real-time 
information about the financial condition of the FCM, and even more so 
to gain real-time information about the financial condition of their 
fellow customers. In contrast, the DCO is in a position to obtain good 
information about the financial condition of FCMs and customers since, 
via its rules, it can require FCMs to provide such information as a 
condition for becoming and remaining clearing members. Based on these 
considerations, there is reason to believe that, while Complete Legal 
Segregation may reduce incentives for customers to monitor their FCMs, 
it will increase incentives for monitoring of FCMs by DCOs and, on 
balance is likely to increase the effectiveness and efficiency with 
which risk taking by clearing FCMs is monitored.
---------------------------------------------------------------------------

    \283\ Blackrock at 8; Freddie Mac at 2; Vanguard at 5.
    \284\ See e.g., Kevin Dowd, Re-Examining the Case for Government 
Deposit Insurance, 59 S. Econ. J. 363, 370 (1993).
    \285\ See, e.g., Andrei Shleifer and Robert W. Vishny, A Survey 
of Corporate Governance, 52 J. Fin. 737, 753 (1997) (discussing 
effect of ``free rider'' issues on monitoring in context of 
corporate governance).
---------------------------------------------------------------------------

e. Operational Costs
    As discussed above, in order for the Complete Legal Segregation 
Model to work better than the Futures Model in the event of a double 
default, the DCO must have information that will enable it to attribute 
the assets in the defaulting FCM's customer account to individual 
customers of the FCM.\286\ Moreover, because the occurrence of a double 
default is rare, and because an FCM in the process of default may not 
(despite its regulatory obligations) be able to provide a DCO with 
accurate and timely information on its customers, section 22.11 
requires clearing FCMs to provide the necessary information to DCOs on 
at least a daily basis. The Commission notes that section 22.12 
similarly requires DCOs to use this information to calculate and record 
the amount of collateral required to support each customer's Cleared 
Swaps transactions on at least a daily basis. This daily information 
processing is not provided under the Futures Model and will add to the 
operational costs of clearing.
---------------------------------------------------------------------------

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

    The NPRM discussed the likely magnitude of increased operational 
costs associated with the more extensive information requirement.\287\ 
The Commission noted there that one estimate suggested the operational 
costs of the Complete Legal Segregation Model (relative to the Futures 
Model) were likely to be slightly less than $1 million per year per 
FCM, with one-time costs of about $700,000.\288\ A DCO's cost of 
accommodating this additional information was estimated to be of the 
same general magnitude. Another comment observed that the operational 
costs would be the same across all models being considered given a 
requirement for DCOs to collect margin on a gross basis.\289\ The 
Commission

[[Page 6369]]

received no alternative quantitative estimates in response to the 
NPRM,\290\ although Fidelity suggested that some of the operational 
costs associated with Complete Legal Segregation will be incurred 
regardless of the segregation model that is chosen because other CFTC 
rulemakings (i.e., the real time reporting rulemaking and the reporting 
of certain post-enactment swap transactions rulemaking) require similar 
reporting.\291\
---------------------------------------------------------------------------

    \287\ 76 FR at 33845-33846.
    \288\ Id. (citing ISDA estimates for operational costs received 
in response to the ANPR).
    \289\ LCH at 2 (``If the Commission adopts [the gross margining 
requirement for DCOs], any DCO offering any swaps clearing service 
under any of the models outlined by the Commission in the Proposed 
Rulemaking will be required to track margin on an individual client 
basis and FCMs will be required to do the same.''). See also 76 FR 
at 69374-76. In addition, some individual customer information 
already resides at the DCO. See CME at 9 (``At the end of each 
trading day, CME Clearing calculates, for each FCM's cleared swaps 
customer account* * * the net margin requirement for each customer 
in the account.'').
    \290\ In fact, FHLB states that the costs and risks associated 
with the additional operational complexity ``may be difficult to 
quantify.'' FHLB at 4.
    \291\ Fidelity at 6.
---------------------------------------------------------------------------

    Based on estimates by CME and ISDA described above, the expected 
scale of the cleared swaps market will require hundreds of billions of 
dollars of collateral to adequately secure swaps positions under any 
segregation model, and will thus potentially expose this collateral to 
some degree of Fellow-Customer Risk. In light of the projected 
magnitude of the customer funds at stake, the Commission believes that 
operational costs of the Complete Legal Segregation Model are a 
relatively minor factor in choosing a model that would protect customer 
funds consistent with section 4d(f) of the CEA, and that this would be 
true even if operational costs proved to be considerably higher than 
the estimate described in the NPRM.
f. Additional Potential Sources of Costs and Benefits Arising From 
Complete Legal Segregation
    As discussed in section I.D.1 above, the Complete Legal Segregation 
Model provides a significant advantage compared to the Futures Model 
with respect to fostering transfer. Specifically, under the Complete 
Legal Segregation Model, information about the Cleared Swaps Customers 
as a whole, and about each individual Cleared Swaps Customer's 
positions, are transmitted to the DCO every day, an information flow 
(and store) that is not present in the Futures Model. Thus, in the 
event of an FCM bankruptcy, each DCO will have important information on 
a customer by customer basis that can be used to facilitate and 
implement transfers, thereby making the DCO less reliant upon the FCM 
for that information.
3. Application to CEA Section 15(a) Considerations
a. Protection of Market Participants
    As discussed above, the primary benefit of the Complete Legal 
Segregation Model is the protection of Cleared Swaps Customers from the 
risk of losing the value of their collateral as a result of a double 
default. Based on estimates by CME and ISDA, the cleared swaps market 
is likely to require upwards of $500 billion in customer collateral 
regardless of the segregation model chosen by the Commission.\292\ 
These assets will be potentially exposed to Fellow-Customer Risk. It is 
not possible to reliably quantify the likelihood of fellow customer 
losses in the absence of Complete Legal Segregation for reasons 
discussed in section VII.B.2.a. above. In addition, the magnitude of 
Fellow-Customer Risk in particular default situations will be affected 
by the extent to which customers foresee or anticipate a default and 
accordingly move their accounts to other FCMs; and the extent to which 
a default is foreseeable or anticipated will vary in different 
defaults. The risk cost imposed on DCOs and their members by Complete 
Legal Segregation will be affected by the foreseeability of default in 
a roughly parallel way.
---------------------------------------------------------------------------

    \292\ See supra n. 243.
---------------------------------------------------------------------------

    Notwithstanding these uncertainties, swaps users who participated 
in this rulemaking process, with only limited exceptions, consistently 
placed great value on protection against Fellow-Customer Risk and 
supported either Complete Legal Segregation or stronger measures to 
provide such protection despite estimates of high dollar costs in the 
form of the capital cost of higher margins or guaranty funds.\293\ 
Since swaps users most likely ultimately will bear, directly or 
indirectly, most of the dollar costs of protection against Fellow-
Customer Risk, the Commission places substantial weight on their 
valuation of such protection.
---------------------------------------------------------------------------

    \293\ See, e.g., Second Roundtable Tr. at 245-249; Second 
Roundtable Tr. at 140, l.12 (Mr. MacFarlane stating that ``Tudor 
would happily pay the incremental costs, both in terms of collateral 
and operational costs [for greater protection].'').
---------------------------------------------------------------------------

b. Efficiency, Competitiveness, and Financial Integrity of Markets
i. Dollar Costs and Swaps Usage
    Complete Legal Segregation could add materially to the dollar cost 
of clearing swaps, affecting competitiveness in particular.\294\ 
Moreover, there were estimates (albeit somewhat speculative estimates) 
that Complete Legal Segregation might require on the order of 70% 
higher margins, 100% higher DCO guaranty funds, or some combination of 
smaller increases in both. In light of the expected large scale of the 
cleared swaps market, these estimates imply industry wide increments in 
margin on the order of $500 billion or more, increments in guaranty 
funds of over $100 billion, or a combination of smaller increments of 
both.\295\ The cost of these measures would not be the dollar amount of 
margin or guaranty fund contributions, but, rather, the opportunity 
cost of using capital for these purposes rather than other business 
purposes. Considerable uncertainty is added to the evaluation of these 
estimates of the dollar cost of Complete Legal Segregation by the fact 
that DCOs do not yet have experience clearing under the Dodd-Frank 
regime (although they do currently clear swaps pursuant to the rules of 
the exchanges) and by LCH's observation that, under the method it uses 
to determine needed financial resources to protect against default, the 
same level of resources is required under both Complete Legal 
Segregation and the Futures Model.\296\
---------------------------------------------------------------------------

    \294\ This analysis is also informed by the extent to which 
clearing certain types of swaps is mandatory, as well as by the cost 
already incurred in the uncleared swaps market.
    \295\ See supra n. 243.
    \296\ See supra n. 269.
---------------------------------------------------------------------------

    If Complete Legal Segregation results in higher dollar costs to 
swaps users, this may discourage some use of swaps for hedging or other 
beneficial economic uses. The Commission does not have precise 
information about the price responsiveness of swaps usage that would 
make it possible to quantify this effect. A countervailing 
consideration is that comments to this rulemaking indicate that 
customers are already transacting in uncleared swaps, and are paying 
for full segregation of the collateral they are posting because of the 
importance to them of protection of that collateral against the 
defaults of others. Moreover, as some commenters noted, concern over 
exposure to Fellow-Customer Risk that they currently pay for and 
receive could discourage swaps usage in the absence of Complete Legal 
Segregation or other protection against such risk.\297\ Comments by 
swaps users indicated that such effects would occur though they did not 
provide quantitative estimates. The evidence from the comments, 
specifically the statements of swap users regarding their willingness 
to pay for legal segregation, suggests that the demand-enhancing

[[Page 6370]]

effects of the increased safety associated with Complete Legal 
Segregation are larger than the demand-reducing effects of higher 
margins and/or fees associated with it.\298\
---------------------------------------------------------------------------

    \297\ See e.g., Second Roundtable at 141, l.3 (Mr. MacFarlane 
stating''the uncertainty that's created by not knowing who we're 
sharing risk in the omnibus pool would cause us to pull our capital 
back from the market.'').
    \298\ See e.g., Second Roundtable Tr. at 245 (Mr. Thum stating 
that ``we're prepared to bear the cost to provide for the margin 
protection that our clients need.'').
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ii. Financial Integrity of Markets
    Complete Legal Segregation is likely to have several effects on the 
financial integrity of markets, the specifics of which are discussed in 
more detail under other headings.\299\ As explained above, Complete 
Legal Segregation is expected to lead to a net improvement in the 
monitoring of risky behavior by FCMs, with the effects of increased 
incentives for such monitoring by DCOs outweighing the effects of 
reduced incentives for such monitoring by customers. This net 
improvement in monitoring of FCMs can be expected to enhance the 
financial integrity of the markets in which clearing FCMs participate.
---------------------------------------------------------------------------

    \299\ See discussion at sections VII.B.2.b, VII.B.2.c, 
VII.B.2.d, and VII.B.3.b.i.
---------------------------------------------------------------------------

    By facilitating porting, Complete Legal Segregation is expected to 
enhance the financial integrity of cleared swaps markets in financial 
stress situations involving FCMs by reducing the likelihood that a 
double default will result in the need to liquidate large volumes of 
swaps positions with resulting costs to customers and the DCO and the 
potential to seriously disrupt the market at large.
    By prohibiting DCOs from using the collateral of non-defaulting 
customers in a double default situation, Complete Legal Segregation 
potentially could have a negative effect on the financial integrity of 
DCOs by reducing the financial resources available to apply to losses 
arising from double defaults. However, the record indicates that DCOs 
would substitute additional resources in the form of higher margin 
levels, larger guaranty funds, or a combination of both as need to 
maintain the ability to cover losses from FCM and customer 
defaults.\300\ Importantly, prohibiting DCOs from using the collateral 
of non-defaulting customers to protect a DCO from risks within a DCO's 
control is consistent with the statute's goal of protecting customer 
funds. As a result, the loss of the ability to rely on the collateral 
of non-defaulting customers would be expected to translate to higher 
dollar costs than under the Futures Model rather than reduced financial 
integrity.
---------------------------------------------------------------------------

    \300\ See supra n. 255.
---------------------------------------------------------------------------

c. Price Discovery
    Complete Legal Segregation is not expected to have a significant 
effect on price discovery under normal market conditions. In 
circumstances of a double default involving a large FCM, Complete Legal 
Segregation may help protect price discovery in the swaps markets by 
reducing the likelihood of the need for a large scale liquidation of 
swaps positions that would disrupt normal pricing.
d. Sound Risk Management Practices
    As discussed above,\301\ Complete Legal Segregation is expected to 
produce a net improvement in the monitoring of risky behavior by FCMs. 
While there may be some reduction in the incentives to Cleared Swaps 
Customers to monitor their FCMs, there is a corresponding increase in 
the incentives by DCOs to do so. There are efficiency gains in 
centralizing this responsibility in a small number of parties, and the 
DCOs (as membership organizations) have greater access to information 
from their Clearing Members, in contrast to Cleared Swaps Customers, 
who (due to considerations of confidentiality) may have little ability 
to obtain information about an FCM's activities with respect to fellow-
customers.
---------------------------------------------------------------------------

    \301\ See supra section VII.B.2.d.
---------------------------------------------------------------------------

e. Other Public Interest Considerations
    By better protecting Cleared Swaps Customer Collateral against 
fellow-customer risk, the LSOC Model will enhance compliance with the 
values of CEA Section 4d(f), which requires that the property of each 
individual customer be protected.

C. Conclusion

    The Commission has carefully considered the available evidence 
regarding the costs and benefits of Complete Legal Segregation Model 
and has concluded that the Complete Legal Segregation Model best 
accomplishes the statutory objective of protecting customer deposits. 
In terms of benefits, customers have much greater assurance of the 
safety of their margin deposits against Fellow-Customer Risk under the 
Complete Legal Segregation Model than under the Futures Model. In 
addition, Complete Legal Segregation will facilitate porting rather 
than liquidation of customer positions in double default situations 
with associated benefits to customers and, for defaults of large FCMs, 
reduced risk of disruption of markets as a result of large volumes of 
customer positions. Complete Legal Segregation also will increase 
incentives for DCOs to monitor risky behavior by member FCMs and that 
this effect can be expected to outweigh reduced incentives for 
customers to monitor their FCMs. In determining that Complete Legal 
Segregation is the appropriate model, the Commission has placed weight 
on, among other considerations, the comments of many swaps users that 
they place great value on assurance of their margins and their 
positions and are willing to incur substantial costs to achieve such 
assurance and on comments by a range of market participants placing 
great importance on porting of customer positions as a response to FCM 
defaults.
    On the cost side, several DCOs that employ the Futures Model for 
the futures-side of their business and other commenters argued that 
Complete Legal Segregation will require some combination of 
substantially higher margin levels and guaranty fund contributions than 
the Futures Model. However, one major DCO reported that, under the 
approach it uses to establish margin and guaranty fund level, these 
levels would be the same under Complete Legal Segregation and the 
Futures Model. Complete Legal Segregation will impose some operational 
costs but such costs are small enough to be a minor consideration 
relative to the other aspects of cost; e.g., the potential increases in 
margins and guaranty funds.
    The Commission notes that, as discussed above, there are a number 
of sources of uncertainty in evaluating the costs and benefits of 
Complete Legal Segregation, such as market participants not yet having 
experience clearing swaps under the Dodd-Frank legal regime and the 
infrequency of double defaults. However, the costs and benefits of all 
the models considered by the Commission are subject to similar 
uncertainties as to the probability of double defaults and customer 
behavior in anticipation of such defaults. Accordingly, such 
uncertainties do not militate against the selection of the Complete 
Legal Segregation Model as the preferred alternative.

VIII. Related Matters

A. Paperwork Reduction Act

1. Introduction
    Sections 22.2(g), 22.5(a), 22.11, 22.12, and 22.16 of these rules 
impose new information disclosure and recordkeeping requirements that 
constitute the collection of information

[[Page 6371]]

within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\302\ Under the PRA, an agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless it displays a currently valid control number.\303\ The 
Commission therefore has requested that the Office of Management and 
Budget (``OMB'') assign a control number for this collection of 
information. The Commission has also submitted the NPRM, this final 
rule release, and supporting documentation to OMB for review in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for this 
collection of information is ``Disclosure and Retention of Certain 
Information Relating to Cleared Swaps Customer Collateral,'' OMB 
Control Number 3038-0091. This collection of information will be 
mandatory. The information in question will be held by private entities 
and, to the extent it involves consumer financial information, may be 
protected under Title V of the Gramm-Leach-Bliley Act as amended by the 
Dodd-Frank Act.\304\ OMB has not yet approved the collection of this 
information.
---------------------------------------------------------------------------

    \302\ 44 U.S.C. 3501 et seq.
    \303\ Id.
    \304\ See generally, Notice of Proposed Rulemaking, Privacy of 
Consumer Financial Information; Conforming Amendments Under Dodd-
Frank Act, 75 FR 66014, Oct. 27, 2010.
---------------------------------------------------------------------------

2. Comments Received on Collection of Information Proposed in NPRM
    Sections 22.2(g), 22.5(a), 22.11, 22.12, and 22.16 and estimates of 
the expected information collection burden were published for comment 
in the NPRM. The collection of information required by the final 
versions of these rules and the associated information collection 
burden is identical to that of the rules as proposed. Comments were 
received regarding proposed sections 22.5(a), 22.11, 22.12, and 22.16. 
The substance of these comments and the Commission's response to them 
is set forth above in sections IV.E, IV.K, IV.L., and IV.P of this 
preamble.
    In addition, in response to a comment on the definition of 
``Cleared Swaps Customer Collateral'' by the FIA requesting that the 
Commission confirm that the term ``Cleared Swaps Customer Collateral'' 
includes all assets provided to an FCM by a Cleared Swaps Customer, 
including amounts in excess of the amount required to margin a Cleared 
Swap by the relevant DCO, the Commission has included in the final rule 
a new permissive provision, subsection 22.13(c)(2). Subsection 
22.13(c)(2) provides that an FCM may transmit to a DCO collateral 
posted by a Cleared Swaps Customer in excess of the amount required by 
the DCO if (1) the rules of the DCO permit such transmission; and (2) 
the DCO provides a mechanism by which the FCM is able to, and maintains 
rules requiring the FCM to, identify each business day, for each 
Cleared Swaps Customer, the amount of collateral posted in excess of 
the amount required by the DCO. This rule subsection may have the 
effect of causing some FCMs to perform a daily computation of the 
amount of collateral posted in excess of the amount required by the 
relevant DCO. In the view of the Commission, this provision does not 
materially change, or add to the burden of, the information collection 
required by the Part 22 rules as proposed. This is so because the 
computation of the amount of collateral posted in excess of the amount 
required by the relevant DCO will be performed using same data sources 
that would be used for the information collections required by 
subsections 22.2(g), 22.11, and 22.12. Moreover, this burden would only 
be imposed (and enforced) by voluntary action of the DCO in permitting, 
and the FCM in transmitting, such additional collateral.
    There were no comments specifically addressing the Commission's 
numerical estimates of information collection burden in section VII.B.2 
of the NPRM.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \305\ requires that 
agencies consider whether their rules will have a significant economic 
impact on a substantial number of small entities and, if so, provide a 
regulatory flexibility analysis of that impact. These Part 22 rules and 
amendments to Part 190 apply to DCOs and FCMs. In the NPRM, the 
Chairman, pursuant to section 605(b) of the RFA, 5 U.S.C. 605(b), 
certified on behalf of the Commission that these rules and amendments 
will not have a significant economic impact on a substantial number of 
small entities based on previous determinations by the Commission that 
DCOs and FCMs are not small entities for purposes of the RFA.\306\
---------------------------------------------------------------------------

    \305\ 5 U.S.C. 601 et seq.
    \306\ See 66 FR 45605, 45609 (Aug. 29, 2001) (DCOs); 47 FR 
18618, 18619-20 (April 30, 1982) (FCMs).
---------------------------------------------------------------------------

List of Subjects

17 CFR Part 22

    Brokers, Clearing, Consumer protection, Reporting and recordkeeping 
requirements, Swaps.

17 CFR Part 190

    Bankruptcy, Brokers, Commodity futures, Reporting and recordkeeping 
requirements, Swaps.

IX. Text of Final Rules

    For the reasons stated in this release, the Commission hereby 
amends Chapter 17 as follows:

0
1. Add Part 22 to read as follows:

PART 22--CLEARED SWAPS

Sec.
22.1 Definitions.
22.2 Futures Commission Merchants: Treatment of Cleared Swaps 
Customer Collateral.
22.3 Derivatives Clearing Organizations: Treatment of Cleared Swaps 
Customer Collateral.
22.4 Futures Commission Merchants and Derivatives Clearing 
Organizations: Permitted Depositories.
22.5 Futures Commission Merchants and Derivatives Clearing 
Organizations: Written Acknowledgement.
22.6 Futures Commission Merchants and Derivatives Clearing 
Organizations: Naming of Cleared Swaps Customer Accounts.
22.7 Permitted Depositories: Treatment of Cleared Swaps Customer 
Collateral.
22.8 Situs of Cleared Swaps Customer Accounts.
22.9 Denomination of Cleared Swaps Customer Collateral and Location 
of Depositories.
22.10 Application of other Regulatory Provisions.
22.11 Information to be Provided Regarding Customers and their 
Cleared Swaps.
22.12 Information to be Maintained Regarding Cleared Swaps Customer 
Collateral.
22.13 Additions to Cleared Swaps Customer Collateral.
22.14 Futures Commission Merchant Failure to Meet a Customer Margin 
Call in Full.
22.15 Treatment of Cleared Swaps Customer Collateral on an 
Individual Basis.
22.16 Disclosures to Customers.

    Authority:  7 U.S.C. 1a, 6d, 7a-1 as amended by Pub. L. 111-203, 
124 Stat. 1376.

Sec.  22.1  Definitions.

    For the purposes of this part:
    Cleared Swap. This term refers to a transaction constituting a 
``cleared swap'' within the meaning of section 1a(7) of the Act.
    (1) This term shall exclude any swap (along with money, securities, 
or other property received to margin, guarantee, or secure such a swap) 
that, pursuant to a Commission rule, regulation, or order, is (along 
with such money, securities, or other property) commingled with a 
commodity future or option (along with money, securities, or other 
property

[[Page 6372]]

received to margin, guarantee, or secure such a future or option) that 
is segregated pursuant to section 4d(a) of the Act.
    (2) This term shall include any trade or contract (along with 
money, securities or other property received to margin, guarantee, or 
secure such a trade or contract), that
    (i) Would be required to be segregated pursuant to section 4d(a) of 
the Act, or
    (ii) Would be subject to Sec.  30.7 of this chapter, but which is, 
in either case, pursuant to a Commission rule, regulation, or order (or 
a derivatives clearing organization rule approved in accordance with 
Sec.  39.15(b)(2) of this chapter), commingled with a swap (along with 
money, securities, or other property received to margin, guarantee, or 
secure such a swap) in an account segregated pursuant to section 4d(f) 
of the Act.
    Cleared Swaps Customer. This term refers to any person entering 
into a Cleared Swap, but shall exclude:
    (1) Any owner or holder of a Cleared Swaps Proprietary Account with 
respect to the Cleared Swaps in such account; and
    (2) A clearing member of a derivatives clearing organization with 
respect to Cleared Swaps cleared on that derivatives clearing 
organization. A person shall be a Cleared Swaps Customer only with 
respect to its Cleared Swaps.
    Cleared Swaps Customer Account. This term refers to any account for 
the Cleared Swaps of Cleared Swaps Customers and associated Cleared 
Swaps Customer Collateral that:
    (1) A futures commission merchant maintains on behalf of Cleared 
Swaps Customers (including, in the case of a Collecting Futures 
Commission Merchant, the Cleared Swaps Customers of a Depositing 
Futures Commission Merchant) or
    (2) A derivatives clearing organization maintains for futures 
commission merchants on behalf of Cleared Swaps Customers thereof.
    Cleared Swaps Customer Collateral. (1) This term means all money, 
securities, or other property received by a futures commission merchant 
or by a derivatives clearing organization from, for, or on behalf of a 
Cleared Swaps Customer, which money, securities, or other property:
    (i) Is intended to or does margin, guarantee, or secure a Cleared 
Swap; or
    (ii) Constitutes, if a Cleared Swap is in the form or nature of an 
option, the settlement value of such option.
    (2) This term shall also include accruals, i.e., all money, 
securities, or other property that a futures commission merchant or 
derivatives clearing organization receives, directly or indirectly, 
which is incident to or results from a Cleared Swap that a futures 
commission merchant intermediates for a Cleared Swaps Customer.
    Cleared Swaps Proprietary Account. (1) This term means an account 
for Cleared Swaps and associated collateral that is carried on the 
books and records of a futures commission merchant for persons with 
certain relationships with that futures commission merchant, 
specifically:
    (i) Where such account is carried for a person falling within one 
of the categories specified in paragraph (2) of this definition, or
    (ii) Where ten percent or more of such account is owned by a person 
falling within one of the categories specified in paragraph (2) of this 
definition, or
    (iii) Where an aggregate of ten percent or more of such account is 
owned by more than one person falling within one or more of the 
categories specified in paragraph (2) of this definition.
    (2) The relationships to the futures commission merchant referred 
to in paragraph (1) of this definition are as follows:
    (i) Such individual himself, or such partnership, corporation or 
association itself;
    (ii) In the case of a partnership, a general partner in such 
partnership;
    (iii) In the case of a limited partnership, a limited or special 
partner in such partnership whose duties include:
    (A) The management of the partnership business or any part thereof;
    (B) The handling, on behalf of such partnership, of:
    (1) The Cleared Swaps of Cleared Swaps Customers or
    (2) The Cleared Swaps Customer Collateral;
    (C) The keeping, on behalf of such partnership, of records 
pertaining to
    (1) the Cleared Swaps of Cleared Swaps Customers or
    (2) the Cleared Swaps Customer Collateral; or
    (D) The signing or co-signing of checks or drafts on behalf of such 
partnership;
    (iv) In the case of a corporation or association, an officer, 
director, or owner of ten percent or more of the capital stock of such 
organization;
    (v) An employee of such individual, partnership, corporation or 
association whose duties include:
    (A) The management of the business of such individual, partnership, 
corporation or association or any part thereof;
    (B) The handling, on behalf of such individual, partnership, 
corporation, or association, of the Cleared Swaps of Cleared Swaps 
Customers or the Cleared Swaps Customer Collateral;
    (C) The keeping of records, on behalf of such individual, 
partnership, corporation, or association, pertaining to the Cleared 
Swaps of Cleared Swaps Customers or the Cleared Swaps Customer 
Collateral; or
    (D) The signing or co-signing of checks or drafts on behalf of such 
individual, partnership, corporation, or association;
    (vi) A spouse or minor dependent living in the same household of 
any of the foregoing persons;
    (vii) A business affiliate that, directly or indirectly, controls 
such individual, partnership, corporation, or association; or
    (viii) A business affiliate that, directly or indirectly, is 
controlled by or is under common control with, such individual, 
partnership, corporation or association. Provided, however, that an 
account owned by any shareholder or member of a cooperative association 
of producers, within the meaning of section 6a of the Act, which 
association is registered as a futures commission merchant and carries 
such account on its records, shall be deemed to be a Cleared Swaps 
Customer Account and not a Cleared Swaps Proprietary Account of such 
association, unless the shareholder or member is an officer, director, 
or manager of the association.
    Clearing Member. This term means any person that has clearing 
privileges such that it can process, clear and settle trades through a 
derivatives clearing organization on behalf of itself or others. The 
derivatives clearing organization need not be organized as a membership 
organization.
    Collecting Futures Commission Merchant. A futures commission 
merchant that carries Cleared Swaps on behalf of another futures 
commission merchant and the Cleared Swaps Customers of the latter 
futures commission merchant, and as part of carrying such Cleared 
Swaps, collects Cleared Swaps Customer Collateral.
    Commingle. To commingle two or more items means to hold such items 
in the same account, or to combine such items in a transfer between 
accounts.
    Customer. This term means any customer of a futures commission 
merchant, other than a Cleared Swaps Customer, including, without 
limitation:
    (1) Any ``customer'' or ``commodity customer'' within the meaning 
of Sec.  1.3 of this chapter; and

[[Page 6373]]

    (2) Any ``foreign futures or foreign options customer'' within the 
meaning of Sec.  30.1(c) of this chapter.
    Depositing Futures Commission Merchant. A futures commission 
merchant that carries Cleared Swaps on behalf of its Cleared Swaps 
Customers through another futures commission merchant and, as part of 
carrying such Cleared Swaps, deposits Cleared Swaps Customer Collateral 
with such futures commission merchant.
    Permitted Depository. This term shall have the meaning set forth in 
Sec.  22.4 of this part.
    Segregate. To segregate two or more items is to keep them in 
separate accounts, and to avoid combining them in the same transfer 
between two accounts.

Sec.  22.2  Futures Commission Merchants: Treatment of Cleared Swaps 
and Associated Cleared Swaps Customer Collateral.

    (a) General. A futures commission merchant shall treat and deal 
with the Cleared Swaps of Cleared Swaps Customers and associated 
Cleared Swaps Customer Collateral as belonging to Cleared Swaps 
Customers.
    (b) Location of Cleared Swaps Customer Collateral. (1) A futures 
commission merchant must segregate all Cleared Swaps Customer 
Collateral that it receives, and must either hold such Cleared Swaps 
Customer Collateral itself as set forth in paragraph (b)(2) of this 
section, or deposit such collateral into one or more Cleared Swaps 
Customer Accounts held at a Permitted Depository, as set forth in 
paragraph (b)(3) of this section.
    (2) If a futures commission merchant holds Cleared Swaps Customer 
Collateral itself, then the futures commission merchant must:
    (i) Physically separate such collateral from its own property;
    (ii) Clearly identify each physical location in which it holds such 
collateral as a ``Location of Cleared Swaps Customer Collateral'' (the 
``FCM Physical Location'');
    (iii) Ensure that the FCM Physical Location provides appropriate 
protection for such collateral; and
    (iv) Record in its books and records the amount of such Cleared 
Swaps Customer Collateral separately from its own funds.
    (3) If a futures commission merchant holds Cleared Swaps Customer 
Collateral in a Permitted Depository, then:
    (i) The Permitted Depository must qualify pursuant to the 
requirements set forth in Sec.  22.4 of this part, and
    (ii) The futures commission merchant must maintain a Cleared Swaps 
Customer Account with each such Permitted Depository.
    (c) Commingling. (1) A futures commission merchant may commingle 
the Cleared Swaps Customer Collateral that it receives from, for, or on 
behalf of multiple Cleared Swaps Customers.
    (2) A futures commission merchant shall not commingle Cleared Swaps 
Customer Collateral with either of the following:
    (i) Funds belonging to the futures commission merchant, except as 
expressly permitted in paragraph (e)(3) of this section; or
    (ii) Other categories of funds belonging to Customers of the 
futures commission merchant, including customer funds (as Sec.  1.3 of 
this chapter defines such term) and the foreign futures or foreign 
options secured amount (as Sec.  1.3 of this chapter defines such 
term), except as expressly permitted by Commission rule, regulation, or 
order, or by a derivatives clearing organization rule approved in 
accordance with Sec.  39.15(b)(2) of this chapter.
    (d) Limitations on Use. (1) No futures commission merchant shall 
use, or permit the use of, the Cleared Swaps Customer Collateral of one 
Cleared Swaps Customer to purchase, margin, or settle the Cleared Swaps 
or any other trade or contract of, or to secure or extend the credit 
of, any person other than such Cleared Swaps Customer. Cleared Swaps 
Customer Collateral shall not be used to margin, guarantee, or secure 
trades or contracts of the entity constituting a Cleared Swaps Customer 
other than in Cleared Swaps, except to the extent permitted by a 
Commission rule, regulation or order.
    (2) A futures commission merchant may not impose or permit the 
imposition of a lien on Cleared Swaps Customer Collateral, including 
any residual financial interest of the futures commission merchant in 
such collateral, as described in paragraph (e)(4) of this section.
    (3) A futures commission merchant may not include, as Cleared Swaps 
Customer Collateral,
    (i) Money invested in the securities, memberships, or obligations 
of any derivatives clearing organization, designated contract market, 
swap execution facility, or swap data repository, or
    (ii) Money, securities, or other property that any derivatives 
clearing organization holds and may use for a purpose other than those 
set forth in Sec.  22.3 of this part.
    (e) Exceptions. Notwithstanding the foregoing:
    (1) Permitted Investments. A futures commission merchant may invest 
money, securities, or other property constituting Cleared Swaps 
Customer Collateral in accordance with Sec.  1.25 of this chapter, 
which section shall apply to such money, securities, or other property 
as if they comprised customer funds or customer money subject to 
segregation pursuant to section 4d(a) of the Act and the regulations 
thereunder.
    (2) Permitted Withdrawals. Such share of Cleared Swaps Customer 
Collateral as in the normal course of business shall be necessary to 
margin, guarantee, secure, transfer, adjust, or settle a Cleared Swaps 
Customer's Cleared Swaps with a derivatives clearing organization, or 
with a Collecting Futures Commission Merchant, may be withdrawn and 
applied to such purposes, including the payment of commissions, 
brokerage, interest, taxes, storage, and other charges, lawfully 
accruing in connection with such Cleared Swaps.
    (3) Deposits of Own Money, Securities, or Other Property.
    (i) In order to ensure that it is always in compliance with 
paragraph (f) of this section, a futures commission merchant may place 
in an FCM Physical Location or deposit in a Cleared Swaps Customer 
Account its own money, securities, or other property (provided, that 
such securities or other property are unencumbered and are of the types 
specified in Sec.  1.25 of this chapter).
    (ii) Money, securities, or other property deposited by a futures 
commission merchant pursuant to 22.13(b) and available to a derivatives 
clearing organization or Collecting Futures Commission Merchant to meet 
the obligations of the futures commission merchant's Cleared Swaps 
Customers collectively, shall be maintained in an account separate from 
the Cleared Swaps Customer Account.
    (4) Residual Financial Interest. (i) If, in accordance with 
paragraph (e)(3)(i) of this section, a futures commission merchant 
places in an FCM Physical Location or deposits in a Cleared Swaps 
Customer Account its own money, securities, or other property, then 
such money, securities, or other property (including accruals thereon) 
shall constitute Cleared Swaps Customer Collateral.
    (ii) The futures commission merchant shall have a residual 
financial interest in any portion of such money, securities, or other 
property in excess of that necessary for compliance with paragraph 
(f)(4) of this section.
    (iii) The futures commission merchant may withdraw money, 
securities, or other property from the FCM Physical

[[Page 6374]]

Location or Cleared Swaps Customer Account, to the extent of its 
residual financial interest therein. At the time of such withdrawal, 
the futures commission merchant shall ensure that the withdrawal does 
not cause its residual financial interest to become less than zero.
    (f) Requirements as to Amount. (1) For purposes of this Sec.  
22.2(f), the term ``account'' shall reference the entries on the books 
and records of a futures commission merchant pertaining to the Cleared 
Swaps Customer Collateral of a particular Cleared Swaps Customer.
    (2) The futures commission merchant must reflect in the account 
that it maintains for each Cleared Swaps Customer the market value of 
any Cleared Swaps Customer Collateral that it receives from such 
customer, as adjusted by:
    (i) Any uses permitted under Sec.  22.2(d) of this part;
    (ii) Any accruals on permitted investments of such collateral under 
Sec.  22.2(e) of this part that, pursuant to the futures commission 
merchant's customer agreement with that customer, are creditable to 
such customer;
    (iii) Any charges lawfully accruing to the Cleared Swaps Customer, 
including any commission, brokerage fee, interest, tax, or storage fee; 
and
    (iv) Any appropriately authorized distribution or transfer of such 
collateral.
    (3) If the market value of Cleared Swaps Customer Collateral in the 
account of a Cleared Swaps Customer is positive after adjustments, then 
that account has a credit balance. If the market value of Cleared Swaps 
Customer Collateral in the account of a Cleared Swaps Customer is 
negative after adjustments, then that account has a debit balance.
    (4) The futures commission merchant must maintain in segregation, 
in its FCM Physical Locations and/or its Cleared Swaps Customer 
Accounts at Permitted Depositories, an amount equal to the sum of any 
credit balances that the Cleared Swaps Customers of the futures 
commission merchant have in their accounts, excluding from such sum any 
debit balances that the Cleared Swaps Customers of the futures 
commission merchant have in their accounts.
    (5) Notwithstanding the foregoing, the futures commission merchant 
must include, in calculating the sum referenced in paragraph (f)(4) of 
this section, any debit balance that a Cleared Swaps Customer may have 
in its account, to the extent that such balance is secured by ``readily 
marketable securities'' that the Cleared Swaps Customer deposited with 
the futures commission merchant.
    (i) For purposes of this section, ``readily marketable'' shall be 
defined as having a ``ready market'' as such latter term is defined in 
Rule 15c3-1(c)(11) of the Securities and Exchange Commission (Sec.  
241.15c3-1(c)(11) of this title).
    (ii) In order for a debit balance to be deemed secured by ``readily 
marketable securities,'' the futures commission merchant must maintain 
a security interest in such securities, and must hold a written 
authorization to liquidate the securities at the discretion of the 
futures commission merchant.
    (iii) To determine the amount secured by ``readily marketable 
securities,'' the futures commission merchant shall:
    (A) Determine the market value of such securities; and
    (B) Reduce such market value by applicable percentage deductions 
(i.e., ``securities haircuts'') as set forth in Rule 15c3-1(c)(2)(vi) 
of the Securities and Exchange Commission (Sec.  240.15c3-1(c)(2)(vi) 
of this title). The portion of the debit balance, not exceeding 100 per 
cent, that is secured by the reduced market value of such readily 
marketable securities shall be included in calculating the sum referred 
to in paragraph (f)(4) of this section.
    (g) Segregated Account; Daily Computation and Record. (1) Each 
futures commission merchant must compute as of the close of each 
business day, on a currency-by-currency basis:
    (i) The aggregate market value of the Cleared Swaps Customer 
Collateral in all FCM Physical Locations and all Cleared Swaps Customer 
Accounts held at Permitted Depositories (the ``Collateral Value'');
    (ii) The sum referenced in paragraph (f)(4) of this section (the 
``Collateral Requirement''); and
    (iii) The amount of the residual financial interest that the 
futures commission merchant holds in such Cleared Swaps Customer 
Collateral, which shall equal the difference between the Collateral 
Value and the Collateral Requirement.
    (2) The futures commission merchant must complete the daily 
computations required by this section prior to noon on the next 
business day and must keep such computations, together with all 
supporting data, in accordance with the requirements of Sec.  1.31 of 
this chapter.

Sec.  22.3  Derivatives Clearing Organizations: Treatment of Cleared 
Swaps Customer Collateral.

    (a) General. A derivatives clearing organization shall treat and 
deal with the Cleared Swaps Customer Collateral deposited by a futures 
commission merchant as belonging to the Cleared Swaps Customers of such 
futures commission merchant and not other persons, including, without 
limitation, the futures commission merchant.
    (b) Location of Cleared Swaps Customer Collateral. (1) The 
derivatives clearing organization must segregate all Cleared Swaps 
Customer Collateral that it receives from futures commission merchants, 
and must either hold such Cleared Swaps Customer Collateral itself as 
set forth in paragraph (b)(2) of this section, or deposit such 
collateral into one or more Cleared Swaps Customer Accounts held at a 
Permitted Depository, as set forth in paragraph (b)(3) of this section.
    (2) If a derivatives clearing organization holds Cleared Swaps 
Customer Collateral itself, then the derivatives clearing organization 
must:
    (i) Physically separate such collateral from its own property, the 
property of any futures commission merchant, and the property of any 
other person that is not a Cleared Swaps Customer of a futures 
commission merchant;
    (ii) Clearly identify each physical location in which it holds such 
collateral as ``Location of Cleared Swaps Customer Collateral'' (the 
``DCO Physical Location'');
    (iii) Ensure that the DCO Physical Location provides appropriate 
protection for such collateral; and
    (iv) Record in its books and records the amount of such Cleared 
Swaps Customer Collateral separately from its own funds, the funds of 
any futures commission merchant, and the funds of any other person that 
is not a Cleared Swaps Customer of a futures commission merchant.
    (3) If a derivatives clearing organization holds Cleared Swaps 
Customer Collateral in a Permitted Depository, then:
    (i) The Permitted Depository must qualify pursuant to the 
requirements set forth in Sec.  22.4 of this part; and
    (ii) The derivatives clearing organization must maintain a Cleared 
Swaps Customer Account with each such Permitted Depository.
    (c) Commingling. (1) A derivatives clearing organization may 
commingle the Cleared Swaps Customer Collateral that it receives from 
multiple futures commission merchants on behalf of their Cleared Swaps 
Customers.
    (2) A derivatives clearing organization shall not commingle the 
Cleared Swaps Customer Collateral that it receives from a futures 
commission merchant on behalf of Cleared Swaps Customers with any of 
the following:

[[Page 6375]]

    (i) The money, securities, or other property belonging to the 
derivatives clearing organization;
    (ii) The money, securities, or other property belonging to any 
futures commission merchant; or
    (iii) Other categories of funds that it receives from a futures 
commission merchant on behalf of Customers, including customer funds 
(as Sec.  1.3 of this chapter defines such term) and the foreign 
futures or foreign options secured amount (as Sec.  1.3 of this chapter 
defines such term), except as expressly permitted by Commission rule, 
regulation or order, (or a derivatives clearing organization rule 
approved in accordance with Sec.  39.15(b)(2) of this chapter).
    (d) Exceptions; Permitted Investments. Notwithstanding the 
foregoing and Sec.  22.15 of this part, a derivatives clearing 
organization may invest the money, securities, or other property 
constituting Cleared Swaps Customer Collateral in accordance with Sec.  
1.25 of this chapter, which section shall apply to such money, 
securities, or other property as if they comprised customer funds or 
customer money subject to segregation pursuant to section 4d(a) of the 
Act and the regulations thereunder.

Sec.  22.4  Futures Commission Merchants and Derivatives Clearing 
Organizations: Permitted Depositories.

    In order for a depository to be a Permitted Depository:
    (a) The depository must (subject to Sec.  22.9) be one of the 
following types of entities:
    (1) A bank located in the United States;
    (2) A trust company located in the United States;
    (3) A Collecting Futures Commission Merchant registered with the 
Commission (but only with respect to a Depositing Futures Commission 
Merchant providing Cleared Swaps Customer Collateral); or
    (4) A derivatives clearing organization registered with the 
Commission; and
    (b) The futures commission merchant or the derivatives clearing 
organization must hold a written acknowledgment letter from the 
depository as required by Sec.  22.5 of this part.

Sec.  22.5  Futures Commission Merchants and Derivatives Clearing 
Organizations: Written Acknowledgement.

    (a) Before depositing Cleared Swaps Customer Collateral, the 
futures commission merchant or derivatives clearing organization shall 
obtain and retain in its files a separate written acknowledgment letter 
from each depository in accordance with Sec. Sec.  1.20 and 1.26 of 
this chapter, with all references to ``customer funds'' modified to 
apply to Cleared Swaps Customer Collateral, and with all references to 
section 4d(a) or 4d(b) of the Act and the regulations thereunder 
modified to apply to section 4d(f) of the Act and the regulations 
thereunder.
    (b) The futures commission merchant or derivatives clearing 
organization shall adhere to all requirements specified in Sec. Sec.  
1.20 and 1.26 of this chapter regarding retaining, permitting access 
to, filing, or amending the written acknowledgment letter, in all cases 
as if the Cleared Swaps Customer Collateral comprised customer funds 
subject to segregation pursuant to section 4d(a) or 4d(b) of the Act 
and the regulations thereunder.
    (c) Notwithstanding paragraph (a) of this section, an 
acknowledgement letter need not be obtained from a derivatives clearing 
organization that has made effective, pursuant to section 5c(c) of the 
Act and the regulations thereunder, rules that provide for the 
segregation of Cleared Swaps Customer Collateral, in accordance with 
all relevant provisions of the Act and the regulations thereunder.

Sec.  22.6  Futures Commission Merchants and Derivatives Clearing 
Organizations: Naming of Cleared Swaps Customer Accounts.

    The name of each Cleared Swaps Customer Account that a futures 
commission merchant or a derivatives clearing organization maintains 
with a Permitted Depository shall:
    (a) Clearly identify the account as a ``Cleared Swaps Customer 
Account'' and
    (b) Clearly indicate that the collateral therein is ``Cleared Swaps 
Customer Collateral'' subject to segregation in accordance with the Act 
and this part.

Sec.  22.7  Permitted Depositories: Treatment of Cleared Swaps Customer 
Collateral.

    A Permitted Depository shall treat all funds in a Cleared Swaps 
Customer Account as Cleared Swaps Customer Collateral. A Permitted 
Depository shall not hold, dispose of, or use any such Cleared Swaps 
Customer Collateral as belonging to any person other than:
    (a) The Cleared Swaps Customers of the futures commission merchant 
maintaining such Cleared Swaps Customer Account or;
    (b) The Cleared Swaps Customers of the futures commission merchants 
for which the derivatives clearing organization maintains such Cleared 
Swaps Customer Account.

Sec.  22.8  Situs of Cleared Swaps Customer Accounts.

    The situs of each of the following shall be located in the United 
States:
    (a) Each FCM Physical Location or DCO Physical Location;
    (b) Each ``account,'' within the meaning of Sec.  22.2(f)(1), that 
a futures commission merchant maintains for each Cleared Swaps 
Customer; and
    (c) Each Cleared Swaps Customer Account on the books and records of 
a derivatives clearing organization with respect to the Cleared Swaps 
Customers of a futures commission merchant.

Sec.  22.9  Denomination of Cleared Swaps Customer Collateral and 
Location of Depositories.

    (a) Subject to paragraph (b) of this section, futures commission 
merchants and derivatives clearing organizations may hold Cleared Swaps 
Customer Collateral in the denominations, at the locations and 
depositories, and subject to the same segregation requirements 
specified in Sec.  1.49 of this chapter, which section shall apply to 
such Cleared Swaps Customer Collateral as if it comprised customer 
funds subject to segregation pursuant to section 4d(a) of the Act.
    (b) Notwithstanding the requirements set forth in Sec.  1.49 of 
this chapter, a futures commission merchant's obligations to a Cleared 
Swaps Customer may be denominated in a currency in which funds have 
accrued to the customer as a result of a Cleared Swap carried through 
such futures commission merchant, to the extent of such accruals.
    (c) Each depository referenced in paragraph (a) of this section 
shall be considered a Permitted Depository for purposes of this part. 
Provided, however, that a futures commission merchant shall only be 
considered a Permitted Depository to the extent that it is acting as a 
Collecting Futures Commission Merchant (as Sec.  22.1 of this part 
defines such term).

Sec.  22.10  Application of other Regulatory Provisions.

    Sections 1.27, 1.28, 1.29, and 1.30 of this chapter shall apply to 
the Cleared Swaps Customer Collateral held by futures commission 
merchants and derivatives clearing organizations to the same extent as 
if such sections referred to:
    (a) ``Cleared Swaps Customer Collateral'' in place of ``customer 
funds;''
    (b) ``Cleared Swaps Customers'' instead of ``commodity or option 
customers'' or ``customers or option customers;''

[[Page 6376]]

    (c) ``Cleared Swaps Contracts'' instead of ``trades, contracts, or 
commodity options;'' and
    (d) ``Section 4d(f) of the Act'' instead of ``section 4d(a)(2) of 
the Act.''

Sec.  22.11  Information To Be Provided Regarding Customers and Their 
Cleared Swaps.

    (a) Each Depositing Futures Commission Merchant shall:
    (1) The first time that the Depositing Futures Commission Merchant 
intermediates a Cleared Swap for a Cleared Swaps Customer with a 
Collecting Futures Commission Merchant, provide information sufficient 
to identify such customer to the relevant Collecting Futures Commission 
Merchant; and
    (2) At least once each business day thereafter, provide information 
to the relevant Collecting Futures Commission Merchant sufficient to 
identify, for each Cleared Swaps Customer, the portfolio of rights and 
obligations arising from the Cleared Swaps that the Depositing Futures 
Commission Merchant intermediates for such customer.
    (b) If an entity serves as both a Depositing Futures Commission 
Merchant and a Collecting Futures Commission Merchant, then:
    (1) The information that such entity must provide to its Collecting 
Futures Commission Merchant pursuant to paragraph (a)(1) of this 
section shall also include information sufficient to identify each 
Cleared Swaps Customer of the Depositing Futures Commission Merchant 
for which such entity serves as a Collecting Futures Commission 
Merchant; and
    (2) The information that such entity must provide to its Collecting 
Futures Commission Merchant pursuant to paragraph (a)(2) of this 
section shall also include information sufficient to identify, for each 
Cleared Swaps Customer referenced in paragraph (b)(1) of this section, 
the portfolio of rights and obligations arising from the Cleared Swaps 
that such entity intermediates as a Collecting Futures Commission 
Merchant, on behalf of its Depositing Futures Commission Merchant, for 
such customer.
    (c) Each futures commission merchant that intermediates a Cleared 
Swap for a Cleared Swaps Customer, on or subject to the rules of a 
derivatives clearing organization, directly as a Clearing Member shall:
    (1) The first time that such futures commission merchant 
intermediates a Cleared Swap for a Cleared Swaps Customer, provide 
information to the relevant derivatives clearing organization 
sufficient to identify such customer; and
    (2) At least once each business day thereafter, provide information 
to the relevant derivatives clearing organization sufficient to 
identify, for each Cleared Swaps Customer, the portfolio of rights and 
obligations arising from the Cleared Swaps that such futures commission 
merchant intermediates for such customer.
    (d) If the futures commission merchant referenced in paragraph (c) 
of this section is a Collecting Futures Commission Merchant, then:
    (1) The information that it must provide to the derivatives 
clearing organization pursuant to paragraph (c)(1) of this section 
shall also include information sufficient to identify each Cleared 
Swaps Customer of any entity that acts as a Depositing Futures 
Commission Merchant in relation to the Collecting Futures Commission 
Merchant (including, without limitation, each Cleared Swaps Customer of 
any Depositing Futures Commission Merchant for which such entity also 
serves as a Collecting Futures Commission Merchant); and
    (2) The information that it must provide to the derivatives 
clearing organization pursuant to paragraph (c)(2) of this section 
shall also include information sufficient to identify, for each Cleared 
Swaps Customer referenced in paragraph (d)(1) of this section, the 
portfolio of rights and obligations arising from the Cleared Swaps that 
the Collecting Futures Commission Merchant intermediates, on behalf of 
the Depositing Futures Commission Merchant, for such customer.
    (e) Each derivatives clearing organization shall:
    (1) Take appropriate steps to confirm that the information it 
receives pursuant to paragraphs (c)(1) or (c)(2) of this section is 
accurate and complete, and
    (2) Ensure that the futures commission merchant is providing the 
derivatives clearing organization the information required by 
paragraphs (c)(1) or (c)(2) of this section on a timely basis.

Sec.  22.12  Information To Be Maintained Regarding Cleared Swaps 
Customer Collateral.

    (a) Each Collecting Futures Commission Merchant receiving Cleared 
Swaps Customer Funds from an entity serving as a Depositing Futures 
Commission Merchant shall, no less frequently than once each business 
day, calculate and record:
    (1) the amount of collateral required at such Collecting Futures 
Commission Merchant for each Cleared Swaps Customer of the entity 
acting as Depositing Futures Commission Merchant (including, without 
limitation, each Cleared Swaps Customer of any Depositing Futures 
Commission Merchant for which such entity also serves as a Collecting 
Futures Commission Merchant); and
    (2) the sum of the individual collateral amounts referenced in 
paragraph (a)(1) of this section.
    (b) Each Collecting Futures Commission Merchant shall calculate the 
collateral amounts referenced in paragraph (a) of this section with 
respect to the portfolio of rights and obligations arising from the 
Cleared Swaps that the Collecting Futures Commission Merchant 
intermediates, on behalf of the Depositing Futures Commission Merchant, 
for each Cleared Swaps Customer referenced in paragraph (a)(1) of this 
section.
    (c) Each derivatives clearing organization receiving Cleared Swaps 
Customer Funds from a futures commission merchant shall, no less 
frequently than once each business day, calculate and record:
    (1) the amount of collateral required at such derivatives clearing 
organization for each Cleared Swaps Customer of the futures commission 
merchant; and
    (2) the sum of the individual collateral amounts referenced in 
paragraph (c)(1) of this section.
    (d) If the futures commission merchant referenced in paragraph (c) 
of this section is a Collecting Futures Commission Merchant, then the 
derivatives clearing organization shall also perform and record the 
results of the calculation required in paragraph (c) of this section 
for each Cleared Swaps Customer of an entity acting as a Depositing 
Futures Commission Merchant in relation to the Collecting Futures 
Commission Merchant (including, without limitation, any Cleared Swaps 
Customer for which such entity is also acting as a Collecting Futures 
Commission Merchant).
    (e) Each futures commission merchant shall calculate the collateral 
amounts referenced in paragraph (c) of this section with respect to the 
portfolio of rights and obligations arising from the Cleared Swaps that 
the futures commission merchant intermediates (including, without 
limitation, as a Collecting Futures Commission Merchant on behalf of a 
Depositing Futures Commission Merchant), for each Cleared Swaps 
Customer referenced in paragraphs (c)(1) and (d) of this section.
    (f) The collateral requirement referenced in paragraph (a) of this

[[Page 6377]]

section with respect to a Collecting Futures Commission Merchant shall 
be no less than that imposed by the relevant derivatives clearing 
organization with respect to the same portfolio of rights and 
obligations for each relevant Cleared Swaps Customer.

Sec.  22.13  Additions to Cleared Swaps Customer Collateral.

    (a)(1) At the election of the derivatives clearing organization or 
Collecting Futures Commission Merchant, the collateral requirement 
referred to in Sec. Sec.  22.12(a), (c), and (d) of this part 
applicable to a particular Cleared Swaps Customer or group of Cleared 
Swaps Customers may be increased based on an evaluation of the credit 
risk posed by such customer or group, in which case the derivatives 
clearing organization or Collecting Futures Commission Merchant shall 
collect and record such higher amount as provided in Sec.  22.12 of 
this part.
    (2) Nothing in paragraph (a)(1) of this section is intended to 
interfere with the right of a futures commission merchant to increase 
the collateral requirements at such futures commission merchant with 
respect to any of its Cleared Swaps Customers or Customers.
    (b) Any collateral deposited by a futures commission merchant 
(including a Depositing Futures Commission Merchant) pursuant to Sec.  
22.2(e)(3)(ii) of this part, which collateral is identified as such 
futures commission merchant's own property may be used by the 
derivatives clearing organization or Collecting Futures Commission 
Merchant, as applicable, to margin, guarantee or secure the Cleared 
Swaps of any or all of such Cleared Swaps Customers.
    (c) A futures commission merchant may transmit to a derivatives 
clearing organization any collateral posted by a Cleared Swaps Customer 
in excess of the amount required by the derivatives clearing 
organization if:
    (1) the rules of the derivatives clearing organization expressly 
permit the futures commission merchant to transmit collateral in excess 
of the amount required by the derivatives clearing organization; and
    (2) the derivatives clearing organization provides a mechanism by 
which the futures commission merchant is able to, and maintains rules 
pursuant to which the futures commission merchant is required to, 
identify each Business Day, for each Cleared Swaps Customer, the amount 
of collateral posted in excess of the amount required by the 
derivatives clearing organization.

Sec.  22.14  Futures Commission Merchant Failure To Meet a Customer 
Margin Call in Full.

    (a) A Depositing Futures Commission Merchant which receives a call 
for either initial margin or variation margin with respect to a Cleared 
Swaps Customer Account from a Collecting Futures Commission Merchant, 
which call such Depositing Futures Commission Merchant does not meet in 
full, shall, with respect to each Cleared Swaps Customer of such 
Depositing Futures Commission Merchant whose Cleared Swaps contribute 
to such margin call,
    (1) Transmit to the Collecting Futures Commission Merchant an 
amount equal to the lesser of
    (i) The amount called for; or
    (ii) The remaining Cleared Swaps Collateral on deposit at such 
Depositing Futures Commission Merchant for that Cleared Swaps Customer; 
and
    (2) Advise the Collecting Futures Commission Merchant of the 
identity of each such Cleared Swaps Customer, and the amount 
transmitted on behalf of each such customer.
    (b) If the entity acting as Depositing Futures Commission Merchant 
referenced in paragraph (a) of this section is also a Collecting 
Futures Commission Merchant, then:
    (1) Such entity shall include in the transmission required in 
paragraph (a)(1) of this section any amount that it receives, pursuant 
to paragraph (a)(1) of this section, from a Depositing Futures 
Commission Merchant for which such entity acts as a Collecting Futures 
Commission Merchant; and
    (2) Such entity shall present its Collecting Futures Commission 
Merchant with the information that it receives, pursuant to paragraph 
(a)(2) of this section, from a Depositing Futures Commission Merchant 
for which such entity acts as a Collecting Futures Commission Merchant.
    (c) A futures commission merchant which receives a call for either 
initial or variation margin with respect to a Cleared Swaps Customer 
Account from a derivatives clearing organization, which call such 
futures commission merchant does not meet in full, shall, with respect 
to each Cleared Swaps Customer of such futures commission merchant 
whose Cleared Swaps contribute to such margin call:
    (1) Transmit to the derivatives clearing organization an amount 
equal to the lesser of
    (i) The amount called for; or
    (ii) The remaining Cleared Swaps Collateral on deposit at such 
futures commission merchant for each such Cleared Swaps Customer; and
    (2) Advise the derivatives clearing organization of the identity of 
each such Cleared Swaps Customer, and the amount transmitted on behalf 
of each such customer.
    (d) If the futures commission merchant referenced in paragraph (c) 
is a Collecting Futures Commission Merchant, then:
    (1) Such Collecting Futures Commission Merchant shall include in 
the transmission required in paragraph (c)(1) of this section any 
amount that it receives from a Depositing Futures Commission Merchant 
pursuant to paragraph (a)(1) of this section; and
    (2) Such Collecting Futures Commission shall present the 
derivatives clearing organization with the information that it receives 
from a Depositing Futures Commission Merchant pursuant to paragraph 
(a)(2) of this section.
    (e) If,
    (1) On the business day prior to the business day on which the 
Depositing Futures Commission Merchant fails to meet a margin call with 
respect to a Cleared Swaps Customer Account, such Collecting Futures 
Commission Merchant referenced in paragraph (a) of this section held, 
with respect to such account, Cleared Swaps Collateral of a value no 
less than the amount specified in Sec.  22.12(a)(2) of this part, after 
the application of haircuts specified by policies applied by such 
Collecting Futures Commission Merchant in its relationship with the 
Depositing Futures Commission Merchant, and
    (2) As of the close of business on the business day on which the 
margin call is not met, the market value of the Cleared Swaps 
Collateral held by the derivatives clearing organization or Collecting 
Futures Commission Merchant is, due to changes in such market value, 
less than the amount specified in Sec.  22.12(a)(2) of this part, then 
the amount of such collateral attributable to each Cleared Swaps 
Customer pursuant to Sec.  22.12(a)(1) of this part shall be reduced by 
the percentage difference between the amount specified in Sec.  
22.12(a)(2) of this part and such market value.
    (f) If:
    (1) On the business day prior to the business day on which the 
futures commission merchant fails to meet a margin call with respect to 
a Cleared Swaps Customer Account, the derivatives clearing organization 
referenced in paragraph (c) of this section held, with respect to such 
account, Cleared Swaps Collateral of a value no less than the amount 
specified in Sec.  22.12(c)(2) of this part, after the application of 
haircuts specified by the

[[Page 6378]]

rules and procedures of such derivatives clearing organization, and
    (2) As of the close of business on the business day on which the 
margin call is not met, the market value of the Cleared Swaps 
Collateral held by the derivatives clearing organization is, due to 
changes in such market value, less than the amount specified in Sec.  
22.12(c)(2) of this part, then the amount of collateral attributable to 
each Cleared Swaps Customer pursuant to Sec.  22.12(c)(1) of this part 
shall be reduced by the percentage difference between the amount 
specified in Sec.  22.12(c)(2) and such market value.
    (g) A derivatives clearing organization or Collecting Futures 
Commission Merchant is entitled to reasonably rely upon any information 
provided by a defaulting futures commission merchant under Sec.  22.14. 
If the defaulting futures commission merchant does not provide such 
information on the date of the futures commission merchant's default, a 
derivatives clearing organization or Collecting Futures Commission 
Merchant may rely on the information previously provided to it by the 
defaulting futures commission merchant.

Sec.  22.15  Treatment of Cleared Swaps Customer Collateral on an 
Individual Basis.

    Subject to Sec.  22.3(d) of this part, each derivatives clearing 
organization and each Collecting Futures Commission Merchant receiving 
Cleared Swaps Customer Collateral from a futures commission merchant 
shall treat the value of collateral required with respect to the 
portfolio of rights and obligations arising out of the Cleared Swaps 
intermediated for each Cleared Swaps Customer, and collected from the 
futures commission merchant, as belonging to such customer, and such 
amount shall not be used to margin, guarantee, or secure the Cleared 
Swaps or other obligations of the futures commission merchant or of any 
other Cleared Swaps Customer or Customer. Nothing contained herein 
shall be construed to limit, in any way, the right of a derivatives 
clearing organization or Collecting Futures Commission Merchant to 
liquidate any or all positions in a Cleared Swaps Customer Account in 
the event of default of a clearing member or Depositing Futures 
Commission Merchant.

Sec.  22.16  Disclosures to Customers.

    (a) A futures commission merchant shall disclose, to each of its 
Cleared Swaps Customers, the governing provisions, as described in 
paragraph (c) of this section, relating to use of Cleared Swaps 
Customer Collateral, transfer, neutralization of the risks, or 
liquidation of Cleared Swaps in the event of a default by the futures 
commission merchant relating to the Cleared Swaps Customer Account, as 
well as any change in such governing provisions.
    (b) If the futures commission merchant referenced in paragraph (a) 
of this section is a Depositing Futures Commission Merchant, then such 
futures commission merchant shall disclose, to each of its Cleared 
Swaps Customers, the governing provisions, as described in paragraph 
(c) of this section, relating to use of Cleared Swaps Customer 
Collateral, transfer, neutralization of the risks, or liquidation of 
Cleared Swaps in the event of a default by:
    (1) Such futures commission merchant or
    (2) Any relevant Collecting Futures Commission Merchant relating to 
the Cleared Swaps Customer Account, as well as any change in such 
governing provisions.
    (c) The governing provisions referred to in paragraphs (a) and (b) 
of this section are the rules of each derivatives clearing 
organization, or the provisions of the customer agreement between the 
Collecting Futures Commission Merchant and the Depositing Futures 
Commission Merchant, on or through which the Depositing Futures 
Commission Merchant will intermediate Cleared Swaps for such Cleared 
Swaps Customer.

PART 190--BANKRUPTCY

0
2. The authority citation for part 190 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7a, 12, 19, and 24, 
and 11 U.S.C. 362, 546, 548, 556, and 761-766, unless otherwise 
noted.

Sec. Sec.  190.01, 190.02, 190.03, 190.05, 190.06, 190.07, 
190.10  [Amended]

0
3. In 17 CFR part 190:
0
a. Remove the words ``commodity account'' and add, in their place, the 
words ``commodity contract account'' in:
0
i. Sections 190.01(w), (y), and (kk)(6);
0
ii. Sections 190.02(d)(1), (6), and (7);
0
iii. Section 190.06(g)(3); and
0
iv. Section 190.10(d)(1).
0
b. Remove the words ``commodity futures account'' and add, in their 
place, the words ``commodity contract account'' in:
0
i. Section 190.03(a)(2); and
0
ii. Section 190.10(h).
0
c. Remove the words ``commodity transactions'' and add, in their place, 
the words ``commodity contract transactions'' in Sec.  190.02(d)(3).
0
d. Remove the words ``commodity futures contract'' and add, in their 
place, the words ``commodity contract'' in Sec.  190.05(a)(1) and 
(b)(1).
0
e. Remove the words ``commodity accounts'' and add, in their place, the 
words ``commodity contract accounts'' in Sec.  190.06(g)(1)(i) and 
(ii).
0
f. Remove the words ``board of trade'' and add, in their place, the 
words ``designated contract market'' in Sec.  190.07(e)(1).
0
g. Remove the words ``contract market'' and add, in their place, the 
words ``designated contract market'' in Sec.  190.07(e)(2)(ii)(B).

0
4. In Sec.  190.01,
0
a. Redesignate paragraphs (e) through (oo) as (f) through (pp);
0
b. Add a new paragraph (e); and
0
c. Revise paragraphs (a), and newly redesignated paragraphs (f), (cc), 
(hh), (ll)(2)(ii), (ll)(4), (ll)(5), and (pp) to read as follows:

Sec.  190.01  Definitions.

* * * * *
    (a)(1) Account class means each of the following types of customer 
accounts which must be recognized as a separate class of account by the 
trustee: futures accounts, foreign futures accounts, leverage accounts, 
delivery accounts as defined in Sec.  190.05(a)(2) of this part, and 
cleared swaps accounts.
    (2)(i) To the extent that the equity balance, as defined in Sec.  
190.07 of this part, of a customer in a commodity option, as defined in 
Sec.  1.3 of this chapter, may be commingled with the equity balance of 
such customer in any domestic commodity futures contract pursuant to 
regulations under the Act, the aggregate shall be treated for purposes 
of this part as being held in a futures account.
    (ii) To the extent that such equity balance of a customer in a 
commodity option may be commingled with the equity balance of such 
customer in any cleared swaps account pursuant to regulations under 
this act, the aggregate shall be treated for purposes of this part as 
being held in a cleared swaps account.
    (iii) If positions or transactions in commodity contracts that 
would otherwise belong to one account class (and the money, securities, 
or other property margining, guaranteeing, or securing such positions 
or transactions), are, pursuant to a Commission rule, regulation, or 
order (or a derivatives clearing organization rule approved in 
accordance with Sec.  39.15(b)(2) of this chapter), held separately 
from other positions and transactions in that account class, and are 
commingled with positions or transactions in commodity

[[Page 6379]]

contracts of another account class (and the money, securities, or other 
property margining, guaranteeing, or securing such positions or 
transactions), then the former positions (and the relevant money, 
securities, or other property) shall be treated, for purposes of this 
part, as being held in an account of the latter account class.
* * * * *
    (e) Calendar day. A calendar day includes the time from midnight to 
midnight.
    (f) Clearing organization shall have the same meaning as that set 
forth in section 761(2) of the Bankruptcy Code.
* * * * *
    (cc) Non-public customer means any person enumerated in the 
definition of Proprietary Account in Sec.  1.3 or Sec.  31.4(e) of this 
chapter, any person excluded from the definition of ``foreign futures 
or foreign options customer'' in the proviso to section 30.1(c) of this 
chapter, or any person enumerated in the definition of Cleared Swaps 
Proprietary Account in Sec.  22.1 of this chapter, in each case, if 
such person is defined as a ``customer'' under paragraph (k) of this 
section.
* * * * *
    (hh) Principal contract means a contract which is not traded on a 
designated contract market, and includes leverage contracts and dealer 
options, but does not include:
    (1) Transactions executed off the floor of a designated contract 
market pursuant to rules approved by the Commission or rules which the 
designated contract market is required to enforce, or pursuant to rules 
of a foreign board of trade located outside the United States, its 
territories or possessions; or
    (2) Cleared swaps contracts.
* * * * *
    (ll) * * *
    (2) * * *
    (ii) Is a bona fide hedging position or transaction as defined in 
Sec.  1.3 of this chapter or is a commodity option transaction which 
has been determined by the registered entity to be economically 
appropriate to the reduction of risks in the conduct and management of 
a commercial enterprise pursuant to rules which have been approved by 
the Commission pursuant to section 5c(c) of the Commodity Exchange Act; 
and
* * * * *
    (4) Any cash or other property deposited prior to the entry of the 
order for relief to pay for the taking of physical delivery on a long 
commodity contract or for payment of the strike price upon exercise of 
a short put or a long call option contract on a physical commodity, 
which cannot be settled in cash, in excess of the amount necessary to 
margin such commodity contract prior to the notice date or exercise 
date, which cash or other property is identified on the books and 
records of the debtor as received from or for the account of a 
particular customer on or after three calendar days before the first 
notice date or three calendar days before the exercise date 
specifically for the purpose of payment of the notice price upon taking 
delivery or the strike price upon exercise, respectively, and such 
customer takes delivery or exercises the option in accordance with the 
applicable designated contract market rules.
    (5) The cash price tendered for any property deposited prior to the 
entry of the order for relief to make physical delivery on a short 
commodity contract or for exercise of a long put or a short call option 
contract on a physical commodity, which cannot be settled in cash, to 
the extent it exceeds the amount necessary to margin such contract 
prior to the notice date or exercise date, which property is identified 
on the books and records of the debtor as received from or for the 
account of a particular customer on or after three calendar days before 
the first notice date or three calendar days before the exercise date 
specifically for the purpose of a delivery or exercise, respectively, 
and such customer makes delivery or exercises the option in accordance 
with the applicable contract market rules.
* * * * *
    (pp) Cleared Swap. This term shall have the same meaning as set 
forth in Sec.  22.1 of this chapter.
0
5. In Sec.  190.02, revise paragraphs (a), (b)(1), (b)(2), (d)(11), 
(e), (f)(1)(i), (f)(1(ii) and (g)(2)(i) to read as follows:

Sec.  190.02  Operation of the debtor's estate subsequent to the filing 
date and prior to the primary liquidation date.

* * * * *
    (a) Notices to the Commission and Designated Self-Regulatory 
Organizations.
    (1) General. Each commodity broker which files a petition in 
bankruptcy shall, at or before the time of such filing, and each 
commodity broker against which such a petition is filed shall, as soon 
as possible, but no later than one calendar day after the receipt of 
notice of such filing, notify the Commission and such broker's 
designated self-regulatory organization, if any, in accordance with 
Sec.  190.10(a) of the filing date, the court in which the proceeding 
has been filed, and the docket number assigned to that proceeding by 
the court.
    (2) Of transfers under section 764(b) of the Bankruptcy Code. As 
soon as possible, but in no event later than the close of business on 
third calendar day after the order for relief, the trustee, the 
applicable self-regulatory organization, or the commodity broker must 
notify the Commission in accordance with Sec.  190.10(a) whether such 
entity or organization intends to transfer or to apply to transfer open 
commodity contracts on behalf of the commodity broker in accordance 
with section 764(b) of the Bankruptcy Code and Sec.  190.06 (e) or (f).
    (b) Notices to customers. (1) Specifically identifiable property 
other than commodity contracts. The trustee must use its best efforts 
to promptly, but in no event later than two calendar days after entry 
of the order for relief, commence to publish in a daily newspaper or 
newspapers of general circulation approved by the court serving the 
location of each branch office of the commodity broker, for two 
consecutive days a notice to customers stating that all specifically 
identifiable property of customers other than open commodity contracts 
which has not otherwise been liquidated will be liquidated commencing 
on the sixth calendar day after the second publication date if the 
customer has not instructed the trustee in writing on or before the 
fifth calendar day after the second publication date to return such 
property pursuant to the terms for distribution of specifically 
identifiable property contained in Sec.  190.08(d)(1) and, on the 
seventh calendar day after such second publication date, if such 
property has not been returned in accordance with such terms on or 
prior to that date. Such notice must describe specifically identifiable 
property in accordance with the definition in this part and must 
specify the terms upon which that property may be returned. Publication 
of the form of notice set forth in the appendix to this part will 
constitute sufficient notice for purposes of this paragraph (b)(1).
    (2) Request for instructions regarding transfer of open commodity 
contracts. The trustee must use its best efforts to request promptly, 
but in no event later than two calendar days after entry of an order 
for relief, customer instructions concerning the transfer or 
liquidation of the specifically identifiable open commodity contracts, 
if any, not required to be liquidated under paragraph (f)(1) of this 
section. The request for customer instructions required by this 
paragraph (b)(2) must state that the trustee is required to liquidate 
any such commodity contract for which transfer instructions have not

[[Page 6380]]

been received on or before the seventh calendar day after entry of the 
order for relief, at an hour specified by the trustee, and any such 
commodity contract for which instructions have been received which has 
not been transferred in accordance with Sec.  190.08(d)(2) on or before 
the seventh calendar day after entry of the order for relief. A form of 
notice is set forth in the appendix to this part.
* * * * *
    (d) * * *
    (11) Whether the claimant's positions in security futures products 
are held in a futures account or a securities account, as these terms 
are defined in Sec.  1.3 of this chapter;
* * * * *
    (e) Transfers--(1) All cases. The trustee for a commodity broker 
must immediately use its best efforts to effect a transfer in 
accordance with Sec.  190.06 (e) and (f) no later than the seventh 
calendar day after the order for relief of the open commodity contracts 
and equity held by the commodity broker for or on behalf of its 
customers.
    (2) Involuntary cases. A commodity broker against which an 
involuntary petition in bankruptcy is filed, or the trustee if a 
trustee has been appointed in such case, must use its best efforts to 
effect a transfer in accordance with Sec.  190.06 (e) and (f) of all 
open commodity contracts and equity held by the commodity broker for or 
on behalf of its customers and such other property as the Commission in 
its discretion may authorize, on or before the seventh calendar day 
after the filing date, and immediately cease doing business: Provided, 
however, That the commodity broker may trade for liquidation only, 
unless otherwise directed by the Commission, by any applicable self-
regulatory organization or by the court: And, Provided further, That if 
the commodity broker demonstrates to the Commission within such period 
that it was in compliance with the segregation and financial 
requirements of this chapter on the filing date, and the Commission 
determines, in its sole discretion, that such transfer or liquidation 
is neither appropriate nor in the public interest, the commodity broker 
may continue in business subject to applicable provisions of the 
Bankruptcy Code and of this chapter.
    (f) * * *
    (1) * * *
    (i) Dealer option contracts, if the dealer option grantor is not 
the debtor, which cannot be transferred on or before the seventh 
calendar day after the order for relief; and
    (ii) Specifically identifiable commodity contracts as defined in 
Sec.  190.01(kk)(2) for which an instruction prohibiting liquidation is 
noted prominently in the accounting records of the debtor and timely 
received under paragraph (b)(2) of this section. Notwithstanding the 
foregoing, an open commodity contract must be offset if: such contract 
is a futures contract or a Cleared Swaps contract which cannot be 
settled in cash and which would otherwise remain open either beyond the 
last day of trading (if applicable), or the first day on which notice 
of intent to deliver may be tendered with respect thereto, whichever 
occurs first; such contract is a long option on a physical commodity 
which cannot be settled in cash and would be automatically exercised, 
has value and would remain open beyond the last day for exercise; such 
contract is a short option on a physical commodity which cannot be 
settled in cash; or, as otherwise specified in these rules.
* * * * *
    (g) * * *
    (2) * * *
    (i) 100% of the maintenance margin requirements of the applicable 
designated contact market or swap execution facility, if any, with 
respect to the open commodity contracts in such account; or
* * * * *

0
6. In Sec.  190.03, revise paragraphs (a)(3), (b)(3), (b)(4), (b)(5), 
and (c) to read as follows:

Sec.  190.03  Operation of the debtor's estate subsequent to the 
primary liquidation date.

* * * * *
    (a) * * *
    (3) Margin calls. The trustee must promptly issue margin calls with 
respect to any account referred to under paragraph (a)(1) of this 
section in which the balance does not equal or exceed 100% of the 
maintenance margin requirements of the applicable designated contact 
market or swap execution facility, if any, with respect to the open 
commodity contracts in such account, or if there are no such 
maintenance margin requirements, 100% of the clearing organization's 
initial margin requirements applicable to the open commodity contracts 
in such account, or if there are no such maintenance margin 
requirements or clearing organization initial margin requirements, then 
50% of the customer initial margin applicable to the commodity 
contracts in such account: Provided, That no margin calls need be made 
to restore customer initial margin.
* * * * *
    (b) * * *
    (3) The trustee has received no customer instructions with respect 
to such contract by the sixth calendar day after entry of the order for 
relief;
    (4) The commodity contract has not been transferred in accordance 
with Sec.  190.08(d)(2) on or before the seventh calendar day after 
entry of the order for relief; or
    (5) The commodity contract would otherwise remain open (e.g., 
because it cannot be settled in cash) beyond the last day of trading in 
such contract (if applicable) or the first day on which notice of 
delivery may be tendered with respect to such contract, whichever 
occurs first.
    (c) Liquidation of specifically identifiable property other than 
open commodity contracts. All specifically identifiable property other 
than open commodity contracts which have not been liquidated prior to 
the primary liquidation date, and for which no customer instructions 
have been timely received must be liquidated, to the extent reasonably 
possible, no later than the sixth calendar day after final publication 
of the notice referred to in Sec.  190.02(b)(1). All other specifically 
identifiable property must be liquidated or returned, to the extent 
reasonably possible, no later than the seventh calendar day after final 
publication of such notice.

0
7. In Sec.  190.04, revise paragraph (d)(1) to read as follows:

Sec.  190.04  Operation of the debtor's estate--general.

* * * * *
    (d) Liquidation -- (1) Order of Liquidation. (i) In the Market. 
Liquidation of open commodity contracts held for a house account or 
customer account by or on behalf of a commodity broker which is a 
debtor shall be accomplished pursuant to the rules of a clearing 
organization, a designated contract market, or a swap execution 
facility, as applicable. Such rules shall ensure that the process for 
liquidating open commodity contracts, whether for the house account or 
the customer account, results in competitive pricing, to the extent 
feasible under market conditions at the time of liquidation. Such rules 
must be submitted to the Commission for approval, pursuant to section 
5c(c) of the Act, and be approved by the Commission. Alternatively, 
such rules must otherwise be submitted to and approved by the 
Commission (or its delegate pursuant to Sec.  190.10(d) of this part) 
prior to their application.
    (ii) Book entry. Notwithstanding paragraph (d)(1) of this section, 
in appropriate cases, upon application by

[[Page 6381]]

the trustee or the affected clearing organization, the Commission may 
permit open commodity contracts to be liquidated, or settlement on such 
contracts to be made, by book entry. Such book entry shall offset open 
commodity contracts, whether matched or not matched on the books of the 
commodity broker, using the settlement price for such commodity 
contracts as determined by the clearing organization. Such settlement 
price shall be determined by the rules of the clearing organization, 
which shall ensure that such settlement price is established in a 
competitive manner, to the extent feasible under market conditions at 
the time of liquidation. Such rules must be submitted to the Commission 
for approval pursuant to section 5c(c) of the Act, and be approved by 
the Commission. Alternatively, such rules must otherwise be approved by 
the Commission (or its delegate pursuant to Sec.  190.10(d) of this 
part) prior to their application.
* * * * *

0
8. In Sec.  190.05, revise paragraph (b) introductory text to read as 
follows:

Sec.  190.05  Making and taking delivery on commodity contracts.

* * * * *
    (b) Rules for deliveries on behalf of a customer of a debtor. 
Except in the case of a commodity contract which is settled in cash, 
each designated contract market, swap execution facility, or clearing 
organization shall adopt, maintain in effect and enforce rules which 
have been submitted in accordance with section 5c(c) of the Act for 
approval by the Commission, which:
* * * * *

0
9. In Sec.  190.06,
0
a. Remove paragraph (e)(1)(iv) and redesignate paragraph (e)(1)(v) as 
(e)(1)(iv);
0
b. Revise paragraphs (a), (e)(1)(iii), (e)(2), (f)(3)(i), (g)(2) and
0
c. Add paragraph (g)(1)(iii) to read as follows:

Sec.  190.06  Transfers.

    (a) Transfer rules. No clearing organization or other self-
regulatory organization may adopt, maintain in effect or enforce rules 
which:
    (1) Are inconsistent with the provisions of this part;
    (2) Interfere with the acceptance by its members of open commodity 
contracts and the equity margining or securing such contracts from 
futures commission merchants, or persons which are required to be 
registered as futures com-mission merchants, which are required to 
transfer accounts pursuant to Sec.  1.17(a)(4) of this chapter; or
    (3) Prevent the acceptance by its members of transfers of open 
commodity contracts and the equity margining or securing such contracts 
from futures commission merchants with respect to which a petition in 
bankruptcy has been filed, if such transfers have been approved by the 
Commission. Provided, however, that this paragraph shall not limit the 
exercise of any contractual right of a clearing organization or other 
registered entity to liquidate open commodity contracts.
* * * * *
    (e) * * *
    (1) * * *
    (iii) Dealer option accounts, if the debtor is the dealer option 
grantor with respect to such accounts; or
* * * * *
    (2) Amount of equity which may be transferred. In no case may 
money, securities or property be transferred in respect of any eligible 
account if the value of such money, securities or property would exceed 
the funded balance of such account based on available information as of 
the calendar day immediately preceding transfer less the value on the 
date of return or transfer of any property previously returned or 
transferred with respect thereto.
    (f) * * *
    (3) * * *
    (i) Of the customer estate. If all eligible customer accounts held 
by a debtor cannot be transferred under this section, a partial 
transfer may nonetheless be made. The Commission will not disapprove 
such a transfer for the sole reason that it was a partial transfer if 
it would prefer the transfer of accounts, the liquidation of which 
could adversely affect the market or the bankrupt estate. Any dealer 
option contract held by or for the account of a debtor which is a 
futures commission merchant from or for the account of a customer which 
has not previously been transferred, and is eligible for transfer, must 
be transferred on or before the seventh calendar day after entry of the 
order for relief.
* * * * *
    (g) * * *
    (1) * * *
    (iii) The transfer prior to the order for relief by a clearing 
organization of one or more accounts held for or on behalf of customers 
of the debtor, provided that (I) the money, securities, or other 
property accompanying such transfer did not exceed the funded balance 
of each account based on available information as of the close of 
business on the business day immediately preceding such transfer less 
the value on the date of return or transfer of any property previously 
returned or transferred thereto, and (II) the transfer is not 
disapproved by the Commission.
    (2) Post-relief transfers. On or after the entry of the order for 
relief, the following transfers to one or more transferees may not be 
avoided by the trustee:
    (i) The transfer of a customer account eligible to be transferred 
under paragraph (e) or (f) of this section made by the trustee of the 
commodity broker or by any self-regulatory organization of the 
commodity broker:
    (A) On or before the seventh calendar day after the entry of the 
order for relief; and
    (B) The Commission is notified in accordance with Sec.  
190.02(a)(2) prior to the transfer and does not disapprove the 
transfer; or
    (ii) The transfer of a customer account at the direction of the 
Commission on or before the seventh calendar day after the order for 
relief upon such terms and conditions as the Commission may deem 
appropriate and in the public interest.
* * * * *

0
10. In Sec.  190.07,
0
a. Redesignate paragraph (b)(2)(xiii) as paragraph (b)(2)(xiv);
0
b. Add a new paragraph (b)(2)(xiii); and
0
c. Revise paragraphs (b)(2)(viii), (b)(2)(ix), (b)(3)(v), (c)(1)(i), 
(e) introductory text, (e)(1) and (e)(4) to read as follows:

Sec.  190.07  Calculation of allowed net equity.

* * * * *
    (b) * * *
    (2) * * *
    (viii) Subject to paragraph (b)(2)(ix) of this section, the futures 
accounts, leverage accounts, options accounts, foreign futures 
accounts, delivery accounts (as defined in Sec.  190.05(a)(2)), and 
cleared swaps accounts of the same person shall not be deemed to be 
held in separate capacities: Provided, however, that such accounts may 
be aggregated only in accordance with paragraph (b)(3) of this section.
    (ix) An omnibus customer account of a futures commission merchant 
maintained with a debtor shall be deemed to be held in a separate 
capacity from the house account and any other omnibus customer account 
of such futures commission merchant.
* * * * *
    (xiii) With respect to the cleared swaps account class, each 
individual customer account within each omnibus customer account 
referred to in

[[Page 6382]]

paragraph (ix) of this section shall be deemed to be held in a separate 
capacity from each other such individual customer account; subject to 
the provisions of paragraphs (b)(2)(i) through (xii) of this paragraph 
(b)(2).
* * * * *
    (3) * * *
    (v) The rules pertaining to separate capacities and permitted 
setoffs contained in this section must be applied subsequent to the 
entry of an order for relief; prior to the filing date, the provisions 
of Sec.  1.22 of this chapter and of sections 4d(a)(2) and 4d(f) of the 
Act (and, in each case, the regulations promulgated thereunder) shall 
govern what setoffs are permitted.
* * * * *
    (c) * * *
    (1) * * *
    (i) Multiplying the ratio of the amount of the net equity claim 
less the amounts referred to in paragraph (c)(1)(ii) of this section of 
such customer for any account class bears to the sum of the net equity 
claims less the amounts referred to in paragraph (c)(1)(ii) of this 
section of all customers for accounts of that class by the sum of:
    (A) The value of the money, securities or property segregated on 
behalf of all accounts of the same class less the amounts referred to 
in paragraph (c)(1)(ii) of this section;
    (B) The value of any money, securities or property which must be 
allocated under Sec.  190.08 to customer accounts of the same class; 
and
    (C) The amount of any add-back required under paragraph (b)(4) of 
this section; and
* * * * *
    (e) Valuation. In computing net equity, commodity contracts and 
other property held by or for a commodity broker must be valued as 
provided in this paragraph (e): Provided, however, that for all 
commodity contracts other than those listed in paragraph (e)(1) of this 
section, if identical commodity contracts, securities, or other 
property are liquidated on the same date, but cannot be liquidated at 
the same price, the trustee may use the weighted average of the 
liquidation prices in computing the net equity of each customer holding 
such contracts, securities, or property.
    (1) Commodity Contracts. Unless otherwise specified in this 
paragraph (e), the value of an open commodity contract shall be equal 
to the settlement price as calculated by the clearing organization 
pursuant to its rules: Provided, that such rules must either be 
submitted to the Commission, pursuant to section 5c(c)(4) of the Act 
and be approved by the Commission, or such rules must be otherwise 
approved by the Commission (or its delegate pursuant to Sec.  190.10(d) 
of this part) prior to their application; Provided, further, that if 
such contract is transferred its value shall be determined as of the 
end of the settlement cycle in which it is transferred; and Provided, 
finally, that if such contract is liquidated, its value shall be equal 
to the net proceeds of liquidation.
* * * * *
    (4) Securities. The value of a listed security shall be equal to 
the closing price for such security on the exchange upon which it is 
traded. The value of all securities not traded on an exchange shall be 
equal in the case of a long position, to the average of the bid prices 
for long positions, and in the case of a short position, to the average 
of the asking prices for the short positions. If liquidated prior to 
the primary liquidation date, the value of such security shall be equal 
to the net proceeds of its liquidation. Securities which are not 
publicly traded shall be valued by the trustee, subject to approval of 
the court, using such professional assistance as the trustee deems 
necessary in its sole discretion under the circumstances.
* * * * *

0
11. In Sec.  190.09, revise paragraph (b) to read as follows:

Sec.  190.09  Member property.

* * * * *
    (b) Scope of Member Property. Member property shall include all 
money, securities and property received, acquired, or held by a 
clearing organization to margin, guarantee or secure, on behalf of a 
clearing member, the proprietary account, as defined in Sec.  1.3 of 
this chapter, any account not belonging to a foreign futures or foreign 
options customer pursuant to the proviso in Sec.  30.1(c), and any 
Cleared Swaps Proprietary Account, as defined in Sec.  22.1: Provided, 
however, that any guaranty deposit or similar payment or deposit made 
by such member and any capital stock, or membership of such member in 
the clearing organization shall also be included in member property 
after payment in full of that portion of the net equity claim of the 
member based on its customer account and of any obligations due to the 
clearing organization which may be paid therefrom in accordance with 
the by-laws or rules of the clearing organization, including 
obligations due from the clearing organization to customers or other 
members.

0
12. In Sec.  190.10, revise paragraph (a) to read as follows:

Sec.  190.10  General.

    (a) Notices. Unless instructed otherwise by the Commission, all 
mandatory or discretionary notices to be given to the Commission under 
this part shall be directed by electronic mail to 
bankruptcyfilings@cftc.gov, with a copy sent by overnight mail to 
Director, Division of Clearing and Risk, Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, 
DC 20581. For purposes of this part, notice to the Commission shall be 
deemed to be given only upon actual receipt.
* * * * *

0
13. Revise appendix A to part 190 to read as follows:

Appendix A to Part 190--Bankruptcy Forms

Bankruptcy Appendix Form 1--Operation of the Debtor's Estate--Schedule 
of Trustee's Duties

    For the convenience of a prospective trustee, the Commission has 
constructed an approximate schedule of important duties which the 
trustee should perform during the early stages of a commodity broker 
bankruptcy proceeding. The schedule includes duties required by this 
part, subchapter IV of chapter 7 of the Bankruptcy Code as well as 
certain practical suggestions, but it is only intended to highlight 
the more significant duties and is not an exhaustive description of 
all the trustee's responsibilities. It also assumes that the 
commodity broker being liquidated is an FCM. Moreover, it is 
important to note that the operating facts in a particular 
bankruptcy proceeding may vary the schedule or obviate the need for 
any of the particular activities.

All Cases

Date of Order for Relief

    1. Assure that the commodity broker has notified the Commission, 
its designated self-regulatory organization (``DSRO'') (if any), and 
all applicable clearing organizations of which it is a member that a 
petition or order for relief has been filed (Sec.  190.02(a)(1)).
    2. Attempt to effectuate the transfer of entire customer 
accounts wherein the commodity contracts are transferred together 
with the money, securities, or other property margining, 
guaranteeing, or securing the commodity contracts (hereinafter the 
``transfer'').
    3. Attempt to estimate shortfall of customer funds segregated 
pursuant to sections 4d(a) and (b) of the Act; customer funds 
segregated pursuant to section 4f of the Act; and the foreign 
futures or foreign options secured amount, as defined in Sec.  1.3 
of this chapter.
    a. The trustee should:
    i. Contact the DSRO (if any) and the clearing organizations and 
attempt to effectuate a transfer with such shortfall under section 
764(b) of the Code; notify the Commission for assistance (Sec.  
190.02(a)(2) and

[[Page 6383]]

(e)(1), Sec.  190.06(b)(2), (e), (f)(3), (g)(2), and (h)) but 
recognize that if there is a substantial shortfall, a transfer of 
such funds or amounts is highly unlikely.
    ii. If a transfer cannot be effectuated, liquidate all customer 
commodity contracts that are margined, guaranteed, or secured by 
funds or amounts with such shortfall, except dealer options and 
specifically identifiable commodity contracts which are bona fide 
hedging positions (as defined in Sec.  190.01(kk)(2)) with 
instructions not to be liquidated. (See Sec. Sec.  190.02(f) and 
190.06(d)(1)). (In this connection, depending upon the size of the 
debtor and other complications of liquidation, the trustee should be 
aware of special liquidation rules, and in particular the 
availability under certain circumstances of book-entry liquidation 
(Sec.  190.04(d)(1)(ii)).
    b. If there is a small shortfall in any of the funds or amounts 
listed in paragraph 2, negotiate with the clearing organization to 
effect a transfer; notify the Commission (Sec. Sec.  190.02(a)(2) 
and (e)(1), 190.06(b)(2), (e), (f)(3), (g)(2), and (h)).
    4. Whether or not a transfer has occurred, liquidate or offset 
open commodity contracts not eligible for transfer (e.g., deficit 
accounts) (Sec.  190.06(e)(1)).
    5. Offset all futures contracts and Cleared Swaps contracts 
which cannot be settled in cash and which would otherwise remain 
open either beyond the last day of trading (if applicable) or the 
first day on which notice of intent to deliver may be tendered with 
respect thereto, whichever occurs first; offset all long options on 
a physical commodity which cannot be settled in cash, have value and 
would be automatically exercised or would remain open beyond the 
last day of exercise; and offset all short options on a physical 
commodity which cannot be settled in cash (Sec.  190.02(f)(1)).
    6. Compute estimated funded balance for each customer commodity 
contract account containing open commodity contracts (Sec.  
190.04(b)) (daily thereafter).
    7. Make margin calls if necessary (Sec.  190.02(g)(1)) (daily 
thereafter).
    8. Liquidate or offset any open commodity contact account for 
which a customer has failed to meet a margin call (Sec.  
190.02(f)(1)) (daily thereafter).
    9. Commence liquidation or offset of specifically identifiable 
property described in Sec.  190.02(f)(2)(i) (property which has lost 
10% or more of value) (and as appropriate thereafter).
    10. Commence liquidation or offset of property described in 
Sec.  190.02(f)(3) (``all other property'').
    11. Be aware of any contracts in delivery position and rules 
pertaining to such contracts (Sec.  190.05).

First Calendar Day After the Entry of an Order for Relief

    1. If a transfer occurred on the date of entry of the order for 
relief:
    a. Liquidate any remaining open commodity contracts, except any 
dealer option or specifically identifiable commodity contract 
[hedge] (See Sec.  190.01(kk)(2) and Sec.  190.02(f)(1)), and not 
otherwise transferred in the transfer.
    b. Primary liquidation date for transferred or liquidated 
commodity contracts (Sec.  190.01(ff)).
    2. If no transfer has yet been effected, continue attempt to 
negotiate transfer of open commodity contracts and dealer options 
(Sec.  190.02(c)(1)).
    3. Provide the clearing organization or Collecting Futures 
Commission Merchant (as such term is defined in Sec.  22.1) with 
assurances to prevent liquidation of open commodity contract 
accounts available for transfer at the customer's instruction or 
liquidate all open commodity contracts except those available for 
transfer at a customer's instruction and dealer options.

Second Calendar Day After the Entry of an Order for Relief

    If no transfer has yet been effected, request directly customer 
instructions regarding transfer of open commodity contracts and 
publish notice for customer instructions regarding the return of 
specifically identifiable property other than commodity contracts 
(Sec. Sec.  190.02(b) (1) and (2)).

Third Calendar Day After the Entry of an Order for Relief

    1. Second publication date for customer instructions (Sec.  
190.02(b)(1)) (publication is to be made on two consecutive days, 
whether or not the second day is a business day).
    2. Last day on which to notify the Commission with regard to 
whether a transfer in accordance with section 764(b) of the 
Bankruptcy Code will take place (Sec.  190.02(a)(2) and Sec.  
190.06(e)).

Sixth Calendar Day After the Entry of an Order for Relief

    Last day for customers to instruct the trustee concerning open 
commodity contracts (Sec.  190.02(b)(2)).

Seventh Calendar Day After the Entry of an Order for Relief

    1. If not previously concluded, conclude transfers under Sec.  
190.06(e) and (f). (See Sec.  190.02(e)(1) and Sec.  
190.06(g)(2)(i)(A)).
    2. Transfer all open dealer option contracts which have not 
previously been transferred (Sec.  190.06(f)(3)(i)).
    3. Primary liquidation date (Sec.  190.01(ff)) (assuming no 
transfers and liquidation effected for all open commodity contracts 
for which no customer instructions were received by the sixth 
calendar day).
    4. Establishment of transfer accounts (Sec.  190.03(a)(1)) 
(assuming this is the primary liquidation date); mark such accounts 
to market (Sec.  190.03(a)(2)) (daily thereafter until closed).
    5. Liquidate or offset all remaining open commodity contracts 
(Sec.  190.02(b)(2)).
    6. If not done previously, notify customers of bankruptcy and 
request customer proof of claim (Sec.  190.02(b)(4)).

Eighth Calendar Day After the Entry of an Order for Relief

    Customer instructions due to trustee concerning specifically 
identifiable property (Sec.  190.02(b)(1)).

Ninth Calendar Day After the Entry of an Order for Relief

    Commence liquidation of specifically identifiable property for 
which no arrangements for return have been made in accordance with 
customer instructions (Sec. Sec.  190.02(b)(1), 190.03(c)).

Tenth Calendar Day After the Entry of an Order for Relief

    Complete liquidation to the extent reasonably possible of 
specifically identifiable property which has yet to be liquidated 
and for which no customer instructions have been received (Sec.  
190.03(c)).

Separate Procedures for Involuntary Petitions for Bankruptcy

    1. Within one calendar day after notice of receipt of filing of 
the petition in bankruptcy, the trustee should assure that proper 
notification has been given to the Commission, the commodity 
broker's designated self-regulatory organization (Sec.  
190.02(a)(1)) (if any), and all applicable clearing organizations; 
margin calls should be issued if necessary (Sec.  190.02(g)(2)).
    2. On or before the seventh calendar day after the filing of a 
petition in bankruptcy, the trustee should use his best efforts to 
effect a transfer in accordance with Sec.  190.06(e) and (f) of all 
open commodity contracts and equity held for or on behalf of 
customers of the commodity broker (Sec.  190.02(e)(2)) unless the 
debtor can provide certain assurances to the trustee.

Bankruptcy Appendix Form 2-- Request for Instructions Concerning Non-
Cash Property Deposited With (Commodity Broker)

    Please take notice: On (date), a petition in bankruptcy was 
filed by [against] (commodity broker). Those customers of (commodity 
broker) who deposited certain kinds of non-cash property (see below) 
with (commodity broker) may instruct the trustee of the estate to 
return their property to them as provided below.
    As no customer may obtain more than his or her proportionate 
share of the property available to satisfy customer claims, if you 
instruct the trustee to return your property to you, you will be 
required to pay the estate, as a condition to the return of your 
property, an amount determined by the trustee. If your property is 
not margining an open contract, this amount will approximate the 
difference between the market value of your property and your pro 
rata share of the estate, as estimated by the trustee. If your 
property is margining an open commodity contract, this amount will 
be approximately the full fair market value of the property on the 
date of its return.

Kinds of Property to Which This Notice Applies

    1. Any security deposited as margin which, as of (date petition 
was filed), was securing an open commodity contract and is:

--registered in your name,
--not transferrable by delivery, and
--not a short-term obligation.
    2. Any fully-paid, non-exempt security held for your account in 
which there were no open commodity contracts as of (date

[[Page 6384]]

petition was filed). (Rather than the return, at this time, of the 
specific securities you deposited with (commodity broker), you may 
instead request now, or at any later time, that the trustee purchase 
``like-kind'' securities of a fair market value which does not 
exceed your proportionate share of the estate).
    3. Any warehouse receipt, bill of lading or other document of 
title deposited as margin which, as of (date petition was filed), 
was securing an open commodity contract and--can be identified in 
(commodity broker)'s records as being held for your account, and--is 
neither in bearer form nor otherwise transferable by delivery.
    4. Any warehouse receipt bill of lading or other document of 
title, or any commodity received, acquired or held by (commodity 
broker) to make or take delivery or exercise from or for your 
account and which--can be identified in (commodity broker)'s records 
as received from or for your account as held specifically for the 
purpose of delivery or exercise.
    5. Any cash or other property deposited to make or take delivery 
on a commodity contract may be eligible to be returned. The trustee 
should be contacted directly for further information if you have 
deposited such property with (commodity broker) and desire its 
return.
    Instructions must be received by (the 5th calendar day after 2d 
publication date) or the trustee will liquidate your property. (If 
you own such property but fail to provide the trustee with 
instructions, you will still have a claim against (commodity broker) 
but you will not be able to have your specific property returned to 
you).

    Note:  Prior to receipt of your instructions, circumstances may 
require the trustee to liquidate your property, or transfer your 
property to another broker if it is margining open commodity 
contracts. If your property is transferred and your instructions 
were received within the required time, your instructions will be 
forwarded to the new broker.

    Instructions should be directed to: (Trustee's name, address, 
and/or telephone).
    Even if you request the return of your property, you must also 
pay the trustee the amount he specifies and provide the trustee with 
proof of your claim before (the 7th calendar day after 2d 
publication date) or your property will be liquidated. (Upon receipt 
of customer instructions to return property, the trustee will mail 
the sender a form which describes the information he must provide to 
substantiate his claim).

    Note: The trustee is required to liquidate your property despite 
the timely receipt of your instructions, money, and proof of claim 
if, for any reason, your property cannot be returned by (close of 
business on the 7th calendar day after 2d publication date).

Bankruptcy Appendix Form 3--Request for Instructions Concerning 
Transfer of Your Hedge Contracts Held by (Commodity Broker)

United States Bankruptcy Court ----District of ----In re ----, 
Debtor, No. ----.
Please take notice: On (date), a petition in bankruptcy was filed by 
[against] (commodity broker).

    You indicated when your hedge account was opened that the 
commodity contracts in your hedge account should not be liquidated 
automatically in the event of the bankruptcy of (commodity broker), 
and that you wished to provide instructions at this time concerning 
their disposition.
    Instructions to transfer your commodity contracts and a cash 
deposit (as described below) must be received by the trustee by (the 
6th calendar day after entry of order for relief) or your commodity 
contracts will be liquidated.
    If you request the transfer of your commodity contracts, prior 
to their transfer, you must pay the trustee in cash an amount 
determined by the trustee which will approximate the difference 
between the value of the equity margining your commodity contracts 
and your pro rata share of the estate plus an amount constituting 
security for the nonrecovery of any overpayments. In your 
instructions, you should specify the broker to which you wish your 
commodity contracts transferred.
    Be further advised that prior to receipt of your instructions, 
circumstances may, in any event, require the trustee to liquidate or 
transfer your commodity contracts. If your commodity contracts are 
so transferred and your instructions are received, your instructions 
will be forwarded to the new broker.
    Note also that the trustee is required to liquidate your 
positions despite the timely receipt of your instructions and money 
if, for any reason, you have not made arrangements to transfer and/
or your contracts are not transferred by (7 calendar days after 
entry of order for relief).
    Instructions should be sent to: (Trustee's or designee's name, 
address, and/or telephone). [Instructions may also be provided by 
phone].

Bankruptcy Appendix Form 4--Proof of Claim

[Note to trustee: As indicated in Sec.  190.02(d), this form is 
provided as a guide to the trustee and should be modified as 
necessary depending upon the information which the trustee needs at 
the time a proof of claim is requested and the time provided for a 
response.]

Proof of Claim

United States Bankruptcy Court ----District of ----In re ----, 
Debtor, No. ----.
Return this form by ---- or your claim will be barred (unless 
extended, for good cause only).

    I. [If claimant is an individual claiming for himself] The 
undersigned, who is the claimant herein, resides at ----.
    [If claimant is a partnership claiming through a member] The 
undersigned, who resides at ----, is a member of ----, a 
partnership, composed of the undersigned and ----, of ----, and 
doing business at ----, and is duly authorized to make this proof of 
claim on behalf of the partnership.
    [If claimant is a corporation claiming though a duly authorized 
officer] The undersigned, who resides at ---- is the ---- of ----, a 
corporation organized under the laws of ---- and doing business at 
----, and is duly authorized to make this proof of claim on behalf 
of the corporation.
    [If claim is made by agent] The undersigned, who resides at ----
, is the agent of ----, and is duly authorized to make this proof of 
claim on behalf of the claimant.
    II. The debtor was, at the time of the filing of the petition 
initiating this case, and still is, indebted to this claimant for 
the total sum of $ ----.
    III. List EACH account on behalf of which a claim is being made 
by number and name of account holder[s], and for EACH account, 
specify the following information:
    a. Whether the account is a futures, foreign futures, leverage, 
option (if an option account, specify whether exchange-traded, 
dealer or cleared swap), ``delivery'' account, or a cleared swaps 
account. A ``delivery'' account is one which contains only documents 
of title, commodities, cash, or other property identified to the 
claimant and deposited for the purposes of making or taking delivery 
on a commodity underlying a commodity contract or for payment of the 
strike price upon exercise of an option.
    b. The capacity in which the account is held, as follows (and if 
more than one is applicable, so state):
    1. [The account is held in the name of the undersigned in his 
individual capacity];
    2. [The account is held by the undersigned as guardian, 
custodian, or conservator for the benefit of a ward or a minor under 
the Uniform Gift to Minors Act];
    3. [The account is held by the undersigned as executor or 
administrator of an estate];
    4. [The account is held by the undersigned as trustee for the 
trust beneficiary];
    5. [The account is held by the undersigned in the name of a 
corporation, partnership, or unincorporated association];
    6. [The account is held as an omnibus customer account of the 
undersigned futures commission merchant];
    7. [The account is held by the undersigned as part owner of a 
joint account];
    8. [The account is held by the undersigned in the name of a plan 
which, on the date the petition in bankruptcy was filed, had in 
effect a registration statement in accordance with the requirements 
of Sec.  1031 of the Employee Retirement Income Security Act of 1974 
and the regulations thereunder]; or
    9. [The account is held by the undersigned as agent or nominee 
for a principal or beneficial owner (and not described above in 
items 1-8 of this II, b)].
    10. [The account is held in any other capacity not described 
above in items 1-9 of this II, b. Specify the capacity].
    c. The equity, as of the date the petition in bankruptcy was 
filed, based on the commodity contracts in the account.
    d. Whether the person[s] (including a general partnership, 
limited partnership, corporation, or other type of association) on 
whose behalf the account is held is one of the following persons OR 
whether one of the following persons, alone or jointly, owns 10% or 
more of the account:
    1. [If the debtor is an individual--
    A. Such individual;
    B. Relative (as defined below in item 8 of this III.d) of the 
debtor or of a general partner of the debtor;

[[Page 6385]]

    C. Partnership in which the debtor is a general partner;
    D. General partner of the debtor; or
    E. Corporation of which the debtor is a director, officer, or 
person in control];
    2. [If the debtor is a partnership--
    A. Such partnership;
    B. General partner in the debtor;
    C. Relative (as defined in item 8 of this III.d) of a general 
partner in, general partner of, or person in control of the debtor;
    D. Partnership in which the debtor is a general partner;
    E. General partner of the debtor; or
    F. Person in control of the debtor];
    3. [If the debtor is a limited partnership--
    A. Such limited partnership;
    B. A limited or special partner in such partnership whose duties 
include:
    i. The management of the partnership business or any part 
thereof;
    ii. The handling of the trades or customer funds of customers of 
such partnership;
    iii. The keeping of records pertaining to the trades or customer 
funds of customers of such partnership; or
    iv. The signing or co-signing of checks or drafts on behalf of 
such partnership];
    4. [If the debtor is a corporation or association (except a 
debtor which is a futures commission merchant and is also a 
cooperative association of producers)--
    A. Such corporation or association;
    B. Director of the debtor;
    C. Officer of the debtor;
    D. Person in control of the debtor;
    E. Partnership in which the debtor is a general partner;
    F. General partner of the debtor;
    G. Relative (as defined in item 8 of this III.d) of a general 
partner, director, officer, or person in control of the debtor;
    H. An officer, director or owner of ten percent or more of the 
capital stock of such organization];
    5. [If the debtor is a futures commission merchant which is a 
cooperative association of producers--
    Shareholder or member of the debtor which is an officer, 
director or manager];
    6. [An employee of such individual, partnership, limited 
partnership, corporation or association whose duties include:
    A. The management of the business of such individual, 
partnership, limited partnership, corporation or association or any 
part thereof;
    B. The handling of the trades or customer funds of customers of 
such individual, partnership, limited partnership, corporation or 
association;
    C. The keeping of records pertaining to the trades or funds of 
customers of such individual, partnership, limited partnership, 
corporation or association; or
    D. The signing or co-signing of checks or drafts on behalf of 
such individual, partnership, limited partnership, corporation or 
association];
    7. [Managing agent of the debtor];
    8. [A spouse or minor dependent living in the same household of 
ANY OF THE FOREGOING PERSONS, or any other relative, regardless of 
residency, (unless previously described in items 1-B, 2-C, or 4-G of 
this III.d) defined as an individual related by affinity or 
consanguinity within the third degree as determined by the common 
law, or individual in a step or adoptive relationship within such 
degree];
    9. [``Affiliate'' of the debtor, defined as:
    A. Entity that directly or indirectly owns, controls, or holds 
with power to vote, 20 percent or more of the out-standing voting 
securities of the debtor, other than an entity that holds such 
securities--
    i. In a fiduciary or agency capacity without sole discretionary 
power to vote such securities; or
    ii. Solely to secure a debt, if such entity has not in fact 
exercised such power to vote;
    B. Corporation 20 percent or more of whose outstanding voting 
securities are directly or indirectly owned, con-trolled, or held 
with power to vote, by the debtor, or by an entity that directly or 
indirectly owns, controls, or holds with power to vote, 20 percent 
or more of the outstanding voting securities of the debtor, other 
than an entity that holds such securities--
    i. In a fiduciary or agency capacity without sole discretionary 
power to vote such securities; or
    ii. Solely to secure a debt, if such entity has not in fact 
exercised such power to vote;
    C. Person whose business is operated under a lease or operating 
agreement by the debtor, or person substantially all of whose 
property is operated under an operating agreement with the debtor;
    D. Entity that otherwise, directly or indirectly, is controlled 
by or is under common control with the debtor];
    E. Entity that operates the business or all or substantially all 
of the property of the debtor under a lease or operating agreement; 
or
    F. Entity that otherwise, directly or indirectly, controls the 
debtor; or
    10. [Any of the persons listed in items 1-7 above of this III.d 
if such person is associated with an affiliate (see item 9 above) of 
the debtor as if the affiliate were the debtor].
    e. Whether the account is a discretionary account. (If it is, 
the name in which the ``attorney in fact'' is held).
    f. If the account is a joint account, the amount of the 
claimant's percentage interest in the account. (Also specify whether 
participants in a joint account are claiming separately or jointly).
    g. Whether the claimant's positions in security futures products 
are held in a futures account or securities account, as those terms 
are defined in Sec.  1.3 of this chapter.
    IV. Describe all claims against the debtor not based upon a 
commodity contract account of the claimant (e.g., if landlord, for 
rent; if customer, for misrepresentation or fraud).
    V. Describe all claims of the DEBTOR against the CLAIMANT not 
already included in the equity of a commodity contract account[s] of 
the claimant (see III.c above).
    VI. Describe any deposits of money, securities or other property 
held by or for the debtor from or for the claimant, and indicate if 
any of this property was included in your answer to III.c above.
    VII. Of the money, securities, or other property described in VI 
above, identify any which consists of the following:
    a. With respect to property received, acquired, or held by or 
for the account of the debtor from or for the account of the 
claimant to margin, guarantee or secure an open commodity contract, 
the following:
    1. Any security which as of the filing date is:
    A. Held for the claimant's account;
    B. Registered in the claimant's name;
    C. Not transferable by delivery; and
    D. Not a short term obligation; or
    2. Any warehouse receipt, bill of lading or other document of 
title which as of the filing date:
    A. Can be identified on the books and records of the debtor as 
held for the account of the claimant; and
    B. Is not in bearer form and is not otherwise transferable by 
delivery.
    b. With respect to open commodity contracts, and except as 
otherwise provided below in item g of this VII, any such contract 
which:
    1. As of the date the petition in bankruptcy was filed, is 
identified on the books and records of the debtor as held for the 
account of the claimant;
    2. Is a bona fide hedging position or transaction as defined in 
Rule 1.3 of the Commodity Futures Trading Commission (``CFTC'') or 
is a commodity option transaction which has been determined by a 
registered entity to be economically appropriate to the reduction of 
risks in the conduct and management of a commercial enterprise 
pursuant to rules which have been approved by the CFTC pursuant to 
section 5c(c) of the Commodity Exchange Act;
    3. Is in an account designated in the accounting records of the 
debtor as a hedging account.
    c. With respect to warehouse receipts, bills of lading or other 
documents of title, or physical commodities received, acquired, or 
held by or for the account of the debtor for the purpose of making 
or taking delivery or exercise from or for the claimant's account, 
any such document of title or commodity which as of the filing date 
can be identified on the books and records of the debtor as received 
from or for the account of the claimant specifically for the purpose 
of delivery or exercise.
    d. Any cash or other property deposited prior to bankruptcy to 
pay for the taking of physical delivery on a long commodity contract 
or for payment of the strike price upon exercise of a short put or a 
long call option contract on a physical commodity, which cannot be 
settled in cash, in excess of the amount necessary to margin such 
commodity contract prior to the notice date or exercise date which 
cash or other property is identified on the books and records of the 
debtor as received from or for the account of the claimant within 
three or less days of the notice date or three or less days of the 
exercise date specifically for the purpose of payment of the notice 
price upon taking delivery or the strike price upon exercise.
    e. The cash price tendered for any property deposited prior to 
bankruptcy to make physical delivery on a short commodity contract 
or for exercise of a long put or a short call option contract on a 
physical commodity, which cannot be settled in cash,

[[Page 6386]]

to the extent it exceeds the amount necessary to margin such 
contract prior to the notice exercise date which property is 
identified on the books and records of the debtor as received from 
or for the account of the claimant within three or less days of the 
notice date or of the exercise date specifically for the purpose of 
a delivery or exercise.
    f. Fully paid, non-exempt securities identified on the books and 
records of the debtor as held by the debtor for or on behalf of the 
commodity contract account of the claimant for which, according to 
such books and records as of the filing date, no open commodity 
contracts were held in the same capacity.
    g. Open commodity contracts transferred to another futures 
commission merchant by the trustee.
    VIII. Specify whether the claimant wishes to receive payment in 
kind, to the extent possible, for any claim for securities.
    IX. Attach copies of any documents which support the information 
provided in this proof of claim, including but not limited to 
customer confirmations, account statements, and statements of 
purchase or sale.
    This proof of claim must be filed with the trustee no later than 
----, or your claim will be barred unless an extension has been 
granted, available only for good cause.

Return this form to:
(Trustee's name (or designee's) and address)
-----------------------------------------------------------------------
Dated:-----------------------------------------------------------------
(Signed)---------------------------------------------------------------

Penalty for Presenting Fraudulent Claim. Fine of not more than 
$5,000 or imprisonment for not more than five years or both--Title 
18, U.S.C. 152.

(Approved by the Office of Management and Budget under control 
number 3038-0021)

0
14. Revise appendix B to part 190 to read as follows:

Appendix B to Part 190--Special Bankruptcy Distributions

Framework 1--Special Distribution of Customer Funds for Futures 
Contracts When FCM Participated in Cross-Margining

    The Commission has established the following distributional 
convention with respect to ``customer funds'' (as Sec.  1.3 of this 
chapter defines such term) for futures contracts held by a futures 
commission merchant (FCM) that participated in a cross-margining 
(XM) program which shall apply if participating market professionals 
sign an agreement that makes reference to this distributional rule 
and the form of such agreement has been approved by the Commission 
by rule, regulation or order:
    All customer funds for futures contracts held in respect of XM 
accounts, regardless of the product that customers holding such 
accounts are trading, are required by Commission order to be 
segregated separately from all other customer segregated funds. For 
purposes of this distributional rule, XM accounts will be deemed to 
be commodity interest accounts and securities held in XM accounts 
will be deemed to be received by the FCM to margin, guarantee or 
secure commodity interest contracts. The maintenance of property in 
an XM account will result in subordination of the claim for such 
property to certain non-XM customer claims and thereby will operate 
to cause such XM claim not to be treated as a customer claim for 
purposes of the Securities Investors Protection Act and the XM 
securities to be excluded from the securities estate. This creates 
subclasses of futures customer accounts, an XM account and a non-XM 
account (a person could hold each type of account), and results in 
two pools of segregated funds belonging to futures customers: An XM 
pool and a non-XM pool. In the event that there is a shortfall in 
the non-XM pool of customer class segregated funds and there is no 
shortfall in the XM pool of customer segregated funds, all futures 
customer net equity claims, whether or not they arise out of the XM 
subclass of accounts, will be combined and will be paid pro rata out 
of the total pool of available XM and non-XM customer funds for 
futures contracts. In the event that there is a shortfall in the XM 
pool of customer segregated funds and there is no shortfall in the 
non-XM pool of customer segregated funds, then futures customer net 
equity claims arising from the XM subclass of accounts shall be 
satisfied first from the XM pool of customer segregated funds, and 
futures customer net equity claims arising from the non-XM subclass 
of accounts shall be satisfied first from the non-XM customer 
segregated funds. Furthermore, in the event that there is a 
shortfall in both the non-XM and XM pools of customer segregated 
funds: (1) If the non-XM shortfall as a percentage of the 
segregation requirement in the non-XM pool is greater than or equal 
to the XM shortfall as a percentage of the segregation requirement 
in the XM pool, all futures customer net equity claims will be paid 
pro rata; and (2) if the XM shortfall as a percentage of the 
segregation requirement in the XM pool is greater than the non-XM 
shortfall as a percentage of the segregation requirement of the non-
XM pool, non-XM futures customer net equity claims will be paid pro 
rata out of the available non-XM segregated funds, and XM futures 
customer net equity claims will be paid pro rata out of the 
available XM segregated funds. In this way, non-XM customers will 
never be adversely affected by an XM shortfall.
    The following examples illustrate the operation of this 
convention. The examples assume that the FCM has two customers, one 
with exclusively XM accounts and one with exclusively non-XM 
accounts. However, the examples would apply equally if there were 
only one customer, with both an XM account and a non-XM account.
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    Issued in Washington, DC on January 11, 2012, by the Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Protection of Cleared Swaps Customer Contracts and 
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy 
Provisions--Commission Voting Summary and Statements of Commissioners

    Note: The following appendices will not appear in the Code of 
Federal Regulations

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton, 
O'Malia and Wetjen voted in the affirmative; Commissioner Sommers 
voted in the negative

Appendix 2--Statement of Chairman Gary Gensler

    I support the final rules on segregation of customer funds for 
cleared swaps. These rules are an important step forward in 
protecting customers and reducing the risk of swaps trading. The 
rules carry out the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) mandate that futures commission 
merchants (FCMs) and derivatives clearing organizations (DCOs) 
segregate customer collateral supporting cleared swaps. FCMs and 
DCOs must hold customer collateral in a separate account from that 
belonging to the FCM or DCO. It prohibits clearing organizations 
from using the collateral of non-defaulting, innocent customers to 
protect themselves and their clearing members. For the first time, 
customer money must be protected individually all the way to the 
clearinghouse.
    We received a tremendous amount of public input on this rule, 
including through two roundtables, as well as through comments on an 
advanced notice of proposed rulemaking and a proposal. This rule 
builds on customer protections included in the clearinghouse core 
principles rule we finalized in October requiring DCOs to collect 
initial margin on a gross basis for their clearing members' customer 
accounts.

Appendix 3--Statement of Commissioner Scott D. O'Malia

    Today, the Commodity Futures Trading Commission (the 
``Commission'') is voting to finalize a rulemaking on protection of 
cleared swaps customer collateral.\307\ Whereas I support this 
rulemaking, I believe that it is important to detail its 
limitations, so that we do not offer market participants a 
misleading sense of comfort in light of the collapse of MF Global, 
Inc. (``MF Global''). As I will explain further, the Commission has 
much more work to do to increase confidence in the customer 
protections that our regulations offer.
---------------------------------------------------------------------------

    \307\ Protection of Cleared Swaps Customer Contracts and 
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy 
Provisions (to be codified at 17 CFR parts 22 and 190) (referenced 
herein as the ``rulemaking''), available at: http://www.cftc.gov/PressRoom/Events/opaevent_cftcdoddfrank011112.
---------------------------------------------------------------------------

    This rulemaking does not address MF Global.
    First, this rulemaking does not address MF Global. The 
rulemaking is entitled, in part, Protection of Cleared Swaps 
Customer Contracts and Collateral. Therefore, it benefits cleared 
swaps customers, and not futures customers (who are bearing the 
brunt of MF Global). This rulemaking would not have prevented a 
shortfall in the customer funds of the ranchers and farmers that 
transact daily in the futures market. Nor would it have expedited 
the transfer of positions and collateral belonging to such customers 
in the event of a collapse similar to that of MF Global.
    This rulemaking may expose swaps customers to more risk.
    Second, this rulemaking only addresses one of three categories 
of risk that an intermediary--like MF Global--can pose to its 
customers. The three categories of risk are (i) ``fellow-customer'' 
risk, (ii) operational risk, and (iii) investment risk. By its own 
admission, this rulemaking only protects against ``fellow-customer'' 
risk. It does not protect against operational risk--namely, the risk 
that an intermediary improperly segregates cleared swaps customer 
collateral.\308\ Moreover, it does not protect against investment 
risk--namely, the risk that an intermediary experiences losses on 
its investment of cleared swaps customer collateral, which it cannot 
cover using its capital.\309\ To be plain, I support limiting 
intermediaries from investing customer collateral in risky 
instruments--regardless of whether such collateral margins futures 
or swaps contracts.\310\ However, I am not na[iuml]ve enough to 
believe that such limitations--without additional Commission 
oversight or action--would be sufficient. I have warned against 
complacency in the past.\311\ I reiterate such warning here.
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    \308\ See section I(D)(2) of the preamble to this rulemaking.
    \309\ Id.
    \310\ See sections 22.2(e)(1) and 22.3(d) of the rule text to 
this rulemaking (to be codified at 17 CFR 22.2(e)(1) and 22.3(d)) 
(limiting an FCM and a DCO to investing cleared swaps customer 
collateral in instruments enumerated in regulation 1.25).
    \311\ See ``Opening Statement of Commissioner Scott D. 
O'Malia'', dated December 5, 2011, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement120511.
---------------------------------------------------------------------------

    Under this rulemaking, what happens if an intermediary--like MF 
Global--becomes insolvent as operational or investment 
irregularities are revealed? Basically, under the Bankruptcy 
Code,\312\ cleared swaps customers would share pro rata in any 
shortfall. A shortfall would complicate the porting of cleared swaps 
customer contracts and associated collateral, notwithstanding the 
enhanced recordkeeping and reporting requirements of this 
rulemaking.
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    \312\ See section 766(h) of the Bankruptcy Code, 11 U.S.C. 
766(h).
---------------------------------------------------------------------------

    By not protecting against operational and investment risk, this 
rulemaking may have the effect of exposing some swaps customers to 
more risk than they currently bear in the over-the-counter markets. 
Since December 2, 2011, we have received eight comment letters from 
end-users, many of which explicitly asked the Commission to not 
finalize this rulemaking until it explores other alternatives that 
may provide greater protection.\313\ These end-users include 
Fidelity Investments, the Committee on Investment of Employee 
Benefit Assets (``CIEBA''), and the Federal Home Loan Banks. 
According to many of these comment letters, swaps customers in the 
over-the-counter markets currently have the option to enter into 
tri-party custody agreements. In general, these agreements may 
provide superior protection to this rulemaking against not only 
fellow-customer risk, but also operational and investment risk.\314\
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    \313\ See comment letters from (i) Managed Funds Association, 
dated December 2, 2011; (ii) Fidelity Investments, dated December 8, 
2011; (iii) Och-Ziff Capital Management Group, dated circa December 
12, 2011; (iv) State Street Corporation, dated December 14, 2011; 
(v) the Committee on Investment of Employee Benefit Assets, dated 
December 22, 2011; (vi) the European Federation for Retirement 
Provision (``EFRP'') and APG Algemene Pensioen Groep, N.V. 
(``APG''), dated December 23, 2011; (vii) the Federal Home Loan 
Banks, dated January 9, 2012; and (viii) BlueMountain Capital 
Management, LLC, Elliot Management Corporation, Moore Capital 
Management, LP, Paulson & Co. Inc., and Tudor Investment 
Corporation, dated January 9, 2012 (the ``Moore et. al. letter''). 
In each case, the comment letters were filed in answer to the notice 
of proposed rulemaking on the Protection of Cleared Swaps Customer 
Contracts and Collateral; Conforming Amendments to the Commodity 
Broker Bankruptcy Provisions, 76 FR 33818, Jun. 9, 2011. All comment 
letters to such notice are available at: http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-10737a.pdf.
    \314\ See, e.g., comment letters from (i) Fidelity Investments, 
dated December 8, 2011; (ii) Och-Ziff Capital Management Group, 
dated circa December 12, 2011; and (iii) CIEBA, dated December 22, 
2011.
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    I understand that staff has been directed to ``carefully 
analyze'' various proposals that commenters have advanced ``with the 
goal of developing proposed rules that provide additional protection 
for collateral belonging to market participants.'' \315\ This is a 
laudable goal. I only hope that we achieve this goal before 
mandatory clearing becomes effective.\316\ Otherwise, we may be 
subjecting

[[Page 6408]]

a substantial portion of cleared swaps customer collateral to 
operational risk and investment risk. To provide some context, such 
collateral--in the aggregate--may amount to anywhere from $500 
billion to $833 billion.\317\ As one commenter stated, ``[i]t would 
seem to be a perverse result that, because of rulemaking promulgated 
under the Dodd-Frank * * * Act, which was * * * meant to enhance the 
safety of the over-the-counter markets by reducing systemic and 
counterparty risks, market participants were to be placed [in] [sic] 
a worse position with regard to risk than they are currently.'' 
\318\ Other commenters supported this statement.\319\
---------------------------------------------------------------------------

    \315\ Section I(F) of the preamble to this rulemaking.
    \316\ See comment letter from CIEBA, dated December 22, 2011 
(stating that ``* * * the Commission should not permit mandatory 
clearing of swaps to become effective until a physical segregation 
option, such as the individual settlement account * * * or another 
satisfactory structure, has been made available to swaps 
customers.'' [emphasis original]).
    This rulemaking does attempt to resolve one request repeated in 
the comment letters filed since December 2, 2011. In section I(F) of 
the preamble, the rulemaking makes clear that the Commission's 2005 
Amendment to Financial and Segregation Interpretation No. 10, 70 FR 
24768, May 11, 2005 (``Segregation Interpretation 10-1''), does not 
apply to cleared swaps. Therefore, Segregation Interpretation 10-1 
would not prohibit an intermediary from entering into a tri-party 
custody agreement with a cleared swaps customer. However, this 
rulemaking similarly makes clear that Segregation Interpretation No. 
10, which the Commission issued in 1984, would continue to apply to 
collateral segregated according to a tri-party custody agreement. In 
other words, cleared swaps customers could not avoid the pro rata 
distribution provisions of the Bankruptcy Code (as well as 
regulation Part 190). Therefore, the resolution in this rulemaking 
may provide commenters with cold comfort.
    \317\ Section VII(B)(2) of the preamble to this rulemaking 
(citing estimates provided by CME Group, Inc. and the International 
Swaps and Derivatives Association, Inc.).
    \318\ Comment letter from Och-Ziff Capital Management Group, 
dated circa December 12, 2011.
    \319\ See the Moore et. al. letter (stating ``[g]iven the 
crucial role that central clearing will play in reducing systemic 
risk in the swaps market, we see no valid argument to suggest that 
customers to cleared swaps should be subject to weaker regulatory 
protections than those afforded counterparties to uncleared 
swaps.''); and comment letter from EFRP and APG, dated December 23, 
2011 (stating ``EFRP and APG support the CFTC's efforts to reduce 
risk, enhance transparency, and promote market integrity, as the 
U.S. Congress intended by enacting Title VII of the Dodd-Frank * * * 
Act. It should be clear though that such reform will only improve 
financial stability, if it is prudent from the perspective of end 
users, such as pension funds. However, as currently framed the 
Proposed Rules subject us to increased risks.'').
---------------------------------------------------------------------------

    This rulemaking may imperfectly address fellow-customer risk.
    Let me now say a few words on ``fellow-customer'' risk. 
Preliminarily, what is it? According to this rulemaking, it is the 
risk that a derivatives clearing organization (``DCO'') will access 
the collateral of non-defaulting cleared swaps customers to cure the 
default of an intermediary.\320\ Under what circumstances could a 
DCO access such collateral? Under this rulemaking, there are two 
circumstances and they have to occur simultaneously. First, a swaps 
customer would need to default to an intermediary. Second, as a 
result of such default, the intermediary must be unable to meet its 
DCO obligations. In short, swaps customer losses must exceed the 
capitalization of the intermediary.\321\ As this rulemaking 
acknowledges, ``fellow-customer'' risk is rare.\322\ In comparison, 
according to notices received by the Commission, operational risk is 
far more prevalent.\323\
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    \320\ Section I(B)(6) of the preamble to this rulemaking.
    \321\ Id.
    \322\ Section VII(B)(2) of the preamble to this rulemaking 
(stating that ``double defaults are rare events.'').
    \323\ Regulation 1.12(h) requires an intermediary that knows or 
should know that it is under-segregated to report to the Commission 
and its designated self-regulatory organization. Usually, under-
segregation results from minor operational failure, and does not 
lead to the collapse of an intermediary. However, a pattern of 
operational failure would draw greater attention and inquiry.
---------------------------------------------------------------------------

    Of course, just because a risk is rare does not mean that the 
Commission should not protect against it. But let us take a closer 
look at the protection that this rulemaking is offering. First, 
although it is close to 230 pages, with nearly 100 pages in rule 
text, only a couple of the provisions of this rulemaking address 
``fellow-customer'' risk. They are regulations 22.11 to 22.16.\324\ 
The remainder of regulation Part 22, as well as the majority of 
changes to regulation Part 190 (Bankruptcy), simply aligns the 
cleared swaps segregation regime with the existing futures 
segregation regime.\325\ As MF Global reveals, the futures 
segregation regime may have some vulnerabilities. In this 
rulemaking, the Commission is unthinkingly replicating these 
vulnerabilities.
---------------------------------------------------------------------------

    \324\ Sections 22.11 to 22.16 of the rule text to this 
rulemaking (to be codified at 17 CFR 22.11 (Information to be 
Provided Regarding Customers and Their Cleared Swaps), 22.12 
(Information to be Maintained Regarding Cleared Swaps Customer 
Collateral), 22.13 (Additions to Cleared Swaps Customer Collateral), 
22.14 (Futures Commission Merchant Failure to Meet a Customer Margin 
Call in Full), 22.15 (Treatment of Cleared Swaps Collateral on an 
Individual Basis), 22.16 (Disclosures to Customers)).
    \325\ See, e.g., section 22.10 to the rule text of this 
rulemaking (to be codified at 17 CFR 22.10 Application of other 
Regulatory Provisions).
---------------------------------------------------------------------------

    Second, this rulemaking only offers protection to a portion of 
the cleared swaps customer collateral that an intermediary holds. In 
general, cleared swaps customer collateral may fall within two 
categories: (i) collateral needed to support contracts; and (ii) 
collateral in excess of that needed to support contracts (``Excess 
Collateral''). The Commission, in its final rulemaking on 
Derivatives Clearing Organization General Provisions and Core 
Principles, states that a DCO must require its clearing members to 
collect Excess Collateral.\326\ However, as certain commenters have 
astutely observed, and as this rulemaking readily admits, this 
rulemaking does not protect Excess Collateral deposited outside of 
the DCO.\327\ So, the Commission has required cleared swaps 
customers to provide collateral that it then does not protect.
---------------------------------------------------------------------------

    \326\ See Derivatives Clearing Organization General Provisions 
and Core Principles, 76 FR 69334, 69438, Nov. 8, 2011 (to be 
codified at 17 CFR 39.13(g)(8)).
    \327\ See section III(B) of the preamble to this rulemaking 
(stating ``CME notes that a portion of the Cleared Swaps Customer 
Collateral will be held at the FCM, not the DCO, and that this 
collateral will not be protected by Complete Legal Segregation in 
the event that an FCM becomes insolvent. This proposition is true 
but is of little or no relevance to the comparison of Complete Legal 
Segregation with the Futures Model favored by these commenters.'').
---------------------------------------------------------------------------

    Third, this rulemaking cites, as a major benefit, the 
possibility of enhanced portability of cleared swaps customer 
contracts, as well as associated collateral, after an intermediary 
defaults due to ``fellow-customer'' risk.\328\ The rulemaking sets 
forth more stringent recordkeeping and reporting requirements as a 
foundation for enhanced portability. As commenters have identified, 
these requirements have two significant weaknesses.
---------------------------------------------------------------------------

    \328\ Section I(D)(2) of the preamble to this rulemaking. To be 
fair, this rulemaking does make the point that enhanced 
recordkeeping and reporting requirements may also foster portability 
in the event of operational or investment risk.
---------------------------------------------------------------------------

    Preliminarily, to maximize portability, each intermediary must 
(i) keep complete and accurate records and (ii) comply with 
reporting requirements. As MF Global and earlier intermediary 
collapses have demonstrated, a distressed intermediary may not 
prioritize recordkeeping and reporting.\329\
---------------------------------------------------------------------------

    \329\ See, e.g., comment letters from (i) the Federal Home Loan 
Banks, dated January 9, 2012 and (ii) CIEBA, dated December 22, 
2011. See also the Moore et. al. letter.
---------------------------------------------------------------------------

    Secondarily, despite requests from various commenters (including 
the Association of Institutional Investors and Vanguard), this 
rulemaking does not provide guidance on the concrete steps that a 
DCO should take to ensure that an intermediary is providing accurate 
and complete information. Instead, the rulemaking states: ``* * * 
the DCO should take the steps appropriate, in the professional 
judgment of its staff, to verify that [intermediaries] have and are 
using systems and appropriate procedures to track accurately, and to 
provide to the DCO accurately, the positions of each customer.'' 
\330\ In light of MF Global, the Commission should give this 
provision--and the requests of commenters--more thought.
---------------------------------------------------------------------------

    \330\ Section IV(K) of the preamble to this rulemaking.
---------------------------------------------------------------------------

    Finally, this rulemaking is silent on one important factor that 
may affect the portability of cleared swaps customer contracts, as 
well as associated collateral--namely, whether the intermediary is 
both a futures commission merchant and a securities broker-dealer. I 
am touching on this issue in the interest of full disclosure.
    A comprehensive solution is needed.
    Despite its limitations, I ultimately support this rulemaking. 
As I have stated previously, the Commission must immediately take 
action to renew public confidence in our customer protection 
regime.\331\ Although this rulemaking largely replicates futures 
segregation, this rulemaking--if it works as promised in an 
intermediary bankruptcy--may enhance portability for cleared swaps 
customers in the event of ``fellow-customer'' risk. Even the 
possibility of such enhancement is non-negligible--especially in the 
volatile economic environment that exists today.
---------------------------------------------------------------------------

    \331\ See Statement on MF Global: Next Steps, dated November 16, 
2011, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement111611.
---------------------------------------------------------------------------

    However, this rulemaking also vividly illustrates some of my 
concerns regarding our Dodd-Frank rulemaking process. First, the 
Commission has a duty to regulate the swaps market. It also owes a 
duty to futures customers. Right now, it is unclear from this 
rulemaking how the Commission means to address futures customer 
concerns. I understand that the investigation into the MF Global 
collapse is ongoing. However, the Commission could examine the 
manner in

[[Page 6409]]

which operational and investment risks contribute to 
undersegregation. Our undersegregation reports would help us with 
such an examination, as well as the detection of potential causal 
patterns for undersegregation.\332\
---------------------------------------------------------------------------

    \332\ See supra note 17.
---------------------------------------------------------------------------

    Second, instead of rushing to complete this rulemaking, I would 
have preferred that the Commission focus on providing a more 
comprehensive solution to operational, investment, and ``fellow-
customer'' risk. Moreover, I would have preferred that the 
Commission more fully explore the alternatives that various 
commenters have advanced, which may provide greater protection for 
futures, as well as cleared swaps customer, collateral. Further, it 
would have been helpful for the Commission to have weighed, in one 
analysis, the benefits and costs of offering a combination of (i) 
this rulemaking and (ii) one or more alternatives.
    Finally, the Commission needs to contemplate whether any 
alternative would be workable in light of the pro rata distribution 
provisions of the Bankruptcy Code. If not, the Commission should 
contemplate recommending to Congress changes to the Bankruptcy Code.
    After MF Global, the Commission needs to provide market 
participants with real, fully developed reforms. I look forward to 
the Commission taking such action.

[FR Doc. 2012-1033 Filed 2-6-12; 8:45 am]
BILLING CODE 6351-01-P
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