[Federal Register Volume 89, Number 42 (Friday, March 1, 2024)]
[Proposed Rules]
[Pages 15312-15363]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-04107]



[[Page 15311]]

Vol. 89

Friday,

No. 42

March 1, 2024

Part III





Commodity Futures Trading Commission





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17 CFR Parts 1, 22 et al.





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Regulations To Address Margin Adequacy and To Account for the Treatment 
of Separate Accounts by Futures Commission Merchants; Proposed Rule

Federal Register / Vol. 89 , No. 42 / Friday, March 1, 2024 / 
Proposed Rules

[[Page 15312]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 22, 30, and 39

RIN 3038-AF21


Regulations To Address Margin Adequacy and To Account for the 
Treatment of Separate Accounts by Futures Commission Merchants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking; withdrawal.

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SUMMARY: On April 14, 2023, the Commodity Futures Trading Commission 
(Commission or CFTC) published a notice of proposed rulemaking (First 
Proposal) that proposed to amend the derivatives clearing organization 
(DCO) risk management regulations adopted under the Commodity Exchange 
Act (CEA) to permit futures commission merchants (FCMs) that are 
clearing members of DCOs (clearing FCMs), subject to specified 
requirements, to treat separate accounts of a single customer as 
accounts of separate legal entities for purposes of certain Commission 
regulations. In light of comments received supporting direct 
application of separate account treatment requirements to FCMs in the 
Commission's regulations, the Commission has determined to withdraw the 
First Proposal. The Commission now proposes regulations to require an 
FCM to ensure that a customer does not withdraw funds from its account 
with the FCM if the balance in such account after such withdrawal would 
be insufficient to meet the customer's initial margin requirements, and 
relatedly, to permit an FCM, in certain circumstances and subject to 
certain conditions, to treat the separate accounts of a single customer 
as accounts of separate entities for purposes of certain Commission 
regulations (Second Proposal). The proposed amendments would establish 
the conditions under which an FCM may engage in such separate account 
treatment.

DATES: Comments must be received on or before April 22, 2024.

ADDRESSES: You may submit comments, identified by RIN 3038-AF21, by any 
of the following methods:
    <bullet> CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
    <bullet> Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
    <bullet> Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. 
Submissions through the CFTC Comments Portal are encouraged. All 
comments must be submitted in English, or if not, accompanied by an 
English translation. Comments will be posted as received to https://comments.cftc.gov. You should submit only information that you wish to 
make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act, a petition for confidential treatment of 
the exempt information may be submitted according to the procedures 
established in Sec.  145.9 of the Commission's regulations. The 
Commission reserves the right, but shall have no obligation, to review, 
pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the proposed determination and order will be retained in 
the public comment file and will be considered as required under the 
Administrative Procedure Act and other applicable laws, and may be 
accessible under the FOIA.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Chief Counsel, 
202-418-5092, <a href="/cdn-cgi/l/email-protection#47353026343422352a2629072421332469202831"><span class="__cf_email__" data-cfemail="a7d5d0c6d4d4c2d5cac6c9e7c4c1d3c489c0c8d1">[email protected]</span></a>; Daniel O'Connell, Special Counsel, 
202-418-5583, <a href="/cdn-cgi/l/email-protection#afcbc0ccc0c1c1cac3c3efccc9dbcc81c8c0d9"><span class="__cf_email__" data-cfemail="32565d515d5c5c575e5e72515446511c555d44">[email protected]</span></a>, Division of Clearing and Risk; Thomas 
Smith, Deputy Director, 202-418-5495, <a href="/cdn-cgi/l/email-protection#d9adaab4b0adb199babfadbaf7beb6af"><span class="__cf_email__" data-cfemail="d5a1a6b8bca1bd95b6b3a1b6fbb2baa3">[email protected]</span></a>; Joshua Beale, 
Associate Director, 202-418-5446, <a href="/cdn-cgi/l/email-protection#6e040c0b0f020b2e0d081a0d40090118"><span class="__cf_email__" data-cfemail="87ede5e2e6ebe2c7e4e1f3e4a9e0e8f1">[email protected]</span></a>; Jennifer Bauer, 
Special Counsel, 202-418-5472, <a href="/cdn-cgi/l/email-protection#fe949c9f8b9b8cbe9d988a9dd0999188"><span class="__cf_email__" data-cfemail="ef858d8e9a8a9daf8c899b8cc1888099">[email protected]</span></a>, Market Participants 
Division, Commodity Futures Trading Commission, Three Lafayette Centre, 
1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. The Commission's Customer Funds Protection Regulations
    B. The Divisions' No-Action Position
    C. The Commission's First Proposal and It's Withdrawal
    D. The Commission's Second Proposal
II. Proposed Regulations
    A. Proposed Amendments to Regulation Sec.  1.3
    B. Proposed Amendments to Regulation Sec.  1.17
    C. Proposed Amendments to Regulations Sec. Sec.  1.20, 1.32, 
22.2, and 30.7
    D. Proposed Regulation Sec.  1.44(a)
    E. Proposed Regulation Sec.  1.44(b)
    F. Proposed Regulation Sec.  1.44(c)
    G. Proposed Regulation Sec.  1.44(d)
    H. Proposed Regulation Sec.  1.44(e)
    I. Proposed Regulation Sec.  1.44(f)
    J. Proposed Regulation Sec.  1.44(g)
    K. Proposed Regulation Sec.  1.44(h)
    L. Proposed Appendix A to Part 1
    M. Proposed Amendments to Regulation Sec.  1.58
    N. Proposed Amendments to Regulation Sec.  1.73
    O. Proposed Amendments to Regulation Sec.  30.2
    P. Proposed Amendments to Regulation Sec.  39.13(g)(8)
III. Cost Benefit Considerations
    A. Introduction
    B. Consideration of the Costs and Benefits of the Commission's 
Action
    C. Costs and Benefits of the Commission's Action as Compared to 
Alternatives
    D. Section 15(a) Factors
IV. Related Matters
    A. Antitrust Considerations
    B. Regulatory Flexibility Act
    C. Paperwork Reduction Act

I. Background

A. The Commission's Customer Funds Protection Regulations \1\
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    \1\ For purposes of completeness and explanation of the basis 
for this Second Proposal, the Commission restates its explanation of 
its customer funds protection regulations, as stated in the First 
Proposal. See Derivatives Clearing Organization Risk Management 
Regulations to Account for the Treatment of Separate Accounts by 
Futures Commission Merchants, 88 FR 22934, 22935-22936 (Apr. 14, 
2023) (First Proposal).
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    Two of the fundamental purposes of the CEA are the avoidance of 
systemic risk and the protection of market participants from misuses of 
customer assets.\2\ The Commission has promulgated a number of 
regulations in furtherance of those objectives, including regulations 
designed to ensure that FCMs appropriately margin customer accounts, 
and are not induced to cover one customer's margin shortfall with 
another customer's funds. In addition to protecting customer assets, 
the current regulations serve the purpose of avoidance of systemic risk 
by mitigating the risk that a customer default in its obligations to a 
clearing FCM results in the clearing FCM in turn defaulting on its 
obligations to a DCO, which could adversely affect the stability of the 
broader financial system.
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    \2\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
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    Section 4d(a)(2) of the CEA and Commission regulation Sec.  1.20(a) 
require an FCM to separately account for and segregate from its own 
funds all money, securities, and property which it has

[[Page 15313]]

received to margin, guarantee, or secure the trades or contracts of its 
commodity customers.\3\ Additionally, section 4d(a)(2) of the CEA and 
Commission regulation Sec.  1.22(a) prohibit an FCM from using the 
money, securities, or property of one customer to margin or settle the 
trades or contracts of another customer.\4\ This requirement is 
designed to prevent disparate treatment of customers by an FCM and 
mitigate the risk that there will be insufficient funds in segregation 
to pay all customer claims if the FCM becomes insolvent.\5\ Section 
4d(a)(2) of the CEA and regulations Sec. Sec.  1.20 and 1.22 
effectively require an FCM to add its own funds into segregation in an 
amount equal to the sum of all customer undermargined amounts, 
including customer account deficits, to prevent the FCM from being 
induced to use one customer's funds to margin or carry another 
customer's trades or contracts.\6\
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    \3\ 7 U.S.C. 6d(a)(2); 17 CFR 1.20(a).
    \4\ 7 U.S.C. 6d(a)(2); 17 CFR 1.22(a).
    \5\ Prohibition of Guarantees Against Loss, 46 FR 11668, 11669 
(Feb. 10, 1981).
    \6\ 7 U.S.C. 6d(a)(2); 17 CFR 1.20; 17 CFR 1.22; Prohibition of 
Guarantees Against Loss, 46 FR at 11669.
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    Section 5b of the CEA,\7\ as amended by the Dodd-Frank Wall Street 
Reform and Consumer Protection Act of 2010,\8\ sets forth eighteen core 
principles with which DCOs must comply to register and maintain 
registration as DCOs with the Commission. In 2011, the Commission 
adopted regulations for DCOs to implement Core Principle D, which 
concerns risk management.\9\ These regulations include a number of 
provisions that require a DCO to in turn require that its clearing 
members take certain steps to support their own risk management in 
order to mitigate the risk that such clearing members pose to the DCO.
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    \7\ 7 U.S.C. 7a-1(b).
    \8\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \9\ Section 5b(c)(2)(D) of the CEA, 7 U.S.C. 7a-1(c)(2)(D); 
Derivatives Clearing Organization General Provisions and Core 
Principles, 76 FR 69334, 69335 (Nov. 8, 2011).
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    Specifically, Commission regulation Sec.  39.13(g)(8)(iii) provides 
that a DCO shall require an FCM clearing member to ensure that a 
customer does not withdraw funds from its account with such clearing 
member unless the net liquidating value plus the margin deposits 
remaining in the customer's account after the withdrawal would be 
sufficient to meet the customer initial margin requirements with 
respect to the products or portfolios in the customer's account, which 
are cleared by the DCO.\10\ Regulation Sec.  39.13(g)(8)(iii) thus 
establishes a ``Margin Adequacy Requirement,'' designed to mitigate the 
risk that an FCM clearing member fails to hold, from a customer, funds 
sufficient to cover the required initial margin for the customer's 
cleared positions.\11\ In light of the use of omnibus margin accounts, 
where the funds of multiple customers are held together, this safeguard 
is necessary to ``avoid the misuse of customer funds'' \12\ by 
mitigating the likelihood that the clearing member will effectively 
cover one customer's margin shortfall using another customer's funds.
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    \10\ 17 CFR 39.13(g)(8)(iii).
    \11\ For purposes of this proposed rulemaking, the Commission 
uses the term ``Margin Adequacy Requirement'' to refer to this 
requirement, which applies indirectly to clearing FCMs via the 
operation of DCO rules, and the analogous requirement set forth in 
proposed regulation Sec.  1.44(b) which would apply directly to all 
FCMs.
    \12\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
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    In adopting the Margin Adequacy Requirement of regulation Sec.  
39.13(g)(8)(iii), the Commission stated \13\ that the regulation was 
consistent with the definition of ``Margin Funds Available for 
Disbursement'' in the Margins Handbook \14\ prepared by the Joint Audit 
Committee (JAC), a representative committee of U.S. futures exchanges 
and the National Futures Association (NFA).\15\ The Commission noted 
that while designated self-regulatory organizations (DSROs) reviewed 
FCMs to determine whether they appropriately prohibited their customers 
from withdrawing funds from their futures accounts, it was unclear to 
what extent that requirement applied to cleared swap accounts when such 
swaps were executed on a designated contract market (DCM) that 
participated in the JAC.\16\ The Commission also noted that clearing 
members that cleared only swaps that were executed on a swap execution 
facility were not subject to the requirements of the JAC Margins 
Handbook or review by a DSRO.\17\
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    \13\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR at 69379.
    \14\ JAC Margins Handbook, available at http://www.jacfutures.com/jac/MarginHandBookWord.aspx.
    \15\ Joint Audit Committee, JAC Members, available at http://www.jacfutures.com/jac/Members.aspx. Self-regulatory organizations, 
such as commodity exchanges and registered futures associations 
(e.g., NFA), enforce minimum financial and reporting requirements, 
among other responsibilities, for their members. See Commission 
regulation Sec.  1.3, 17 CFR 1.3. Pursuant to Commission regulation 
Sec.  1.52(d), when an FCM is a member of more than one self-
regulatory organization, the self-regulatory organizations may 
decide among themselves which of them will assume primary 
responsibility for these regulatory duties and, upon approval of 
such a plan by the Commission, the self-regulatory organization 
assuming such primary responsibility will be appointed the 
designated self-regulatory organization for the FCM. 17 CFR 1.52(d).
    \16\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR at 69379.
    \17\ Id.
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    Thus, regulation Sec.  39.13(g)(8)(iii) was also designed to apply 
these risk mitigation and customer protection standards to futures and 
swap positions carried in customer accounts by clearing FCMs. However, 
Commission regulations do not apply a Margin Adequacy Requirement to 
non-clearing FCMs, and regulation Sec.  39.13(g)(8)(iii) does not 
require DCOs to apply that requirement to the positions carried by a 
clearing FCM that are not cleared at a registered DCO (e.g., most 
foreign futures and foreign option positions).\18\
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    \18\ The term ``foreign futures'' means any contract for the 
purchase or sale of any commodity for future delivery made, or to be 
made, on or subject to the rules of any foreign board of trade. 17 
CFR 30.1(a). The term ``foreign option'' means any transaction or 
agreement which is or is held out to be of the character of, or is 
commonly known to the trade as, an ``option'', ``privilege'', 
``indemnity'', ``bid'', ``offer'', ``put'', ``call'', ``advance 
guaranty'' or ``decline guaranty'', made or to be made on or subject 
to the rules of any foreign board of trade. 17 CFR 30.1(b).
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B. The Divisions' No-Action Position \19\
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    \19\ For purposes of completeness and explanation of the basis 
for this Second Proposal, the Commission restates its explanation of 
the no-action position contained in CFTC Letter No. 19-17, as stated 
in the First Proposal. See First Proposal, 88 FR 22936-22937.
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    On July 10, 2019, the Division of Swap Dealer and Intermediary 
Oversight (DSIO) (now Market Participants Division (MPD)) and the 
Division of Clearing and Risk (DCR) (collectively, the Divisions) 
published CFTC Letter No. 19-17, which, among other things, provides 
guidance with respect to the processing of margin withdrawals under 
regulation Sec.  39.13(g)(8)(iii) and announced a conditional and time-
limited no-action position for certain such withdrawals.\20\ The 
advisory followed discussions with and written representations from the 
Asset Management Group of the Securities Industry and Financial Markets 
Association (SIFMA-AMG), the Chicago Mercantile Exchange (CME), the 
Futures Industry Association (FIA), the JAC, and several FCMs, 
regarding practices among FCMs and their customers related to the 
handling of separate accounts of the same

[[Page 15314]]

customer.\21\ CFTC Letter No. 19-17 used the term ``beneficial owner'' 
synonymously with the term ``customer,'' as ``beneficial owner'' was, 
in this context, commonly used to refer to the customer that is 
financially responsible for an account. Additionally, as discussed 
further below, in the customer relationship context, FCMs often deal 
directly with a commodity trading advisor acting as an agent of the 
customer rather than the customer itself. For the avoidance of 
confusion (e.g., with regard to the terms ``owner'' or ``ownership,'' 
as those terms are used in Forms 40 and 102, or parts 17-20, or with 
regard to the term ``beneficial owner,'' as that term may be used by 
other agencies), this proposed rulemaking uses only the term 
``customer,'' except where directly quoting or paraphrasing a source 
that uses ``beneficial owner.''
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    \20\ CFTC Letter No. 19-17, July 10, 2019, available at https://www.cftc.gov/csl/19-17/download as extended by CFTC Letter No. 20-
28, Sept. 15, 2020, available at https://www.cftc.gov/csl/20-28/download; CFTC Letter No. 21-29, Dec. 21, 2021, available at https://www.cftc.gov/csl/21-29/download; and CFTC Letter No. 22-11, Sept. 
15, 2022, available at https://www.cftc.gov/csl/22-11/download; CFTC 
Letter No. 23-13, Sept. 11, 2023, available at https://www.cftc.gov/csl/23-13/download.
    \21\ SIFMA-AMG letter dated June 7, 2019 to Brian A. Bussey and 
Matthew B. Kulkin (SIFMA-AMG Letter); CME letter dated June 14, 2019 
to Brian A. Bussey and Matthew B. Kulkin (CME Letter); and FIA 
letter dated June 26, 2019 to Brian A. Bussey and Matthew B. Kulkin 
(First FIA Letter).
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    The written representations preceding the issuance of CFTC Letter 
No. 19-17 included letters filed separately by SIFMA-AMG, CME, and FIA 
(collectively, the ``Industry Letters'').\22\ Citing regulation Sec.  
39.13(g)(8)(iii)'s requirements related to the withdrawal of customer 
initial margin, and JAC Regulatory Alert #19-02 reminding FCMs of those 
requirements,\23\ SIFMA-AMG and FIA explained that provisions in 
certain FCM customer agreements provide that certain accounts carried 
by the FCM that have the same customer are treated as accounts for 
different legal entities (i.e., ``separate accounts'').\24\
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    \22\ The Commission notes that while CME disagreed with certain 
aspects of FIA's letter that fall beyond the scope of this 
rulemaking, CME's letter noted that CME was ``amenable to the 
Commission amending Rule 39.13(g)(8)(iii) to allow a DCO to permit 
a[n] FCM to release excess funds from a customer's separate account 
notwithstanding an outstanding margin call in another account of the 
same customer provided that certain specified risk-mitigating 
conditions . . . are satisfied.'' CME Letter.
    \23\ JAC, Regulatory Alert #19-02, May 14, 2019, available at 
http://www.jacfutures.com/jac/jacupdates/2019/jac1902.pdf.
    \24\ SIFMA-AMG Letter; First FIA Letter.
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    As FIA explained, there are a variety of reasons why a customer may 
want separate treatment for its accounts under such an agreement.\25\ 
For instance, an institutional customer, such as an investment or 
pension fund, may allocate assets to investment managers under 
investment management agreements that require each investment manager 
to invest a specified portion of the customer's assets under management 
in accordance with an agreed trading strategy, independent of the 
trading that may be undertaken for the customer by the same or other 
investment managers acting on behalf of other accounts of the 
customer.\26\ In such a situation, an investment manager may, in order 
to implement its trading strategy effectively, want assurance that the 
portion of funds it has been allocated to manage is entirely available 
to the investment manager, and will not be affected by the activities 
of other investment managers who manage other portions of the 
customer's assets and maintain separate accounts at the same FCM. 
Additionally, a commercial enterprise may establish separate agreements 
to leverage specific broker expertise on products or to diversify risk 
management strategies.\27\ In such cases, each separate account may be 
subject to a separate customer agreement, which the FCM negotiates 
directly with, in many cases, the customer's agent, which often will be 
an investment manager.\28\
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    \25\ First FIA Letter.
    \26\ See id.
    \27\ Id.
    \28\ Cf. id.
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    SIFMA-AMG and FIA asserted that, subject to appropriate FCM 
internal controls and procedures, separate accounts should be treated 
as separate legal entities for purposes of regulation Sec.  
39.13(g)(8)(iii); i.e., separate accounts should not be combined when 
determining an account's margin funds available for disbursement.\29\ 
SIFMA-AMG and FIA maintained that such separate account treatment 
should not be expected to expose an FCM to any greater regulatory or 
financial risk, and asserted that an FCM's internal controls and 
procedures could be designed to assure that the FCM does not undertake 
any additional risk as to the separate account.\30\ The Industry 
Letters included a number of examples of such controls and 
procedures.\31\
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    \29\ SIFMA-AMG Letter; First FIA Letter.
    \30\ SIFMA-AMG Letter; First FIA Letter.
    \31\ SIFMA-AMG Letter; First FIA Letter; CME Letter.
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    In its letter, SIFMA-AMG suggested that it would be possible to 
allow for separate account treatment without undermining the risk 
mitigation and customer protection goals of regulation Sec.  
39.13(g)(8)(iii).\32\ SIFMA-AMG recognized that there may be some 
instances, such as a customer default, in which separate account 
treatment would no longer be appropriate.\33\ SIFMA-AMG stated that an 
FCM could agree to first satisfy any amounts owed from agreed assets 
related to a separate account, and continue to release funds until the 
FCM provided the separate account with a notice of an event of default 
under the applicable clearing account agreement, and determined that it 
is no longer prudent to continue to separately margin the separate 
accounts, provided that such actions are consistent with the FCM's 
written internal controls and procedures.\34\ SIFMA-AMG further stated 
that, in such instance, the FCM would retain the ability to ultimately 
look to funds in other accounts of the customer, including accounts 
under different control, and the right to call the customer for 
funds.\35\ CME similarly asserted that disbursements on a separate 
account basis should not be permitted in certain circumstances, such as 
financial distress, that fall outside the ``ordinary course of 
business.'' \36\ While CME asserted that the plain language of 
regulation Sec.  39.13(g)(8)(iii) unambiguously forbids disbursements 
on a separate account basis, CME noted that it would be amenable to the 
Commission amending the regulation to permit such disbursements, 
subject to certain such risk-mitigating conditions.\37\
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    \32\ SIFMA-AMG Letter.
    \33\ Id.
    \34\ Id.
    \35\ Id.
    \36\ CME Letter.
    \37\ Id.
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    SIFMA-AMG and FIA requested that DCR confirm that it would not 
recommend that the Commission initiate an enforcement action against a 
DCO that permits its clearing FCMs to treat certain separate accounts 
of a customer as accounts of separate entities for purposes of 
regulation Sec.  39.13(g)(8)(iii),\38\ and confirm that a clearing FCM 
may release excess funds from a separate customer account 
notwithstanding an outstanding margin call in another account of the 
same customer.\39\
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    \38\ FIA specifically noted that such a no-action position could 
be conditioned on the FCM maintaining certain internal controls and 
procedures.
    \39\ SIFMA-AMG Letter; First FIA Letter; see also CME Letter.
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    In CFTC Letter No. 19-17, DCR stated that, in the context of 
separate accounts, the risk management goals of regulation Sec.  
39.13(g)(8)(iii) may effectively be addressed if a clearing FCM 
carrying a customer with separate accounts meets certain conditions, 
which were derived from the Industry Letters and specified in CFTC 
Letter No. 19-17.\40\ DCR stated that it would not recommend that the 
Commission take enforcement action against a DCO if the DCO permits its 
clearing FCMs to treat certain separate accounts as accounts of 
separate entities

[[Page 15315]]

for purposes of regulation Sec.  39.13(g)(8)(iii) subject to these 
conditions.\41\ The no-action position extended until June 30, 2021, in 
order to provide staff with time to recommend, and the Commission with 
time to determine whether to conduct and, if so, conduct, a rulemaking 
to implement a permanent solution.\42\ CFTC Letter No. 20-28, published 
on September 15, 2020, extended the no-action position until December 
31, 2021 due to challenges presented by the COVID-19 pandemic.\43\ CFTC 
Letter No. 20-28 stated that if the process to consider codifying the 
no-action position provided for by CFTC Letter No. 19-17 was not 
completed by that date, DSIO and DCR would consider further extending 
the no-action position.\44\ The Divisions published CFTC Letter No. 21-
29, further extending the no-action position until September 30, 
2022.\45\ On September 15, 2022, the Divisions published CFTC Letter 
No. 22-11, which further extended the no-action position until the 
earlier of September 30, 2023 or the effective date of any final 
Commission action relating to regulation Sec.  39.13(g).\46\ As with 
CFTC Letter No. 21-29, this extension was issued in order to provide 
additional time for the Commission to consider a rulemaking. As 
discussed further below, while the Commission proposed a rulemaking to 
codify the no-action position in CFTC Letter No. 19-17, the Commission 
has determined to withdraw that proposed rulemaking in light of 
comments received and propose a new rulemaking in part 1 of its 
regulations to both impose a Margin Adequacy Requirement (as discussed 
herein) and simultaneously provide for separate account treatment. On 
September 11, 2023, the Divisions published CFTC Letter No. 23-13, 
extending the no-action position until the earlier of June 30, 2024 or 
the effective date of any final Commission action relating to 
regulation Sec.  39.13(g),\47\ to provide further time for staff to 
develop and for the Commission to consider the Second Proposal, and to 
receive and consider comments thereon and consider and adopt a final 
rule.
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    \40\ CFTC Letter No. 19-17.
    \41\ Id.
    \42\ Id.
    \43\ CFTC Letter No. 20-28.
    \44\ Id.
    \45\ CFTC Letter No. 21-29.
    \46\ CFTC Letter No. 22-11.
    \47\ The Commission notes that this Second Proposal amends Sec.  
39.13(g) to refer to proposed regulation Sec.  1.44.
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C. The Commission's First Proposal and its Withdrawal

    On April 14, 2023, the Commission published in the Federal Register 
a notice of proposed rulemaking--the First Proposal--designed to codify 
the no-action position in CFTC Letter No. 19-17.\48\ The First Proposal 
proposed to amend regulation Sec.  39.13 to add new paragraph (j) 
allowing a DCO to permit a clearing FCM to treat the separate accounts 
of customers as accounts of separate entities for purposes of 
regulation Sec.  39.13(g)(8)(iii), if such clearing member's written 
internal controls and procedures permitted it to do so, and the DCO 
required its clearing members to comply with conditions specified in 
proposed regulation Sec.  39.13(j).
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    \48\ First Proposal.
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    The conditions for separate account treatment in proposed 
regulation Sec.  39.13(j) were substantially similar to the conditions 
specified in CFTC Letter No. 19-17. However, certain conditions in 
proposed regulation Sec.  39.13(j) reflected modification of the 
conditions in CFTC Letter No. 19-17 on which they were based. Such 
modifications included adding further reporting requirements for 
clearing members required to cease separate account treatment, an 
explicit process for clearing members to resume separate account 
treatment, and provisions designed to further clarify the requirement 
that separate accounts be on a one business day margin call.
    The comment period for the First Proposal was extended once at the 
request of a commenter and closed on June 30, 2023.\49\ The Commission 
received comments from twelve commenters.\50\ While commenters 
generally supported codifying the no-action position in CFTC Letter No. 
19-17, six commenters \51\ contended that the Commission should codify 
the no-action position in its part 1 FCM regulations (where it would 
apply directly to all FCMs) rather than its part 39 DCO regulations 
(where it applies only to clearing FCMs, through the instrumentality of 
DCOs). Other commenters did not opine on whether the proposed 
codification should be in part 1 versus part 39.
---------------------------------------------------------------------------

    \49\ Derivatives Clearing Organization Risk Management 
Regulations to Account for the Treatment of Separate Accounts by 
Futures Commission Merchants, 88 FR 39205 (June 15, 2023).
    \50\ American Council of Life Insurers (ACLI), CME, FIA, 
Intercontinental Exchange, Inc. (ICE), JAC, Managed Funds 
Association (MFA), NFA, SIFMA-AMG, Symphony Communications Services, 
LLC, and three individuals.
    \51\ CME, FIA, ICE, JAC, NFA, and SIFMA-AMG.
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    The Commission originally proposed to codify the no-action position 
in CFTC Letter No. 19-17 in part 39 in order to hew closely to the 
operation of the no-action position: DCOs could choose to permit 
clearing FCMs to engage in separate account treatment, provided such 
clearing FCMs complied with certain conditions.
    In its comment responding to the First Proposal, CME recommended 
codification in part 1 to extend the benefits of separate account 
treatment to all FCMs equally, whether or not they are clearing members 
of one or more DCOs.\52\ CME asserted that codification in part 1 would 
eliminate the risk that a current or future DCO chooses not to permit 
separate account treatment, noting that CME's own clearing members have 
invested significant time and effort in conforming their policies, 
systems, and practices to comply with the no-action conditions and 
related JAC advisory notices.\53\ As CME further contended, under the 
First Proposal, if one DCO chose not to permit separate account 
treatment, then an FCM would have to exclude contracts cleared through 
that DCO from its customers' separate accounts.\54\ CME argued that 
this would likely make separate margining operationally infeasible, 
noting that the First Proposal acknowledged that an FCM's futures 
account for a customer includes all futures products that the FCM 
clears for the customer, and the initial margin requirement for the 
account would be the total of the initial margin the FCM charges the 
customer for each contract in the account, in each case regardless of 
the DCO at which the contracts are cleared.\55\
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    \52\ CME Comment Letter.
    \53\ Id. (citing regulations Sec. Sec.  1.17, 1.20 and 22.2).
    \54\ Id.
    \55\ Id.
---------------------------------------------------------------------------

    CME also asserted that the First Proposal would effectively create 
two sets of reporting requirements applicable only to those FCM 
clearing members who choose to implement separate account margining at 
one or more DCOs, with new reporting requirements that conflict with 
regulations in part 1 that require calculation of deficits across all 
accounts of a single beneficial owner.\56\
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    \56\ Id.
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    CME further asserted that codification in part 39 would create new 
burdens for DCOs related to conducting examinations for compliance and 
the composition of DCO Chief Compliance Officer (CCO) reports, and 
would allow

[[Page 15316]]

for disparate implementation by DCOs.\57\ CME additionally opined that 
certain proposed requirements in the First Proposal were outside the 
scope of DCOs' risk management responsibilities and instead should be 
applied directly to FCMs.\58\
---------------------------------------------------------------------------

    \57\ Id.
    \58\ Id.
---------------------------------------------------------------------------

    In its comment, FIA contended that rules that affect the 
obligations of FCMs should be set out in part 1, and, similar to CME, 
argued that, if the no-action position is codified in part 1, then non-
clearing FCMs and FCMs that maintain 30.7 accounts for 30.7 customers 
pursuant to part 30 of the Commission's regulations would be able to 
provide consistent treatment to customers with the same enhanced risk 
management standards set forth in the no-action position.\59\ FIA also 
asserted that codification in part 1 would allow an FCM to control 
whether enhanced standards and separate account treatment are offered 
to a specific customer, rather than requiring each DCO to manage and 
control whether separate account treatment is permitted.\60\ FIA 
additionally contended that the terms and conditions under which 
separate account treatment should be permitted or prohibited is a 
decision that the Commission, rather than individual DCOs, should 
make.\61\
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    \59\ FIA Comment letter. As set forth in Commission regulations, 
the term ``30.7 account'' means any account maintained by an FCM for 
or on behalf of 30.7 customers to hold money, securities, or other 
property to margin, guarantee, or secure foreign futures or foreign 
option positions. 17 CFR 30.1(g). The term ``30.7 customer'' means 
any person who trades foreign futures or foreign options through an 
FCM, except for the owner or holder of a proprietary account as 
defined in regulation Sec.  1.3. 17 CFR 30.1(f).
    \60\ Id.
    \61\ Id. FIA noted that FCMs collect customer margin across DCOs 
and, if a DCO was to deny its clearing FCMs the right to provide 
separate account treatment, or establish different standards, such 
FCMs would effectively be denied the right to provide separate 
account treatment for their customers. Id.
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    In its comment, ICE supported part 1 codification on the basis that 
the no-action conditions are mainly relevant to the operation of an FCM 
and its relationship with its customers, rather than the operation of a 
DCO.\62\ ICE also argued that supervision of FCM compliance with 
requirements related to separate accounts would be more consistently 
applied if not done at the individual DCO level.\63\ ICE noted that 
functions of supervision, examination, and surveillance of the 
relationship between FCMs and customers are typically performed by an 
FCM's DSRO under Commission regulation Sec.  1.52, rather than by 
DCOs.\64\ ICE further contended that it would be more efficient for an 
FCM to address issues related to separate account treatment with a 
single DSRO rather than each DCO of which it is a member, and that 
imposing on DCOs additional burden and costs of supervising separate 
account treatment conditions may disincentivize DCOs from permitting 
FCMs to engage in separate account treatment.\65\
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    \62\ ICE Comment Letter. For instance, ICE contended that DCOs 
would not be well-placed to administer or enforce ensuring FCMs 
verify the identity of authorized representatives of clients, and 
recommended that if the Commission believes it necessary to 
establish steps clearing FCMs must take to identify such 
representatives, that it applies those requirements directly to such 
FCMs. Id. ICE also contended that a DSRO would be better placed than 
a DCO to readily assess whether an FCM is applying separate account 
treatment consistently. Id.
    \63\ Id.
    \64\ Id.
    \65\ Id.
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    In its comment, the JAC opined that conditions for separate account 
treatment should be stringent enough to mitigate to the maximum extent 
possible the additional risks to other customers of an FCM that 
separate account treatment presents, but noted that, in any case, part 
39 DCO regulations do not fall under the JAC's self-regulatory 
organization surveillance authority.\66\ Similar to CME, the JAC also 
asserted that the First Proposal lacked clarity regarding whether it 
contemplated bifurcated reporting requirements, because the First 
Proposal provided that a clearing FCM would need to calculate certain 
separate account customer balances for capital and segregation 
differently than under parts 1, 22, or 30, but did not include 
amendments to those regulations.\67\ Thus, the JAC argued, it was 
unclear whether the JAC would continue to review and monitor an FCM's 
financial statements prepared in accordance with those regulations, 
while a DCO would monitor the FCM's different computations prepared in 
accordance with proposed regulation Sec.  39.13(j).\68\ The JAC also 
noted that the First Proposal did not provide for separate account 
treatment for non-clearing FCMs and Commission regulation Sec.  30.7 
customers.\69\
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    \66\ JAC Comment Letter.
    \67\ Id.
    \68\ Id.
    \69\ Id.
---------------------------------------------------------------------------

    Like other commenters, NFA argued that codification in part 1 would 
provide a clear path for an FCM's DSRO to examine it for compliance 
with separate account treatment requirements, and would provide greater 
clarity to non-clearing FCMs regarding whether they are permitted to 
engage in separate account treatment.\70\
---------------------------------------------------------------------------

    \70\ NFA Comment Letter.
---------------------------------------------------------------------------

    SIFMA-AMG recommended incorporating the First Proposal's 
conditions, with modifications, in Commission regulations Sec. Sec.  
1.11 and 1.56, and argued that codification in part 1 would directly 
establish obligations for the FCM, rather than indirect obligations 
applied through the DCO, with respect to separate treatment of customer 
accounts within the CFTC's regulatory framework.\71\ SIFMA-AMG also 
argued that codification in part 1 would clarify that the regulatory 
obligations of the proposed regulation are the FCM's, and not the DCO's 
obligation to evaluate and determine if the FCM's behavior was 
appropriate.\72\
---------------------------------------------------------------------------

    \71\ SIFMA-AMG Comment Letter.
    \72\ Id.
---------------------------------------------------------------------------

    In light of these comments, the Commission has determined to 
propose codification of the underlying Margin Adequacy Requirement 
(i.e., that an FCM should not permit a customer to withdraw margin 
funds from that customer's accounts with the FCM if the net liquidating 
value plus the margin deposits remaining in such accounts after such 
withdrawal would be insufficient to meet the customer's initial margin 
requirements) \73\ along with the conditional modification of that 
requirement embodied in CFTC Letter No. 19-17, in part 1 of its 
regulations. The Commission believes codification in part 1 can be 
effectuated in a manner that provides appropriate flexibility for 
market participants, enhanced risk management and protection of 
customer funds along with appropriate flexibility for a larger number 
of FCMs, and more efficient supervision of compliance with the no-
action conditions proposed to be codified, while maintaining the 
effectiveness of those conditions. Therefore, the Commission formally 
withdraws its First Proposal, and proposes this new rulemaking to 
provide for separate account treatment through part 1 of its 
regulations.
---------------------------------------------------------------------------

    \73\ As discussed further below, this requirement, which 
currently is effectively applied only to clearing FCMs, and 
predominately to part 1 (futures customer) and part 22 (Cleared 
Swaps Customer) accounts, would through codification in part 1 
effectively apply to all FCMs, including those that are not members 
of a DCO, and would apply to all FCMs' 30.7 accounts.
---------------------------------------------------------------------------

    Separate from the question of whether the proposed codification 
should be in part 1 versus part 39, commenters provided feedback 
related to the proposed codification of individual no-action 
conditions. These comments are discussed below. The Commission notes

[[Page 15317]]

that, with some exceptions that it believes are helpful to 
understanding differences between the First Proposal and this Second 
Proposal, certain comments that appear to be premised specifically on 
the First Proposal's proposed codification in part 39 in contrast to 
part 1 are not discussed, as the Commission no longer proposes to 
codify the no-action position in part 39.
    In addition to the comments noted above, FIA supported amending 
regulation Sec.  1.56 to add a new paragraph recognizing (i) the right 
of an FCM to allow a customer to withdraw excess funds from a separate 
account while there is an outstanding margin call in another separate 
account, and (ii) that an FCM may agree that, in the absence of certain 
conditions, it will not use excess funds from one account to meet an 
obligation in another account without the customer's consent.\74\ ACLI, 
MFA, and SIFMA-AMG additionally supported codification of 
interpretation of regulation Sec.  1.56.\75\
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    \74\ FIA Comment Letter. The Commission also received comments 
from two individuals generally supportive of the First Proposal. 
Additionally, the Commission received a comment from Symphony 
Communication Services, LLC, describing ways in which the 
commenter's technological capabilities could facilitate compliance 
with certain components of the First Proposal. Lastly, the 
Commission received a comment from an individual requesting that the 
Commission provide a chart explaining to what extent and subject to 
what conditions portfolio-based margining is available across 
specific products and scenarios. The Commission considers this 
request outside the scope of this Second Proposal.
    \75\ ACLI Comment Letter; MFA Comment Letter; SIFMA-AMG Comment 
Letter.
---------------------------------------------------------------------------

    While appreciating those comments, the Commission seeks in this 
Second Proposal to engage in a narrower task: to directly apply the 
Margin Adequacy Requirement to all FCMs, while enacting a narrow 
codification (with respect to all FCMs) of the no-action position in 
CFTC Letter No. 19-17 with respect to the current Margin Adequacy 
Requirement embodied in regulation Sec.  39.13(g)(8)(iii). Amendments 
to regulation Sec.  1.56 are outside the scope of the proposed 
rulemaking.
    As such, where an FCM elects to apply separate account treatment, 
such treatment shall apply only for purposes of proposed regulation 
Sec.  1.44 (inclusive of the Margin Adequacy Requirement of proposed 
regulation Sec.  1.44(b)), including requirements that flow through to, 
e.g., Commission regulations Sec. Sec.  1.17, 1.20, 1.32, 1.58, 1.73, 
22.2, 30.7, the gross margining requirement of regulation Sec.  
39.13(g)(8)(i), and the Margin Adequacy Requirement of proposed 
regulation Sec.  39.13(g)(8)(iii). Nothing in this rulemaking is 
intended to affect the requirements of regulation Sec.  1.56 or, unless 
otherwise expressly indicated, any other Commission regulation.

D. The Commission's Second Proposal

    For the reasons discussed above, the Commission proposes to codify 
the Margin Adequacy Requirement, along with the no-action position in 
CFTC Letter No. 19-17, in part 1. The bulk of the proposed regulation 
will be contained in new Commission regulation Sec.  1.44, which is 
presently reserved. However, as explained below, the Commission also 
proposes supporting amendments in Commission regulations Sec. Sec.  
1.3, 1.17, 1.20, 1.32, 1.58, 1.73, 22.2, 30.2, 30.7, and 39.13 to 
facilitate implementation of proposed regulation Sec.  1.44. The 
Commission is also proposing a number of amendments to address 
inadvertent inconsistencies in existing regulations.\76\
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    \76\ These are proposed changes to regulation Sec.  1.3 (to 
clarify that Saturday is not a business day), regulation Sec.  
1.17(b) (to reorganize the wording of the definition of the term 
``business day'' for capital purposes to be consistent with the 
wording in the proposed amendments to regulation Sec.  1.3, to 
clarify that the definition of the term ``risk margin'' includes 
both customer and noncustomer accounts, and to change the term 
``FCM'' to read ``futures commission merchant''), regulations 
Sec. Sec.  1.20(i), 30.7(f)(2), and 22.2(f) to revise the regulatory 
description of the calculation of the total amount of funds that an 
FCM must hold in segregation for futures customers, Cleared Swaps 
Customers, and 30.7 customers, respectively, to align such 
description with the Commission's financial forms and the 
instructions to such forms, reorganizing regulations Sec.  22.2(f)), 
Sec.  1.58(a) and (b) (to clarify that gross margining requirements 
for omnibus accounts carried for one FCM at another FCM apply to 
cleared swaps as well as to futures and options and futures), and 
Sec.  30.2(b) (to clarify, in the context of the exclusion for 
applying certain regulations to persons and transactions subject to 
the requirements of part 30, existing regulations Sec. Sec.  1.41, 
1.42, and 1.43 (which were added in the 2021 part 190 bankruptcy 
rulemaking) are not excluded). These proposed changes are discussed 
in more detail in the relevant sections below.
---------------------------------------------------------------------------

    The Commission's Second Proposal represents in part a 
reorganization of the First Proposal. The First Proposal largely 
mirrored the organization of the no-action position in CFTC Letter No. 
19-17, first providing that a DCO could allow a clearing FCM to engage 
in separate account treatment (so long as such clearing FCM complied 
with certain conditions), then explaining specific circumstances that 
would disqualify a clearing FCM from engaging in separate account 
treatment, and finally providing the specific risk-mitigating 
conditions with which the clearing FCM would be required to comply in 
order to provide separate account treatment.
    Proposed regulation Sec.  1.44 is comprised of eight paragraphs. 
First, proposed regulation Sec.  1.44(a) defines key terms solely for 
purposes of proposed regulation Sec.  1.44. Second, proposed regulation 
Sec.  1.44(b) incorporates for all FCMs, and for all accounts,\77\ the 
same Margin Adequacy Requirement that DCOs are obligated in regulation 
Sec.  39.13(g)(8)(iii) to require their clearing FCMs to apply. Third, 
proposed regulation Sec.  1.44(c) makes clear that an FCM can engage in 
separate account treatment only during the ``ordinary course of 
business,'' a term that is defined in proposed regulation Sec.  1.44. 
Fourth, proposed regulation Sec.  1.44(d) explains how FCMs may elect 
to engage in separate account treatment for one or more customers. 
Fifth, proposed regulation Sec.  1.44(e) enumerates events inconsistent 
with the ordinary course of business and contains requirements for FCMs 
related to cessation of separate account treatment upon the occurrence 
of such events, and resumption of separate account treatment upon the 
cure of such events. Sixth, proposed regulation Sec.  1.44(f) contains 
the requirement that each separate account be on a ``one business day 
margin call'' and sets out regulations designed to explain the meaning 
of a one business day margin call for purposes of proposed regulation 
Sec.  1.44. Seventh, proposed regulation Sec.  1.44(g) sets forth 
capital, risk management, and segregation calculation requirements with 
which FCMs would be required to comply with respect to accounts for 
which the FCM has elected separate treatment. Eighth, proposed 
regulation Sec.  1.44(h) sets out information and disclosure 
requirements for FCMs that engage in separate account treatment.
---------------------------------------------------------------------------

    \77\ Proposed regulation Sec.  1.44(a) defines ``account'' to 
include futures accounts and Cleared Swaps Customer Accounts, both 
of which terms are defined in regulation Sec.  1.3, and 30.7 
accounts. A 30.7 account means any account maintained by an FCM for 
or on behalf of 30.7 customers to hold money, securities, or other 
property to margin, guarantee, or secure foreign futures or foreign 
options. 17 CFR 30.1(g).
---------------------------------------------------------------------------

    In its comment responding to the First Proposal, the JAC 
recommended adding two additional conditions for separate account 
treatment. First, the JAC supported adding a condition requiring a 
clearing FCM's risk-based capital requirement to be adjusted to capture 
the risk of accounts receiving separate treatment.\78\ As discussed 
below, the Commission is proposing to amend regulation Sec.  1.17 to 
revise an FCM's risk-based capital requirement to capture the risks of 
separate accounts. Second, the JAC supported adding a condition 
requiring accounts treated as separate accounts to be identified as

[[Page 15318]]

such in an FCM's books and records, including on customer 
statements.\79\ The Commission's proposed regulation Sec.  1.44(d)(1), 
as discussed below, would provide that an FCM must include each 
separate account customer on a list of separate account customers 
maintained in its books and records. While an FCM may elect to 
specifically identify separate accounts as such in customer statements, 
the Commission expects that FCMs will be able to readily identify all 
of their customer accounts receiving separate treatment.
---------------------------------------------------------------------------

    \78\ JAC Comment Letter.
    \79\ Id.
---------------------------------------------------------------------------

II. Proposed Regulations

    Section 8a(5) of the CEA \80\ authorizes the Commission ``to make 
and promulgate such rules and regulation as, in the judgment of the 
Commission, are reasonably necessary to effectuate any of the 
provisions, or to accomplish any of the purposes, of'' the CEA. The 
Commission is proposing these rules pursuant to section 8a(5) as 
reasonably necessary to effectuate sections 4d(a)(2) and 4d(f)(2),\81\ 
providing for the segregation and protection of, respectively, futures 
customer funds and Cleared Swaps Customer Collateral, and 
4(b)(2)(A),\82\ providing for the safeguarding of customers' funds in 
connection with foreign futures and foreign option transactions. As 
additional authority, the Commission is also proposing these rules as 
reasonably necessary to effectuate section 4f(b), which requires an FCM 
to meet minimum financial requirements prescribed by the Commission as 
necessary to ensure that the firm meets its obligations.\83\ Moreover, 
as further additional authority, the Commission is also proposing these 
rules as reasonably necessary to accomplish the purposes of the CEA as 
set forth in section 3(b); \84\ specifically, ``the avoidance of 
systemic risk'' and ``protect[ing] all market participants from . . . 
misuses of customer assets.''
---------------------------------------------------------------------------

    \80\ 7 U.S.C. 12a(5).
    \81\ 7 U.S.C. 6d(a)(2) and (f)(2).
    \82\ 7 U.S.C. 6(b)(2)(A).
    \83\ 7 U.S.C. 6f(b).
    \84\ 7 U.S.C. 5(b).
---------------------------------------------------------------------------

    Accordingly, the Commission preliminarily believes that the 
amendments proposed herein relating to the Margin Adequacy Requirement, 
and the modification of this requirement to permit, subject to certain 
prescribed conditions, separate account treatment in connection with 
the withdrawal of customer initial margin, support the customer funds 
protection and risk management provisions and purposes of the CEA. As 
further described below, the Commission also preliminarily believes 
that preventing the under-margining of customer accounts and mitigating 
the risk of a clearing member default, or the default of a non-clearing 
FCM, and the potential for systemic risk in either scenario, is 
effectively addressed by the standards set forth in the proposed 
regulation.
    All FCMs are currently subject to a detailed set of requirements 
designed to provide effective protection for customer funds. These 
include, for futures accounts, regulations Sec. Sec.  1.20 (requiring 
segregation), 1.22 (requiring, inter alia, residual interest to cover 
undermargined amounts), and 1.23 (requiring FCMs to maintain residual 
interest in segregated accounts up to a targeted amount that they 
determine based on specified considerations), as well as similar 
requirements with respect to Cleared Swaps Customer Accounts 
(respectively, regulations Sec. Sec.  22.2(d) and (f), and 22.17), and 
30.7 accounts (regulation Sec.  30.7).
    Regulation Sec.  39.13(g)(8)(iii) provides an additional layer of 
protection, but only with respect to FCMs that are clearing members of 
DCOs. There is no analogous Margin Adequacy Requirement applicable to 
FCMs that are not clearing members of DCOs. As discussed above, 
regulation Sec.  39.13(g)(8)(iii) is designed to mitigate the risk that 
a clearing member fails to hold, from a customer, funds sufficient to 
cover the required initial margin for the customer's cleared positions 
and, in light of the use of omnibus margin accounts, ``avoid the misuse 
of customer funds'' by mitigating the likelihood that the clearing 
member will effectively cover one customer's margin shortfall using 
another customer's funds.\85\ Regulation Sec.  39.13(g)(8)(iii) 
provides a risk mitigation provision for DCOs, clearing FCMs, and 
customers. The effect of the staff no-action position is to allow DCOs 
to permit clearing FCMs to engage in separate account treatment for 
purposes of that provision, but subject to conditions designed to 
maintain the provision's risk mitigating effects.
---------------------------------------------------------------------------

    \85\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
---------------------------------------------------------------------------

    Where it is now proposing to establish requirements for separate 
account treatment for all FCMs by adding a similar Margin Adequacy 
Requirement to part 1, the Commission seeks to replicate the same 
regulatory structure on an all-FCM basis, and furthers the customer 
fund protection and risk mitigation purposes of the CEA \86\ by 
implementing measures designed to further ensure that all FCMs, whether 
clearing or non-clearing, do not create or exacerbate an under-
margining scenario.
---------------------------------------------------------------------------

    \86\ Section 3(b) of the CEA, 7 U.S.C. 5(b) (It is the purpose 
of this Act to ensure the financial integrity of all transactions 
subject to this Act and the avoidance of systemic risk and to 
protect all market participants from misuses of customer assets)
---------------------------------------------------------------------------

    Similar to the First Proposal, the requirements for separate 
account treatment proposed herein are designed to ensure that FCMs 
carry out separate account treatment in a consistent and documented 
manner, monitor customer accounts on a separate and combined basis, 
identify and act upon instances of financial or operational distress 
that necessitate a cessation of separate account treatment, provide 
appropriate disclosures to customers \87\ regarding separate account 
treatment, and apprise their DSROs when they apply separate account 
treatment or an event has occurred that would necessitate cessation of 
separate account treatment.\88\
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    \87\ In this proposal, references to a ``customer'' are to a 
direct customer of the FCM in question. Thus, where non-clearing FCM 
N clears through clearing FCM C, a customer (including a separate 
account customer) of N is not considered a customer of C.
    \88\ For the avoidance of doubt, the Second Proposal permits an 
FCM to elect to engage in separate account treatment. It neither 
requires an FCM to engage in such treatment nor requires a customer 
of an FCM that elects to engage in separate account treatment to 
elect to have its accounts with such FCM treated as separate 
accounts of separate entities. Thus, separate account treatment 
requires an affirmative election of both the FCM and the customer.
---------------------------------------------------------------------------

    The Second Proposal is designed to extend the customer protection 
and risk management benefits of regulation Sec.  39.13(g)(8)(iii) to 
all FCMs and all of their customer accounts, and to provide an 
alternative means of achieving those risk management goals if the FCM 
elects to permit customers to maintain separate accounts under the 
proposal.\89\ Additionally, as discussed further below in the cost 
benefit considerations, because a number of clearing FCMs have already 
implemented the conditions set forth in CFTC Letter No. 19-17, a number 
of FCMs will have already implemented, in significant part, the 
requirements proposed herein.
---------------------------------------------------------------------------

    \89\ As a result, proposed regulation Sec.  1.44 would prohibit 
the application of portfolio margining or cross-margining treatment 
between separate accounts of the same customer, but would not 
prohibit the application of such treatments within a particular 
separate account of a customer.
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Request for Comment
    Question 1: The Commission requests comment regarding whether, in 
light of changes made in this Second Proposal relative to the First 
Proposal, it should consider any conditions additional to those 
contained in proposed regulation Sec.  1.44 below, or modify or remove 
any of the conditions proposed herein.
    Question 2: The Commission requests comment regarding whether the

[[Page 15319]]

interaction between proposed regulation Sec.  1.44(g) through (h) and 
other regulations under parts 1, 22, and 30 affected by the proposed 
requirements therein (e.g., regulations Sec. Sec.  1.17, 1.20, 1.22, 
1.23, 1.32, 1.55, 1.58, 1.73, 22.2, 30.2, and 30.7) is sufficiently 
clear.

A. Proposed Amendments to Regulation Sec.  1.3

    The definitions contained in Commission regulation Sec.  1.3 are 
key to understanding and interpreting the Commission's regulations, 
including part 1 FCM regulations. The Commission believes the 
provisions of proposed regulation Sec.  1.44 necessitate an amendment 
to regulation Sec.  1.3.
    The Commission proposes to amend the definition of ``business day'' 
in regulation Sec.  1.3. Current regulation Sec.  1.3 provides, in 
relevant part, that ``business day'' means any day other than a Sunday 
or holiday. The Commission proposes to expand this definition to 
confirm that the term encompasses any day other than a Saturday, 
Sunday, or holiday. This term, which is applicable to proposed 
regulation Sec.  1.44(f), setting forth the requirement that separate 
accounts be on a one business day margin call, is similar to the 
proposed definition of ``United States business day,'' which appeared 
in the First Proposal.\90\ As in the First Proposal, however, the term 
is intended to encompass days on which banks and custodians are open in 
the United States to facilitate payment of margin. Thus, for the 
avoidance of doubt, ``holiday'' in this context refers to holidays in 
the United States.
---------------------------------------------------------------------------

    \90\ Under the First Proposal, the term ``United States business 
day'' referred to weekdays not including federal holidays as 
established by 5 U.S.C. 6103.
---------------------------------------------------------------------------

    The Commission notes that, notwithstanding the current definition 
of the term in regulation Sec.  1.3, which is used in a variety of 
regulations, in actual practice, Saturdays are generally not treated as 
business days in the markets,\91\ by market participants, or for 
regulatory purposes.\92\ The Commission is thus proposing to change the 
definition of ``business day'' in regulation Sec.  1.3 to conform to 
that reality.
---------------------------------------------------------------------------

    \91\ It is true that some markets are moving toward 24/7 
operation. The Commission will continue to monitor these 
developments, and consider further rulemaking in this area as 
appropriate. Nonetheless, a definition of business days that 
includes Saturday, but not Sunday, does not reflect present or 
plausible future reality.
    \92\ For instance, Saturdays are treated as non-business days 
for purposes of swaps reporting under parts 43 and 45 of the 
Commission's regulations, 17 CFR 43.1; 17 CFR 45.2, execution of 
confirmations by swap dealers, 17 CFR 23.501(c)(5)(ii), and under 
the Commission's part 39 DCO regulations, 17 CFR 39.2 (defining an 
intraday business day period). See also, e.g., CFTC, Guidebook for 
Part 17.00: Reports by Reporting Markets, Futures Commission 
Merchants, Clearing Members, and Foreign Brokers, at 18, May 30, 
2023 (noting that for purposes of part 17.00 reports, ``reporting 
entities may elect to not consider Saturdays to be a business day, 
as Saturday is not commonly known as such'').
---------------------------------------------------------------------------

Request for Comment
    Question 3: The Commission requests comment regarding whether its 
proposal to revise the definition of ``business day'' in regulation 
Sec.  1.3 would result in any adverse consequences for any market 
participants.

B. Proposed Amendments to Regulation Sec.  1.17

    Regulation Sec.  1.17 currently establishes minimum financial 
requirements for FCMs. In this regard, regulation Sec.  1.17(a)(1)(i) 
provides that each person registered as an FCM must maintain adjusted 
net capital equal to, or in excess of, the greatest of: (1) $1 million 
(or $20 million if the FCM is also registered as a swap dealer); (2) 
eight percent of the total ``risk margin'' required on the positions in 
customer and noncustomer accounts \93\ carried by the FCM; (3) the 
amount of adjusted net capital required by NFA as a registered futures 
association; or (4) for an FCM registered as a securities broker or 
dealer with the Securities and Exchange Commission (SEC), the amount of 
net capital required by SEC rule Sec.  15c3-1.\94\ For purposes of 
regulation Sec.  1.17(a)(1)(i), the term ``risk margin'' is defined by 
paragraph (b)(8) of regulation Sec.  1.17 to generally mean the level 
of maintenance margin or performance bond required for customer and 
noncustomer positions established by the applicable exchanges or 
clearing organizations.
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    \93\ The term ``noncustomer account'' generally means the 
accounts of affiliates of an FCM or employees of an FCM. See 17 CFR 
1.17(b)(4).
    \94\ 17 CFR 240.15c3-1.
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    The Commission is proposing several amendments to regulation Sec.  
1.17 to reflect the regulatory capital treatment of separate accounts 
that would result from the implementation of proposed regulation Sec.  
1.44, including the conditions contained in proposed regulation Sec.  
1.44(g)(3) discussed below. These proposed amendments were not part of 
the First Proposal. As a general matter, the proposed amendments to 
regulation Sec.  1.17 are designed to ensure that FCMs risk manage 
separate accounts consistently, and cannot revert to calculating 
minimum financial requirements on a combined account basis where such 
calculations would tend to reflect less risk and reduced financial 
requirements for a customer than if each of the customer's separate 
accounts were treated as an account of a distinct customer without 
regard to the same customer's other separate accounts.
    Consistent with the above intent, the Commission is proposing to 
expand the list of modifiers to the definition of the term ``risk 
margin'' for an account by adding proposed paragraph (b)(8)(v) to 
regulation Sec.  1.17, providing that if an FCM carries separate 
accounts for separate account customers pursuant to proposed regulation 
Sec.  1.44, then the FCM shall calculate the risk margin pursuant to 
regulation Sec.  1.17(a)(1)(i)(B)(1) as if each separate account is 
owned by a separate entity. The Commission notes that, under the 
proposed regulation, risk margin would be calculated on an individual 
basis for each separate account. Calculating risk margin separately for 
each separate account would eliminate the potential for portfolio 
margining offsets based on positions between separate accounts of the 
same separate account customer.\95\ Therefore, the proposal to treat 
separate accounts as accounts of separate entities would either 
increase, or leave unchanged, the total risk margin requirement, and 
thus the minimum adjusted net capital requirement, for an FCM providing 
separate account treatment.\96\ The proposed addition of paragraph 
(b)(8)(v) to regulation Sec.  1.17 is intended to further clarify that, 
pursuant to the Commission's FCM capital rule, an FCM that elects to 
permit separate account treatment must compute the risk margin amount 
for separate

[[Page 15320]]

accounts as if each account is an account of a separate entity.
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    \95\ As noted in regulation Sec.  39.13(g)(4), a DCO may allow 
reduction in initial margin requirements for related positions if 
the price risks with respect to such positions are significantly and 
reliably correlated. This includes cases where (A) The products on 
which the positions are based are complements of, or substitutes 
for, each other. An example might be long versus short positions in 
oil and natural gas, both of which may be used for generating 
energy. However, portfolio margining is applicable only to accounts 
for the same customer. See regulation Sec.  39.13(g)(8)(i) 
(requiring collection of initial margin on a gross basis for each 
clearing member's customer accounts). So, if a customer has, in a 
single account, both long oil positions and short natural gas 
positions, they may benefit from a reduction in initial margin 
requirements for the two risk-offsetting positions. However, if 
those positions are in different separate accounts of the customer 
under this proposal, the positions would not lead to an initial 
margin reduction as the positions would not be margined on a 
combined or portfolio basis.
    \96\ As noted above, per regulation Sec.  1.17(a)(1)(i), the 
adjusted net capital requirement for an FCM is the greatest of a 
number of calculations, one of which is eight percent of the total 
risk margin requirement as defined in regulation Sec.  1.17(b)(8). 
Thus, a calculation that would increase, or leave the same, the risk 
margin requirement would correspondingly increase, or leave the 
same, the adjusted net capital requirement.
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    The Commission further notes that the proposed amendment to the 
definition of the term ``risk margin'' in regulation Sec.  1.17(b)(8) 
to reflect separate accounts, and the resulting potential increase in 
an FCM's minimum adjusted net capital requirement under regulation 
Sec.  1.17(a)(1)(i), would also impact other regulations that impose 
obligations on FCMs based on their level of adjusted net capital. For 
example, regulation Sec.  1.17(h) conditions an FCM's ability to repay 
or prepay subordinated debt obligations on the FCM maintaining an 
amount of adjusted net capital that, after taking into effect the 
amount of the subordinated debt payment and other subordinate debt 
payments maturing within a set time period, exceeds the FCM's minimum 
adjusted net capital requirement by 120 percent to 125 percent, as 
specified in the applicable provision of regulation Sec.  1.17(h).\97\ 
The proposed amendments to the minimum capital requirements would also 
impact an FCM's obligation to provide certain notices to the Commission 
and to the FCM's DSRO under Commission regulation Sec.  1.12.\98\
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    \97\ See, e.g., 17 CFR 1.17(h)(2)(vii) which generally provides, 
subject to certain conditions, that an FCM may not make a prepayment 
on an outstanding subordinated debt obligation if such payment would 
result in the FCM maintaining less than 120 percent of its minimum 
adjusted net capital requirement.
    \98\ See, e.g., 17 CFR 1.12(a), which requires an FCM to provide 
notice to the Commission and the firm's DSRO if the FCM's adjusted 
net capital at any time is less than the minimum required by 
regulation Sec.  1.17.
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    The Commission additionally notes that, as discussed further below, 
it is additionally proposing to amend regulation Sec.  1.58 to provide 
that, where a clearing FCM carries an omnibus customer account for a 
non-clearing FCM, and the non-clearing FCM applies separate account 
treatment, then such non-clearing FCM must calculate initial and 
maintenance margin for purposes of regulation Sec.  1.58(a) separately 
for each separate account. These proposed amendments to regulation 
Sec.  1.58 are discussed further below.
    Second, the Commission proposes to amend regulation Sec.  
1.17(c)(2), which defines ``current assets'' that an FCM may recognize 
and include in computing its net capital. Regulation Sec.  1.17(c)(2) 
currently defines ``current assets'' to include cash and other assets 
or resources commonly identified as those that are reasonably expected 
to be realized in cash or sold during the next 12 months. Regulation 
Sec.  1.17(c)(2)(i), however, provides that an FCM must exclude from 
current assets any unsecured receivables resulting from futures, 
Cleared Swaps, or 30.7 accounts that liquidate to a deficit or contain 
a debit ledger balance only, provided, however, that the FCM may 
include a deficit or debit ledger balance in current assets until the 
close of business on the business day following the date on which the 
deficit or debit ledger balance originated (provided, in turn, that the 
account had timely satisfied the previous day's deficits or debit 
ledger balances).
    The Commission is proposing to amend regulation Sec.  1.17(c)(2)(i) 
to provide explicitly that if an FCM carries separate accounts for 
separate account customers pursuant to proposed regulation Sec.  1.44, 
then the FCM must treat each separate account as an account of a 
separate entity. Accordingly, the FCM must exclude each unsecured 
separate account that liquidates to a deficit or contains a debit 
ledger balance only from current assets in its calculation of net 
capital, provided, however, that if the separate account is subject to 
a call for margin by the FCM it may be included in current assets until 
the close of business on the business day following the date on which 
the deficit or debit ledger balance originated, provided that the 
separate account timely satisfied previous day's debit or deficits in 
its entirety. If the separate account does not satisfy a previous day's 
deficit in its entirety, then the deficit for the separate account, and 
any other deficits of the separate account customer in other separate 
accounts carried by the FCM, shall not be included in current assets 
until all such calls are satisfied in their entirety. The proposed 
amendment to regulation Sec.  1.17(c)(2)(i) would provide the same 
capital treatment to separate accounts as is currently provided 
customer accounts that liquidate to deficits or contain debit ledger 
balances, and is consistent with corresponding conditions to the no-
action position in CFTC Letter No. 19-17.\99\
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    \99\ CFTC Letter No. 19-17. CFTC Letter No. 19-17 provides that 
an ``FCM shall record each separate account independently in the 
FCM's books and records, i.e., the FCM shall record separate 
accounts as a receivable (debit/deficit) or payable with no offsets 
between the other separate accounts of the same customer.'' Id. 
(Condition 6.) CFTC Letter No. 19-17 also provides that ``the 
receivable from a separate account shall only be considered secured 
(a current/allowable asset) based on the assets of that separate 
account, not on the assets held in another separate account of the 
same customer.'' Id. (Condition 7.)
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    Third, the Commission proposes to amend regulation Sec.  
1.17(c)(4), which defines the term ``liabilities'' for purposes of an 
FCM calculating its net capital. Regulation Sec.  1.17(c)(4) generally 
defines the term ``liabilities'' to mean the total money liabilities of 
an FCM arising in connection with any transaction whatsoever, including 
economic obligations of an FCM that are recognized and measured in 
conformity with generally accepted accounting principles. Regulation 
Sec.  1.17(c)(4) also provides that for purposes of computing net 
capital, an FCM may exclude from its liabilities funds held in 
segregation for futures customers, Cleared Swaps Customers, and 30.7 
customers, provided that such segregated funds are also excluded from 
the FCM's current assets in computing the firm's net capital. The 
Commission is proposing to amend regulation Sec.  1.17(c)(4)(ii) to 
explicitly provide that an FCM that carries the separate accounts of 
separate account customers pursuant to proposed regulation Sec.  1.44 
must compute the amount of money, securities, and property due to a 
separate account customer as if each separate account of the separate 
account customer is a distinct customer. The Commission is further 
proposing to amend regulation Sec.  1.17(c)(4)(ii) to provide that an 
FCM, in computing its net capital, may exclude funds held in 
segregation for separate account customers from the FCM's liabilities, 
provided that funds held in segregation for separate account customers 
are also excluded from the FCM's current assets. The purpose of the 
proposed amendment is to ensure that an FCM, in computing its net 
capital, reflects separate accounts in a consistent manner in 
determining its total current assets and liabilities.
    Fourth, the Commission proposes to amend regulation Sec.  
1.17(c)(5), which defines the term ``adjusted net capital.'' Regulation 
Sec.  1.17(c)(5)(viii) provides, in relevant part, that adjusted net 
capital means net capital minus, among other items detailed in 
regulation Sec.  1.17(c)(5), the amount of funds required in each 
customer account to meet maintenance margin requirements of the 
applicable board of trade or, if there are no such maintenance margin 
requirements, clearing organization margin requirements applicable to 
the account's positions. FCMs are allowed to apply (that is, to reduce 
the amount of this deduction from capital by) ``calls for margin or 
other required deposits which are outstanding no more than one business 
day.'' However, once a customer fails to meet a margin call within one 
business day, the FCM loses the one business day ``grace period'' for 
receiving any of that customer's future margin calls, until the point 
in time at which the customer is no longer undermargined.

[[Page 15321]]

    Thus, if, due to activity on Monday, Customer A is undermargined by 
$150, and the FCM calls Customer A for that margin on Tuesday, the FCM 
does not need to deduct that $150 from its net capital in computing its 
adjusted net capital, so long as the margin call is met by the close of 
business on Wednesday. Moreover, if Customer A, due to activity on 
Tuesday, is undermargined by an additional $100, and the FCM calls for 
that additional $100 on Wednesday, the FCM does not need to deduct that 
additional $100 on Wednesday. If Customer A meets the $150 call by 
close of business Wednesday, and the $100 call by close of business on 
Thursday, then no deduction need be taken for either the $150 or the 
$100 margin calls. However, if Customer A fails to meet Tuesday's $150 
call by close of business on Wednesday, then the FCM must deduct both 
the $150 from Tuesday and the $100 from Wednesday (thus a total of 
$250), as well as any future undermargined amounts until Customer A 
cures its entire undermargined amount. Again, once a customer fails to 
meet a margin call within one business day, the FCM loses the one 
business day ``grace period'' for that customer meeting any of its 
future margin calls, until the point in time at which the customer is 
no longer undermargined.
    The Commission proposes to amend regulation Sec.  1.17(c)(5)(viii) 
to provide that an FCM that carries separate accounts for a separate 
account customer pursuant to proposed regulation Sec.  1.44 must 
compute the amount of funds required to meet maintenance margin 
requirements for each separate account as if the account was owned by a 
distinct customer. However, if a margin call for any separate account 
of a separate account customer is outstanding for more than one 
business day, then (consistent with the treatment of multiple margin 
calls for a single customer described in the previous paragraph), no 
margin call for that separate account customer will benefit from the 
one business day grace period until the point in time at which all 
margin calls for the separate accounts of that separate account 
customer have been met in full.
    As discussed further below in the context of proposed regulation 
Sec.  1.44(f), the concepts of margin calls that are outstanding no 
more than one business day (for purposes of Sec.  1.17(c)(5)(viii)), 
and meeting a one business day margin call (for purposes of Sec.  
1.44(f)) are separate and distinct--it is possible that a separate 
account customer may meet the test for the first, but not the second, 
or may meet the test for the second, but not the first.
    The Commission notes that its proposed amendments to regulation 
Sec.  1.17 also include a number of technical changes designed to 
improve clarity and promote consistency with other Commission 
regulations.\100\
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    \100\ E.g., changes to punctuation and substitution of level of 
maintenance margin or performance bond required for the customer and 
noncustomer positions for level of maintenance margin or performance 
bond required for the customer or noncustomer positions with respect 
to the meaning of risk margin for an account. See, e.g., proposed 
regulation Sec.  1.17(b)(8). The Commission is further proposing to 
replace the term ``FCM'' in regulation Sec.  1.17(b)(8) with 
``futures commission merchant.'' The Commission is also proposing to 
reorganize paragraph Sec.  1.17(c)(5)(viii) into sub-paragraphs (A), 
(B), (C), and (D) to enhance clarity. The Commission is additionally 
proposing to reorganize the wording of the definition of the term 
``business day'' in regulation Sec.  1.17(b)(6) to read any day 
other than a Saturday, Sunday, or holiday rather than any day other 
than a Sunday, Saturday, or holiday. This change would align the 
wording with the wording of the term ``business day'' in proposed 
regulation Sec.  1.3.
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C. Proposed Amendments to Regulations Sec. Sec.  1.20, 1.32, 22.2, and 
30.7

    As previously stated, a fundamental purpose of the CEA is to 
provide for the protection of market participants from misuses of 
customer assets.\101\ Regulations Sec. Sec.  1.32, 22.2(g), and 30.7(l) 
are designed in part to further this purpose by requiring each FCM 
carrying accounts for futures customers, Cleared Swaps Customers, or 
30.7 customers, respectively, to perform a daily computation of, and to 
prepare a daily record demonstrating compliance with, the FCM's 
obligation to hold a sufficient amount of funds in designated customer 
segregated accounts to meet the aggregate credit balances of all of the 
FCM's futures customers, Cleared Swaps Customers, and 30.7 
customers.\102\ An FCM is required to prepare the daily segregation 
calculations reflecting customer account balances as of the close of 
business each day, and to submit the applicable segregation statements 
electronically to the Commission and to the FCM's DSRO by noon the next 
business day.
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    \101\ Section 3(b) of the CEA, 7 U.S.C. 5(b).
    \102\ Each FCM that carries accounts for futures customers, 
Cleared Swaps Customers, and 30.7 customers is required to prepare 
daily statements demonstrating compliance with the applicable 
segregation requirements. For futures customers, the FCM must 
prepare a daily Statement of Segregation Requirements and Funds in 
Segregation for Customers Trading on U.S. Commodity Exchanges (17 
CFR 1.32(a)) (``Futures Segregation Statement''); for Cleared Swaps 
Customers, the FCM must prepare a daily Statement of Cleared Swaps 
Customer Segregation Requirements and Funds in Cleared Swaps 
Customer Accounts under section 4d(f) of the CEA (17 CFR 22.2(g)(1) 
through (4)) (``Cleared Swaps Segregation Statement''); and for 30.7 
customers, the FCM must prepare a daily Statement of Secured Amounts 
and Funds Held in Separate Accounts for 30.7 Customers pursuant to 
Commission Regulation 30.7 (17 CFR 30.7(l)(1)). The statements 
listed above are part of the Commission's Form 1-FR-FCM, which 
contains the financial reporting templates required to be filed by 
FCMs.
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    The Commission is proposing to amend regulations Sec. Sec.  1.32, 
22.2, and 30.7 to provide that an FCM that permits separate accounts 
pursuant to proposed regulation Sec.  1.44 must perform its daily 
segregation calculations, and prepare its daily segregation statements, 
by treating the accounts of separate account customers as accounts of 
separate entities. The proposed amendments would add new paragraph (l) 
to regulation Sec.  1.32, new paragraph (g)(11) to regulation Sec.  
22.2, and new paragraph (l)(11) to regulation Sec.  30.7. The purpose 
of the proposed amendments is to establish the manner in which these 
existing segregation and reporting obligations apply to FCMs that 
permit separate accounts pursuant to proposed regulation Sec.  1.44. 
Regulations Sec. Sec.  1.32, 22.2, and 30.7 require an FCM to prepare 
one daily segregation computation, and submit one segregation schedule, 
for each of its futures customer funds, Cleared Swaps Customer 
Collateral, and 30.7 customer funds, respectively. The proposed 
amendments to regulations Sec. Sec.  1.32, 22.2(g), and 30.7(l) provide 
that an FCM that permits separate accounts, in preparing such 
computation and segregation schedule, would be required to record each 
separate account as if it was an account of a separate entity, and 
include all separate accounts with other futures accounts, Cleared 
Swaps Customer Accounts, and 30.7 accounts, as applicable, carried by 
the FCM that are not separate accounts.
    In addition, the proposed amendments would provide that an FCM, in 
computing its segregation obligations, may offset a net deficit in a 
particular separate account customer's separate account against the 
current value of any readily marketable securities held by the FCM for 
the separate account customer, provided that the readily marketable 
securities are held as margin collateral for the specific separate 
account that is in deficit. Readily marketable securities held for 
other separate accounts of the separate account customer may not be 
used to offset the separate accounts that is in deficit.\103\ The 
proposed amendments to regulations Sec. Sec.  1.32, 22.2(g), and 
30.7(l) with respect to the offsetting of a net deficit in a customer's 
account by the value of readily marketable securities

[[Page 15322]]

held in the customer's account are consistent with how an FCM currently 
offsets a net deficit in a customer's account that is margined by 
securities. In addition, the proposed amendments are consistent with 
the separate account conditions to the no-action position in CFTC 
Letter No. 19-17.\104\
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    \103\ I.e., if separate account customer S has separate accounts 
A and B, then readily marketable securities held for separate 
account A could not be used to offset a deficit in separate account 
B, and vice versa.
    \104\ See CFTC Letter No. 19-17 (providing, among other 
conditions for separate account treatment, that ``[e]ach receivable 
from a separate account shall be `grossed up' on the applicable 
segregation, secured or cleared swaps customer statement; thus, an 
FCM shall use its own funds to cover the debit/deficit of each 
separate account.'').
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    The Commission is also proposing to amend regulation Sec.  22.2(f) 
to revise the regulatory description of the stated calculation of the 
total amount of funds that an FCM is required to hold in segregation 
for Cleared Swaps Customers. The proposed amendment would (i) correct 
an error included in the drafting of the description of the calculation 
when the regulation was originally adopted in 2012; and (ii) align the 
regulatory text describing the segregation calculation set forth in 
regulation Sec.  22.2(f) with the calculation performed on the Cleared 
Swaps Segregation Statement that is submitted to the Commission each 
day by FCMs with Cleared Swaps Customers pursuant to regulation Sec.  
22.2(g). The proposed amendment would be applicable across FCMs with 
Cleared Swaps Customers, whether or not such FCMs maintain separate 
accounts.
    The segregation calculation required by regulation Sec.  22.2(f) is 
intended to ensure that an FCM holds, at all times, a sufficient amount 
of funds in segregation to cover its total financial obligation to all 
Cleared Swaps Customers. Compliance with the segregation requirements 
helps ensure that an FCM is not using the funds of one Cleared Swaps 
Customer to cover a deficit in the Cleared Swaps Customer Account of 
another Cleared Swaps Customer, and further helps ensure that an FCM 
holds sufficient funds in segregation to transfer the Cleared Swaps 
Customer Accounts, including the Cleared Swaps and the Cleared Swaps 
Customer Collateral, to a transferee FCM if the transferor FCM becomes 
insolvent.
    To achieve the regulatory objective noted above, regulation Sec.  
22.2(f)(2) currently requires an FCM to calculate its minimum 
segregation requirement as the sum of the net liquidating equities of 
each Cleared Swaps Customer Account with a positive account balance 
carried by the firm. The net liquidating equity of a Cleared Swaps 
Customer Account is explicitly calculated as the sum of the market 
value of any funds held in the Cleared Swaps Customer Account of a 
Cleared Swaps Customer (including readily marketable securities), as 
adjusted positively or negatively by, among other things, any 
unrealized gains or losses on open Cleared Swaps positions, the value 
of open long option positions and short option positions, fees charged 
to the account, and authorized withdrawals. To the extent that the 
calculation results in a net liquidating equity that is positive, the 
Cleared Swaps Customer Account has a credit balance.\105\ To the extent 
that the calculation results in a net liquidating equity that is 
negative, the Cleared Swaps Customer Account has a debit balance.\106\ 
Regulation Sec.  22.2(f)(4) provides that an FCM must hold, at all 
times, a sufficient amount of funds in segregation to meet the total 
net liquidating equities of all Cleared Swaps Customer Accounts with 
credit balances, and further provides that the FCM may not offset this 
total by any Cleared Swaps Customer Accounts with debit balances.
---------------------------------------------------------------------------

    \105\ 17 CFR 22.2(f)(3).
    \106\ Id.
---------------------------------------------------------------------------

    With respect to Cleared Swaps Customer Accounts with debit 
balances, regulation Sec.  22.2(f)(5) further requires the FCM to 
include in the total funds required to be held in segregation all debit 
balances to the extent secured by readily marketable securities held 
for the particular Cleared Swaps Customers that have debit balances. 
The required addition of debit balance accounts in regulation Sec.  
22.2(f)(5) was intended to be consistent with the long-standing Futures 
Segregation Statement contained in the Form 1-FR-FCM and the Form 1-FR-
FCM Instructions Manual.\107\ An error, however, was made in drafting 
the description of the details of the segregation calculation in 
regulation Sec.  22.2(f)(5). Specifically, as noted above, regulation 
Sec.  22.2(f)(5) requires an FCM to include in the total segregation 
requirement any Cleared Swaps Customer Accounts with debit balances 
that are secured by readily marketable securities. However, the full 
value of the readily marketable collateral is part of the calculation 
of the net liquidating equity of the account. Therefore, a Cleared 
Swaps Customer Account with a debit balance would never have additional 
readily marketable securities available to offset a debit balance.\108\
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    \107\ In adopting the final regulation Sec.  22.2(f), the 
Commission stated that proposed regulation Sec.  22.2(f) set forth 
an explicit calculation for the amount of Cleared Swaps Customer 
Collateral that an FCM must maintain in segregation that did not 
materially differ from the calculation of the amount of funds an FCM 
is required to hold in segregation under the Form 1-FR-FCM for 
futures customers. The Commission adopted final regulation Sec.  
22.2(f) as proposed. Protection of Cleared Swaps Customer Contracts 
and Collateral; Conforming Amendments to the Commodity Broker 
Bankruptcy Provisions; Final Rule, 77 FR 6336, at 6352-6353 (Feb. 7, 
2012).
    \108\ For example, if a Cleared Swaps Customer Account was 
comprised of cash of $300, securities of $200, and an unrealized 
loss on open Cleared Swaps of $600, the account would have a net 
equity debit balance of $100 under regulation Sec.  22.2(f). There 
are no additional securities that the FCM may use to secure the $100 
debit balance and, therefore, the FCM is required to increase its 
segregation requirement by $100 to ensure that there are sufficient 
funds in segregation to cover the FCM's obligation to all Cleared 
Swaps Customers with a credit balance.
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    The segregation calculation required under regulation Sec.  1.32 
for futures accounts, and the Commission's Form 1-FR-FCM and related 
Form 1-FR-FCM Instructions Manual, differs from the description as 
currently written in regulation Sec.  22.2(f)(4) and (5) with respect 
to the offsetting of debit balances by readily marketable securities. 
Specifically, an FCM is required to calculate the net equity of each 
futures customer excluding the value of any noncash collateral held in 
the account.\109\ If the calculation results in a debit balance, the 
FCM is permitted to offset the debit balance by the fair market value 
of any readily marketable securities (after application of applicable 
securities haircuts set forth in the regulation).\110\
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    \109\ The Form 1-FR-FCM Instructions Manual provides that a 
customer account is in deficit when the combination of the account's 
cash ledger balance, unrealized gain or loss on open futures 
contracts, and the value of open option contracts liquidates to an 
amount less than zero. The manual explicitly provides that ``[a]ny 
securities used to margin the account are not included in 
determining a customer's deficit.'' 1-FR-FCM Instructions Manual, p. 
10-2. Accordingly, an FCM would exclude the value of any readily 
marketable securities from the calculation of the customer's account 
balance. The 1-FR-FCM Instructions Manual is available on the 
Commission's website at: www.cftc.gov/sites/default/files/idc/groups/public/@iointermediaries/documents/file/1fr-fcminstructions.pdf.
    \110\ 17 CFR 1.32(b). Applying the calculation in regulation 
Sec.  1.32 to Cleared Swaps, if a Cleared Swaps Customer Account was 
comprised of cash of $300, securities of $200, and an unrealized 
loss on open Cleared Swaps of $600, the account would have a net 
equity debit balance of $300, as the value of the securities is not 
included in the calculation ($300 cash less $600 in unrealized 
losses, results in a $300 debit balance). The FCM may offset the 
$300 debit balance by $170, which represents the value of the 
readily marketable securities held in the account as collateral 
($200 fair market value of the securities, less a $30 haircut). The 
FCM is then required to include $130 in its segregation requirement, 
which represents the amount of the unsecured debit balance remaining 
in the customer's account (i.e., $300 debit balance, less $170 value 
of the securities after haircuts).
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    As noted above, the proposed amendments to regulation Sec.  
22.2(f)(4) and (5) are intended to correct the description of the 
segregation calculation and to make it consistent

[[Page 15323]]

with how FCMs calculate their total Cleared Swaps segregation 
obligations under regulation Sec.  22.2(g), with how FCMs report their 
total segregation requirements on the Cleared Swaps Segregation 
Statement, and with the segregation calculation requirements for 
futures accounts under regulation Sec.  1.32. Thus, the proposed 
amendments are not expected to have any effect on FCMs.
    In addition, the Commission is proposing to amend regulations 
Sec. Sec.  1.20(i) and 30.7(f), which require an FCM carrying futures 
accounts and 30.7 accounts, respectively, to calculate its total 
segregation requirements in a manner that is consistent with current 
regulation Sec.  22.2(f). As with the proposed amendment to regulation 
Sec.  22.2(f), the proposed amendments to regulations Sec. Sec.  
1.20(i) and 30.7(f) apply across FCMs that maintain futures customer 
accounts or 30.7 customer accounts, respectively, whether or not such 
FCMs maintain separate accounts. The Commission adopted current 
regulations Sec. Sec.  1.20(i) and 30.7(f) in 2013. The final 
regulations, however, did not include the provision set forth in 
regulation Sec.  22.2(f)(5) requiring an FCM to include any secured 
debit balances in its segregation requirement. This omission was 
unintentional, as the Commission expressed its intent to ``mirror'' the 
requirements of regulation Sec.  22.2(f) in regulation Sec.  1.20(i) 
(and effectively regulation Sec.  30.7(f)).\111\
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    \111\ Enhancing Protections Afforded Customers and Customer 
Funds Held by Futures Commission Merchants and Derivatives Clearing 
Organizations, 78 FR 68506, 68543 (Nov. 14, 2013) (discussing the 
Commission's intent to adopt regulation Sec.  1.20(i) consistent 
with the corresponding requirements in regulation Sec.  22.2(f)); 
id. at 68576 (discussing the Commission's intent for the daily 
segregation calculation for 30.7 accounts to be consistent with the 
requirements for the daily segregation calculations for futures 
customer funds in regulation Sec.  1.32).
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    To address the omission, the Commission is proposing to amend 
regulations Sec. Sec.  1.20(i) and 30.7(f) to reflect the requirement 
for an FCM to include in the calculation of its futures and foreign 
futures segregation requirement any unsecured customer debit balances, 
calculated consistent with the proposed amendments to regulation Sec.  
22.2(f)(4) and (5) that are discussed above. The proposed amendments to 
regulations Sec. Sec.  1.20(i) and 30.7(f) would accurately describe 
and reflect the existing segregation calculations for futures, foreign 
futures, and Cleared Swaps as originally intended. The proposed 
amendments to regulations Sec. Sec.  1.20(i) and 30.7(f) are not 
expected to have any impact on FCMs as the firms currently calculate 
their segregation requirements by including customer unsecured debit 
balances.

D. Proposed Regulation Sec.  1.44(a)

    Proposed regulation Sec.  1.44 will represent a discrete set of 
regulations, first directly requiring FCMs to avoid returning margin to 
customers where doing so would create or exacerbate a margin deficiency 
in the customer's account, but then allowing FCMs to provide for 
separate account treatment within the Commission's broader regulatory 
framework for FCMs. As such, proposed regulation Sec.  1.44 contains a 
number of terms that are specific to proposed regulation Sec.  1.44, 
but are not applicable, or are not applicable in the same manner, with 
respect to other of the Commission's FCM regulations. The Commission 
therefore proposes to add new regulation Sec.  1.44(a) to define 
certain terms ``only for purposes of this section'' (i.e., proposed 
regulation Sec.  1.44).
    The Commission proposes to define ``account'' for purposes of 
proposed regulation Sec.  1.44 as meaning a futures account, a Cleared 
Swaps Customer Account (both of which are defined in regulation Sec.  
1.3, which definitions apply broadly to all CFTC regulations) or a 
Sec.  30.7 account (as defined in regulation Sec.  30.1). This 
definition is intended to implement the proposed Margin Adequacy 
Requirement and requirements for separate account treatment subject to 
such Margin Adequacy Requirement, with respect to accounts of all three 
types. This definition was not included in the First Proposal.
    The Commission also proposes in proposed regulation Sec.  1.44(a) 
to further define ``business day,'' as having the same meaning as set 
forth in regulation Sec.  1.3, but with the clarification that 
``holiday'' refers to Federal holidays as established by 5 U.S.C. 6103. 
As noted above, this definition is similar to the definition of 
``United States business day'' included in the First Proposal. In its 
comment responding to the First Proposal, FIA noted that the term 
``United States business day'' accounts for days that banks are open, 
but may not encompass days when other markets, such as securities 
markets, are closed, which could make it difficult to meet margin calls 
by liquidating certain instruments.\112\ The Commission requests 
further comment on this term, below.
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    \112\ FIA Comment Letter.
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    Relatedly, the Commission proposes to define ``one business day 
margin call'' as a margin call that is issued and met in accordance 
with the requirements of proposed regulation Sec.  1.44(f). The First 
Proposal did not include this definition, although it contained 
provisions that, similar to proposed regulation Sec.  1.44(f), further 
explained when an FCM would be considered in compliance with a one 
business day margin call. As noted above, this definition (along with 
all of the definitions in proposed regulation Sec.  1.44(a)) applies 
only for purposes of proposed regulation Sec.  1.44, thus, this 
definition of ``one business day margin call'' is not intended to apply 
in any other context.
    Under proposed regulation Sec.  1.44, an FCM may engage in separate 
account treatment only when it, and its customer, are operating within 
the ``ordinary course of business,'' as that term is defined in the 
proposed regulation. The Commission proposes to define ``ordinary 
course of business'' as meaning the standard day-to-day operation of 
the FCM's business relationship with its separate account customer, a 
condition where there are no unusual circumstances that might indicate 
a materially increased level of risk that the separate account customer 
may fail promptly to perform its financial obligations to the FCM, or 
decreased financial resilience on the part of the FCM. As noted in the 
proposed definition, proposed regulation Sec.  1.44(e) sets out 
circumstances that are inconsistent with the ordinary course of 
business, and the occurrence of which would require a cessation of 
separate account treatment. This definition of ``ordinary course of 
business'' is unchanged from the First Proposal, except that it 
replaces the term ``customer'' with the term ``separate account 
customer.'' Comments received regarding the definition of ``ordinary 
course of business'' are addressed in connection with proposed 
regulation Sec.  1.44(e) below, which enumerates events that are 
inconsistent with the ordinary course of business.
    The Commission also proposes to define ``separate account'' as 
meaning any one of multiple accounts of the same separate account 
customer that are carried by the same FCM. The definition of this term 
is the same as in the First Proposal, except that it replaces 
``customer'' with ``separate account customer'' and excludes the 
criteria that the FCM be a clearing member of a DCO. The Commission did 
not receive comments on the definition of this term in the First 
Proposal.
    As noted above, the Commission proposes to define ``separate 
account customer'' as meaning a customer for

[[Page 15324]]

which the FCM has elected to engage in separate account treatment. This 
definition was not included in the First Proposal.
    Lastly, the Commission proposes to define ``undermargined amount'' 
for an account as meaning the amount, if any, by which the customer 
margin requirements with respect to all products held in that account, 
exceeds the net liquidating value plus the margin deposits currently 
remaining in that account.\113\ The definition notes that for purposes 
of this definition, ``margin requirements'' shall mean the level of 
maintenance margin or performance bond (including, as appropriate, the 
equity component or premium for long or short option positions) 
required for the positions in the account by the applicable exchanges 
or clearing organizations.\114\ This clarification (which is drawn from 
the definition of risk margin in regulation Sec.  1.17(b)(8)) is in 
recognition of the difference between exchange (or clearing 
organization) requirements for ``initial margin'' and ``maintenance 
margin.'' However, here, in distinction to risk margin, the equity 
component or premium for long or short option positions is included, 
since those are part of the total required level of margin. ``Initial 
margin'' is the amount of margin (otherwise known as ``performance 
bond'' \115\ in this context) required to establish a position. Some 
(though not all) contract markets and clearing houses establish 
``maintenance margin'' requirements that are less than the 
corresponding initial margin requirement.'' Where, due to adverse 
market movements, the amount of margin on deposit is less than the 
initial margin requirement, but greater than or equal to maintenance 
margin, the FCM is not required to (though it may) call additional 
margin from the customer. Once the amount of margin on deposit is less 
than the maintenance margin required, the FCM must call the customer 
for enough margin to meet the initial margin level.
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    \113\ The definition of ``undermargined amount'' in proposed 
regulation Sec.  1.44(a) is different from, and simpler than, the 
definitions of ``undermargined amount'' for the purpose of residual 
interest calculations in regulations Sec. Sec.  1.22(c)(1), 
22.2(f)(6)(i), and 30.7(f)(1)(ii). The calculations in the latter 
cases are required to take into account information at the close of 
business on day T-1 that will be used to calculate a residual 
interest requirement on day T, as well as payments that may be 
received on day T, and the elimination of double counting of debit 
balances.
    \114\ The definition of ``undermargined amount'' in proposed 
regulation Sec.  1.44(a) further provides that, with respect to 
positions for which maintenance margin is not specified, ``margin 
requirements'' shall refer to the initial margin required for such 
positions.
    \115\ ``Performance bond'' secures the performance by a customer 
to meet its variation margin payment obligations to its FCM (or the 
performance of variation margin payment obligations of an FCM to the 
clearinghouse, or to an intermediary upstream FCM).
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    The Commission uses this term in connection with proposed 
regulation Sec.  1.44(f) in defining the requirements for making and 
meeting a one business day margin call, as well as in regulation Sec.  
1.44(g) in setting LSOC compliance calculations for separate accounts. 
This definition was not included in the First Proposal.
Request for Comment
    Question 4: How should the proposed definition of ``business day'' 
address days when securities and other markets are closed? For 
instance, should the Commission address in the definition days when 
such other markets are open, or create an exception for days when such 
markets are closed on a prescheduled basis? (E.g., a requirement rolls 
over to the next day that the market is open.) What liquidity 
challenges or other risks would result from such an exception? How do 
FCMs and customers currently address these cases?
    Question 5: In the proposed definition of ``undermargined amount'' 
in proposed regulation Sec.  1.44(a), the term ``margin deposits 
currently remaining'' does not include a deduction for ``haircuts'' on 
non-cash collateral or collateral posted in alternate currencies. This 
is consistent with the approach taken with respect to calculating 
undermargined amounts for purposes of determining requirements for 
residual interest in regulations Sec. Sec.  1.22(c)(1), 22.2(f)(6)(i), 
and 30.7(f)(1)(ii). By contrast, in a number of cases, Commission 
regulations require FCMs, in determining the amount of customer debit/
deficit balances secured by readily marketable securities, to apply 
securities haircuts set forth in SEC Rule 15c3-1(c)(2).\116\ Similarly, 
some exchanges require members, in determining the amount of margin 
they are required to collect from their customers, to apply haircuts to 
securities collateral in amounts consistent with SEC Rule 240.15c3-1, 
and to apply haircuts to commodities in amounts consistent with the 
inventory haircuts specified in Commission regulation Sec.  
1.17(c)(5)(ii).\117\
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    \116\ See, e.g., regulations Sec. Sec.  1.32(b) and 
22.2(f)(5)(iii).
    \117\ See, e.g., CME Rule 930.C, ICE Futures U.S. Rule 5.03(j).
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    Should the definition of ``undermargined amount'' apply haircuts to 
the value of customer collateral held by the FCM? If so, should the 
amount of such haircuts be based on SEC rule 240.15c3-1 and Commission 
regulation Sec.  1.17(c)(5)(ii), or some other basis?

E. Proposed Regulation Sec.  1.44(b)

    As discussed above, the Commission proposes regulation Sec.  
1.44(b) to apply directly to FCMs, whether clearing or non-clearing, 
the same Margin Adequacy Requirement that DCOs are required to apply to 
their clearing FCMs pursuant to regulation Sec.  39.13(g)(8)(iii). 
Proposed regulation Sec.  1.44(b) provides that an FCM shall ensure 
that a customer does not withdraw funds from its accounts with such FCM 
unless the net liquidating value plus the margin deposits remaining in 
the customer's account after such withdrawal are sufficient to meet the 
customer initial margin requirements with respect to all products held 
in such customer's account, except as provided in proposed regulation 
Sec.  1.44(c), which allows for separate account treatment under 
ordinary course of business conditions.\118\
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    \118\ Consistent with the existing Margins Handbook, the Margin 
Adequacy Requirement is based on initial margin requirements rather 
than any lower maintenance margin requirement. See JAC Margins 
Handbook at p. 10-1 (``Margin Funds Available for Disbursement = Net 
Liquidating Value + Margin Deposits-Initial Margin Requirement 
>=0''); see also supra n. 14 and accompanying text.
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    The Commission acknowledges that real-time calculation of margin 
adequacy with respect to a potential withdrawal may prove 
impracticable. Instead, the Commission seeks to articulate a standard 
for the time as of which such calculation shall be made that is 
consistent with the Commission's requirements for calculation of 
undermargined amounts for purposes of an FCM's residual interest 
calculations. Regulations Sec. Sec.  1.22(c)(2), 22.2(f)(6)(ii), and 
30.7(f)(ii)(B) require each FCM to compute such undermargined amounts 
based on the information available to the FCM as of the close of each 
business day for futures customer accounts, Cleared Swaps Customer 
Accounts, and 30.7 accounts, respectively. To ensure such consistency, 
proposed regulation Sec.  1.44(b)(1) provides that the sufficiency of 
the amount in a customer's account to meet customer initial margin 
requirements following a potential withdrawal shall be calculated as of 
close of business on the previous business day.
    In order to address circumstances in which the previous day is a 
holiday on which markets, but not banks, may be open, proposed 
regulation Sec.  1.44(b)(2) further provides that, for purposes of

[[Page 15325]]

proposed regulation Sec.  1.44(b)(1)'s margin adequacy calculation 
requirements, where the previous day (excluding Saturdays and Sundays) 
is a holiday, as defined in proposed regulation Sec.  1.44(a), where 
any DCM on which the FCM trades is open for trading, and where an 
account of any of the FCM's customers includes positions traded on such 
a market, the margin adequacy calculation shall instead be made as of 
the close of business on such holiday.\119\
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    \119\ Proposed regulation Sec.  1.44(b)(2), and proposed 
regulation Sec.  1.44(f)(7), discussed below, are consistent with 
JAC Regulatory Alert 22-02, which provides that an FCM must issue 
margin calls to customers on holidays where futures markets are open 
and U.S. banks are closed. The margin calls are calculated based on 
information as of the close of the previous business day (i.e., the 
business day prior to the holiday) and the FCM does not count the 
holiday for purposes of aging the margin call. JAC Regulatory Alert 
22-01, Mar. 30, 2022, available at www.jacfutures.com.
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    The Commission notes that proposed regulation Sec.  1.44(b)'s 
requirements related to the timing of the margin adequacy calculation 
required by the same section are intended to represent a minimum 
standard, and are not intended to prevent an FCM from exercising its 
judgment in connection with good risk management practice to prevent 
the disbursement of customer funds based on intervening intraday market 
movements resulting in losses to a customer account between the 
calculation benchmark set forth in proposed regulation Sec.  1.44(b) 
and the time at which a customer requests to withdraw funds. Ensuring 
that customers do not withdraw funds from their accounts at FCMs if 
such withdrawal would create or exacerbate an initial margin shortfall 
is reasonably necessary from a risk management perspective, in that it 
reduces the likelihood and extent of the risk that the FCM must cover 
losses due to a default by the customer on obligations that exceed the 
margin actually held by the FCM. Similarly, because customer funds are 
held by an FCM in omnibus accounts, this prohibition will reduce the 
likelihood and extent of the risk that the FCM will effectively use the 
margin of other customers to ``margin or guarantee the trades or 
contracts, or to secure or extend the credit of'' a customer that was 
permitted to withdraw margin in a manner that created or exacerbated an 
undermargined condition,\120\ whether the duty to prevent such 
withdrawals falls on DCOs acting on their member FCMs, or directly on 
FCMs. Because regulation Sec.  39.13(g)(8)(iii) applies only to DCOs 
(which in turn can only apply regulation Sec.  39.13(g)(8)(iii)'s 
Margin Adequacy Requirement to their clearing member FCMs), and given 
the strong trend of the comments in favor of addressing these issues in 
a manner uniform among all types of FCMs directly in part 1 rather than 
indirectly through part 39, the Commission now views it as reasonably 
necessary to extend to all FCMs the requirement to prevent such under-
margining scenarios.
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    \120\ Cf. CEA 4d(a)(2), 7 U.S.C. 6d(a)(2) (an FCM may not use 
the money or property of one customer ``to margin or guarantee the 
trades or contracts, or to secure or extend the credit, of any 
customer or person other than the one for whom the same are held.'')
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    Accordingly, the Commission preliminarily believes that proposed 
regulation Sec.  1.44(b), which will apply a similar Margin Adequacy 
Requirement directly to FCMs, both clearing and non-clearing, would 
further serve to protect customer funds and mitigate systemic risk, 
thus effectuating CEA section 4d(a)(2), 4d(f)(2), and 4(b)(2)(A) \121\ 
and accomplishing the purposes of ``avoidance of systemic risk'' and 
``protecting all market participants from . . . misuses of customer 
assets.'' \122\
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    \121\ 7 U.S.C. 6d(a)(2), 6d(f)(2), and 6(b)(2)(A).
    \122\ CEA 3(b), 7 U.S.C. 5(b). See, as discussed above, section 
8a(5) of the CEA, 7 U.S.C. 12a(5), authorizing the Commission to 
make and promulgate such rules and regulation as in the Commission's 
judgment are reasonably necessary to effectuate any of the 
provisions, or to accomplish any of the purposes, of the CEA.
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F. Proposed Regulation Sec.  1.44(c)

    Proposed regulation Sec.  1.44(c) sets forth the fundamental terms 
and conditions for separate account treatment. As a general matter, 
those terms and conditions are substantially the same as in CFTC Letter 
No. 19-17, and in the First Proposal, except that the FCM may choose to 
engage in separate account treatment without a DCO specifically 
authorizing such treatment. Proposed regulation Sec.  1.44(c) provides 
that an FCM may, only during the ordinary course of business, as that 
term is defined in proposed regulation Sec.  1.44, treat the separate 
accounts of a separate account customer as accounts of separate 
entities for purposes of proposed regulation Sec.  1.44(b),\123\ if 
such FCM elects to do so as specified in proposed regulation Sec.  
1.44(d). Proposed regulation Sec.  1.44(c) further provides that an FCM 
that has made such an election shall comply with the risk-mitigating 
conditions set forth further in proposed regulation Sec.  1.44 and 
maintain written internal controls and procedures designed to ensure 
such compliance.
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    \123\ As noted above, proposed regulation Sec.  1.44(b) is 
intended to serve as an analog to regulation Sec.  39.13(g)(8)(iii) 
for FCMs.
---------------------------------------------------------------------------

    The Commission preliminarily believes that permitting FCMs to treat 
the separate accounts of separate account customers as accounts of 
separate entities for purposes of proposed regulation Sec.  1.44(b), 
subject to the risk-mitigating conditions set forth further in proposed 
regulation Sec.  1.44, accomplishes the CEA's purpose of promoting 
responsible innovation, while also maintaining continuity of robust 
customer fund protection and risk mitigation.\124\ Compliance with 
those conditions can best be achieved if the FCM maintains written 
internal controls and procedures designed to ensure such compliance.
---------------------------------------------------------------------------

    \124\ See CEA 3(b), 8a(5).
---------------------------------------------------------------------------

G. Proposed Regulation Sec.  1.44(d)

    Proposed regulation Sec.  1.44(d) provides that an FCM may elect to 
treat the separate accounts of a customer as accounts of separate 
entities for purposes of proposed regulation Sec.  1.44(b). In order to 
do so, an FCM shall include the customer on a list of separate account 
customers maintained in its books and records. Such list shall include 
the identity of each separate account customer, as well as the identity 
of each separate account of such customer. The FCM is required to keep 
such list current. Furthermore, the first time that an FCM chooses to 
include a customer on a list of separate account customers, the FCM is 
required to provide notification of the election to allow separate 
account treatment for customers in accordance with the process 
specified in regulation Sec.  1.12(n)(3).\125\ For the avoidance of 
doubt, the notification of such election would remain a one-time 
notification made the first time the FCM begins providing separate 
account notification for a customer. Successive notifications would not 
be required for each additional customer for which the FCM provides 
separate account treatment. Furthermore, the FCM would need only 
provide notification of the election, and would not be required to 
include the identity of the separate account customer. Proposed 
regulation Sec.  1.44(d) is intended to ensure that DSROs are able 
effectively to monitor and regulate FCMs that engage in separate 
account treatment, and that FCMs have the records necessary to 
understand which accounts receive separate account treatment for 
purposes of monitoring

[[Page 15326]]

compliance with the proposed regulation.
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    \125\ See 17 CFR 1.12(n)(3). Once an FCM provides notice in the 
first instance that it will apply separate account treatment to one 
or more customers, it would not be required to provide the same 
notification each time it applies separate account treatment to a 
new or additional customer.
---------------------------------------------------------------------------

    The First Proposal proposed to require a clearing FCM to (i) 
provide a one-time notification to its DSRO and any DCO of which it is 
a clearing member that it will apply such treatment; (ii) maintain and 
keep current a list of all separate accounts receiving such treatment; 
and (iii) conduct a review of such records of accounts receiving 
separate treatment no less than quarterly.
    With respect to the proposed one-time notice requirement for 
separate account treatment, the JAC in its comment contended that such 
notice (and other notices required under the First Proposal) should be 
made to any DCO permitting separate account treatment of which a 
clearing FCM is a member, but should not be required to be provided to 
the clearing FCM's DSRO, as monitoring for compliance with separate 
account treatment requirements would not fall under the oversight of 
the DSRO.\126\ Because the Commission is no longer proposing to codify 
the no-action position in CFTC Letter No. 19-17 in part 39, it is no 
longer proposing to require that notifications made to DSROs 
additionally be made to every DCO of which the notifying FCM is a 
member. Furthermore, the Commission believes notice to the Commission, 
and to DSROs (who review FCMs' compliance with the Commission's part 1 
regulations) pursuant to proposed regulation Sec.  1.44(d)(2) is 
proper.
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    \126\ JAC Comment Letter.
---------------------------------------------------------------------------

    With respect to the proposed recordkeeping requirement, CME opined 
in its comment that clearing FCMs should be required to be able to 
produce, upon request of the relevant DCO or the Commission, a current 
list of accounts receiving separate treatment.\127\ The Commission 
believes such requirement is already provided for by the requirement in 
proposed regulation Sec.  1.44(d) to maintain and keep current such a 
list, combined with Commission regulation Sec.  1.31(d)'s requirement 
for records entities to produce regulatory records promptly upon 
request by Commission representatives.
---------------------------------------------------------------------------

    \127\ CME Comment Letter.
---------------------------------------------------------------------------

    The Commission notes that, in proposing the recordkeeping 
requirement in this Second Proposal, it has determined not to include 
the First Proposal's proposed requirement that an FCM review records of 
accounts receiving separate treatment no less than quarterly, as the 
Commission views the objective of such requirement--the keeping of 
accurate and current records--as being subsumed by this Second 
Proposal's proposed requirement to maintain and keep current a list of 
accounts receiving separate treatment.

H. Proposed Regulation Sec.  1.44(e)

    Proposed regulation Sec.  1.44(e) enumerates events that would be 
inconsistent with the ordinary course of business, as that term is 
defined in proposed regulation Sec.  1.44(a), and sets forth 
requirements related to the cessation and resumption of permitting 
disbursements on a separate account basis upon, respectively, the 
occurrence and cure of certain non-ordinary course of business events. 
Each of these events would raise important concerns about the financial 
resiliency of the FCM or one or more of its separate account 
customers.\128\
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    \128\ For example, while the bankruptcy of an FCM or a separate 
account customer would have direct effects, the bankruptcy of an FCM 
or separate account customer's parent company would also portend 
financial challenges for, respectively, the FCM or separate account 
customer (e.g., if the parent company decided to liquidate its 
subsidiaries in bankruptcy). Experience in the bankruptcies of, 
e.g., Refco and Lehman, demonstrates that when one member of an 
affiliate financial company structure files for bankruptcy, other 
affiliates soon follow.
---------------------------------------------------------------------------

    These events are divided into two categories: (i) those that 
concern the separate accounts of a particular separate account 
customer, and the occurrence of any one of which would require the FCM 
to cease permitting disbursements on a separate account basis with 
respect to all accounts of that customer; and (ii) those that concern 
the financial status of the FCM itself, and the occurrence of any one 
of which would require the FCM to cease permitting disbursements on a 
separate account basis with respect to all of its separate account 
customers.
    It is important to note, however, that under this proposal, while a 
separate account customer is outside the ordinary course of business as 
defined in proposed regulation Sec.  1.44(a), it is only the privilege 
of permitting disbursements on a separate account basis, pursuant to 
proposed regulation Sec.  1.44(c), with respect to that customer and 
that customer's separate accounts, that is terminated (or suspended). 
So long as a customer remains a separate account customer, whether or 
not within the ordinary course of business, then the FCM is required to 
comply with the requirements in proposed regulation Sec. Sec.  1.44(g) 
and (h), including with respect to the relevant provisions addressed in 
regulations Sec. Sec.  1.17, 1.20, 1.22, 1.23, 1.32, 1.55, 1.58, 1.73, 
22.2, 30.7, and 39.13(g)(8)(i) with respect to that customer and all of 
that customer's separate accounts. Similarly, if it is the FCM that is 
outside the ordinary course of business, it is only the privilege of 
permitting disbursements on a separate account basis with respect to 
any of the FCM's separate account customers and their separate accounts 
that is terminated (or suspended). The FCM continues to be required to 
comply with the requirements in regulation Sec. Sec.  1.44(g) and (h), 
including with respect to the relevant provisions described above, with 
respect to all of its separate account customers and their separate 
accounts.
    The first category of events is as follows:
    <bullet> (1)(i) The separate account customer, including any 
separate account of such customer, fails to deposit initial margin or 
maintain maintenance margin or make payment of variation margin or 
option premium as specified in proposed regulation Sec.  1.44(f).\129\
---------------------------------------------------------------------------

    \129\ I.e., the one business day margin call requirement.
---------------------------------------------------------------------------

    <bullet> (ii) The occurrence and declaration by the FCM of an event 
of default as defined in the account documentation executed between the 
FCM and the separate account customer.
    <bullet> (iii) A good faith determination by the FCM's CCO, one of 
its senior risk managers, or other senior manager, following such FCM's 
own internal escalation procedures, that the separate account customer 
is in financial distress, or there is significant and bona fide risk 
that the separate account customer will be unable promptly to perform 
its financial obligations to the FCM, whether due to operational 
reasons or otherwise.
    <bullet> (iv) The insolvency or bankruptcy of the separate account 
customer or a parent company of such customer.
    <bullet> (v) The FCM receives notification that a board of trade, a 
DCO, a self-regulatory organization (SRO) as defined in regulation 
Sec.  1.3 or section 3(a)(26) of the Securities Exchange Act of 1934, 
the Commission, or another regulator \130\ with jurisdiction over the 
separate account customer, has initiated an action \131\ with respect 
to such customer based on an allegation that the customer is in 
financial distress.
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    \130\ E.g., the SEC or a foreign regulator.
    \131\ In this context, the term ``initiate an action'' is 
intended to include the filing of a complaint or a petition to take 
action against an entity, or an analogous process. The initiation or 
conduct of an investigation would not be sufficient to constitute 
``initiating an action'' in this context.
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    <bullet> (vi) The FCM is directed to cease permitting disbursements 
on a separate account basis, with respect to the

[[Page 15327]]

separate account customer, by a board of trade, a DCO, an SRO, the 
Commission, or another regulator with jurisdiction over the FCM, 
pursuant to, as applicable, board of trade, DCO, or SRO rules, 
government regulations, or law.
    The second set of events is as follows:
    <bullet> (2)(i) The FCM is notified by a board of trade, a DCO, an 
SRO, the Commission, or another regulator with jurisdiction over the 
FCM, that the board of trade, the DCO, the SRO, the Commission, or 
other regulator, as applicable, believes the FCM is in financial or 
other distress.
    <bullet> (ii) The FCM is under financial or other distress as 
determined in good faith by its CCO, senior risk managers, or other 
senior management.
    <bullet> (iii) The insolvency or bankruptcy of the FCM or a parent 
company of the FCM.
    Proposed regulation Sec.  1.44(e)(3) provides that the FCM must 
provide notice to its DSRO and to the Commission of the occurrence of 
any of the events suspending or terminating separate account treatment 
for one or more separate account customers. The notice must be provided 
to the DSRO and the Commission in accordance with the process specified 
in regulation Sec.  1.12(n)(3). The notice also must identify the event 
and, if applicable, the customer. The FCM would be required to provide 
such notice promptly in writing no later than the next business day 
following the date on which the FCM identifies or has been informed 
that the relevant event has occurred. The notification required upon 
exiting the ordinary course of business is intended to ensure that the 
Commission and DSROs will be apprised of the occurrence of non-ordinary 
course of business events, and will actively communicate with and 
monitor an FCM with respect to the resolution of such events (i.e., 
where an FCM attempts to reenter ordinary course of business 
conditions).
    Proposed regulation Sec.  1.44(e)(4) provides an avenue for an FCM 
that has experienced a non-ordinary course of business event with 
respect to itself or a customer to return to the ordinary course of 
business and resume separate account treatment for itself or its 
customers, as may be the case. Proposed regulation Sec.  1.44(e)(4) 
provides that an FCM that has ceased permitting disbursements on a 
separate account basis to a separate account customer due to the 
occurrence of a non-ordinary course of business event, with respect to 
that specific separate account customer, or with respect to all such 
customers, may resume permitting disbursements to such customer(s) on a 
separate account basis if such FCM reasonably believes, based on new 
information, that those circumstances triggering the event have been 
cured, and such FCM documents in writing the factual basis and 
rationale for its conclusion. However, proposed regulation Sec.  
1.44(e)(4) also provides that, if the circumstances triggering 
cessation of separate account treatment were an action or direction by 
a board of trade, a DCO, an SRO, the Commission, or another regulator 
with jurisdiction over the separate account customer or the FCM, then 
cure of those circumstances would require the withdrawal or other 
appropriate termination of such action or direction by that entity.
    That permitting disbursements on a separate account basis should be 
discontinued (or at least suspended) under certain circumstances is 
reflected in CME's recommendation, preceding issuance of CFTC Letter 
No. 19-17, that separate account treatment be permitted only during the 
ordinary course of business. As CME explained, FCMs should maintain the 
flexibility to determine that either the customer or the FCM itself is 
in distress and ``pause'' disbursements until the customer's other 
account can demonstrably meet the call to deposit funds.\132\ 
Similarly, as CME noted, an FCM should not be purposely releasing funds 
to a customer when the customer's overall account is in deficit, as 
doing so may create a shortfall in segregated, secured, or Cleared 
Swaps Accounts in the event the FCM becomes insolvent.\133\ However, 
the Commission acknowledges that in some instances, an FCM or customer 
may exit a state of financial, operational, or other distress, such 
that resumption of separate account treatment would be appropriate. By 
explicitly providing FCMs with an avenue to resume separate account 
treatment consistent with the resumption of the ordinary course of 
business, the Commission seeks to incentivize transparency between FCMs 
and their DSROs and Commission staff with respect to conditions at the 
FCMs or customers that could indicate operational or financial distress 
and, more generally, the risk management program at the FCM.
---------------------------------------------------------------------------

    \132\ CME Letter.
    \133\ Id.
---------------------------------------------------------------------------

    Proposed regulation Sec.  1.44(e) is designed to ensure that 
disbursements are permitted on a separate account basis only during the 
routine operation of the FCM's business relationship with its customer. 
Certain events signaling financial or operational distress of the FCM 
or customer are inconsistent with the normal operation of the business 
relationship between the FCM and its customer. The Commission believes 
that, when such events occur, and throughout the duration of their 
occurrence, suspending FCMs' ability to provide for separate account 
treatment with respect to the Margin Adequacy Requirement is reasonably 
necessary to accomplish the goals of protecting customer funds and 
mitigating systemic risk.
    The list of non-ordinary course of business events proposed herein, 
as well as the criteria and process for an FCM to resume separate 
account treatment, remains the same as proposed in the First Proposal, 
except that the Commission has changed certain aspects of the proposed 
regulation to account for placement of the requirement in part 1 (and 
thus applicability to all FCMs, including non-clearing FCMs), and 
notification of non-ordinary course of business events to the 
Commission and to the FCM's DSRO through the process specified by 
regulation Sec.  1.12(n)(3) (i.e., deleting the First Proposal's 
separate requirement for a clearing FCM to provide notice to any DCO of 
which it is a member that it has experienced a non-ordinary course of 
business event (in addition to its DSRO, as provided for in CFTC Letter 
No. 19-17), and deleting the requirement for a clearing FCM to provide 
separate notice to its DSRO and any DCO of which it is a member that it 
will resume separate account treatment).
    In its comment responding to the First Proposal, CME recommended 
that the Commission add certain additional events to the list of non-
ordinary course of business events: (1) when an FCM is under-
capitalized; (2) when an FCM is not in compliance with segregated, 
secured, or Cleared Swaps requirements; (3) when an FCM has filed 
notice of non-current books and records; and (4) when an FCM has filed 
notice of a material inadequacy in internal controls that impact its 
ability to remain in compliance with Commission regulations.\134\ The 
JAC similarly recommended adding as non-ordinary course of business 
event (1) when an FCM does not maintain required CFTC capital, futures 
customer funds, 30.7 customer funds, Cleared Swaps Customer Collateral, 
residual interest compliance or LSOC compliance, or does not comply 
with the First Proposal's financial computation requirements; and (2) 
when the FCM does not maintain current books and records or has a

[[Page 15328]]

material inadequacy in internal controls.\135\ The foregoing events are 
generally matters for which an FCM must already make a report to, inter 
alia, the Commission and the DSRO pursuant to regulation Sec.  
1.12.\136\
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    \134\ CME Comment Letter.
    \135\ JAC Comment Letter.
    \136\ See, e.g., regulation Sec.  1.12, which requires an FCM to 
provide written notice to the Commission and to the firm's DSRO if 
the FCM is undercapitalized (regulation Sec.  1.12(a)); maintains a 
level of adjusted net capital that is below established ``early 
warning levels'' (regulation Sec.  1.12(b)); fails to maintain 
current books and records (regulation Sec.  1.12(c)); discovers or 
is notified by an independent public accountant of the existence of 
any material inadequacy in the firm's accounting system, the 
internal accounting controls, or the procedures for safeguarding 
customer and firm assets (regulation Sec.  1.12(d)); is 
undersegregated with respect to futures customer funds, Cleared 
Swaps Customer Collateral, or 30.7 customer funds (regulation Sec.  
1.12(h)); or does not hold sufficient funds in segregated accounts 
to meet targeted residual interest amounts or maintains an amount of 
residual interest that is less than the sum of the undermargined 
amounts in customer accounts (regulation Sec.  1.12(j)).
---------------------------------------------------------------------------

    CME additionally opined that the Commission should make clear that 
any FCM undergoing an event that in the FCM's opinion is inconsistent 
with the ordinary course of business should be considered outside the 
ordinary course of business until such event is resolved, and clarify 
that the list of non-ordinary course of business events is not 
exhaustive and is subject to the discretion of the FCM in accordance 
with its risk management practices.\137\
---------------------------------------------------------------------------

    \137\ CME Comment Letter.
---------------------------------------------------------------------------

    In this Second Proposal, the Commission has determined not to 
adjust the list of non-ordinary course of business events, or add 
additional conditions to exiting or resuming separate account 
treatment, because the Commission believes the list of non-ordinary 
course of business events proposed herein is sufficiently flexible to 
capture CME and JAC's recommended additional non-ordinary course of 
business events, and is therefore not exhaustive.\138\ In addition, the 
FCM's DSRO will generally have received notification of the occurrence 
of these events consistent with the requirements of regulation Sec.  
1.12, and could, if it deems necessary, take action that would result 
in the suspension of separate account treatment pursuant to proposed 
regulation Sec.  1.44(e)(1)(vi) or (e)(2)(i).
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    \138\ E.g., proposed regulation Sec.  1.44(e)(1)(iii) (A good 
faith determination by the FCM's CCO, one of its senior risk 
managers, or other senior manager, following such FCM's own internal 
escalation procedures, that the separate account customer is in 
financial distress, or there is significant and bona fide risk that 
the separate account customer will be unable promptly to perform its 
financial obligations to the FCM, whether due to operational reasons 
or otherwise.) could encompass a wide variety of conditions that 
could result in a cessation of separate account treatment.
---------------------------------------------------------------------------

    FIA opposed the further definition of ``ordinary course of 
business'' through enumerated events, arguing that as long as a 
customer timely meets margin requirements and is not subject to 
bankruptcy, an FCM should be permitted to allow separate account 
treatment.\139\ The Commission notes that, while there may be 
commercial and operational merits to FIA's more flexible proposed 
approach, a number of non-ordinary course of business events are 
anticipatory--intended to result in cessation of separate account 
treatment when the customer is in distress, but before such customer 
reaches the point of bankruptcy or not being able to post margin. FIA's 
comment also does not consider non-ordinary course of business events 
occurring at the FCM, rather than just at the customer.
---------------------------------------------------------------------------

    \139\ FIA Comment Letter.
---------------------------------------------------------------------------

    FIA additionally asserted that requirements in the First Proposal 
for DCOs permitting separate account treatment to require their 
clearing FCMs to communicate to their DSRO and any DCO of which they 
are a member (i) the occurrence of non-ordinary course of business 
events and (ii) the resumption of a state of ordinary course of 
business, would create a new filing requirement without any perceived 
benefit and incorrectly imply that separate accounts and their 
customers pose particular risk management challenges.\140\ The 
Commission notes that, as a condition of the staff no-action position 
provided in CFTC Letter No. 19-17, a DCO permitting separate account 
treatment needed to require a clearing FCM to report to its DSRO the 
occurrence of a non-ordinary course of business event. The First 
Proposal's proposed requirement to include any DCO of which a clearing 
FCM is a member as an additional recipient for reports required of the 
FCM, would no longer apply under this proposal.
---------------------------------------------------------------------------

    \140\ Id.
---------------------------------------------------------------------------

    The JAC in its comment argued that an FCM exiting or reentering the 
ordinary course of business (as well as starting separate account 
treatment) should not be required to notify its DSRO of that fact on 
grounds that monitoring for compliance with the proposed separate 
account treatment does not fall under the oversight responsibilities of 
an SRO, DSRO, or the JAC, and that it would not make sense for a DCO to 
implement rules that would require a clearing FCM to notify its DSRO of 
activity specifically governed by the DCO's rules.\141\ Under this 
Second Proposal, however, separate account treatment will be governed 
by the Commission's part 1 regulations, and thus would fall within 
oversight responsibilities of an SRO or DSRO, or the oversight program 
maintained by the JAC.
---------------------------------------------------------------------------

    \141\ JAC Comment Letter.
---------------------------------------------------------------------------

    The Commission further notes that, under this Second Proposal, the 
notice requirements for FCMs (to provide notice to the Commission and 
DSRO of the occurrence of a non-ordinary course of business event via 
the process set forth in regulation Sec.  1.12(n)(3)) are substantially 
similar to their counterparts in CFTC Letter No. 19-17 (requiring 
notice of a non-ordinary course of business event to a DSRO, although 
not expressly to the Commission), and that the Commission is not now 
proposing a separate requirement for notice to DCOs of exit from and 
reentry into separate account treatment (or of initiation of separate 
account treatment).
    In its comment, SIFMA-AMG asserted that the Commission's proposed 
definition of ``ordinary course of business'' did not provide clarity 
on the meaning of ``standard day-to-day operation,'' noting that DCOs 
instead would be required to continuously monitor for a series of 
events.\142\ SIFMA-AMG also asserted that some non-ordinary course of 
business events do not appear to rise to the level of significance to 
suggest they are not ordinary course of business, such as the failure 
of a customer to make a maintenance margin payment, and that other 
events require discretion and subjective analysis.\143\ SIFMA-AMG 
recommended the Commission redefine the term ``ordinary course of 
business'' and clearly delineate events such as default or bankruptcy 
that are limited instances that would not be considered ordinary course 
of business. SIFMA-AMG did not propose an alternative

[[Page 15329]]

definition of ``ordinary course of business.''
---------------------------------------------------------------------------

    \142\ SIFMA-AMG Comment Letter. With respect to continuous 
monitoring, there are six events (proposed regulation Sec.  
1.44(e)(1)(i) through (vi)) that are ``inconsistent with the 
ordinary course of business with respect to the separate accounts of 
a particular separate account customer.'' The first three of these 
include a payment default and determinations by the FCM or its 
employees, all of which should otherwise be monitored by an FCM as 
part of its normal risk management. The last two involve cases where 
the FCM either ``receives notification'' or ``is directed,'' neither 
of which requires monitoring by the FCM. By proposed regulation 
Sec.  1.44(e)(1)(iv), the FCM is required to monitor whether a 
separate account customer has become ``insolvent or bankrupt''--
conditions that SIFMA-AMG agrees are outside the ordinary course of 
business. Monitoring for the insolvency or bankruptcy of a client 
would also appear to be a basic part of an FCM's credit risk 
management, regardless of separate account treatment.
    \143\ Id.
---------------------------------------------------------------------------

    As discussed above, the Commission notes that a number of non-
ordinary course of business events are anticipatory, and thus are 
intended to result in cessation of separate account treatment before a 
customer or FCM reaches the point of default or bankruptcy. Proposed 
regulation Sec.  1.44(e) is intended to provide concrete criteria for 
when a customer or FCM is operating outside the Commission's definition 
of ``ordinary course of business'' in proposed regulation Sec.  1.44(a) 
that are sufficiently flexible to account for the myriad ways in which 
a customer or FCM can enter a state of financial or operational 
distress, such that providing for separate account treatment would no 
longer be prudent from a risk management perspective.

I. Proposed Regulation Sec.  1.44(f)

    Proposed regulation Sec.  1.44(f) requires that each separate 
account must be on a one business day margin call, subject to certain 
requirements designed to further define what constitutes a one business 
day margin call. Providing for a one business day margin call, as 
defined in this regulation Sec.  1.44(f), ensures that margin 
shortfalls are timely corrected, and that a customer's inability to 
meet a margin call is timely identified. However, in certain 
circumstances, it may be impracticable for payments to be received on a 
same-day basis due to the mechanics of international payment systems 
(e.g., time zones and schedules of correspondent banks). In proposing 
requirements to define timely payment of margin for purposes of the 
standard set forth in proposed regulation Sec.  1.44(f), the 
Commission's goal is to establish requirements that reflect industry 
best practices among FCMs and customers.\144\
---------------------------------------------------------------------------

    \144\ An analysis by FIA indicated that, for the FCMs studied, 
on average more than 90% of margin deficits were collected by the 
close of business on the day following the market movements creating 
such deficits. For a majority of the FCMs studied, 95% of margin 
deficits were collected by that time. See Letter from Barbara 
Wierzinski, General Counsel, FIA, to Melissa Jurgens, Secretary, 
CFTC, Costs of the Proposed Residual Interest Requirement Compared 
to the FIA Alternative, at 3, available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=59283&SearchText=FIA.
---------------------------------------------------------------------------

    Specifically, the Commission understands that, while margin calls 
made in the morning in the U.S. Eastern Time Zone (ET) are typically 
capable of being met on a same-day basis when margin is paid in United 
States dollars (USD) and Canadian dollars (CAD), the operation of time 
zones and banking conventions in other jurisdictions may necessitate 
additional time when margin is paid in other currencies. For example, 
the Commission understands, based on discussions with market 
participants, that margin paid in Japanese yen (JPY) and certain other 
currencies is typically received two business days after a margin call 
is issued, and margin paid in British pounds (GBP), euros (EUR), and 
certain other non-USD/CAD/JPY currencies is typically received one 
business day after a margin call is issued.
    Proposed regulation Sec.  1.44(f)(1) provides that, except as 
explicitly provided in proposed regulation Sec.  1.44(f), if, as a 
result of market movements or position changes on the previous business 
day, a separate account is undermargined (i.e., the undermargined 
amount for the account is greater than zero), the FCM shall issue a 
margin call for that separate account for at least the amount necessary 
for the separate account to meet the initial margin required by the 
applicable exchanges or clearing organizations (including, as 
appropriate, the equity component or premium for long or short option 
positions) for the positions in the separate account.\145\ Such call 
must be met by the applicable separate account customer no later than 
the close of the Fedwire Funds Service on the same business day, 
consistent with the industry standard for when 90-95% of margin 
deficits are cured.\146\
---------------------------------------------------------------------------

    \145\ The undermargined amount is based on maintenance margin, 
which may be lower than initial margin. However, if an account falls 
below the maintenance margin level, the amount of the margin call is 
generally required to be the amount necessary to bring the account 
back to the (potentially higher) initial margin level.
    \146\ The Fedwire Funds Service is an electronic funds transfer 
service commonly used for settlement and clearing arrangements. The 
service currently closes at 7:00 p.m. ET. For purposes of the 
Fedwire Funds Service, Federal Reserve Banks observe as holidays all 
Saturdays, all Sundays, and the holidays listed on the Federal 
Reserve Banks' Holiday Schedules. See The Federal Reserve, 
Fedwire[supreg] Funds Service and National Settlement Service 
Operating Hours and FedPayments[supreg] Manager Hours of 
Availability, available at https://www.frbservices.org/resources/financial-services/wires/operating-hours.html. Because the Fedwire 
Funds Service hours of operations may be subject to change, the 
Commission has determined to tie the timeframe to fulfill the one 
business day margin call requirements of proposed regulation Sec.  
1.44(f) to the Fedwire Funds Service's closing rather than an 
absolute time.
---------------------------------------------------------------------------

    In light of challenges to same-day settlement posed by margining in 
certain currencies, as described above, and in recognition of the 
particular banking conventions around payments in other currencies, 
proposed regulation Sec.  1.44(f)(2) provides that payment of margin in 
certain currencies listed in proposed Appendix A to part 1 shall be 
considered in compliance with the requirements of proposed regulation 
Sec.  1.44(f) provided they are received by the applicable FCM no later 
than the end of the second business day after the day on which the 
margin call is issued.
    Furthermore, proposed regulation Sec.  1.44(f)(3) provides that 
payment of margin in fiat currencies other than USD, CAD, or currencies 
listed in proposed Appendix A to part 1 shall be considered in 
compliance with the requirements of proposed regulation Sec.  1.44(f) 
if received by the applicable FCM no later than the end of the business 
day after the business day on which the margin call was issued.
    In the First Proposal, the Commission proposed that:
    <bullet> Subject to certain exceptions, if the margin call is 
issued by 11:00 a.m. ET on a United States business day (as that term 
was proposed to be defined), it must be met by the applicable customer 
no later than the close of the Fedwire Funds Service on the same United 
States business day. In no case can a clearing member contractually 
agree to delay issuing such a margin call until after 11:00 a.m. ET on 
any given United States business day or to otherwise engage in 
practices that are intended to circumvent the one business day margin 
call standard by causing such delay.
    <bullet> Payment of margin in JPY shall be considered in compliance 
with the requirements of the one business day margin call standard if 
received by the applicable clearing member by 12:00 p.m., ET, on the 
second United States business day after the business day on which the 
margin call is issued.\147\
---------------------------------------------------------------------------

    \147\ In the First Proposal, the Commission requested comment on 
whether there are other currencies besides JPY where the relevant 
banking conventions render payment before the second U.S. business 
day after a margin call is issued impracticable; to specifically 
identify any such currencies; and to provide specifics about the 
operational issues involved with respect to each such currency.
---------------------------------------------------------------------------

    <bullet> Payment of margin in fiat currencies other than USD, CAD, 
or JPY shall be considered in compliance with the requirements of the 
one business day margin call standard if received by the applicable 
clearing member by 12:00 p.m., ET, on the United States business day 
after the business day on which the margin call is issued.
    With respect to the timing of margin payments, CME, in its comment 
in response to the First Proposal, opined that the Commission should 
encourage FCMs to collect margin in all currencies as quickly as 
feasible.\148\ While the

[[Page 15330]]

Commission does encourage FCMs to collect margin in all currencies as 
quickly as feasible, the Commission understands that compliance 
challenges could arise with respect to FCMs attempting to determine 
whether they are meeting an ``as quickly as feasible'' standard, and 
chooses to maintain the more definite standard set forth in this 
proposed regulation, subject to certain revisions with respect to the 
specific margin payment timing requirements as discussed below.
---------------------------------------------------------------------------

    \148\ CME Comment Letter. In addition, the Commission requested 
comment on whether, in anticipation of potential developments with 
respect to the use of central bank digital currencies or other 
digital assets, the proposed regulation should explicitly address 
the timing of payment of margin in digital assets. CME, the only 
commenter to respond to this question, opined that this question 
should be addressed in a separate request for comment. Id. The 
Commission is not proposing to address the timing of margin payments 
in digital assets in the present proposal, other than to note that, 
under regulation Sec.  1.44(f) as currently proposed, payments of 
margin in digital assets that are not fiat currencies (i.e., are not 
created by a government), and are not listed in proposed Appendix A 
to part 1, would be due on a same-day basis. To the extent that the 
future development and use of digital fiat currencies results in a 
situation where general practice is to settle payments in such 
currencies on a same-day basis, the Commission would address this in 
a subsequent rulemaking.
---------------------------------------------------------------------------

    CME also opined that the Commission should treat all currencies 
equally where relevant banking conventions render payment impracticable 
before the second U.S. business day after a margin call is made (i.e., 
such provision should not pertain solely to JPY).\149\
---------------------------------------------------------------------------

    \149\ Id.
---------------------------------------------------------------------------

    In this Second Proposal, the Commission again requests comment 
regarding the inclusion of currencies with respect to proposed Appendix 
A to part 1 (i.e., currencies for which payment of margin may be 
impracticable before the second business day after a margin call is 
made) and proposes a process for the addition or removal of currencies 
with respect to proposed Appendix A to part 1 on a going-forward basis.
    FIA commented that the one business day margin call requirements in 
the First Proposal were at once too broad with exceptions that were too 
narrow.\150\ FIA asserted that while neither the CEA nor Commission 
regulations specify when an FCM must make a margin call, all customer 
accounts are subject to a one business day margin call under certain 
CME and ICE Futures U.S. rules as well as the JAC Margins 
Handbook.\151\ FIA further noted that while neither the CEA nor 
Commission regulations specify when a margin call must be met, the JAC 
Margins Handbook provides that margin calls must be met within a 
``reasonable time,'' defined as ``less than five business days for 
customers and less than four business days for noncustomers and omnibus 
accounts . . . counted from and includ[ing] the day the account became 
undermargined,'' and CME rules provide that a clearing member may deem 
a ``reasonable time'' to mean one hour.\152\
---------------------------------------------------------------------------

    \150\ FIA Comment Letter. SIFMA-AMG voiced similar concerns, 
arguing that the Commission's proposal was overly prescriptive and 
did not consider legitimate reasons for why firms may have different 
margin call deadlines.
    \151\ Id.
    \152\ Id.
---------------------------------------------------------------------------

    FIA also asserted that Commission regulations (e.g., regulations 
Sec. Sec.  1.22(c) and 1.17(c)(5)(viii)) already provide a strong 
incentive to ensure margin calls are met no later than the following 
(or, at the latest, second) business day after the event giving rise to 
the margin call, and that FCMs generally do make margin calls within 
one business day.\153\ Additionally, FIA argued that the proposed 
regulation would impose a new recordkeeping requirement because FCMs 
would have to record the precise time a margin call is issued and, 
likely, met.\154\ FIA recommended that instead the Commission should 
instead provide that FCM policies and procedures assure all margin 
calls are met on no more than a one business day margin call basis 
except as a result of administrative error or operational 
constraint.\155\
---------------------------------------------------------------------------

    \153\ Id.
    \154\ Id.
    \155\ Id.
---------------------------------------------------------------------------

    With respect to the timing of margin payments in JPY, FIA argued 
that the Commission's proposal was too restrictive and that such 
requirement should focus on the date payment is irrevocably initiated 
rather than received.\156\ With respect to the timing of margin 
payments in CAD, JPY, and other non-USD currencies, FIA opined that the 
Commission's proposal was arbitrary and unworkable.\157\
---------------------------------------------------------------------------

    \156\ Id.
    \157\ Id.
---------------------------------------------------------------------------

    In the Commission's view, a ``one business day margin call'' should 
be defined beyond the term itself. FIA did not propose any such 
definition, and the Commission believes market participants should have 
clarity with respect to the criteria for a one business day margin 
call, with clear lines with respect to what conduct is and is not 
compliant. Additionally, while FCMs may ensure that margin calls are 
generally met within one business day, for purposes of separate account 
treatment, the Commission wishes to ensure that such margin calls are 
(subject to specified exceptions) always met on a one business day 
basis. With respect to FIA's comment that the definition of a one 
business day margin call should be based on when payment is irrevocably 
initiated, the Commission believes such suggestion may be 
impracticable, given the challenge to an FCM in having information that 
will reliably prove when a customer has initiated payment and 
information on whether and when such payments are ``irrevocable.''
    However, in the Second Proposal, the Commission has deleted its 
prior proposed specific timing requirements with respect to the making 
and meeting of margin calls on a one business day basis. Instead, if an 
account is undermargined as a result of the prior day's market moves, a 
margin call must be made and met on a same-day basis, with the 
allowance of either one or two additional business days for margin 
payments in certain non-USD/CAD currencies.\158\ The Commission expects 
such alteration will also address FIA's concerns regarding the 
recording of precise timestamps with respect to when margin calls have 
been made or met.
---------------------------------------------------------------------------

    \158\ Such requirement would not apply to margin calls made in 
light of intraday market movements.
---------------------------------------------------------------------------

    In its comment, the JAC requested that the Commission clarify that 
its one business day margin call requirements do not impact existing 
regulations regarding the aging of margin calls or clearing FCMs' 
financial reporting, regardless of the time of day the FCM issues the 
margin call or if the customer is outside the U.S.\159\ The Commission 
believes the proposed regulation accomplishes this by specifying that 
the definitions contained within proposed regulation Sec.  1.44(a) 
apply only for purposes of proposed regulation Sec.  1.44, and that the 
margin payment timing requirements of proposed regulation Sec.  1.44(f) 
apply solely for purposes of proposed regulation Sec.  1.44.
---------------------------------------------------------------------------

    \159\ JAC Comment Letter.
---------------------------------------------------------------------------

    The JAC also requested that the Commission clarify that its 
proposed codification does not affect the balances recorded in 
customers' accounts, or the undermargined amount which the FCM must 
include in its residual interest and LSOC compliance calculations.\160\ 
The Commission notes, with respect to the calculation of balances in 
customers' accounts and the undermargined amount which the FCM must 
include in its residual interest and LSOC compliance calculations, such 
figures

[[Page 15331]]

would be calculated on a separate account basis, as discussed 
herein.\161\
---------------------------------------------------------------------------

    \160\ Id.
    \161\ See, e.g., JAC, Regulatory Alert, #18-02, at 2, June 6, 
2018 (discussing undermargined accounts), proposed regulation Sec.  
1.44(g)(5).
---------------------------------------------------------------------------

    The JAC further requested that the Commission clarify that, 
notwithstanding its proposed one business day margin call requirements, 
a margin call must be issued to the customer within one business day 
after the event giving rise to the margin deficiency, even if the call 
cannot be made until after 11:00 a.m. ET, and even if the business day 
is not a business day in the customer's jurisdiction. The Commission 
believes proposed regulation Sec.  1.44(f)(1) addresses this comment by 
removing the link to the specific time of 11:00 a.m. ET. Rather, if as 
a result of market moves or position changes on the prior business day, 
a separate account is undermargined, then the FCM is required to issue 
a margin call for the separate account for at least the amount 
necessary for the separate account to meet the initial margin required 
by the applicable exchanges or clearing organizations (including, as 
appropriate, the equity component or premium for long or short option 
positions), and that such call must be met by the applicable separate 
account customer no later than the close of the Fedwire Funds Service 
on the same business day regardless of what time the margin call was 
issued, subject to the proposed limited one or two business-day 
exception for margin payments posted by separate account customers in 
certain non-USD/CAD currencies, and other exceptions explicitly 
provided for in proposed regulation Sec.  1.44(f).
    The JAC additionally contended that receipts and disbursements from 
separate accounts should occur on the same day.\162\ The Commission 
believes this standard will in the main be met where, under the 
proposed regulation, customers will be required to meet any margin call 
on the day it is issued, with the limited exceptions discussed in the 
previous paragraph of one or two business days for payments of margin 
in certain non-USD/CAD currencies.
---------------------------------------------------------------------------

    \162\ Id.
---------------------------------------------------------------------------

    With respect to the timing of margin payments in non-USD/CAD 
currencies, the JAC argued that the Commission should adopt a mechanism 
to provide timely and efficient changes to payment timelines for 
meeting a one business day margin call, and that such authority should 
rest solely with the Commission, rather than with individual DCOs, in 
order to ensure consistency and avoid confusion where some separately 
margined accounts may contain positions with one or more DCO.\163\
---------------------------------------------------------------------------

    \163\ Id.
---------------------------------------------------------------------------

    The proposed procedure outlined herein to remove currencies from or 
add currencies to proposed Appendix A to part 1 as set forth in 
proposed regulation Sec.  1.44 is intended to address this 
comment.\164\
---------------------------------------------------------------------------

    \164\ This procedure is intended to seek the aid of market 
participants in ``evaluating when a particular foreign currency is 
eligible for one-day or two-day settlement,'' and thus, on an 
ongoing basis, matching proposed Appendix A to part 1 to current 
industry conventions. Cf. FIA Comment Letter.
---------------------------------------------------------------------------

    While ICE did not object to the Commission's proposed margin 
payment timing framework in the First Proposal, ICE recommended that 
the Commission clarify that the proposed regulation would not affect 
stricter margin call timeframes established by DCOs for clearing 
members.
    While such clarification may not be required in light of the 
applicability of proposed regulation Sec.  1.44 to all FCMs regardless 
of clearing membership and removal of the proposed codification from 
part 39, for the avoidance of doubt, the Commission states explicitly 
that the proposed regulation is not intended to affect or prohibit more 
stringent risk management requirements, including margin call 
timeframes, that may be established by DCOs with respect to their 
members. The Commission confirms that an FCM that is a member of a DCO 
is obligated to comply with such DCO's margin call timeframes, applied 
in a manner consistent with DCO rules, including those that are more 
stringent than those addressed in proposed regulation Sec.  1.44.\165\ 
This is consistent with the approach taken with respect to other risk 
management measures, such as capital requirements.\166\
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    \165\ Cf. Sec.  39.17(a)(1) (A DCO shall maintain adequate 
arrangements and resources for the effective monitoring and 
enforcement of compliance (by its clearing members) with the rules 
of the DCO.).
    \166\ Compare, e.g., regulation Sec.  1.17(a)(1) (setting 
adjusted net capital requirements with an absolute minimum of $1 
million, with CME Rule 970.A.1 (setting minimum capital requirements 
with an absolute minimum of $5 million).
---------------------------------------------------------------------------

    In its comment, MFA argued that the proposed regulation failed to 
consider that legitimate reasons exist for firms to impose different 
margin call deadlines for different clients, and asserted that CFTC 
Letter No. 19-17 instead recognized such operational complexities by 
affording firms greater operational flexibility in prescribing margin 
cutoff times.\167\
---------------------------------------------------------------------------

    \167\ MFA Comment Letter.
---------------------------------------------------------------------------

    As discussed above, in this Second Proposal, the Commission has 
eliminated time-of-day-specific requirements for when margin calls must 
be made and met in favor of a general same-day requirement.
    In its comment, SIFMA-AMG argued that the Commission should abandon 
its proposed currency-based three-tiered margin payment timing scheme, 
arguing that the allowance of grace periods permits for flexibility and 
serves to address issues posed by operational complexities.\168\ For 
example, SIFMA-AMG further argued that the Commission's proposal did 
not consider what would happen if different managers for the same 
client chose different Eurozone countries to follow for purposes of 
banking holidays, and did not account for parties that may be located 
in different time zones. The Commission believes it is important from a 
risk mitigation perspective to preserve a one business day margin call 
standard, in accordance with industry best practice for prompt 
fulfillment of margining requirements, and further believes it 
important from a perspective of regulatory certainty that there be 
clear lines drawn around the meaning of a one business day margin call. 
In this Second Proposal, by eliminating prescriptive margin payment 
timing requirements in favor of a requirement that a margin call be 
made and met on a same-day basis, with limited extensions for payment 
of margin in certain currencies, the Commission seeks to implement a 
standard more flexible and capable of addressing operational 
complexities than the standard set forth in the First Proposal. With 
respect to the specific examples raised by SIFMA-AMG, different 
managers, of different separate accounts, for the same customer 
(client), would not be precluded from using different countries for 
purposes of banking holidays, as each such separate account would be 
separately margined. Nonetheless, if that were to create operational 
difficulties for the customer, then the customer could resolve those 
issues with the managers. Additionally, the Commission again invites 
comment on those currencies for which margin payments should be 
considered compliant if made by the second business day after a margin 
call is issued.
---------------------------------------------------------------------------

    \168\ SIFMA-AMG Comment Letter.
---------------------------------------------------------------------------

    The occurrence of a foreign holiday during which banks are closed 
may also create difficulties in payment of margin in a fiat currency 
other than USD. Therefore, the Commission proposes regulation Sec.  
1.44(f)(4), which states that the relevant deadline for payment of 
margin in fiat currencies other than USD may be extended by up to one

[[Page 15332]]

additional business day and still be considered in compliance with the 
requirements of proposed regulation Sec.  1.44(f) if payment is delayed 
due to a banking holiday in the jurisdiction of issue of the currency. 
For payments in EUR, either the separate account customer or the 
investment manager managing the separate account may designate one 
country within the Eurozone with which they have the most significant 
contacts for purposes of meeting margin calls in that separate account, 
and whose banking holidays shall be referred to for purposes of 
compliance with the regulation.\169\
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    \169\ With respect to margin payments in EUR, proposed 
regulation Sec.  1.44(f)(4) is intended to prevent customers or 
investment managers from leveraging banking holidays in a 
multiplicity of jurisdictions, to circumvent requirements to pay 
margin timely.
---------------------------------------------------------------------------

    Proposed regulation Sec.  1.44(f)(4) is designed to provide FCMs 
with a level of discretion in how they manage risk by allowing an FCM 
to permit limited delays in margin payments due to non-U.S. banking 
conventions. Proposed regulation Sec.  1.44(f)(4) would not, however, 
require an FCM to extend the deadline for payments of margin. Here, the 
Commission is seeking to allow FCMs to exercise risk management 
judgment in balancing, within limits, the risk management challenges 
caused by extending the time before a margin call is met with the 
burdens involved in requiring the client or investment manager to 
prefund potential margin calls in advance of the holiday or to arrange 
to pay margin more promptly in USD or another currency not affected by 
the holiday. The Commission expects that FCM risk management decisions, 
including the use of any extension permitted under proposed regulation 
Sec.  1.44(f)(4), will be made in consideration of relevant risk 
management factors; e.g., a client's risk profile and market 
conditions, evaluated at the time the risk management decisions are 
made.\170\ The Commission included this proposed requirement in the 
First Proposal in substantively the same form.
---------------------------------------------------------------------------

    \170\ This expectation is consistent with the statement of the 
directors of DCR and DSIO in issuing CFTC Letter No. 19-17. CFTC, 
Statement by the Directors of the Division of Clearing and Risk and 
the Division of Swap Dealer and Intermediary Oversight Concerning 
the Treatment of Separate Accounts of the Same Beneficial Owner, 
Sept. 13, 2019, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/dcrdsiodirectorstatement091319 (``We fully expect 
that DCOs and FCMs and their customers will agree that FCMs must 
retain, at all times, the discretion to determine that the facts and 
circumstances of a particular shortfall are extraordinary and 
therefore necessitate accelerating the timeline and relying on the 
FCM's protocol for liquidation or for accessing funds in the other 
accounts of the beneficial owner held at the FCM.''). See also CFTC 
Letter No. 20-28 (stating the same).
---------------------------------------------------------------------------

    In its comment in response to the First Proposal, the JAC argued 
that this proposed requirement would create a new recordkeeping 
requirement for clearing FCMs, and recommended that the Commission 
clarify that it does not impact the requirements of any other CFTC 
regulations or SRO rules related to margin calls.\171\ As noted above, 
the Commission believes the proposed regulation addresses this comment 
in making clear that the requirements in proposed regulation Sec.  
1.44(f) for meeting a one business day margin call apply solely for 
purposes of proposed regulation Sec.  1.44(f).
---------------------------------------------------------------------------

    \171\ JAC Comment Letter.
---------------------------------------------------------------------------

    In CFTC Letter No. 19-17, staff stated that a failure to deposit, 
maintain, or pay margin or option premium due to administrative errors 
or operational constraints would not constitute a failure to timely 
deposit or maintain initial or variation margin that would place a 
customer out of the ordinary course of business. This provision was 
intended to prevent a clearing FCM from being excluded from relying on 
the no-action position as a result of one-off exceptions, such as mis-
entered data, a flawed software update, or an unusual and unexpected 
information technology outage (e.g., an unanticipated outage of the 
Fedwire Funds Service).
    Accordingly, the Commission proposes regulation Sec.  1.44(f)(5), 
which provides that a failure with respect to a specific separate 
account to deposit, maintain, or pay margin or option premium that was 
called pursuant to proposed regulation Sec.  1.44(f)(1), due to unusual 
administrative error or operational constraints that a separate account 
customer or investment manager acting diligently and in good faith 
could not have reasonably foreseen,\172\ does not constitute a failure 
to comply with the requirements of proposed regulation Sec.  1.44(f). 
For such purposes, an FCM's determination that the failure to deposit, 
maintain, or pay margin or option premium is due to such administrative 
error or operational constraints must be based on the FCM's reasonable 
belief in light of information known to the FCM at the time the FCM 
learns of the relevant administrative error or operational 
constraint.\173\ The Commission included this proposed requirement in 
the First Proposal in substantially the same form, with one change.
---------------------------------------------------------------------------

    \172\ One would expect administrative errors at a well-run money 
manager to be unusual and unforeseen. For the avoidance of doubt, 
``unforeseen'' refers to the particular occurrence of a constraint 
or error; for example, the fact that some small percentage of errors 
may be foreseen does not mean that any particular error is foreseen 
(and ``unusual'' means that such percentage should indeed be small). 
Moreover, an unusual and unforeseen administrative error or 
operational constraint that prevents payment might occur at one of a 
number of points in the payment chain beyond the money manager: 
Examples include an error or operational failure on the part of the 
bank that the money manager instructs to send a wire transfer to the 
FCM, an error or operational failure on the part of the bank (for 
cash) or custodian (for securities) designated to receive margin on 
behalf of the FCM, or an error or operational failure on the part of 
a bank in the middle of a chain between the sending bank and the 
FCM's bank (particularly in the context of transfers of foreign 
currency).
    \173\ The Commission is proposing to establish this 
reasonableness standard for an FCM's determination that a failure to 
timely deposit, maintain, or pay margin or option premium on the 
basis of administrative error or operational constraints. The 
Commission believes the proposed standard confers significant 
discretion upon FCMs to assess the disposition of their customers 
while requiring that FCMs act reasonably and on the basis of current 
and relevant information, diligently gathered.
---------------------------------------------------------------------------

    The current proposal adds the term ``with respect to a specific 
separate account'' to make clear that ``unusual'' is based on a 
particular separate account, not the FCM's business with respect to 
separate accounts as a whole.\174\
---------------------------------------------------------------------------

    \174\ Consider an FCM with two dozen separate account customers, 
with an average of four separate accounts per customer, resulting in 
96 separate accounts for that FCM. If each separate account has an 
exception only once per year, that would result in a total of 96 
exceptions, or around two per week, for the FCM. While the 
Commission does not intend to set a prescriptive definition of 
``unusual'' in this context, it may nonetheless be seen that once 
per year is unusual, while twice per week is not.
---------------------------------------------------------------------------

    In its comment in response to the First Proposal, FIA argued that 
the Commission's proposed standards for ``unusual'' and ``unforeseen'' 
are too subjective and would unnecessarily expose FCMs to enforcement 
actions, noting that unusual or unforeseen events are often outside an 
FCM's control.\175\ FIA did not, however, propose alternative 
standards.
---------------------------------------------------------------------------

    \175\ FIA Comment Letter. FIA observes that ``An FCM should not 
be subject to administrative sanctions for matters over which the 
FCM has no control.'' Id. The requirements of regulation Sec.  1.44 
are consistent with that principle.
    The consequence of a separate account customer failing to meet a 
one-day margin call for reasons that fall outside the scope of an 
``unusual administrative error or operational constraints that a 
separate account customer or investment manager acting diligently 
and in good faith could not have reasonably foreseen'' is that the 
customer is outside the ``ordinary course of business,'' and that 
thus the FCM must cease treating the separate accounts of the 
separate account customer as accounts of separate entities for 
purposes of margin distribution under regulation Sec.  1.44(b). That 
action--which would be required to be taken by the FCM--is not an 
administrative sanction on the FCM, which likely would not have 
direct control over financial and operational conditions at its 
customer, but rather a measure, designed to protect the FCM and the 
markets more broadly, that has a negative effect on the customer 
(rather than the FCM).

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

[[Page 15333]]

    Similarly, MFA in its comment argued that FCMs, asset managers, and 
customers benefit from agreed-upon grace periods for shortfalls 
resulting from administrative or operational issues unrelated to 
ability to pay, and argued that use of terms such as ``unusual,'' 
``diligently and in good faith'' are subjective.\176\ MFA argued that 
the Commission should remove the condition now encompassed by proposed 
regulation Sec.  1.44(f)(5).
---------------------------------------------------------------------------

    \176\ MFA Comment Letter.
---------------------------------------------------------------------------

    In its comment, SIFMA-AMG argued that the Commission should remove 
or re-propose the standard that failure to meet margin obligations 
``due to unusual administrative error or operational constraints that a 
customer or investment manager acting diligently and in good faith 
could not have reasonably foreseen'' does not constitute a failure to 
comply with the one business day margin call requirement, on the basis 
that this proposed provision is ambiguous.
    The Commission believes the further criteria for determining the 
existence of an administrative error or operational constraint provide 
a clearer definition of the meaning of these terms. The Commission 
additionally believes that, while FCMs engaged in separate account 
treatment should not enter agreements that obviate the risk-mitigating 
purpose of requiring margin calls be met on a one business day basis, 
proposed regulation Sec.  1.44(f)(5) strikes a reasonable balance in 
ensuring that FCMs and customers are not forced to cease separate 
account treatment as a result of unusual and unexpected, one-off 
errors.
    It should also be noted that the provisions of paragraph (f) of 
proposed regulation Sec.  1.44 are subject to the language that ``the 
following provisions apply solely for the purposes of this paragraph 
(f).'' This is separate from, e.g., requirements for margin aging under 
regulation Sec.  1.17(c)(5)(viii), which requires payment by the end of 
the business day after the business day on which the margin call is 
made.
    For example, if a margin call for a separate account is made on 
Tuesday based on events on Monday, and the margin call is to be met in 
JPY, payment by close of business on Thursday would be timely for 
purposes of proposed regulation Sec.  1.44(f), because JPY is a 
currency listed in proposed Appendix A to part 1, and that payment 
would be considered in compliance with the requirements of paragraph 
(f) of regulation Sec.  1.44 ``if received by the applicable futures 
commission merchant no later than the end of the second business day 
after the day on which the margin call is issued.'' However, payment 
for that margin call would not be timely for purposes of regulation 
Sec.  1.17(c)(5)(viii) unless received by close of business on 
Wednesday.
    On the other hand, if that margin call is to be made in USD or CAD, 
and it is not received until Wednesday, and there is no ``unusual 
administrative error or operational constraints that a customer or 
investment manager acting diligently and in good faith could not have 
reasonably foreseen'' (i.e., proposed regulation Sec.  1.44(f)(5) does 
not apply), then, while payment by Wednesday is timely for purposes of 
regulation Sec.  1.17(c)(5)(viii), after the close of business on 
Tuesday, the separate account customer would be out of compliance with 
the one business day margin call called for by proposed regulation 
Sec.  1.44(f).
    Proposed regulation Sec.  1.44(f)(6) states that an FCM would not 
be in compliance with the requirements of proposed regulation Sec.  
1.44(f) if it contractually agrees to provide separate account 
customers with periods of time to meet margin calls that extend beyond 
the time periods specified in proposed regulation Sec. Sec.  1.44(f)(1) 
through (5),\177\ or engages in practices that are designed to 
circumvent proposed regulation Sec.  1.44(f). The Commission proposes 
this provision, which was included in the First Proposal in 
substantively the same form, in order to make clear that it is 
establishing a maximum period of time in which a margin call must be 
met for purposes of this regulation, rather than establishing a minimum 
time that an FCM must allow. Proposed regulation Sec.  1.44(f) would 
not preclude an FCM from having customer agreements that provide for 
more stringent margining requirements, or applying more stringent 
margining requirements in appropriate circumstances. The statement that 
these ``requirements apply solely for purposes of this paragraph (f)'' 
means that such requirements are not intended to apply to any other 
provision; e.g., they are not intended to define when an account is 
undermargined for purposes of regulation Sec.  1.17. Conversely, the 
Commission does not propose to prohibit contractual arrangements 
inconsistent with proposed regulation Sec.  1.44(f). However, the FCM 
would not be permitted to engage in separate account treatment under 
such arrangements.
---------------------------------------------------------------------------

    \177\ For example, if an FCM and a customer contract for a grace 
or cure period that would operate to make margin due and payable 
later than the deadlines described herein, including a case where 
the FCM would not have the discretion to liquidate the customer's 
positions and/or collateral where margin is not paid by such time, 
such an agreement would be inconsistent with the conditions under 
which such FCM may engage in separate account treatment.
---------------------------------------------------------------------------

    In its comment, CME argued that the proposed regulation could 
create confusion by incorrectly implying that customers not utilizing 
separate account treatment may be given contractual terms providing for 
a period of time longer than one business day to satisfy a margin call 
or may otherwise restrict the FCM's discretion as to liquidation in 
contravention of CME Group Exchange rules.\178\
---------------------------------------------------------------------------

    \178\ CME Comment Letter.
---------------------------------------------------------------------------

    In its comment, the JAC similarly contended that the Commission 
incorrectly implied that an FCM may contractually agree to a grace or 
cure period for any customers that are not treated as separate 
accounts, and recommended that the Commission make clear that if an FCM 
and customer contract for margin calls to be met on a longer than one 
business day basis, then the FCM is not making a bona fide attempt to 
collect margin within one business day after the event giving rise to 
the margin deficiency.\179\
---------------------------------------------------------------------------

    \179\ JAC Comment Letter.
---------------------------------------------------------------------------

    The Commission notes that it is not proposing this regulation to 
conform to the rules of a particular DCO, to the extent the DCO may 
prohibit such grace or cure periods, and further notes that this 
proposed regulation does not prevent a DCO from maintaining and 
enforcing rules that apply more stringent risk management standards to 
their clearing members than are set forth therein.
    Proposed regulation Sec.  1.44(f)(7) is an exception to proposed 
regulation Sec.  1.44(f)(1), dealing with the special case of certain 
holidays (i.e., Columbus Day and Veterans day) on which some DCMs may 
be open for trading, but on which banks are closed (and, therefore, 
payment of margin may be difficult or impracticable). It only applies 
to an FCM if that FCM trades on such a DCM, and to a separate account 
if that separate account includes positions traded on such a DCM.
    Paragraph (i) deals with margin calls based on undermargined 
amounts in a separate account resulting from market movements on the 
business day before the holiday. Such calls may be made on the holiday, 
but would be due by the close of Fedwire on the next business day after 
the holiday.\180\
---------------------------------------------------------------------------

    \180\ Additional days due to other provisions of proposed 
regulation Sec.  1.44(f) would also be applicable.
---------------------------------------------------------------------------

    Paragraph (ii) deals with margin calls based on undermargined 
amounts

[[Page 15334]]

resulting from market movements on the holiday. If, as a result of such 
market movements, a separate account is undermargined by an amount 
greater than the amount it was undermargined as a result of market 
movements or position changes on the business day before the holiday, 
the futures commission merchant shall issue a margin call for the 
separate account for at least the incremental undermargined amount.
    The following uses Veterans Day (November 11) as an example, and 
assumes that no relevant day falls on a weekend. If, as a result of 
market movements on November 10, a separate account is undermargined by 
$100, the FCM would issue a margin call of at least $100 and, payment 
of that $100 would be due by the close of Fedwire on November 12.
    If that separate account were to be undermargined by a total of 
$160 as a result of market movements on November 11, the FCM would 
issue a margin call for at least the incremental amount ($160-$100 = 
$60) on November 12, and that incremental $60 would also be due by the 
close of Fedwire on November 12. If, instead, the separate account 
gained $60 on November 11, the original margin call for $100 (issued on 
November 11) would still need to be met by the close of Fedwire on 
November 12.
    By contrast, if the separate account were not undermargined as a 
result of market movements on November 10, but then became 
undermargined by $60 as a result of market movements on November 11, 
the FCM would issue a margin call in the amount of at least $60 on 
November 12, and payment would be due by the close of Fedwire on 
November 12.
    In its comment letter, the JAC also opined that if the Commission 
addresses unscheduled banking holidays or U.S. securities market 
closures, the Commission should make clear that any such provisions 
apply only to determining if a margin call is considered one-day and do 
not govern how such holidays or closures are considered for any other 
purpose.\181\ The Commission believes the proposed regulation addresses 
this comment in making clear that the requirements in proposed 
regulation Sec.  1.44(f) for meeting a one business day margin call 
apply solely for purposes of proposed regulation Sec.  1.44(f).
---------------------------------------------------------------------------

    \181\ JAC Comment Letter.
---------------------------------------------------------------------------

    CME asserted that unscheduled closings of banks or securities 
markets should be handled on an industry-wide basis, based on facts and 
circumstances specific to each such situation, and not prescriptively, 
noting that CME, FIA, SIFMA, and many other exchanges and clearing 
organizations have worked to establish protocols for these 
scenarios.\182\ Such unscheduled closings (for, e.g., a national day of 
mourning) would fall under the rubric of an ``unusual . . . operational 
constraint[ ].''
---------------------------------------------------------------------------

    \182\ Id.
---------------------------------------------------------------------------

    In its comment letter, SIFMA-AMG recommended the Commission 
preserve the flexibility of a limited discretionary grace period, 
stating that the proposed regulation would mean that a ``single `foot 
fault' '' with respect to a single manager could cause an FCM to revert 
to margining on a gross basis.
    The Commission believes the requirement of a one business day 
margin call, as set forth in the no-action position and further 
expanded on in the Second Proposal, is a core component of mitigating 
the risk that separate account treatment will result in the under-
margining of one or more separate accounts. The effect of a one 
business day margin call is to limit the time during which a customer 
account (or, here, a customer's separate account) is undermargined, and 
thus to limit the risk to the FCM (and the FCM's omnibus customer 
account for futures, Cleared Swaps, or foreign futures or foreign 
options). One business day is industry best practice. The Commission 
notes that a ``single,'' one-off error with respect to a single manager 
would also not under the proposed regulation result in a reversion to 
margining on a customer basis if such error meets the criteria for an 
unusual and unforeseen administrative error or operational constraint 
discussed above.
    Lastly, the Commission proposes regulation Sec.  1.44(f)(8) to set 
forth a procedure to adjust the scope of currencies in proposed 
Appendix A to part 1. In proposing regulation Sec.  1.44(f)(8), the 
Commission seeks to ensure a more flexible process whereby members of 
the public, or the Commission itself, may initiate a process to expand 
or narrow proposed Appendix A to part 1 as may be required from time to 
time, subject to public notice and comment. Proposed regulation Sec.  
1.44(f)(8) provides that any person may submit to the Commission any 
currency that such person proposes to add to or remove from proposed 
Appendix A to part 1. The submission must include a statement that 
margin payments in the relevant currency cannot, in the case of a 
proposed addition, or can, in the case of a proposed removal, 
practicably be received by the futures commission merchant issuing a 
margin call no later than the end of the first business day after the 
day on which the margin call is issued. The submitter would need to 
support such assertion with documentation or other relevant supporting 
information, as well as any additional information that the Commission 
requests.\183\ The Commission would be required to review the 
submission and determine whether to propose to add the relevant 
currency to, or remove it from, proposed Appendix A to part 1. The 
Commission would also be required to issue such determination through 
notice-and-comment rulemaking, with a comment period of no less than 
thirty days. Proposed regulation Sec.  1.44(f)(8) also provides that 
the Commission may propose to issue such a determination of its own 
accord, without prompting by a submission from a member of the public. 
As with a public submission, a Commission determination on its own 
accord would be subject to notice and comment rulemaking, with a public 
comment period of no less than thirty days.
---------------------------------------------------------------------------

    \183\ Submitters may request confidential treatment for parts of 
its submission in accordance with Commission regulation Sec.  
145.9(d).
---------------------------------------------------------------------------

Request for Comment
    Question 6: The Commission requests comment regarding whether, in 
light of changes made in this Second Proposal relative to the First 
Proposal, the regulatory framework set forth in proposed regulation 
Sec.  1.44(f) appropriately balances practicability and burden with 
risk management. If not, what alternative approach should be taken? How 
would such an alternative approach better balance those considerations? 
In particular, the Commission requests comment on whether the proposed 
standard of timeliness for a one business day margin call set forth in 
proposed regulation Sec.  1.44(f) presents practicability challenges 
and, if so, what those challenges are, and how the proposed standard of 
timeliness could be improved.
    Question 7: Proposed regulation Sec.  1.44(f)(4) provides that the 
relevant deadline for payment of margin in fiat currencies other than 
USD may be extended by up to one additional business day and still be 
considered in compliance with the requirements of proposed regulation 
Sec.  1.44(f) if payment is delayed due to a banking holiday in the 
jurisdiction of issue of the currency. Proposed regulation Sec.  
1.44(f)(4) further provides that, for payments in EUR, either the 
separate account customer or

[[Page 15335]]

the investment manager managing the separate account may designate one 
country within the Eurozone that they have the most significant 
contacts with for purposes of meeting margin calls in that separate 
account, whose banking holidays shall be referred to for such purpose. 
As noted above, this provision is intended to prevent customers or 
investment managers from leveraging banking holidays in a multiplicity 
of jurisdictions to circumvent requirements to pay margin promptly. 
Separately from Question 6 above, the Commission requests comment 
specifically in relation to proposed regulation Sec.  1.44(f)(4), with 
respect to:
    (1) Whether commenters believe it will be impracticable to comply 
with proposed regulation Sec.  1.44(f)(4), as that section pertains to 
payment of margin in EUR. For example, if a customer selects Eurozone 
Country A as the jurisdiction that is most significant to their 
operations for purposes of meeting margin calls in separate accounts, 
but also uses a bank in Eurozone Country B to meet margin payments in 
EUR, would a banking holiday in Country B (but not Country A) make it 
impracticable for the customer to pay margin in compliance with 
proposed regulation Sec.  1.44(f)(3)? Commenters are requested to 
provide examples of operational or other challenges that would result 
in such impracticability.
    (2) To the extent commenters have such practicability concerns, 
how, in the alternative, should the Commission seek to achieve its 
goal, discussed above, of preventing evasion of the one business day 
margin call standard, in light of differing banking holidays within the 
national jurisdictions that comprise the Eurozone?

J. Proposed Regulation Sec.  1.44(g)

    Proposed regulation Sec.  1.44(g) contains requirements related to 
calculations for capital, risk management, and segregation of customer 
funds. These provisions are substantially similar to the corresponding 
no-action conditions in CFTC Letter No. 19-17, and to corresponding 
conditions included in the First Proposal, except that they have been 
reorganized and subject to minor changes to account for their proposed 
inclusion in part 1 of the Commission's regulations as well as the 
proposed introduction of new defined terms. Many of these provisions 
are intended to ensure that an FCM treats each separate account as a 
distinct account from all other accounts of a separate account customer 
for purposes of the FCM computing its regulatory capital and 
segregation of customer funds. The proposed provisions are also 
intended to ensure that an FCM treats separate accounts in a consistent 
manner for purposes of risk management.
    As FIA noted in its June 26, 2019 letter, customer agreements that 
provide for separate account treatment generally require that a 
separate account be margined separately from any other account 
maintained for the customer with the FCM, and assets held in one 
separate account should not ordinarily be used to offset, or (absent 
default) meet, any obligations of another separate account, including 
obligations that it or another investment manager may have incurred on 
behalf of a different account of the same customer.\184\ In that 
letter, preceding issuance of CFTC Letter No. 19-17, FIA observed that 
these restrictions serve to assure the customer, or the asset manager 
responsible for a particular account, that the account will not be 
subject to unanticipated interference that may exacerbate stress on a 
customer's aggregate exposure to the FCM.\185\ Additionally, FIA noted 
that where an FCM treats separate accounts as separate customers for 
risk management purposes, the FCM may manage risk more conservatively 
against the customer under the assumption that the customer has fewer 
assets than it may in fact have.\186\
---------------------------------------------------------------------------

    \184\ First FIA Letter.
    \185\ Id.
    \186\ Id.
---------------------------------------------------------------------------

    Accordingly, proposed regulation Sec.  1.44(g) would, if adopted, 
apply to all FCMs certain conditions in CFTC Letter No. 19-17. These 
conditions are designed to provide for consistent treatment of separate 
accounts. Proposed regulation Sec.  1.44(g) requires a separate account 
of a customer to be treated separately from other separate accounts of 
the same customer for purposes of certain existing computational and 
recordkeeping requirements, which would otherwise be met by treating 
accounts of the same customer on a combined basis. Because accounts 
subject to proposed regulation Sec.  1.44 would be risk-managed on a 
separate basis, the Commission believes it is appropriate for the 
proposed regulation to provide that FCMs apply these risk-mitigating 
computational and recordkeeping requirements on a separate account 
basis. The effect of the requirements in these paragraphs is to augment 
the FCM's existing obligations under various provisions of regulation 
Sec.  1.17.
    Proposed regulation Sec.  1.44(g)(1) provides that an FCM's 
internal risk management policies and procedures shall provide for 
stress testing as set forth in regulation Sec.  1.73, and credit limits 
for separate account customers. Proposed regulation Sec.  1.44(g)(1) 
further provides that such stress testing must be performed, and the 
credit limits must be applied, both on an individual separate account 
and on a combined account basis. By conducting stress testing on both 
an individual separate account and on a combined account basis, an FCM 
can determine the potential for significant loss in the event of 
extreme market conditions, and the ability of traders and FCMs to 
absorb those losses, with respect to each individual account of a 
customer, as well as with respect to all of the customer's accounts. 
Additionally, by applying credit limits on both an individual separate 
account basis (to address issues that may be specific to the particular 
strategy governing the separate account) and on a combined account 
basis (to address issues that may be applicable to the customer's 
overall portfolio at the FCM), an FCM can be in a better position to 
manage the financial risks they incur as a result of carrying positions 
both for a customer's separate account and for all of the customer's 
accounts. By better managing the financial risks posed by customers and 
understanding the extent of customers' risk exposures, FCMs can better 
mitigate the risk that customers do not maintain sufficient funds to 
meet applicable initial and maintenance margin requirements, and 
anticipate and mitigate the risk of the occurrence of certain of the 
events detailed in proposed regulation Sec.  1.44(e).
    Proposed regulation Sec.  1.44(g)(2) provides that an FCM shall 
calculate the margin requirement for each separate account of a 
separate account customer independently from such margin requirement 
for all other separate accounts of the same customer with no offsets or 
spreads recognized across the separate accounts. An FCM would be 
required to treat each separate account of a customer independently 
from all other separate accounts of the same customer for purposes of 
computing capital charges for undermargined customer accounts in 
determining its adjusted net capital under regulation Sec.  1.17.
    Proposed regulation Sec.  1.44(g)(3) provides that an FCM shall, in 
computing its adjusted net capital for purposes of regulation Sec.  
1.17, record each separate account of a separate account customer in 
the books and records of the FCM as a distinct account of a customer, 
including recording each separate account with a net debit balance or a 
deficit as a receivable from the separate account customer, with no 
offsets between the other separate

[[Page 15336]]

accounts of the same separate account customer, with respect to 
separate account customers, comply with certain additional requirements 
in computing its adjusted net capital for purposes of regulation Sec.  
1.17.
    Regulations Sec. Sec.  1.20, 22.2, and 30.7 currently require an 
FCM to maintain a sufficient amount of customer funds in segregated 
accounts to meet its total obligations to all futures customers, 
Cleared Swaps Customers, and 30.7 customers, respectively.\187\ In 
order to ensure that the FCM holds sufficient funds in segregation to 
satisfy the aggregate account balances of all customers with positive 
net liquidating balances, the FCM is prohibited from netting the 
account balances of customers with deficit or debit ledger balances 
against the account balances of customers with credit balances.\188\ 
Each FCM is also required to prepare and submit to the Commission, and 
to FCM's DSRO, a daily statement demonstrating compliance with its 
segregation obligations.\189\
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    \187\ 17 CFR 1.20(a), 22.2(f)(2), and 30.7(a).
    \188\ 17 CFR 1.20(i)(4), 22.2(f)(4), and 30.7(f)(2)(iv) for 
futures customer accounts, Cleared Swaps Customer Accounts, and 30.7 
accounts, respectively.
    \189\ See 17 CFR 1.32(d), 22.2(g)(3), and 30.7(l)(3).
---------------------------------------------------------------------------

    Proposed regulation Sec.  1.44(g)(4) provides that an FCM shall, in 
calculating the amount of its own funds it is required to maintain in 
segregated accounts to cover deficits or debit ledger balances pursuant 
to regulations Sec. Sec.  1.20(i), 22.2(f), or 30.7(f)(2) in any 
futures customer accounts, Cleared Swaps Customer Accounts, or 30.7 
accounts, respectively, include any deficits or debit ledger balances 
of any separate account as if the accounts are accounts of separate 
entities. The purpose of proposed regulation Sec.  1.44(g)(4) is to 
ensure that an FCM that elects to permit separate account customers 
treats separate accounts as if the accounts are accounts of separate 
entities for purposes of computing the amount of funds the FCM is 
required to hold in segregation for futures customers, Cleared Swaps 
Customers, and 30.7 customers. Specifically, proposed regulation Sec.  
1.44(g) would provide that an FCM may not offset a deficit or debit 
ledger balance in the separate account of a separate account customer 
by any credit balance in any other separate accounts of the separate 
account customer carried by the FCM. Proposed regulation Sec.  1.44(g) 
would impose the same obligations on separate accounts that are 
currently imposed by regulations Sec. Sec.  1.20, 22.2, and 30.7 on 
customer accounts that are not separate accounts. Proposed regulation 
Sec.  1.44(g) is also consistent with CFTC Letter No. 19-17.\190\
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    \190\ CFTC Letter No. 19-17 provides that an ``FCM shall use its 
own funds to cover the debit/deficit of each separate account.'' 
CFTC Letter No. 19-17.
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    Regulations Sec. Sec.  1.22, 22.2, and 30.7 currently prohibit an 
FCM from using, or permitting the use of, the funds of one futures 
customer, Cleared Swaps Customer, or 30.7 customer, respectively, to 
purchase, margin or settle the positions of, or to secure or extend the 
credit of, any person other than such customer.\191\ To ensure 
compliance with this prohibition, each FCM is required to compute, as 
of the close of the previous business day, the total undermargined 
amount of its customers' accounts and to maintain a sufficient amount 
of the FCMs' own funds (i.e., residual interest) in the applicable 
customer segregated accounts to cover the undermargined amounts.\192\
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    \191\ 17 CFR 1.22(a), 22.2(d), and 30.7(f)(1)(i).
    \192\ An FCM is required to maintain a sufficient amount of its 
own funds in segregation to cover the FCM's customers' undermargined 
amounts by the residual interest deadline. The residual interest 
deadline for futures customers and 30.7 customers is 6:00 p.m. 
Eastern Time on the next business day. 17 CFR 1.22(c) & 30.7(f). The 
residual interest deadline for Cleared Swaps Customers is the time 
of settlement on the next business day of the applicable swaps 
clearing organization. 17 CFR 22.2(f)(6).
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    The Commission is proposing regulation Sec.  1.44(g)(5) to provide 
that, for purposes of its residual interest and LSOC compliance 
calculations, as applicable under regulations Sec. Sec.  1.22(c), 
22.2(f)(6), and 30.7(f)(1)(ii), the FCM shall treat the separate 
accounts of a separate account customer as if the accounts were 
accounts of separate entities and include the undermargined amount of 
each separate account, and cover such deficiency with its own funds. 
The proposed amendments would result in an FCM treating each separate 
account in a manner comparable with the treatment currently provided to 
customer accounts that are not separate accounts. The proposal is also 
consistent with CFTC Letter No. 19-17.\193\
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    \193\ CFTC Letter No. 19-17 provides that an ``FCM shall include 
the margin deficiency of each separate account, and cover with its 
own funds as applicable, for purposes of its [r]esidual [i]nterest 
and LSOC compliance calculations. CFTC Letter No. 19-17 (Condition 
10).
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    Commission regulation Sec.  1.11 requires an FCM that accepts 
customer funds to margin futures, Cleared Swaps, or foreign futures and 
foreign options to implement a risk management program designed to 
monitor and manage the risks associated with the activities of the 
FCM.\194\ The risk management program is required to address, among 
other risks, segregation risk, and further requires an FCM to establish 
a targeted amount of its own funds, or residual interest, that the firm 
will hold in segregated accounts for futures customers, Cleared Swaps 
Customers, and 30.7 customers to reasonably ensure that the FCM remains 
in compliance with its obligation to hold, at all times, a sufficient 
level of funds in segregation to cover its full obligation to its 
customers.\195\ Regulation 1.23(c) further requires an FCM to establish 
a targeted residual interest amount that is held in segregation to 
reasonably ensure that the FCM remains in compliance, at all times, 
with its customer funds segregation requirements.\196\
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    \194\ 17 CFR 1.11.
    \195\ 17 CFR 1.11(e)(3)(i)(D).
    \196\ 17 CFR 1.23(c).
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    The Commission is proposing to adopt regulation Sec.  1.44(g)(6) to 
provide that, in determining its residual interest target for purposes 
of regulations Sec. Sec.  1.11(e)(3)(i)(D) and 1.23(c), the FCM must 
treat separate accounts of separate account customers as accounts of 
separate entities. In this regard, an FCM is required to consider the 
potential impact to segregated funds and to the FCM's targeted residual 
interest resulting from one or more separate accounts of a separate 
account customer that are undermargined, or that contain deficits or 
debit ledger balances, without taking into consideration the funds in 
excess of the margin requirements maintained in other separate accounts 
of the separate account customer.
    Currently, Commission regulations require an FCM to maintain its 
own capital, or residual interest, in customer segregated accounts in 
an amount equal to or greater than its customers' aggregate 
undermargined accounts.\197\ Additionally, each day, an FCM is required 
to perform a segregated calculation to verify its compliance with 
segregation requirements. The FCM must file a daily electronic report 
showing its segregation calculation with its DSRO, and the DSRO must be 
provided with electronic access to the FCM's bank accounts to verify 
that the funds are maintained. The FCM must also assure its DSRO that 
when it meets a margin call for customer positions, it never uses value 
provided by one customer to meet another customer's obligation.\198\ 
These requirements are intended to prevent FCMs from being induced to 
cover one customer's margin shortfall with another customer's excess 
margin, and allow DSROs to verify that FCMs are not in fact doing so. 
Proposed

[[Page 15337]]

regulation Sec.  1.44(g)(6) is designed to ensure that margin 
deficiencies are calculated accurately for accounts receiving separate 
treatment, and that such deficiencies are covered consistent with 
existing Commission regulations. Proposed regulation Sec.  1.44(g)(6) 
is also consistent with the conditions to the no-action position in 
CFTC Letter No. 19-17.\199\
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    \197\ See, e.g., 17 CFR 1.22(c)(3); 17 CFR 22.2(f)(6)(iii)(A).
    \198\ See, e.g., 17 CFR 22.2(g).
    \199\ CFTC Letter No. 19-17 provides that the ``FCM shall factor 
into its residual interest target customer receivables as computed 
on a separate account basis.'' CFTC Letter No. 19-17 (Condition 9).
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    With respect to the provisions in the First Proposal corresponding 
to the provisions in proposed regulation Sec.  1.44(g), the Commission 
received a comment from FIA. With respect to proposed regulation Sec.  
1.44(g)(1), FIA noted that FCMs are already required under regulation 
Sec.  1.73 to provide for stress testing and credit limits for all 
customers, including separate account customers.\200\ FIA asserted that 
stress testing for separate accounts would provide no additional risk 
management benefits when they do not account for all of a customer's 
underlying assets.\201\
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    \200\ FIA Comment Letter.
    \201\ Id.
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    Regulation Sec.  1.73 does not presently provide for stress testing 
on a separate account basis, and does not apply to non-clearing FCMs. 
As discussed further below, the Commission believes that it is 
appropriate to apply these risk management requirements, including 
requirements for stress testing, to non-clearing FCMs with respect to 
the separate accounts of their separate account customers, and that 
doing so on such basis could allow FCMs to detect potential 
deficiencies, the correction of which would prevent the occurrence of 
conditions that would necessitate a cessation of separate account 
treatment. The separate requirement to additionally conduct stress 
testing on a combined account basis is intended to serve as a backstop 
so that an FCM can have a view of all of a customer's actual holdings. 
If the customer does default, the FCM will have to liquidate all of the 
customer's holdings. Understanding the extent to which the positions 
within separate accounts may be additive (and perhaps create more 
concentrated positions when considered together) is also important to 
an FCM's ability to manage risk.

K. Proposed Regulation Sec.  1.44(h)

    Proposed regulation Sec.  1.44(h) contains requirements related to 
information and disclosures. As with the provisions in proposed 
regulation Sec.  1.44(g), these provisions are substantially similar to 
their corresponding no-action conditions in CFTC Letter No. 19-17, and 
to corresponding conditions included in the First Proposal, except that 
they have been reorganized and subject to minor changes to account for 
their proposed inclusion in part 1 as well as the proposed introduction 
of new defined terms.
    Proposed regulation Sec.  1.44(h)(1) provides that an FCM shall 
obtain from each separate account customer or, as applicable, the 
manager of a separate account, information sufficient for the FCM to 
(i) assess the value of the assets dedicated to such separate account; 
and (ii) identify the direct or indirect parent company of the separate 
account customer, as applicable, if such customer has a direct or 
indirect parent company.\202\ Proposed regulation Sec.  1.44(h)(1) is 
intended to ensure that FCMs have visibility with respect to customers' 
financial resources appropriate to ensure that a customer's separate 
account is adequately margined, and to identify when a customer's 
financial circumstances would necessitate the cessation of separate 
account treatment. Proposed regulation Sec.  1.44(h)(1)(i) contemplates 
that, in certain instances, an investment manager may manage one or 
more accounts under power of attorney on a customer's behalf; in such 
cases, an FCM may obtain the requisite financial information from the 
investment manager. Proposed regulation Sec.  1.44(h)(1)(ii) is 
intended to ensure that FCMs have sufficient information to identify 
the direct or indirect parent company of a customer so that they may 
identify when a parent company of a customer has become insolvent, for 
purposes of proposed regulation Sec.  1.44(e)(1)(iv).
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    \202\ The Commission understands that, in certain cases, such as 
when a customer is a fund, the customer may not have a parent 
company. In such cases, the requirement to obtain information 
sufficient to identify the direct or indirect parent company would 
not apply.
---------------------------------------------------------------------------

    In its comment in response to the First Proposal, CME asserted that 
if the parent of an FCM has multiple relationships with a customer 
(e.g., prime brokerage or lending), it should be sufficient that the 
FCM's parent has this information and can provide it to the Commission 
upon request. The Commission believes that if an asset manager is 
managing a specified set of assets, then it is relevant for the FCM to 
know the size of that set of assets. Additionally, the requirement to 
gather information sufficient to identify the direct or indirect parent 
of the customer is intended to ensure that the FCM understands who the 
parent is so that it can be aware if the parent becomes insolvent or 
otherwise experiences a non-ordinary course of business event. That an 
FCM's parent may hold such information does not necessarily mean that 
the FCM has such information readily available--a goal this proposed 
provision is designed to accomplish.
    In its comment, FIA argued that this provision was unnecessary as 
the proposed requirement is already consistent with proper risk 
management or otherwise required by applicable law.\203\ FIA further 
argued that this provision may imply that an FCM has obligations with 
regard to separate account customers that do not exist for other 
customers. The Commission notes that to the extent 31 CFR 1010.230, 
which pertains to the identification of beneficial owners, does not 
contain specific requirements related to the identification of direct 
or indirect parent companies, or the value of assets dedicated to 
separate accounts, proposed regulation Sec.  1.44(h)(1) is designed to 
capture such information; additionally, while proposed regulation Sec.  
1.44 makes clear that its requirements are applicable to FCMs that 
provide separate account treatment for customers, it does not state 
that it is intended to supersede any other requirements related to 
ascertaining the identity of beneficial owners (i.e., customers). FIA 
additionally opposed any further amendment to this provision that would 
require an FCM to obtain any specific information or documentation, or 
prescribe the schedule by which an FCM must update such information; 
the Commission in this Second Proposal has determined not to propose 
such further requirements and expects that FCMs will obtain the 
requisite information in a time and manner consistent with the FCM's 
existing risk management policies.
---------------------------------------------------------------------------

    \203\ FIA Comment Letter (citing 31 CFR 1010.230).
---------------------------------------------------------------------------

    In its comment, the JAC asserted that further clarity is needed on 
how clearing FCMs should determine the value of assets dedicated to 
separate accounts, and that such information should be updated at least 
annually and more often as facts and circumstances warrant. The 
Commission recognizes that there may exist significant diversity among 
separate account customers in the nature of customer positions, 
underlying assets, and frequency with which such assets change in terms 
of size and composition. The Commission does not wish to set a 
prescriptive, one-size-fits-all standard in the method and frequency of 
the valuation contemplated by proposed regulation Sec.  1.44(h)(1), and

[[Page 15338]]

believes an FCM should be able to value assets in a manner consistent 
with its otherwise appropriate risk management policies.
    Proposed regulation Sec.  1.44(h)(2) provides that, where a 
separate account customer has appointed a third-party as the primary 
contact to the FCM, the FCM must obtain and maintain current contact 
information of an authorized representative at the customer, and take 
reasonable steps to verify that such contact information is and remains 
accurate, and that the person is in fact an authorized representative 
of the customer. In many cases, an investment manager acts under a 
power of attorney on behalf of a customer, and the FCM has little 
direct contact with the customer. Proposed regulation Sec.  1.44(h)(2) 
is designed to ensure that FCMs have a reliable means of contacting 
separate account customers directly if the investment manager fails to 
ensure prompt payment on behalf of the customer. Under the First 
Proposal, a DCO would have needed to require that a clearing FCM 
engaged in separate account treatment review and, if necessary, update 
the relevant contact information no less than annually. The Commission 
has determined to omit the requirement of an annual review from this 
Second Proposal for the avoidance of confusion with respect to the 
requirement to maintain current contact information for authorized 
representatives as, in the Commission's view, reasonable steps to 
verify that contact information remains accurate may, depending on the 
circumstances, necessitate review and update of such information on a 
basis more or less frequent than annually.
    In its comment in response to the First Proposal, FIA opposed 
required annual updates of contact information for customer 
representatives, asserting that FCMs are in regular contact with 
investment managers and will have current contact information for them. 
While FCMs may communicate regularly with investment managers, and 
generally have current contact information for them, the Commission 
notes that its intent is to enable the FCM to have contact information 
for the customer, in addition to having contact information for the 
investment manager, in order to enable the FCM to contact the customer 
directly if the FCM has problems with the account manager. As noted 
above, in this Second Proposal, the Commission has omitted the annual 
update requirement, but will require that customer representative 
contact information be kept current. The Commission considers it 
prudent risk management practice that the FCM maintain a line of 
contact to the customer of a separate account, and this is consistent 
with a condition of the no-action position.
    In its comment, the JAC argued that the Commission should require a 
corporate resolution or similar document authorizing a representative 
at a customer to represent the customer if the customer is not an 
individual. The JAC opined that maintaining current contact information 
for authorized representatives of customers with associated corporate 
resolutions or similar documentation should already be part of a 
clearing FCM's policies and procedures (noting that most such FCMs 
likely already review such information on at least an annual basis), 
and noted that the additional cost of adding such a requirement would 
likely be de minimis. The Commission notes that the proposed regulation 
already would require FCMs to take reasonable steps to verify that the 
authorized representative of a customer is in fact an authorized 
representative of the customer. While the proposed regulation would not 
preclude an FCM from requiring from a customer a corporate resolution 
authorizing a representative to represent a customer in order for the 
FCM to comply with this requirement, the Commission wishes to preserve 
a degree of flexibility in how FCMs may choose to verify the identity 
and authorization of customer representatives, and is not at this time 
prescribing specific means of verifying such information.
    Proposed regulation Sec.  1.44 will not affect the Commission's 
bankruptcy rules under part 190 of its regulations or any rights of a 
customer or FCM in bankruptcy thereunder. In the event that an FCM 
electing separate account treatment experiences a bankruptcy, the 
accounts of a customer in each account class will be consolidated, and 
accounts of the same customer treated separately for purposes of 
proposed regulation Sec.  1.44 will not be treated separately in 
bankruptcy. To make this limitation clear to customers and FCMs, the 
Commission proposes regulation Sec.  1.44(h)(3), which provides that an 
FCM must provide each separate account customer with a disclosure that, 
pursuant to part 190 of the Commission's regulations, all separate 
accounts of the customer in each account class will be combined in the 
event of the FCM's bankruptcy. The disclosure statement required by 
proposed regulation Sec.  1.44(h)(3) must be delivered directly to the 
customer via electronic means, in writing or in such other manner as 
the FCM customarily delivers disclosures pursuant to applicable 
Commission regulations, and as permissible under the FCM's customer 
documentation. Furthermore, the FCM must maintain documentation 
demonstrating that the disclosure statement required by proposed 
regulation Sec.  1.44(h)(3) was delivered directly to the customer. 
Additionally, the FCM must include the disclosure statement required by 
proposed regulation Sec.  1.44(h)(3) on its website or within its 
Disclosure Document required by Commission regulation Sec.  1.55(i).
    The Bankruptcy Reform Act of 1978 \204\ enacted subchapter IV of 
chapter 7 of the Bankruptcy Code, title 11 of the U.S. Code, to add 
certain provisions designed to afford enhanced protections to commodity 
customer property and protect markets from the reversal of certain 
transfers of money or other property, in recognition of the complexity 
of the commodity business.\205\ The Commission enacted part 190 of its 
regulations, 17 CFR part 190, to implement subchapter IV. Under part 
190, all separate accounts of a customer in an account class will be 
combined in the event of an FCM's bankruptcy.\206\ The Commission 
proposes to adopt proposed regulation Sec.  1.44(h)(3) so that 
customers receive full and fair disclosure as to the treatment of their 
accounts in an FCM bankruptcy.
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    \204\ Public Law 95-598, 92 Stat. 2549.
    \205\ Bankruptcy, 46 FR 57535, 57535-36 (Nov. 24, 1981).
    \206\ 17 CFR 190.08(b)(2)(i) and (xii) (Aggregate the credit and 
debit equity balances of all accounts of the same class held by a 
customer in the same capacity. Except as otherwise provided in this 
paragraph (b)(2), all accounts that are deemed to be held by a 
person in its individual capacity shall be deemed to be held in the 
same capacity. Except as otherwise provided in this section, an 
account maintained with a debtor by an agent or nominee for a 
principal or a beneficial owner shall be deemed to be an account 
held in the individual capacity of such principal or beneficial 
owner.).
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    Proposed regulation Sec.  1.44(h)(4) provides that an FCM that has 
made an election pursuant to proposed regulation Sec.  1.44(d) shall 
disclose in the Disclosure Document required by regulation Sec.  
1.55(i) that it permits the separate treatment of accounts for the same 
customer under the terms and conditions of proposed regulation Sec.  
1.44. A similar provision was included in the First Proposal as 
proposed regulation Sec.  39.13(j)(13). Regulation Sec.  1.55 was 
adopted to advise new customers of the substantial risk of loss 
inherent in trading commodity futures.\207\ The Commission amended 
regulation Sec.  1.55 in 2013 to, among other things, add new paragraph 
(i) requiring FCMs to disclose to customers

[[Page 15339]]

all information about the FCM, including its business, operations, risk 
profile, and affiliates, that would be material to the customer's 
decision to entrust funds to and otherwise do business with the FCM and 
that is otherwise necessary for full and fair disclosure.\208\ Such 
disclosures include material information regarding specific topics 
identified in regulation Sec.  1.55(k), which include a basic overview 
of customer funds segregation, as well as current risk practices, 
controls, and procedures.\209\ These disclosures are designed to 
``enable customers to make informed judgments regarding the 
appropriateness of selecting an FCM'' and enhance the diligence that a 
customer can conduct prior to opening an account and on an ongoing 
basis.\210\ The Commission believes that the application of separate 
account treatment for some customers of an FCM, is ``material to the . 
. . decision to entrust . . . funds to and otherwise do business with 
the [FCM]'' with respect to the customers of such FCM generally 
because, in the event that separate account treatment for some 
customers were to contribute to a loss that exceeds the FCM's ability 
to cover, that loss might affect the segregated funds of all of the 
FCM's customers in one or more account classes.\211\ Accordingly, the 
Commission proposes regulation Sec.  1.44(h)(4) to ensure that 
customers are apprised of a matter that is relevant to the FCM's risk 
management policies.
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    \207\ Adoption of Customer Protection Rules, 43 FR 31886, 31888 
(July 24, 1978).
    \208\ 17 CFR 1.55(i).
    \209\ 17 CFR 1.55(k)(8), (11).
    \210\ Enhancing Protections Afforded Customers and Customer 
Funds Held by Futures Commission Merchants and Derivatives Clearing 
Organizations, 78 FR 68506, 68564 (Nov. 14, 2013).
    \211\ See 17 CFR 1.55(i).
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    In its comment in response to the First Proposal, the JAC contended 
that the Disclosure Document should be provided directly to the 
authorized representative of a customer to ensure the customer has a 
complete understanding of how its accounts will be combined in FCM 
bankruptcy. The JAC also requested that the Commission clarify what is 
meant by ``delivered separately'' to the underlying customer. The 
Commission notes that in this Second Proposal, ``delivered separately'' 
has been changed to ``delivered directly,'' to clarify that the 
Disclosure Document must be provided specifically to the customer.
    The JAC also contended that the regulation Sec.  1.55(i) disclosure 
should be expanded ``not only to indicate that the FCM permits separate 
account treatment, but also to include a thorough discussion of 
additional risks to other customers as highlighted by the Commission in 
the Preamble discussion.'' \212\ In the Commission's view, the proposed 
conditions for separate account treatment are intended to achieve the 
same risk management objectives that would otherwise be achieved 
through application of the Margin Adequacy Requirement, and an FCM that 
complies with those conditions would not subject customers other than 
separate account customers to substantial additional or different 
risks. Nonetheless, while such risks may not be substantial, they 
cannot be said to be nonexistent, and so the Commission is adding in 
proposed regulation Sec.  1.44(h)(4) to the disclosure proposed in the 
First Proposal the language that ``in the event that separate account 
treatment for some customers were to contribute to a loss that exceeds 
the FCM's ability to cover, that loss may affect the segregated funds 
of all of the FCM's customers in one or more account classes.''
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    \212\ JAC Comment Letter.
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    Additionally, the JAC recommended that the Commission address how 
separate account treatment may impact a pro rata distribution in the 
event of a clearing FCM bankruptcy. For the avoidance of doubt, the 
Commission confirms that, if an FCM disburses funds to a customer 
receiving separate treatment which would not otherwise have been 
available if the accounts were treated on a gross basis, the FCM 
subsequently declares bankruptcy and, as a result of the separate 
account disbursement, the customer has a smaller amount of funds on 
deposit when its separate accounts are combined in bankruptcy, then the 
customer may share in any shortfall in customer funds at the FCM to a 
lesser extent than would a customer not subject to separate account 
treatment. This result is an inherent risk of separate account 
treatment, but is not unique; any customer that reduces their amount of 
margin on deposit at an FCM shortly before the FCM goes into bankruptcy 
(either by reducing excess margin, or reducing the risk of their 
positions and withdrawing the resulting margin excess) would similarly 
benefit.
    Additionally, proposed regulation Sec.  1.44(h)(4)(i) provides that 
an FCM that applies separate account treatment pursuant to proposed 
regulation Sec.  1.44 must apply such treatment in a consistent manner 
over time, and that if the election pursuant to proposed regulation 
Sec.  1.44(d) for a separate account customer is revoked, such election 
may not be reinstated during the 30 days following such revocation. The 
Commission proposes this 30-day period to further ensure that FCMs will 
conduct a diligent and thorough review to confirm that the 
circumstances leading to cessation of separate account treatment have 
been cured, and to prevent the possibility that, as discussed below, an 
FCM could toggle its separate account treatment election for purposes 
other than serving customers' bona fide commercial purposes. Proposed 
regulation Sec.  1.44(h)(i) is intended to ensure that FCMs employ 
separate account treatment in a way that is consistent with the 
customer protection and FCM risk management provisions of the CEA and 
Commission regulations. The Commission recognizes that, while bona fide 
business or risk management purposes may at times warrant application 
or cessation of separate account treatment, FCMs should not apply or 
cease separate account treatment for reasons, or in a manner, that 
would contravene the customer protection and risk mitigation purposes 
of the CEA and Commission regulations. For instance, an FCM should not 
switch back and forth between separate and combined treatment for 
customer accounts in order to achieve more preferable margining 
outcomes or offset margin shortfalls in particular accounts. The period 
of 30 days was chosen to balance this goal with a recognition that, 
after a sufficient period of time, the relevant circumstances for a 
particular customer may change for reasons other than strategic 
switching. The Commission recognizes that there are a wide variety of 
circumstances that may indicate inconsistent application of separate 
account treatment.

L. Proposed Appendix A to Part 1

    As discussed above, the Commission proposes Appendix A to part 1 to 
set forth those currencies for which payment of margin shall be 
considered in compliance with the one business day margin call 
requirements of proposed regulation Sec.  1.44(f) if received no later 
than the end of the second business day after the day on which the 
margin call is issued. As discussed above, the procedures for adding 
currencies to or removing currencies from proposed Appendix A to part 1 
would be set forth in proposed regulation Sec.  1.44(f)(8).
    In the First Proposal, the Commission proposed that margin paid in 
JPY would receive two-business day treatment and requested that 
commenters indicate which, if any, additional currencies would require 
similar treatment. In its comment, FIA stated, based on its members' 
knowledge and experience, considering time zone limitations and

[[Page 15340]]

industry settlement conventions, that the following currencies may also 
require such treatment: Australian dollar (AUD), Chinese renminbi 
(CNY), Hong Kong dollar (HKD), Hungarian forint (HUF), Israeli new 
shekel (ILS), New Zealand dollar (NZD), Singapore dollar (SGD), South 
African rand (ZAR), and Turkish lira (TRY).\213\ The Commission is 
persuaded by this analysis, and understands that the list of currencies 
in proposed Appendix A to part 1 is consistent with current industry 
settlement conventions, based on the Commission staff's informational 
discussions with industry professionals knowledgeable regarding such 
conventions. The Commission proposes that the initial currencies under 
proposed Appendix A to part 1 should be AUD, HKD, HUF, ILS, NZD, SGD, 
ZAR, TRY, and CNY. The Commission would welcome further comment 
indicating industry settlement conventions for other currencies.
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    \213\ FIA Comment Letter.
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M. Proposed Amendments to Regulation Sec.  1.58

    Regulation Sec.  1.58(a) currently provides that each FCM that 
carries a commodity futures or commodity option position for another 
FCM or a foreign broker on an omnibus basis must collect, and each FCM 
and foreign broker whose account is so carried, must deposit initial 
and maintenance margin on positions reportable under Commission 
regulation Sec.  17.04 at a level of at least that established for 
customer accounts by the rules of the relevant contract market. 
Regulation Sec.  1.58(a) is designed to ensure that where a clearing 
FCM (i.e., a carrying FCM) carries a customer omnibus account for a 
non-clearing FCM (i.e., a depositing FCM), the risk posed by the 
customers of the depositing FCM continues to be appropriately mitigated 
through margining of those positions (i.e., calculation of initial and 
maintenance margins) on a gross basis at the depositing FCM. This is 
analogous to the margining of positions of a clearing FCM on a gross 
basis at the DCO.\214\
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    \214\ See Sec.  39.13(g)(8)(i).
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    In proposing regulation Sec.  1.58(a), the ``Commission view[ed] 
with great concern the fact that [a significant] amount of customer 
funds [was] being held by firms [i.e., non-clearing FCMs] that, in 
comparison to clearing FCMs, generally have less capital and are less 
equipped to handle the volatility of the commodity markets, a concern 
which was highlighted by the . . . bankruptcies [of three FCMs] which 
occurred during the last half of 1980.'' \215\ In light of the 
segregation requirements at the time--which did not yet apply to 
foreign futures and foreign options, and also did not apply to cleared 
swaps (a category that did not then exist), these requirements were 
designed only to apply to futures and options. The requirement was 
therefore tied to position reporting under regulation Sec.  17.04, a 
reporting requirement that is limited to futures and options.
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    \215\ See Gross Margining of Omnibus Accounts, 46 FR 62864 (Dec. 
29, 1981).
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    By 2011, industry practice had developed such that ``[u]nder 
current industry practice, omnibus accounts report gross positions to 
their clearing members and clearing members collect margins on a gross 
basis for positions held in omnibus accounts.'' \216\ The Commission 
thus required DCOs to require that clearing members post margin to DCOs 
on a gross basis for both domestic futures and cleared swaps.\217\ The 
Commission stated, as its rationale, that it
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    \216\ See Derivatives Clearing Organization General Provisions 
and Core Principles, 76 FR 69334, 69375 (Nov. 8, 2011).
    \217\ See id., regulation Sec.  39.13(g)(8)(i).

continues to believe, as stated in the notice of proposed 
rulemaking, that gross margining of customer accounts will: (a) More 
appropriately address the risks posed to a DCO by its clearing 
members' customers than net margining; (b) will increase the 
financial resources available to a DCO in the event of a customer 
default; and (c) with respect to cleared swaps, will support the 
requirement in Sec.  39.13(g)(2)(iii) that a DCO must margin each 
swap portfolio at a minimum 99 percent confidence level.\218\
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    \218\ Derivatives Clearing Organization General Provisions and 
Core Principles, 76 FR 69375-69376.

    The Commission also noted that, ``under certain circumstances gross 
margining may also increase the portability of customer positions in an 
FCM insolvency. That is, a gross margining requirement would increase 
the likelihood that there will be sufficient collateral on deposit in 
support of a customer position to enable the DCO to transfer it to a 
solvent FCM.'' \219\
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    \219\ Id. at 69376 n. 133 (citing CPSS-IOSCO Consultative Report 
[on PFMI], Principle 14: Segregation and Portability, Explanatory 
Notes 3.14.6 and 3.14.8, at 67-68).
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    At the time, with its focus on implementing rules for DCOs, the 
Commission did not amend regulation Sec.  1.58 explicitly to require 
gross margining for omnibus accounts cleared by a non-clearing FCM 
through a clearing FCM. However, reviewing the matter presently, the 
Commission is of the view that the reasons for requiring clearing FCMs 
to post margin at a DCO on a gross basis apply, mutatis mutandis, to 
support requiring gross margining for omnibus customer accounts of non-
clearing FCMs for Cleared Swaps in addition to domestic futures.\220\
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    \220\ By contrast, the Commission has imposed limits on holding 
the foreign futures or foreign options secured amount outside the 
United States. See regulation Sec.  30.7(c) (limiting such amounts 
to 120% of the total amount of funds necessary to meet margin and 
prefunding margin requirements established by rule, regulation or 
order of foreign boards of trade or foreign clearing organizations, 
or to meet margin calls issued by foreign brokers carrying the 30.7 
customers' foreign futures and foreign options positions.) Requiring 
an FCM to send a larger amount of 30.7 funds upstream to a foreign 
broker or foreign clearing organization would run counter to the 
regulation's goal of limiting such amounts. Accordingly, the 
Commission is not proposing to require gross margining with respect 
to 30.7 accounts.
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    Accordingly, the Commission is proposing to amend regulations Sec.  
1.58(a) and (b) to require, in the case of (a), addressing gross 
collection of margin generally, that each futures commission merchant 
which carries a futures, options, or Cleared Swaps position for another 
futures commission merchant or for a foreign broker on an omnibus basis 
must collect, and each futures commission merchant and foreign broker 
for which an omnibus account is being carried must deposit, initial and 
maintenance margin on each position so carried at a level no less than 
that established for customer accounts by the rules of the applicable 
contract market or other board of trade (or, if the board of trade does 
not specify any such margin level, the level specified by the relevant 
clearing organization), i.e., on a gross margin basis, and, in the case 
of (b), addressing entitlement to spread or hedge margin treatment, 
that where an FCM carries a futures, options, or Cleared Swaps position 
for another futures commission merchant or for a foreign broker on an 
omnibus basis allows a position to be margined as a spread position or 
as a hedged position in accordance with the rules of the applicable 
contract market, the carrying futures commission merchant must obtain 
and retain a written representation from the futures commission 
merchant or from the foreign broker for which the omnibus account is 
being carried that each such position is entitled to be so margined.
    Under this proposal, clearing FCM initial and maintenance margin 
requirements for separate accounts of the same customer are proposed to 
be calculated on a gross basis as the margin for accounts of distinct 
customers.\221\ The Commission preliminarily believes

[[Page 15341]]

it is important to continuity of risk management that the same approach 
also be applied in the case of a non-clearing (depositing) FCM whose 
accounts are carried by a clearing (carrying) FCM, with respect to the 
amount that depositing FCM is required to deposit, and that the 
carrying FCM is required to collect.\222\ The Commission is therefore 
proposing to amend regulation Sec.  1.58 to add new paragraph (c) 
providing that, where an FCM has established an omnibus account that is 
carried by another FCM, and the depositing FCM has elected to treat the 
separate accounts of a customer as accounts of separate entities for 
purposes of proposed regulation Sec.  1.44, then the depositing FCM 
must calculate initial and maintenance margin for purposes of 
regulation Sec.  1.58(a) separately for each separate account.\223\
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    \221\ See proposed regulation Sec.  1.44(g)(2).
    \222\ As a result, each customer with accounts subject to 
separate account treatment should be subject to the same or greater 
margin requirements as such customer would be subject to if its 
separate accounts were margined on a combined account basis.
    \223\ If non-clearing FCM N has customers P and Q, and Q is a 
separate account customer with separate accounts R, S, and T, then N 
would calculate, on a gross basis, the margin requirements for 
accounts P, R, S, and T, consistent with proposed regulation Sec.  
1.58(c). That gross margin requirement, across those four accounts, 
will be the amount that, consistent with regulation Sec.  1.58(a), N 
must deposit and N's clearing FCM, C, must collect.
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N. Proposed Amendments to Regulation Sec.  1.73

    The Commission proposes to amend regulation Sec.  1.73 to add new 
paragraph (c) providing that an FCM that is not a clearing member of a 
DCO but that treats the separate accounts of a customer as accounts of 
separate entities for purposes of proposed regulation Sec.  1.44 shall 
comply with regulation Sec.  1.73(a) and (b) with respect to accounts 
and separate accounts of separate account customers receiving separate 
treatment, as if the FCM were a clearing member of a DCO. Regulation 
Sec.  1.73 currently sets forth risk management requirements only for 
FCMs that are clearing members of DCOs. The Commission proposes this 
amendment to ensure that, where non-clearing FCMs are engaging in 
separate account treatment, they are required to comply with the same 
baseline risk management requirements with respect to those separate 
accounts as their clearing counterparts do with respect to all 
accounts. In particular, this amendment will link with a non-clearing 
FCM's compliance with proposed regulation Sec.  1.44(g)(1)'s stress 
testing and credit limit requirements. Since 2019, clearing FCMs have 
successfully applied regulation Sec.  1.73(a), in conjunction with the 
no-action position's stress testing and credit limit conditions,\224\ 
to manage the risk of accounts subject to separate treatment. In 
proposing to codify the no-action position in part 1 of the 
Commission's regulations, the Commission believes it would be prudent 
from a customer funds protection perspective, and a systemic risk 
mitigation perspective, to ensure that any FCMs that provide for 
separate account treatment, whether clearing or non-clearing, do so 
subject to similarly heightened risk management requirements. The 
Commission expects that, by applying the heightened risk management 
requirements applicable to clearing FCMs to all of a non-clearing FCM's 
accounts for a customer receiving separate treatment, a non-clearing 
FCM would be better able to detect and prevent the emergence of risks 
that could lead to operational or financial distress at such customer, 
reducing the potential risk of a default (or a failure to maintain 
adequate customer funds) by the non-clearing FCM.
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    \224\ CFTC Letter No. 19-17 (Condition 3).
---------------------------------------------------------------------------

O. Proposed Amendments to Regulation Sec.  30.2

    Commission regulation Sec.  30.2(b) currently excludes an FCM 
engaging in foreign futures and foreign option transactions for 30.7 
customers from certain provision of the Commission's regulations, 
including regulation Sec.  1.44, in recognition that such transactions 
are entered into on contract markets that are subject to regulation by 
non-U.S. authorities.\225\ Regulation Sec.  1.44 is currently reserved, 
and the Commission is proposing to amend regulation Sec.  30.2(b) to 
remove regulation Sec.  1.44 from the list of excluded 
regulations.\226\
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    \225\ For example, regulation Sec.  30.2 excludes persons and 
foreign futures and foreign options transactions from the 
segregation requirements of Sec.  1.20, which applies only to 
futures customer funds and transactions. Commission regulation Sec.  
30.7 addresses the segregation requirements of 30.7 customer funds.
    \226\ Regulation Sec.  1.44 is currently reserved and, 
accordingly, does not impose any regulatory obligation on an FCM. 
When regulation Sec.  30.2 was promulgated, regulation Sec.  1.44 
addressed records and reports of warehouses, depositories, and other 
similar entities; this regulation was subsequently deleted.
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    The proposed amendment to regulation Sec.  30.2(b) is consistent 
with the proposed imposition of the Margin Adequacy Requirement on 30.7 
accounts and the proposed definition of the term ``account'' in 
regulation Sec.  1.44(a), which would include 30.7 accounts in addition 
to futures accounts and Cleared Swaps Customer Accounts.
    The Commission is also proposing to remove the exclusion of 
regulations Sec. Sec.  1.41-1.43 from applicability to part 30. When 
regulation Sec.  30.2 was promulgated in 1987 as part of the 
establishment of part 30,\227\ it explicitly provided that certain of 
its existing regulations would not be applicable ``to the persons and 
transactions that are subject to the requirements of'' part 30. At that 
time, regulations Sec. Sec.  1.41-1.43 addressed, respectively, crop or 
market information letters, filing of contract market rules with the 
Commission, and warehouses, depositories, and other similar entities. 
Those regulations were subsequently deleted, and those sections were 
reserved.
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    \227\ Foreign Futures and Foreign Options Transactions, 52 FR 
28980 (Aug. 5, 1987).
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    When the Commission revised its part 190 bankruptcy rules in 2021, 
the Commission added, as regulations Sec. Sec.  1.41-1.43, designation 
of hedging accounts, delivery accounts, and conditions on accepting 
letters of credit as collateral. Each of these regulations was intended 
to apply to foreign futures accounts. However, regulation Sec.  30.2 
was not amended to conform with that intention. The Commission proposes 
to address that now.

P. Proposed Amendments to Regulation Sec.  39.13(g)(8)

    Regulation Sec.  39.13(g)(8)(i) requires DCOs to collect customer 
margin from their clearing members on a gross basis, that is, collect 
margin equal to the sum of initial margin amounts that would be 
required by the DCO for each individual customer within that account if 
each individual customer were a clearing member.\228\ The Commission 
proposes to add new regulation Sec.  39.13(g)(8)(i)(E) to clarify that, 
for purposes of this regulation on gross margining, each separate 
account of a separate account customer shall be treated as an account 
of a separate individual customer.
---------------------------------------------------------------------------

    \228\ 17 CFR 39.13(g)(3)(i)(A).
---------------------------------------------------------------------------

    The Commission also proposes to amend regulation Sec.  
39.13(g)(8)(iii), to provide that such paragraph shall apply except as 
provided for in regulation Sec.  1.44. The Commission proposes this 
amendment to ensure that the carve-out (represented by proposed 
regulation Sec.  1.44(c) through (h)) to the Margin Adequacy 
Requirement (represented by proposed regulation Sec.  1.44(b)) that 
would apply to all FCMs is also effectuated with respect to the Margin 
Adequacy Requirement applicable to clearing members through DCOs 
pursuant to regulation Sec.  39.13(g)(8)(iii).
    Question 8: If the Commission includes the Margin Adequacy 
Requirement and requirements regarding separate account treatment in

[[Page 15342]]

Part 1 of its regulations as proposed, should the Commission remove 
regulation 39.13(g)(8)(iii)?

III. Cost Benefit Considerations

A. Introduction

    Section 15(a) of the CEA requires the Commission to ``consider the 
costs and benefits'' of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\229\ 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 markets; (3) price discovery; (4) sound risk 
management practices; and (5) other public interest considerations 
(collectively referred to herein as the Section 15(a) Factors). 
Accordingly, the Commission considers the costs and benefits associated 
with the proposed regulation in light of the Section 15(a) Factors. In 
conducting its analysis, the Commission may, in its discretion, give 
greater weight to any one of the five enumerated areas of concern. In 
the sections that follow, the Commission considers: (1) the costs and 
benefits of the proposed regulation; (2) the alternatives contemplated 
by the Commission and their costs and benefits; and (3) the impact of 
the proposed regulation on the Section 15(a) Factors.
---------------------------------------------------------------------------

    \229\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    By its terms, section 15(a) does not require the Commission to 
quantify the costs and benefits of a new rule or to determine whether 
the benefits of the adopted rule outweigh its costs. Nonetheless, the 
Commission has endeavored to assess the expected costs and benefits of 
the proposed amendments in quantitative terms, including Paperwork 
Reduction Act (PRA)-related costs, where practicable. In situations 
where the Commission is unable to quantify the costs and benefits, the 
Commission identifies and considers the costs and benefits of the 
applicable proposed amendments in qualitative terms. However, the 
Commission lacks the data necessary to reasonably quantify all of the 
costs and benefits considered below. In some instances, it is not 
reasonably feasible to quantify the costs and benefits to FCMs with 
respect to certain factors, such as market integrity. Additionally, any 
initial and recurring compliance costs for any particular FCM will 
depend on its size, existing infrastructure, practices, and cost 
structures. The Commission welcomes comments on any such costs, 
especially by clearing FCMs, who may be better able to provide 
quantitative costs data or estimates, based on their respective 
experiences relating to the application of CFTC Letter No. 19-17. 
Notwithstanding these types of limitations, the Commission otherwise 
identifies and considers the costs and benefits of these proposed rule 
amendments in qualitative terms.
    In the following consideration of costs and benefits, the 
Commission first identifies and discusses the benefits and costs 
attributable to the proposed rule amendments. Next, the Commission 
identifies and discusses the benefits and costs attributable to the 
proposed rule amendments as compared to alternatives to the proposed 
rule amendments. The Commission, where applicable, then considers the 
costs and benefits of the proposed rule amendments in light of the 
Section 15(a) Factors.
    The Commission notes that this consideration of costs and benefits 
is based on, inter alia, its understanding that the derivatives markets 
regulated by the Commission function internationally, with (1) 
transactions that involve entities organized in the United States 
occurring across different international jurisdictions, (2) some 
entities organized outside of the United States that are prospective 
Commission registrants, and (3) some entities that typically operate 
both within and outside the United States, and that follow 
substantially similar business practices wherever located. Where the 
Commission does not specifically refer to matters of location, the 
discussion of costs and benefits below refers to the effects of the 
proposed regulations on all relevant derivatives activity, whether 
based on their actual occurrence in the United States or on their 
connection with, or effect on, U.S. commerce.\230\
---------------------------------------------------------------------------

    \230\ See, e.g., 7 U.S.C. 2(i).
---------------------------------------------------------------------------

    The Commission generally requests comment on all aspects of its 
cost-benefit considerations, including the identification and 
assessment of any costs or benefits not discussed herein; the potential 
costs and benefits of the alternatives that the Commission discussed in 
this release; data and any other information to assist or otherwise 
inform the Commission's ability to quantify or qualitatively describe 
the costs and benefits of the proposed rule amendments; and 
substantiating data, statistics, and any other information to support 
positions posited by commenters with respect to the Commission's 
discussion. Commenters may also suggest other alternatives to the 
proposed approach where the commenters believe that the alternatives 
would be appropriate under the CEA and would provide a more appropriate 
cost-benefit profile.
    The Commission is also including a number of questions for the 
purpose of eliciting cost and benefit estimates from public commenters 
wherever possible. Quantifying other costs and benefits, such as the 
effects of potential changes in the behavior of FCMs resulting from the 
proposal are inherently harder to measure. Thus, the Commission is 
similarly requesting comment through questions to help it better 
quantify these impacts. Due to these quantification difficulties, for 
this NPRM (Second Proposal), the Commission offers the following 
qualitative discussion of its costs and benefits.
1. Proposed Regulation
    The Commission is proposing to promulgate new regulations in part 1 
of its regulations designed to (1) further ensure that FCMs hold 
customer funds sufficient to cover the required initial margin for the 
customer's positions, by prohibiting an FCM from permitting customers 
to withdraw funds from their accounts with such FCM unless the net 
liquidating value plus the margin deposits remaining in the customer's 
account after the withdrawal would be sufficient to meet the customer 
initial margin requirements with respect to the products or portfolios 
in the customer's account (i.e., the Margin Adequacy Requirement) 
(proposed regulation Sec.  1.44(b)) and (2) permit FCMs to treat the 
separate accounts of a single customer as accounts of separate entities 
for purposes of the Margin Adequacy Requirement, subject to conditions 
designed to ensure that such separate account treatment is carried out 
in a documented and consistent manner, and that FCMs, their DSROs, and 
the Commission are apprised of, and able to respond to, conditions 
that, for risk mitigation reasons, would necessitate the cessation of 
such separate account treatment (proposed regulation Sec.  1.44(c) 
through (h)).\231\ The Commission is also proposing to revise 
regulations in parts 1, 22, and 30 of its regulations related to 
definitions, FCM minimum financial requirements, reporting, collection 
of margin, and clearing FCM risk management (proposed amendments to 
regulations Sec. Sec.  1.3, 1.17, 1.20, 1.58, and 1.73, as well as 
Sec. Sec.  22.2 and 30.7), and part 39 of its regulations related to 
DCO risk management (proposed

[[Page 15343]]

amendments to regulation Sec.  39.13), to facilitate full 
implementation of the Margin Adequacy Requirement and conditions for 
separate account treatment.
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    \231\ Proposed regulation Sec.  1.44(a) provides definitions 
supporting the other paragraph of the regulation.
---------------------------------------------------------------------------

2. Baseline: Current Part 1 and Regulation 39.13(g)(8)(iii)
    The Commission identifies the costs and benefits of the proposed 
amendments relative to the baseline of the regulatory status quo. In 
particular, the baseline that the Commission considers for the costs 
and benefits of these proposed rule amendments is the Commission 
regulations now in effect; specifically, part 1 of the Commission's 
regulations (where the operative part of the proposed regulation would 
be codified) and regulation Sec.  39.13(g)(8)(iii) (which contains the 
Commission's current Margin Adequacy Requirement). In considering the 
costs and benefits of the proposed regulation against this baseline, 
the Commission considers the costs and benefits for both clearing FCMs 
and non-clearing FCMs--the two categories of market participants that 
would be directly affected by the proposed regulation. To the extent 
that certain FCMs that are clearing members of DCOs have taken actions 
in reliance on CFTC Letter No. 19-17, the Commission recognizes the 
practical implications of those actions on the costs and benefits of 
the proposed regulation.
a. Baseline With Respect to Clearing FCMs
    Regulation Sec.  39.13(g)(8)(iii) currently provides that DCOs 
shall establish a Margin Adequacy Requirement for their clearing FCMs 
with respect to the products that the DCOs clear. Thus, under the 
status quo baseline, clearing FCMs are, albeit indirectly (through the 
operation of DCO rules designed to implement regulation Sec.  
39.13(g)(8)(iii)), subject to the Margin Adequacy Requirement for 
futures and Cleared Swaps. They are not, however, subject to the Margin 
Adequacy Requirement for foreign futures that are not cleared by a 
DCO.\232\ Under the baseline--which does not include the effect of CFTC 
Letter No. 19-17 and its superseding letters--clearing FCMs are not 
permitted to engage in separate account treatment with respect to the 
Margin Adequacy Requirement.
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    \232\ While existing regulation Sec.  39.13(g)(8)(iii) does not 
require DCOs to impose a Margin Adequacy Requirement on their 
clearing FCMs with respect to such FCMs' foreign futures (part 30) 
accounts, it may well be the case that such FCMs' existing systems 
and procedures already apply that requirement to those accounts, 
because it may be impracticable operationally to treat those 
accounts differently from futures and Cleared Swaps Accounts. If 
that assumption is correct, the proposed part 1 Margin Adequacy 
Requirement is unlikely to impose significant costs on, or cause 
significant benefits with respect to, clearing FCMs. The Commission 
seeks comment on the validity of that assumption.
---------------------------------------------------------------------------

b. Baseline With Respect to Non-Clearing FCMs
    Commission regulations do not, either directly or indirectly, 
impose a Margin Adequacy Requirement on non-clearing FCMs. Accordingly, 
they currently have no need to engage in separate account treatment 
with respect to such a requirement.
    The Commission's current part 1 regulations do not contain any 
requirements specifically related to the separate treatment of 
accounts. As noted above, under the baseline, clearing FCMs are not 
permitted to engage in separate account treatment with respect to 
regulation Sec.  39.13(g)(8)(iii)'s Margin Adequacy Requirement, and 
non-clearing FCMs have no need to engage in separate account treatment 
with respect to the Margin Adequacy Requirement of regulation Sec.  
39.13(g)(8)(iii) (because DCO rules addressing that regulation do not 
apply to non-clearing FCMs). Additionally, a non-clearing FCM would not 
be permitted to treat the accounts of a single customer as accounts of 
separate entities for purposes of regulatory requirements imposed by 
the Commission (e.g., capital requirements under regulation Sec.  
1.17).

B. Consideration of the Costs and Benefits of the Commission's Action

1. Benefits
a. Margin Adequacy Requirement (Proposed Regulation Sec.  1.44(b))
    As discussed above, the Commission is proposing to (a) promulgate 
new regulations in part 1 of its regulations designed to (1) further 
ensure that FCMs hold customer funds sufficient to cover the required 
initial margin for the customer's positions, and (2) permit FCMs to 
treat the separate accounts of a single customer as accounts of 
separate entities for purposes of such Margin Adequacy Requirement, 
subject to requirements designed to mitigate the risk that such 
separate account treatment could result in or worsen an under-margining 
scenario; and (b) make supporting amendments in parts 1, 22, 30, and 39 
to facilitate the Margin Adequacy Requirement and requirements for 
separate account treatment, namely through changes to definitions, 
amendment of certain margin calculation requirements, application of 
certain risk management requirements to non-clearing FCMs engaged in 
separate account treatment, and amendment of regulation Sec.  
39.13(g)(8)(iii)'s Margin Adequacy Requirement to accommodate separate 
account treatment under the proposed regulation.
    Existing regulation Sec.  39.13(g)(8)(iii) establishes a Margin 
Adequacy Requirement, designed to mitigate the risk that a clearing 
member fails to hold, from a customer, funds sufficient to cover the 
required initial margin for the customer's cleared positions, and 
thereby designed to avoid the risk that a clearing FCM will, whether 
deliberately or inadvertently, misuse customer funds by using one 
customer's funds to cover another customer's margin shortfall. DCO Core 
Principle D, which concerns DCO risk management, imposes a number of 
duties upon DCOs related to their ability to manage the risks 
associated with discharging their responsibilities as DCOs, such as 
measuring credit exposures, limiting exposures to potential default-
related losses, setting margin requirements, and establishing risk 
management models and parameters.\233\ Among other requirements, Core 
Principle D requires that the margin required from each member and 
participant of a DCO be sufficient to cover potential exposures in 
normal market conditions.\234\ Regulation Sec.  39.13 implements Core 
Principle D, including through regulation Sec.  39.13(g)(8)(iii)'s 
restrictions on withdrawal of customer initial margin.
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    \233\ Section 5b(c)(2)(D) of the CEA, 7 U.S.C. 7a-1(c)(2)(D).
    \234\ Section 5b(c)(2)(D)(iv) of the CEA, 7 U.S.C. 7a-
1(c)(2)(D)(iv).
---------------------------------------------------------------------------

    With respect to clearing FCMs, because regulation Sec.  
39.13(g)(8)(iii) already results in the application of a Margin 
Adequacy Requirement to clearing FCMs through DCO rules in the context 
of futures and Cleared Swaps, the benefits of a Margin Adequacy 
Requirement in part 1 that applies directly to FCMs will be more 
limited than the benefits with respect to non-clearing FCMs. However, 
the Commission preliminarily believes that, to the extent there are 
failures in compliance with respect to margin adequacy, proposed 
regulation Sec.  1.44(b) will provide an additional avenue (i.e., 
through the Commission) for monitoring and enforcement of margin 
adequacy for clearing FCMs. Moreover, proposed regulation Sec.  1.44(b) 
will expand the Margin Adequacy Requirement to apply to foreign futures 
transactions cleared

[[Page 15344]]

through both clearing and non-clearing FCMs.\235\
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    \235\ To the extent that FCMs already follow the Margin Adequacy 
Requirement for foreign futures, e.g., for reasons of operational 
convenience (for example, if a clearing FCM applies the Margin 
Adequacy Requirement to its customer risk management for futures and 
Cleared Swaps, it may be easier to also apply it in the context of 
customer risk management for foreign futures than to have two 
different approaches) or as a matter of prudent risk management, the 
related costs and benefits would be reduced.
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    With respect to non-clearing FCMs, the Margin Adequacy Requirement 
of proposed regulation Sec.  1.44(b) will result in similar benefits to 
those currently experienced with respect to clearing FCMs under 
regulation Sec.  39.13(g)(8)(iii). Regulation Sec.  39.13(g)(8)(iii) 
provides that DCOs shall require clearing FCMs to ensure that their 
customers do not withdraw funds from their accounts unless sufficient 
funds remain to meet customer initial margin requirements with respect 
to all products and swap portfolios held in the customers' accounts and 
cleared by the DCO. This requirement is designed to prevent the under-
margining of customer accounts, and thus mitigate the risk of a 
clearing member default and the consequences that could accrue to the 
broader financial system.
    Section 4d(a)(2) of the CEA and regulation Sec.  1.20(a) require an 
FCM to separately account for and segregate all money, securities, and 
property which it has received to margin, guarantee, or secure the 
trades or contracts of its commodity customers, and section 4d(a)(2) of 
the CEA and regulation Sec.  1.22(a) prohibit an FCM from using the 
money, securities, or property of one customer to margin or settle the 
trades or contracts of another customer.\236\
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    \236\ 7 U.S.C. 6d(a)(2); 17 CFR 1.20(a); 17 CFR 1.22(a).
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    The Commission preliminarily believes that proposed regulation 
Sec.  1.44(b), which will apply a Margin Adequacy Requirement directly 
to FCMs, both clearing and non-clearing, would further achieve the 
benefits of serving to protect customer funds, and mitigating systemic 
risk that could arise from misuse of customer funds, by applying the 
under-margining avoidance requirements of regulation Sec.  
39.13(g)(8)(iii) directly to all FCMs. As noted above, this Margin 
Adequacy Requirement does not currently apply to non-clearing FCMs. The 
Commission further preliminarily believes that the application of such 
a Margin Adequacy Requirement to all FCMs (and to all three types of 
customer transactions, including (additionally) foreign futures 
transactions), through more broadly preventing under-margining 
situations, is reasonably necessary to better effectuate CEA section 
4d(a)(2) and to better accomplish the purposes of the CEA (from section 
3(b)) of ``avoidance of systemic risk'' and ``protecting all market 
participants from . . . misuses of customer assets.''
b. Requirements for Separate Account Treatment (Proposed Regulation 
Sec.  1.44(c) Through (h) and Supporting Amendments to Regulations 
Sec. Sec.  1.3, 1.17, 1.20, 1.32, 1.58, 1.73, 22.2, 30.2, 30.7, and 
39.13(g)(8))
    As discussed in section I.B above, there are a number of commercial 
reasons why an FCM or customer may wish to treat the separate accounts 
of a single customer as accounts of separate entities. Combination of 
all accounts of the same customer within the same regulatory account 
classification for purposes of margining and determining funds 
available for disbursement may make it challenging for certain 
customers and their investment managers to achieve certain commercial 
purposes.\237\ For example, where a customer has apportioned assets 
among multiple investment managers, neither the customer nor their 
investment managers may be able to obtain certainty that the individual 
portion of funds allocated to one investment manager will not be 
affected by the activities of other investment managers.
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    \237\ See First FIA Letter.
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    Where FCMs are able to treat the separate accounts of a single 
customer as accounts of separate entities for purposes of the proposed 
Margin Adequacy Requirement, customers benefit from being better able 
to leverage the skills and expertise of investment managers, and 
realize the benefits of a balance of investment strategies in order to 
meet specific commercial goals. Moreover, as discussed further below, 
clearing FCMs and customers of clearing FCMs already relying on the no-
action position would also obtain the benefit of continuing to leverage 
existing systems and procedures to provide for separate account 
treatment.
    The Commission believes that, where such separate account treatment 
is offered, it should be subject to safeguards that mitigate the risk 
that it will result in the under-margining of customer accounts. By 
applying regulatory safeguards designed to preserve the goals of the 
Margin Adequacy Requirement during such treatment, the proposal would 
achieve the benefit of permitting separate account treatment in a 
manner that would not contravene the customer funds protection and risk 
mitigation purposes of the CEA and Commission regulations.
    The Commission also believes that several years of successful 
separate account activity based on the no-action conditions of CFTC 
Letter No. 19-17 and its superseding letters by DCOs, clearing FCMs, 
and customers demonstrate that separate account treatment can be 
successfully applied, subject to certain safeguards.
    As discussed above, section 4d(a)(2) of the CEA and Commission 
regulations Sec. Sec.  1.20(a) and 1.22(a) require an FCM to account 
separately for and segregate futures customer funds and prohibit FCMs 
from using one customer's funds to cover another customer's margin 
shortfall \238\--requirements which serve to further the CEA's purposes 
(as set forth in section 3(b)) of protecting customer funds and 
avoiding systemic risk.
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    \238\ See also the analogous requirements in CEA Sec. Sec.  
4d(f)(2) and 4(b), and regulations Sec. Sec.  22.2 and 30.7 (for, 
respectively, Cleared Swaps and foreign futures).
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    Part 1 of the Commission's regulations contain the principle 
regulations applicable to the operation of FCMs that support the above-
described statutory purposes and requirements. Such regulations include 
requirements related to financial and other reporting, risk management, 
treatment of customer funds, and recordkeeping, among others. As noted 
above, the Commission believes that a Margin Adequacy Requirement, 
directly applied to all FCMs and combined with separate account 
treatment, can further CEA section 4d(a)(2)'s customer fund protection 
and risk avoidance requirements \239\ while offering commercial utility 
for a variety of market participants. However, part 1 does not 
currently contain any regulations imposing such a Margin Adequacy 
Requirement, or governing the manner in which separate account 
treatment may be conducted.
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    \239\ And, similarly, those of CEA section 4d(f)(2) and 4(b).
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    The proposed regulation is designed to achieve the benefit of 
bridging this gap by
    (i) inserting a Margin Adequacy Requirement (proposed regulation 
Sec.  1.44(b)) into part 1 to ensure further that an FCM (whether a 
clearing or non-clearing FCM) does not permit margin withdrawals that 
would create or exacerbate an under-margining situation,
    (ii) allowing FCMs to treat the separate accounts of a single 
customer as accounts of separate entities for purposes of the Margin 
Adequacy Requirement, with the benefits

[[Page 15345]]

discussed above (proposed regulation Sec.  1.44(c)),
    (iii) establishing the manner in which FCMs may elect to engage in 
separate account treatment for a particular customer, with the benefit 
of identifying both for the FCM and its supervisory authorities (the 
Commission and SROs) whether it is engaging in separate account 
treatment, and, if so, for which customers, with the benefit of 
facilitating effective regulatory/self-regulatory supervision (proposed 
regulation Sec.  1.44(d)),
    (iv) setting forth financial and operational conditions for 
customers and FCMs that would identify risk management issues that are 
sufficiently significant to disqualify a particular separate account 
customer (or an FCM with respect to all of its separate account 
customers) from separate account treatment, with the benefit of 
mitigating risk by suspending separate account treatment under such 
circumstances (proposed regulation Sec.  1.44(e)),
    (v) requiring that separate accounts be on a one business day 
margin call, while setting forth limited circumstances where failure to 
actually receive margin on a same-day basis may be excused, with the 
benefit of limiting the extent of potential under-margining, (proposed 
regulation Sec.  1.44(f)), and
    (vi) establishing requirements designed to ensure that separate 
account treatment is carried out in a consistent and documented manner, 
and carrying that treatment through to related FCM capital, customer 
funds protection, and risk management requirements in part 1 (proposed 
regulation Sec.  1.44(g) through (h)), with the benefit of further 
ensuring that the risk management objectives of the Margin Adequacy 
Requirement continue to be met during separate account treatment.
    Proposed revisions to regulations Sec. Sec.  1.3, 1.17, 1.20, 1.32, 
1.58, 1.73, 22.2, 30.2, 30.7, and 39.13(g)(8)(i) are designed to define 
terms used in proposed regulation Sec.  1.44 and facilitate 
implementation of provisions in proposed regulation Sec.  1.44 that 
would affect compliance with financial requirements for FCMs, 
collection of margin, and FCM risk management. Additionally, a proposed 
revision to regulation Sec.  39.13(g)(8)(iii) is intended to make clear 
that regulation Sec.  39.13(g)(8)(iii)'s Margin Adequacy Requirement, 
applicable directly to DCOs and indirectly to clearing FCMs, and 
similar in substance to the Margin Adequacy Requirement of proposed 
regulation Sec.  1.44(b), does not require DCOs to preclude separate 
account treatment carried out subject to proposed regulation Sec.  
1.44.
    The Commission preliminarily believes that proposed regulation 
Sec.  1.44(c) through (h), and proposed supporting amendments to 
regulations Sec. Sec.  1.3, 1.17, 1.20, 1.32, 1.58, 1.73, 22.2, 30.2, 
30.7, and 39.13 would benefit both clearing FCMs and non-clearing FCMs, 
in addition to customers and other market participants, by providing a 
comprehensive framework that affirms the availability of separate 
account treatment, and sets forth the manner in which such treatment 
can be carried out consistent with the customer fund protection and 
risk avoidance objectives of regulation Sec.  39.13(g)(8)(iii) (as 
applied via DCO rules, with respect to clearing FCMs) and proposed 
regulation Sec.  1.44(b)'s Margin Adequacy Requirement (with respect to 
both clearing FCMs and non-clearing FCMs).
    The Commission additionally notes that the allowance of, and 
requirements for separate account treatment in proposed regulation 
Sec.  1.44(c) through (h) are substantially similar to the conditions 
to the staff no-action position in CFTC Letter No. 19-17. A number of 
clearing FCMs have adopted some practices based on this no-action 
position provided by Commission staff. As such, to the extent that some 
clearing FCMs have relied on the no-action position, the actual costs 
and benefits of the proposed rule amendments as realized in the market 
may not be as significant as a comparison of the rule to the regulatory 
baseline would suggest.\240\
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    \240\ For those clearing FCMs that currently choose not to 
engage in separate account treatment, and therefore, do not adhere 
to CFTC Letter No. 19-17, but choose to do so after this proposed 
regulation were to be adopted, the Commission submits that there 
will be significant costs; similar to those faced by non-clearing 
FCMs. This is discussed further below in the costs section.
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    Moreover, if the Commission were to allow the no-action position in 
CFTC Letter No. 19-17 to expire, and did not adopt the proposed 
regulation, then clearing FCMs that already engage in separate account 
treatment consistent with the terms of CFTC Letter No. 19-17 would be 
required to reverse those changes. This could entail significant 
expenditures of funds and resources in order to rework systems, 
procedures, and customer documentation for such FCMs.\241\ Hence, 
actual benefits to the regulation may accrue from the ability of many 
FCMs to avoid these costs.
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    \241\ See Second FIA Letter. For instance, FIA noted that 
clearing FCMs would again be required to review and amend customer 
agreements, noting that negotiations to amend such agreements would 
likely prove ``extremely difficult'' as ``advisers would seek to 
assure that their ability to manage their clients' assets entrusted 
to them would not be adversely affected by the actions (or 
inactions) of another adviser.'' FIA letter dated May 11, 2022 to 
Robert Wasserman (Third FIA Letter). FIA further noted that ``an 
adviser may be less likely to use exchange-traded derivatives to 
hedge its customers' cash market positions if the adviser could not 
have confidence that it would be able to withdraw its customers' 
excess margin as necessary to meet its obligations in other 
markets.'' Id.
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Request for Comment
    Question 9: What evidence can be provided that customers have been 
able to achieve better performance by virtue of allowing separate 
account treatment? Is there evidence of under margining due to separate 
account treatment since CFTC Letter No. 19-17 was issued?
    Question 10: Is there evidence of regulatory arbitrage between 
clearing FCMs and non-clearing FCMs on the grounds that the latter are 
not currently subject to the Margin Adequacy Requirement?
2. Costs
    The proposed regulation would (i) amend part 1 of the Commission 
regulations to add a new requirement (proposed regulation Sec.  
1.44(b)) for FCMs to hold customer funds sufficient to cover the 
required initial margin for the customer's positions (the Margin 
Adequacy Requirement); (ii) amend part 1 to, in the same new section, 
(proposed regulation Sec.  1.44(c-h)) permit FCMs, subject to certain 
conditions and for purposes of the Margin Adequacy Requirement, treat 
the accounts of a single customer as accounts of separate entities; and 
(iii) amend existing regulations in parts 1 and 39 to facilitate 
implementation of the proposed new regulation. The Commission herein 
discusses the costs related to each such set of amendments with respect 
to clearing and non-clearing FCMs. There are currently 60 registered 
FCMs, and of these, the Commission estimates that approximately 40 are 
clearing FCMs and approximately 20 are non-clearing FCMs.\242\ While 
the proposed regulation would require all FCMs to comply with the 
Margin Adequacy Requirement, it would not require FCMs to engage in 
separate account treatment, and the Commission does not expect that all 
FCMs will engage in separate account treatment.\243\ Accordingly, as 
noted in connection with the Commission's discussion below related to 
the PRA, the Commission estimates that 30 FCMs

[[Page 15346]]

will choose to apply separate account treatment.
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    \242\ CFTC, Financial Data for FCMs, Sept. 20, 2023, available 
at https://www.cftc.gov/MarketReports/financialfcmdata/index.htm.
    \243\ See CME Comment Letter (noting that 14 of 42 clearing FCMs 
at CME had notified CME that they intended to avail themselves of 
the no-action position in CFTC Letter No. 19-17, but that a number 
of these firms did not ultimately implement separate account 
treatment).
---------------------------------------------------------------------------

a. Margin Adequacy Requirement (Proposed Regulation Sec.  1.44(b))
    The Margin Adequacy Requirement of proposed regulation Sec.  
1.44(b) would require FCMs to hold customer funds sufficient to cover 
the required initial margin for customer positions. With respect to 
clearing FCMs, the Commission estimates that the cost of compliance 
would be de minimis. As discussed above, existing regulation Sec.  
39.13(g)(8)(iii) provides that a DCO shall require its clearing members 
to ensure that their customers do not withdraw funds from their 
accounts with such clearing members unless the net liquidating value 
plus the margin deposits remaining in a customer's account after such 
withdrawal are sufficient to meet the customer initial margin 
requirements with respect to all products and swap portfolios held in 
such customer's account which are cleared by the DCO. Thus, regulation 
Sec.  39.13(g)(8)(iii) applies a requirement that is substantively 
identical to the proposed requirement indirectly to clearing FCMs, 
through the rules of their DCOs. Because clearing FCMs are already 
functionally subject to the Margin Adequacy Requirements of proposed 
regulation Sec.  1.44(b) as a result of regulation Sec.  
39.13(g)(8)(iii), the Commission does not expect any significant 
additional cost of compliance for clearing FCMs.
    Non-clearing FCMs are not currently subject to a Margin Adequacy 
Requirement promulgated by the Commission, and the Commission expects 
that the costs for a non-clearing FCM to comply could be significant. 
The Commission expects that compliance with the Margin Adequacy 
Requirement for a non-clearing FCM may entail many of the same types of 
costs noted below in connection with compliance with separate account 
treatment requirements. Such costs could include personnel, 
operational, and other costs related to updating internal policies and 
procedures, updating or renegotiating customer documentation, and 
implementing or configuring internal systems to identify and prevent 
margin withdrawals that would be inconsistent with the proposed Margin 
Adequacy Requirement. The Commission expects that the compliance costs 
for non-clearing FCMs could vary significantly depending on factors 
such as the FCM's size, customer base, and existing compliance 
infrastructure and resources. The extent to which non-clearing FCMs 
need to develop new tools, policies, and procedures may however be 
reduced, to the extent that such FCMs already voluntarily take steps to 
avoid distributing funds back to their customers in a manner that would 
create or exacerbate an undermargined condition for a customer, as a 
means of managing risks to the FCM.
    Moreover, while promoting margin adequacy is a policy goal of many 
of the regulations in CEA, there are potential costs to individual 
investors of the Margin Adequacy Requirement. In general, tightening 
the rules concerning margins can reduce the return to investors, and 
some effects of this type could result from requiring margin adequacy 
at non-clearing FCMs.
b. Requirements for Separate Account Treatment (Proposed Regulation 
Sec.  1.44(c) Through (h) and Supporting Amendments to Regulations 
Sec. Sec.  1.3, 1.17, 1.20, 1.32, 1.58, 1.73, 22.2, 30.2, 30.7, and 
39.13(g)(8))
    In addition to the Margin Adequacy Requirement of proposed 
regulation Sec.  1.44(b), the Commission is also proposing in proposed 
regulation Sec.  1.44(c) through (h) rules to allow FCMs to apply 
separate account treatment for purposes of the Margin Adequacy 
Requirement, and requirements for the application of such treatment. 
The proposed regulation would not require FCMs to apply separate 
account treatment, and FCMs that do not presently apply separate 
account treatment, and do not desire to do so in the future, would 
generally not incur any costs related to the application of such 
treatment. Furthermore, the Commission believes that an FCM electing to 
allow for separate account treatment will do so because such FCM 
believes the benefits of doing so will exceed the costs of doing so.
    With respect to FCMs that choose to engage in separate account 
treatment under the proposed regulation, the Commission expects that 
clearing FCMs and non-clearing FCMs will generally incur the same types 
of compliance costs, as there are no applicable requirements for 
separate account treatment under the baseline with respect to either 
clearing FCMs or non-clearing FCMs, and the requirements of the 
proposed regulation generally do not distinguish between clearing FCMs 
and non-clearing FCMs.\244\
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    \244\ There are two distinctions between clearing and non-
clearing FCMs relevant to separate account compliance costs.
    The first would not create a difference in costs: Gross 
collection of margin without netting between separate accounts is 
required by proposed regulation Sec.  1.44(g)(2) and existing 
regulation Sec.  39.13(g)(8)(i), as clarified by proposed regulation 
Sec.  39.13(g)(8)(i)(E) for clearing FCMs, and proposed regulation 
Sec.  1.58(c) creates this requirement for non-clearing FCMs.
    The second would create some difference in additional costs: 
Under current regulation Sec.  1.73, clearing FCMs are required to 
establish risk-based credit limits, screen orders for compliance 
with those limits, and monitor adherence to those limits, as well as 
conduct stress testing of positions that could pose material risk. 
Non-clearing FCMs are not currently required to do these things. 
Under proposed regulations Sec. Sec.  1.44(g)(1) and 1.73(c), they 
would be required to do so for separate account customers and 
separate accounts, both on an individual separate account and 
aggregate basis. As such, there are additional incremental costs 
faced by non-clearing FCMs that choose separate account treatment.
---------------------------------------------------------------------------

    The costs of the proposed regulation related to application of 
separate account treatment will likely vary across FCMs depending on 
the nature of their existing rule and compliance infrastructures, and 
as such would be difficult to quantify with precision. However, for 
those FCMs that choose to engage in separate account treatment in a 
manner consistent with the proposed regulation, the costs of compliance 
could be significant, and may vary based on factors such as the size 
and existing compliance resources of a particular FCM, as well as the 
extent to which the FCM's existing risk management policies and 
procedures already incorporate risk management measures that overlap 
with those required under the proposed rule. FCMs that wish to allow 
for separate account treatment would likely incur costs in connection 
with updating their policies and procedures, internal systems, customer 
documentation and (re-)negotiation of customer agreements to allow for 
separate account treatment under the conditions codified in the 
proposed regulation.
    In a letter to the Commission staff dated April 1, 2022, FIA noted 
that, ``For many [clearing] FCMs and their customers, the terms and 
conditions of the no-action position . . . presented significant 
operational and systems challenges,'' as clearing FCMs were required to 
``(i) adopt new practices for stress testing accounts; (ii) review and 
possibly change margin-timing expectations for non-US accounts; (iii) 
undertake legal analysis to clarify interpretive questions; and (iv) 
revise their segregation calculation and recordkeeping practices,'' as 
well as engage in ``time-consuming documentation changes and customer 
outreach.'' \245\
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    \245\ FIA letter dated Apr. 1, 2022 to Clark Hutchison and 
Amanda Olear (Second FIA Letter).
---------------------------------------------------------------------------

    FIA further described these challenges in a letter to the 
Commission staff dated May 11, 2022, noting that in order to meet the 
conditions of the no-action

[[Page 15347]]

position, clearing FCMs were required to review and in some cases amend 
customer agreements, and identify and implement information technology 
systems changes.\246\ FIA also asserted that clearing FCMs were likely 
required to revise internal controls and procedures.\247\ FIA stated 
that while the costs incurred by each clearing FCM varied depending on 
its customer base, among larger clearing FCMs with a significant 
institutional customer base, personnel costs would have included 
identifying and reviewing up to 3,000 customer agreements to determine 
which agreements required modification, and then negotiating amendments 
with customers or their advisers.\248\ FIA further stated that because 
the relevant provisions of these agreements were not uniform, they 
generally required individual attention.\249\
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    \246\ Third FIA Letter. FIA noted that these changes were 
particularly challenging for FCMs that are part of a bank holding 
company structure, as ``[m]odifying integrated technology 
information systems across a bank holding company structure is 
complicated, expensive and time-consuming.'' Id.
    \247\ Id.
    \248\ Id.
    \249\ Id.
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    The Commission anticipates that similar costs would arise for FCMs 
attempting to meet the requirements of the proposed separate accounts 
rule.
    Of the costs that FCMs would likely incur related to application of 
separate account treatment, some costs would be incurred on a one-time 
basis (e.g., updates to systems, procedures, disclosure documents, and 
recordkeeping practices, and renegotiation of customer agreements with 
separate account customers), and some would be recurring (e.g., 
monitoring compliance with the one-day margin call requirement and the 
other conditions for ordinary course of business). However, those costs 
could vary widely on an FCM-by-FCM basis, depending on factors such as 
the number of customers at a particular FCM who wish to have separate 
treatment applied to their accounts; thus, for some FCMs, ongoing costs 
of maintaining compliance may be less significant.
    While the Commission, in connection with its Paperwork Reduction 
Act assessment below,\250\ estimates that certain reporting, 
disclosure, and recordkeeping costs would not be significant on an 
entity level, as FIA noted, taken as a whole, compliance with the 
conditions that the proposed regulation would codify could result in 
significant operational and systems costs. In other words, the 
Commission anticipates that FCMs may incur significant costs related to 
designing and implementing new systems, or enhancing existing systems, 
to comply with the proposed regulation, as well as negotiation costs, 
even where direct recordkeeping costs may not be significant on an 
entity-by-entity basis.\251\
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    \250\ As discussed below, the Commission staff estimates total 
annual costs of $1,700,010 across 30 respondents with respect to 
reporting, disclosure, and recordkeeping requirements; however, as 
certain such costs are one-time costs, the Commission staff expects 
such figure would be reduced after the first year of application of 
separate account treatment.
    \251\ This may be true to a somewhat lesser extent with respect 
to new entrants to the FCM business, in that those FCMs would incur 
the cost of implementing policies, procedures, and systems that 
comply with the conditions of the proposed regulation, but would not 
need to retrofit existing policies, procedures, and systems.
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    In terms of implementation costs relative to the baseline (that 
does not consider the effects of NAL 19-17), the Commission believes 
clearing FCMs and non-clearing FCMs will be subject to the same types 
of costs related to application of separate account treatment.
    As discussed above, a number of clearing FCMs have adopted some 
current practices based not only upon regulation Sec.  
39.13(g)(8)(iii)'s existing Margin Adequacy Requirement applicable to 
clearing FCMs through the rules of such clearing FCMs' DCOs, but also 
on the no-action position provided by Commission staff in CFTC Letter 
No. 19-17, and decisions by DCOs to provide relief from their rules 
adopting a Margin Adequacy Requirement in line with (and subject to the 
conditions specified in) that staff no-action position. As such, to the 
extent that clearing FCMs have relied on the no-action position, the 
actual costs and benefits of the proposed rule amendments as realized 
in the market may not be as significant as a comparison of the rule to 
the regulatory baseline would suggest.\252\ Specifically, to the extent 
clearing FCMs already rely on the effects of the no-action position, 
the tools (e.g., software) and policies and procedures necessary to 
comply with the proposed regulation on an ongoing basis will largely 
have already been built, and the costs associated with compliance will 
largely have already been incurred.\253\ (This would not apply to non-
clearing FCMs, who have no current need to rely on the effects of the 
no-action position.) However, the Commission notes that because the 
provisions of the proposed regulation vary in some respects from the 
terms of the no-action position, at least some additional costs are 
likely to be incurred by clearing FCMs that already rely on the no-
action position.
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    \252\ For those clearing FCMs that currently choose not to 
engage in separate account treatment, and therefore, do not adhere 
to CFTC Letter No. 19-17, but choose to do so after this proposed 
regulation were to be adopted, the Commission submits that there 
will be significant costs similar to non-clearing FCMs.
    \253\ Communications from FIA indicate that significant 
resources have, in fact, been expended to meet the conditions of the 
NAL. See Second FIA Letter.
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    In addition to compliance costs, one other type of costs should be 
noted: The Commission is of the view that the risk mitigants in 
proposed regulation Sec.  1.44(c) through (h) would achieve the 
benefits of the Margin Adequacy Requirement while permitting separate 
account treatment. However, there does exist a possibility that, 
despite these risk mitigants, an under-margin condition could exist, 
followed by a default by the customer to the FCM, and a consequent 
default by the FCM upstream (either to a DCO or to a clearing FCM), 
where the losses due to that default would be greater than they would 
have been absent separate account treatment.
    Question 11: Are the descriptions of the types of costs that would 
be incurred by FCMs to implement each of the Margin Adequacy 
Requirement and Separate Account Treatment under the proposed rules 
appropriately comprehensive? What data can be provided about the 
magnitude of these costs, either by type or in the aggregate?
    Question 12: The Commission requests comment on the extent to which 
FCMs that are not presently clearing members that rely on the no-action 
position in CFTC Letter No. 19-17 would, following implementation of 
the proposed regulation, seek to engage in separate account treatment. 
Commenters are requested to provide data where available.
    Question 13: The Commission requests comment regarding whether 
there are FCMs that chose not to rely on the no-action position 
provided by CFTC Letter No. 19-17 due to the conditions required to 
rely on that position. The Commission further requests comment on how 
the implementation of those conditions in the current rulemaking 
proposal could be modified to mitigate the burden of compliance while 
achieving the goals of mitigating systemic risk and protecting customer 
funds.

C. Costs and Benefits of the Commission's Action as Compared to 
Alternatives

    The Commission considered as an alternative to the proposed 
regulation

[[Page 15348]]

codifying the no-action position absent the conditions. This 
alternative would preserve the benefits of separate account treatment 
for FCMs and customers. However, as discussed further below, the 
conditions of the no-action position--proposed to be codified herein on 
an FCM-wide basis--are designed to permit separate account treatment 
only to the extent that such treatment would not contravene the risk 
mitigation goals of regulation Sec.  39.13 (and the Margin Adequacy 
Requirement of proposed regulation Sec.  1.44(b)). The Commission 
preliminarily believes that codifying the staff no-action position 
without the conditions would intensify risks for DCOs, FCMs, and 
customers. For instance, without a requirement to cease separate 
account treatment in cases in which a customer is in financial 
distress, it is more likely that an under-margining scenario would be 
exacerbated, and a customer default to the clearing FCM--and 
potentially a default of the clearing FCM to the DCO--would be more 
likely. It would also forego applying the benefits of the Margin 
Adequacy Requirement and specific risk-mitigating requirements for 
separate account treatment to all FCMs.

D. Section 15(a) Factors

    Section 15(a) of the CEA requires the Commission to consider the 
effects of its actions in light of the following five factors:
1. Protection of Market Participants and the Public
    Section 15(a)(2)(A) of the CEA requires the Commission to evaluate 
the costs and benefits of a proposed regulation in light of 
considerations of protection of market participants and the public. The 
Commission preliminarily believes that the amendments proposed herein 
would strengthen the customer protection and risk mitigation provisions 
of part 1 applicable to FCMs generally, and, with respect to clearing 
FCMs, maintain the efficacy of protections for customers and the 
broader financial system contained in Core Principle D and regulation 
Sec.  39.13.
    The Commission believes that the proposed regulation's Margin 
Adequacy Requirement will have a salutary effect on the protection of 
market participants and the public. Section 4d(a)(2) of the CEA and the 
Commission's implementing regulations under part 1 require FCMs to 
segregate customer funds to margin trades and prohibit FCMs from using 
one customer's funds to margin another customer's trades. The proposed 
regulation is designed to effectuate and support these requirements by 
implementing requirements for FCMs to limit the potential for losses 
from defaults and maintain margin sufficient to cover potential 
exposures in normal market conditions \254\ by requiring FCMs to ensure 
that their customers do not withdraw funds from their accounts if such 
withdrawal would create or exacerbate an initial margin shortfall, and 
to do so in a manner consistent with the Margin Adequacy Requirement in 
regulation Sec.  39.13(g)(8)(iii) already applicable through DCO rules 
to clearing FCMs. This requirement protects not only market 
participants by requiring FCMs to ensure that adequate margin exists to 
cover customer positions; it also protects the public from disruption 
to the wider financial system by mitigating the risk that an FCM will 
default due to customer nonpayment of variation margin obligations 
combined with insufficient initial margin.
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    \254\ 7 U.S.C. 7a-1(c)(2)(D)(iii) through (iv).
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    The Commission also believes the requirements in the proposed 
regulation for carrying out separate account treatment will provide for 
separate account treatment in a manner that protects market 
participants and the public. While, with respect to clearing FCMs 
subject to the indirect effects of current Sec.  39.13(g)(8)(iii), 
permitting separate account treatment unavoidably creates some 
additional risk of a margin deficiency, the conditions of the no-action 
position outlined in CFTC Letter No. 19-17, and proposed to be codified 
herein, as modified and applicable on an FCM-wide basis, are designed 
to effectuate these customer protection and risk mitigation goals 
notwithstanding an FCM's application of separate account treatment (and 
the consequent additional risk). For example, separate account 
treatment is not permitted in certain circumstances outside the 
ordinary course of business (e.g., where an FCM learns a customer is in 
financial distress, and thus may be unable promptly to meet initial 
margin requirements, whether in one or more separate accounts or on a 
combined account basis). The proposed regulation would also put in 
place requirements for FCMs designed to ensure that they collect 
information sufficient to understand the value of assets dedicated to a 
separate account, apply separate account treatment consistently, and 
maintain reliable lines of contact for the ultimate customer of the 
account. Clearing FCMs have, for over four years, successfully relied 
on a no-action letter, as applied through their DCOs, establishing 
conditions substantially similar to the conditions in the proposed 
rule, and the Commission believes codification of these conditions, as 
proposed herein, supports protection of market participants and the 
public.
2. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    Section 15(a)(2)(B) of the CEA requires the Commission to evaluate 
the costs and benefits of a proposed regulation in light of efficiency, 
competitiveness, and financial integrity of futures markets. The 
Commission preliminarily believes that the proposed regulation may 
carry potential implications for the financial integrity of markets, 
but not for the efficiency or competitiveness of markets, which the 
Commission preliminarily believes remain unchanged.
    As stated above, the purposes of the Commission's customer funds 
protection and risk management regulations include not just protection 
of customer assets, but also mitigation of systemic risk: a customer in 
default to an FCM may in turn trigger the FCM to default, either to the 
DCO (if it is a clearing member) or to another FCM that is itself a 
clearing member, with cascading consequences for the clearing FCM (if 
applicable) or the DCO and the wider financial system. The proposed 
Margin Adequacy Requirement advances those purposes directly. The 
proposed amendments permitting separate account treatment reflect the 
Commission's preliminary conclusion that the conditions of CFTC Letter 
No. 19-17, as proposed to be codified herein, are sufficient and 
appropriate to guard against such risks for purposes of the proposed 
Margin Adequacy Requirement.
    In CFTC Letter No. 19-17, the Commission staff highlighted market 
participants' concerns that the Commission should recognize ``diverse 
practices among FCMs and their customers with respect to the handling 
of separate accounts of the same beneficial owner'' as consistent with 
regulation Sec.  39.13(g)(8)(iii). FIA, in particular, outlined several 
business cases in which a customer may want to apply separate account 
treatment, and each of SIFMA-AMG, FIA, and CME outlined controls that 
clearing FCMs could apply to ensure that, in instances in which 
separate account treatment is desired, such treatment can be applied in 
a manner that effectively prevents systemic risk.\255\ By proposing to 
codify in part 1 a Margin Adequacy

[[Page 15349]]

Requirement directly applicable to FCMs similar to the Margin Adequacy 
Requirement of regulation Sec.  39.13(g)(8)(iii), and a modified 
version of the no-action position provided for by CFTC Letter No. 19-17 
and its superseding letters, applicable to all FCMs, the Commission is 
proposing a framework for FCMs, whether clearing or non-clearing, to 
provide separate account treatment for customers subject to enhanced 
customer fund and risk mitigation protections, thereby ensuring FCMs 
can compete on services offered to customers to address their financial 
needs, in a manner consistent with the customer protection and risk 
mitigation goals of the CEA.
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    \255\ See First FIA Letter; SIFMA-AMG Letter; CME Letter.
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3. Price Discovery
    Section 15(a)(2)(C) of the CEA requires the Commission to evaluate 
the costs and benefits of a proposed regulation in light of price 
discovery considerations. The Commission preliminarily believes that 
the proposed amendments will not have a significant impact on price 
discovery.
4. Sound Risk Management Practices
    Section 15(a)(2)(D) of the CEA requires the Commission to evaluate 
the costs and benefits of a proposed regulation in light of sound risk 
management practices. As discussed above, the CEA sets forth 
requirements providing that an FCM may not use one customer's funds to 
cover another customer's margin shortfall. The proposed Margin Adequacy 
Requirement serves these purposes by further ensuring that FCMs do not 
allow customers to create or increase under-margining in their accounts 
through withdrawals of funds. While, as discussed above, clearing FCMs 
are already subject to this requirement as a result of DCO rules 
adopted under regulation Sec.  39.13(g)(8)(iii), the proposed 
regulation will also apply this requirement to non-clearing FCMs, and 
will create another avenue to monitoring and enforcement of this 
requirement for clearing FCMs.
    Additionally, the Commission believes that the proposed regulation 
will ensure that application of the proposed regime for separate 
account treatment occurs in a manner that continues to be consistent 
with the CEA's customer fund protection and risk mitigation objectives. 
As discussed above, the no-action position has been successfully used 
to allow clearing FCMs to engage in separate account treatment in a 
manner that is consistent with the protection of customer funds and the 
mitigation of systemic risk, including by requiring the application of 
separate account treatment in a consistent manner, and requiring 
regulatory notifications and the cessation of separate account 
treatment in certain instances of operational or financial distress. 
The Commission preliminarily believes codification of the no-action 
conditions, and the Margin Adequacy Requirement they address, applied 
directly to all FCMs, promotes sound FCM risk management 
practices.\256\
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    \256\ See, e.g., First FIA Letter (describing use of separate 
account treatment for hedging purposes).
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5. Other Public Interest Considerations
    Section 15(a)(2)(e) of the CEA requires the Commission to evaluate 
the costs and benefits of a proposed regulation in light of other 
public interest considerations. The Commission is identifying a public 
interest benefit in codifying the Divisions' no-action position, where 
the efficacy of that position has been demonstrated. In such a 
situation, the Commission believes it serves the public interest and, 
in particular, the interests of market participants, to engage in 
notice-and-comment rulemaking, where it seeks and considers the views 
of the public in amending its regulations, rather than for market 
participants to continue to rely on a time-limited no-action position 
that can be easily withdrawn, provides less long-term certainty for 
market participants, and offers a more limited opportunity for public 
input.
Request for Comment
    Question 14: The Commission requests comment, including any 
available quantifiable data and analysis, concerning its analysis of 
the Section 15(a) factors.

IV. Related Matters

A. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA in issuing any order or adopting any Commission 
rule or regulation.\257\
---------------------------------------------------------------------------

    \257\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether the proposed regulation implicates any 
other specific public interest to be protected by the antitrust laws.
    The Commission has considered the proposed regulation to determine 
whether it is anticompetitive and has preliminarily identified no 
anticompetitive effects. The Commission requests comment on whether the 
proposed regulation is anticompetitive and, if it is, what the 
anticompetitive effects are.
    Because the Commission has preliminarily determined that the 
proposed regulation is not anticompetitive and has no anticompetitive 
effects, the Commission has not identified any less anticompetitive 
means of achieving the purposes of the CEA. The Commission requests 
comment on whether there are less anticompetitive means of achieving 
the relevant purposes of the CEA that would otherwise be served by 
adopting the proposed regulation.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires agencies to consider 
whether the rules they propose will have a significant economic impact 
on a substantial number of small entities and, if so, provide a 
regulatory flexibility analysis with respect to such impact.\258\ The 
rules proposed herein would require all FCMs to ensure that they do not 
permit their customers to withdraw funds from their accounts unless the 
net liquidating value plus the margin deposits remaining in the account 
are sufficient to meet the customer initial margin requirements for 
such accounts, but would also establish conditions under which FCMs 
could engage in separate account treatment. The Commission has 
previously established certain definitions of ``small entities'' to be 
used by the Commission in evaluating the impact of its regulations on 
small entities in accordance with the RFA.\259\ The Commission has 
previously determined that FCMs are not small entities for the purpose 
of the RFA.\260\ Accordingly, the Chairman, on behalf of the 
Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that these 
proposed rules will not have a significant economic impact on a 
substantial number of small entities.
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    \258\ 5 U.S.C. 601 et seq.
    \259\ Bankruptcy Regulations, 86 FR 19324, 19416 (Apr. 13, 2021) 
(citing Policy Statement and Establishment of Definitions of ``Small 
Entities'' for Purposes of the Regulatory Flexibility Act, 47 FR 
18618 (Apr. 30, 1982)).
    \260\ See id. (citing New Regulatory Framework for Clearing 
Organizations, 66 FR 45604, 45609 (Aug. 29, 2001); Customer Margin 
Rules Relating to Security Futures, 67 FR 53146, 53171 (Aug. 14, 
2002)).
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C. Paperwork Reduction Act

    The PRA \261\ imposes certain requirements on Federal agencies in

[[Page 15350]]

connection with their conducting or sponsoring any collection of 
information as defined by the PRA. Any 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. The 
Office of Management and Budget (OMB) has not yet assigned a control 
number to the new collection.
---------------------------------------------------------------------------

    \261\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    This proposed rulemaking would result in a new collection of 
information within the meaning of the PRA, as discussed below. The 
Commission therefore is submitting this proposal to OMB for review, in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. If adopted, 
responses to this collection of information would be required to obtain 
a benefit. Specifically, FCMs would be required to respond to the 
collection in order to obtain the benefit of engaging in separate 
account treatment for purposes of regulation Sec.  1.44.
    The Commission will protect proprietary information it may receive 
according to the Freedom of Information Act and 17 CFR part 145, 
``Commission Records and Information.'' In addition, section 8(a)(1) of 
the CEA strictly prohibits the Commission, unless specifically 
authorized by the CEA, from making public data and information that 
would separately disclose the business transactions or market positions 
of any person and trade secrets or names of customers.\262\ The 
Commission also is required to protect certain information contained in 
a government system of records according to the Privacy Act of 1974, 5 
U.S.C. 552a.
---------------------------------------------------------------------------

    \262\ 7 U.S.C. 12(a)(1).
---------------------------------------------------------------------------

1. Information Provided by Reporting Entities/Persons
    The proposed regulation applies directly to FCMs. All FCMs that 
engage in separate account treatment, both those that are clearing 
members of DCOs and those that are not, would be subject to certain 
reporting, disclosure, and recordkeeping requirements to comply with 
the conditions specified in proposed regulation Sec.  1.44.
    While the Commission staff estimates burden hours and costs using 
current part 1 and regulation Sec.  39.13(g)(8)(iii) as a baseline, the 
Commission notes that FCMs that are clearing members of DCOs are 
already effectively subject to the Margin Adequacy Requirement, in 
order to comply with rules that their DCOs have established in order to 
in turn comply with the DCO's obligations under regulation Sec.  
39.13(g)(8)(iii). Thus, the Commission notes that many clearing FCMs 
already are subject to the conditions of the no-action position, which 
are substantially similar to the proposed regulation. For these 
clearing FCMs, the Commission expects that any additional cost or 
administrative burden associated with complying with the proposed 
regulation would be reduced.\263\
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    \263\ However, the Commission expects that FCMs that do not 
currently rely on the no-action position, but choose to apply 
separate account treatment after (and if) the proposed regulation is 
finalized, would incur new costs. This would include all non-
clearing FCMs that choose to apply separate account treatment after 
(and if) the proposed regulation is finalized.
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a. Reporting Requirements
    The proposed regulation contains two reporting requirements that 
could result in a collection of information from ten or more persons 
over a 12-month period.
    There are currently approximately 61 registered FCMs.\264\ The 
Commission staff estimates that slightly less than half of all FCMs 
would engage in separate account treatment under the proposed 
regulation, resulting in approximately 30 respondents.
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    \264\ See CFTC, Selected FCM Financial Data as of August 31, 
2023, available at https://www.cftc.gov/sites/default/files/2023-10/01%20-%20FCM%20webpage%20Update%20-%20August%202023.xlsx.
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    First, proposed regulation Sec.  1.44(d)(2) provides that, to the 
extent an FCM elects to treat the separate accounts of a customer as 
accounts of separate entities pursuant to the terms of proposed 
regulation Sec.  1.44, the FCM must provide a one-time notification to 
its DSRO and to the Commission that it will apply such treatment. The 
Commission staff estimates this would result in a total of one response 
per respondent on a one-time basis, and that respondents could expend 
up to $273, based on an hourly rate of $273,\265\ to comply with the 
proposed regulation. This would result in an annual burden of 30 hours 
and an aggregated cost of $8,190 (30 respondents x $273).
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    \265\ This figure is rounded to the nearest dollar and based on 
the annual mean wage for U.S. Bureau of Labor Statistics (BLS) 
category 13-2061, ``Financial Examiners.'' BLS, Occupational 
Employment and Wages, May 2022 [hereinafter ``BLS Data''], available 
at https://www.bls.gov/oes/current/oes_nat.htm. This category 
consists of professionals who ``[e]nforce or ensure compliance with 
laws and regulations governing financial and securities institutions 
and financial and real estate transactions.'' BLS, Occupational 
Employment and Wages, May 2022: 13-2061 Financial Examiners, 
available at https://www.bls.gov/oes/current/oes132061.htm. 
According to BLS, the mean salary for this category in the context 
of Securities, Commodity Contracts, and Other Financial Investments 
and Related Activities is $117,270. This number is divided by 1,800 
work hours in a year to account for sick leave and vacations and 
multiplied by 4 to account for retirement, health, and other 
benefits or compensation, as well as for office space, computer 
equipment support, and human resources support. This number is 
further multiplied by 1.0494 to account for the 4.94% change in the 
Consumer Price Index for Urban Wage-Earners and Clerical Workers 
between May 2022 and September 2023 (288.022 to 302.257). BLS, CPI 
for Urban Wage Earners and Clerical Workers (CPI-W), U.S. City 
Average, All Items--CWUR0000SA0, available at https://www.bls.gov/data/#prices. Together, these modifications yield an hourly rate of 
$273. The rounding and modifications applied with respect to the 
estimated average burden hour cost for this occupational category 
have been applied with respect to each occupational category 
discussed as part of this analysis.
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    Second, proposed regulation Sec.  1.44(e)(3) requires an FCM 
engaging in separate account treatment to communicate promptly in 
writing to its DSRO and to the Commission the occurrence of certain 
enumerated ``non-ordinary course of business'' events. The Commission 
staff estimates that each such FCM may experience two non-ordinary 
course of business events per year, either with respect to themselves, 
or a customer. For purposes of determining the number of responses, the 
Commission staff anticipates that additional notifications of 
substantially the same information, and at substantially the same time, 
by means of electronic communication to both the DSRO and the 
Commission would not materially increase the time and cost burden for 
such FCM. Therefore, for purposes of these estimates, the Commission 
staff treats a set of notifications sent to the DSRO and to the 
Commission as a single response.\266\ Accordingly, the Commission staff 
estimates a total of two responses per respondent on an annual basis. 
In addition, the Commission staff estimates that each response would 
take eight hours. This yields a total annual burden of 480 hours (2 
responses * 8 hours/response * 30 respondents). In addition, the 
Commission staff estimates that each respondent could expend up to 
$4,368 annually, based on an hourly rate of $273, to comply with this 
requirement.\267\ This would result in an aggregated cost of $131,040 
per annum (30 respondents x $4,368).
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    \266\ The Commission staff applies the same assumption to 
notifications to DSROs and the Commission with respect to proposed 
regulation Sec.  1.44(d)(2) and proposed regulation Sec.  
1.44(e)(3).
    \267\ Financial Examiners.
---------------------------------------------------------------------------

    The aggregate information collection burden estimate associated 
with the proposed reporting requirements is as follows: \268\
---------------------------------------------------------------------------

    \268\ This estimate reflects the aggregate information 
collection burden estimate associated with the proposed reporting 
requirements for the first annual period following implementation of 
the proposed regulation. Because proposed regulation Sec.  
1.44(d)(2) would result in a one-time reporting requirement, the 
Commission staff estimates that for each subsequent annual period, 
the number of reports, burden hours, and burden cost would be 
reduced accordingly.

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[[Page 15351]]

    Estimated number of respondents: 30.
    Estimated number of reports: 90.
    Estimated annual hours burden: 510.
    Estimated annual cost: $139,230.
b. Disclosure Requirements
    The proposed regulation contains three disclosure requirements that 
could affect ten or more persons in a 12-month period.
    First, proposed regulation Sec.  1.44(h)(3)(i) requires an FCM to 
provide each customer using separate accounts with a disclosure that, 
pursuant to part 190 of the Commission's regulations, all separate 
accounts of the customer will be combined in the event of the FCM's 
bankruptcy. The Commission staff estimates that this would result in a 
total of 125 responses per respondent on a one-time basis, and that 
respondents are likely to spend one hour to comply with this 
requirement for a total of 125 annual burden hours and up to $19,500 
annually, based on an hourly rate of $156.\269\ This would result in an 
annual burden of 3,750 hours and an aggregated cost of $585,000 (30 
respondents x $19,500). This estimate reflects an initial disclosure 
distributed to existing customers subject to separate account 
treatment. The Commission staff expects that, on a going forward basis, 
this disclosure would be included in standard disclosures for new 
customers, and would therefore not result in any additional costs.
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    \269\ This figure is based on the annual mean wage of $67,070 
for BLS category 43-6012, ``Legal Secretaries & Administrative 
Assistants'' in the New York City Metropolitan Area, one of the top 
paying metropolitan areas for this category. BLS Data. https://www.bls.gov/oes/current/oes436012.htm.
---------------------------------------------------------------------------

    Second, proposed regulation Sec.  1.44(h)(3)(iii) requires that an 
FCM engaging in separate account treatment include the disclosure 
statement required by proposed regulation Sec.  1.44(h)(3) on its 
website or within its Disclosure Document required by regulation Sec.  
1.55(i). If the FCM opts to update its Disclosure Document, the 
Commission staff estimates that this proposed requirement would result 
in a total of one response on a one-time basis, and that each 
respondent could expend up to $580 annually, based on an hourly rate of 
$580,\270\ to comply with the proposed regulation. This would result in 
an estimated 30 burden hours annually and an aggregated cost of $17,400 
(30 respondents x $580). This estimate reflects one updated disclosure 
distributed to existing customers. If the FCM opts to include the 
disclosure on its website, the Commission staff estimates that this 
proposed requirement would result in a total of one response on a one-
time basis, and that each respondent could expend up to $293 annually, 
based on an hourly rate of $293, to comply with the proposed 
regulation.\271\ This would result in an estimated 30 burden hours 
annually and an aggregated cost of $8,790 (30 respondents x $293). The 
Commission staff expects that once the disclosure is included in the 
Disclosure Document required by regulation Sec.  1.55(i) or posted on 
the FCM's website, the FCM would not incur any additional costs.
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    \270\ BLS 2022 Data for BLS Category 23-1011, ``Lawyers,'' in 
Securities, Commodity Contracts, and Other Financial Investments and 
Related Activities, https://data.bls.gov/oes/#/indOcc/Multiple%20occupations%20for%20one%20industry (mean annual salary of 
$248,830).
    \271\ This figure is based on the annual mean wage for BLS 
category 15-1254, ``Web Developers.'' According to BLS, the mean 
salary for this category in the context of Securities, Commodity 
Contracts, and Other Financial Investments and Related Activities is 
$125,760.
---------------------------------------------------------------------------

    Third, proposed regulation Sec.  1.44(h)(4) requires an FCM that 
has made an election pursuant to regulation Sec.  1.44(d) to disclose 
in the Disclosure Document required under regulation Sec.  1.55(i) that 
it permits the separate treatment of accounts for the same customer 
under the terms and conditions of regulation Sec.  1.44. The Commission 
staff estimates that this would result in a total of one response per 
respondent on a one-time basis, and that respondents could expend up to 
$580 annually, based on an hourly rate of $580,\272\ to comply with the 
proposed regulation. This would result in an estimated 30 burden hours 
annually and an aggregated cost of $17,400 (30 respondents x $580). 
This estimate reflects an initial updated disclosure distributed to 
existing customers. The Commission staff expects that once this 
disclosure is made, the disclosure would be included in the Disclosure 
Document required by regulation Sec.  1.55(i) going forward, and would 
not result in any additional costs.
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    \272\ Lawyers.
---------------------------------------------------------------------------

    The aggregate information collection burden estimate associated 
with the proposed disclosure requirements is as follows: \273\
---------------------------------------------------------------------------

    \273\ For purposes of this analysis, the Commission staff 
calculates the aggregate information collection burden assuming that 
respondents choose to include the disclosure statement required by 
proposed regulation Sec.  1.44(h)(3) on their websites and within 
their Disclosure Document required by proposed regulation Sec.  
1.55(i), in order to comply with proposed regulation Sec.  
1.44(h)(3)(iii). Additionally, this estimate reflects the aggregate 
information collection burden estimate associated with the proposed 
disclosure requirements for the first annual period following 
implementation of the proposed regulation. Because each of proposed 
regulation Sec.  1.44(h)(3)(i), Sec.  1.44(h)(3)(iii), and Sec.  
1.44(h)(4) would result in a one-time disclosure requirement for PRA 
purposes, the Commission staff estimates that for each subsequent 
annual period the number of respondents, reports, burden hours, and 
burden cost would be reduced accordingly.
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    Estimated number of respondents: 30.
    Estimated number of reports: 3,840.
    Estimated annual hours burden: 3,840.
    Estimated annual cost: $628,590.
c. Recordkeeping Requirements
    The proposed regulation contains four recordkeeping requirements 
that could affect ten or more persons in a 12-month period.
    First, proposed regulation Sec.  1.44(d)(1) provides that, to elect 
to treat the separate accounts of a customer as accounts of separate 
entities, for purposes of the Margin Adequacy Requirement, the FCM 
shall include the customer on a list of separate account customers 
maintained in its books and records receiving such treatment. The 
Commission staff estimates that this would result in a total of 125 
responses per respondent on a one-time basis, and that respondents 
could expend up to $8,531 annually, based on an hourly rate of 
$273,\274\ to comply with the proposed regulation. This would result in 
an estimated 938 burden hours annually and an aggregated cost of 
$255,930 per annum (30 respondents x $8,531).
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    \274\ Financial Examiners.
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    Second, proposed regulation Sec.  1.44(e)(4) provides that an FCM 
that has ceased permitting disbursements on a separate account basis to 
a separate account customer due to the occurrence of a non-ordinary 
course of business event may resume permitting disbursements on a 
separate account basis if the FCM reasonably believes, based on new 
information, that the circumstances leading to cessation of separate 
account treatment have been cured, and the FCM documents in writing the 
factual basis and rationale for its conclusion that such circumstances 
have been cured. Where the Commission staff have estimated above that 
an FCM may experience two non-ordinary course of business events per 
year, the Commission staff conservatively estimate that in each case 
the conditions leading to cessation of separate account treatment would 
be cured. Accordingly, the Commission staff estimates that documenting 
the cure of each non-ordinary course of business event would require 
two recordkeeping responses per respondent on an annual basis, and that

[[Page 15352]]

respondents could expend up to $1,092 annually, based on an hourly rate 
of $273,\275\ to comply with this requirement. This would result in an 
aggregated cost of $32,760 per annum (30 respondents x $1,092).
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    \275\ Financial Examiners.
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    Third, proposed regulation Sec.  1.44(h)(2) provides that where a 
separate accounts customer has appointed a third-party as the primary 
contact to the FCM, the FCM must obtain and maintain current contact 
information of an authorized representative(s) at the customer and take 
reasonable steps to verify that such contact information is and remains 
accurate and that such person is in fact an authorized representative 
of the customer. The Commission staff estimates this would result in a 
total of 125 responses per respondent on an annual basis,\276\ and that 
respondents could expend up to $19,500 annually, based on an hourly 
rate of $156.\277\ This would result in an estimated 3,750 burden hours 
annually and an aggregated cost of $585,000 per annum (30 respondents x 
$19,500).
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    \276\ FIA stated that while the costs incurred by each FCM to 
comply with the conditions of CFTC Letter No. 19-17 varies depending 
on customer base, among larger FCMs with a significant institutional 
customer base, personnel costs would have included identifying and 
reviewing up to 3,000 customer agreements to determine which 
agreements required modification, and then negotiating amendments 
with customers or their advisors. The Commission staff estimates, 
based on the 30 largest FCMs by customer assets in segregation as of 
the Commission's FCM financial data report for May 31, 2022, that 
there are 3,750 customers of FCMs whose accounts could be in scope 
for the proposed regulation, with an average of 125 customers per 
FCM.
    \277\ This figure is based on the annual mean wage of $67,070 
for BLS category 43-6012, ``Legal Secretaries & Administrative 
Assistants'' in the New York City Metropolitan Area, one of the top 
paying metropolitan areas for this category. BLS Data, available at 
https://www.bls.gov/oes/current/oes436012.htm.
---------------------------------------------------------------------------

    Fourth, proposed regulation Sec.  1.44(h)(3)(ii) requires that an 
FCM maintain documentation demonstrating that the part 190 disclosure 
statement required by proposed regulation Sec.  1.44(h)(3)(i) was 
delivered directly to the customer. The Commission staff estimates that 
this would result in a total of 125 responses per respondent on a one-
time basis, and that respondents could expend up to $1,950 annually, 
based on an hourly rate of $156, to comply with the proposed 
regulation. This would result in an estimated 375 burden hours annually 
and an aggregated cost of $58,500 (30 respondents x $1,950). This 
estimate reflects initial recordkeeping of documentation that the 
disclosure was delivered to existing customers subject to separate 
account treatment. The Commission staff estimates that, once such 
recordkeeping is complete, the recordkeeping required by proposed 
regulation Sec.  1.44(h)(3)(ii) would be required only with respect to 
new customers who receive disclosures pursuant to proposed regulation 
Sec.  1.44(h)(3)(ii), and the costs and burden hours associated with 
proposed regulation Sec.  1.44(h)(3)(ii) would be reduced 
accordingly.\278\
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    \278\ This estimate reflects the aggregate information 
collection burden estimates associated with the proposed disclosure 
requirements for the first annual period following implementation of 
the proposed regulation. Because, as noted above, proposed 
regulation Sec.  1.44(h)(3)(i) would result in a one-time 
recordkeeping requirement as to each customer (i.e., once the 
disclosure is provided to existing customers, it would need to be 
provided only to new customers on a going forward basis), the 
Commission staff estimates that for each subsequent annual period 
the number of reports, burden hours, and burden cost would be 
reduced accordingly.
---------------------------------------------------------------------------

    The Commission notes that while certain other provisions of the 
proposed regulation may result in recordkeeping requirements, the 
Commission anticipates that any burden associated with these 
requirements is likely to be de minimis and therefore does not expect 
these provisions to increase the recordkeeping burden for FCMs.
    The aggregate information collection burden estimate associated 
with the proposed reporting requirements is as follows:
    Estimated number of respondents: 30.
    Estimated number of reports: 11,310.
    Estimated annual hours burden: 5,183.
    Estimated annual cost: $932,190.
2. Information Collection Comments
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the proposed information collection 
requirements discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the 
Commission will consider public comments on this proposed collection of 
information regarding:
    <bullet> Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    <bullet> Evaluating the accuracy of the estimated burden of the 
proposed collection of information, including the degree to which the 
methodology and the assumptions that the Commission employed were 
valid;
    <bullet> Enhancing the quality, utility, and clarity of the 
information proposed to be collected; and
    <bullet> Reducing the burden of the proposed information collection 
requirements on registered entities, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
information collection techniques; e.g., permitting electronic 
submission of responses.
    Organizations and individuals desiring to submit comments on the 
proposed information collection requirements should send those comments 
to:
    <bullet> The Office of Information and Regulatory Affairs, Office 
of Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures 
Trading Commission;
    <bullet> (202) 395-6566 (fax); or
    <bullet> <a href="/cdn-cgi/l/email-protection#1f50564d5e6c6a7d72766c6c7670716c5f70727d317a706f31787069"><span class="__cf_email__" data-cfemail="c08f899281b3b5a2ada9b3b3a9afaeb380afada2eea5afb0eea7afb6">[email protected]</span></a> (email).
    Please provide the Commission with a copy of submitted comments so 
that, if the Commission determines to promulgate a final rule, all such 
comments can be summarized and addressed in the final rule preamble. 
Refer to the ADDRESSES section of this notice of proposed rulemaking 
for comment submission instructions to the Commission. A copy of the 
supporting statements for the collections of information discussed 
above may be obtained by visiting RegInfo.gov. OMB is required to make 
a decision concerning the collection of information between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment is best assured of receiving full consideration if 
OMB receives it within 30 days of publication of this notice of 
proposed rulemaking. Nothing in the foregoing affects the deadline 
enumerated above for public comment to the Commission on the proposed 
rules.

List of Subjects

17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

17 CFR Part 22

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

17 CFR Part 30

    Consumer protection.

17 CFR Part 39

    Clearing, Clearing organizations, Commodity futures, Consumer 
protection.


[[Page 15353]]


    For the reasons set forth in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR chapter I as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 
6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 
9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 
(2012).

0
2. Amend Sec.  1.3 by revising the definition of ``business day'' to 
read as follows:


Sec.  1.3  Definitions.

* * * * *
    Business day. This term means any day other than a Saturday, 
Sunday, or holiday. In all notices required by the Act or by the rules 
and regulations in this chapter to be given in terms of business days 
the rule for computing time shall be to exclude the day on which notice 
is given and include the day on which shall take place the act of which 
notice is given.
* * * * *
0
3. Amend Sec.  1.17 by:
0
a. Republishing the paragraph heading of paragraph (b);
0
b. Revising paragraph (b)(6);
0
c. Revising introductory text of paragraph (b)(8);
0
d. Adding new paragraph (b)(8)(v);
0
e. Republishing the paragraph heading of paragraph (c);
0
f. Republishing the paragraph heading of paragraph (c)(2);
0
g. Revising paragraph (c)(2)(i);
0
h. Republishing the paragraph heading of paragraph (c)(4);
0
i. Revising paragraph (c)(4)(ii);
0
j. Republishing the paragraph heading of (c)(5); and
0
k. Revising paragraph (c)(5)(viii).
    The republications, revisions, and additions read as follows:


Sec.  1.17   Minimum financial requirements for futures commission 
merchants and introducing brokers.

* * * * *
    (b) For the purposes of this section:
* * * * *
    (6) Business day means any day other than a Saturday, Sunday, or 
holiday.
* * * * *
    (8) Risk margin for an account means the level of maintenance 
margin or performance bond required for the customer -and noncustomer 
positions by the applicable exchanges or clearing organizations, and, 
where margin or performance bond is required only for accounts at the 
clearing organization, for purposes of the futures commission 
merchant's risk-based capital calculations applying the same margin or 
performance bond requirements to customer and noncustomer positions in 
accounts carried by the futures commission merchant, subject to the 
following.
* * * * *
    (v) If a futures commission merchant carries separate accounts for 
separate account customers pursuant to Sec.  1.44 of this part, the 
futures commission merchant shall calculate the risk margin pursuant to 
this section as if the separate accounts are owned by separate 
entities.
* * * * *
    (c) Definitions: For the purposes of this section:
* * * * *
    (2) The term current assets means cash and other assets or 
resources commonly identified as those which are reasonably expected to 
be realized in cash or sold during the next 12 months. ``Current 
assets'' shall:
    (i) Exclude any unsecured commodity futures, options, cleared 
swaps, or other Commission regulated account containing a ledger 
balance and open trades, the combination of which liquidates to a 
deficit or containing a debit ledger balance only. For purposes of this 
paragraph (c)(2)(i), a futures commission merchant that carries 
separate accounts for separate account customers pursuant to Sec.  1.44 
of this part shall treat each separate account as if it is the account 
of a separate entity, apply only margin collateral held for the 
particular separate account in determining if the deficit or debit 
ledger balance is secured, and exclude from current assets a separate 
account that liquidates to a deficit or contains a debit ledger balance 
only. Provided, however, that any deficit or debit ledger balance in an 
account listed above, including a separate account, which is the 
subject of a call for margin or other required deposits may be included 
in current assets until the close of business on the business day 
following the date on which such deficit or debit ledger balance 
originated provided that the account had timely satisfied, through the 
deposit of new funds, the previous day's deficit or debit ledger 
balance, if any, in its entirety. If a separate account does not meet a 
previous day's margin call for a deficit or debit balance, the futures 
commission merchant shall exclude all separate accounts of that 
separate account customer carried by the futures commission merchant 
that have a deficit or debit ledger balance from current assets under 
this paragraph.
* * * * *
    (4) The term liabilities means the total money liabilities of an 
applicant or registrant arising in connection with any transaction 
whatsoever, including economic obligations of an applicant or 
registrant that are recognized and measured in conformity with 
generally accepted accounting principles. ``Liabilities'' also include 
certain deferred credits that are not obligations but that are 
recognized and measured in conformity with generally accepted 
accounting principles. For the purposes of computing ``net capital,'' 
the term ``liabilities'':
* * * * *
    (ii) Excludes, in the case of a futures commission merchant, the 
amount of money, securities and property due to customers which is held 
in segregated accounts in compliance with the requirements of the Act 
and these regulations. For purposes of this paragraph (c)(4)(ii), a 
futures commission merchant that carries separate accounts of a 
separate account customer pursuant to Sec.  1.44 of this part shall 
compute the amount of money, securities and property due to the 
separate account customer as if the separate accounts were accounts of 
separate entities. A futures commission merchant may exclude money, 
securities and property due to customers, including separate account 
customers, only if such money, securities and property held in 
segregated accounts have been excluded from current assets in computing 
net capital;
* * * * *
    (5) The term adjusted net capital means net capital less:
* * * * *
    (viii) (A) In the case of a futures commission merchant, for 
undermargined customer accounts, the amount of funds required in each 
such account to meet maintenance margin requirements of the applicable 
board of trade, or if there are no such maintenance margin 
requirements, clearing organization margin requirements applicable to 
such positions, after application of calls for margin or other required 
deposits which are outstanding no more than one business day. If there 
are no such maintenance margin requirements or clearing organization 
margin requirements, then the amount of funds required to provide 
margin equal to the amount necessary, after application of calls for 
margin or other required

[[Page 15354]]

deposits outstanding no more than one business day, to restore original 
margin when the original margin has been depleted by 50 percent or 
more. If, however, a call for margin or other required deposits for an 
undermargined customer account is outstanding for more than one 
business day, then no such call for that undermargined customer account 
shall be applied until all such calls for margin have been met in full.
    (B) If a futures commission merchant carries separate accounts for 
one or more separate account customers pursuant to Sec.  1.44 of this 
part, the futures commission merchant shall compute the amount of funds 
required under paragraph (c)(5)(viii)(A) of this section to meet 
maintenance margin requirements for each separate account as if the 
account is owned by a separate entity, after application of calls for 
margin or other required deposits which are outstanding no more than 
one business day. If, however, a call for margin or other required 
deposits for any separate account of a particular separate account 
customer is outstanding for more than one business day, then all 
outstanding margin calls for all separate accounts of that separate 
account customer shall be treated as if the margin calls are 
outstanding for more than one business day, and shall be deducted from 
net capital until all such calls have been met in full.
    (C) If a customer account or a customer separate account deficit or 
debit ledger balance is excluded from current assets in accordance with 
paragraph (c)(2)(i) of this section, such deficit or debit ledger 
balance amount shall not also be deducted from current assets under 
this paragraph (c)(5)(viii) of this section.
    (D) In the event that an owner of a customer account, or a customer 
separate account pursuant to Sec.  1.44 of this part, has deposited an 
asset other than cash to margin, guarantee or secure the account, the 
value attributable to such asset for purposes of this paragraph 
(c)(5)(viii) of this section shall be the lesser of:
    (1) The value attributable to the asset pursuant to the margin 
rules of the applicable board of trade, or
    (2) The market value of the asset after application of the 
percentage deductions specified in paragraph (c)(5) of this section;
* * * * *
0
4. Amend Sec.  1.20 by revising paragraph (i)(4) and adding new 
paragraph (i)(5) to read as follows:


Sec.  1.20  Futures customer funds to be segregated and separately 
accounted for.

* * * * *
    (i) * * *
    (4) The futures commission merchant must, at all times, maintain in 
segregation an amount equal to the sum of any credit and debit balances 
that the futures customers of the futures commission merchant have in 
their accounts. Notwithstanding the above, a futures commission 
merchant must add back to the total amount of funds required to be 
maintained in segregation any futures customer accounts with debit 
balances in the amounts calculated in accordance with paragraph (5) of 
this section.
    (5) The futures commission merchant, in calculating the total 
amount of funds required to be maintained in segregation pursuant to 
paragraph (i)(4) of this section, must include any debit balance, as 
calculated pursuant to this paragraph (i)(5), that a futures customer 
has in its account, to the extent that such debit balance is not 
secured by ``readily marketable securities'' that the particular 
futures customer deposited with the futures commission merchant.
    (i) For purposes of calculating the amount of a futures account's 
debit balance that the futures commission merchant is required to 
include in its calculation of its total segregation requirement 
pursuant to this paragraph (i)(5), the futures commission merchant 
shall calculate the net liquidating equity of each futures account in 
accordance with paragraph (i)(2) of this section, except that the 
futures commission merchant shall exclude from the calculation any 
noncash collateral held in the futures customer account as margin 
collateral. The futures commission merchant may offset the debit 
balance computed under this paragraph (i)(5) to the extent of any 
``readily marketable securities,'' subject to percentage deductions 
(i.e., ``securities haircuts'') as specified in paragraph (f)(5)(iv) of 
this section, held for the particular futures customer to secure its 
debit balance.
    (ii) 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).
    (iii) 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.
    (iv) To determine the amount of such debit balance 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). Futures commission merchants that establish and enforce 
written policies and procedures to assess the credit risk of commercial 
paper, convertible debt instruments, or nonconvertible debt instruments 
in accordance with Rule 240.15c3-1(c)(2)(vi) of the Securities and 
Exchange Commission (Sec.  240.15c3-1(c)(2)(vi) of this title) may 
apply the lower haircut percentages specified in Rule 240.15c3-
1(c)(2)(vi) for such commercial paper, convertible debt instruments and 
nonconvertible debt instruments.
* * * * *
0
5. Amend Sec.  1.32 by adding new paragraph (l) to read as follows:


Sec.  1.32  Reporting of segregated account computation and details 
regarding the holding of futures customer funds.

* * * * *
    (l) A futures commission merchant that carries futures accounts for 
futures customers as separate accounts for separate account customers 
pursuant to Sec.  1.44 of this part shall:
    (i) Calculate the total amount of futures customer funds on deposit 
in segregated accounts carried as separate accounts of separate account 
customers on behalf of such futures customers pursuant to paragraph 
(a)(1) of this section and the total amount of futures customer funds 
required to be on deposit in segregated accounts carried as separate 
accounts of separate account customers on behalf of such futures 
customers pursuant to paragraph (a)(2) of this section by including the 
separate accounts of the separate account customers as if the separate 
accounts were accounts of separate entities;
    (ii) Offset a net deficit in a particular futures account carried 
as a separate account of a separate account customer in accordance with 
paragraph (b) of this section against the current market value of 
readily marketable securities held only for the particular separate 
account of such separate account customer; and
    (iii) Document its segregation computation in the Statement of 
Segregation Requirements and Funds in Segregation of Customers Trading 
on U.S. Commodity Exchanges required by paragraph (c) of this section 
by

[[Page 15355]]

incorporating and reflecting the futures accounts carried as separate 
accounts of separate account customers as accounts of separate 
entities.
0
6. Add Sec.  1.44 to read as follows:


Sec.  1.44   Margin Adequacy and Treatment of Separate Accounts.

    (a) Definitions. These following definitions apply only for 
purposes of this section, except to the extent explicitly noted:
    Account means a futures account as defined in Sec.  1.3 of this 
part, a Cleared Swaps Customer Account as defined in Sec.  1.3 of this 
part, or, a 30.7 account as defined in Sec.  30.1 of this chapter.
    Business day has the meaning set forth in Sec.  1.3 of this part, 
with the clarification that ``holiday'' has the meaning defined in 
paragraph (a) of this section.
    Holiday means Federal holidays as established by 5 U.S.C. 6103.
    One business day margin call means a margin call that is issued and 
met in accordance with the requirements of paragraph (f) of this 
section.
    Ordinary course of business means the standard day-to-day operation 
of the futures commission merchant's business relationship with its 
separate account customer. Events specified in paragraph (e) of this 
section are inconsistent with the ordinary course of business.
    Separate account means any one of multiple accounts of the same 
separate account customer that are carried by the same futures 
commission merchant.
    Separate account customer means a customer for which the futures 
commission merchant has made the election set forth in paragraph (d) of 
this section.
    Undermargined amount for an account means the amount, if any, by 
which the customer margin requirements with respect to all products 
held in that account exceeds the net liquidating value plus the margin 
deposits currently remaining in that account. For purposes of this 
definition, ``margin requirements'' shall mean the level of maintenance 
margin or performance bond (including, as appropriate, the equity 
component or premium for long or short option positions) required for 
the positions in the account by the applicable exchanges or clearing 
organizations. With respect to positions for which maintenance margin 
is not specified, ``margin requirements'' shall refer to the clearing 
organization margin requirements applicable to such positions.
    (b) Ensuring adequacy of customer initial margin.
    (1) A futures commission merchant shall ensure that a customer does 
not withdraw funds from its accounts with such futures commission 
merchant unless the net liquidating value (calculated as of the close 
of business on the previous business day) plus the margin deposits 
remaining in the customer's account after such withdrawal are 
sufficient to meet the customer initial margin requirements with 
respect to all products held in such customer's account, except as 
provided in paragraph (c) of this section.
    (2) For the purposes of paragraph (1) above, where the previous day 
(excluding Saturdays and Sundays) is a holiday, as defined in Sec.  
1.44(a) of this chapter, where any designated contract market on which 
the futures commission merchant trades is open for trading, and where 
an account of any of the futures commission merchant's customers 
includes positions traded on such a market, the net liquidating value 
for such an account should instead be calculated as of the close of 
business on such holiday.
    (c) Separate account treatment with respect to withdrawal of 
customer initial margin. A futures commission merchant may, only during 
the ``ordinary course of business'' as that term is defined in this 
section, treat the separate accounts of a separate account customer as 
accounts of separate entities for purposes of paragraph (b) of this 
section if such futures commission merchant elects to do so as 
specified in paragraph (d) of this section. A futures commission 
merchant that has made such an election shall comply with the 
requirements set forth in this section, and maintain written internal 
controls and procedures designed to ensure such compliance.
    (d) Election to treat a customer's accounts as separate accounts.
    (1) To elect to treat the separate accounts of a customer as 
accounts of separate entities for purposes of paragraph (b) of this 
section, the futures commission merchant shall include the customer on 
a list of separate account customers maintained in its books and 
records. This list shall include the identity of each separate account 
customer, identify each separate account of such customer, and be kept 
current.
    (2) The first time that the futures commission merchant includes a 
customer on the list of separate account customers, it shall, within 
one business day, provide notification of the election to allow 
separate account treatment for customers to its designated self-
regulatory organization and to the Commission. The notice shall be 
provided in accordance with the process specified in paragraph 
1.12(n)(3) of this part.
    (e) Events inconsistent with the ordinary course of business.
    (1) The following events are inconsistent with the ordinary course 
of business with respect to the separate accounts of a particular 
separate account customer, and the occurrence of any such event would 
require the futures commission merchant to cease permitting 
disbursements on a separate account basis with respect to all accounts 
of the relevant separate account customer:
    (i) The separate account customer, including any separate account 
of such customer, fails to deposit initial margin or maintain 
maintenance margin or make payment of variation margin or option 
premium as specified in paragraph (f) of this section.
    (ii) The occurrence and declaration by the futures commission 
merchant of an event of default as defined in the account documentation 
executed between the futures commission merchant and the separate 
account customer.
    (iii) A good faith determination by the futures commission 
merchant's chief compliance officer, one of its senior risk managers, 
or other senior manager, following such futures commission merchant's 
own internal escalation procedures, that the separate account customer 
is in financial distress, or there is significant and bona fide risk 
that the separate account customer will be unable promptly to perform 
its financial obligations to the futures commission merchant, whether 
due to operational reasons or otherwise.
    (iv) The insolvency or bankruptcy of the separate account customer 
or a parent company of such customer.
    (v) The futures commission merchant receives notification that a 
board of trade, a derivatives clearing organization, a self-regulatory 
organization as defined in Sec.  1.3 of this part or Sec.  3(a)(26) of 
the Securities Exchange Act of 1934, the Commission, or another 
regulator with jurisdiction over the separate account customer, has 
initiated an action with respect to such customer based on an 
allegation that the customer is in financial distress.
    (vi) The futures commission merchant is directed to cease 
permitting disbursements on a separate account basis, with respect to 
the separate account customer, by a board of trade, a derivatives 
clearing organization, a self-regulatory organization, the Commission, 
or another regulator with jurisdiction over the futures commission 
merchant, pursuant to, as applicable, board of trade, derivatives 
clearing

[[Page 15356]]

organization or self-regulatory organization rules, government 
regulations, or law.
    (2) The following events are inconsistent with the ordinary course 
of business with respect to the separate accounts of all separate 
account customers of the futures commission merchant, and the 
occurrence of any such event would require the futures commission 
merchant to cease permitting disbursements on a separate account basis 
with respect to any of its customers:
    (i) The futures commission merchant is notified by a board of 
trade, a derivatives clearing organization, a self-regulatory 
organization, the Commission, or another regulator with jurisdiction 
over the futures commission merchant, that the board of trade, the 
derivatives clearing organization, the self-regulatory organization, 
the Commission, or other regulator, as applicable, believes the futures 
commission merchant is in financial or other distress.
    (ii) The futures commission merchant is under financial or other 
distress as determined in good faith by its chief compliance officer, 
senior risk managers, or other senior management.
    (iii) The insolvency or bankruptcy of the futures commission 
merchant or a parent company of the futures commission merchant.
    (3) The futures commission merchant must provide notice to its 
designated self-regulatory organization and to the Commission of the 
occurrence of any of the events enumerated in paragraphs (e)(1) or 
(e)(2) of this section. The notice must identify the event and (if 
applicable) the customer, and be provided promptly in writing, and in 
any case no later than the next business day following the date on 
which the futures commission merchant identifies or has been informed 
that such event has occurred. Such notice must be provided in 
accordance with the process specified in paragraph 1.12(n)(3) of this 
part.
    (4) A futures commission merchant that has ceased permitting 
disbursements on a separate account basis to a separate account 
customer due to the occurrence of any of the events enumerated in 
paragraph (e)(1) of this section with respect to a specific separate 
account customer (or in paragraph (e)(2) with respect to all of its 
separate account customers) may resume permitting disbursements on a 
separate account basis to that customer (or, respectively, all 
customers) if such futures commission merchant reasonably believes, 
based on new information, that those circumstances have been cured, and 
such futures commission merchant documents in writing the factual basis 
and rationale for that conclusion. If the circumstances triggering 
cessation of separate account treatment were an action or direction by 
one of the entities described in paragraphs (e)(1)(v) or (vi), or 
paragraph (e)(2)(i), of this section, then the cure of those 
circumstances would require the withdrawal or other appropriate 
termination of such action or direction by that entity.
    (f) Requirements: One business day margin call. Each separate 
account must be on a one business day margin call. The following 
provisions apply solely for purposes of this paragraph (f):
    (1) Except as explicitly provided in this paragraph (f), if, as a 
result of market movements or changes in positions on the previous 
business day, a separate account is undermargined (i.e., the 
undermargined amount for that account is greater than zero), the 
futures commission merchant shall issue a margin call for the separate 
account for at least the amount necessary for the separate account to 
meet the initial margin required by the applicable exchanges or 
clearing organizations (including, as appropriate, the equity component 
or premium for long or short option positions) for the positions in the 
separate account, and that call must be met by the applicable separate 
account customer no later than the close of the Fedwire Funds Service 
on the same business day.
    (2) Payment of margin in currencies listed in Appendix A to this 
part shall be considered in compliance with the requirements of this 
paragraph (f) if received by the applicable futures commission merchant 
no later than the end of the second business day after the day on which 
the margin call is issued.
    (3) Payment of margin in fiat currencies other than U.S. Dollars, 
Canadian Dollars, or currencies listed in Appendix A to this part shall 
be considered in compliance with the requirements of this paragraph (f) 
if received by the applicable futures commission merchant no later than 
the end of the business day after the day on which the margin call is 
issued.
    (4) The relevant deadline for payment of margin in fiat currencies 
other than U.S. Dollars may be extended by up to one additional 
business day and still be considered in compliance with the 
requirements of this paragraph (f) if payment is delayed due to a 
banking holiday in the jurisdiction of issue of the currency. For 
payments in Euro, either the separate account customer or the 
investment manager managing the separate account may designate one 
country within the Eurozone that they have the most significant 
contacts with for purposes of meeting margin calls in that separate 
account, whose banking holidays shall be referred to for this purpose.
    (5) A failure with respect to a specific separate account to 
deposit, maintain, or pay margin or option premium that was called 
pursuant to paragraph (f)(1) of this section, due to unusual 
administrative error or operational constraints that a separate account 
customer or investment manager acting diligently and in good faith 
could not have reasonably foreseen, does not constitute a failure to 
comply with the requirements of this paragraph (f). For these purposes, 
a futures commission merchant's determination that the failure to 
deposit, maintain, or pay margin or option premium is due to such 
administrative error or operational constraints must be based on the 
futures commission merchant's reasonable belief in light of information 
known to the futures commission merchant at the time the futures 
commission merchant learns of the relevant administrative error or 
operational constraint.
    (6) A futures commission merchant would not be in compliance with 
the requirements of this paragraph (f) if it contractually agrees to 
provide separate account customers with periods of time to meet margin 
calls that extend beyond the time periods specified in paragraph (f)(1) 
through (5) of this section, or engages in practices that are designed 
to circumvent this paragraph (f).
    (7) In the case of a holiday where any designated contract market 
on which the futures commission merchant trades is open for trading, 
and where a separate account of any of the futures commission 
merchant's separate account customers includes positions traded on such 
a market, then for any such separate account:
    (i) If, as a result of market movements or changes in positions on 
the business day before the holiday, a separate account is 
undermargined, the futures commission merchant shall issue a margin 
call for the separate account for at least the undermargined amount, 
and that call must be met by the applicable separate account customer 
no later than the close of the Fedwire Funds Service on the next 
business day after the holiday, and,
    (ii) If, as a result of market movements or changes in positions on 
the holiday, a separate account is undermargined by an amount greater 
than the amount it was undermargined as a result of market movements or 
changes in positions on the business day before the holiday, the 
futures commission merchant shall

[[Page 15357]]

issue a margin call for the separate account for at least the 
incremental undermargined amount, and that call must be met by the 
applicable separate account customer no later than the close of the 
Fedwire Funds Service on the next business day after the holiday.
    (8) Any person may submit to the Commission any currency that such 
person proposes should be added to or removed from Appendix A to this 
part.
    (i) A submission pursuant to this paragraph (f)(8) shall include:
    (A) A statement that margin payments in the relevant currency 
cannot, in the case of a proposed addition, or can, in the case of a 
proposed removal, practicably be received by the futures commission 
merchant issuing a margin call no later than the end of the first 
business day after the day on which the margin call is issued;
    (B) Documentation or other information sufficient to support the 
statement contemplated by paragraph (f)(8)(i)(A) of this section; and
    (C) Any additional information specifically requested by the 
Commission.
    (ii) A submitter pursuant to paragraph (f)(8)(i) of this section 
that wishes to request confidential treatment for portions of its 
submission may do so in accordance with the procedures set out in Sec.  
145.9(d) of this chapter.
    (iii) The Commission shall review a submission made pursuant to 
paragraph (f)(8) of this section and determine whether to propose to 
add the relevant currency to, or remove the relevant currency from, 
Appendix A to this part.
    (iv) If the Commission proposes to add a currency to or remove a 
currency from Appendix A to this part, the Commission shall issue such 
determination through notice and comment rulemaking, and shall provide 
a public comment period of no less than thirty days.
    (v) The Commission may, of its own accord and absent a submission 
pursuant to paragraph (f)(8) of this section, propose to issue a 
determination to add a currency to or remove a currency from Appendix A 
to this part pursuant to the procedure set forth in paragraph 
(f)(8)(iv) of this section.
    (g) Requirements: Calculations for capital, risk management, and 
segregation.
    (1) The futures commission merchant's internal risk management 
policies and procedures shall provide for stress testing and credit 
limits as set forth in Sec.  1.73 of this part for separate account 
customers. Such stress testing must be performed, and the credit limits 
must be applied, both on an individual separate account and on a 
combined account basis.
    (2) A futures commission merchant shall calculate the margin 
requirement for each separate account of a separate account customer 
independently from such margin requirement for all other separate 
accounts of the same customer with no offsets or spreads recognized 
across the separate accounts.
    (3) A futures commission merchant shall, in computing its adjusted 
net capital for purposes of Sec.  1.17 of this part, record each 
separate account of a separate account customer in the books and 
records of the futures commission merchant as a distinct account of a 
customer. This includes recording each separate account with a net 
debit balance or a deficit as a receivable from the separate account 
customer, with no offsets between the other separate accounts of the 
same separate account customer.
    (4) A futures commission merchant shall, in calculating the amount 
of its own funds it is required to maintain in segregated accounts to 
cover deficits or debit ledger balances pursuant to Sec. Sec.  1.20(i), 
22.2(f), or 30.7(f)(2) of this chapter in any futures customer 
accounts, Cleared Swaps Customer Accounts, or 30.7 accounts, 
respectively, include any deficits or debit ledger balances of any 
separate accounts as if the accounts are accounts of separate entities.
    (5) For purposes of its residual interest and legally segregated 
operationally commingled compliance calculations, as applicable under 
Sec. Sec.  1.22(c), 22.2(f)(6), and 30.7(f)(1)(ii) of this chapter, a 
futures commission merchant shall treat the separate accounts of a 
separate account customer as if the accounts were accounts of separate 
entities and include the undermargined amount of each separate account, 
and cover such undermargined amount with its own funds.
    (6) In determining its residual interest target for purposes of 
Sec. Sec.  1.11(e)(3)(i)(D) and 1.23(c) of this part, the futures 
commission merchant must consider the impact of calculating customer 
receivables for separate account customers on a separate account basis.
    (h) Requirements: information and disclosures.
    (1) A futures commission merchant shall obtain from each separate 
account customer or, as applicable, the manager of a separate account, 
information sufficient for the futures commission merchant to:
    (i) Assess the value of the assets dedicated to such separate 
account; and
    (ii) Identify the direct or indirect parent company of the separate 
account customer, as applicable, if such customer has a direct or 
indirect parent company.
    (2) Where a separate account customer has appointed a third-party 
as the primary contact to the futures commission merchant, the futures 
commission merchant must obtain and maintain current contact 
information of an authorized representative at the customer, and take 
reasonable steps to verify that such contact information is and remains 
accurate, and that the person is in fact an authorized representative 
of the customer.
    (3) A futures commission merchant must provide each separate 
account customer a disclosure that, pursuant to part 190 of the 
Commission's regulations, all separate accounts of the customer in each 
account class will be combined in the event of the futures commission 
merchant's bankruptcy.
    (i) The disclosure statement required by this paragraph (h)(3) must 
be delivered directly to the customer via electronic means, in writing 
or in such other manner as the futures commission merchant customarily 
delivers disclosures pursuant to applicable Commission regulations, and 
as permissible under the futures commission merchant's customer 
documentation.
    (ii) The futures commission merchant must maintain documentation 
demonstrating that the disclosure statement required by this paragraph 
(h)(3) was delivered directly to the customer.
    (iii) The futures commission merchant must include the disclosure 
statement required by this paragraph (h)(3) on its website or within 
its Disclosure Document required by paragraph 1.55(i) of this chapter.
    (4) A futures commission merchant that has made an election 
pursuant to paragraph (d) of this section shall disclose in the 
Disclosure Document required under paragraph 1.55(i) of this part that 
it permits the separate treatment of accounts for the same customer 
under the terms and conditions of this Sec.  1.44 and that, in the 
event that separate account treatment for some customers were to 
contribute to a loss that exceeds the futures commission merchant's 
ability to cover, that loss may affect the segregated funds of all of 
the futures commission merchant's customers in one or more account 
classes.
    (i) A futures commission merchant that applies separate account 
treatment pursuant to this section shall apply such treatment in a 
consistent manner over time. If the election pursuant to paragraph (d) 
of this section for a

[[Page 15358]]

separate account customer is revoked, it may not be reinstated during 
the 30 days following such revocation.
0
7. Amend Sec.  1.58 by revising paragraphs (a) and (b) and adding new 
paragraph (c) as follows:


Sec.  1.58   Gross collection of exchange-set margins.

    (a) Each futures commission merchant which carries a futures, 
options on futures, or Cleared Swaps position for another futures 
commission merchant or for a foreign broker on an omnibus basis must 
collect, and each futures commission merchant and foreign broker for 
which an omnibus account is being carried must deposit, initial and 
maintenance margin on each position so carried at a level no less than 
that established for customer accounts by the rules of the applicable 
contract market or other board of trade. If the contract market or 
other board of trade does not specify any such margin level, the level 
required will be that specified by the relevant clearing organization.
    (b) If the futures commission merchant which carries a futures, 
options on futures, or Cleared Swaps position for another futures 
commission merchant or for a foreign broker on an omnibus basis allows 
a position to be margined as a spread position or as a hedged position 
in accordance with the rules of the applicable contract market, the 
carrying futures commission merchant must obtain and retain a written 
representation from the futures commission merchant or from the foreign 
broker for which the omnibus account is being carried that each such 
position is entitled to be so margined.
    (c) Where a futures commission merchant has established an omnibus 
account that is carried by another futures commission merchant, and the 
depositing futures commission merchant has elected to treat the 
separate accounts of a futures customer or a Cleared Swaps Customer as 
accounts of separate entities for purposes of Sec.  1.44 of this part, 
the depositing futures commission merchant shall calculate the required 
initial and maintenance margin for purposes of paragraph (a) of this 
section separately for each such separate account.
0
8. Amend Sec.  1.73 by adding new paragraph (c) as follows:


Sec.  1.73   Clearing futures commission merchant risk management.

* * * * *
    (c) A futures commission merchant that is not a clearing member of 
a derivatives clearing organization, but that treats the separate 
accounts of a customer as accounts of separate entities for purposes of 
Sec.  1.44 of this part, shall comply with paragraphs (a) and (b) of 
this section with respect to the accounts and separate accounts of 
separate account customers as if it was a clearing member of a 
derivatives clearing organization.
0
9. Add new Appendix A to Part 1 to read as follows:

Appendix A to Part 1--Treatment of Certain Foreign Currencies for 
Margin Adequacy Requirements under Regulation 1.44

    Payment of margin in currencies listed in Table 1 of this 
Appendix A shall be considered in compliance with the requirements 
of Regulation 1.44(f) of Part 1 of the Commission's regulations if 
received by the applicable futures commission merchant no later than 
the end of the second business day after the day on which the margin 
call is issued.

                          Table 1 to Appendix A
------------------------------------------------------------------------
                                Currency
-------------------------------------------------------------------------
Australian dollar (AUD)
Chinese renminbi (CNY)
Hong Kong dollar (HKD)
Hungarian forint (HUF)
Israeli new shekel (ILS)
Japanese yen (JPY)
New Zealand dollar (NZD)
Singapore dollar (SGD)
South African rand (ZAR)
Turkish lira (TRY)
------------------------------------------------------------------------

PART 22--CLEARED SWAPS

0
10. The authority citation for part 22 continues to read as follows:

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

0
11. Amend Sec.  22.2 by:
0
a. Republishing the paragraph heading of paragraph (f);
0
b. Revising paragraphs (f)(4) and (5);
0
c. Republishing the paragraph heading of paragraph (g); and
0
d. Adding new paragraph (g)(11).
    The republications, revisions, and additions read as follows:


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

* * * * *
    (f) Requirement as to amount.
* * * * *
    (4) The futures commission merchant must, at all times, maintain in 
segregation, in its FCM Physical Locations and/or its Cleared Swaps 
Customer Accounts at Permitted Depositories, an amount equal to the sum 
of any credit and debit balances that the Cleared Swaps Customers of 
the futures commission merchant have in their accounts. Notwithstanding 
the above, a futures commission merchant must add back to the total 
amount of funds required to be maintained in segregation any Cleared 
Swaps Customer Accounts with debit balances in the amounts calculated 
in accordance with paragraph (5) of this section.
    (5) The futures commission merchant, in calculating the total 
amount of funds required to be maintained in segregation pursuant to 
paragraph (f)(4) of this section, must include any debit balance, as 
calculated pursuant to this paragraph (f)(5), that a Cleared Swaps 
Customer has in its account, to the extent that such debit balance is 
not secured by ``readily marketable securities'' that the particular 
Cleared Swaps Customer deposited with the futures commission merchant.
    (i) For purposes of calculating the amount of a Cleared Swaps 
Customer Account's debit balance that the futures commission merchant 
is required to include in its calculation of its total segregation 
requirement pursuant to this paragraph (f)(5), the futures commission 
merchant shall calculate the net liquidating equity of each Cleared 
Swaps Customer Account in accordance with paragraph (f)(2) of this 
section, except that the futures commission merchant shall exclude from 
the calculation any noncash collateral held in the Cleared Swaps 
Customer Account as margin collateral. The futures commission merchant 
may offset the debit balance computed under this paragraph (f)(5) to 
the extent of any ``readily marketable securities,'' subject to 
percentage deductions (i.e., ``securities haircuts'') as specified in 
paragraph (f)(5)(iv) of this section, held for the particular Cleared 
Swaps Customer to secure its debit balance.
    (ii) 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).
    (iii) 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.
    (iv) To determine the amount of such debit balance secured by 
``readily marketable securities,'' the futures commission merchant 
shall:
    (A) Determine the market value of such securities; and

[[Page 15359]]

    (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). Futures commission merchants that establish and enforce 
written policies and procedures to assess the credit risk of commercial 
paper, convertible debt instruments, or nonconvertible debt instruments 
in accordance with Rule 240.15c3-1(c)(2)(vi) of the Securities and 
Exchange Commission (Sec.  240.15c3-1(c)(2)(vi) of this title) may 
apply the lower haircut percentages specified in Rule 240.15c3-
1(c)(2)(vi) for such commercial paper, convertible debt instruments and 
nonconvertible debt instruments.
* * * * *
    (g) Segregated account; Daily computation and record.
* * * * *
    (11) A futures commission merchant that carries Cleared Swaps 
Accounts for Cleared Swaps Customers as separate accounts for separate 
account customers pursuant to Sec.  1.44 of this chapter shall:
    (i) Calculate the total amount of Cleared Swaps Customer Collateral 
on deposit in segregated accounts on behalf of Cleared Swaps Customers 
pursuant to paragraph (g)(1)(i) of this section and the total amount of 
Cleared Swaps Customer Collateral required to be on deposit in 
segregated accounts on behalf of Cleared Swaps Customers pursuant to 
paragraph (g)(1)(ii) of this section by including the separate accounts 
of the separate account customers as if the separate accounts were 
accounts of separate entities;
    (ii) Offset a net deficit in a particular Cleared Swaps Customer 
Account carried as a separate account of a separate account customer in 
accordance with paragraphs (f)(4) and (5) and (g)(1)(ii) of this 
section against the current market value of readily marketable 
securities held only for the particular separate account of such 
separate account customer; and
    (iii) Document its segregation computation in the Statement of 
Cleared Swaps Customer Segregation Requirements and Funds in Cleared 
Swaps Customer Accounts under 4d(f) of the CEA required by paragraph 
(g)(2) of this section by incorporating and reflecting the Cleared 
Swaps Customer Accounts carried as separate accounts of separate 
account customers as accounts of separate entities.

PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS

0
12. The authority citation for part 30 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 6, 6c, and 12a, unless otherwise 
noted.

0
13. Amend Sec.  30.2 by revising paragraph (b) to read as follows:


Sec.  30.2  Applicability of the Act and rules.

* * * * *
    (b) The provisions of Sec. Sec.  1.20 through 1.30, 1.32, 
1.35(a)(2) through (4) and (c) through (i), 1.36(b), 1.38, 1.39, 1.40, 
1.45 through 1.51, 1.53, 1.54, 1.55, 1.58, 1.59, 33.2 through 33.6 and 
parts 15 through 20 of this chapter shall not be applicable to the 
persons and transactions that are subject to the requirements of this 
part.
0
14. Amend Sec.  30.7 by:
0
a. Republishing the paragraph heading of paragraph (f);
0
b. Republishing the paragraph heading of paragraph (f)(2);
0
c. Revising paragraph (f)(2)(iv);
0
d. Adding paragraph (f)(2)(v);
0
e. Republishing the paragraph heading of paragraph (l); and
0
f. Adding paragraph (l)(11).
    The republications, revisions, and additions read as follows:


Sec.  30.7  Treatment of foreign futures or foreign options secured 
amount.

* * * * *
    (f) Limitations on use of 30.7 customer funds.
* * * * *
    (2) Requirements as to amount.
* * * * *
    (iv) The futures commission merchant must, at all times, maintain 
in segregation an amount equal to the sum of any credit and debit 
balances that 30.7 customers of the futures commission merchant have in 
their accounts. Notwithstanding the above, a futures commission 
merchant must add back to the total amount of funds required to be 
maintained in segregation any 30.7 accounts with debit balances in the 
amounts calculated in accordance with paragraph (f)(2)(v) of this 
section.
    (v) The futures commission merchant, in calculating the total 
amount of funds required to be maintained in segregation pursuant to 
paragraph (f)(2)(iv) of this section, must include any debit balance, 
as calculated pursuant to this paragraph (f)(2)(v), that a 30.7 
customer has in its account, to the extent that such debit balance is 
not secured by ``readily marketable securities'' that the particular 
30.7 customer deposited with the futures commission merchant.
    (A) For purposes of calculating the amount of a 30.7 account's 
debit balance that the futures commission merchant is required to 
include in its calculation of its total segregation requirement 
pursuant to this paragraph (f)(2)(v), the futures commission merchant 
shall calculate the net liquidating equity of each 30.7 account in 
accordance with paragraph (f)(2)(ii) of this section, except that the 
futures commission merchant shall exclude from the calculation any 
noncash collateral held in the 30.7 account as margin collateral. The 
futures commission merchant may offset the debit balance computed under 
this paragraph (f)(2)(v) to the extent of any ``readily marketable 
securities,'' subject to percentage deductions (i.e., ``securities 
haircuts'') as specified in paragraph (f)(2)(v)(D) of this section, 
held for the particular 30.7 customer to secure its debit balance.
    (B) 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).
    (C) 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.
    (D) To determine the amount of such debit balance secured by 
``readily marketable securities.'' To do so, the futures commission 
merchant shall:
    (1) Determine the market value of such securities; and
    (2) 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). Futures commission merchants that establish and enforce 
written policies and procedures to assess the credit risk of commercial 
paper, convertible debt instruments, or nonconvertible debt instruments 
in accordance with Rule 240.15c3-1(c)(2)(vi) of the Securities and 
Exchange Commission (Sec.  240.15c3-1(c)(2)(vi) of this title) may 
apply the lower haircut percentages specified in Rule 240.15c3-
1(c)(2)(vi) for such commercial paper, convertible debt instruments and 
nonconvertible debt instruments.
* * * * *
    (l) Daily computation of 30.7 customer secured amount requirement 
and details regarding the holding and investing of 30.7 customer funds.
* * * * *

[[Page 15360]]

    (11) A futures commission merchant that carries 30.7 accounts for 
30.7 customers as separate accounts for separate account customers 
pursuant to Sec.  1.44 of this chapter shall:
    (i) Calculate the total amount of 30.7 customer funds on deposit in 
30.7 accounts on behalf of 30.7 customers pursuant to paragraph (l)(1) 
of this section and the total amount of 30.7 customer funds required to 
be on deposit in segregated accounts on behalf of 30.7 customers 
pursuant to paragraph (l)(1) of this section by including the separate 
accounts of the separate account customers as if the separate accounts 
were accounts of separate entities;
    (ii) Offset a net deficit in a particular 30.7 account carried as a 
separate account of a separate account customer in accordance with this 
paragraph (l) against the current market value of readily marketable 
securities held only for the particular separate account of such 
separate account customer; and
    (iii) Document its segregation computation in the Statement of 
Secured Amounts and Funds Held in Separate Accounts for 30.7 Customers 
pursuant to Commission Regulation 30.7 required by paragraph (l)(3) of 
this section by incorporating and reflecting the 30.7 accounts carried 
as separate accounts of separate account customers as accounts of 
separate entities.

PART 39--DERIVATIVES CLEARING ORGANIZATIONS

0
15. The authority citation for part 39 continues to read as follows:

    Authority: 7 U.S.C. 2, 6(c), 7a-1, and 12a(5); 12 U.S.C. 5464; 
15 U.S.C. 8325; Section 752 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, title VII, sec. 752, July 
21, 2010, 124 Stat. 1749.

0
16. Amend Sec.  39.13 by:
0
a. Republishing the paragraph heading of paragraph (g);
0
b. Republishing the paragraph heading of paragraph (g)(8);
0
c. Adding paragraph (g)(8)(i)(E); and
0
d. Revising paragraph (g)(8)(iii).
    The republications, addition and revision to read as follows:


Sec.  39.13  Risk management.

* * * * *
    (g) Margin requirements--
* * * * *
    (8) Customer margin--
    (i) * * *
    (E) For purposes of this paragraph (g)(8)(i), each separate account 
of a separate account customer (as such terms are defined in Sec.  1.44 
of this chapter) shall be treated as an account of a separate 
individual customer.
* * * * *
    (iii) Withdrawal of customer initial margin. A derivatives clearing 
organization shall require its clearing members to ensure that their 
customers do not withdraw funds from their accounts with such clearing 
members unless the net liquidating value plus the margin deposits 
remaining in a customer's account after such withdrawal are sufficient 
to meet the customer initial margin requirements with respect to all 
products and swap portfolios held in such customer's account which are 
cleared by the derivatives clearing organization, except as provided 
for in Sec.  1.44 of this chapter.
* * * * *

    Issued in Washington, DC, on February 23, 2024, by the 
Commission.
Robert Sidman,
Deputy Secretary of the Commission.


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

Appendices to Regulations To Address Margin Adequacy and To Account for 
the Treatment of Separate Accounts by Futures Commission Merchants--
Commission Voting Summary and Chairman's and Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Behnam and Commissioners Goldsmith 
Romero, Mersinger, and Pham voted in the affirmative. Commissioner 
Johnson voted to concur. No Commissioner voted in the negative.

Appendix 2--Statement of Commissioner Kristin N. Johnson

Introduction

    The Commodity Futures Trading Commission (Commission or CFTC) 
has adopted several key regulations that establish guardrails to 
protect against the misuse or misapplication of customer funds. The 
Commodity Exchange Act (CEA) and Commission regulations establish 
critical protections for customers to help prevent them from losing 
money as a result of losses caused by their futures commission 
merchant (FCM) or their fellow customers at the FCM. These include 
Sections 4 and 4d of the CEA and Parts 1, 22, and 30 of the 
Commission regulations, which require an FCM to segregate its own 
funds from those of its customers and prohibit an FCM from using one 
customer's funds to cover the losses of another.
    A foundational principle of the Commission's customer protection 
regime is a prohibition against the use of one customer's funds to 
cover the liabilities of another customer. It is difficult to 
overstate the importance of regulations that prevent this kind of 
misuse, particularly when customer funds are commingled in a single 
omnibus account.
    The Commission must not weaken regulations intended to reinforce 
these protections. Determining whether a regulation might result in 
weakening these protections requires careful qualitative and 
quantitative assessment and evaluation of (un)anticipated risks and 
thoughtful reinforcement of robust risk management requirements.
    The Commission is amending an existing customer protection 
provision under CFTC Regulation 39.13(g)(8)(iii). This regulation 
establishes a margin adequacy requirement by prohibiting the 
withdrawal of funds by a customer of a clearing FCM if such 
withdrawal would result in the account being undermargined. The 
purpose of Commission Regulation 39.13(g)(8)(iii) is to mitigate the 
risk that a clearing member, using an omnibus margin account, fails 
to hold sufficient funds from one customer to cover that customer's 
initial margin requirements and effectively covers the customer's 
margin shortfall using another customer's funds.
    The proposed amendment would codify the requirements of CFTC 
Regulation 39.13(g)(8)(iii) in Part 1 of the Commission's 
regulations governing FCMs, thus extending the requirements to non-
clearing FCMs as well, but would permit an FCM to treat the separate 
accounts of a single customer, or beneficial owner, as accounts of 
separate entities, subject to certain risk-mitigation conditions 
(Proposed Rule).\1\ This amendment thus allows disbursements on a 
separate account basis such that a customer may withdraw funds from 
one account even if its other account is undermargined, so long as 
the customer is in compliance with the relevant risk-management 
conditions.
---------------------------------------------------------------------------

    \1\ This would permit non-clearing FCMs to engage in separate 
account treatment and would allow FCMs, rather than DCOs, to 
determine whether or not to permit their customers to elect such 
treatment.
---------------------------------------------------------------------------

    It is indisputable that the Proposed Rule introduces risks that 
do not exist under CFTC Regulation 39.13(g)(8)(iii). Permitting a 
customer to withdraw ``excess'' margin from one account when it has 
insufficient margin in another account could exacerbate the 
customer's overall margin deficiency and any shortfall in the FCM's 
customer account, amplify default risk, and increase fellow-customer 
risk. Prior to finalizing this rule, it is imperative that the 
Commission understand the potential risks that may arise by 
permitting disbursements on a separate account basis.
    Customer asset protections are essential to the individuals and 
institutional businesses whose assets are held by an intermediary 
and therefore may be at risk. As I have stated previously,

creating and enforcing effective, well-tailored rules governing the 
custody, investment, and preservation of customer funds must be 
among the Commission's highest priorities. Without these rules and 
rigorous enforcement, our markets would lack the foundation of trust 
upon which every transaction is built.\2\
---------------------------------------------------------------------------

    \2\ Kristin N. Johnson, Commissioner, CFTC, Statement on 
Preserving Trust and Preventing the Erosion of Customer Protection 
Regulation (Nov. 3, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnstatement110323.


[[Page 15361]]


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

    I am supportive of careful, well-tailored, workable, and 
practical regulations that do not undermine or weaken customer 
protection. I strongly believe that the Commission would have 
benefited from a formal report detailing relevant risk management 
concerns that may arise as a result of introducing the Proposed 
Rule. Among other issues outlined below, the Commission would 
benefit from receiving data and analysis that details the potential 
risk management consequences attendant to adopting the Proposed Rule 
as well as any related measures that may mitigate risk management 
concerns.
    Before adopting a final rule, the Commission, through supporting 
data and analyses, must assure itself that the Proposed Rule 
accomplishes the customer protection and risk management goals of 
regulation 39.13(g)(8)(iii).

Call for Supporting Risk Management Data and Analyses

    The Commission is amending CFTC Regulation 39.13(g)(8)(iii) to 
permit disbursements on a separate accounts basis, subject to 
certain risk-mitigating conditions.
    As I have said before, permitting disbursements on a separate 
accounts basis is inconsistent with the plain language of CFTC 
Regulation 39.13(g)(8)(iii), which was adopted by the Commission 
following the 2008-2009 financial crisis pursuant to the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), 
and introduces new or additional risks. I am, however, supportive of 
solutions that are grounded in data and analyses demonstrating that 
an amendment to CFTC Regulation 39.13(g)(8)(iii) achieves the same 
goals and objectives underpinning this regulation.
    It would be helpful, in the context of evaluating the Proposed 
Rule, to have a sufficiently robust analysis of the sufficiency and 
adequacy of the risk-mitigating measures that have been in place 
since 2019.
    The Commission should conduct a study to assess any additional 
risks and the scope and magnitude of such risks. Alongside a formal 
report offering a data-driven analysis, commentators should include 
comprehensive analyses and evidence indicating that the adoption of 
the Proposed Rule does not increase risks to our markets, or, if 
there are increased risks, that the risk-mitigation measures adopted 
by the Commission are effective. We also welcome feedback on other 
measures to ensure that FCMs maintain robust risk-management 
practices.

Margin Adequacy Requirement

    In order to register, and maintain registration, as a 
derivatives clearing organization (DCO), a clearinghouse must 
demonstrate the ability, and continue, to comply with the core 
principles for DCOs set forth in Section 5b of the CEA. The core 
principles were added to the CEA by the Commodity Futures 
Modernization Act of 2000 (CFMA). In implementing the CFMA, the 
Commission did not adopt implementing rules and regulations, but 
instead promulgated guidance for DCOs on compliance with the core 
principles.
    Section 725(c) of the Dodd-Frank Act amended Section 5b(c)(2) of 
the CEA to expressly confirm that the Commission may adopt 
implementing rules and regulations pursuant to its rulemaking 
authority under Section 8a(5) of the CEA.
    The Commission adopted CFTC Regulation 39.13(g)(8)(iii) in 2011. 
The adoption was part of a broader rulemaking to implement certain 
provisions of the Dodd-Frank Act governing the activities of DCOs, 
including Core Principle D--risk management--requiring each DCO to 
ensure that its risk management framework is sufficient to manage 
the risks associated with discharging the responsibilities of a DCO 
through the use of appropriate tools and procedures. CFTC 
regulations require DCOs to collect initial margin from their 
customers on a gross basis, even if customer collateral is held in 
an omnibus account.
    Under CFTC Regulation 39.13(g)(8)(iii), a DCO must require ``its 
clearing members to ensure that their customers do not withdraw 
funds from their accounts with such clearing members unless the net 
liquidating value plus the margin deposits remaining in a customer's 
account after such withdrawal are sufficient to meet the customer 
initial margin requirements with respect to all products and swap 
portfolios held in such customer's account which are cleared by the 
derivatives clearing organization.'' \3\
---------------------------------------------------------------------------

    \3\ 17 CFR 39.13 (g)(8)(iii).
---------------------------------------------------------------------------

    The purpose of this regulation is to mitigate the risk that a 
clearing member, using an omnibus margin account, fails to hold 
sufficient funds from one customer to cover such customer's initial 
margin requirements and effectively covers such customer's margin 
shortfall using another customer's funds.
    In the Preamble to the Proposed Rule, the Commission recognizes,

[i]n light of the use of omnibus margin accounts, where the funds of 
multiple customers are held together, this safeguard is necessary to 
``avoid the misuse of customer funds'' by mitigating the likelihood 
that the clearing member will effectively cover one customer's 
margin shortfall using another customer's funds.\4\
---------------------------------------------------------------------------

    \4\ Regulations to Address Margin Adequacy and to Account for 
the Treatment of Separate Accounts by Futures Commission Merchants 
(Voting Draft) at 7.

    An omnibus account structure creates a potential dilution of the 
pool of funds available to U.S. customers in the event of a 
bankruptcy of the FCM to the extent the FCM's customer account is 
undermargined. In a bankruptcy proceeding, customer property is 
distributed pro rata and so all customers share in any shortfall in 
the customer account of a particular class.

Concerns With Separate Accounts

    In 2019, the Joint Audit Committee (JAC) issued a regulatory 
alert providing an interpretation of the requirements of CFTC 
Regulation 39.13(g)(8)(iii).\5\ Under the JAC's interpretation, 
separate accounts of the same customer were to be combined for the 
purpose of determining the amount of margin funds available for 
disbursement from any of the accounts.
---------------------------------------------------------------------------

    \5\ See JAC, Regulatory Alert #19-02 (May 14, 2019), http://www.jacfutures.com/jac/jacupdates/2019/jac1902.pdf.
---------------------------------------------------------------------------

    This interpretation was inconsistent with the prevailing 
practices, including as documented under customer agreements, among 
FCMs, and FCM customers with respect to the treatment of separate 
accounts.
    FCMs would establish separate accounts for customers for 
commercial purposes. For example, ``such accounts are: (i) 
separately contracted for with different asset management firms; 
(ii) established as a separate investment portfolio within the same 
asset management firm; (iii) established by a commercial entity for 
the purpose of a commodity or margin financing arrangement and 
secured by the lender as a secondary security interest; or (iv) 
necessary to separately account for or settle obligations of 
separate branches established pursuant to separate legal/country 
jurisdictions.'' \6\ Although separate accounts may be owned by the 
same customer or beneficial owner, FCMs did not combine those 
accounts for margin purposes.
---------------------------------------------------------------------------

    \6\ See, e.g., Letter from SIFMA AMG to Brain A. Bussey, Dir. at 
Div. of Clearing and Risk, CFTC, & Matthew B. Kulkin, Dir. at Div. 
of Swap Dealer and Intermediary Oversight, CFTC (June 7, 2019), 
https://www.sifma.org/wp-content/uploads/2021/01/Request-for-Interpretation-Rule-1.56b-and-Rule-39.131.pdf.
---------------------------------------------------------------------------

    In response to the JAC's interpretation, several industry trade 
associations requested that the Commission provide time limited no-
action relief with respect to the treatment of separate accounts by 
FCMs.\7\ Specifically, they requested that the Commission interpret 
Commission Regulation 39.13(g)(8)(iii) to permit separate accounts 
of the same customer to ``be treated as separate legal entities'' 
therefore not combined when determining an account's margin funds 
available for disbursement.'' \8\
---------------------------------------------------------------------------

    \7\ Id.
    \8\ Id.
---------------------------------------------------------------------------

    The separate account treatment permits margin to be withdrawn 
from one account of a customer while another account of that same 
customer faces a margin call, it creates the risk that a customer 
will withdraw funds from the account in surplus and then later 
default on the margin call, leaving the FCM with fewer resources to 
cover the resulting losses.

Separate Account Treatment

    In 2019, the Commission issued a time-limited, temporary no-
action letter that permitted disbursements on a separate account 
basis, subject to certain conditions that mitigate the risk of 
default and strengthen an FCM's risk-management of customers granted 
separate account treatment. The Commission aimed to achieve the 
customer protection and risk management goals of CFTC Regulation 
39.13(g)(8)(iii).
    In 2023, the Commission approved a proposed rule to codify, in 
Part 39 governing DCOs, the staff no-action position regarding the 
treatment of separate accounts of a single customer by an FCM that 
is a clearing

[[Page 15362]]

member of a DCO. In April 2023, the Commission published in the 
Federal Register a notice of proposed rulemaking that would codify 
the no-action letter.
    Following comments to the proposed rule supporting direct 
application of separate account treatment to FCMs (both clearing and 
non-clearing), the Commission proposes to withdraw the original 
proposal in favor of the Proposed Rule.\9\
---------------------------------------------------------------------------

    \9\ This would permit non-clearing FCMs to engage in separate 
account treatment and would allow FCMs, rather than DCOs, to 
determine whether or not to permit their customers to elect such 
treatment.
---------------------------------------------------------------------------

    The Proposed Rule codifies (with important changes, including 
the establishment of a margin adequacy requirement applicable to 
clearing and non-clearing FCMs and increased specificity in the one-
day margin requirement) the existing no-action position under which 
FCMs are permitted to treat different accounts of the same 
beneficial owner as separate accounts for purposes of permitting 
margin withdrawals.

Sufficiency of Risk-Mitigation Conditions

    The Proposed Rule permits separate account treatment subject to 
risk-management standards. The customer protections built into this 
Proposed Rule help to mitigate the risk that it creates, 
particularly by requiring customers receiving separate account 
treatment to meet margin calls the same day they are made (referred 
to as the one-day margin requirement), and requiring separate 
account treatment to cease when the customer or the FCM is no longer 
operating in the ordinary course of business. In many ways, the 
enhanced requirements for FCMs to maintain internal controls and 
policies and procedures designed to ensure compliance with the 
Proposed Rule strengthen the risk-management compliance practices of 
FCMs.
    One-day margin requirement. Under the one-day margin 
requirement, a separate account customer must meet any margin call 
by the close of the Fedwire Funds Service on the same day.\10\ This 
requirement is subject to enumerated exemptions, including for 
payments in certain foreign currencies where the mechanics of 
international payment systems would make compliance with the one-day 
margin requirement impractical.\11\
---------------------------------------------------------------------------

    \10\ See e.g., Proposed 17 CFR 1.44(f).
    \11\ Id.
---------------------------------------------------------------------------

    Ordinary course of business. Under the Proposed Rule, separate 
account treatment for a customer would cease if the customer or its 
FCM ceased operating in the ordinary course of business--the day-to-
day operation of the FCM's relationship with its customer.\12\ These 
events include a failure to meet the one-day margin call as well as 
an event of default, financial distress, other distress, insolvency, 
bankruptcy, or an inability to perform financial obligations. These 
events are standard across all FCMs that elect separate account 
treatment.\13\
---------------------------------------------------------------------------

    \12\ See e.g., Proposed 17 CFR 1.44(c).
    \13\ See e.g., Proposed 17 CFR 1.44(e).
---------------------------------------------------------------------------

    These two requirements work together to mitigate the risk of 
default by a customer that benefits from separate account treatment. 
The ordinary course of business standard works to prevent an 
insolvent or soon-to-be insolvent beneficial owner from continuing 
to receive separate account treatment. And the one-day margin 
requirement creates a cap on the amount of time during which an 
insolvent or soon-to-be insolvent beneficial owner could take funds 
out of one account while failing to meet a margin call for another 
account.

Conclusion

    As I have previously noted,

[s]ince the earliest days of federal prudential and market 
regulation in our nation, thought leaders have advocated for 
regulation that preserves customer assets held by others. In his 
book published in 1914--Other People's Money--former Supreme Court 
Justice Louis Brandeis advocated for similar reforms that safeguard 
the assets of financial markets customers.\14\
---------------------------------------------------------------------------

    \14\ Kristin N. Johnson, Commissioner, CFTC, Statement on 
Closing a Gap, Preserving Market Integrity and Protecting Clearing 
Member Funds Held by Derivatives Clearing Organizations (Dec. 18, 
2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement121823b.

    Under the CEA, the Commission is directed to ``protect all 
market participants from . . . misuses of customer assets.'' \15\ 
For these reasons articulated above, I concur with the Proposed 
Rule.
---------------------------------------------------------------------------

    \15\ 7 U.S.C. 5(b).
---------------------------------------------------------------------------

    The final rule addressing these issues, however, must be 
supported by data and analyses indicating the potential risks 
arising from the Proposed Rule and how such risks will be managed. I 
look forward to comments on this Proposed Rule, particularly 
comments that demonstrate the sufficiency or adequacy of the risk-
mitigation conditions in the Proposed Rule.
    I would like to thank the staff of the Division of Clearing and 
Risk for their thoughtful work on this rule and for their 
willingness to incorporate feedback from my office into the proposed 
amendments published today.

Appendix 3--Statement of Support of Commissioner Caroline D. Pham

    I support the Notice of Proposed Rulemaking on the Regulations 
to Address Margin Adequacy and to Account for the Treatment of 
Separate Accounts by Futures Commission Merchants (FCMs) (Treatment 
of Separate Accounts Proposal or NPRM), as well as the Commission's 
withdrawal of the first proposal on this issue (2023 Proposal).\1\ 
Today's Treatment of Separate Accounts Proposal gets the Commission 
closer to the pragmatic approach it was striving for in the 2023 
Proposal. To help ensure the Commission truly gets there in the 
final rule, I highlight specific areas for public comment below.
---------------------------------------------------------------------------

    \1\ The Commission's first proposal on the matter was in April 
2023. See Derivatives Clearing Organization Risk Management 
Regulations to Account for the Treatment of Separate Accounts by 
Futures Commission Merchants, 88 FR 22934 (Apr. 14, 2023) (2023 
Proposal), https://www.federalregister.gov/documents/2023/04/14/2023-06248/derivatives-clearing-organization-risk-management-regulations-to-account-for-the-treatment-of.
---------------------------------------------------------------------------

    I would like to thank Daniel O'Connell and Bob Wasserman in the 
Division of Clearing and Risk, and Jennifer Bauer and Joshua Beale 
in the Market Participants Division, for their work on the NPRM. I 
appreciate the staff's generosity with their time for briefings and 
answering questions, as well as working with me to make revisions to 
address my concerns.
    As the Treatment of Separate Accounts Proposal explains, two of 
the fundamental purposes of the Commodity Exchange Act (CEA) are the 
avoidance of systemic risk and the protection of market participants 
from misuses of customer assets.\2\ Regulation 39.13(g)(8)(iii) 
requires that a CFTC-registered derivatives clearing organization 
(DCO) requires its clearing members to ensure that their customers 
do not withdraw funds from clearing member accounts, with one 
exception.
---------------------------------------------------------------------------

    \2\ CEA section 4d(a)(2) Regulation 1.20(a) require an FCM to 
separately account for and segregate from its own funds all money, 
securities, and property which it has received to margin, guarantee, 
or secure the trades or contracts of its commodity customers. 7 
U.S.C. 6d(a)(2); 17 CFR 1.20(a). CEA section 4d(a)(2) and Regulation 
1.22(a) prohibit an FCM from using the money, securities, or 
property of one customer to margin or settle the trades or contracts 
of another customer. 7 U.S.C. 6d(a)(2); 17 CFR 1.22(a).
---------------------------------------------------------------------------

    Clearing member customers can withdraw funds if the net 
liquidating value plus the margin deposits remaining in the account 
meet the customer's initial margin requirements with respect to all 
products and swap portfolios cleared by the DCO that are held in the 
customer's account. This is known as the ``Margin Adequacy 
Requirement'' because it helps ensure a clearing member has, from a 
customer, funds sufficient to cover the customer's cleared initial 
margin requirements. And, in light of the use of omnibus margin 
accounts, the Margin Adequacy Requirement avoids the clearing member 
covering one customer's margin shortfall with another customer's 
funds. Overall, this is one of the many CFTC rules that protects 
customer funds.
    The 2023 Proposal, among other things, proposed allowing DCOs to 
permit clearing FCMs to treat the separate accounts of a single 
beneficial owner, or customer, as accounts of separate legal 
entities to satisfy the requirements of Regulation 
39.13(g)(8)(iii),\3\ subject to multiple conditions. The 2023 
Proposal was intended to accommodate certain FCM customer agreements 
that provide that certain accounts carried by the FCM that have the 
same beneficial owner are treated as accounts for

[[Page 15363]]

different legal entities for commercial purposes.
---------------------------------------------------------------------------

    \3\ As explained in the NPRM and the 2023 Proposal, the 
Commission is proposing to codify the relief in CFTC Letter No. 19-
17, July 10, 2019, https://www.cftc.gov/csl/19-17/download as 
extended by CFTC Letter No. 20-28, Sept. 15, 2020, https://www.cftc.gov/csl/20-28/download; CFTC Letter No. 21-29, Dec. 21, 
2021, https://www.cftc.gov/csl/21-29/download; and CFTC Letter No. 
22-11, Sept. 15, 2022, https://www.cftc.gov/csl/22-11/download; CFTC 
Letter No. 23-13, Sept. 11, 2023, https://www.cftc.gov/csl/23-13/download.
---------------------------------------------------------------------------

    However, in response to comments, the Commission is now 
withdrawing the 2023 Proposal and issuing the Treatment of Separate 
Accounts Proposal. I commend this decision because I believe this 
NPRM gets the Commission closer to what it set out to do in the 2023 
Proposal: accommodate certain FCM customer agreements that provide 
that certain accounts carried by the FCM that have the same 
beneficial owner are treated as accounts for different legal 
entities for commercial purposes.
    To aid in this effort, I have highlighted specific areas for 
public comment below.

Specific Areas for Public Comment

Ordinary Course of Business

    I encourage commenters to review all of the definitions, in 
particular those in proposed new Regulation 1.44. For instance, I am 
particularly interested in whether the Commission has improved the 
accuracy of the definition of ``ordinary course of business,'' along 
with what constitutes events inconsistent with the ``ordinary course 
of business'' in Regulation 1.44(e). As we learned with the 2023 
Proposal, getting this right is pivotal to having the proposed 
framework function as intended.

One Business Day Margin Call

    As a second definitions example, I am interested in whether the 
Commission has improved the definition of ``one business day margin 
call'' along with its requirements in Regulation 1.44(f). Commenters 
provided extensive comments on this provision, and while the NPRM 
has improved on it, we need to be sure the proposed definition does 
not impede FCM risk management practices and is consistent with the 
law or standard practices in other jurisdictions and operationally 
feasible.
    The Treatment of Separate Accounts Proposal provides that the 
relevant deadline for payment of margin in fiat currencies other 
than USD may be extended by up to one additional business day and 
still be considered in compliance with the requirements of 
Regulation 1.44(f) if payment is delayed due to a banking holiday in 
the jurisdiction of issue of the currency.
    Regulation 1.44(f)(4) further provides that, for payments in 
EUR, either the separate account customer or the investment manager 
managing the separate account may designate only one country within 
the eurozone that they have the most significant contacts with for 
purposes of meeting margin calls in that separate account, whose 
banking holidays shall be referred to for such purpose.
    Since the eurozone is comprised of 20 countries, each with their 
own national laws and banking holidays, I am concerned that the CFTC 
is imposing an overly prescriptive and unworkable requirement with 
little practical benefit. I am interested in whether commenters 
believe it will be impracticable to comply with Regulation 
1.44(f)(4). I encourage commenters to look at Question 7 in the 
NPRM--which staff added at my request--for specific examples and 
additional prompts.

Other Circumstances Involving Banking Holidays

    Similarly, the Treatment of Separate Accounts Proposal also 
provides an exception from Regulation 1.44(f)(1), set forth in 
Regulation 1.44(f)(7), for the special case of certain holidays when 
some DCMs may be open for trading, but banks are closed. I am 
interested in whether the Commission's expansion of the exception 
from the 2023 Proposal fully resolves the issues raised by 
commenters, or still poses operational or compliance issues for 
FCMs.

Conclusion

    Overall, I am pleased to support the Treatment of Separate 
Accounts Proposal and hope we can get it right in the final rule. I 
look forward to the comments on the NPRM.

[FR Doc. 2024-04107 Filed 2-29-24; 8:45 am]
BILLING CODE 6351-01-P


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