```

[Federal Register Volume 76, Number 111 (Thursday, June 9, 2011)]
[Proposed Rules]
[Pages 33818-33878]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-10737]

[[Page 33817]]

Vol. 76

Thursday,

No. 111

June 9, 2011

Part II

Commodity Futures Trading Commission

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17 CFR Parts 22 and 190

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

Federal Register / Vol. 76 , No. 111 / Thursday, June 9, 2011 / 
Proposed Rules

[[Page 33818]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 22 and 190

RIN 3038-AC99

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

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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

DATES: Comments must be received on or before August 8, 2011.

ADDRESSES: You may submit comments, identified by RIN number 3038-AC99, 
by any of the following methods:
     The agency's Web site, at http://comments.cftc.gov. Follow 
the instructions for submitting comments through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.

Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.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.\1\
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    \1\ 17 CFR 145.9.
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    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 http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate 
Director, Division of Clearing and Intermediary Oversight (DCIO), at 
202-418-5092 or rwasserman@cftc.gov; Jon DeBord, Attorney-Advisor, 
DCIO, at 202-418-5478 or jdebord@cftc.gov; Martin White, Assistant 
General Counsel, at 202-418-5129 or mwhite@cftc.gov; David Reiffen, 
Senior Economist, Office of the Chief Economist, at 202-418-5602 or 
dreiffen@cftc.gov; or Todd Prono, Financial Economist, Office of the 
Chief Economist, at 202-418-5460 or tprono@cftc.gov, in each case, also 
at the Commodity Futures Trading Commission, Three Lafayette Centre, 
1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Background
    A. Segregation Requirements
    B. Implementation Alternatives
    C. Solicitation of Public Input Regarding the Alternatives
    1. Roundtable
    2. ANPR
    a. Questions
    b. Comments: Background
    c. Comments: Discussion
    1. Statutory Issues
    2. What is the appropriate starting point?
    3. Costs
    a. Operational Costs
    b. The Risk Costs
    i. The Physical Segregation Model and the Complete Legal 
Segregation Model
    ii. The Legal Segregation With Recourse Model and the Futures 
Model
    c. Assumptions Underlying Risk Costs
    4. Benefits
    a. Fellow-Customer Risk and Investment Risk
    b. Portability
    c. Systemic Risk
    d. Induced Changes in Behavior
    e. Portfolio Margining
    5. The Optional Approach
III. The Proposed Rules
    A. Statutory Issues and the Appropriate Starting Point
    B. Costs
    1. Rationale
    2. Questions
    C. Benefits
    1. Rationale
    a. Fellow-Customer Risk and Investment Risk
    b. Portability
    c. Systemic Risk
    d. Induced Changes in Behavior
    e. Portfolio Margining
    2. Questions
    D. Proposing the Complete Legal Segregation Model: Weighing of 
Costs and Benefits
    E. The Optional Approach
    1. Rationale
    2. Questions
    F. Structure of These Proposed Regulations
IV. Section by Section Analysis: Segregation of Cleared Swaps for 
Customers
    A. Proposed Regulation 22.1: Definitions
    1. ``Segregate'' and ``Commingle''
    2. ``Cleared Swap''
    3. ``Cleared Swaps Customer'' and ``Customer''
    4. ``Cleared Swaps Customer Collateral''
    5. ``Cleared Swaps Customer Account'' and ``Cleared Swaps 
Proprietary Account''
    6. ``Collecting Futures Commission Merchant'' and ``Depositing 
Futures Commission Merchant''
    B. Proposed Regulation 22.2--Futures Commission Merchants: 
Treatment of Cleared Swaps Customer Collateral
    1. In General
    2. Location of Collateral
    a. The First Method
    b. The Second Method
    3. Commingling
    4. Limitations on Use
    5. Exceptions
    a. Permitted Investments
    b. Permitted Withdrawals
    c. Deposits of Own Money, Securities, or Other Property
    d. Residual Financial Interest
    e. Requirements as to Amount
    i. Background
    ii. Proposed Requirement
    iii. Question
    f. Segregated Account; Daily Computation and Record
    C. Proposed Regulation 22.3--Derivatives Clearing Organizations: 
Treatment of Cleared Swaps Customer Collateral
    1. In General
    2. Location of Collateral
    a. The First Method
    b. The Second Method
    c. Questions
    3. Commingling
    4. Exceptions
    a. FCM Deposits and Withdrawals
    b. Permitted Investments
    D. Proposed Regulation 22.4--Futures Commission Merchants and 
Derivatives Clearing Organizations: Permitted Depositories
    1. The Permitted Depositories
    2. Question
    E. Proposed Regulation 22.5--Futures Commission Merchants and 
Derivatives

[[Page 33819]]

Clearing Organizations: Written Acknowledgment
    1. Substantive Requirements
    2. Question
    F. Proposed Regulation 22.6--Futures Commission Merchants and 
Derivatives Clearing Organizations: Naming of Cleared Swaps Customer 
Accounts
    G. Proposed Regulation 22.7--Permitted Depositories: Treatment 
of Cleared Swaps Customer Collateral
    H. Proposed Regulation 22.8--Situs of Cleared Swaps Accounts
    1. Proposed Requirements
    2. Questions
    I. Proposed Regulation 22.9--Denomination of Cleared Swaps 
Customer Collateral and Location of Depositories
    J. Proposed Regulation 22.10--Incorporation by Reference
    K. Proposed Regulation 22.11--Information To Be Provided 
Regarding Customers and Their Cleared Swaps
    1. Proposed Requirements
    2. Questions
    L. Proposed Regulation 22.12--Information To Be Maintained 
Regarding Cleared Swaps Customer Collateral
    M. Proposed Regulation 22.13--Additions to Cleared Swaps 
Customer Collateral
    N. Proposed Regulation 22.14--Futures Commission Merchant 
Failure To Meet a Customer Margin Call in Full
    O. Proposed Regulation 22.15--Treatment of Cleared Swaps 
Customer Collateral on an Individual Basis
    P. Proposed Regulation 22.16--Disclosures to Customers
V. Section by Section Analysis: Amendments to Regulation Part 190
    A. Background
    B. Definition
    1. Proposed Amendment to Regulation 190.01(a)--Account Class
    2. Proposed New Regulation 190.01(e)--Calendar Day
    3. Proposed Amendment to Regulation 190.01(f)--Clearing 
Organization
    4. Proposed Amendment to Regulation 190.01(cc)--Non-Public 
Customer
    5. Proposed Amendment to Regulation 190.01(hh)--Principal 
Contract
    6. Proposed Amendment to Regulation 190.01(ll)--Specifically 
Identifiable Property
    7. Proposed Amendment to Regulation 190.01(pp)--Cleared Swap
    C. Proposed Amendments to Regulation 190.02--Operation of the 
Debtor's Estate Subsequent to the Filing Date and Prior to the 
Primary Liquidation Date
    D. Proposed Amendments to Regulation 190.03--Operation of the 
Debtor's Estate Subsequent to the Primary Liquidation Date
    E. Proposed Amendments to Regulation 190.04--Operation of the 
Debtor's Estate--General
    F. Proposed Amendments to Regulation 190.05--Making and Taking 
Delivery on Commodity Contracts
    G. Proposed Amendments to Regulation 190.06--Transfers
    H. Proposed Amendments to Regulation 190.07--Calculation of 
Allowed Net Equity
    I. Proposed Amendments to Regulation 190.09--Member Property
    J. Proposed Amendments to Regulation 190.10--General
    K. Proposed Amendments to Appendix A to Part 190--Bankruptcy 
Forms, Bankruptcy
    L. Proposed Amendments to Appendix B to Part 190--Special 
Bankruptcy Distributions
VI. Effective Date
VII. Administrative Compliance
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    1. Introduction
    2. Information Provided by Reporting Entities
    3. Information Collection Comments
    C. Cost-Benefit Analysis
    1. Introduction
    a. Requirement Under Section 15(a) of the CEA
    b. Structure of the Analysis
    2. Costs of the Complete Legal Segregation Model, the Legal 
Segregation With Recourse Model, and the Futures Model
    a. Operational Costs
    b. Risk Costs
    c. Induced Changes in Behavior
    d. Portability
    e. Potential Preferences of Cleared Swaps Customers
    f. The Optional Approach
    3. Summary of Benefits of Legal Segregation Models
    a. Fellow-Customer Risk
    b. Portability and Systemic Risk
    c. Induced Changes in Behavior
    4. Relevance to Section 15(a)(2) Considerations
    a. Protection of Market Participants and the Public
    b. Efficiency, Competitiveness, and Financial Integrity of 
Markets
    c. Price Discovery
    d. Sound Risk Management
    e. Other Public Interest Considerations
    5. Public Comment
VIII. Text of Proposed Rules

I. Introduction

    The Dodd-Frank Act \2\ mandates that each FCM and DCO ``segregate'' 
customer collateral supporting cleared swaps. In other words, the FCM 
and the DCO (i) must hold such customer collateral in an account (or 
location) that is separate from the property belonging to the FCM or 
DCO, and (ii) must not use the collateral of one customer to (A) cover 
the obligations of another customer or (B) the obligations of the FCM 
or DCO.\3\
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    \2\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 
(2010). The text of the Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    \3\ See section 724 of the Dodd-Frank Act. There is some 
controversy with respect to section 4d(f)(6) of the CEA as applied 
to a DCO. See section II(C) herein.
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    In order to implement the segregation requirements in the Dodd-
Frank Act, the Commission has determined to propose that each FCM and 
DCO be required to enter (or ``segregate''), in its books and records, 
the cleared swaps of each individual customer and relevant collateral. 
The Commission also proposes to permit each FCM and DCO to 
operationally hold (or ``commingle'') all relevant collateral in one 
account. The Commission further proposes that, in the event that an FCM 
defaults simultaneously with one or more cleared swaps customers, the 
DCO may access the collateral of the FCM's defaulting cleared swaps 
customers to cure the default, but not the collateral of the FCM's non-
defaulting cleared swaps customers. However, the Commission is 
continuing to assess the benefits and costs of the proposal, and is 
considering whether to permit the DCO to access the collateral of non-
defaulting cleared swaps customers, after the DCO attempts to cure the 
default by applying its own capital and the guaranty fund contributions 
of its non-defaulting FCM members. Moreover, the Commission is also 
continuing to assess the feasibility of permitting each DCO to choose 
the level of protection that it would accord to the cleared swaps 
customer collateral of its FCM members.
    In deciding to propose the above requirements, the Commission 
looked to current practices for the protection of uncleared swaps 
collateral, as well as current practices for the protection of 
collateral supporting futures customer contracts. The Commission, 
through its staff, sought comment from a wide variety of stakeholders 
(i.e., swaps customers, FCMs, and DCOs), through external meetings \4\ 
and a public roundtable.\5\ Further, the Commission issued an advanced 
notice of proposed rulemaking (the ``ANPR'').\6\ After carefully 
considering all comments, the Commission has reached the conclusion 
that this proposal (i) protects cleared swaps customer collateral in 
the manner mandated by the Dodd-Frank Act, and (ii) provides the best 
balance between (A) the benefits of mitigating Fellow-Customer Risk, 
Investment Risk (as such terms are defined below) and systemic risk, 
inducing changes in behavior, and enhancing portability as well as 
potentially facilitating portfolio margining, and (B) the operational 
and

[[Page 33820]]

risk costs \7\ associated with implementation. This notice of proposed 
rulemaking (the ``NPRM'') sets forth the rationale for such conclusion. 
The Commission requests comment on each element of its rationale, its 
conclusion, and any alternatives to the proposal that it is considering 
(such as, whether to permit the DCO to access the collateral of non-
defaulting cleared swaps customers and whether to permit each DCO to 
choose the level of protection for such collateral).
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    \4\ A list of external meetings is available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_6_SegBankruptcy/index.htm.
    \5\ A transcript of the Staff Roundtable on Individual Customer 
Collateral Protection (the ``Roundtable'') is available at: http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission6_102210-transcrip.pdf.
    \6\ See Advance Notice of Proposed Rulemaking for Protection of 
Cleared Swaps Customers Before and After Commodity Broker 
Bankruptcies, 75 FR 75162, Dec. 2, 2010.
    \7\ See section II(C)(3) below.
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II. Background

A. Segregation Requirements

    On July 21, 2010, President Obama signed the Dodd-Frank Act. Title 
VII of the Dodd-Frank Act \8\ amended the CEA \9\ to establish a 
comprehensive new regulatory framework for swaps and certain security-
based swaps. The legislation was enacted to reduce risk, increase 
transparency, and promote market integrity within the financial system 
by, among other things: (i) Providing for the registration and 
comprehensive regulation of swap dealers and major swap participants; 
\10\ (ii) imposing mandatory clearing and trade execution requirements 
on clearable swap contracts; (iii) creating robust recordkeeping and 
real-time reporting regimes; and (iv) enhancing the rulemaking and 
enforcement authorities of the Commission with respect to, among 
others, all registered entities and intermediaries subject to the 
oversight of the Commission.
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    \8\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \9\ 7 U.S.C. 1 et seq.
    \10\ In this release, the terms ``swap dealer'' and ``major swap 
participant'' shall have the meanings set forth in section 721(a) of 
the Dodd-Frank Act, which added sections 1a(49) and (33) of the CEA. 
However, section 721(c) of the Dodd-Frank Act directs the Commission 
to promulgate rules to further define, among other terms, ``swap 
dealer'' and ``major swap participant.'' The Commission is in the 
process of this rulemaking. See 75 FR 80173, Dec. 21, 2010.
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    Section 724 of the Dodd-Frank Act prescribes the manner in which 
cleared swaps (and related collateral) \11\ must be treated prior to 
and after bankruptcy. Section 724(a) of the Dodd-Frank Act amends 
section 4d of the CEA to add a new paragraph (f). New section 4d(f) 
imposes the following requirements on an FCM, as well as any depository 
thereof (including, without limitation, a DCO):
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    \11\ Proposed regulation 22.1 defines ``Cleared Swap'' and 
``Cleared Swaps Customer Collateral.''
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    1. The FCM must treat and deal with all collateral (including 
accruals thereon) deposited by a customer \12\ to margin its cleared 
swaps as belonging to such customer;
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    \12\ Proposed regulation 22.1 defines ``Cleared Swaps 
Customer.''
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    2. The FCM may not commingle such collateral with its own property 
and may not, with certain exceptions, use such collateral to margin the 
cleared swaps of any person other than the customer depositing such 
collateral;
    3. A DCO may not hold or dispose of the collateral that an FCM 
receives from a customer to margin cleared swaps as belonging to the 
FCM or any person other than the customer; and
    4. The FCM and the DCO may only invest such collateral in 
enumerated investments.
    Section 724(b) of the Dodd-Frank Act governs bankruptcy treatment 
of cleared swaps by clarifying that cleared swaps are ``commodity 
contracts'' within the meaning of section 761(4)(F) of the Bankruptcy 
Code.\13\ Therefore, in the event of an FCM or DCO insolvency, cleared 
swaps customers may invoke the protections of Subchapter IV of Chapter 
7 of the Bankruptcy Code (``Subchapter IV''). Such protections include: 
(i) Protected transfers of cleared swaps and related collateral; \14\ 
and (ii) if cleared swaps are subject to liquidation, preferential 
distribution of remaining collateral.\15\
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    \13\ 11 U.S.C. 761(4)(F).
    \14\ See, e.g., 11 U.S.C. 764.
    \15\ See, e.g., 11 U.S.C. 766(h) and (i).
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B. Implementation Alternatives

    The Commission considered several alternatives for implementing new 
section 4d(f) of the CEA. The first alternative that the Commission 
explored was legal segregation with operational commingling (the 
``Legal Segregation Model''). Under the Legal Segregation Model, each 
FCM and DCO would enter (or ``segregate''), in its books and records, 
the cleared swaps of each individual customer and relevant collateral. 
Each FCM and DCO would ensure that such entries are separate from 
entries indicating (i) FCM or DCO obligations or (ii) the obligations 
of non-cleared swaps customers. Operationally, however, each FCM and 
DCO would be permitted to hold (or ``commingle'') the relevant 
collateral in one account. Each FCM and DCO would ensure that such 
account is separate from any account holding FCM or DCO property or 
holding property belonging to non-cleared swaps customers.
    Under the Legal Segregation Model, the FCM, prior to default, would 
ensure that the DCO does not use the collateral of one cleared swaps 
customer to support the obligations of another customer by making 
certain that the value of the cleared swaps collateral that the DCO 
holds equals or exceeds the value of all cleared swaps collateral that 
it has received to secure the contracts of the FCM's customers. The 
Commission considered two possible scenarios after a simultaneous 
default of the FCM and of one or more cleared swaps customers. First, 
the Commission contemplated permitting the DCO to access the collateral 
of the defaulting cleared swaps customers, but not the collateral of 
the non-defaulting cleared swaps customers (the ``Complete Legal 
Segregation Model'').\16\ Second, the Commission contemplated 
permitting the DCO to access the collateral of the non-defaulting 
cleared swaps customers, after the DCO applies its own capital to cure 
the default, as well as the guaranty fund contributions of its non-
defaulting FCM members (the ``Legal Segregation with Recourse 
Model'').\17\
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    \16\ The Complete Legal Segregation Model was referred to as the 
Legal Segregation with Commingling model in the ANPR.
    \17\ The Legal Segregation with Recourse Model was known as the 
Moving Customers to the Back of the Waterfall model in the ANPR.
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    As its second alternative, the Commission explored full physical 
segregation (the ``Physical Segregation Model'').\18\ Prior to FCM 
default, the Physical Segregation Model differs from the Legal 
Segregation Model only operationally. Like the Legal Segregation Model, 
each FCM and DCO would enter (or ``segregate''), in its books and 
records, the cleared swaps of each individual customer and relevant 
collateral. However, unlike the Legal Segregation Model, each FCM and 
DCO would maintain separate individual accounts for the relevant 
collateral. Hence, prior to default, the FCM would ensure that the DCO 
does not use the collateral of one cleared swaps customer to support 
the obligations of another customer by making certain that the DCO does 
not mistakenly transfer collateral in (i) the account belonging to the 
former to (ii) the account belonging to the latter. After a 
simultaneous default of the FCM and of one or more cleared swaps 
customers, the Physical Segregation Model leads to the same result as 
the Complete Legal Segregation Model. Specifically, the DCO would be 
permitted to access the collateral of the defaulting cleared swaps 
customers, but not the collateral of the non-defaulting customers.
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    \18\ In the ANPR, the Commission referred to this model as Full 
Physical Segregation.
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    As its third alternative, the Commission explored replicating the

[[Page 33821]]

segregation requirement currently applicable to futures (the ``Futures 
Model'').\19\ Prior to default, the Futures Model shares certain 
similarities with the Legal Segregation Model. Specifically, each FCM 
would enter (or ``segregate''), in its books and records, the cleared 
swaps of each individual customer and relevant collateral. Each DCO, 
however, would recognize, in its books and records, the cleared swaps 
that an FCM intermediates on a collective (or ``omnibus'') basis. Each 
FCM and DCO would be permitted to hold (or ``commingle'') all cleared 
swaps collateral in one account. After default, the Futures Model 
shares certain similarities with the Legal Segregation with Recourse 
Model. Specifically, the DCO would be permitted to access the 
collateral of the non-defaulting cleared swaps customers. However, 
under the Futures Model, the DCO would be permitted to access such 
collateral before applying its own capital or the guaranty fund 
contributions of non-defaulting FCM members.
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    \19\ See sections 4d(a) and (b) of the CEA, as well as 
regulations 1.20 to 1.30. The Futures Model was referred to as the 
Baseline model in the ANPR.
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    Finally, the Commission explored permitting a DCO to choose between 
(i) the Legal Segregation Model (whether Complete or with Recourse), 
(ii) the Physical Segregation Model, and (iii) the Futures Model, 
rather than mandating any particular alternative.

C. Solicitation of Public Input Regarding the Alternatives

    Throughout the fall and winter of 2010, the Commission sought 
public comment on the alternatives mentioned above, and on the 
advisability of permitting the DCO to choose between alternatives. 
First, the Commission, through its staff, held extensive external 
meetings with three segments of stakeholders (i.e., DCOs, FCMs, and 
swaps customers).\20\ Second, on October 22, 2010, the Commission, 
through its staff, held the Roundtable. Third, on November 19, 2010, 
the Commission issued the ANPR.
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    \20\ A list of external meetings is available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_6_SegBankruptcy/index.htm.
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1. Roundtable
    As the ANPR describes, the Roundtable revealed that stakeholders 
had countervailing concerns regarding the alternatives that the 
Commission set forth. On the one hand, a number of swaps customers 
argued that the Commission should focus on effectively eliminating 
fellow-customer risk \21\ and investment risk.\22\ Such swaps customers 
emphasized that (i) they currently transact in uncleared swaps, (ii) 
they are able to negotiate for individual segregation at independent 
third parties for collateral supporting such uncleared swaps, and 
therefore (iii) they are currently subject to neither Fellow-Customer 
Risk nor Investment Risk. Such customers found it inappropriate that, 
under certain alternatives that the Commission set forth, they should 
be subject to Fellow-Customer Risk and Investment Risk when they 
transact in cleared swaps. As the ANPR noted, pension funds were 
specifically concerned about whether Fellow-Customer Risk and 
Investment Risk would be incompatible with their obligations under the 
Employee Retirement Income Security Act.\23\
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    \21\ ``Fellow-Customer Risk'' is the risk that a DCO would 
access the collateral of non-defaulting cleared swaps customers to 
cure an FCM default. Basically, among other things, an FCM functions 
as a guarantor of customer transactions with a DCO. Section 4d(f) of 
the CEA prohibits an FCM from using the collateral deposited by one 
cleared swaps customer to support the transactions of another 
customer. Therefore, if one cleared swaps customer owes money to the 
FCM (i.e., the customer has a debit balance), the FCM, acting as 
guarantor, must deposit its own capital with the DCO to settle 
obligations attributable to such customer. If such customer defaults 
to the FCM, and the obligations attributable to such customer are so 
significant that the FCM does not have sufficient capital to meet 
such obligations, then the FCM would default to the DCO.
    In general, DCOs maintain packages of financial resources to 
cure the default. The first element of such packages is the property 
of the defaulting FCM (i.e., collateral deposited to support FCM 
proprietary transactions and contributions to the DCO guaranty 
fund). As mentioned above, other elements of such packages may 
include: (i) The collateral that the FCM deposited to support the 
transactions of non-defaulting cleared swaps customers; (ii) a 
portion of the capital of the DCO; and (iii) contributions to the 
guaranty fund from other DCO members. Typically, a DCO would exhaust 
one element before moving onto the next element. Therefore, the risk 
that the DCO would use any one element depends on the position of 
that element in the package.
    \22\ ``Investment Risk'' is the risk that each cleared swaps 
customer would share pro rata in any decline in the value of FCM or 
DCO investments of cleared swaps customer collateral. Section 4d(f) 
of the CEA permits an FCM to invest cleared swaps customer 
collateral in certain enumerated instruments. The Commission is 
proposing to expand such instruments to include those referenced in 
regulation 1.25 (as it may be amended from time to time). Even 
though (i) such investments are ``consistent with the objectives of 
preserving principal and maintaining liquidity,'' and (ii) both the 
FCM, as well as the DCO, value such investments conservatively (by, 
e.g., applying haircuts), the value of such investments may decline 
to less than the value of the collateral originally deposited. See 
regulation 1.25(b) (as proposed to be amended in Investment of 
Customer Funds and Funds Held in an Account for Foreign Futures and 
Foreign Options Transactions, 75 FR 67642, Nov. 3, 2011). In such a 
situation, all customers would share in the decline pro rata, even 
if the invested collateral belonged to certain customers and not 
others.
    \23\ 75 FR at 75163.
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    On the other hand, a number of FCMs and DCOs argued that the 
benefits of effectively eliminating Fellow-Customer Risk and Investment 
Risk are outweighed by the costs. With respect to benefits, these FCMs 
and DCOs noted that the Futures Model has served the futures industry 
well for many decades. With respect to costs, these FCMs and DCOs 
described two potential sources. First, FCMs and DCOs stated that, 
depending on the manner in which the Commission proposes to eliminate 
or mitigate Fellow-Customer Risk and Investment Risk, they may 
experience substantial increases to operational costs. Second, and more 
significantly, FCMs and DCOs stated that they may incur additional risk 
costs due to proposed financial resources requirements.\24\ 
Specifically, the Commission has proposed to require each DCO to 
maintain a package of financial resources sufficient, at a minimum, to:
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    \24\ For a more detailed discussion regarding risk costs, see 
section II(C)(3)(b) infra.

[e]nable the derivatives clearing organization to meet its financial 
obligations to its clearing members notwithstanding a default by the 
clearing member creating the largest financial exposure for the 
derivatives clearing organization in extreme but plausible market 
---------------------------------------------------------------------------
conditions.\25\

    \25\ Financial Resources Requirements for Derivatives Clearing 
Organizations, 75 FR 63113, 63118, Oct. 14, 2010 (proposed 
regulation 39.11(a)(1)).
    The Commission has proposed to require systemically-important 
DCOs to maintain a financial resources package sufficient to cover a 
default by the two clearing members creating the largest combined 
financial exposure in extreme but plausible market conditions. Id. 
at 63119 (proposed regulation 39.29(a)).
---------------------------------------------------------------------------

    Some DCOs may have anticipated including collateral from non-
defaulting cleared swaps customers as an element in their financial 
resources packages. If DCOs no longer have access to such collateral, 
then those DCOs would need to obtain additional financial resources to 
meet proposed Commission requirements. As the ANPR noted, DCOs stated 
that they could obtain such financial resources in two ways (or a 
combination thereof). They can increase the amount of collateral that 
each cleared swaps customer must provide to margin its cleared swaps. 
Alternatively, they can increase the amount of capital that each FCM 
must contribute to the relevant DCO guaranty funds. Both FCMs and DCOs 
averred that the costs associated with obtaining such additional 
financial resources may be

[[Page 33822]]

substantial, and would ultimately be borne by cleared swaps 
customers.\26\
---------------------------------------------------------------------------

    \26\ 75 FR at 75163. For example, one DCO estimated that it 
would have to increase the amount of collateral that each cleared 
swaps customer must provide by 60 percent, if it could no longer 
access the collateral of non-defaulting cleared swaps customers to 
cure certain defaults.
---------------------------------------------------------------------------

2. ANPR
a. Questions
    Given the countervailing concerns that stakeholders expressed at 
the Roundtable, the Commission decided to seek further comment through 
the ANPR on the potential benefits and costs of (i) the Legal 
Segregation Model (whether Complete or with Recourse), (ii) the 
Physical Segregation Model, and (iii) the Futures Model. As the ANPR 
explicitly stated, ``[t]he Commission [was] seeking to achieve two 
basic goals: Protection of customers and their collateral, and 
minimization of costs imposed on customers and on the industry as a 
whole.'' \27\
---------------------------------------------------------------------------

    \27\ Id.
---------------------------------------------------------------------------

    Although the ANPR sought comment on the abovementioned models from 
the general public, it addressed specific questions to the three 
segments of stakeholders (i.e., DCOs, FCMs, and swaps customers). The 
Commission asked all three segments to identify the benefits of each 
model relative to the others. The Commission then asked all three 
segments to estimate the costs of implementing each model from their 
perspective. Specifically, for FCMs, the Commission asked for estimates 
of (i) FCM compliance costs for each model (other than the Futures 
Model) and (ii) FCM costs resulting from DCOs seeking additional 
financial resources to meet proposed Commission requirements. For DCOs, 
the Commission asked for estimates of: (i) DCO, as well as FCM, 
compliance costs for each model (other than the Futures Model); and 
(ii) DCO, as well as FCM, costs resulting from DCOs seeking additional 
financial resources to meet proposed Commission requirements. In 
addition to the above, the Commission requested comment on the impact 
of each model on behavior, as well as whether Congress evinced intent 
for the Commission to adopt any one or more of these models.
b. Comments: Background
    The Commission received thirty-one comments from twenty-nine 
commenters.\28\ Of the commenters, fifteen represented current or 
potential cleared swaps customers (i.e., buy-side firms or groups),\29\ 
eight represented FCMs or investment firms (or organizations 
thereof),\30\ four were DCOs,\31\ one was the National Futures 
Association (``NFA''), and one was from a legal practitioner.\32\ The 
Commission invites further comment on any of the issues raised and the 
factual and analytical points made in the comments received in response 
to the ANPR.
---------------------------------------------------------------------------

    \28\ Federated Investors submitted two comments, both of which 
focused on the investment of cleared swaps customer collateral. ISDA 
submitted two comments, an original comment (the ``ISDA Original'') 
and, later, a supplemental comment (the ``ISDA Supplemental'').
    \29\ Buy-side firms or groups (collectively, the ``buy-side'') 
included the following: (i) Alternative Investment Management 
Association (``AIMA''); (ii) BlackRock, Inc. (``BlackRock''); (iii) 
California Public Employees Retirement System (``CALPERS''); (iv) 
Coalition for Derivatives End Users (by Gibson, Dunn & Crutcher); 
(v) Coalition for Energy End Users; (vi) Committee on Investment of 
Employee Benefit Assets (``CIEBA''); (vii) Federal Farm Credit Banks 
Funding Corp.; (viii) Federal Home Loan Banks (``FHLB''); (ix) 
Fidelity Investments (``Fidelity''); (x) Freddie Mac; (xi) 
Investment Company Institute; (xii) Managed Funds Association; 
(xiii) Securities Industry and Financial Markets Association Asset 
Management Group (``SIFMA-AMG''); (xiv) Tudor Investment 
Corporation; and (xv) Vanguard.
    \30\ FCMs or investment firms (or organizations thereof) 
(collectively, the ``FCMs'') included the following: (i) Citigroup 
Global Markets, Inc. (``Citigroup Capital Markets''); (ii) Federated 
Investors, Inc. (Freeman and Hawke); (iii) Futures Industry 
Association; (iv) International Swaps and Derivatives Association 
(``ISDA'') (Original and Supplemental); (v) Newedge USA, LLC 
(``Newedge''); (vi) Norges Bank Investment Management; (vii) 
Securities Industry and Financial Markets Association (``SIFMA''); 
and (viii) State Street Corporation.
    \31\ DCOs (collectively, the ``DCOs'') included the following: 
(i) CME Group (``CME''); (ii) IntercontinentalExchange, Inc. 
(``ICE''); (iii) LCH Clearnet Group (``LCH''); and (iv) Minneapolis 
Grain Exchange, Inc.
    \32\ Jerrold Salzman.
---------------------------------------------------------------------------

    The comments were generally divided by the nature of the commenter: 
most (though not all) of the buy-side commenters favored either the 
Legal Segregation Model (whether Complete or with Recourse) or the 
Physical Segregation Model, manifesting a willingness to bear the added 
costs. Most of the FCMs and DCOs favored the Futures Model. LCH favored 
the Complete Legal Segregation Model. Finally, ISDA, in its 
supplemental comment, opined that the most important factor that the 
Commission should consider is the extent to which a model fostered the 
portability \33\ of cleared swaps belonging to non-defaulting 
customers. ISDA noted that the Physical Segregation Model and what is 
now referred to as the Complete Legal Segregation Model were most 
conducive to that goal.
---------------------------------------------------------------------------

    \33\ Portability refers to the ability to reliably transfer the 
swaps (and related collateral) of a non-defaulting customer from an 
insolvent FCM to a solvent FCM, without the necessity of liquidating 
and re-establishing the swaps.
---------------------------------------------------------------------------

c. Comments: Discussion
    In general, comments to the ANPR addressed the following major 
issues: (i) Concerns with statutory interpretation; (ii) the 
appropriate basis for comparison of benefits and costs for each model; 
(iii) estimates of costs, and the assumptions underlying such 
estimates; (iv) the benefits of individual collateral protection (e.g., 
on Fellow-Customer Risk, Investment Risk, systemic risk, induced 
changes in behavior, and portfolio margining); and (v) the 
appropriateness of optional models.
1. Statutory Issues
    Section 4d(f)(6) of the CEA prohibits ``any person, including any 
derivatives clearing organization * * *'' from holding, disposing, or 
using cleared swaps customer collateral ``for deposit in a separate 
account or accounts * * * as belonging to * * * any person other than 
the swaps customer of the futures commission merchant.'' The emphasis 
on ``separate account or accounts'' and the use of ``customer'' in the 
singular contrasts with section 4d(b) of the CEA (applicable to futures 
customer contracts and related collateral). In the ANPR, the Commission 
asked for comment as to whether Congress evinced intent to create a 
segregation regime that protects cleared swaps (and related customer 
collateral) on a more individualized basis than futures (and related 
customer collateral). In general, commenters presented opposing views. 
For example, one commenter viewed use of the singular term ``customer'' 
in section 4d(f)(6) of the CEA as a ``critical difference.'' \34\ 
Similarly, another commenter viewed such use ``as direction to the * * 
* Commission to ensure that customer initial margin [for cleared swaps] 
is not put at risk on account of actions of other customers.'' \35\ In 
contrast, a third commenter expressed doubt as to whether Congress 
would ``adopt such a subtle method of moving away from [omnibus 
customer protection] and directing the use of individually segregated 
accounts for cleared swaps.'' \36\ The commenter further observed that 
it would be anomalous to afford greater protection to cleared

[[Page 33823]]

swaps customers, many of which are large and presumed to be 
sophisticated, than futures customers, some of whom might be individual 
or ``retail'' customers.\37\
---------------------------------------------------------------------------

    \34\ CIEBA at 4 at note 2.
    \35\ FHLB at 3 at note 3.
    Additionally, some commenters maintained that the Futures Model 
depends on an interpretive statement issued by the Office of the 
General Counsel, which they describe as ``dated and questionable'' 
in relation to cleared swaps. See FHLB at 4, Federal Farm Credit 
Banks Funding Corporation at 3. See also Interpretative Statement, 
No. 85-3, Regarding the Use of Segregated Funds by Clearing 
Organizations Upon Default by Member Firms (OGC Aug. 12, 1985).
    \36\ CME at 5.
    \37\ See CME at 5-6.
---------------------------------------------------------------------------

2. What is the appropriate starting point?
    In general, commenters presented opposing views on whether the 
Commission should consider the benefits and costs of each model in 
light of current swaps practice or current futures practice. Most buy-
side commenters stated that benefits and costs of each model should be 
informed by current swaps practice. First, these commenters emphasized 
that they are currently able to negotiate for individual collateral 
protection at independent third parties, and are therefore exposed to 
neither Fellow-Customer Risk nor Investment Risk. Second, these 
commenters stated that they are accustomed to the costs associated with 
individual collateral protection and note that their counterparties 
enjoy profit from this business model. Finally, these commenters 
maintained that the Futures Model forms an inappropriate basis for the 
consideration of benefits and costs because:
    (i) The Commission is contemplating the appropriate segregation 
regime for cleared swaps and related customer collateral; (ii) the 
Futures Model references industry conventions for futures contracts and 
related collateral; and (iii) the market for cleared swaps has 
developed and may continue to develop in a different manner than the 
market for futures contracts.\38\
---------------------------------------------------------------------------

    \38\ For example, the swaps markets have historically been 
bespoke, whereas the futures markets have historically been more 
standardized. Such historical differences may persist while the 
swaps markets transition from the over-the-counter environment to a 
cleared and transparent environment. Specifically, while the swaps 
market ``dwarf[s]'' the futures market, ``the tremendous diversity 
in products and trade parameters'' in the swaps market ``effectively 
results in a lower liquidity,'' thereby resulting in the risks that 
omnibus clearing poses for swaps customers to be significantly 
greater than they are for futures customers. See Fidelity at 6, 
Vanguard at 2-5.
---------------------------------------------------------------------------

    In contrast, a number of commenters, primarily the FCMs and the 
DCOs, suggested that the benefits and costs of each model should be 
informed by current futures practice. In support of this position, 
these commenters note that the futures segregation requirement has 
served the futures industry well for many decades.
3. Costs
    In general, commenters estimated the costs of implementing each 
model in light of the basis for consideration that they viewed most 
appropriate. For example, those commenters that argued that current 
swaps practice should inform the benefits and costs of each model 
emphasized that they have been willing to bear the costs for individual 
collateral protection. In contrast, those commenters that argued that 
current futures practice should inform the benefits and costs of each 
model emphasized that implementing either the Legal Segregation Model 
(whether Complete or with Recourse) or the Physical Segregation Model 
would lead to substantial costs. As mentioned above, they described two 
major sources for such costs: (i) Operational costs; and (ii) costs 
associated with obtaining additional financial resources to meet 
proposed Commission requirements (assuming that the Commission 
prohibits a DCO from accessing the collateral of non-defaulting cleared 
swaps customers to cure an FCM default) (the ``Risk Costs'').\39\ 
Certain other commenters disagreed with the assumptions underlying 
estimates of Risk Costs, but not those underlying estimates of 
operational costs.
---------------------------------------------------------------------------

    \39\ Additionally, induced changes in behavior may create a 
systemic cost. Such costs have been addressed under the rubric of 
moral hazard below.
---------------------------------------------------------------------------

a. Operational Costs \40\
---------------------------------------------------------------------------

    \40\ Some commenters claim that it may be difficult for FCMs and 
DCOs to maintain separate models for futures customer collateral and 
cleared swaps customer collateral.
---------------------------------------------------------------------------

    For the Physical Segregation Model, one commenter estimates that an 
FCM would incur upfront operational costs of $33 million and ongoing 
operational costs of $136 million.\41\ Another commenter estimates that 
a DCO would incur upfront operational costs of $7.5 million and ongoing 
operational costs of $40 million.\42\ In contrast, for the Legal 
Segregation Model (whether Complete or with Recourse), commenters have 
suggested that the operational costs would be more modest. For example, 
commenters estimate that an FCM would incur upfront operational costs 
of $1 million and ongoing operational costs of $700,000.\43\
---------------------------------------------------------------------------

    \41\ ISDA Original at 10.
    \42\ See generally ICE at 10-12.
    As mentioned above, the Physical Segregation Model would require 
that each FCM and DCO maintain a separate account for each cleared 
swaps customer. Therefore, the costs that commenters identify 
include, among other things, (i) the costs to establish and maintain 
such accounts, (ii) the costs to effect separate fund transfers 
between such accounts, (iii) the costs of account reconciliation, 
and (iv) the costs to establish the information technology 
infrastructure for such accounts.
    \43\ See ISDA Supplemental at 7. This modifies the ongoing 
figure in ISDA Original at 10 (the upfront figure there is correct).
    In contrast to the Physical Segregation Model, the Legal 
Segregation Model (whether Complete or with Recourse) would permit 
an FCM and a DCO to continue maintaining omnibus accounts, while 
requiring enhanced reporting. Therefore, the costs that commenters 
identify pertain mostly to such reporting.
---------------------------------------------------------------------------

b. The Risk Costs
    i. The physical segregation model and the complete legal 
segregation model.
    Both the Physical Segregation Model and the Complete Legal 
Segregation Model would result in Risk Costs,\44\ because they both 
prohibit a DCO from accessing the collateral of non-defaulting cleared 
swaps customers. As mentioned above, a DCO may seek to cover Risk Costs 
in two different ways (or a combination thereof). First, the DCO may 
increase the amount of collateral that each cleared swaps customer must 
provide to margin its cleared swaps. One commenter estimated that this 
increase may equal 69.75 percent (i.e., a total increase of $581 
billion). Second, a DCO may increase the amount of resources that each 
FCM must contribute to the guaranty fund. The same commenter estimated 
that a DCO may double such contributions (i.e., a total increase of 
$128 billion).\45\ Another commenter--a DCO--agrees with such estimate, 
stating that it would double FCM contributions to its guaranty fund 
(i.e., the guaranty fund would increase from $50 billion to $100 
billion).\46\
---------------------------------------------------------------------------

    \44\ One should note that the dollar figures for Risk Costs 
presented by commenters and described in the text represent 
increased use of capital, not actual costs. The cost associated with 
these figures would reflect the opportunity cost of forgoing 
possible higher return from alternative uses of the capital in 
question.
    \45\ See ISDA Original at 12-13. One should note that this 
amount represents increased use of capital, and thus does not 
represent hundreds of billions in costs.
    \46\ See CME at 8-9. This commenter also would consider the use 
of ``concentration margin'' to cover such Risk Costs. According to 
such commenter, charging concentration margin would constitute a 
``more targeted approach,'' because a DCO would charge extra margin 
``to the customer cleared-swap accounts in the clearing system with 
the largest potential shortfalls,'' rather than increasing the 
overall size of the guaranty fund. The commenter acknowledges that 
it ``currently lack[s] sufficient information to precisely assess an 
appropriate methodology to incorporate concentration margin in a 
potential financial-safeguards regime,'' but does state that 
``likely concentration charges would fall in the range of $50 
billion to $250 billion.'' The commenter anticipates that customers 
using ``cleared swaps to hedge exposures in other markets may bear 
the brunt of a concentration margin approach.'' The Commission notes 
that such an approach may arguably provide for better alignment of 
risk-creation and risk-assumption, which commenters from the buy-
side have requested.
---------------------------------------------------------------------------

    ii. The legal segregation with recourse model and the futures 
model.
    Based on the rationale articulated above, neither the Legal 
Segregation with Recourse Model nor the Futures Model would result in a 
need to obtain

[[Page 33824]]

additional financial resources to meet proposed Commission 
requirements, since under these models DCOs would have access to the 
collateral of non-defaulting customers in the event of a simultaneous 
default by an FCM and one or more customers.\47\ However, one commenter 
observed that the Legal Segregation with Recourse Model increases the 
likelihood that a DCO would access (i) its own contribution and (ii) 
the guaranty fund contributions of non-defaulting FCM members, in each 
case, to cure a default. The commenter stated that ``[t]he increased 
risk to which the DCO and clearing members would be exposed represents 
a real wealth transfer from the clearing infrastructure (DCOs and 
clearing members), upon which systemic safety is to depend, to 
clients.'' \48\
---------------------------------------------------------------------------

    \47\ See ISDA Original at 12-13. See ISDA Supplemental at 5-6. 
For a sense of scale, ISDA estimated that, under the Futures Model 
and the Legal Segregation with Recourse Model, industry-wide initial 
margin for cleared swaps customer contracts would total $833 
billion, and DCO guaranty funds would total $128 billion.
    \48\ See ISDA Supplemental at 6.
---------------------------------------------------------------------------

c. Assumptions Underlying Risk Costs
    Certain commenters disagreed with the assumptions underlying the 
estimates of Risk Costs for the Complete Legal Segregation Model and 
the Physical Segregation Model. Specifically, they questioned whether, 
upon an FCM default, a DCO would have any collateral of non-defaulting 
cleared swaps customers left to access. These commenters noted that, if 
an FCM declines over time, customers may begin transferring their 
cleared swaps collateral to more creditworthy FCMs.\49\ Therefore, a 
DCO may choose not to rely on the collateral of non-defaulting cleared 
swaps customers for risk management reasons. If the DCO makes such a 
choice, it would incur no Risk Costs in adopting either the Complete 
Legal Segregation Model or the Physical Segregation Model. These 
commenters observed that certain DCOs experienced in clearing swaps 
have already made such a choice.\50\
---------------------------------------------------------------------------

    \49\ See, e.g., Citigroup Capital Markets at 1-2 (``customers of 
a deteriorating, non-defaulted FCM have the ability pursuant to CFTC 
regulation and clearing house rules to move their positions to an 
alternative FCM''), Federal Farm Credit Banks Funding Corp. at 4 
(``when faced with a clearing member's potential deterioration in 
credit * * * a customer [may] transfer its positions to another 
clearing member which could have the unintended effect of 
accelerating a clearing member's credit problems''), LCH at 2-3 
(stating that while in a ``shock event,'' a DCO may access 
collateral from non-defaulting cleared swaps customers, in the 
contrasting case of an FCM default following a gradual decline, 
``the assumption of access to non-defaulting client Initial Margin 
does not hold'').
    \50\ For example, LCH stated that, in order for
    DCOs [to be] managed prudently * * * their risk waterfalls must 
cater for all events, not just `shock' events. This requires that 
DCOs clearing swaps must always assume that no client Initial Margin 
is available at the point of a default, as this is the most 
conservative assumption from a risk management standpoint.
    Id.
---------------------------------------------------------------------------

4. Benefits
a. Fellow-Customer Risk and Investment Risk
    In general, commenters agreed that the Physical Segregation Model 
would eliminate Investment Risk, and that such model, along with the 
Legal Segregation Model (whether Complete or with Recourse), would 
mitigate Fellow-Customer Risk. As mentioned above, commenters disagreed 
on whether such benefits would outweigh the operational costs and Risk 
Costs, as applicable, which would be incurred to implement such 
models.\51\
---------------------------------------------------------------------------

    \51\ Compare CME at 4 (`` * * * adopting an individual 
segregation model for customer cleared swaps * * * would impose 
significantly higher costs on customers and clearing members * * * 
the increased costs may decrease participation in the CFTC-regulated 
cleared swaps market * * * .'') with BlackRock at 2 (``We fail to 
understand why protecting collateral for segregation for the OTC 
Derivative Account Class when done at an FCM is associated with high 
costs when the OTC derivatives market has been able to function as a 
profitable business with collateral segregation as part of this 
business model'').
---------------------------------------------------------------------------

b. Portability
    One commenter emphasized that the most important factor that the 
Commission should consider in deciding which model to propose is the 
effect of that model on the portability of the cleared swaps of non-
defaulting customers in the event of an FCM default. The commenter 
stated that the Physical Segregation Model and the Complete Legal 
Segregation Model would most facilitate portability.\52\
---------------------------------------------------------------------------

    \52\ See ISDA Supplemental at 4.
---------------------------------------------------------------------------

c. Systemic Risk
    A number of commenters described ways in which the Legal 
Segregation Model (whether Complete or with Recourse) or the Physical 
Segregation Model may mitigate systemic risk. The commenter that 
emphasized the importance of portability stated that the Complete Legal 
Segregation Model or the Physical Segregation Model would mitigate 
systemic risk by enhancing portability of the cleared swaps of non-
defaulting customers in the event of FCM default.\53\ However, this 
commenter did not believe that the Legal Segregation with Recourse 
Model would mitigate systemic risk to the same extent since it would 
not facilitate portability to the same extent as the Complete Legal 
Segregation Model.\54\ Second, certain commenters suggested that the 
Legal Segregation Model (whether Complete or with Recourse) or the 
Physical Segregation Model may ameliorate certain pro-cyclical 
incentives under the Futures Model for bank-style ``runs'' on FCMs that 
are perceived to be weakening.\55\
---------------------------------------------------------------------------

    \53\ See id. at 4, 7. ISDA also noted that ``[f]ellow customer 
risk, properly conceived, includes the cost incurred by non-
defaulting clients as the result of a DCO closing out their 
positions following a client and FCM default.'' See also id. at 2 
(``We believe that the client desire for continuance of transactions 
and the avoidance of systemic risk requires additional focus on the 
facilitation of trade portability and the re-prioritization of 
close-out procedures as the option of last resort. From a client 
point of view, the enforced close-out of positions could lead to 
significant losses, particularly for a financial entity hedging 
other rate exposures. The close-out of even a portion of a large 
derivative book, like that which is currently run by a GSE, for 
example, may create huge losses for the swap hedger, and ultimately 
significant costs to the taxpayer. Further, for clients that are 
subject to regulatory capital requirements, a reduction in the 
ability to port positions may lead to higher regulatory capital 
costs'').
    \54\ See id. at 5. The commenter further observed that the Legal 
Segregation with Recourse Model represents a ``wealth transfer'' 
from the DCO and its FCM members to cleared swaps customers relative 
to the Futures Model, which may increase systemic risk to the extent 
that such transfer weakens the DCO and the FCMs.
    \55\ See FHLB at 7 (``the primary way for customers to manage 
their fellow-customer risk is to have advance arrangements in place 
that would allow them to quickly move their cleared trades from a 
defaulting clearing member to another clearing member * * * [this] 
may prompt the equivalent of a `run on the bank' when information 
becomes available that suggests a clearing member may be facing 
financial stress'' which may not ``make[] sense from a systemic risk 
perspective''). See also AIMA at 1 (where ``client collateral is 
inadequately protected, '' ``lack of confidence in the system * * * 
can cause customers to seek to avoid losses by liquidating or moving 
their positions in stressed market conditions, causing `runs' on 
futures commission merchants, greatly exacerbating market stress and 
contributing to wider financial instability'').
---------------------------------------------------------------------------

d. Induced Changes in Behavior
    In general, commenters offered different opinions on the 
appropriate focus of induced changes in behavior analysis. For example, 
certain commenters focused on the effects of the Futures Model on the 
motivations of the DCO. As mentioned above, under the Futures Model, a 
DCO may access the collateral of non-defaulting cleared swaps customers 
prior to its own capital in the event of an FCM default. Therefore, the 
above-mentioned commenters argued that under the Futures Model a DCO 
may be less motivated to ensure that each FCM member is managing the 
risks posed by cleared swaps customers properly than under Legal 
Segregation or Physical Segregation models.\56\
---------------------------------------------------------------------------

    \56\ See, e.g., Freddie Mac at 3, 4; BlackRock at 5; Vanguard at 
7.

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

[[Page 33825]]

    Other commenters focused on the effect of the Legal Segregation 
Model (especially Complete) and the Physical Segregation Model on the 
motivations of cleared swaps customers and FCMs. First, these 
commenters argued that such models would cause changes in behavior, 
because cleared swaps customers benefitting from individual collateral 
protection would be less motivated to create market discipline by 
clearing thorough less risky firms.\57\ Second, these commenters 
contended that FCMs would be less motivated to maintain substantial 
excess net capital in order to present a more attractive profile to 
customers.\58\
---------------------------------------------------------------------------

    \57\ See, e.g., CME at 4, ISDA Supplemental at 6.
    \58\ See, e.g., ISDA Supplemental at 6.
---------------------------------------------------------------------------

    Finally, a number of commenters observed that an important 
consideration in selecting a model is the effect that the model would 
have on the willingness of cleared swaps customers to maintain excess 
margin. The more protective of cleared swaps customer collateral a 
model is, the more likely it is that cleared swaps customers would be 
willing to maintain excess margin.
e. Portfolio Margining
    A number of commenters expressed concern that the use of models 
other than the Futures Model would create fragmented segregation 
requirements (whether across securities and commodities accounts, or 
between different classes of commodities accounts), which in turn would 
create barriers to the ability of cleared swaps customers to portfolio 
margin.\59\
---------------------------------------------------------------------------

    \59\ See SIFMA at 3-4, Investment Company Institute at 5-6, 
Futures Industry Association at 6.
---------------------------------------------------------------------------

5. The Optional Approach \60\
---------------------------------------------------------------------------

    \60\ The Optional Approach may be implemented in two ways. 
First, the Commission may permit each DCO to offer more than one 
model for protecting cleared swaps customer contracts and related 
collateral. For example, certain FCM members may choose the Complete 
Legal Segregation Model, whereas other FCM members may choose the 
Legal Segregation with Recourse Model. Second, the Commission may 
permit each DCO to offer a different model for protecting cleared 
swaps customer contracts and related collateral. For example, a DCO 
could choose to offer the Complete Legal Segregation Model to all of 
its FCM members, whereas another DCO could choose to offer the 
Futures Model.
---------------------------------------------------------------------------

    Finally, a number of commenters suggested that the Commission 
permit DCOs the option of offering different models for protecting 
cleared swaps customer contracts and related collateral (the ``Optional 
Approach'').\61\ However, other commenters found the Optional Approach 
to be impracticable.\62\ Still other commenters stated that the 
Optional Approach may not succeed in reducing costs for those cleared 
swaps customers that do not opt for greater protection, and that the 
Optional Approach, depending on the manner in which it is structured, 
may indeed increase the amount of funds such customers have at 
risk.\63\
---------------------------------------------------------------------------

    \61\ See, e.g., Freddie Mac at 3 (``requiring DCOs to provide 
individual segregation on an optional basis is the best way to 
achieve the Commission's twin goals of maximizing customer 
protection and minimizing cost''), NFA at 2 (The ``better mousetrap 
may involve * * * clearing organizations adopting one of the other 
models discussed by the Commission. The Commission's regulations 
should ensure that DCOs have the flexibility to offer those 
alternative structures * * *'').
    \62\ See, e.g., ICE at 12 (``ICE's general sense is that any 
bifurcated or optional model will further complicate the settlement 
process and lead to greater uncertainty during times of financial 
stress''), Investment Company Institute at 6 (``Due to the host of 
legal, regulatory, operational and other issues which would be 
presented, ICI does not believe that it would be appropriate to 
implement individual customer protection on an optional rather than 
a mandatory basis in connection with this rulemaking proceeding * * 
*'').
    \63\ See, e.g., ISDA Original at 13 (``if highly credit worthy 
customers choose the more expensive, higher protection option,'' 
pooling may be less effective from the point of view of the DCO, 
which may be required to increase initial margin for all customers, 
including those choosing to bear fellow customer risk, forcing the 
latter to bear both increased funding cost and a greater amount of 
funds at risk).
---------------------------------------------------------------------------

III. The Proposed Rules

    After carefully considering all comments, the Commission has 
decided to propose the Complete Legal Segregation Model in this NPRM 
for the following reasons.
    First, as discussed in section III(A) herein, the Commission 
believes that section 4d(f) of the CEA provides it with authority to 
propose the Complete Legal Segregation Model. Further, the Commission 
believes that the language of section 4d(f) of the CEA supports 
strongly considering the current swaps practice.
    Second, as discussed in section III(D) herein, the Commission 
believes that the Complete Legal Segregation Model provides the best 
balance between benefits and costs in order to protect market 
participants and the public. Section III(B) herein describes the 
Commission's evaluation of the costs of each model, whereas section 
III(C) herein describes the Commission's evaluation of the benefits of 
each model.
    As mentioned in section I (Introduction) herein, the Commission is 
continuing to assess the benefits and costs of the Complete Legal 
Segregation Model. As part of such assessment, the Commission is 
considering whether to adopt, in the alternative, the Legal Segregation 
with Recourse Model. Further, the Commission is continuing to assess 
the feasibility of the Optional Approach and the Futures Model, and 
seeks comments thereon.
    The Commission requests comments on (i) its proposal, (ii) whether 
it should adopt, in the alternative, the Legal Segregation with 
Recourse Model, and (iii) whether it should adopt the Optional Approach 
or the Futures Model. The Commission has set forth specific questions 
below.

A. Statutory Issues and the Appropriate Starting Point

    Section 4d(f) of the CEA provides the Commission with the authority 
to afford individualized protection to cleared swaps customer 
collateral. As mentioned above, new section 4d(f)(6) of the CEA 
prohibits ``any person, including any derivatives clearing organization 
* * * '' from holding, disposing, or using customer collateral ``for 
deposit in a separate account or accounts * * * as belonging to * * * 
any person other than the swaps customer of the futures commission 
merchant.'' The reference to ``separate account or accounts'' and the 
use of ``customer'' in the singular contrasts with section 4d(b) of the 
CEA, which governs the handling of customer collateral by DCOs in the 
futures market. Section 4d(b) prohibits a DCO from holding, disposing, 
or using customer collateral ``for deposit in a separate account * * * 
as belonging to * * * any person other than the customers of such 
futures commission merchant,'' using the plural form ``customers'' to 
refer to the property of customers collectively. The contrast between 
sections 4d(b) and 4d(f)(6) of the CEA suggests that the Commission 
need not treat cleared swaps customer collateral in the same manner as 
futures customer collateral. This is particularly true because the 
reference to ``separate account or accounts'' and ``customer'' in 
section 4d(f)(6) of the CEA accords with the individual collateral 
protection currently available in the swaps markets and contrasts with 
the omnibus approach traditionally used in futures markets. For the 
same reason, the Commission is persuaded that the costs of and 
protections provided by current swaps practices are highly relevant to 
the evaluation of alternative models for implementing the statute.

B. Costs \64\
---------------------------------------------------------------------------

    \64\ For additional discussion of cost issues, with particular 
reference to the costs of the proposed Complete Legal Segregation 
Model and the Legal Segregation with Recourse Model relative to the 
Futures Model, see the cost-benefit analysis at section VII(C) 
infra.
---------------------------------------------------------------------------

1. Rationale
    As mentioned above, the Commission believes that current swaps 
practices

[[Page 33826]]

forms an appropriate perspective for considering the costs of each 
model for protecting cleared swaps customer collateral. The Commission 
further believes that the operational costs and Risk Costs that 
commenters have identified for each model should be examined in light 
of the current practice of many swaps customers to incur costs to 
obtain individual collateral protection with independent third-parties.
    With respect to operational costs, the Commission notes that 
commenters appeared to have relied upon appropriate assumptions in 
their estimates for the Legal Segregation Model (whether Complete or 
with Recourse) and the Physical Segregation Model.\65\ With respect to 
Risk Costs, the Commission observes that commenters appeared to have 
relied upon appropriate assumptions in their estimates for the Legal 
Segregation with Recourse Model and the Futures Model.\66\ In contrast, 
the Commission finds, at least initially, persuasive the comments 
questioning the estimates of Risk Costs for the Complete Legal 
Segregation Model and the Physical Segregation Model, to the extent 
that such estimates are based on the assumption that collateral from 
non-defaulting cleared swaps customers would be fully available to DCOs 
in practice.\67\
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    \65\ The Commission is not persuaded by the claim that it may be 
difficult for FCMs and DCOs to maintain separate models for futures 
customer collateral and cleared swaps customer collateral. Many FCMs 
are part of organizations that currently (and in the future will) 
maintain separate models for futures and uncleared swaps, and there 
has been no evidence of problems with the ability of such FCMs to 
operate both business lines. Indeed, there are DCOs that currently 
maintain different guaranty funds for cleared swaps and futures 
contracts, and that apply materially different margin models to such 
contracts (e.g., futures contracts vs. credit default swaps vs. 
interest rate swaps), again without reported trouble.
    \66\ Regarding the comment stating that the Legal Segregation 
with Recourse Model would result in a ``wealth transfer'' from the 
DCO and its FCM members to cleared swaps customers, the Commission 
notes that such comment did not include an estimate for any 
additional costs resulting from such ``transfer.'' Moreover, such 
statement is simply the obverse of the observation by other 
commenters that the Futures Model would involve implicit costs to 
customers. See, e.g., Federal Farm Credit Banks Funding Corp. at 3 
(``Under the [futures] model, the hundreds of millions of dollars 
that the System Banks will likely post as initial margin and 
variation margin for cleared trades would be at economic risk'').
    \67\ For example, the size of the customer account at Lehman 
declined substantially in the days before its bankruptcy filing and 
caused DCOs to declare it in default. For additional discussion of 
the relationship of estimates of Risk Costs to assumptions about the 
availability of the collateral of non-defaulting customers in the 
event of an FCM default, see the discussion of fellow-customer 
behavior and ``diversification'' effects in relation to the design 
of a DCO's financial resources package in the cost-benefit analysis 
at section VII(C)(2)(b) infra.
---------------------------------------------------------------------------

2. Questions
    The Commission seeks comment on potential operational costs 
associated with implementing the Futures Model, and whether such costs 
could vary depending on the volume of swaps to be cleared.
    Further, the Commission seeks comment on potential operational 
costs and Risk Costs for all models other than the Futures Model, 
especially with respect to (i) the extent to which such costs could be 
offset against the costs that swaps customers currently incur to obtain 
individual collateral protection, and (ii) the extent to which such 
costs may correspond to the implicit costs that customers may bear due 
to Fellow-Customer Risk.
    The Commission also seeks comment on the assumptions underlying 
estimates of Risk Costs for the Complete Legal Segregation Model and 
the Physical Segregation Model.
     Specifically, is it plausible that an FCM might decline 
gradually over time rather than in a sudden event? If so, is it 
plausible that customers of such a declining FCM might transfer their 
cleared swaps and related collateral to another FCM?
     If the Commission were to permit a DCO to access 
collateral from non-defaulting cleared swaps customers to cure a 
default, would it be prudent, in light of answers to the foregoing 
questions, for the DCO to rely upon such collateral in calculating the 
financial resources package that it must hold? Why or why not, or to 
what extent? If not, or if only to a limited extent, how does that 
conclusion affect the Risk Costs for the Complete Legal Segregation 
Model (as well as the Physical Segregation Model)? Do DCOs account for 
potential differences between fellow customer collateral at the time of 
calculation and expected fellow-customer collateral at the time of 
default in their default resource calculations? If so, how?
    In addition, as discussed above, a number of commenters on the ANPR 
suggested that consideration of the costs and benefits of all models 
should be informed by the protections for collateral obtained by 
customers in the existing swaps market and of the costs incurred for 
such protections.\68\ The Commission invites additional comment on 
these subjects, including quantitative information. Specifically, the 
Commission invites the submission of additional information on the 
costs of each level of protection, as well as the submission of 
detailed quantitative information on the effects, if any, of the 
absence of Fellow-Customer Risk on guaranty fund levels, margin levels 
and other economic characteristics of the use of collateral in the 
cleared swaps market. Additionally, the Commission invites the 
submission of detailed quantitative information on the costs currently 
incurred to protect collateral in the cleared and uncleared swaps 
markets.
---------------------------------------------------------------------------

    \68\ See section II(C)(2)(c)(2) supra.
---------------------------------------------------------------------------

    Finally, some commenters on the ANPR stated that swaps, including 
cleared swaps, have inherent characteristics that differentiate them 
from exchange-traded futures contracts and that affect the magnitude of 
the exposure that Cleared Swaps Customers have to Fellow-Customer 
Risk.\69\ The Commission invites additional comment on the prevalence 
of such characteristics and their bearing on the costs and benefits of 
the proposed rule and potential alternatives.
---------------------------------------------------------------------------

    \69\ See, e.g., note 38, supra.
---------------------------------------------------------------------------

C. Benefits \70\
---------------------------------------------------------------------------

    \70\ For additional discussion of benefits issues, with 
particular reference to the benefits of the proposed Complete Legal 
Segregation Model and the Legal Segregation with Recourse Model 
relative to the Futures Model, see the cost-benefit analysis at 
section VII(C) infra.
---------------------------------------------------------------------------

1. Rationale
a. Fellow-Customer Risk and Investment Risk
    The Commission agrees with commenters that the Legal Segregation 
Model (whether Complete or with Recourse) and the Physical Segregation 
Model would mitigate Fellow-Customer Risk and Investment Risk to 
differing extents. With respect to Fellow-Customer Risk, the Commission 
believes that: (i) The Physical Segregation Model would eliminate 
Fellow-Customer Risk, albeit only to the extent permitted under the 
Bankruptcy Code; \71\ (ii) the Complete Legal Segregation Model would 
largely mitigate Fellow-Customer Risk in FCM defaults of all 
magnitudes; \72\ and (iii) the Legal Segregation with Recourse Model 
would

[[Page 33827]]

largely mitigate Fellow-Customer Risk \73\ in all but the most extreme 
FCM defaults.
---------------------------------------------------------------------------

    \71\ As discussed further below, section 766(h) of the 
Bankruptcy Code, 11 U.S.C. 766(h), requires that customer property 
be distributed ``ratably to customers on the basis and to the extent 
of such customers' allowed net equity claims * * *.''
    \72\ Because the DCO would allocate collateral between 
defaulting and non-defaulting cleared swaps customers based on 
information the FCM provided the day prior to default, such 
allocation would not reflect movement in the cleared swaps portfolio 
of such customers on the day of default.
    \73\ Id.
---------------------------------------------------------------------------

    The Commission agrees with commenters that the Physical Segregation 
Model would eliminate Investment Risk because the FCM and DCO would 
invest the collateral of one cleared swaps customer separately from the 
collateral of another such customer. Therefore, the FCM or DCO may 
attribute losses on such investments to one particular customer. The 
Commission believes that the Legal Segregation Model (whether Complete 
or with Recourse) and the Futures Model would not mitigate Investment 
Risk. Such models permit the FCM and DCO to hold the collateral of all 
cleared swaps customers in one account, and therefore neither the FCM 
nor the DCO would be able to attribute investments (and losses thereon) 
to one particular customer.
b. Portability
    The Commission agrees with commenters that the Complete Legal 
Segregation Model and the Physical Segregation Model would enhance 
portability of the cleared swaps of non-defaulting customers in the 
event of an FCM default. The Commission notes that the Legal 
Segregation with Recourse Model would not likely facilitate portability 
to the same extent, because the DCO is unlikely to release the 
collateral of such non-defaulting customers until it has completed the 
process of liquidating the portfolio of the defaulting FCM and 
customers. Therefore, even if the DCO or trustee ports the cleared 
swaps of non-defaulting customers, such customers may need to post 
additional collateral at the non-defaulting FCM to support such swaps. 
Such customers may not be able to meet such increased capital demands, 
especially during a time of resource scarcity.
c. Systemic Risk
    The Commission agrees with comments that the Complete Legal 
Segregation Model and the Physical Segregation Model would most 
mitigate systemic risk by enhancing portability of the cleared swaps of 
non-defaulting customers in the event that an FCM defaults. The 
Commission notes that certain international regulators also emphasize 
the importance of portability. For example, the Consultative Report on 
the Principles for Financial Market Infrastructures (the ``CPSS-IOSCO 
Principles'') \74\ issued by the Committee on Payment and Settlement 
Systems (``CPSS'') and the Technical Committee of the International 
Organization of Securities Commissions (``IOSCO,'' and together ``CPSS-
IOSCO'') and the Proposal for a Regulation on OTC Derivatives, Central 
Counterparties and Trade Repositories by the European Parliament and 
Council (the ``EU Proposal'') \75\ highlight the importance of 
portability of cleared swaps customer contracts and related collateral. 
As stated in the CPSS-IOSCO Principles, the ``[e]fficient and complete 
portability of customer positions and collateral is important in both 
pre-default and post-default scenarios, but is particularly critical 
when a participant defaults or is undergoing insolvency 
proceedings''.\76\ The EU Proposal explains that segregation and 
portability are ``critical to effectively reduc[ing] counterparty 
credit risk through the use of [central counterparties], to achiev[ing] 
a level playing field among European [central counterparties] and to 
protect the legitimate interests of clients of clearing members''.\77\
---------------------------------------------------------------------------

    \74\ See CPSS-IOSCO, CPSS-IOSCO Principles (March 10, 2011), 
available at http://www.bis.org/publ/cpss94.pdf.
    \75\ See European Commission, EU Proposal (Sept. 15, 2010), 
available at http://ec.europa.eu/internal_market/financial-markets/docs/derivatives/20100915_proposal_en.pdf.
    \76\ See CPSS-IOSCO Principles at 69.
    \77\ See EU Proposal at 10 (Sept. 15, 2010).
---------------------------------------------------------------------------

d. Induced Changes in Behavior \78\
---------------------------------------------------------------------------

    \78\ See section VII(C)(2) herein for a description of induced 
changes in behavior for DCOs if the Commission adopts either the 
Complete Legal Segregation or the Legal Segregation with Recourse 
Models.
---------------------------------------------------------------------------

    The Commission agrees with commenters that argued that the better 
the protection that a model affords to the collateral of non-defaulting 
cleared swaps customers, the more likely customers would leave excess 
margin at an FCM. In contrast, the Commission does not find persuasive 
arguments that the Legal Segregation Model (especially Complete) and 
the Physical Segregation Model would cause changes in behavior, by (i) 
discouraging cleared swaps customers from creating market discipline by 
clearing through less risky firms,\79\ or (ii) discouraging FCMs from 
maintaining substantial excess net capital to present a more attractive 
profile to customers.\80\
---------------------------------------------------------------------------

    \79\ See, e.g., CME at 4, ISDA Supplemental at 6.
    \80\ See, e.g., ISDA Supplemental at 6.
---------------------------------------------------------------------------

    With respect to (i), cleared swaps customers generally cannot exert 
material market discipline because they lack information to accurately 
assess the risk of their FCMs. For example, certain commenters noted 
that cleared swaps customers cannot obtain information about the risk 
profile of fellow customers.\81\ Buy-side commenters reinforced such 
observation by stating that they would not want fellow customers 
learning of their own risk profiles.\82\ Even if FCMs were to disclose 
general policies regarding the risk profiles of customers that they 
accept, it is not clear how cleared swaps customers would learn about 
exceptions to the FCM policies that may be granted. Given the 
foregoing, the Commission is interested in whether FCM disclosures to 
cleared swaps customers could be improved. What measures could FCMs 
take to provide more comprehensive and useful disclosures regarding 
their proprietary risks and the risk profiles of their customers? For 
example, one commenter suggested that the Commission could require FCM 
disclosures to include the following:
---------------------------------------------------------------------------

    \81\ E.g., ADM at 3, BlackRock at 5, CIEBA at 2, 4-6, FFCB at 4, 
FHLB at 1, MFA at 8, Tudor at 2.
    \82\ E.g., BlackRock at 5, FHLB at 2.
---------------------------------------------------------------------------

     The FCM's total equity, regulatory capital and net worth;
     The dollar value of the FCM's proprietary margin 
requirements as a percentage of its segregated and secured customer 
margin requirements;
     What number of the FCM's customers comprise an agreed 
significant percentage of its customer segregated funds;
     The aggregate notional value of non-hedged, principal OTC 
transactions into which the FCM has entered;
     The amount, generic source and purpose of any unsecured 
and uncommitted short-term funding the FCM is using;
     The aggregate amount of financing the FCM provides for 
customer transactions involving illiquid financial products for which 
it is difficult to obtain timely and accurate prices;
     The percentage of defaulting assets (debits and deficits) 
the FCM had during the prior year compared to its year-end segregated 
and secured customer funds; and
     A summary of the FCM's current risk practices, controls 
and procedures.\83\
---------------------------------------------------------------------------

    \83\ See NewEdge at 3 to 5.

The Commission requests comment as to whether it would make the FCM 
disclosure more useful to customers if such disclosure contained one or 
more of the elements above. Which elements would be most helpful to 
customers? What would be the cost to FCMs of generating such 
disclosures? What would be the costs and benefits to

[[Page 33828]]

customers of receiving and reviewing such disclosures?
    With respect to (ii), the Commission notes that FCMs have claimed 
in recent net capital rulemakings that Commission capital requirements 
are sufficient.\84\ If such capital requirements are sufficient, it 
would appear that excess net capital is not necessary.\85\
---------------------------------------------------------------------------

    \84\ See, e.g., Newedge Letter of June 8, 2009 at 2 
(``increasing capital requirements does not necessarily ensure 
fiscal solvency.''), id. at 4 (increasing capital requirements would 
be anti-competitive). (Attachment B to the Newedge comment to this 
rulemaking).
    \85\ See section VII(C)(2)(c) infra for additional discussion of 
induced changes in behavior for DCOs, including effects on 
monitoring of FCM risk, if the Commission adopts either the Complete 
Legal Segregation or the Legal Segregation with Recourse Models.
---------------------------------------------------------------------------

e. Portfolio Margining.\86\
---------------------------------------------------------------------------

    \86\ See section IV(A)(2) herein for a more detailed description 
of Commission orders under section 4d(f) of the CEA.
---------------------------------------------------------------------------

    In response to concerns regarding the impact of models other than 
the Futures Model on portfolio margining,\87\ the Commission believes 
that such impact would likely be positive. Specifically, a DCO could 
more easily justify to the Commission that issuing an order under 
section 4d(f) of the CEA (or approving rules permitting commingling 
pursuant to proposed regulation 39.15(b)(2)) \88\ is appropriate if the 
regulations under such section mitigate Fellow-Customer Risk, since the 
impact of any different risk from the product being brought into the 
portfolio would be limited to the customer who chooses to trade that 
product. This is in contrast to the Futures Model, where the risks that 
the product being brought into the portfolio affect customers who do 
not--and would not--trade that product.
---------------------------------------------------------------------------

    \87\ See SIFMA at 3-4, Investment Company Institute at 5-6, 
Futures Industry Association at 6.
    \88\ See Notice of Proposed Rulemaking on Risk Management 
Requirements for Derivatives Clearing Organizations, 76 FR 3698 
(Jan. 20, 2011).
---------------------------------------------------------------------------

2. Questions
    The Commission seeks comment on the above analysis of benefits 
accorded by each model, including whether there are any additional 
benefits that the Commission should consider. What benefits would be 
realized by, alternatively, adopting the Futures Model?

D. Proposing the Complete Legal Segregation Model: Weighing of Costs 
and Benefits

    As mentioned above, commenters generally agreed that customers 
would bear the costs of implementing any model. Therefore, the 
Commission believes that it is appropriate to give weight to the 
preference of customers. The Commission finds it compelling that most 
(although not all) buy-side commenters to the ANPR favored a model 
other than the Futures Model. The Commission notes that models other 
than the Futures Model would provide more individualized protection to 
cleared swaps customer collateral in accordance with section 4d(f) of 
the CEA. Any such model may provide substantial benefits in the form of 
(i) decreased Fellow-Customer Risk (as well as Investment Risk, in 
certain circumstances), (ii) increased likelihood of portability, (iii) 
decreased systemic risk, and (iv) positive impact on portfolio 
margining. The Commission seeks additional comments, in particular from 
customers, as to whether and why, in light of this NPRM, they favor or 
oppose adoption of the Futures Model. The Commission anticipates that, 
to the extent it decides to adopt the Futures Model, the proposed rule 
text from proposed regulation 22.2 to proposed regulation 22.10 would 
implement such model. The Commission notes that changes to the language 
of proposed regulation 22.15 may be necessary. Specifically, proposed 
regulation 22.15 would need to include an additional section to the 
effect that a DCO may, if its rules so provide, use the Cleared Swaps 
Customer Collateral of all Cleared Swaps Customers of a Depositing 
Futures Commission Merchant that has defaulted on a payment to the DCO 
with respect to its Cleared Swaps Customer Account.
    In choosing between the Legal Segregation Model (whether Complete 
or with Recourse) and the Physical Segregation Model, the Commission 
notes that the operational costs for the Physical Segregation Model are 
substantially higher than the operational costs for the Legal 
Segregation Model (whether Complete or with Recourse).
    With respect to benefits, the Commission believes that the Physical 
Segregation Model provides only incremental advantages over the Legal 
Segregation Model (whether Complete or with Recourse) with respect to 
the mitigation of Fellow-Customer Risk. The Physical Segregation Model, 
unlike the Legal Segregation Model (whether Complete or with Recourse), 
does eliminate Investment Risk. However, the Commission notes that (i) 
it is in the process of further addressing Investment Risk by proposing 
amendments to regulation 1.25, and (ii) each FCM and DCO already values 
investments conservatively. Finally, the Commission observes that the 
Physical Segregation Model generally enhances portability to the same 
extent as the Complete Legal Segregation Model, and therefore would 
have similar effects on systemic risk. The Physical Segregation Model 
and the Legal Segregation Model (whether Complete or with Recourse) 
would likely enhance portfolio margining to the same extent.
    Consequently, after weighing the potential costs and benefits of 
the Physical Segregation Model, the Commission has decided that this 
model does not provide the best balance, in that it provides similar 
benefits as the Legal Segregation Model (whether Complete or with 
Recourse), but costs more to implement. Hence, the Commission has 
determined not to propose the Physical Segregation Model.
    In choosing between the Complete Legal Segregation Model and the 
Legal Segregation with Recourse Model, the Commission notes that 
commenters have argued that implementing the former would result in 
significant Risk Costs, whereas implementing the latter would result in 
no Risk Costs. As mentioned above, the Commission finds, at least 
initially, persuasive comments that question the assumptions underlying 
the estimates of Risk Costs for the Complete Legal Segregation Model. 
Nevertheless, the Commission recognizes that such assumptions form an 
area of divergence between commenters, and therefore asks for 
additional comment on the Risk Costs for the Complete Legal Segregation 
Model. The Commission observes that operational costs for the Complete 
Legal Segregation Model and the Legal Segregation with Recourse Model 
are approximately the same.
    With respect to benefits, the Commission notes that the Complete 
Legal Segregation Model would mitigate Fellow-Customer Risk even in 
extreme FCM defaults, unlike the Legal Segregation with Recourse Model. 
Further, the Complete Legal Segregation Model would enhance portability 
(and therefore mitigate systemic risk) to a significantly greater 
extent than the Legal Segregation with Recourse Model. Finally, the 
Complete Legal Segregation Model would have an incremental advantage 
over the Legal Segregation with Recourse Model with respect to impact 
on portfolio margining.
    Consequently, after weighing the potential costs and benefits, the 
Commission has determined that the Complete Legal Segregation Model 
provides the best balance, and therefore has determined to propose the 
Complete Legal Segregation Model. Nevertheless, because the Commission 
is still evaluating the costs associated with such model, as well as 
with the Legal

[[Page 33829]]

Segregation with Recourse Model, the Commission is also considering the 
Legal Segregation with Recourse Model.\89\
---------------------------------------------------------------------------

    \89\ See generally section IV(O) below.
---------------------------------------------------------------------------

E. The Optional Approach

1. Rationale
    As mentioned above, a number of commenters urged the Commission to 
propose the Optional Approach. The Commission has preliminarily 
declined to propose the Optional Approach because it may not be 
compatible with the Bankruptcy Code and regulation part 190 (``Part 
190''). Specifically, if customer collateral cannot be transferred, 
section 766(h) of the Bankruptcy Code \90\ requires that such 
collateral be distributed on a pro rata basis. In implementing this 
section of the Bankruptcy Code, the Commission has created in Part 190 
the ``account class'' concept, which enables customer collateral to be 
separated into different categories for distribution depending on the 
type of customer (i.e., futures customer, foreign futures customer, and 
cleared swaps customer) holding a claim. All customers belonging to one 
``account class'' would share pro rata in the collateral attributed to 
that ``account class.'' Therefore, all cleared swaps customers would 
belong to one ``account class,'' and would share pro rata in the 
cleared swaps collateral remaining after their contracts are ported or 
liquidated. If, under the Optional Approach, certain cleared swaps 
customers had chosen a model that provided more individual collateral 
protection while others had not, the former would still share in any 
shortfalls in cleared swaps customer collateral resulting from the 
choices of the latter. The Commission notes that the ``account class'' 
concept, which has been tested and upheld in prior bankruptcy 
proceedings, has never permitted customers transacting in the same type 
of contracts, with two different segregation requirements, to be deemed 
participants in separate ``account classes.'' \91\
---------------------------------------------------------------------------

    \90\ 11 U.S.C. 761(h).
    \91\ The Commission created the ``account class'' concept in 
adopting original part 190. See 46 FR 57535 (Nov. 24, 1981). The 
Commission noted that ``the accounts held by a commodity broker 
would be divided into four types or classes: Futures accounts, 
foreign futures accounts, leverage accounts and commodity options 
accounts, which correspond to the four estates a commodity broker 
may have based upon the different types of transactions it handles 
for customers.'' Id. at 57536. These classes corresponded to 
different definitions of ``customer'' found in section 761(9) of the 
Bankruptcy Code: With respect to a ``futures commission merchant,'' 
a ``foreign futures commission merchant,'' a ``leverage transaction 
merchant,'' and a ``commodity options dealer.'' See 11 U.S.C. 
761(9).
    In making that proposal, the Commission cited to text in the 
House Report for the 1978 Bankruptcy Code concerning those 
definitions, which noted that:
    It is anticipated that a debtor with multifaceted 
characteristics will have separate estates for each different kind 
of customer. Thus, a debtor that is a leverage transaction merchant 
and a commodity options dealer would have separate estates for the 
leverage transaction customers and for the options customers, and a 
general estate for other creditors.
    See H.R. Rep. 95-595 at 355, 1978 U.S.C.C.A.N. 5963, 6346.
    In the release adopting part 190, the Commission added another 
``account class,'' delivery accounts, for property related to the 
making or taking of physical delivery by a customer. Delivery 
accounts are not mentioned in section 761(9) of the Bankruptcy Code, 
but are, again, related to a ``different kind of customer.'' See 48 
FR 8716, 8731 (Mar. 1, 1983). Similarly, in April of 2010, the 
Commission added another ``account class,'' for cleared OTC 
transactions. Once again, this represented a ``separate estate'' for 
a ``different kind of customer.'' See 75 FR 17297 (Apr. 6, 2010). 
Separating cleared swaps customers by the type of model the DCO 
adopts does not fit this tested rubric: The customers are all of the 
same ``kind,'' namely, all cleared swaps customers.
---------------------------------------------------------------------------

    Moreover, as a number of commenters have noted, optional models may 
cause legal, regulatory, operational and other complexities.\92\
---------------------------------------------------------------------------

    \92\ See, e.g., ICE at 12, Investment Company Institute at 6, 
LCH at 7.
---------------------------------------------------------------------------

2. Questions
    It may be possible for the Commission to resolve the 
incompatibility between (i) the Optional Approach and (ii) the 
Bankruptcy Code and Part 190, by permitting DCOs to require that FCMs 
establish separate legal entities, each of which is limited to clearing 
at DCOs that use only one of (A) the Complete Legal Segregation Model 
or (B) the Legal Segregation with Recourse Model. The Commission notes, 
however, that this approach might cause concerns with respect to open 
access and competition. The Commission seeks comment on the 
practicability of this approach.
     What costs (including implementation, operational, and 
capital) would such DCOs and FCMs incur?
     Would FCMs be willing to establish such separate legal 
entities? What systemic risk impacts might there be, if any?
     Would such an approach create benefits or burdens in other 
contexts?
     What would be the effect of this approach on competition 
and on opening FCM access to clearing organizations?
    In addition, the Commission seeks comment on whether the Optional 
Approach should be expanded to add the Futures Model as an option. If 
so, what would be the impact on (1) costs, (2) the protection of 
Cleared Swaps Customer Collateral, and (3) the existence of effective 
choice by customers?
    The Commission also seeks comment on whether to implement a model 
that permits DCOs to offer the Physical Segregation Model for cleared 
swaps customer collateral for some set of customers of their FCM 
members, with the remaining cleared swaps customer collateral staying 
in an omnibus account under the Futures Model. (Under this model, the 
customers in question would hold claims with respect to the collateral 
placed in physical segregation directly against the DCO rather than 
against the FCM through which the customers clear.) \93\
---------------------------------------------------------------------------

    \93\ See comment from Jerrold Salzman, available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=42253&SearchText= (discussing the legal 
segregation of certain customer accounts as a way to minimize fellow 
customer risk).
---------------------------------------------------------------------------

     How would such a model work in the ordinary course of 
business (i.e., pre-FCM member default)? For example, how would an FCM 
and a DCO structure their respective cash flows to accommodate such 
model? To the extent that an FCM or DCO may structure their cash flows 
in different ways, what are the issues, costs, or risks of each way?
     What changes to proposed Part 22 and Part 190 should the 
Commission make to accommodate this model?
     Who (e.g., the cleared swaps customer, FCM member, and 
DCO) would have what rights in cleared swaps customer collateral at 
every stage of clearing (including with respect to initial margin and 
variation payments and collections)?
     In the event of an FCM bankruptcy, would such cleared 
swaps customer collateral constitute ``customer property'' subject to 
ratable distribution pursuant to section 766(h) of the Bankruptcy Code?
    [cir] To what extent would the answer to this question depend on 
the manner in which the FCM and the DCO structured their respective 
cash flows in the ordinary course of business?
    [cir] To the extent cleared swaps customer collateral is removed 
from ``customer property'':
    [dec221] What vulnerabilities might that raise for the protection 
of such collateral in an FCM or a DCO bankruptcy? For example, is there 
a risk that, in some circumstances, such property might be deemed to be 
part of a bankrupt FCM's or DCO's bankruptcy estate subject to the 
claims of creditors other than the relevant swaps customers?
    [dec221] What changes would need to be made to self-regulatory 
organization audit programs to ensure protection of

[[Page 33830]]

cleared swaps customer collateral pre-bankruptcy?
     Should such a model be an option elected by cleared swaps 
customers, or mandatory for defined ``high-risk'' customers?
    [cir] By whom would the definition of ``high-risk'' be set?
    [cir] What criteria should be included in the definition of ``high 
risk''?
    [cir] Would the definition of ``high risk'' vary by asset class?
     To the extent the model is optional by a cleared swaps 
customer, to what extent might there be a tendency for cleared swaps 
customers posing greater risk to remain in the omnibus pool? What 
policy concerns, if any, might be raised by the inclusion of a larger 
concentration of cleared swaps customers posing greater risk in the 
omnibus pool?

Please provide a detailed quantitative analysis of the costs and 
benefits of this model relative to other models that are being 
considered in this NPRM, and relative to the existing uncleared swaps 
market. Please specify how each cost and benefit would be ultimately 
allocated to, or borne by, cleared swaps customers, FCMs and DCOs. 
Specifically, how would this type of model affect operational costs and 
Risk Costs?

F. Structure of These Proposed Regulations

    Proposed regulation part 22 (``Part 22'') establishes the basic 
architecture for protecting cleared swaps customer collateral through 
the promulgation of definitions and procedures for the segregation of 
cleared swaps pertaining to customers, as well as associated 
collateral. The Commission intends for proposed Part 22 to incorporate 
legal segregation, and to parallel, for the most part, the substance of 
corresponding provisions in part 1 to Title 17 (the ``Part 1 
Provisions''), in updated and clarified form, with respect to issues 
such as requirements for treatment of customer funds on a day-to-day 
basis, required amounts of collateral in customer accounts, and 
required qualifications for permitted depositories. While most of the 
proposed regulations in Part 22 will remain the same for the Complete 
Legal Segregation Model and the Legal Segregation with Recourse Model, 
proposed regulation 22.15 sets forth alternatives to take into account 
the fact that, under the Legal Segregation with Recourse Model, 
following an event of default a DCO would be able to access the 
collateral of non-defaulting cleared swaps customers after the DCO 
applied (i) its own capital to cure the default and (ii) the guaranty 
fund contributions of its non-defaulting FCM members.
    The infrastructure supporting legal segregation is established in 
proposed regulations 22.11-22.16, including (i) the requirement that an 
FCM transmit to its DCO daily information regarding customers and their 
swaps, (ii) tools that the DCO may use to manage the risk it incurs 
with respect to individual customers, (iii) steps the FCM is required 
to take if it fails to meet a cleared swaps customer margin call in 
full, and (iv) an explicit requirement that cleared swaps customer 
collateral be treated on an individual basis. The Commission requests 
comment on whether Part 22 differs in substance from the Part 1 
Provisions, other than in the specific instances described in this 
NPRM.
    In addition, proposed revisions to Part 190 of the Commission's 
regulations generally implement changes wrought by the Dodd-Frank Act, 
including the inclusion of swaps cleared with a DCO as customer 
contracts for all commodity brokers, the inclusion of swaps execution 
facilities as a category of trading venue, and additional conforming 
changes to time periods. Additional proposed changes have been made to 
conform Part 190 to current market practices (e.g., providing for 
auctions of swaps portfolios in the event of a commodity broker 
insolvency).

IV. Section by Section Analysis: Segregation of Cleared Swaps for 
Customers

A. Proposed Regulation 22.1: Definitions

    Proposed regulation 22.1 establishes definitions for, inter alia, 
the following terms: ``cleared swap,'' ``cleared swaps customer,'' 
``cleared swaps customer account,'' ``cleared swaps customer 
collateral,'' ``cleared swaps proprietary account,'' ``clearing 
member,'' \94\ ``collecting futures commission merchant,'' 
``commingle,'' ``customer,'' ``depositing futures commission 
merchant,'' ``permitted depository,'' \95\ and ``segregate.''
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    \94\ Under the Commission's proposal, the term ``clearing 
member'' means ``any person that has clearing privileges such that 
it can process, clear and settle trades through a derivatives 
clearing organization on behalf of itself or others. The derivatives 
clearing organization need not be organized as a membership 
organization.''
    \95\ The Commission is proposing to define ``permitted 
depository'' as a depository that meets the following conditions:
    (a) The depository must (subject to proposed regulation 22.9) be 
one of the following types of entities:
    (1) A bank located in the United States;
    (2) a trust company located in the United States;
    (3) a Collecting Futures Commission Merchant registered with the 
Commission (but only with respect to a Depositing Futures Commission 
Merchant providing Cleared Swaps Customer Collateral); or
    (4) a derivatives clearing organization registered with the 
Commission; and
    (b) the FCM or the DCO must hold a written acknowledgment letter 
from the depository as required by proposed regulation 22.5. See 
also the discussion under section IV(D).
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1. ``Segregate'' and ``Commingle''
    The Commission has never defined the terms ``segregate'' and 
``commingle,'' although the Part 1 Provisions make extensive use of 
these terms. Regulation 22.1 proposes definitions for these terms that 
are intended to codify the common meaning of such terms under the Part 
1 Provisions. Pursuant to the proposal, to ``segregate'' two or more 
items means to keep them in separate accounts and to avoid combining 
them in the same transfer between accounts. In contrast, to 
``commingle'' two or more items means to hold them in the same account, 
or to combine such items in a transfer between accounts. For purposes 
of these definitions, to keep items in separate accounts means: (i) To 
hold tangible items \96\ physically separate within one's own 
organization; (ii) to deposit tangible or intangible items \97\ with a 
Permitted Depository (as discussed further below) in separate accounts; 
and (iii) to reflect tangible or intangible items in separate entries 
in books and records. To hold items in the same account means exactly 
the opposite--namely, (i) to hold tangible items physically together 
within one's own organization; (ii) to deposit tangible or intangible 
items with a Permitted Depository in the same account; and (iii) to 
reflect tangible or intangible items in the same entries in books and 
records.
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    \96\ Tangible items may include, e.g., gold ingots or warehouse 
receipts, as discussed further below.
    \97\ Intangible items may include, e.g., wire transfers or 
dematerialized securities, as discussed further below.
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2. ``Cleared Swap''
    The term ``Cleared Swap'' has no analog in the Part 1 Provisions. 
Regulation 22.1 proposes a definition that incorporates section 1a(7) 
of the CEA,\98\ as added by section 721 of the Dodd-Frank Act. This 
definition then excludes, for purposes of Part 22 only, cleared swaps 
(and related collateral) that, pursuant to Commission order under 
section 4d(a) of the CEA,\99\ are

[[Page 33831]]

commingled with futures contracts (and related collateral) in an 
account established for the futures contracts. The definition 
conversely includes, for purposes of Part 22 only, futures contracts or 
foreign futures contracts (and, in each case, related collateral) that, 
pursuant to Commission order under section 4d(f) of the CEA,\100\ are 
commingled with cleared swaps (and related collateral) in an account 
established for the cleared swaps. The rationale for such exclusion and 
inclusion is that, under Commission precedent,\101\ once cleared swaps 
(and related collateral) are commingled with futures contracts (and 
related collateral) in a futures account, the Part 1 Provisions and the 
Bankruptcy Rules would apply to the cleared swaps (and related 
collateral) as if such swaps constituted futures contracts (and related 
collateral). Similarly, once futures contracts or foreign futures 
contracts (and, in each case, related collateral) are commingled with 
cleared swaps (and related collateral) in a cleared swaps account, the 
proposed definition of ``Cleared Swap'' would apply Part 22 and the 
Bankruptcy Rules to the former contracts as if they constituted cleared 
swaps (and related collateral). Therefore, the proposed definition of 
``Cleared Swap,'' with such exclusion and inclusion, simply extends 
Commission precedent.
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    \98\ 7 U.S.C. 1a(7). The Commission is working on regulations, 
along with the Securities and Exchange Commission, that would 
further define certain key terms of the Dodd-Frank Act, including 
``swaps.'' See Definitions Contained in Title VII of Dodd-Frank Wall 
Street Reform and Consumer Protection Act, 75 FR 51429 (Aug. 20, 
2010). Such regulations, when finalized, would automatically be 
incorporated in the definition of ``cleared swap'' cited herein.
    \99\ 7 U.S.C. 6d(a).
    \100\ 7 U.S.C. 6d(f).
    \101\ For example, current regulation 190.01(a) states: ``* * * 
if positions in commodity contracts that would otherwise belong to 
one account class (and the money, securities, and/or other property 
margining, guaranteeing, or securing such positions), are, pursuant 
to a Commission order, commingled with positions in commodity 
contracts of the futures account class (and the money, securities, 
and/or other property margining, guaranteeing, or securing such 
positions), then the former positions (and the relevant money, 
securities, and/or other property) shall be treated, for purposes of 
this part, as being held in an account of the futures account 
class.'' 17 CFR 190.01(a). In the notice proposing current 
regulation 190.01(a), 74 FR 40794 (Aug. 13, 2009), the Commission 
stated that the regulation codified two previous interpretative 
statements: (i) The Interpretative Statement Regarding Funds Related 
to Cleared-Only Contracts Determined To Be Included in a Customer's 
Net Equity, 73 FR 65514 (Nov. 4, 2008); and (ii) the Interpretative 
Statement Regarding Funds Determined to be Held in the Futures 
Account Type of Customer Account Class, 69 FR 69510 (Nov. 30, 2004).
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3. ``Cleared Swaps Customer'' and ``Customer''
    Regulation 22.1 proposes a definition of ``Cleared Swaps Customer'' 
that has two elements. First, an entity holding a Cleared Swaps 
Proprietary Account (as discussed further below) is not a ``Cleared 
Swaps Customer'' with respect to the Cleared Swaps (and related 
collateral) in that account. Such exclusion is consistent with 
regulation 1.3,\102\ which defines ``customer'' and ``commodity 
customer'' for futures contracts. Second, an entity is only a ``Cleared 
Swaps Customer'' with respect to its Cleared Swaps (and related 
collateral). Additionally, the same entity may be a ``customer'' or 
``commodity customer'' (as regulation 1.3 defines such terms) with 
respect to its futures contracts, and a ``foreign futures or foreign 
options customer'' (as regulation 30.1(c) \103\ defines such term) with 
respect to its foreign futures contracts.\104\ Because certain 
provisions of Part 22 distinguish the status of such entity (i) as a 
``Cleared Swaps Customer'' and (ii) as a ``customer'' or ``commodity 
customer'' or ``foreign futures or options customer,'' regulation 22.1 
proposes a definition for ``Customer'' that includes any customer of an 
FCM other than a ``Cleared Swaps Customer.''
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    \102\ 17 CFR 1.3.
    \103\ 17 CFR 30.1(c).
    \104\ The contracts (and related collateral) of such entity 
would be subject to three different segregation regimes. 
Specifically, the entity would be entitled to the protections of (i) 
the Corresponding Provisions with respect to its futures contracts 
(and related collateral), (ii) regulation 30.7 with respect to its 
foreign futures contracts (and related collateral), and (iii) Part 
22 with respect to its Cleared Swaps (and related collateral).
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4. ``Cleared Swaps Customer Collateral''
    Regulation 22.1 proposes to define ``Cleared Swaps Customer 
Collateral'' to include money, securities, or other property that an 
FCM or a DCO receives, from, for, or on behalf of a Cleared Swaps 
Customer, which (i) is intended to or does margin, guarantee, or secure 
a Cleared Swap,\105\ or (ii) if the Cleared Swap is in the form or 
nature of an option, constitutes the settlement value of such option. 
Additionally, regulation 22.1 proposes to define ``Cleared Swaps 
Customer Collateral'' to include ``accruals,'' which are the money, 
securities, or other property that an FCM or DCO receives, either 
directly or indirectly, as incident to or resulting from a Cleared Swap 
that the FCM intermediates for a Cleared Swaps Customer.\106\
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    \105\ Proposed regulation 22.1 provides that ``Cleared Swaps 
Customer Collateral'' includes collateral that an FCM or a DCO 
receives from, for, or on behalf of a Cleared Swaps Customer that 
either (i) is actually margining, guaranteeing, or securing a 
Cleared Swap or (ii) is intended to margin, guarantee, or secure a 
Cleared Swap. This provision is a clarification of ``customer 
funds'' as defined in regulation 1.3, which includes ``all money, 
securities, and property received by a futures commission merchant 
or by a clearing organization from, for, or on behalf of, customers 
or option customers * * * to margin, guarantee, or secure futures 
contracts.''
    \106\ The Commission does not intend to include in Part 22 a 
parallel to regulation 1.21, given that (i) regulation 22.1 proposes 
to broadly include ``accruals'' in the definition of ``Cleared Swaps 
Customer Collateral'' and (ii) regulation 22.2(c) proposes to permit 
an FCM to commingle the ``Cleared Swaps Customer Collateral'' of 
multiple ``Cleared Swaps Customers.''
    Regulation 1.21 states: ``All money received directly or 
indirectly by, and all money and equities accruing to, a futures 
commission merchant from any clearing organization or from any 
clearing member or from any member of a contract market incident to 
or resulting from any trade, contract or commodity option made by or 
through such futures commission merchant on behalf of any commodity 
or option customer shall be considered as accruing to such commodity 
or option customer within the meaning of the Act and these 
regulations. Such money and equities shall be treated and dealt with 
as belonging to such commodity or option customer in accordance with 
the provisions of the Act and these regulations. Money and equities 
accruing in connection with commodity or option customers' open 
trades, contracts, or commodity options need not be separately 
credited to individual accounts but may be treated and dealt with as 
belonging undivided to all commodity or option customers having open 
trades, contracts, or commodity option positions which if closed 
would result in a credit to such commodity or option customers.'' 17 
CFR 1.21.
    The Commission requests comment on whether it should include in 
Part 22 a parallel to regulation 1.21.
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    In general, the proposed definition parallels regulation 1.3,\107\ 
which defines ``customer funds'' for futures contracts. However, the 
proposed definition differs from regulation 1.3 in three 
instances.\108\ First, the proposed definition explicitly includes a 
Cleared Swap in the form or nature of an option as ``Cleared Swaps 
Customer Collateral.'' The Commission believes that such change 
appropriately clarifies that a Cleared Swap functioning as an option, 
but not labeled as one, falls within the scope of the proposed 
definition. Second, the proposed definition does not explicitly include 
option premiums as ``Cleared Swaps Customer Collateral.'' The 
Commission believes that such amounts are already incorporated in the 
settlement value of the option, and that listing such amounts 
separately may cause unnecessary confusion. Third, the proposed 
definition explicitly includes in ``accruals'' the money, securities, 
or other property that a DCO may receive relating to the Cleared Swap 
that an FCM intermediates for a Cleared Swap Customer. The Commission 
believes that such inclusion is appropriate since proposed regulation 
22.3 permits a DCO to invest the ``Cleared Swaps Customer Collateral'' 
that it receives from the FCM in accordance with regulation 1.25.\109\ 
Therefore, any increases in value

[[Page 33832]]

resulting from the investment would properly belong to the Cleared 
Swaps Customer, and would constitute another form of ``Cleared Swaps 
Customer Collateral.''
---------------------------------------------------------------------------

    \107\ 17 CFR 1.3.
    \108\ In addition to these three instances, the proposed 
definition does not incorporate certain parallels to regulation 1.3 
(exclusion from ``customer funds'' of collateral to secure security 
futures products in a securities account) because such parallels are 
not applicable to the context of Cleared Swaps (and related 
collateral).
    \109\ 17 CFR 1.25.
---------------------------------------------------------------------------

5. ``Cleared Swaps Customer Account'' and ``Cleared Swaps Proprietary 
Account''
    Regulation 22.1 proposes to define ``Cleared Swaps Customer 
Account'' as (i) an account that an FCM maintains at a Permitted 
Depository (as such term is discussed below) for the Cleared Swaps (and 
related collateral) of its Cleared Swaps Customers, or (ii) an account 
that a DCO maintains at a Permitted Depository, for collateral related 
to Cleared Swaps that the FCM members intermediate for their Cleared 
Swaps Customers. The proposed definition does not include any physical 
locations in which an FCM or a DCO may itself hold tangible Cleared 
Swaps Customer Collateral. As described below, regulations 22.2 and 
22.3 propose to define such physical locations as the ``FCM Physical 
Location'' and the ``DCO Physical Location,'' respectively. The 
proposed definition is consistent with regulation 1.3,\110\ which 
defines ``futures account.'' However, the proposed definition provides 
greater specificity than regulation 1.3 regarding (i) the entities 
maintaining the ``Cleared Swaps Customer Account'' (i.e., the FCM or 
DCO) and (ii) the Permitted Depositories for a ``Cleared Swaps Customer 
Account.''
---------------------------------------------------------------------------

    \110\ 17 CFR 1.3.
---------------------------------------------------------------------------

    Regulation 22.1 proposes a definition for ``Cleared Swaps 
Proprietary Account'' that is substantially similar to regulation 1.3, 
which defines ``Proprietary Account'' for futures contracts.\111\ The 
proposed definition contains a proviso, in paragraph (b)(8), that 
states ``an account owned by any shareholder or member of a cooperative 
association of producers, within the meaning of section 6a of the Act, 
which association is registered as an FCM and carries such account on 
its records, shall be deemed to be a Cleared Swaps Customer Account and 
not a Cleared Swaps Proprietary Account of such association, unless the 
shareholder or member is an officer, director, or manager of the 
association.'' This proviso parallels paragraph viii in the definition 
of ``Proprietary Account'' in regulation 1.3. The Commission requests 
comment on whether this proviso remains relevant, and, in particular, 
with respect to Cleared Swaps.
---------------------------------------------------------------------------

    \111\ Id.
---------------------------------------------------------------------------

6. ``Collecting Futures Commission Merchant'' and ``Depositing Futures 
Commission Merchant''
    The terms ``Collecting Futures Commission Merchant'' and 
``Depositing Futures Commission Merchant'' have no analogs in the Part 
1 Provisions. Regulation 22.1 proposes to define a ``Collecting Futures 
Commission Merchant'' as one that carries Cleared Swaps on behalf of 
another FCM and the Cleared Swaps Customers of that other FCM and, as 
part of doing so, collects Cleared Swaps Customer Collateral. In 
contrast, regulation 22.1 proposes to define a ``Depositing Futures 
Commission Merchant'' as one that carries Cleared Swaps on behalf of 
its Cleared Swaps Customers through a Collecting Futures Commission 
Merchant, and, as part of doing so, deposits Cleared Swaps Customer 
Collateral with such Collecting Futures Commission Merchant. Regulation 
22.7, as described below, proposes to employ the terms ``Collecting 
Futures Commission Merchant'' and ``Depositing Futures Commission 
Merchant'' to delineate the circumstances in which one FCM may serve as 
a Permitted Depository to another.

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

    Regulation 22.2 proposes requirements for an FCM's treatment of 
Cleared Swaps Customer Collateral, as well as the associated Cleared 
Swaps.
1. In General
    Regulation 22.2(a) proposes to require an FCM to treat and deal 
with the Cleared Swaps of Cleared Swaps Customers, as well as 
associated Cleared Swaps Customer Collateral, as belonging to the 
Cleared Swaps Customers. In other words, the FCM may not use Cleared 
Swaps Customer Collateral to cover or support (i) its own obligations 
or (ii) the obligations of Customers (e.g., entities transacting in 
futures or equities contracts). Such proposal parallels regulations 
1.20(a) and 1.26(a), which apply to ``customer funds,'' and obligations 
purchased with customer funds, for futures contracts.\112\
---------------------------------------------------------------------------

    \112\ Regulation 1.20(a) states: ``Under no circumstances shall 
any portion of customer funds be obligated to a clearing 
organization, any member of a contract market, a futures commission 
merchant, or any depository except to purchase, margin, guarantee, 
secure, transfer, adjust or settle trades, contracts or commodity 
option transactions of commodity or option customers.'' 17 CFR 
1.20(a).
---------------------------------------------------------------------------

2. Location of Collateral
    Regulation 22.2(b) proposes to require that an FCM segregate all 
Cleared Swaps Customer Collateral that it receives. Such proposal 
parallels regulations 1.20(a) and 1.26(a).\113\ Additionally, 
regulation 22.2(b) proposes to require that an FCM adopt one of two 
methods to hold segregated Cleared Swaps Customer Collateral, which 
parallel either implicit assumptions or explicit provisions of 
regulation 1.20(a).
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    \113\ Regulation 1.20(a) states: ``All customer funds shall be 
separately accounted for and segregated as belonging to commodity or 
option customers.'' Id.
    Regulation 1.26(a) states: ``Each futures commission merchant 
who invests customer funds in instruments described in Sec. 1.25 
shall separately account for such instruments and segregate such 
instruments as belonging to such commodity or option customers.'' 17 
CFR 1.26.
---------------------------------------------------------------------------

a. The First Method
    Paralleling an implicit assumption of regulations 1.20(a) and 
1.26(a), the first method permits the FCM to hold Cleared Swaps 
Customer Collateral itself.\114\ Continuing such parallel, the first 
method limits the FCM to holding tangible collateral (e.g., gold ingots 
or warehouse receipts) because no FCM currently serves as a depository 
registered with domestic or foreign banking regulators, and because of 
uncertainty regarding the effectiveness of such segregation if an FCM 
that was so registered held intangible collateral in its own accounts. 
Finally, the first method requires the FCM, in holding such Cleared 
Swaps Customer Collateral, to:
---------------------------------------------------------------------------

    \114\ Regulation 1.20(a) does not require that an FCM hold 
``customer funds'' in a depository. Rather, it applies certain 
requirements to the holding of ``customer funds when deposited with 
any bank, trust company, clearing organization or another futures 
commission merchant * * *'' (emphasis added). In the absence of a 
requirement to use a depository, regulation 1.20(a) must implicitly 
permit the FCM to hold ``customer funds'' itself. Id. Regulation 
1.26(a) contains similar language regarding the use of a depository. 
Id.
---------------------------------------------------------------------------

     Physically separate the collateral from FCM property 
(e.g., in a box or vault);
     Clearly identify each physical location (an ``FCM Physical 
Location'') in which it holds such collateral as a ``Location of 
Cleared Swaps Customer Collateral'' (e.g., by affixing a label or sign 
to the box or vault);
     Ensure that the FCM Physical Location provides appropriate 
protection for such collateral (e.g., by confirming that the box or 
vault has locks and is fire resistant); and
     Record in its books and records the amount of such 
collateral separately from FCM funds (i.e., to reflect the reality of 
physical separation in books and records).

[[Page 33833]]

b. The Second Method
    Paralleling an explicit provision of regulations 1.20(a) and 
1.26(a),\115\ the second method permits the FCM to hold Cleared Swaps 
Customer Collateral outside of itself, i.e., at a depository.\116\ 
Continuing that parallel, the second method limits the FCM to certain 
Permitted Depositories (as further discussed below), and requires that 
the FCM deposit such collateral in a Cleared Swaps Customer Account.
---------------------------------------------------------------------------

    \115\ Regulation 1.20(a) states: ``All customer funds shall be 
separately accounted for and segregated as belonging to commodity or 
option customers. Such customer funds when deposited with any bank, 
trust company, clearing organization or another futures commission 
merchant shall be deposited under an account name which clearly 
identifies them as such and shows that they are segregated as 
required by the Act and this part.'' Id. Regulation 1.26(a) contains 
similar language. Id.
    \116\ If an FCM chooses to accept intangible Cleared Swaps 
Customer Collateral, then the proposal effectively requires the FCM 
to maintain such collateral outside of itself. If the FCM accepts 
tangible Cleared Swaps Customer Collateral (e.g., a gold ingot) and 
transfers such collateral to a depository (e.g., a DCO), the FCM 
will be considered to be depositing such collateral rather than 
maintaining the collateral itself.
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3. Commingling
    Regulation 22.2(c) proposes to permit an FCM to commingle the 
Cleared Swaps Customer Collateral of multiple Cleared Swaps Customers, 
while prohibiting the FCM from commingling Cleared Swaps Customer 
Collateral with:
     FCM property, except as permitted under proposed 
regulation 22.2(e) (as discussed below); or
     ``Customer funds'' for futures contracts (as regulation 
1.3 defines such term) or the ``foreign futures or foreign options 
secured amount'' (as regulation 1.3 defines such term), except as 
permitted by a Commission rule, regulation or order (or a derivatives 
clearing organization rule approved pursuant to regulation 
39.15(b)(2)).\117\
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    \117\ As the discussion on the proposed definition of ``Cleared 
Swaps'' highlights, if the Commission adopts a rule or regulation or 
issues an order pursuant to section 4d(a) of the CEA, or if the 
Commission approves DCO rules pursuant to proposed regulation 
39.15(b)(2) permitting such commingling, the Commission would apply 
the Corresponding Provisions and Part 190 to the Cleared Swap (and 
related collateral) as if the swap constituted a futures contract 
(and related collateral).
    In contrast, if the Commission adopts a rule or regulation or 
issues an order pursuant to section 4d(f) of the CEA, or if the 
Commission approves DCO rules pursuant to proposed regulation 
39.15(b)(2) permitting such commingling, the proposed definition of 
``Cleared Swap'' would operate to apply Part 22 and Part 190 to (i) 
the futures contract (and related collateral) or (ii) the foreign 
futures contract (and related collateral) as if such contracts 
constituted Cleared Swaps (and related collateral).
---------------------------------------------------------------------------

Proposed regulation 22.2(c) parallels regulations 1.20(a), 1.20(c), and 
1.26(a).\118\
---------------------------------------------------------------------------

    \118\ Regulations 1.20(a) and 1.26(a) implicitly (i) permit the 
FCM to commingle ``customer funds'' from multiple futures customers 
and (ii) prohibit the FCM from commingling ``customer funds'' with 
either FCM funds or funds supporting customer transactions in non-
futures contracts. Specifically, regulation 1.20(a) states: ``All 
customer funds shall be separately accounted for and segregated as 
belonging to commodity or option customers.'' Similarly, regulation 
1.26(a) states: ``Each futures commission merchant who invests 
customer funds in instruments described in Sec. 1.25 shall 
separately account for such instruments and segregate such 
instruments as belonging to such commodity or option customers.'' 17 
CFR 1.20(a) and 1.26(a).
    Regulation 1.20(c), in contrast, first explicitly prohibits an 
FCM from commingling the ``customer funds'' of one futures customer 
with (i) ``customer funds'' of another futures customer, (ii) funds 
supporting customer transactions in non-futures contracts (e.g., the 
``foreign futures and options secured amount,'' as defined in 
regulation 1.3), and (iii) FCM funds. Specifically, regulation 
1.20(c) states: ``Each futures commission merchant shall treat and 
deal with the customer funds of a commodity customer or of an option 
customer as belonging to such commodity or option customer. All 
customer funds shall be separately accounted for, and shall not be 
commingled with the money, securities, or property of a futures 
commission merchant or of any other person. * * *'' Notwithstanding 
the foregoing, however, regulation 1.20(c) then permits an FCM to 
commingle ``customer funds'' of multiple futures customers for 
convenience. Specifically, regulation 1.20(c) contains the following 
proviso: ``Provided, however, that customer funds treated as 
belonging to the commodity or option customers of a futures 
commission merchant may for convenience be commingled and deposited 
in the same account or accounts with any bank or trust company, with 
another person registered as a futures commission merchant, or with 
a clearing organization. * * *'' Regulation 1.20(c) does not contain 
a similar exception for (i) funds supporting customer transactions 
in non-futures contracts or (ii) FCM funds. 17 CFR 1.20(c).
---------------------------------------------------------------------------

4. Limitations on Use
    Regulation 22.2(d) proposes certain limitations on the use that an 
FCM may make of Cleared Swaps Customer Collateral. First, regulation 
22.2(d)(1) proposes to prohibit an FCM from using, or permitting the 
use of, the Cleared Swaps Customer Collateral or one Cleared Swaps 
Customer to purchase, margin, or settle the Cleared Swaps, or any other 
transaction, of a person other than the Cleared Swaps Customer. Such 
proposal parallels regulation 1.20(c) and 1.22.\119\ Second, regulation 
22.2(d)(2) proposes to prohibit an FCM from using Cleared Swaps 
Customer Collateral to margin, guarantee, or secure the non-Cleared 
Swap contracts (e.g., futures or foreign futures contracts) of the 
entity constituting the Cleared Swaps Customer.\120\ Such proposal 
parallels regulation 1.22.\121\
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    \119\ Regulation 1.20(c) states: ``All customer funds shall be 
separately accounted for, and shall not * * * be used to secure or 
guarantee the trades, contracts or commodity options, or to secure 
or extend the credit, of any person other than the one for whom the 
same are held.'' Id.
    Regulation 1.22 states: ``No futures commission merchant shall 
use, or permit the use of, the customer funds of one commodity and/
or option customer to purchase, margin, or settle the trades, 
contracts, or commodity options of, or to secure or extend the 
credit of, any person other than such customer or option customer.'' 
17 CFR 1.22.
    \120\ As mentioned above, an entity may simultaneously transact 
(i) futures contracts, (ii) foreign futures contracts, and (iii) 
Cleared Swaps. Such entity would constitute a Cleared Swaps Customer 
only with respect to its Cleared Swaps.
    \121\ Regulation 1.22 further states: ``Customer funds shall not 
be used to carry trades or positions of the same commodity and/or 
option customer other than in commodities or commodity options 
traded through the facilities of a contract market.'' 17 CFR 1.22.
---------------------------------------------------------------------------

    Regulation 22.2(d)(2) proposes to prohibit an FCM from imposing, or 
permitting the imposition of, a lien on Cleared Swaps Customer 
Collateral, including on any FCM residual financial interest therein 
(as regulation 22.2(e)(3) discusses further). The Commission believes 
that such a prohibition, in the event that an FCM becomes insolvent, 
would preempt the claim of an FCM creditor against any portion of the 
Cleared Swaps Customer Collateral, and would thereby prevent the FCM 
creditor from interfering with the porting of such collateral to a 
solvent FCM.
    Regulation 22.2(d)(3) proposes to prohibit an FCM from claiming 
that any of the following constitutes Cleared Swaps Customer 
Collateral:
     Money invested in the securities, memberships, or 
obligations of any DCO, DCM, SEF, or SDR; or
     Money, securities, or other property that any DCO holds 
and may use for a purpose other than to margin, guarantee, secure, 
transfer, adjust or settle the obligations incurred by the FCM on 
behalf of its Cleared Swaps Customers.

Such proposal parallels regulation 1.24.\122\
---------------------------------------------------------------------------

    \122\ Regulation 1.24 states: ``Money held in a segregated 
account by a futures commission merchant shall not include: (a) 
Money invested in obligations or stocks of any clearing organization 
or in memberships in or obligations of any contract market; or (b) 
money held by any clearing organization which it may use for any 
purpose other than to purchase, margin, guarantee, secure, transfer, 
adjust, or settle the contracts, trades, or commodity options of the 
commodity or option customers of such futures commission merchant.'' 
17 CFR 1.24.
---------------------------------------------------------------------------

5. Exceptions
    Regulation 22.2(e) proposes certain exceptions to the 
abovementioned requirements and limitations.
a. Permitted Investments
    Proposed regulation 22.2(e)(1) constitutes an exception to 
regulation 22.2(d) (Limitations on Use). Regulation 22.2(e)(1) proposes 
to allow an FCM to

[[Page 33834]]

invest Cleared Swaps Customer Collateral in accordance with regulation 
1.25, as such regulation may be amended from time to time. Regulation 
1.25 delineates permitted investments of ``customer funds'' (as 
regulation 1.3 defines such term) for futures contracts.\123\
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    \123\ One commenter, Federated Investors, Inc. (Freeman and 
Hawke), argues that limitations on the investment of customer 
collateral in money market mutual funds are inappropriate for 
futures, and even more inappropriate for swaps. As mentioned above, 
the Commission has proposed amendments to regulation 1.25. See 
Investment of Customer Funds and Funds Held in an Account for 
Foreign Futures and Foreign Options Transactions, 75 FR 67642 (Nov. 
3, 2010). With respect to limitations on investment of cleared swaps 
customer collateral, the Dodd-Frank Act provides, in newly-enacted 
section 4d(f)(4) of the CEA, that such collateral
    * * * may be invested in obligations of the United States, in 
general obligations of any State or of any political subdivision of 
a State, and in obligations fully guaranteed as to principal and 
interest by the United States, or in any other investment that the 
Commission may by rule or regulation prescribe * * *.
    Thus, with the exception of the specified government 
obligations, Congress chose not to mandate any specific acceptable 
customer investments. In exercising the power granted under section 
4d(f)(4) to expand the universe of acceptable customer investments, 
the Commission is seeking the same goals as in regulation 1.25--
namely, preserving principal and maintaining liquidity. See 75 FR at 
67646. Accordingly, the Commission is proposing to incorporate the 
provisions of regulation 1.25 (as amended from time to time) by 
reference.
---------------------------------------------------------------------------

    By allowing certain investments of Cleared Swaps Customer 
Collateral, proposed regulation 22.2(e)(1) parallels regulation 
1.20(c).\124\
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    \124\ Regulation 1.20(c) states: ``* * * customer funds may be 
invested in instruments described in Sec. 1.25.'' 17 CFR 1.20(c).
---------------------------------------------------------------------------

b. Permitted Withdrawals
    Proposed regulation 22.2(e)(2) permits an FCM to withdraw Cleared 
Swaps Customer Collateral for such purposes as meeting margin calls at 
a DCO or a Collecting FCM, or to meet charges lawfully accruing in 
connection with a cleared swap, such as brokerage or storage charges. 
Regulation 22.2(e)(2) parallels regulation 1.20(c) and implements 
section 4d(f)(3)(A)(ii).
c. Deposits of Own Money, Securities, or Other Property
    Proposed regulation 22.2(e)(3) constitutes an exception to 
regulations 22.2(b) (Location of Cleared Swaps Customer Collateral) and 
(c) (Commingling). Regulation 22.2(e)(3) proposes to permit an FCM: (i) 
To place its own property in an FCM Physical Location or (ii) to 
deposit its own property in a Cleared Swaps Customer Account.\125\ As 
further explained below, proposed regulation 22.2(f) (Requirements as 
to Amount) mandates an FCM to use its own capital to cover the negative 
account balance of any Cleared Swaps Customer. To avoid the possibility 
of a deficiency,\126\ an FCM may choose to place or deposit, in 
advance, its own property in an FCM Physical Location or a Cleared 
Swaps Customer Account, as applicable. By permitting such placement or 
deposit, proposed regulation 22.2(e)(3) parallels regulation 1.23.\127\
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    \125\ Regulation 22.2(e)(3) proposes to permit an FCM to deposit 
only those securities that are unencumbered and are of the types 
specified in regulation 1.25. Such proposal accords with regulation 
1.23. See infra note 127. The Commission notes, however, that this 
proposal does not, and is not meant to, require a DCO to accept all 
of the types of securities or other property specified in regulation 
1.25.
    \126\ See regulation 1.12(h) (requiring an FCM that learns of a 
deficiency in segregated funds to notify the Commission and the 
FCM's designated self-regulatory organization of that deficiency).
    \127\ Regulation 1.23 states: ``The provision in section 
4d(a)(2) of the Act and the provision in Sec.  1.20(c), which 
prohibit the commingling of customer funds with the funds of a 
futures commission merchant, shall not be * * * construed to prevent 
a futures commission merchant from adding to such segregated 
customer funds such amount or amounts of money, from its own funds 
or unencumbered securities from its own inventory, of the type set 
forth in Sec.  1.25, as it may deem necessary to ensure any and all 
commodity or option customers' accounts from becoming under 
segregated at any time.'' 17 CFR 1.23.
---------------------------------------------------------------------------

d. Residual Financial Interest
    Proposed regulation 22.2(e)(4) clarifies that, if an FCM places or 
deposits its own property in an FCM Physical Location or a Cleared 
Swaps Customer Account, as applicable, then that property becomes 
Cleared Swaps Customer Collateral. This regulation would permit an FCM 
to retain a residual financial interest in property in excess of that 
necessary to comport with proposed regulation 22.2(f) (Requirements as 
to Amount). It allows the FCM to make withdrawals from the FCM Physical 
Location or the Cleared Swaps Customer Account, as applicable, so long 
as the FCM first ascertains that such withdrawals do not surpass its 
residual financial interest. In general, proposed regulation 22.2(e)(4) 
parallels regulation 1.23.\128\
---------------------------------------------------------------------------

    \128\ Regulation 1.23 states, in addition to the text in note 
127 supra: ``The provision in section 4d(a)(2) of the Act and the 
provision in Sec.  1.20(c), which prohibit the commingling of 
customer funds with the funds of a futures commission merchant, 
shall not be construed to prevent a futures commission merchant from 
having a residual financial interest in the customer funds, 
segregated as required by the Act and the rules in this part and set 
apart for the benefit of commodity or option customers * * * The 
books and records of a futures commission merchant shall at all 
times accurately reflect its interest in the segregated funds. A 
futures commission merchant may draw upon such segregated funds to 
its own order, to the extent of its actual interest therein, 
including the withdrawal of securities held in segregated 
safekeeping accounts held by a bank, trust company, contract market, 
clearing organization or other futures commission merchant. Such 
withdrawal shall not result in the funds of one commodity and/or 
option customer being used to purchase, margin or carry the trades, 
contracts or commodity options, or extend the credit of any other 
commodity customer, option customer or other customer.'' Id.
---------------------------------------------------------------------------

e. Requirements as to Amount
i. Background
    Proposed regulation 22.2(f) sets forth an explicit calculation for 
the value of Cleared Swaps Customer Collateral that each FCM must hold, 
which parallels the implicit calculation in the Part 1 Provisions. The 
Part 1 Provisions clearly require an FCM to segregate ``customer 
funds'' (as regulation 1.3 defines such term) for futures 
contracts.\129\ However, the Part 1 Provisions also consider ``customer 
funds'' to be fungible. Specifically, because the Part 1 Provisions 
permit FCM commingling of ``customer funds'' from multiple futures 
customers \130\ and FCM investment of such funds,\131\ the Part 1 
Provisions implicitly allow an FCM to meet its obligations without 
maintaining the exact property that each futures customer conveys. The 
Part 1 Provisions do require an FCM to maintain, at a minimum, an 
overall amount of ``customer funds'' in segregation.\132\ Nevertheless, 
the Part 1 Provisions do not set forth an explicit calculation for such 
amount. Instead, the Part 1 Provisions imply that an FCM must maintain 
an amount in segregation that would prevent the FCM from using the 
``customer funds'' of one futures customer to ``secure or guarantee the 
trades, contracts or commodity options, or to secure or extend the 
credit of any person other than the one for whom the same are held.'' 
\133\ Form 1-FR-FCM builds upon this implicit calculation.
---------------------------------------------------------------------------

    \129\ See regulations 1.20(a) and (c) and 1.26(a).
    \130\ See regulation 1.20(c).
    \131\ See regulations 1.20(c) and 1.25.
    \132\ Regulation 1.32 states: ``Each futures commission merchant 
must compute as of the close of each business day, on a currency-by-
currency basis * * * (2) the amount of such customer funds required 
by the Act and these regulations to be on deposit in segregated 
accounts on behalf of such commodity and option customers. * * *'' 
17 CFR 1.32.
    \133\ Regulation 1.20.
---------------------------------------------------------------------------

ii. Proposed Requirement
    Consistent with the intention of the Commission to incorporate 
updated and clarified versions of the Part 1 Provisions in Part 22, the 
Commission proposes an explicit calculation for the amount of Cleared 
Swaps Customer Collateral that an FCM must maintain in segregation. As 
such this calculation is intended only to make explicit what the Part 1 
Provisions left implicit, the

[[Page 33835]]

calculation does not materially differ in the Form 1-FR-FCM from the 
calculation for ``customer funds'' of futures customers.
    First, regulation 22.2(f) proposes to define ``account'' to 
reference FCM's books and records pertaining to the Cleared Swaps 
Customer Collateral of a particular Cleared Swaps Customer.
    Second, regulation 22.2(f) proposes to require an FCM to reflect in 
its account for each Cleared Swaps Customer the market value of any 
Cleared Swaps Collateral that it receives from such customer, as 
adjusted for:
     Any uses that proposed regulation 22.2(d) permits;
     Any accruals or losses on investments permitted by 
proposed regulation 22.2(e) that, pursuant to the applicable FCM 
customer agreement, are creditable or chargeable to such Cleared Swaps 
Customer;
     Any charges lawfully accruing to the Cleared Swaps 
Customer, including any commission, brokerage fee, interest, tax, or 
storage fee; and
     Any appropriately authorized distribution or transfer of 
the Cleared Swaps Collateral.
    Third, regulation 22.2(f) proposes to categorize accounts of 
Cleared Swaps Customers as having credit or debit balances. Accounts 
where the market value of Cleared Swaps Customer Collateral is positive 
after adjustments have credit balances. Conversely, accounts where the 
market value of Cleared Swaps Customer Collateral is negative after 
adjustments have debit balances.
    Fourth, regulation 22.2(f) proposes to require an FCM to maintain 
in segregation, in its FCM Physical Location and/or its Cleared Swaps 
Customer Accounts at Permitted Depositories, an amount equal to the sum 
of any credit balances that Cleared Swaps Customers have in their 
accounts, excluding from such sum any debit balances that Cleared Swaps 
Customers have in their accounts (the ``Collateral Requirement'').
    Finally, regulation 22.2(f) proposes an exception to the exclusion 
of debit balances, which parallels regulation 1.32(b).\134\ 
Specifically, to the extent that a Cleared Swaps Customer deposited 
``readily marketable securities'' with the FCM to secure a debit 
balance in its account, then the FCM must include such balance in the 
Collateral Requirement. ``Readily marketable'' is proposed to 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). Regulation 22.2(f) proposes to deem a 
debit balance ``secured'' only if the FCM maintains a security interest 
in the ``readily marketable securities,'' and holds a written 
authorization to liquidate such securities in its discretion. To 
determine the amount of the debit balance that the FCM must include in 
the Collateral Requirement, regulation 22.2(f) proposes to require the 
FCM: (i) To determine the market value of such securities, and (ii) to 
reduce such market value by applicable percentage deductions (i.e., 
``securities haircuts'') as set forth in rule 15c3-1(c)(2)(vi) of the 
Securities and Exchange Commission. The FCM would include in the 
Collateral Requirement that portion of the debit balance, not exceeding 
100 percent, which is secured by such reduced market value.
---------------------------------------------------------------------------

    \134\ Regulation 1.32(b) states: ``In computing the amount of 
funds required to be in segregated accounts, a futures commission 
merchant may offset any net deficit in a particular customer's 
account against the current market value of readily marketable 
securities, less applicable percentage deductions (i.e., 
``securities haircuts'') as set forth in rule 15c3-1(c)(2)(vi) of 
the Securities and Exchange Commission (17 CFR 241.15c3-
1(c)(2)(vi)), held for the same customer's account. The futures 
commission merchant must maintain a security interest in the 
securities, including a written authorization to liquidate the 
securities at the futures commission merchant's discretion, and must 
segregate the securities in a safekeeping account with a bank, trust 
company, clearing organization of a contract market, or another 
futures commission merchant. For purposes of this section, a 
security will be considered readily marketable if it is traded on a 
``ready market'' as defined in rule 15c3-1(c)(11)(i) of the 
Securities and Exchange Commission (17 CFR 240.15c3-1(c)(11)(i)).'' 
17 CFR 1.32(b).
---------------------------------------------------------------------------

iii. Question
    The Commission requests comment on the Collateral Requirement 
proposed in regulation 22.2(f). Specifically, the Commission requests 
comment on whether the explicit calculation of such Collateral 
Requirement materially differs from the implicit calculation in the 
Part 1 Provisions for segregated ``customer funds'' of futures 
customers.
f. Segregated Account; Daily Computation and Record
    Regulation 22.2(g), paralleling regulation 1.32,\135\ proposes to 
require an FCM to compute, as of the close of each business day, on a 
currency-by-currency basis:
---------------------------------------------------------------------------

    \135\ Regulation 1.32(a) states: ``Each futures commission 
merchant must compute as of the close of each business day, on a 
currency-by-currency basis: (1) The total amount of customer funds 
on deposit in segregated accounts on behalf of commodity and option 
customers; (2) the amount of such customer funds required by the Act 
and these regulations to be on deposit in segregated accounts on 
behalf of such commodity and option customers; and (3) the amount of 
the futures commission merchant's residual interest in such customer 
funds.'' 17 CFR 1.32(a).
---------------------------------------------------------------------------

     The aggregate market value of the Cleared Swaps Customer 
Collateral in all FCM Physical Locations and all Cleared Swaps Customer 
Accounts at Permitted Depositories (the ``Collateral Value'');
     The Collateral Requirement; and
     The amount of the residual financial interest that the FCM 
holds in such Cleared Swaps Customer Collateral (i.e., the difference 
between the Collateral Value and the Collateral Requirement).
    Regulation 22.2(g), further paralleling regulation 1.32,\136\ 
proposes to require the FCM to complete the abovementioned computation 
prior to noon on the next business day, and to keep all computations, 
together with supporting data, in accordance with regulation 1.31. 
``Noon'' refers to noon in the time zone where the FCM's principal 
office is located.
---------------------------------------------------------------------------

    \136\ Regulation 1.32(c) states: ``The daily computations 
required by this section must be completed by the futures commission 
merchant prior to noon on the next business day and must be kept, 
together with all supporting data, in accordance with the 
requirements of Sec.  1.31.'' 17 CFR 1.32(c).
---------------------------------------------------------------------------

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

    Regulation 22.3 proposes requirements for DCO treatment of Cleared 
Swaps Customer Collateral from FCMs, as well as the associated Cleared 
Swaps. Such requirements generally parallel the Part 1 Provisions.
1. In General
    Regulation 22.3(a) proposes to require a DCO to treat and deal with 
the Cleared Swaps Customer Collateral deposited by an FCM as belonging 
to the Cleared Swaps Customers of such FCM and not other persons, 
including, without limitation, the FCM. In other words, the DCO may not 
use Cleared Swaps Customer Collateral to cover or support (i) the 
obligations of the FCM depositing the Cleared Swaps Customer 
Collateral, (ii) the obligations of any other FCM, or (iii) the 
obligations of Customers (e.g., entities transacting in futures or 
equities contracts) of any FCM. Such proposal parallels regulation 
1.20(a), which applies to ``customer funds'' for futures 
contracts.\137\
---------------------------------------------------------------------------

    \137\ See note 112 supra.
---------------------------------------------------------------------------

2. Location of Collateral
    Regulation 22.3(b) proposes to require that a DCO segregate all 
Cleared Swaps Customer Collateral that it receives from

[[Page 33836]]

FCMs. Such proposal parallels regulations 1.20(b) and 1.26(b).\138\ 
Additionally, regulation 22.2(b) proposes to require that a DCO adopt 
one of two methods to hold segregated Cleared Swaps Customer 
Collateral, which parallel either implicit assumptions or explicit 
provisions of regulation 1.20(b).
---------------------------------------------------------------------------

    \138\ Regulation 1.20(b) states: ``All customer funds received 
by a clearing organization from a member of the clearing 
organization to purchase, margin, guarantee, secure or settle the 
trades, contracts or commodity options of the clearing member's 
commodity or option customers and all money accruing to such 
commodity or option customers as the result of trades, contracts or 
commodity options so carried shall be separately accounted for and 
segregated as belonging to such commodity or option customers. * * 
*'' 17 CFR 1.20(b).
    Regulation 1.26(b) states: ``Each clearing organization which 
invests money belonging or accruing to commodity or option customers 
of its clearing members in instruments described in Sec.  1.25 shall 
separately account for such instruments and segregate such 
instruments as belonging to such commodity or option customers.'' 17 
CFR 1.26(b).
---------------------------------------------------------------------------

a. The First Method
    Paralleling an implicit assumption of regulations 1.20(b) and 
1.26(b), the first method permits the DCO to hold Cleared Swaps 
Customer Collateral itself.\139\ Continuing such parallel, the first 
method limits the DCO to holding tangible collateral (e.g., gold ingots 
or warehouse receipts) because no DCO serves as a depository for 
intangible collateral. Finally, the first method requires the FCM, in 
holding such Cleared Swaps Customer Collateral, to:
---------------------------------------------------------------------------

    \139\ Regulation 1.20(b) does not require that a DCO hold 
``customer funds'' from FCMs in a depository. Rather, it applies 
certain requirements to the holding of ``customer funds when 
deposited in a bank or trust company * * *'' (emphasis added). In 
the absence of a requirement to use a depository, regulation 1.20(b) 
must implicitly permit the DCO to hold ``customer funds'' from FCMs 
itself. Id. Regulation 1.26(b) contains similar language regarding 
the use of a depository. Id.
---------------------------------------------------------------------------

     Physically separate (e.g., in a box or vault) such 
collateral from its own property, the property of any FCM, and the 
property of any other person that is not a Cleared Swaps Customer of an 
FCM;
     Clearly identify each physical location (the ``DCO 
Physical Location'') in which it holds such collateral as a ``Location 
of Cleared Swaps Customer Collateral'' (e.g., by affixing a label or 
sign to the box or vault);
     Ensure that each such DCO Physical Location provides 
appropriate protection for such collateral (e.g., by confirming that 
the box or vault has locks and is fire resistant); and
     Record in its books and records the amount of such 
collateral separately from its own funds, the funds of any FCM, and the 
funds of any other person that is not a Cleared Swaps Customer of an 
FCM (i.e., to reflect the reality of physical separation in books and 
records).
b. The Second Method
    Paralleling explicit provisions of regulations 1.20(b) and 
1.26(b),\140\ the second method permits the DCO to hold Cleared Swaps 
Customer Collateral from FCMs outside of itself.\141\ Continuing such 
parallel, the second method limits the DCO to certain Permitted 
Depositories (as further discussed below), and requires that the DCO 
maintain a Cleared Swaps Customer Account with each Permitted 
Depository.
---------------------------------------------------------------------------

    \140\ Regulation 1.20(b) states: ``All customer funds received 
by a clearing organization from a member of the clearing 
organization to purchase, margin, guarantee, secure or settle the 
trades, contracts or commodity options of the clearing member's 
commodity or option customers and all money accruing to such 
commodity or option customers as the result of trades, contracts or 
commodity options so carried shall be separately accounted for and 
segregated as belonging to such commodity or option customers, and a 
clearing organization shall not hold, use or dispose of such 
customer funds except as belonging to such commodity or option 
customers. Such customer funds when deposited in a bank or trust 
company shall be deposited under an account name which clearly shows 
that they are the customer funds of the commodity or option 
customers of clearing members, segregated as required by the Act and 
these regulations.'' Id. Regulation 1.26(b) contains similar 
language. Id.
    \141\ If a DCO chooses to accept intangible Cleared Swaps 
Customer Collateral from an FCM, then the proposal effectively 
requires the DCO to maintain such collateral outside of itself.
---------------------------------------------------------------------------

c. Questions
    As described above, both the first and second methods incorporate 
assumptions with respect to DCO structure that were true when 
regulations 1.20(b) and 1.26(b) were first adopted and remain true 
currently. However, the Commission recognizes that DCO structure may 
change after the Dodd-Frank Act and the regulations thereunder become 
effective. Notably, the Commission recognizes that a depository 
registered with either domestic or foreign banking regulators may seek 
to become a DCO, and that such depository may seek to hold Cleared 
Swaps Customer Collateral, as well as other forms of customer property. 
The Commission therefore requests comment on what, if any, changes to 
proposed regulation 22.3 may be appropriate to accommodate such 
possibility. Specifically, the Commission requests comment on whether a 
DCO that is also a registered depository should be permitted to hold 
both tangible and intangible forms of Cleared Swaps Customer Collateral 
from FCMs itself. What challenges might this arrangement pose to 
protection (including effective segregation) of Cleared Swaps Customer 
Collateral (as well as other forms of customer property)? How might 
these challenges be addressed?
3. Commingling
    Regulation 22.3(c) proposes to permit a DCO to commingle the 
Cleared Swaps Customer Collateral that it receives from multiple FCMs 
on behalf of their Cleared Swaps Customers, while prohibiting the DCO 
from commingling Cleared Swaps Customer Collateral with:
     The money, securities, or other property belonging to the 
DCO;
     The money, securities, or other property belonging to any 
FCM; or
     Other categories of funds that it receives from an FCM on 
behalf of Customers, including ``customer funds'' for futures contracts 
(as regulation 1.3 defines such term) or the ``foreign futures or 
foreign options secured amount'' (as regulation 1.3 defines such term), 
except as permitted by a Commission rule, regulation or order (or by a 
derivatives clearing organization rule approved pursuant to regulation 
39.15(b)(2)).\142\
---------------------------------------------------------------------------

    \142\ See note 117 supra.
---------------------------------------------------------------------------

    Proposed regulation 22.3(c) parallels regulations 1.20(a), 1.20(b), 
and 1.26(b).\143\
---------------------------------------------------------------------------

    \143\ Regulations 1.20(a), 1.20(b), and 1.26(b) implicitly (i) 
permit the DCO to commingle the ``customer funds'' that it receives 
from multiple FCMs and (ii) prohibit the DCO from commingling 
``customer funds'' with DCO funds, FCM funds, or funds supporting 
customer transactions in non-futures contracts. Specifically, 
regulation 1.20(a) states: ``All customer funds shall be separately 
accounted for and segregated as belonging to commodity or option 
customers.'' Regulation 1.20(b) further develops such language, as 
detailed in note 140 supra. Similarly, regulation 1.26(b) states: 
``Each clearing organization which invests money belonging or 
accruing to commodity or option customers of its clearing members in 
instruments described in Sec.  1.25 shall separately account for 
such instruments and segregate such instruments as belonging to such 
commodity or option customers.'' 17 CFR 1.20(a), 1.20(b), and 
1.26(a).
---------------------------------------------------------------------------

4. Exceptions
    Regulations 22.3(d) and (e) propose certain exceptions to the 
abovementioned requirements and limitations.
a. FCM Deposits and Withdrawals
    Regulation 22.3(d) constitutes an exception to regulation 22.3(c) 
(Commingling). Regulation 22.3(d) proposes to allow a DCO to place 
money, securities, or other property belonging to an FCM in a DCO 
Physical Location, or deposit such money, securities, or other property 
in the relevant Cleared Swaps Customer Account, pursuant to an 
instruction

[[Page 33837]]

from the FCM. Regulation 22.3(d) further proposes to permit FCM 
withdrawals of money, securities, or other property from a DCO Physical 
Location or Cleared Swaps Customer Account. As discussed below, a DCO 
functions as a Permitted Depository for an FCM. Proposed regulation 
22.3 enables such function, by facilitating (i) FCM deposits of its own 
money, securities, or other property in its Cleared Swaps Customer 
Account at the DCO,\144\ and (ii) FCM withdrawals of its residual 
financial interest in the Cleared Swaps Customer Collateral.\145\
---------------------------------------------------------------------------

    \144\ See proposed regulation 22.2(d)(2).
    \145\ See proposed regulation 22.2(d)(3).
---------------------------------------------------------------------------

b. Permitted Investments
    Regulation 22.3(e) constitutes an exception to regulation 
22.3(b)(1) (Location of Cleared Swaps Collateral) and regulation 22.15 
(Treatment of Cleared Swaps Collateral on an Individual Basis). 
Regulation 22.3(e) proposes to allow a DCO to invest Cleared Swaps 
Customer Collateral in accordance with regulation 1.25, which 
delineates permitted investments of ``customer funds'' (as regulation 
1.3 defines such term) for futures contracts.

D. Proposed Regulation 22.4--Futures Commission Merchants and 
Derivatives Clearing Organizations: Permitted Depositories

1. The Permitted Depositories
    Regulation 22.4 proposes a list of depositories permitted to hold 
Cleared Swaps Customer Collateral (the ``Permitted Depositories''). For 
a DCO or an FCM, a Permitted Depository must (subject to regulation 
22.9) be: (i) A bank located in the United States; (ii) a trust company 
located in the United States; or (iii) a DCO. As discussed further 
below, regulation 22.9 incorporates regulation 1.49 with respect to 
Permitted Depositories located outside the United States.\146\ An FCM 
may also serve as a Permitted Depository, but only if it is a 
``Collecting Futures Commission Merchant'' carrying the Cleared Swaps 
(and related Cleared Swaps Customer Collateral) of a ``Depositing 
Futures Commission Merchant'' (as regulation 22.1 proposes to define 
each such term). Before an entity may serve as a Permitted Depository, 
the DCO or FCM seeking to maintain a Cleared Swaps Customer Account 
must obtain a written acknowledgement letter, as discussed further 
below.
---------------------------------------------------------------------------

    \146\ While there is some ambiguity as to whether regulation 
1.49 currently applies to DCOs given the provisions of current 
regulation 39.2, the Commission has proposed amendments that would 
remove regulation 39.2. See Risk Management Requirements for 
Derivatives Clearing Organizations, 76 FR 3698, 3714 (Jan. 20, 
2011). Thus, if the proposed amendments are finalized as written, 
DCOs would be subject to the requirements set forth in regulation 
1.49. In addition, notwithstanding regulation 39.2, the Commission 
and industry have proceeded on the basis that the requirements of 
regulation 1.49 apply to DCOs.
---------------------------------------------------------------------------

    In general, proposed regulation 22.4 parallels regulations 1.20, 
1.26 and 1.49(d)(2), with the exception of allowing an FCM to serve as 
a Permitted Depository only if the FCM is a ``Collecting Futures 
Commission Merchant.'' \147\ The Commission believes that such a 
limitation is appropriate, because the purpose for allowing an FCM to 
serve as a Permitted Depository is to facilitate the clearing of swaps 
carried by an FCM that is not a member of a particular DCO (i.e., the 
Depositing Futures Commission Merchant) through another FCM that is a 
member of that DCO (i.e., the Collecting Futures Commission 
Merchant).\148\
---------------------------------------------------------------------------

    \147\ Regulations 1.20(a) and (c) imply that an FCM may deposit 
``customer funds'' with ``any bank, trust company, clearing 
organization or another futures commission merchant.'' Regulation 
1.20(b) implies than a DCO may deposit ``customer funds'' from FCMs 
with ``a bank or trust company.'' Regulations 1.26(a) and (b) 
contain similar language. Regulation 1.49(d)(2) clarifies that an 
FCM or DCO may deposit ``customer funds'' in the United States only 
with ``(i) A bank or trust company; (ii) A futures commission 
merchant registered as such with the Commission; or (iii) A 
derivatives clearing organization.'' 17 CFR 1.20, 1.26, and 
1.49(d)(2).
    \148\ See section 4d(f)(3)(A)(ii) of the CEA, as amended by 
section 724 of the Dodd-Frank Act (explicitly stating that Cleared 
Swaps Customer Collateral may be withdrawn to margin, guarantee, 
secure, transfer, adjust, or settle a Cleared Swap with a DCO, or 
any member of a DCO, and not explicitly allowing withdrawals for any 
other purpose (except for permitted investments)).
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2. Question
    The Commission seeks public comment on whether the limitation that 
it is proposing for an FCM serving as a Permitted Depository is 
appropriate.

E. Proposed Regulation 22.5--Futures Commission Merchants and 
Derivatives Clearing Organizations: Written Acknowledgement

1. Substantive Requirements
    As mentioned above, a DCO or FCM must obtain a written 
acknowledgement letter from a potential Permitted Depository before 
opening a Cleared Swaps Customer Account.\149\ Regulation 22.5 proposes 
substantive requirements for such letter. First, regulation 22.5 
proposes to mandate that the FCM or DCO obtain a written 
acknowledgement letter in accordance with regulations 1.20 and 1.26, 
which shall apply to Cleared Swaps Customer Collateral as if such 
collateral constituted ``customer funds'' (as regulation 1.3 defines 
such term). The Commission seeks comment as to whether such 
incorporation by reference is the most appropriate way to proceed, or 
whether the Commission should publish a separate form acknowledgement 
letter for swaps. In what way should such separate form letter differ 
from the form letter previously published for futures customer funds? 
\150\
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    \149\ The function of a written acknowledgment letter is to 
ensure that a potential Permitted Depository is aware that (i) the 
FCM or DCO is opening a Cleared Swaps Customer Account, (ii) the 
funds deposited in such account constitute Cleared Swaps Customer 
Collateral, and (iii) such Cleared Swaps Customer Collateral is 
subject to the requirements of section 4d(f) of the CEA and Part 22 
(when finalized).
    \150\ See 75 FR 47738 (Aug. 9, 2010) (proposing form 
acknowledgment letters for customer funds and secured amount funds).
---------------------------------------------------------------------------

    Second, regulation 22.5 proposes to exempt the FCM or DCO from the 
requirement to obtain a written acknowledgement letter, if the 
potential Permitted Depository is a DCO that has adopted rules 
providing for the segregation of Cleared Swaps Customer Collateral. 
This proposed exemption is consistent with regulation 1.20.\151\
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    \151\ Currently, with respect to an FCM, regulation 1.20(a) 
states: ``Each registrant shall obtain and retain in its files for 
the period provided in Sec.  1.31 a written acknowledgment from such 
bank, trust company, clearing organization, or futures commission 
merchant, that it was informed that the customer funds deposited 
therein are those of commodity or option customers and are being 
held in accordance with the provisions of the Act and this part: 
Provided, however, that an acknowledgment need not be obtained from 
a clearing organization that has adopted and submitted to the 
Commission rules that provide for the segregation as customer funds, 
in accordance with all relevant provisions of the Act and the rules 
and orders promulgated thereunder, of all funds held on behalf of 
customers.'' 17 CFR 1.20(a).
    Currently, with respect to a DCO, regulation 1.20(b) states: 
``The clearing organization shall obtain and retain in its files for 
the period provided by Sec.  1.31 an acknowledgment from such bank 
or trust company that it was informed that the customer funds 
deposited therein are those of commodity or option customers of its 
clearing members and are being held in accordance with the 
provisions of the Act and these regulations.'' 17 CFR 1.20(b).
    However, as noted above, the Commission is currently considering 
a notice of proposed rulemaking amending regulation 1.20. See 75 FR 
47740 (Aug. 9, 2010).
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2. Question
    The Commission is currently considering a notice of proposed 
rulemaking amending regulation 1.20 with respect to requirements for 
written acknowledgement letters from depositories of ``customer funds'' 
(as regulation 1.3 defines such term) for futures contracts. The 
Commission seeks comment on whether the following are appropriate: (i) 
The incorporation of regulation 1.20 (as the Commission may choose to 
amend such

[[Page 33838]]

regulation) in proposed regulation 22.5, and (ii) the adaptation of any 
form letter that the Commission may choose to promulgate under 
regulation 1.20 to accommodate Cleared Swaps Customer Collateral under 
regulation 22.5.

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

    Regulation 22.6 proposes to require an FCM or DCO to ensure that 
the name of each Cleared Swaps Customer Account that it maintains with 
a Permitted Depository (i) clearly identifies the account as a 
``Cleared Swaps Customer Account,'' and (ii) clearly indicates that the 
collateral therein is ``Cleared Swaps Customer Collateral'' subject to 
segregation in accordance with section 4d(f) of the CEA and Part 22 (as 
final). Proposed regulation 22.6 parallels regulation 1.20(a), 1.20(b), 
1.26(a), and 1.26(b).\152\
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    \152\ With respect to the responsibilities of an FCM, regulation 
1.20(a) states: ``Such customer funds when deposited with any bank, 
trust company, clearing organization or another futures commission 
merchant shall be deposited under an account name which clearly 
identifies them as such and shows that they are segregated as 
required by the Act and this part.'' 17 CFR 1.20(a). With respect to 
the responsibilities of a DCO, regulation 1.20(b) states: ``Such 
customer funds when deposited in a bank or trust company shall be 
deposited under an account name which clearly shows that they are 
the customer funds of the commodity or option customers of clearing 
members, segregated as required by the Act and these regulations.'' 
17 CFR 1.20(b). Regulations 1.26(a) and (b) contain similar 
language.
---------------------------------------------------------------------------

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

    Regulation 22.7 proposes to require a Permitted Depository to treat 
all funds in a Cleared Swaps Customer Account as Cleared Swaps Customer 
Collateral. Regulation 22.7 further proposes to prohibit a Permitted 
Depository from holding, disposing of, or using any Cleared Swaps 
Customer Collateral as belonging to any person other than (i) the 
Cleared Swaps Customers of the FCM maintaining such Cleared Swaps 
Customer Account or (b) the Cleared Swaps Customers of the FCMs for 
which the DCO maintains such Cleared Swaps Customer Account. In other 
words, no Permitted Depository may use Cleared Swaps Customer 
Collateral to cover or support the obligations of the FCM or DCO 
maintaining the Cleared Swaps Customer Account. Proposed regulation 
22.7 parallels section 4d(f)(6) of the CEA, as added by section 724 of 
the Dodd-Frank Act.\153\ Proposed regulation 22.7 also parallels 
regulation 1.20.\154\
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    \153\ Section 4d(f)(6) of the CEA states: ``It shall be unlawful 
for any person, including any derivatives clearing organization and 
any depository institution, that has received any money, securities, 
or property for deposit in a separate account or accounts as 
provided in paragraph (2) to hold, dispose of, or use any such 
money, securities, or property as belonging to the depositing 
futures commission merchant or any person other than the swaps 
customer of the futures commission merchant.'' 7 U.S.C. 6d.
    \154\ Regulation 1.20 states: ``No person, including any 
clearing organization or any depository, that has received customer 
funds for deposit in a segregated account, as provided in this 
section, may hold, dispose of, or use any such funds as belonging to 
any person other than the option or commodity customers of the 
futures commission merchant which deposited such funds.'' 17 CFR 
1.20.
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H. Proposed Regulation 22.8--Situs of Cleared Swaps Accounts

1. Proposed Requirements
    Proposed regulation 22.8 has no analog in the Part 1 Provisions. 
Regulation 22.8 proposes to require (i) each FCM to designate the 
United States as the site (i.e., the legal situs) of the FCM Physical 
Location and the ``account'' (as regulation 22.2(f)(1) defines such 
term) that the FCM maintains for each Cleared Swaps Customer, and (ii) 
each DCO to designate the United States as the site (i.e., the legal 
situs) of the DCO Physical Location and the Cleared Swaps Customer 
Account that the DCO maintains on its books and records for the Cleared 
Swaps Customers of each FCM. In light of increased cross-border 
activity,\155\ the Commission believes that proposed regulation 22.8 is 
appropriate, as it is intended to ensure that, in the event of an FCM 
or DCO insolvency, Cleared Swaps Customer Collateral, whether received 
by an FCM or DCO, would be treated in accordance with the United States 
Bankruptcy Code. The Commission does not intend for proposed regulation 
22.8 to affect the actual locations in which an FCM or DCO may hold 
Cleared Swaps Customer Collateral. As discussed further below, an FCM 
or DCO may hold Cleared Swaps Customer Collateral (i) in denominations 
other than the United States dollar and (ii) at depositories within or 
outside of the United States. Additionally, the Commission does not 
intend for proposed regulation 22.8 to affect choice of law provisions 
that a DCO might set forth in its rules or an FCM might set forth in 
its agreement with a Cleared Swaps Customer.
---------------------------------------------------------------------------

    \155\ For example, the Commission currently regulates certain 
entities based outside of the United States (e.g., LCH.Clearnet 
Limited and ICE Clear Europe, each of which is based in the United 
Kingdom).
---------------------------------------------------------------------------

2. Questions
    The Commission requests comment on whether proposed regulation 22.8 
achieves the purpose of the Commission--namely, to ensure that Cleared 
Swaps Customer Collateral be treated in accordance with the United 
States Bankruptcy Code, to the extent possible. If proposed regulation 
22.8 does not achieve such purpose, what alternatives should the 
Commission consider to achieve such purpose? Additionally, the 
Commission requests comment on the benefits and costs of proposed 
regulation 22.8, as well as any alternatives.

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

    Regulation 22.9 proposes to incorporate regulation 1.49 by 
reference, as applicable to Cleared Swaps Customer Collateral. 
Regulation 1.49 sets forth, for futures contracts, rules determining 
the permitted denominations of customer funds (i.e., permitted 
currencies and amounts in each currency), permitted locations of 
customer funds (i.e., permitted countries and amounts in each country), 
and qualifications that entities outside of the United States must meet 
to become Permitted Depositories (e.g., minimum regulatory capital). 
However, regulation 22.9 proposes to allow an FCM to serve as a 
Permitted Depository only if that FCM is a ``Collecting Futures 
Commission Merchant'' carrying the Cleared Swaps, and associated 
Cleared Swaps Customer Collateral, for the Cleared Swaps Customers of a 
``Depositing Futures Commission Merchant.'' Such proposal accords with 
proposed regulation 22.4.

J. Proposed Regulation 22.10--Incorporation by Reference

    Regulation 22.10 proposes to incorporate by reference regulations 
1.27 (Record of investments), 1.28 (Appraisal of obligations purchased 
with customer funds), 1.29 (Increment or interest resulting from 
investment of customer funds), and 1.30 (Loans by futures commission 
merchants; treatment of proceeds), as applicable to Cleared Swaps 
Customers and Cleared Swaps Customer Collateral. Regulation 1.27 
requires FCMs and DCOs investing ``customer funds'' (as regulation 1.3 
defines such term) to maintain specified records concerning such 
investments. Regulation 1.28 requires FCMs investing ``customer funds'' 
to record and report such investment at no greater than market value. 
Regulation 1.29 permits

[[Page 33839]]

FCMs and DCOs investing ``customer funds'' to receive and retain any 
increment or interest thereon. Regulation 1.30 permits FCMs to loan 
their own funds to customers on a secured basis, and to repledge or 
sell such security pursuant to agreement with such customers. 
Regulation 1.30 does make clear, however, that the proceeds of such 
loans, when used to purchase, margin, guarantee, or secure futures 
contracts, shall be treated as ``customer funds.''

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

1. Proposed Requirements
    In order to implement the Complete Legal Segregation Model, 
regulations 22.11 to 22.16 propose, among other things, requirements 
that ensure that each DCO and FCM: (i) Obtains, on a daily basis, 
information necessary for risk management; (ii) performs, on a daily 
basis, risk management calculations and records the results; (iii) 
receives on the day of default, any residual Cleared Swaps Customer 
Collateral; and (iv) allocates, on the day of default, the value of 
Cleared Swaps Customer Collateral that it owes to each individual 
customer. Regulations 22.11 to 22.16 recognize that swaps may be 
cleared through a multi-tier system, with certain FCMs clearing swaps 
for customers directly with the DCO and other FCMs clearing swaps for 
customers indirectly through another FCM. Therefore, Part 22 recognizes 
the concepts of ``Depositing Futures Commission Merchant'' and 
``Collecting Futures Commission Merchant,'' each of which is described 
above. Regulations 22.11 to 22.16 extend their requirements through 
each potential tier of clearing, from the Depositing Futures Commission 
Merchant through the Collecting Futures Commission Merchant and finally 
to the DCO.
    Regulation 22.11 proposes to require that (i) each Depositing 
Futures Commission Merchant provide to its Collecting Futures 
Commission Merchant and (ii) each FCM member provide to its DCO, in 
each case, information sufficient to identify Cleared Swaps Customers 
on a one-time basis, and information sufficient to identify the 
portfolio of rights and obligations belonging to such customers with 
respect to their Cleared Swaps on a daily basis. If a Depositing 
Futures Commission Merchant or FCM member also serves as a Collecting 
Futures Commission Merchant, then it must provide the specified 
information with respect to each individual Cleared Swaps Customer for 
which it acts (on behalf of a Depositing Futures Commission Merchant) 
as a Collecting Futures Commission Merchant.
    The abovementioned information should aid Collecting Futures 
Commission Merchants and DCOs in their daily risk management programs 
by (i) revealing ownership of cleared swaps customer contracts (in 
contrast to currently available Large Trader information, which is 
based on control of futures contracts) and (ii) permitting DCOs to 
aggregate the positions of Cleared Swaps Customers clearing through 
multiple FCMs, and Collecting Futures Commission Merchants to aggregate 
the contracts of Cleared Swaps Customers clearing through multiple 
Depositing Futures Commission Merchants. The abovementioned information 
will also enable Collecting Futures Commission Merchants and DCOs to 
conform to their obligations to allocate Cleared Swaps Customer 
Collateral, in the event of an FCM default, pursuant to proposed 
regulation 22.15.
    The DCO is at the apex of the reporting structure that regulation 
22.11 establishes, as it receives all information for each individual 
Cleared Swaps Customer that FCMs, Collecting Futures Commission 
Merchants, and Depositing Futures Commission Merchants serve. 
Therefore, regulation 22.11 proposes to hold the DCO responsible for 
taking appropriate steps to confirm that the information that it 
receives is accurate and complete, and ensure that the information is 
being produced on a timely basis. However, because the DCO may not have 
a direct relationship with, e.g., a Depositing Futures Commission 
Merchant, the Commission intends for the DCO to take ``appropriate 
steps'' to ensure that its FCM members enter into suitable arrangements 
with, e.g., a Depositing Futures Commission Merchant to verify the 
accuracy and timeliness of information. In this manner, the Commission 
intends for the verification requirement to be applied through each 
potential tier of clearing.
2. Questions
    Does the proposed requirement in regulation 22.11 for a Depositing 
Futures Commission Merchant to provide a Collecting Futures Commission 
Merchant with information sufficient to identify its Cleared Swaps 
Customers raise any, e.g., competitive concerns? Could such concerns be 
resolved if the identities of such Cleared Swaps Customers are coded, 
with the DCO, but not the Collecting Futures Commission Merchant, 
receiving a copy of such code? What other methods would resolve such 
concerns?

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

    Regulation 22.12 proposes to require DCOs and Collecting Futures 
Commission Merchants to use the information provided pursuant to 
proposed regulation 22.11 to calculate, no less frequently than once 
each business day, the amount of collateral required (i) for each 
relevant Cleared Swaps Customer (including each such customer of a 
Depositing Futures Commission Merchant), based on the portfolio of 
rights and obligations arising from its Cleared Swaps; and (ii) for all 
relevant Cleared Swaps Customers. It is not the responsibility of a DCO 
or a Collecting Futures Commission Merchant to monitor or to calculate 
the extent to which a Cleared Swaps Customer has, in fact, posted 
excess or insufficient collateral. In the latter case, the relevant FCM 
will have, in effect, made a loan to the Cleared Swaps Customer and 
will have a claim against that customer, outside of the relationship 
with the DCO or the Collecting Futures Commission Merchant.

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

    Regulation 22.13 proposes two tools that DCOs or Collecting Futures 
Commission Merchants may use to manage the risk they incur with respect 
to individual Cleared Swaps Customers. These tools are not intended to 
be mandatory or exclusive, and the Commission seeks comment on how the 
Commission may enable DCOs or Collecting Futures Commission Merchants 
to use other tools to manage such risk.
    Regulation 22.13(a) proposes to clarify that a DCO or Collecting 
Futures Commission Merchant may increase the collateral required of a 
particular Cleared Swaps Customer or group of such customers, based on 
an evaluation of the credit risk posed by such customer(s), in which 
case such higher amount shall be calculated and recorded as provided in 
proposed regulation 22.12, and would (on an individual basis) be 
available in the event of a default by any such Cleared Swaps Customer. 
This proposed clarification is not intended to interfere with the right 
of any FCM to increase the collateral requirements with respect to any 
of its customers. The Commission requests comment regarding whether a 
DCO or a

[[Page 33840]]

Collecting Futures Commission Merchant may wish to increase the 
collateral required, in the manner described above, for any reason 
other than credit risk.
    Similarly, proposed regulation 22.13(b) clarifies that any 
collateral deposited by an FCM out of its own funds pursuant to 
proposed regulation 22.2(e)(3), in which the FCM has a residual 
financial interest pursuant to proposed regulation 22.2(e)(4), may, to 
the extent of such residual interest, be used by a DCO or Collecting 
Futures Commission Merchant to margin the cleared swaps of any or all 
of such customers. Thus, if a DCO chooses to require an FCM member, or 
if a Collecting Futures Commission Merchant chooses to require a 
Depositing Futures Commission Merchant, in each case, to post such 
additional collateral out of its own funds, the collateral would be 
available, to the extent specified above, on an omnibus basis, in the 
event of default of any relevant Cleared Swaps Customer.

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

    The structure of proposed regulations 22.14(a) through (d) is 
intended to ensure that each tier of clearing receives the requisite 
transmissions of Cleared Swaps Customer Collateral and information to 
attribute such collateral on the date of an FCM default. Starting from 
the lowest tier, regulation 22.14(a) proposes to require a Depositing 
Futures Commission Merchant that fails to meet a margin call with 
respect to a Cleared Swaps Customer Account, in full, to (i) transmit 
to its Collecting Futures Commission Merchant, with respect to each 
Cleared Swaps Customer of the Depositing Futures Commission Merchant 
whose contracts contribute to that margin call, the lesser of the 
amount called for or the remaining collateral for that customer on 
deposit at such Depositing Futures Commission Merchant, and (ii) advise 
the Collecting Futures Commission Merchant of the identity of the 
Cleared Swaps Customer and the amount transmitted on behalf of such 
customer. Moving towards the middle tier, regulation 22.14(b) proposes 
to parallel the above requirement for a Depositing Futures Commission 
Merchant that also serves as a Collecting Futures Commission Merchant. 
Moving towards the apex, regulations 22.14(c) and (d) propose to 
parallel the above requirement for an FCM member of a DCO, including if 
the FCM member is also a Collecting Futures Commission Merchant.
    Regulations 22.14(e) and (f) propose to address a situation 
involving investment risk, the loss of value of collateral, despite the 
application of haircuts. Specifically, if (i) the collateral collected 
by a DCO or Collecting Futures Commission Merchant is sufficient to 
meet the amount of collateral required by regulation 22.12 on the 
business day before the failure to meet the margin call (with 
sufficiency measured including the application of haircuts specified by 
the rules and procedures of the DCO or the policies applied by the 
Collecting Futures Commission Merchant), and (ii) as of the close of 
business on the business day of the failure to meet the margin call, 
the value of such collateral is, due to changes in market value, less 
than the amount required by regulation 22.12 on the business day before 
the failure to meet the margin call, then that loss of value will be 
shared among the customers pro rata: The amount of collateral 
attributable to each customer will be reduced by the percentage 
difference between the amount specified in regulation 22.12 on that 
previous business day and the market value of the collateral on the day 
of the failure to meet the margin call. The Commission believes that 
investment risk, unlike fellow-customer risk, should not be borne by 
the DCO. The Commission seeks comment on this allocation of investment 
risk.

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

    Proposed regulation 22.15 sets forth the basic principle of 
individual collateral protection. It requires each DCO and each 
Collecting Futures Commission Merchant to treat the amount of 
collateral required with respect to the portfolio of rights and 
obligations arising out of the Cleared Swaps intermediated for each 
Cleared Swaps Customer as belonging to that customer. That amount may 
not be used to margin, guarantee or secure the cleared swaps, or any 
other obligations, of an FCM, or of any other customer.
    It should be noted that what is protected is an amount (i.e., a 
value) of collateral, rather than any specific item of collateral.
    As discussed above, the Commission is proposing herein the Complete 
Legal Segregation Model, but is seeking comment as to whether the Legal 
Segregation with Recourse Model would be more appropriate. Under the 
Legal Segregation with Recourse Model, this regulation would be 
modified to permit the use of the Cleared Swaps Customer Collateral of 
non-defaulting customers after the exhaustion of both the DCO's 
contribution to default resources from its own capital, and the 
guaranty fund contributions of clearing members.
    Specifically, an additional section would be added to the effect 
that

a derivatives clearing organization may, if its rules so provide, 
and if the derivatives clearing organization has first exhausted the 
resources described in Sec. Sec.  39.11(b)(1)(ii) [the derivatives 
clearing organization's own capital], (iii) [Guaranty fund 
deposits], and (iv) [other financial resources deemed acceptable by 
the Commission], use the Cleared Swaps Customer Collateral of all 
Cleared Swaps Customers of a depositing futures commission merchant 
that has defaulted in a payment to the derivatives clearing 
organization with respect to its Cleared Swaps Customer Account.

    Under such a proposal, the Commission does not contemplate 
requiring the use of a DCO's assessment powers before permitting the 
use of the collateral of non-defaulting customers under the Legal 
Segregation with Recourse Model.

P. Proposed Regulation 22.16--Disclosures to Customers

    In order to make Cleared Swaps Customers aware of the limits of 
protection under the Complete Legal Segregation Model, proposed 
regulations 22.16(a) and (b) require FCMs to disclose to their Cleared 
Swaps Customers the governing provisions relating to use of customer 
collateral, transfer of Cleared Swaps and related collateral, 
neutralization of the risks of customer positions, or liquidation of 
cleared swaps, in each case in the event of a default by its FCM 
related to the Cleared Swaps Customer Account, either to a Collecting 
Futures Commission Merchant or directly to a DCO. Proposed regulation 
22.16(c) specifies that the governing provisions are the rules of the 
DCO, or the provisions of the customer agreement between the Depositing 
Futures Commission Merchant and the Collecting Futures Commission 
Merchant, on or through which the Depositing Futures Commission 
Merchant clears swaps for Cleared Swaps Customers.
    The Commission is particularly interested in further discussion of 
the benefits and costs of each model in light of the proposed 
regulations (i.e., the Complete Legal Segregation Model that is 
proposed and the Legal Segregation with Recourse Model that is being 
considered). In particular, the Commission seeks comment on (1) 
Operational costs: The incremental activities commenters would be 
required to perform, with respect to

[[Page 33841]]

cleared swaps and cleared swaps collateral under each model that they 
are not currently required to perform with respect to futures and 
futures collateral, and the initial and annualized costs of such 
activities. How can these costs be estimated industry-wide? Please 
provide a detailed basis for these estimates; and (2) Risk Environment 
Costs: How do you see the industry adapting to the risk changes 
attendant to each model? What types of costs would you expect your 
institution to incur if the industry adapts to the model in the most 
efficient manner feasible? How are those costs different from the costs 
your institution incurs relative to futures and futures collateral? 
What is a reasonable estimate of the initial and annualized ongoing 
incremental costs incurred by your institution, and how can such costs 
be estimated industry wide? Please provide a detailed basis for your 
estimates.

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

A. Background

    In April of 2010, prior to the enactment of the Dodd-Frank Act, the 
Commission promulgated rules to establish an account class for cleared 
OTC derivatives (and related collateral).\156\ At that time, there were 
questions concerning the authority of the Commission to require the 
segregation of cleared OTC derivatives (and related collateral), or to 
establish the account class for the insolvency of a DCO. As a result, 
protection for cleared OTC derivatives (and related) collateral was 
limited to those cases where such derivatives and collateral were 
required to be segregated pursuant to the rules of a DCO, and the reach 
of the account class was limited to cases of the bankruptcy of a 
commodity broker that is an FCM. Moreover, while section 4d(a)(2) of 
the CEA permitted the inclusion in the domestic futures account class 
of transactions and related collateral from outside that class, there 
was no similar provision permitting the inclusion in the cleared OTC 
account class of transactions and related collateral from outside that 
latter class.
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    \156\ See Account Class, 75 FR 17297 (Apr. 6, 2010).
---------------------------------------------------------------------------

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

B. Definitions

    The Commission proposes certain technical amendments to regulation 
190.01 to remove the reference to the definition of ``Opt-out 
customer'' from the definition of ``Non-Public Customer,'' and to 
include or exclude Cleared Swaps and Cleared Swaps Collateral in the 
definitions of ``Clearing Organization,'' ``Non-Public Customer,'' and 
``Principal Contract,'' as appropriate. The Commission also proposes 
substantive changes to the definitions of ``Account Class'' and 
``Cleared Swaps.''
1. Proposed Amendment to Regulation 190.01(a)--Account Class
    The Commission proposes amending regulation 190.01(a) to change the 
definition of account class to include a class for cleared swaps 
accounts, without limiting that definition to commodity brokers that 
are FCMs (as is currently the case). In addition, commodity option 
accounts would be deleted from the definition because the term 
commodity options, as defined in section 1.3, includes options on 
futures (which are regulated as futures) and options on commodities 
(which under the Dodd-Frank Act are swaps). The additions of 
subsections (a)(2)(i) and (a)(2)(ii) are meant to make clear that 
options on futures and options on commodities should not be grouped 
into one account class; rather options on futures should be deemed part 
of the futures account class and options on commodities should deemed 
part of the cleared swaps account class. Another proposed amendment, 
subsection (a)(3), is intended to clarify that Commission orders 
putting futures contracts and related collateral in the cleared swaps 
account class (pursuant to new section 4d(f)(3)(B) of the CEA) are 
treated, for bankruptcy purposes, in a manner analogous to orders 
putting cleared swaps and related collateral in the futures account 
class (pursuant to CEA section 4d(a)(2)). The proposed amended Sec.  
190.01(a) would clarify that if, pursuant to a Commission rule, 
regulation or order (or a derivatives clearing organization rule 
approved pursuant to regulation 39.15(b)(2)), positions or transactions 
that would otherwise belong to one class are associated with positions 
and related collateral in commodity contracts another account class, 
then the former positions and related collateral shall be treated as 
part of the latter account class.
2. Proposed New Regulation 190.01(e)--Calendar Day
    The Commission proposes defining the term ``calendar day'' to 
include the time from midnight to midnight.
3. Proposed Amendment to Regulation 190.01(f)--Clearing Organization
    The Commission proposes to amend the definition of clearing 
organization to remove, as unnecessary, the reference to commodity 
options traded on or subject to the rules of a contract market or board 
of trade.
4. Proposed Amendment to Regulation 190.01(cc)--Non-Public Customer
    The Commission proposes to amend the definition of non-public 
customer to include references to non-public customers under regulation 
30.1(c) (with respect to foreign futures and options customers) and in 
the definition of cleared swaps proprietary account.
5. Proposed Amendment to Regulation 190.01(hh)--Principal Contract
    The Commission proposes to amend the definition of principal 
contract to include an exclusion for cleared swaps contracts.
6. Proposed Amendment to Regulation 190.01(ll)--Specifically 
Identifiable Property
    The Commission proposes to amend the definition of specifically 
identifiable property to change, in subsection (ll)(2)(ii), an 
anachronistic reference to section 5a(a)(12) of the CEA to a reference 
to 5c(c) of the CEA, and to change references to ``business days'' in 
subsections (ll)(4) and (ll)(5) to references to ``calendar days,'' to 
conform to other proposed changes to Part 190 implementing Public Law 
111-16, the Statutory Time-Periods Technical Amendments Act of 2009, 
which (in relevant part) changed the time period in 11 U.S.C. 764(b) 
from five (business) days to seven (calendar) days.\157\ Because the 
pace of recent commodity broker bankruptcies has included work on 
weekends, references to four or fewer ``business days'' have

[[Page 33842]]

been changed to the same number of calendar days; while references to 
five business days have been changed to six calendar days.
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    \157\ See generally 75 FR 75432, 75435 (Dec. 3, 2010).
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7. Proposed Amendment to Regulation 190.01 (pp)--Cleared Swap
    Proposed new Sec.  190.01(pp) replaces the definition of ``Cleared 
OTC Derivative'' that the Commission previously adopted with a 
definition of cleared swap that incorporates by reference the 
definition of that term in Sec.  22.1.

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

    The Commission is proposing certain technical amendments to (1) 
expand regulation 190.02 to apply to cleared swaps (and related 
collateral) and (2) change references to ``business days'' to 
references to ``calendar days,'' and require transfer instructions by 
the sixth calendar day after the order for relief and instructed 
transfers to be completed by the seventh calendar day after the order 
for relief, in order to fall within the protection of section 764(b) of 
the Bankruptcy Code. Other proposed amendments to Sec.  190.02(g)(1)(i) 
are intended to clarify that maintenance margin refers to the 
maintenance margin requirements of the applicable designated contract 
market or swap execution facility. Inclusion of the words ``if any'' 
reflects Commission recognition that there may be situations where 
there is no applicable designated contract market or swap execution 
facility.

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

    In addition to certain technical amendments to (1) expand 
regulation 190.03 to apply to cleared swaps (and related collateral) 
and (2) change references to ``business days'' to references to 
``calendar days,'' proposed amendments to Sec.  190.03(a)(3) are 
intended to clarify that maintenance margin refers to the maintenance 
margin requirements of the applicable designated contract market or 
swap execution facility. Inclusion of the words ``if any'' reflects 
Commission recognition that there may be situations where there is no 
applicable designated contract market or swap execution facility.

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

    Proposed amendments to regulation 190.04 would extend the 
liquidation of open commodity contracts held for a house account or a 
customer account by or on behalf of a commodity broker that is a debtor 
to commodity contracts traded on swap execution facilities.\158\ These 
commodity contracts would be liquidated in accordance with the rules of 
the relevant swap execution facility or designated contract market, 
under a liquidation process that, to the extent possible under market 
conditions at the time of liquidation, results in competitive pricing. 
In addition, in order to conform to current market practice, the 
amendments would allow open commodity contracts that are liquidated by 
book entry to be offset using the settlement price as calculated by the 
relevant clearing organization pursuant to its rules, which rules would 
also be required to promote competitive pricing to the extent feasible 
under market conditions at the time of liquidation. Such rules are 
required to be submitted to the Commission for approval pursuant to 
section 5c(c) of the CEA, or approved by the Commission (or its 
delegate) pursuant to regulation 190.10(d).
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    \158\ Open commodity contracts traded on a designated contract 
market would continue to be liquidated in accordance with the rules 
of the relevant designated contract market.
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F. Proposed Amendments to Regulation 190.05--Making and Taking Delivery 
on Commodity Contracts

    Proposed amendments to regulation 190.05 are technical in nature, 
changing a reference to ``contract market'' to ``designated contract 
market, swap execution facility, or clearing organization,'' and 
requiring the submission of rules for approval subject to section 5c(c) 
of the CEA.

G. Proposed Amendments to Regulation 190.06--Transfers

    Proposed amendments to regulation 190.06(a) are intended to clarify 
that nothing in paragraph (a) would constrain the contractual right of 
the DCO to liquidate open commodity contracts, even those pertaining to 
customers (whether transacting in futures, cleared swaps, or other 
products).
    Proposed amendments to regulation 190.06(e) would permit the 
trustee to transfer accounts with no open commodity contracts. In past 
commodity broker bankruptcies, the Commission has permitted the 
transfer of such accounts. Moreover, section 761(9)(A)(ii)(I) and (II) 
of the Bankruptcy Code define a ``customer'' to include an entity that 
holds a claim against the FCM arising out of: (i) the liquidation of a 
commodity contract and (ii) a deposit or payment of property with such 
FCM for the purpose of making or margining a commodity contract, either 
of which might occur after or before the customer holds a commodity 
contract. Further, section 764 of the Bankruptcy Code prohibits the 
trustee from avoiding post-petition transfers: (i) facilitating the 
liquidation of a commodity contract, and presumably claims attendant 
thereto, and (ii) of any cash, securities, or other property margining 
or securing a commodity contract, and presumably claims thereto.
    Proposed amendments to regulation 190.06(g) would prohibit the 
trustee from avoiding pre-petition transfers made by a clearing 
organization on behalf of customers of the debtor of accounts held for 
or on behalf of customers of the debtor as long as the money, 
securities, or other property accompanying such transfer would not 
exceed the funded balance of such accounts based on information 
available as of the close of business on the business day immediately 
preceding such transfer minus the value on the date of return or 
transfer of any property previously returned or transferred thereto. 
The Commission believes that this change promotes portability by 
allowing clearing organizations to efficiently manage the customer 
accounts of the debtor in a default scenario.
    In light of the importance of transfers to swaps markets, the 
Commission observes that certain portions of regulation 190.06 are not 
being changed. Specifically, regulation 190.06(f)(3) addresses partial 
transfers, whether with respect to fewer than all customers (subsection 
(i)), or with respect to fewer than all contracts cleared on behalf of 
a particular customer (subsection (ii)). Moreover, regulation 
190.06(e)(2) limits the amount of equity that may be transferred in 
respect of any account to the funded balance of that account, subject 
to certain adjustments, ``based on available information as of the 
calendar day immediately preceding transfer'' (emphasis supplied).
    While a transfer of all contracts in all accounts may be 
preferable, it may, in certain circumstances, be impracticable. If so, 
the regulations described above accommodate partial transfers.
    In addition, technical amendments have been made to change 
``business day'' to ``calendar day.''

[[Page 33843]]

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

    Proposed amendments to regulation 190.07(b) clarify that individual 
cleared swaps customer accounts within an omnibus account are to be 
treated individually. A proposed amendment to regulation 190.07(c) 
corrects a typographical error. Proposed amendments to regulation 
190.07(e) would change the valuation of an open commodity contract so 
that the value of the commodity contract would be derived from the 
settlement price as calculated by the relevant clearing organization 
pursuant to its rules, provided that such rules have been submitted to 
the Commission for approval pursuant to section 5c(c)(4) of the CEA and 
have received such approval, or have been approved pursuant to 
regulation 190.10(d). This change is intended to conform the valuation 
of an open commodity contract to current market practices. Another 
proposed amendment to regulation 190.07(e) would change references to 
securities traded over-the-counter pursuant to the National Association 
of Securities Dealers Automated Quotation System to securities not 
traded on an exchange, again to conform to current market practices.

I. Proposed Amendments to Regulation 190.09--Member Property

    Proposed amendments to regulation 190.09(b) have been made to 
include references to an account excluded pursuant to the proviso in 
regulation 30.1(c) (with respect to proprietary foreign futures and 
options customers) and to the cleared swaps proprietary account.

J. Proposed Amendments to Regulation 190.10--General

    Proposed amendments to regulation 190.10 (a) have been made to 
remove references to providing notice by telegram or ordinary postal 
mail and to require notice by e-mail and overnight mail.

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

    Proposed changes to appendix A, form 1 would remove references to 
``bulk transfers'' and replace the term with the word ``transfers.'' 
While the Commission believes that the trustee should transfer as much 
of a customer account as possible for each account class \159\ to one 
non-defaulting FCM, the Commission recognizes that there may be 
situations where a bulk transfer may not be possible.\160\
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    \159\ Account class means each of the following types of 
customer accounts that must be recognized as a separate class of 
account by the trustee: futures accounts, foreign futures accounts, 
leverage accounts, delivery accounts as defined in Sec.  
190.05(a)(2) of this part, and cleared swaps accounts.
    \160\ For example, when evaluating the creditworthiness of 
various FCMs, the trustee may conclude that it would be preferable 
to transfer portions of a customer account to several different non-
defaulting FCMs who have high credit ratings instead of one non-
defaulting futures commission merchant with lower credit quality.
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    Technical amendments also are being proposed for appendix A to Part 
190. These amendments would include revisions to reflect the addition 
of section 4d(f) by section 724 of the Dodd-Frank Act. In addition, 
amendments have been made to clarify that Commission approval with 
respect to the rules of a registered entity that require Commission 
approval means Commission approval under section 5c(c) of the CEA. 
Additional technical amendments to appendix A to Part 190 have been 
proposed to conform certain time periods to the proposed changes made 
by the Commission to implement Public Law 111-16, the Statutory Time-
Periods Technical Amendments Act of 2009.

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

    Proposed amendments to appendix B would clarify that the cross 
margining program is intended to apply only to futures customers and 
futures customer funds.

VI. Effective Date

    The Commission requests comment on the appropriate timing of 
effectiveness for the final rules for Part 22.\161\ Specifically, is 
six months after the promulgation of final rules sufficient? If not, 
please specify a recommended time period, and explain in detail the 
reasons why no shorter period will be sufficient.
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    \161\ The amendments to Part 190 appear to be self-executing, 
but commenters are invited to suggest why an implementation period 
for these amendments might be necessary.
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VII. Administrative Compliance

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'')\162\ requires that 
agencies, in proposing rules, 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 
addressing the impact. The proposed rules will affect DCOs and FCMs. 
The Commission has previously determined that DCOs and FCMs are not 
small entities for purposes of the RFA.\163\
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    \162\ 5 U.S.C. 601 et seq.
    \163\ See 66 FR 45605, 45609 (Aug. 29, 2001) (DCOs); 47 FR 
18618, 18619-20 (Apr. 30, 1982) (FCMs).
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    Accordingly, pursuant to section 605(b) of the RFA, 5 U.S.C. 
605(b), the Chairman, on behalf of the Commission, certifies that these 
proposed rule amendments will not have a significant economic impact on 
a substantial number of small entities. The Commission invites the 
public to comment on this finding.

B. Paperwork Reduction Act

1. Introduction
    Provisions of proposed new Part 22 of the Commission's rules 
include new information disclosure and recordkeeping requirements that 
constitute the collection of information within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\164\ The Commission 
therefore is submitting this proposed collection of information to the 
Office of Management and Budget (``OMB'') for review in accordance with 
44 U.S.C. 3507(d) and 5 CFR 1320.11. Under the PRA, an agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number.\165\ The title for this collection of information is 
``Disclosure and Retention of Certain Information Relating to Cleared 
Swaps Customer Collateral,'' OMB Control Number 3038-NEW. This 
collection of information will be mandatory. The information in 
question will be held by private entities and, to the extent it 
involves consumer financial information, may be protected under Title V 
of the Gramm-Leach-Bliley Act as amended by the Dodd-Frank Act.\166\ 
This collection of information has not yet been assigned an OMB control 
number.
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    \164\ 44 U.S.C. 3501 et seq.
    \165\ Id.
    \166\ See generally Notice of Proposed Rulemaking, Privacy of 
Consumer Financial Information; Conforming Amendments Under Dodd-
Frank Act, 75 FR 66014 (Oct. 27, 2010).
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2. Information Provided by Reporting Entities
    Proposed section 22.2(g) requires each FCM with Cleared Swaps 
Customer Accounts to compute daily the amount of Cleared Swaps Customer 
Collateral on deposit in Cleared Swaps Customer Accounts, the amount of 
such collateral

[[Page 33844]]

required to be on deposit in such accounts and the amount of the FCM's 
residual financial interest in such accounts. The computations and 
supporting data must be kept in accordance with the CFTC regulation 
1.31, which establishes generally applicable rules for recordkeeping 
under the CEA. The purpose of this collection of information is to help 
ensure that FCMs' Cleared Swaps Customer Accounts are in compliance at 
all times with statutory and regulatory requirements for such accounts.
    Proposed section 22.5(a) requires an FCM or DCO to obtain, from 
each depository with which it deposits cleared swaps customer 
funds,\167\ a letter acknowledging that such funds belong to the 
cleared swaps customers of the FCM, and not the FCM itself or any other 
person. The purpose of this collection of information is to confirm 
that the depository understands its responsibilities with respect to 
protection of cleared swaps customer funds.
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    \167\ Proposed section 22.5(c) provides an exception for a DCO 
serving as a depository where such DCO has made effective rules that 
provide for the segregation of Cleared Swaps Customer Collateral in 
accordance with all relevant provisions of the CEA and the 
regulations thereunder.
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    Proposed section 22.11 requires each FCM that intermediates cleared 
swaps for customers on or subject to the rules of a DCO, whether 
directly as a clearing member or indirectly through a Collecting 
Futures Commission Merchant, to provide the DCO or the Collecting 
Futures Commission Merchant, as appropriate, with information 
sufficient to identify each customer of the FCM whose swaps are cleared 
by the FCM. Section 22.11 also requires the FCM, at least once daily, 
to provide the DCO or the Collecting Futures Commission Merchant, as 
appropriate, with information sufficient to identify each customer's 
portfolio of rights and obligations arising out of cleared swaps 
intermediated by the FCM. The purpose of this collection of information 
is to facilitate risk management by DCOs and Collecting Futures 
Commission Merchants, and, in the event of default by the FCM, to 
enable DCOs and Collecting Futures Commission Merchants to perform 
their duty, pursuant to section 22.15, to treat the collateral 
attributed to each customer of the FCM on an individual basis.
    Proposed section 22.12 requires that each Collecting Futures 
Commission Merchant and DCO, on a daily basis, calculate, based on 
information received pursuant to proposed section 22.11 and on 
information generated and used in the ordinary course of business by 
the Collecting Futures Commission Merchant or DCO, and record certain 
information about the amount of collateral required for each Cleared 
Swaps Customer and the sum of these amounts.
    Proposed section 22.16 requires that each FCM who has cleared swaps 
customers disclose to each of such customers the governing provisions, 
as established by DCO rules or customer agreements between collecting 
and depositing FCMs, relating to use of customer collateral, transfer, 
neutralization of the risks, or liquidation of cleared swaps in the 
event of a default by a depositing FCM relating to a cleared swaps 
customer account. The purpose of this collection of information is to 
ensure that cleared swaps customers are informed of the procedures to 
which accounts containing their swaps collateral may be subject in the 
event of a default by their FCM.
    The recordkeeping and disclosure requirements of sections 22.2(g) 
and 22.11 are expected to apply to approximately 100 entities on a 
daily basis.\168\ The recordkeeping requirement of section 22.5 is 
expected to apply to approximately 100 entities on an approximately 
annual basis. Based on experience with analogous recordkeeping and 
disclosure requirements for FCMs in futures transactions, the 
recordkeeping and disclosure required by section 22.2(g) is expected to 
require about 100 hours annually per entity, for a total burden of 
approximately 20,000 hours. At an hourly rate of $25 per hour, the cost 
burden would be approximately $2500 per entity per year for a total of 
$250,000. Also based on experience with analogous recordkeeping 
requirements for FCMs in futures transactions, the recordkeeping 
requirement of section 22.5 is expected to require about 5 hours per 
entity per year, for a total burden of approximately 500 hours per 
year. At an hourly rate of $25 per hour, the cost burden would be 
approximately $125 annually per entity, for a total of $12,500.
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    \168\ This estimate is based on the following: there are 
currently approximately 125 FCMs registered with the Commission. 
However, it is expected that only FCMs with substantial capital will 
be capable of clearing swaps. There are approximately 75 FCMs with 
adjusted net capital in excess of $25 million, accordingly, and 
allowing room for growth, it is estimated that there will be 100 
FCMs subject to these requirements.
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    The disclosure required by section 22.11 involves information that 
FCMs that intermediate swaps generate and use in the usual and 
customary ordinary course of their business. It is expected that the 
required disclosure will be performed using automated data systems that 
FCMs maintain and use in the usual and customary ordinary course of 
their business but that certain additional functionality will need to 
be added to these systems to perform the required disclosure. Because 
of the novel character of proposed section 22.11, it is not possible to 
make a precise estimate of the paperwork burden. We estimate that the 
necessary modifications to, and maintenance of, systems may require a 
range of between 20 and 40 hours of work annually at a salary of 
approximately $75 per hour.\169\ The total annual burden for section 
22.11 therefore is estimated at 2,000 to 4,000 hours and $150,000 to 
$300,000.
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    \169\ The range of estimates of hours is influenced by the fact 
that FCMs commonly use similar or identical data systems produced by 
a small number of vendors, so there may be significant economies of 
scale in making the system modifications required for the section 
22.11 disclosure. The estimates also are based on the assumption 
that half of the time required to modify systems will be expended on 
a one-time basis and annualized over five years.
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    The recordkeeping required by proposed section 22.12 involves 
information that Collecting Futures Commission Merchants and DCOs will 
receive pursuant to proposed section 22.11 or that they generate and 
use in the usual and customary ordinary course of their business. It is 
expected that the required recordkeeping will be performed using 
automated data systems that Collecting Futures Commission Merchants and 
DCOs maintain and use in the usual and customary ordinary course of 
their business but that certain additional functionality will need to 
be added to these systems to perform the required disclosure. Because 
of the novel character of proposed section 22.12, it is not possible to 
make a precise estimate of the paperwork burden. We estimate that the 
necessary modifications to, and maintenance of, systems may require a 
range of between 20 and 40 hours of work annually at a salary of 
approximately $75 per hour.\170\ It is expected that the required 
recordkeeping will be performed by approximately 100 entities. The 
total annual burden for section 22.11

[[Page 33845]]

therefore is estimated at 2,000 to 4,000 hours and $150,000 to 
$300,000.
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    \170\ The range of estimates of hours is influenced by the fact 
that FCMs and DCOs commonly use similar or identical data systems 
produced by a small number of vendors, so there may be significant 
economies of scale in making the system modifications required for 
the section 22.12 recordkeeping. The estimates also are based on the 
assumption that half of the time required to modify systems will be 
expended on a one-time basis and annualized over five years.
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    Proposed section 22.16 would apply to the same estimated 100 
entities as sections 22.2(g), 22.5(a) and 22.11. The required 
disclosure would have to be made once each time a swaps customer begins 
to be cleared through a particular DCO or collecting FCM and each time 
a DCO or collecting FCM through which a customer's swaps are cleared 
changes it polices on the matters covered by the disclosure. It is 
expected that each disclosure would require about 0.2 hours of staff 
time by staff with a salary level of about $25 per hour. It is 
uncertain what average number of swaps customers FCMs will have, and 
what average number of disclosures will be required for each customer 
annually. Assuming an average of 500 customers per FCM and two 
disclosures per customer per year, the estimated total annual burden 
would be 200 hours and $5000 per entity, for an overall burden of 
$500,000.
3. Information Collection Comments
    The Commission requests comment on all aspects of this proposed 
mandatory collection of information and document retention. 
Specifically, the Commission requests comment on whether the Commission 
has provided sufficient clarity concerning the types of information 
that would be required to be disclosed and retained.

C. Cost-Benefit Analysis

1. Introduction
a. Requirement Under Section 15(a) of the CEA
    Section 15(a) of the CEA \171\ requires the Commission to consider 
the costs and benefits of its actions before issuing a rulemaking under 
the CEA. Section 15(a) further specifies that the costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: (i) Protection of market participants and the public; (ii) 
efficiency, competitiveness, and financial integrity of futures 
markets; (iii) price discovery; (iv) sound risk management practices; 
and (v) other public interest considerations. The Commission may in its 
discretion give greater weight to any one of the five enumerated areas 
and could in its discretion determine that, notwithstanding its costs, 
a particular rule is necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or accomplish any of 
the purposes of the CEA.
---------------------------------------------------------------------------

    \171\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

b. Structure of the Analysis
    As mentioned above, the Commission has decided to propose the 
Complete Legal Segregation Model. A number of commenters to the ANPR 
suggested that the costs and benefits of the Complete Legal Segregation 
Model should be informed by the Futures Model. Such commenters provided 
quantitative estimates of such costs (but not such benefits). Using 
these quantitative estimates of cost, the Commission discusses the 
costs and benefits of the Complete Legal Segregation Model (as well as 
the Legal Segregation with Recourse Model) in relation to a common 
baseline--namely, the Futures Model.
    The Commission notes that other commenters suggested that the costs 
and benefits of the Complete Legal Segregation Model should be informed 
by the protections for collateral obtained by customers in the existing 
swaps markets and of the costs incurred for such protections. While 
this alternative is not part of the formal analysis, it can inform us 
of the costs of the various models. Therefore, the Commission has asked 
for additional comment on such protections, including quantitative 
estimates of costs, in section III(B) herein.
    Finally, as mentioned above, the Commission is considering the 
Legal Segregation with Recourse Model. The Commission has asked for 
additional comment on the Legal Segregation with Recourse Model, as 
well as (i) the Futures Model and (ii) the Optional Approach.
2. Costs of the Complete Legal Segregation Model, the Legal Segregation 
With Recourse Model, and the Futures Model
    There are several kinds of costs associated with the Complete Legal 
Segregation and the Legal Segregation with Recourse Models, relative to 
the Futures Model. These can be categorized as operational costs, Risk 
Costs (as section II(C)(3) defines such term), and costs associated 
with induced changes in behavior. The Complete Legal Segregation, the 
Legal Segregation with Recourse, and the Futures Models will require 
different payments from various parties in the event that there is a 
simultaneous default of one or more Cleared Swaps Customers and their 
FCMs. The direct effect of the Complete Legal Segregation and the Legal 
Segregation with Recourse Models, in contrast to the Futures Model, 
would be to protect the Cleared Swaps Customer Collateral of non-
defaulting customers against claims by the relevant DCO.\172\ In 
general, this protection of non-defaulting customers makes it more 
likely, relative to the Futures Model, that the financial resource 
package of the DCO (including, e.g., the DCO's own capital contribution 
and the guaranty funds contributed by member FCMs) would need to be 
applied to the liability of the defaulting Cleared Swaps Customer(s).
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    \172\ According to comments on the ANPR, the direct benefit to 
customers in the form of reduced risk of loss of collateral stemming 
from the activities of fellow customers may generate indirect 
benefits. For example, commenters indicated that increased security 
for collateral could increase their ability to use swaps for 
business purposes, although this effect could be counterbalanced by 
increased dollar costs. Commenters also stated that the increased 
protection against Fellow-Customer Risk would reduce their need to 
incur costs to protect against the effects of loss of Cleared Swaps 
Customer Collateral.
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a. Operational Costs
    Operational costs associated with the Complete Legal Segregation 
and the Legal Segregation with Recourse Models result from a greater 
need, relative to the Futures Model, to transfer information about 
individual Cleared Swaps Customer Contracts between FCMs and DCOs, an 
increased amount of account information kept by DCOs, potential 
increases in compliance costs, and related kinds of costs. Some of 
these costs will be one-time set-up costs, and other costs will be 
recurring. Operational costs associated with the Complete Legal 
Segregation and the Legal Segregation with Recourse Models can be 
expected to be identical or close to identical because the 
informational and other operational requirements of both models are 
substantially similar--where the two models differ is in the scope of 
DCO's claim to Cleared Swaps Customer Collateral in the event of the 
simultaneous default of one or more Cleared Swaps Customers and their 
FCMs.
    Precise determination of the extent of operational costs associated 
with the Complete Legal Segregation and the Legal Segregation with 
Recourse Models depends on the number of Cleared Swaps Customers at 
each FCM, the number and types of Cleared Swaps Customer Accounts held 
by each customer, and other factors. Some estimates of the typical 
FCM's costs were provided by ISDA. As discussed above, in comments on 
the ANPR, ISDA estimates that the Complete Legal Segregation and the 
Legal Segregation with Recourse Models would involve a one-time cost 
increase of $0.8 million to $1 million per FCM, plus a recurring

[[Page 33846]]

annual cost with a median estimate of roughly $0.7 million.\173\ In 
addition, there would be costs faced by each DCO, which would likely be 
of a similar magnitude, unless the DCO already possesses the 
information required to implement the Complete Legal Segregation and 
the Legal Segregation with Recourse Models. A DCO with such information 
may find the operational costs associated with the Complete Legal 
Segregation and the Legal Segregation with Recourse Models to be 
negligible.
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    \173\ See note 43 supra.
---------------------------------------------------------------------------

b. Risk Costs
    Risk Costs refer to the costs associated with reassigning liability 
in the event of a customer default (i.e., the Complete Legal 
Segregation Model or the Legal Segregation with Recourse Model compared 
to the Futures Model). This can usefully be divided into direct and 
indirect costs (and associated benefits). The direct costs of the 
Complete Legal Segregation and the Legal Segregation with Recourse 
Models are the increased risk the DCO will face when one or more 
Cleared Swaps Customers and their FCMs default. Under the Complete 
Legal Segregation Model, this is equal to the probability of a default 
by a Cleared Swaps Customer and its FCM, times the expected 
contribution that fellow customers would have provided toward the 
uncovered loss. The gain to Cleared Swaps Customers under this model is 
the value they place on avoiding this same cost (i.e., owning insurance 
against Fellow-Customer Risk). The Legal Segregation with Recourse 
Model is fundamentally similar, except that the Cleared Swaps Customers 
may ultimately be responsible for some of that deficiency, should the 
capital of the DCO and the guaranty fund contributions of non-
defaulting FCM members be exhausted.\174\
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    \174\ Implicitly then, unless there are offsetting changes, the 
resources available to the DCO to cover its obligations to 
counterparties in the event of the default of one or more Cleared 
Swaps Customers and their FCMs would potentially be smaller under 
the Complete Legal Segregation Model than under the Legal 
Segregation with Recourse Model, and hence the guarantee offered to 
Cleared Swaps counterparties by the DCO would potentially be less 
secure under the Complete Legal Segregation Model. Such offsetting 
changes, however, are required by proposed Commission requirements 
regarding DCO financial resource packages. See section II(C)(1) 
herein. As the following discussion indicates, the DCO may take 
steps, in terms of enhanced resources and use of risk-management 
tools to insure the security that it offers to Cleared Swaps 
counterparties.
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    Thus, the Complete Legal Segregation Model will potentially result 
in a decrease in the financial resources package available to the DCO 
in the event of default. Hence, maintaining the same assurance of 
performance requires the DCO to raise additional financial resources. 
While the Legal Segregation with Recourse Model does not directly 
reduce DCO financial resources, it restructures them so as to likely 
lead a DCO to change its default management structure. The exact nature 
of the Risk Costs will depend on how each DCO structures its default 
management structure if the Complete Legal Segregation or the Legal 
Segregation with Recourse Models is chosen over the Futures Model. The 
comments sent to the Commission have suggested two possible ways by 
which the DCO may vary its default management structure: (i) By 
increasing the amount of collateral that each Cleared Swaps Customer 
must provide; or (ii) by increasing the amount of resources that each 
FCM must contribute to the guaranty fund.
    Focusing on (i) (an increase in the amount of collateral that each 
Cleared Swaps Customer must provide), estimates of the size of the 
increase vary, and in principle depend on whether the Complete Legal 
Segregation Model or the Legal Segregation with Recourse Model is under 
consideration. In comments on the ANPR, both CME and ISDA suggest that 
the Complete Legal Segregation Model would require an increase of 
approximately 70% in Cleared Swaps Customer Collateral, or an increase 
of roughly $500-600 billion in total required Cleared Swaps Customer 
Collateral relative to the Futures Model. The organizations had 
somewhat different views of the Legal Segregation with Recourse Model. 
ISDA noted that the total pool of capital available to a DCO under this 
model would not be changed, although there would be ``a real wealth 
transfer'' from the FCMs and DCO to the customers, while CME suggested 
that the increase would be of a similar magnitude to the effect of the 
Complete Legal Segregation Model.
    If instead the capital structure is restored though (ii) (an 
increase in the amount of resources that each FCM would contribute to 
the guaranty fund), what were described as ``conservative'' estimates 
suggest an increase of $50 billion (CME) to $128 billion (ISDA) in 
guaranty funds for the Complete Legal Segregation Model.\175\ By 
contrast, LCH, in its comment, stated that there would be no need for 
additions to the guaranty fund under either the Complete Legal 
Segregation Model or the Legal Segregation with Recourse Model because 
the manner in which it currently calculates the size of its guaranty 
fund provides adequate resources against default risk under the 
Complete Legal Segregation Model and the Legal Segregation with 
Recourse Model and because, in the view of LCH, a guaranty fund of 
similar size would be required to provide adequate security under the 
Futures Model.
---------------------------------------------------------------------------

    \175\ Presumably, some of the cost to the FCMs would be offset 
by enhanced charges to customers. Buy-side commenters to the ANPR 
have indicated that they would be willing to bear such charges.
---------------------------------------------------------------------------

    The wide divergence in these figures is due in large part to 
different implicit assumptions about fellow customer behavior, and how 
such behavior should affect a DCO's prudent design of its financial 
resources package. Specifically, Core Principle B for DCOs, section 
5b(c)(2)(B) of the CEA, requires the sufficiency of a DCO's financial 
resources package to be judged relative to the ``worst'' exposure, in a 
probabilistic sense, created by a member or participant in extreme but 
plausible market conditions. In the Complete Legal Segregation Model, 
such an approach likely requires an assessment of the largest stressed 
loss on a to-be-specified number of the largest customers to the given 
FCM since, in this instance, the DCO would not have access to the 
collateral of non-defaulting customers in such an event. By contrast, 
the Futures and the Legal Segregation with Recourse Models allow (to a 
degree) for the sufficiency of the DCO financial resources package to 
be judged relative to the ``worst'' loss that an FCM suffers in its 
omnibus customer account, recognizing that account as a diversified 
pool and taking advantage of the diversification benefit realized by 
the DCO across the customers within that pool. This is so because the 
Futures Model (and, at a later point, the Legal Segregation with 
Recourse Model) would allow the DCO to use the collateral of non-
defaulting customers to cover losses the DCO would otherwise face as a 
result of a simultaneous default of one or more Cleared Swaps Customers 
and their FCMs.\176\
---------------------------------------------------------------------------

    \176\ While the Legal Segregation with Recourse Model permits 
the DCO to take into account the omnibus customer account, as a 
diversified pool, in calculating the total resources available to 
cover the DCO's obligations resulting from a combined customer/FCM 
default, as explained above, it would expose the DCO to a higher 
risk of having to use the DCO's own capital and the guaranty fund 
contributions of non-defaulting FCM members than the Futures Model.
---------------------------------------------------------------------------

    However, the extent of the diversification effect arising from the 
DCO's access to the entire omnibus customer account allowed by the 
Futures Model (and, at a later point in the process, the Legal 
Segregation with Recourse Model) depends on how much

[[Page 33847]]

of the resources supplied by non-defaulting Cleared Swaps Customers 
(via initial margin) will be present in the account following a 
default. If all Cleared Swaps Customer Contracts remained with the 
defaulting FCM through the default, then the DCO could potentially 
measure the adequacy of the guaranty fund based on a fully diversified 
pool of customer positions. Conversely, if all Cleared Swaps Customers 
would transfer their positions to a different FCM in anticipation of 
the default, then the diversification (and its consequence for the 
DCO's financial resources package) would be eliminated.\177\
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    \177\ LCH states that a methodology in which no diversification 
is assumed represents their current practice, and is the most 
``conservative'' in terms of capital adequacy. It argues that it is 
imprudent to assume that any funds in the omnibus Cleared Swaps 
Customer Account will remain at the time of default because that 
default may plausibly occur not as a sudden shock but, rather, as 
the end of a process of credit deterioration taking place over a 
number of days (potentially a number of weeks), during which time 
the Cleared Swaps Customers have time to port their Cleared Swaps 
Contracts and associated collateral away from the defaulting FCM. 
Thus, according to the logic of LCH's approach, the size of the 
guaranty fund and/or initial margin levels would need to be as high 
under the Futures Model as under either the Complete Legal 
Segregation or the Legal Segregation with Recourse Models.
---------------------------------------------------------------------------

    More generally, the extent to which the Complete Legal Segregation 
or the Legal Segregation with Recourse Models really requires a larger 
guaranty fund or higher levels of collateral per Cleared Swaps Customer 
(relative to the Futures Model) depends on the extent to which Cleared 
Swaps Customer Contracts can be expected to remain with the defaulting 
FCM during the time period immediately before the default.\178\ Since 
the circumstances of particular FCM defaults will vary, DCOs, in 
determining their financial resources package, can be expected to take 
into consideration the possibility that, at least for some FCM 
defaults, there will be warning signs, resulting in a portion of 
Cleared Swaps Customer Collateral being transferred out of the Cleared 
Swaps Customer Account maintained by the defaulting FCM. And while 
determining the appropriate assumptions regarding customer behavior 
under either the Futures or the Legal Segregation with Recourse Models 
is central to the issue of capital adequacy, it may prove less central 
to the consideration of costs and benefits under this rule, since both 
those costs and benefits depend on the extent to which Cleared Swaps 
Customers will transfer their Cleared Swaps Contracts.
---------------------------------------------------------------------------

    \178\ The LCH's observation also impacts the requisite change in 
Cleared Swaps Customer Collateral. The question of how to 
appropriately evaluate the omnibus customer account is a question of 
financial resources and is beyond the scope of this rulemaking. We 
note, however, that to the extent that immediate history may provide 
some guidance, the aggregate amount of segregated funds in Lehman's 
omnibus customer account dropped by roughly 75% during the week 
prior to its filing for bankruptcy.
---------------------------------------------------------------------------

    A distinct question in evaluating Risk Cost is how to translate a 
Cleared Swaps Customer Collateral or guaranty fund increase to a cost 
increase. A customer required to post an additional $100 of Cleared 
Swaps Customer Collateral is not made worse off by $100. Moreover, the 
cost to the customer is, at least in part, offset by the benefit to the 
DCO. The cost to the customer of a Cleared Swaps Customer Collateral 
increase of $100 is the difference between the gain he or she would 
have received by retaining that $100, and the return he or she will 
receive on the asset while it is on deposit with the FCM or DCO. For 
example, the customer might invest the $100 in buying and holding grain 
over the pendency of the swap if the level of Cleared Swaps Customer 
Collateral were not increased, while he or she is limited to the return 
on assets the DCO will accept as margin payment (e.g., the t-bill rate) 
under the new, higher margins. While an exact figure for this 
difference is difficult to calculate precisely, it is likely to be in a 
range of 1-4% per year over the life of the swap. Offsetting this cost 
is the gain to the DCO of having additional assets available in the 
event of the simultaneous default of one or more Cleared Swaps 
Customers and their FCMs, which may enable it to obtain a higher rate 
of return on some of its other assets.\179\ Similarly, the cost to an 
FCM of a guaranty fund contribution increase is equal to the difference 
in return between acceptable instruments for deposit to the guaranty 
fund and the FCM's potential return on that $100 if it were not 
deposited to the guaranty fund.
---------------------------------------------------------------------------

    \179\ An additional offset to this cost is the value that 
customers assign to the increased safety of their collateral from 
fellow customer risk, a point which is discussed further below.
---------------------------------------------------------------------------

    The benefit to customers of greater protection for customer margin 
provided by the Complete Legal Segregation Model and the Legal 
Segregation with Recourse Model also depends, to some extent, on 
assumptions about customers' behavior in advance of a fellow-customer 
default. Under the extreme assumption that all customers costlessly 
anticipate the default and move their positions to a different FCM, 
then neither the Complete Legal Segregation Model nor the Legal 
Segregation with Recourse Model provides any benefit to customers 
(since their Cleared Swaps Customer Accounts would not have been at 
risk under the benchmark). More generally, the greater the extent to 
which customers will move their positions, the lower the benefits of 
the Complete Legal Segregation Model and the Legal Segregation with 
Recourse Model relative to the Futures Model. Of course, under the 
Futures Model there exists uncertainty surrounding a customer's ability 
to anticipate an FCM default, and this uncertainty is either wholly or 
mostly eliminated under the Complete Legal Segregation and the Legal 
Segregation with Recourse Models. However, this benefit afforded the 
customer needs to be balanced against the cost to the DCO of insuring 
against this uncertainty, a portion of which can be anticipated to be 
passed along to the customer. Thus, both the capital costs and the 
benefits of the Complete Legal Segregation and the Legal Segregation 
with Recourse Models, relative to the Futures Model, will tend to be 
lower to the extent customers are likely to move their positions in 
advance of an FCM default and higher to the extent customers are 
unlikely to be able to move their positions. As a result, differing 
assumptions about customer mobility in advance of default are likely to 
have smaller implications for the relative costs and benefits of 
differing approaches than they do for Risk Cost considered in 
isolation.
c. Induced Changes in Behavior
    Finally, in the category of costs and benefits associated with 
induced changes in behavior, several issues are worth noting. CME has 
argued that the Complete Legal Segregation and the Legal Segregation 
with Recourse Models could potentially reduce the incentives of 
individual customers to exercise due diligence when choosing an FCM. In 
effect, they argue that because the financial condition of the FCM, and 
of the FCM's other customers, will be less relevant to the customer's 
liability in the event of fellow customer default, the customer will 
devote less effort to monitoring the FCM and its customers. While this 
is likely to be true, these liability regimes have offsetting increased 
monitoring incentives on the part of FCMs and the DCO. That is, because 
the Complete Legal Segregation and the Legal Segregation with Recourse 
Models increase the likelihood that a customer default would impact the 
guaranty fund, increased incentives exist to protect that fund through 
more careful monitoring by the suppliers of the guaranty fund and their 
agent (the

[[Page 33848]]

DCO). Indeed, as discussed above,\180\ other commenters (BlackRock, 
Freddie Mac, and Vanguard) observe that the availability of fellow-
customer collateral as a buffer reduces the incentives of DCOs to 
provide vigorous oversight. The net effect of these incentive changes 
on the incentive to monitor is difficult to quantify. However, the 
basic economics of monitoring suggest that there are efficiency gains 
to centralizing monitoring in a small number of parties.\181\ This is 
because there are ``free rider'' effects associated with diffuse 
liability; when liability is spread upon a large number of agents, each 
gains little from devoting resources to monitoring the firm.\182\ This 
effect is compounded by an information effect; even if the incentive 
exists, it is difficult for individual customers to gain access to 
information about the financial condition of the FCM, and even more so 
about the financial condition of their fellow customers. In contrast, 
the DCO will, especially under the Complete Legal Segregation Model and 
the Legal Segregation with Recourse Model, have good information about 
the financial condition of both FCMs and customers.
---------------------------------------------------------------------------

    \180\ See note 56 supra.
    \181\ In the banking literature, this argument supports capital 
requirements as effective disincentives to excessive risk-taking.
    \182\ See, e.g., Andrei Shleifer and Robert W. Vishny, A Survey 
of Corporate Governance, 52 J. Fin. 737, 753 (1997) (discussing 
effect of ``free rider'' issues on monitoring in context of 
corporate governance).
---------------------------------------------------------------------------

d. Portability
    Another issue is the ease of moving Cleared Swaps Customer 
Contracts to new FCMs following an FCM default. Following a default by 
an FCM, the Cleared Swaps Contracts of the FCM's customers either have 
to be moved to another FCM, or closed. Moving a position to another FCM 
allows the DCO to maintain its net position in that contract at zero, 
which is generally a goal of a DCO. It also prevents a customer from 
needing to reestablish a position, which potentially can be costly, 
especially in a stressed economic state.\183\ As discussed above, the 
various models result in different amounts of customer-specific 
information residing with the DCO under the various models. While it is 
difficult to quantify the effects of the alternatives on the cost of 
moving positions between FCMs, it would seem that both the Complete 
Legal Segregation and the Legal Segregation with Recourse models do not 
decrease portability, especially given the increases in capital 
requirements that many commenters view as a likely consequence of 
either model. In fact, ISDA emphasizes that the Complete Legal 
Segregation Model likely increases portability.
---------------------------------------------------------------------------

    \183\ See ISDA Supplemental at 2.
---------------------------------------------------------------------------

e. Potential Preferences of Cleared Swaps Customers
    Overall, evaluating the costs and benefits of the Complete Legal 
Segregation Model and the Legal Segregation with Recourse Model 
relative to the Futures Model requires one to know the inherently-
subjective valuation end-users place on the lower likelihood of losing 
their initial margin, as well as more precise estimates of the cost. 
Given the constraints on such knowledge, and the likelihood that the 
benefits to customers will, to some extent, vary with the cost to DCOs 
(that is, both are related to the same underlying factors), the best 
indirect evidence of the likely effect is the comments provided by the 
buy-side. While the Commission has not canvassed all buy-side members, 
most of those that chose to comment on the ANPR support the change. It 
is not knowable if these commenters fully internalized all of the 
potential costs outlined above (e.g., potentially higher margins, 
increased costs imposed by FCMs). However, these commenters generally 
told the Commission that they understood that more protection for 
customer collateral was likely to come at a cost and that they 
nevertheless favored more protective approaches.
f. The Optional Approach
    A final option is giving DCOs the choice of which segregation model 
to employ. If all DCOs would adopt the same model when given a choice, 
then the foregoing analysis would apply. In contrast, if different DCOs 
might adopt different models, then the analysis of the system-wide 
costs and benefits would need to account for the choices made by the 
extant DCOs. The Commission seeks comment on the likely alternatives 
that would emerge if DCOs had the option of choosing their segregation 
model, and the likely costs and benefits of having alternative default 
models available.\184\
---------------------------------------------------------------------------

    \184\ Section III(E) describes certain concerns with adopting 
the Optional Approach.
---------------------------------------------------------------------------

3. Summary of Benefits of Legal Segregation Models
    Based on the discussion in the previous section, the primary 
expected benefits of adopting the Complete Legal Segregation or the 
Legal Segregation with Recourse Models to implementing section 724 of 
the Dodd-Frank Act can be summarized as follows.
a. Fellow-Customer Risk
    The primary direct benefit from either the Complete Legal 
Segregation or the Legal Segregation with Recourse Models is to reduce 
the risk to Cleared Swaps Customers of losing the value of their 
collateral in a scenario in which an FCM and one or more of its 
customers defaults on its obligations in connection with Cleared Swaps 
transactions. The Complete Legal Segregation Model would largely 
eliminate this risk.\185\ The Legal Segregation with Recourse Model 
would limit this risk to defaults in which the magnitude of the Cleared 
Swaps Customer component of the default exceeds the aggregate of the 
DCO's own capital and the guaranty fund contributions of non-defaulting 
FCM members.
---------------------------------------------------------------------------

    \185\ As noted above, this model would leave some residual 
fellow-customer risk because the DCO would allocate collateral 
between defaulting and non-defaulting customers based on information 
the FCM provided the day prior to default, so the allocation would 
not reflect movement in the cleared swaps portfolio of customers on 
the day of default.
---------------------------------------------------------------------------

    As discussed in the previous section, the value of this reduced 
risk of loss to Cleared Swaps Customers will, to some degree, depend on 
the extent to which such customers are able to anticipate FCM defaults 
and voluntarily transfer their Cleared Swaps Contracts, and associated 
collateral, to other FCMs before the default occurs. In practice, some 
FCM defaults may be anticipated by a substantial proportion of Cleared 
Swaps Customers, while others may occur suddenly with few or no 
customers able to transfer their collateral.\186\ For this reason, an 
important benefit of the Legal Segregation Model (particularly the 
Complete Legal Segregation Model) is greater certainty. By providing 
post-default protection against Fellow-Customer Risk (as such term is 
defined above), the Legal Segregation Model provides Cleared Swaps 
Customers with a degree of certainty that they will not lose their 
collateral due to the actions of other customers regardless of whether 
they are able to anticipate an FCM default. Swaps customers who 
commented on the ANPR indicated that such certainty was critical to 
their business model. The direct benefit to Cleared Swaps Customers of 
reduced Fellow-Customer Risk and reduced

[[Page 33849]]

uncertainty may generate a variety of indirect benefits, for example an 
increased ability by some businesses to use cleared swaps as a risk 
management tool or a reduced need by Cleared Swaps Customers to incur 
costs to protect against the consequences of Fellow-Customer Risk in 
the event of an FCM default.
---------------------------------------------------------------------------

    \186\ See footnote 178 supra (regarding recent experience with 
Lehman). Cf. e.g., Inskeep v. Griffin, 440 B.R. 148, 151-52 
(Beginning on Monday, December 21, 1998 and continuing into the 
morning of Tuesday, December 22, 1998 * * * Park * * * a trader who 
operated out of Griffin Trading Company's London office, 
substantially exceeded his trading limits and suffered losses * * * 
As a result of Park's losses, Griffin Trading became insolvent.'').
---------------------------------------------------------------------------

b. Portability and Systemic Risk
    An additional benefit of the Complete Legal Segregation Model is to 
foster portability. By preserving the collateral of non-defaulting 
Cleared Swaps Customers, this model increases the likelihood that the 
Cleared Swaps Contracts of these customers can be successfully 
transferred. Fostering such transfer, as opposed to the liquidation of 
these Cleared Swaps Contracts, will carry benefits both for the Cleared 
Swaps Customers and for the financial system as a whole (the latter by 
reducing the likelihood that markets would be roiled by a mass 
liquidation).
c. Induced Changes in Behavior
    Further benefits are expected to result from changes in behavior 
induced by the direct costs and benefits of the Complete Legal 
Segregation or Legal Segregation with Recourse Models. Because DCOs 
will not be able to rely on the collateral of non-defaulting Cleared 
Swaps Customers, they will have incentives to increase the extent of 
their monitoring of the risk posed by their FCM members and the major 
customers of those FCMs. This will have a tendency to reduce the 
incidence of FCM and major customer defaults. Some commenters on the 
ANPR suggested that the greater protection provided by the Legal 
Segregation Model (particularly the Complete Legal Segregation Model) 
will mean that Cleared Swaps Customers have less incentive to monitor 
the riskiness of their FCMs than under the Futures Model in which 
customers are exposed to greater risk of loss. However, for reasons 
explained in the previous section, DCOs are in a better position than 
Cleared Swaps Customers to monitor FCMs, and the customers thereof, so 
the benefits from increased monitoring by DCOs can be expected to 
outweigh any reduced monitoring by customers.\187\
---------------------------------------------------------------------------

    \187\ Moreover, any reduced monitoring by customers would also 
imply a reduced monitoring cost.
---------------------------------------------------------------------------

4. Relevance to Section 15(a)(2) Considerations
    The costs and benefits discussed in the previous sections bear on a 
number of the considerations listed in section 15(a)(2) of the CEA:
    a. Protection of market participants and the public. The primary 
benefit of the Complete Legal Segregation Model, reduction in the risk 
of loss of Cleared Swaps Customer Collateral, advances this interest. 
The Commission notes that the Legal Segregation with Recourse Model, 
which the Commission is considering, also achieves such benefit, but to 
a lesser extent.
    b. Efficiency, competitiveness, and financial integrity of markets. 
As mentioned above, the Complete Legal Segregation Model would increase 
the likelihood that, in the event of a simultaneous FCM and Cleared 
Swaps Customer default, the DCO would be able to transfer the Cleared 
Swaps of non-defaulting Cleared Swaps Customers. Therefore, to the 
extent that the Complete Legal Segregation Model would enable Cleared 
Swaps Customers to avoid liquidation of their existing Cleared Swaps, 
this model would avoid what one commenter described as ``major market 
disruption with significant adverse economic impact.'' \188\ Such 
avoidance would therefore promote the financial integrity of the 
markets.
---------------------------------------------------------------------------

    \188\ See ISDA Supplemental at 3.
---------------------------------------------------------------------------

    Additionally, behavioral responses to the Complete Legal 
Segregation Model discussed above may also affect the financial 
integrity of markets. To the extent that the Complete Legal Segregation 
Model creates incentives for DCOs to employ higher levels of monitoring 
of FCMs and their Cleared Swaps Customers, it will enhance the 
financial integrity of markets.
    The Commission notes that, in contrast to the Complete Legal 
Segregation Model, the Legal Segregation with Recourse Model increases 
the likelihood of the transfer of Cleared Swaps Customer Contracts to a 
lesser extent. Therefore, the Legal Segregation with Recourse Model 
does not enhance the financial integrity of markets as much as the 
Complete Legal Segregation Model.
    As mentioned above, the Complete Legal Segregation Model arguably 
entails greater Risk Costs, although not operational costs, than the 
Legal Segregation with Recourse Model. Both such models arguably entail 
greater operational costs than the Futures Model. However:
     As discussed above, commenters exhibited considerable 
divergence in their estimates of Risk Costs.
     As discussed above, ANPR commenters suggested that the 
incremental operational costs of the Complete Legal Segregation or the 
Legal Segregation with Recourse Models, as compared with the Futures 
Model, would be relatively modest against the size of the market for 
cleared swaps.
     Despite the possibility of increased Risk Costs and 
operational costs, most buy-side commenters to the ANPR suggested that 
they valued the degree of certainty that they will not lose Cleared 
Swaps Customer Collateral, and several such commenters indicated that 
the absence of this level of certainty would impair their ability to 
use cleared swaps for risk management purposes. To the extent that 
these commenters represented the perspective of swaps users generally, 
then, notwithstanding the possibility of increased Risk Costs and 
operational costs, adoption of either the Complete Legal Segregation or 
the Legal Segregation with Recourse Models may increase the efficiency 
and competitiveness of markets, because they may encourage buy-side use 
of such markets in the management of risk.
    Because the Complete Legal Segregation Model would eliminate the 
ability of DCOs to access the collateral of non-defaulting Cleared 
Swaps Customers in the event of an FCM default accompanied by the 
default of one or more customers, other things held constant, there 
could potentially be negative effects on a DCO's financial integrity. 
Such potential negative effects would not be present for the Legal 
Segregation with Recourse Model, because DCOs would still have the 
ability to access the collateral of non-defaulting Cleared Swaps 
Customers. To the extent that negative effects may exist, Core 
Principle B for DCOs, section 5b(c)(2)(B) of the CEA would require a 
DCO to have available alternative resources to protect the DCO from the 
consequences of a major FCM default, such as higher margin levels or 
larger guaranty funds. Consistent with this requirement, commenters on 
the ANPR who considered access to the collateral of non-defaulting 
Cleared Swaps Customers to be important generally assumed that DCOs 
would procure alternative financial resources if the Complete Legal 
Segregation Model is adopted. As a result, any potential negative 
effect of the Complete Legal Segregation Model on market integrity will 
be reflected in higher capital costs rather than an actual reduction in 
market integrity.
    c. Price discovery. The effect of the Complete Legal Segregation 
Model (or the Legal Segregation with Recourse Model), as proposed, on 
price discovery will depend on the value that Cleared Swaps Customers 
assign to the additional protection that they will

[[Page 33850]]

receive for Cleared Swaps Collateral against the cost that they will 
pay for such protection. If the former would exceed the latter, as buy-
side commenters to the ANPR suggested, then Cleared Swaps Customers may 
be encouraged to participate in the markets, which could have a 
positive impact on price discovery
    d. Sound risk management practices. To the extent that the Complete 
Legal Segregation Model or the Legal Segregation with Recourse Model 
creates incentives for higher levels of monitoring of FCMs and their 
Cleared Swaps Customers by DCOs, it will enhance sound risk management 
practices. As discussed above, some commenters suggested that the 
Complete Legal Segregation Model or the Legal Segregation with Recourse 
Model would reduce incentives for Cleared Swaps Customers to ``risk 
manage'' their FCMs. As noted above, there are significant questions 
about the ability of customers to ``risk manage'' their FCMs 
effectively. Moreover, the Commission expects that any such effect 
would be outweighed by enhanced risk management on the part of DCOs.
    e. Other public interest considerations. As discussed above, some 
commenters suggested that the Complete Legal Segregation Model would 
increase market stability in times of stress facilitating the prompt 
transfer of customer positions without the need for liquidation when an 
FCM defaults.
5. Public Comment
    The Commission invites public comment on its cost-benefit 
considerations, including the costs and benefits of the Complete 
Segregation Model (as proposed), the Legal Segregation with Recourse 
Model (which is under consideration), the Futures Model, and giving 
DCOs a choice of such approaches. Commenters are also invited to submit 
any data or other information that they may have quantifying or 
qualifying the costs and benefits with their comment letters.

List of Subjects

17 CFR Part 22

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

17 CFR Part 190

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

VIII. Text of Proposed Rules

    For the reasons stated in this release, the Commission hereby 
proposes to amend Chapter as follows:
    1. Add Part 22 to read as follows:

PART 22--CLEARED SWAPS

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

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

Sec.  22.1  Definitions.

    For the purposes of this part:
    Cleared Swap. This term refers to a transaction constituting a 
``cleared swap'' within the meaning of section 1a(7) of the Act.
    (1) This term shall exclude any swap (along with money, securities, 
or other property received to margin, guarantee, or secure such a swap) 
that, pursuant to a Commission rule, regulation, or order (or a 
derivatives clearing organization rule approved in accordance with 
Sec.  39.15(b)(2) of this chapter), is (along with such money, 
securities, or other property) commingled with a commodity future or 
option (along with money, securities, or other property received to 
margin, guarantee, or secure such a future or option) that is 
segregated pursuant to section 4d(a) of the Act.
    (2) This term shall include any trade or contract (along with 
money, securities or other property received to margin, guarantee, or 
secure such a trade or contract), that (i) Would be required to be 
segregated pursuant to section 4d(a) of the Act, or (ii) Would be 
subject to Sec.  30.7 of this chapter, but which is, in either case, 
pursuant to a Commission rule, regulation, or order (or a derivatives 
clearing organization rule approved in accordance with Sec.  
39.15(b)(2) of this chapter), commingled with a swap (along with money, 
securities, or other property received to margin, guarantee, or secure 
such a swap) in an account segregated pursuant to section 4d(f) of the 
Act.
    Cleared Swaps Customer. This term refers to any person entering 
into a Cleared Swap, but shall exclude any owner or holder of a Cleared 
Swaps Proprietary Account with respect to the Cleared Swaps in such 
account. A person shall be a Cleared Swaps Customer only with respect 
to its Cleared Swaps.
    Cleared Swaps Customer Account. This term refers to any account for 
the Cleared Swaps of Cleared Swaps Customers and associated Cleared 
Swaps Customer Collateral that:
    (1) A futures commission merchant maintains on behalf of Cleared 
Swaps Customers (including, in the case of a Collecting Futures 
Commission Merchant, the Cleared Swaps Customers of a Depositing 
Futures Commission Merchant) or
    (2) A derivatives clearing organization maintains for futures 
commission merchants on behalf of Cleared Swaps Customers thereof.
    Cleared Swaps Customer Collateral. (1) This term means all money, 
securities, or other property received by a futures commission merchant 
or by a derivatives clearing organization from, for, or on behalf of a 
Cleared Swaps Customer, which money, securities, or other property:
    (i) Is intended to or does margin, guarantee, or secure a Cleared 
Swap; or
    (ii) Constitutes, if a Cleared Swap is in the form or nature of an 
option, the settlement value of such option.
    (2) This term shall also include accruals, i.e., all money, 
securities, or other property that a futures commission merchant or 
derivatives clearing organization receives, directly or indirectly, 
which is incident to or results from a Cleared Swap that a futures 
commission merchant intermediates for a Cleared Swaps Customer.
    Cleared Swaps Proprietary Account. (1) This term means an account 
for Cleared Swaps and associated collateral that is carried on the 
books and records of a futures commission merchant for persons with 
certain relationships with

[[Page 33851]]

that futures commission merchant, specifically:
    (i) Where such account is carried for a person falling within one 
of the categories specified in paragraph (2) of this definition, or
    (ii) Where ten percent or more of such account is owned by a person 
falling within one of the categories specified in paragraph (2) of this 
definition, or
    (iii) Where an aggregate of ten percent or more of such account is 
owned by more than one person falling within one or more of the 
categories specified in paragraph (2) of this definition.
    (2) The relationships to the futures commission merchant referred 
to in paragraph (1) of this definition are as follows:
    (i) Such individual himself, or such partnership, corporation or 
association itself;
    (ii) In the case of a partnership, a general partner in such 
partnership;
    (iii) In the case of a limited partnership, a limited or special 
partner in such partnership whose duties include:
    (A) The management of the partnership business or any part thereof;
    (B) The handling, on behalf of such partnership, of (i) the Cleared 
Swaps of Cleared Swaps Customers or (ii) the Cleared Swaps Customer 
Collateral;
    (C) The keeping, on behalf of such partnership, of records 
pertaining to (i) the Cleared Swaps of Cleared Swaps Customers or (ii) 
the Cleared Swaps Customer Collateral; or
    (D) The signing or co-signing of checks or drafts on behalf of such 
partnership;
    (iv) In the case of a corporation or association, an officer, 
director, or owner of ten percent or more of the capital stock of such 
organization;
    (v) An employee of such individual, partnership, corporation or 
association whose duties include:
    (A) The management of the business of such individual, partnership, 
corporation or association or any part thereof;
    (B) The handling, on behalf of such individual, partnership, 
corporation, or association, of the Cleared Swaps of Cleared Swaps 
Customers or the Cleared Swaps Customer Collateral;
    (C) The keeping of records, on behalf of such individual, 
partnership, corporation, or association, pertaining to the Cleared 
Swaps of Cleared Swaps Customers or the Cleared Swaps Customer 
Collateral; or
    (D) The signing or co-signing of checks or drafts on behalf of such 
individual, partnership, corporation, or association;
    (vi) A spouse or minor dependent living in the same household of 
any of the foregoing persons;
    (vii) A business affiliate that, directly or indirectly, controls 
such individual, partnership, corporation, or association; or
    (viii) A business affiliate that, directly or indirectly, is 
controlled by or is under common control with, such individual, 
partnership, corporation or association. Provided, however, that an 
account owned by any shareholder or member of a cooperative association 
of producers, within the meaning of section 6a of the Act, which 
association is registered as a futures commission merchant and carries 
such account on its records, shall be deemed to be a Cleared Swaps 
Customer Account and not a Cleared Swaps Proprietary Account of such 
association, unless the shareholder or member is an officer, director, 
or manager of the association.
    Clearing Member. This term means any person that has clearing 
privileges such that it can process, clear and settle trades through a 
derivatives clearing organization on behalf of itself or others. The 
derivatives clearing organization need not be organized as a membership 
organization.
    Collecting Futures Commission Merchant. A futures commission 
merchant that carries Cleared Swaps on behalf of another futures 
commission merchant and the Cleared Swaps Customers of the latter 
futures commission merchant, and as part of carrying such Cleared 
Swaps, collects Cleared Swaps Customer Collateral.
    Commingle. To commingle two or more items means to hold such items 
in the same account, or to combine such items in a transfer between 
accounts.
    Customer. This term means any customer of a futures commission 
merchant, other than a Cleared Swaps Customer, including, without 
limitation:
    (1) Any ``customer'' or ``commodity customer'' within the meaning 
of Sec.  1.3 of this chapter; and
    (2) Any ``foreign futures or foreign options customer'' within the 
meaning of Sec.  30.1(c) of this chapter.
    Depositing Futures Commission Merchant. A futures commission 
merchant that carries Cleared Swaps on behalf of its Cleared Swaps 
Customers through another futures commission merchant and, as part of 
carrying such Cleared Swaps, deposits Cleared Swaps Customer Collateral 
with such futures commission merchant.
    Permitted Depository. This term shall have the meaning set forth in 
Sec.  22.4 of this part.
    Segregate. To segregate two or more items is to keep them in 
separate accounts, and to avoid combining them in the same transfer 
between two accounts.

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

    (a) General. A futures commission merchant shall treat and deal 
with the Cleared Swaps of Cleared Swaps Customers and associated 
Cleared Swaps Customer Collateral as belonging to Cleared Swaps 
Customers.
    (b) Location of Cleared Swaps Customer Collateral. (1) A futures 
commission merchant must segregate all Cleared Swaps Customer 
Collateral that it receives, and must either hold such Cleared Swaps 
Customer Collateral itself as set forth in subparagraph (b)(2) of this 
section, or deposit such collateral into one or more Cleared Swaps 
Customer Accounts held at a Permitted Depository, as set forth in 
subparagraph (b)(3) of this section.
    (2) If a futures commission merchant holds Cleared Swaps Customer 
Collateral itself, then the futures commission merchant must:
    (i) Physically separate such collateral from its own property;
    (ii) Clearly identify each physical location in which it holds such 
collateral as a ``Location of Cleared Swaps Customer Collateral'' (the 
``FCM Physical Location'');
    (iii) Ensure that the FCM Physical Location provides appropriate 
protection for such collateral; and
    (iv) Record in its books and records the amount of such Cleared 
Swaps Customer Collateral separately from its own funds.
    (3) If a futures commission merchant holds Cleared Swaps Customer 
Collateral in a Permitted Depository, then:
    (i) The Permitted Depository must qualify pursuant to the 
requirements set forth in Sec.  22.4 of this part, and
    (ii) The futures commission merchant must maintain a Cleared Swaps 
Customer Account with each such Permitted Depository.
    (c) Commingling. (1) A futures commission merchant may commingle 
the Cleared Swaps Customer Collateral that it receives from, for, or on 
behalf of multiple Cleared Swaps Customers.
    (2) A futures commission merchant shall not commingle Cleared Swaps 
Customer Collateral with either of the following:
    (i) Funds belonging to the futures commission merchant, except as 
expressly permitted in paragraph (e)(3) of this section; or
    (ii) Other categories of funds belonging to Customers of the 
futures

[[Page 33852]]

commission merchant, including customer funds (as Sec.  1.3 of this 
chapter defines such term) and the foreign futures or foreign options 
secured amount (as Sec.  1.3 of this chapter defines such term), except 
as expressly permitted by Commission rule, regulation, or order, or by 
a derivatives clearing organization rule approved in accordance with 
Sec.  39.15(b)(2) of this chapter.
    (d) Limitations on Use. (1) No futures commission merchant shall 
use, or permit the use of, the Cleared Swaps Customer Collateral of one 
Cleared Swaps Customer to purchase, margin, or settle the Cleared Swaps 
or any other trade or contract of, or to secure or extend the credit 
of, any person other than such Cleared Swaps Customer. Cleared Swaps 
Customer Collateral shall not be used to margin, guarantee, or secure 
trades or contracts of the entity constituting a Cleared Swaps Customer 
other than in Cleared Swaps, except to the extent permitted by a 
Commission rule, regulation or order, or by a derivatives clearing 
organization rule approved in accordance with Sec.  39.15(b)(2) of this 
chapter.
    (2) A futures commission merchant may not impose or permit the 
imposition of a lien on Cleared Swaps Customer Collateral, including 
any residual financial interest of the futures commission merchant in 
such collateral, as described in paragraph (e)(4) of this section.
    (3) A futures commission merchant may not include, as Cleared Swaps 
Customer Collateral,
    (i) Money invested in the securities, memberships, or obligations 
of any derivatives clearing organization, designated contract market, 
swap execution facility, or swap data repository, or
    (ii) Money, securities, or other property that any derivatives 
clearing organization holds and may use for a purpose other than those 
set forth in Sec.  22.3 of this part.
    (e) Exceptions. Notwithstanding the foregoing:
    (1) Permitted Investments. A futures commission merchant may invest 
money, securities, or other property constituting Cleared Swaps 
Customer Collateral in accordance with Sec.  1.25 of this chapter, 
which section shall apply to such money, securities, or other property 
as if they comprised customer funds or customer money subject to 
segregation pursuant to section 4d(a) of the Act and the regulations 
thereunder.
    (2) Permitted Withdrawals. Such share of Cleared Swaps Customer 
Collateral as in the normal course of business shall be necessary to 
margin, guarantee, secure, transfer, adjust, or settle a Cleared Swaps 
Customer's cleared swaps with a derivatives clearing organization, or 
with a Collecting Futures Commission Merchant, may be withdrawn and 
applied to such purposes, including the payment of commissions, 
brokerage, interest, taxes, storage, and other charges, lawfully 
accruing in connection with such cleared swaps.
    (3) Deposits of Own Money, Securities, or Other Property. In order 
to ensure that it is always in compliance with paragraph (f) of this 
section, a futures commission merchant may place in an FCM Physical 
Location or deposit in a Cleared Swaps Customer Account its own money, 
securities, or other property (provided, that such securities or other 
property are unencumbered and are of the types specified in Sec.  1.25 
of this chapter).
    (4) Residual Financial Interest. (i) If, in accordance with 
paragraph (e)(3) of this section, a futures commission merchant places 
in an FCM Physical Location or deposits in a Cleared Swaps Customer 
Account its own money, securities, or other property, then such money, 
securities, or other property (including accruals thereon) shall 
constitute Cleared Swaps Customer Collateral.
    (ii) The futures commission merchant shall have a residual 
financial interest in any portion of such money, securities, or other 
property in excess of that necessary for compliance with paragraph 
(f)(4) of this section.
    (iii) The futures commission merchant may withdraw money, 
securities, or other property from the FCM Physical Location or Cleared 
Swaps Customer Account, to the extent of its residual financial 
interest therein. At the time of such withdrawal, the futures 
commission merchant shall ensure that the withdrawal does not cause its 
residual financial interest to become less than zero.
    (f) Requirements as to Amount. (1) For purposes of this section 
22.2(f), the term ``account'' shall reference the entries on the books 
and records of a futures commission merchant pertaining to the Cleared 
Swaps Customer Collateral of a particular Cleared Swaps Customer.
    (2) The futures commission merchant must reflect in the account 
that it maintains for each Cleared Swaps Customer the market value of 
any Cleared Swaps Customer Collateral that it receives from such 
customer, as adjusted by:
    (i) Any uses permitted under Sec.  22.2(d) of this part;
    (ii) Any accruals or losses on permitted investments of such 
collateral under Sec.  22.2(e) of this part that, pursuant to the 
futures commission merchant's customer agreement with that customer, 
are creditable or chargeable to such customer;
    (iii) Any charges lawfully accruing to the Cleared Swaps Customer, 
including any commission, brokerage fee, interest, tax, or storage fee; 
and
    (iv) Any appropriately authorized distribution or transfer of such 
collateral.
    (3) If the market value of Cleared Swaps Customer Collateral in the 
account of a Cleared Swaps Customer is positive after adjustments, then 
that account has a credit balance. If the market value of Cleared Swaps 
Customer Collateral in the account of a Cleared Swaps Customer is 
negative after adjustments, then that account has a debit balance.
    (4) The futures commission merchant must maintain in segregation, 
in its FCM Physical Locations and/or its Cleared Swaps Customer 
Accounts at Permitted Depositories, an amount equal to the sum of any 
credit balances that the Cleared Swaps Customers of the futures 
commission merchant have in their accounts, excluding from such sum any 
debit balances that the Cleared Swaps Customers of the futures 
commission merchant have in their accounts.
    (5) Notwithstanding the foregoing, the futures commission merchant 
must include, in calculating the sum referenced in paragraph (f)(4) of 
this section, any debit balance that a Cleared Swaps Customer may have 
in its account, to the extent that such balance is secured by ``readily 
marketable securities'' that the Cleared Swaps Customer deposited with 
the futures commission merchant.
    (i) For purposes of this section, ``readily marketable'' shall be 
defined as having a ``ready market'' as such latter term is defined in 
Rule 15c3-1(c)(11) of the Securities and Exchange Commission (Sec.  
241.15c3-1(c)(11) of this title).
    (ii) In order for a debit balance to be deemed secured by ``readily 
marketable securities,'' the futures commission merchant must maintain 
a security interest in such securities, and must hold a written 
authorization to liquidate the securities at the discretion of the 
futures commission merchant.
    (iii) To determine the amount secured by ``readily marketable 
securities,'' the futures commission merchant shall: (A) determine the 
market value of such securities; and (B) reduce such market value by 
applicable percentage deductions (i.e., ``securities haircuts'') as set 
forth in Rule 15c3-1(c)(2)(vi) of the

[[Page 33853]]

Securities and Exchange Commission (Sec.  240.15c3-1(c)(2)(vi) of this 
title). The portion of the debit balance, not exceeding 100 per cent, 
that is secured by the reduced market value of such readily marketable 
securities shall be included in calculating the sum referred to in 
paragraph (f)(4) of this section.
    (g) Segregated Account; Daily Computation and Record. (1) Each 
futures commission merchant must compute as of the close of each 
business day, on a currency-by-currency basis:
    (i) The aggregate market value of the Cleared Swaps Customer 
Collateral in all FCM Physical Locations and all Cleared Swaps Customer 
Accounts held at Permitted Depositories (the ``Collateral Value'');
    (ii) The sum referenced in paragraph (f)(4) of this section (the 
``Collateral Requirement''); and
    (iii) The amount of the residual financial interest that the 
futures commission merchant holds in such Cleared Swaps Customer 
Collateral, which shall equal the difference between the Collateral 
Value and the Collateral Requirement.
    (2) The futures commission merchant must complete the daily 
computations required by this section prior to noon on the next 
business day and must keep such computations, together with all 
supporting data, in accordance with the requirements of Sec.  1.31 of 
this chapter.

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

    (a) General. A derivatives clearing organization shall treat and 
deal with the Cleared Swaps Customer Collateral deposited by a futures 
commission merchant as belonging to the Cleared Swaps Customers of such 
futures commission merchant and not other persons, including, without 
limitation, the futures commission merchant.
    (b) Location of Cleared Swaps Customer Collateral. (1) The 
derivatives clearing organization must segregate all Cleared Swaps 
Customer Collateral that it receives from futures commission merchants, 
and must either hold such Cleared Swaps Customer Collateral itself as 
set forth in paragraph (b)(2) of this section, or deposit such 
collateral into one or more Cleared Swaps Customer Accounts held at a 
Permitted Depository, as set forth in paragraph (b)(3) of this section.
    (2) If a derivatives clearing organization holds Cleared Swaps 
Customer Collateral itself, then the derivatives clearing organization 
must:
    (i) Physically separate such collateral from its own property, the 
property of any futures commission merchant, and the property of any 
other person that is not a Cleared Swaps Customer of a futures 
commission merchant;
    (ii) Clearly identify each physical location in which it holds such 
collateral as ``Location of Cleared Swaps Customer Collateral'' (the 
``DCO Physical Location'');
    (iii) Ensure that the DCO Physical Location provides appropriate 
protection for such collateral; and
    (iv) Record in its books and records the amount of such Cleared 
Swaps Customer Collateral separately from its own funds, the funds of 
any futures commission merchant, and the funds of any other person that 
is not a Cleared Swaps Customer of a futures commission merchant.
    (3) If a derivatives clearing organization holds Cleared Swaps 
Customer Collateral in a Permitted Depository, then:
    (i) The Permitted Depository must qualify pursuant to the 
requirements set forth in Sec.  22.4 of this part; and
    (ii) The derivatives clearing organization must maintain a Cleared 
Swaps Customer Account with each such Permitted Depository.
    (c) Commingling. (1) A derivatives clearing organization may 
commingle the Cleared Swaps Customer Collateral that it receives from 
multiple futures commission merchants on behalf of their Cleared Swaps 
Customers.
    (2) A derivatives clearing organization shall not commingle the 
Cleared Swaps Customer Collateral that it receives from a futures 
commission merchant on behalf of Cleared Swaps Customers with any of 
the following:
    (i) The money, securities, or other property belonging to the 
derivatives clearing organization;
    (ii) The money, securities, or other property belonging to any 
futures commission merchant; or
    (iii) Other categories of funds that it receives from a futures 
commission merchant on behalf of Customers, including customer funds 
(as Sec.  1.3 of this chapter defines such term) and the foreign 
futures or foreign options secured amount (as Sec.  1.3 of this chapter 
defines such term), except as expressly permitted by Commission rule, 
regulation or order, (or a derivatives clearing organization rule 
approved in accordance with Sec.  39.15(b)(2) of this chapter).
    (d) Exceptions; Deposits and Withdrawals from Futures Commission 
Merchants. Notwithstanding the foregoing, pursuant to an instruction 
from a futures commission merchant, a derivatives clearing organization 
may place money, securities, or other property belonging to the futures 
commission merchant in a DCO Physical Location, or deposit such money, 
securities, or other property in the Cleared Swaps Customer Accounts 
that the derivatives clearing organization maintains. The derivatives 
clearing organization may permit the futures commission merchant to 
withdraw such money, securities, or other property from a DCO Physical 
Location or Cleared Swaps Customer Account.
    (e) Exceptions; Permitted Investments. Notwithstanding the 
foregoing and Sec.  22.15 of this part, a derivatives clearing 
organization may invest the money, securities, or other property 
constituting Cleared Swaps Customer Collateral in accordance with Sec.  
1.25 of this chapter, which section shall apply to such money, 
securities, or other property as if they comprised customer funds or 
customer money subject to segregation pursuant to section 4d(a) of the 
Act and the regulations thereunder.

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

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

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

    (a) Before depositing Cleared Swaps Customer Collateral, the 
futures commission merchant or derivatives clearing organization shall 
obtain and retain in its files a separate written acknowledgment letter 
from each depository in accordance with Sec. Sec.  1.20 and 1.26 of 
this chapter, with all references to ``customer funds'' modified to 
apply to Cleared Swaps Customer Collateral, and with all references to 
section 4d(a) or 4d(b) of the Act and the regulations thereunder 
modified to apply to section 4d(f) of the Act and the regulations 
thereunder.

[[Page 33854]]

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

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

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

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

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

Sec.  22.8  Situs of Cleared Swaps Accounts.

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

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

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

Sec.  22.10  Incorporation by Reference.

    Sections 1.27, 1.28, 1.29, and 1.30 of this chapter shall apply to 
the Cleared Swaps Customer Collateral held by futures commission 
merchants and derivatives clearing organizations to the same extent as 
if such sections referred to:
    (a) ``Cleared Swaps Customer Collateral'' in place of ``customer 
funds;''
    (b) ``Cleared Swaps Customers'' instead of ``commodity or option 
customers'' or ``customers or option customers;''
    (c) ``Cleared Swaps Contracts'' instead of ``trades, contracts, or 
commodity options;'' and
    (d) ``Section 4d(f) of the Act'' instead of ``section 4d(a)(2) of 
the Act.''

Sec.  22.11  Information to be Provided Regarding Customers and their 
Cleared Swaps.

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

[[Page 33855]]

    (2) The information that it must provide to the derivatives 
clearing organization pursuant to paragraph (c)(2) of this section 
shall also include information sufficient to identify, for each Cleared 
Swaps Customer referenced in paragraph (d)(1) of this section, the 
portfolio of rights and obligations arising from the Cleared Swaps that 
the Collecting Futures Commission Merchant intermediates, on behalf of 
the Depositing Futures Commission Merchant, for such customer.
    (e) Each derivatives clearing organization shall (1) take 
appropriate steps to confirm that the information it receives pursuant 
to paragraphs (c)(1) or (c)(2) of this section is accurate and 
complete, and (2) ensure that the futures commission merchant is 
providing the derivatives clearing organization the information 
required by paragraphs (c)(1) or (c)(2) of this section on a timely 
basis.

Sec.  22.12  Information to be Maintained Regarding Cleared Swaps 
Customer Collateral.

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

Sec.  22.13  Additions to Cleared Swaps Customer Collateral.

    (a)(1) At the election of the derivatives clearing organization or 
Collecting Futures Commission Merchant, the collateral requirement 
referred to in Sec.  22.12(a), (c), and (d) of this part applicable to 
a particular Cleared Swaps Customer or group of Cleared Swaps Customers 
may be increased based on an evaluation of the credit risk posed by 
such customer or group, in which case the derivatives clearing 
organization or Collecting Futures Commission Merchant shall collect 
and record such higher amount as provided in section 22.12 of this 
part.
    (2) Nothing in paragraph (a)(1) of this section is intended to 
interfere with the right of a futures commission merchant to increase 
the collateral requirements at such futures commission merchant with 
respect to any of its Cleared Swaps Customers or Customers.
    (b) Any collateral deposited by a futures commission merchant 
(including a Depositing Futures Commission Merchant) pursuant to Sec.  
22.2(e)(3) of this part, which collateral is identified as funds or 
securities in which such futures commission merchant has a residual 
financial interest pursuant to Sec.  22.2(e)(4) of this part, may, to 
the extent of such residual financial interest, be used by the 
derivatives clearing organization or Collecting Futures Commission 
Merchant, as applicable, to margin, guarantee or secure the cleared 
swaps of any or all of such Cleared Swaps Customers.

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

    (a) A Depositing Futures Commission Merchant which receives a call 
for either initial margin or variation margin with respect to a Cleared 
Swaps Customer Account from a Collecting Futures Commission Merchant, 
which call such Depositing Futures Commission Merchant does not meet in 
full, shall, with respect to each Cleared Swaps Customer of such 
Depositing Futures Commission Merchant whose Cleared Swaps contribute 
to such margin call,
    (1) Transmit to the Collecting Futures Commission Merchant an 
amount equal to the lesser of
    (i) The amount called for; or
    (ii) The remaining Cleared Swaps Collateral on deposit at such 
Depositing Futures Commission Merchant for that Cleared Swaps Customer; 
and
    (2) Advise the Collecting Futures Commission Merchant of the 
identity of each such Cleared Swaps Customer, and the amount 
transmitted on behalf of each such customer.
    (b) If the entity acting as Depositing Futures Commission Merchant 
referenced in paragraph (a) of this section is also a Collecting 
Futures Commission Merchant, then:
    (1) Such entity shall include in the transmission required in 
paragraph (a)(1) of this section any amount that it receives, pursuant 
to paragraph (a)(1) of this section, from a Depositing Futures 
Commission Merchant for which such entity acts as a Collecting Futures 
Commission Merchant; and
    (2) Such entity shall present its Collecting Futures Commission 
Merchant with the information that it receives, pursuant to paragraph 
(a)(2) of this section, from a Depositing Futures Commission Merchant 
for which such

[[Page 33856]]

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

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

    Subject to Sec.  22.3(e) of this part, each derivatives clearing 
organization and each Collecting Futures Commission Merchant receiving 
Cleared Swaps Customer Collateral from a Depositing Futures Commission 
Merchant shall treat the value of collateral required with respect to 
the portfolio of rights and obligations arising out of the Cleared 
Swaps intermediated for each Cleared Swaps Customer, and collected from 
the Depositing Futures Commission Merchant, as belonging to such 
customer, and such amount shall not be used to margin, guarantee, or 
secure the Cleared Swaps or other obligations of the Depositing Futures 
Commission Merchant or of any other Cleared Swaps Customer or Customer.

Sec.  22.16  Disclosures to Customers.

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

PART 190--BANKRUPTCY

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

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

    3. In 17 CFR Part 190:
    A. Remove the words ``commodity account'' and ``commodity futures 
account'' and add, in their place, the words ``commodity contract 
account'' in:
    i. Sections 190.01(w), (y), and (kk)(6),
    ii. Sections 190.02(d)(1), (6), and (7),
    iii. Section 190.03(a)(2),
    iv. Sections 190.06(g)(1)(i), (ii), and (3),
    v. Sections 190.10(d)(1) and (h),
    B. Remove the words ``commodity futures contract'' and add, in 
their place, the words ``commodity contract'' in Sec.  190.05(a)(1) and 
(b)(1).
    C. Remove the words ``contract market'' and ``board of trade'' and 
add, in their place, the words ``designated contract market'' in:
    i. Sections 190.01(gg), (kk)(2)(i), (4) and (5),
    ii. Section 190.04(d)(1)(i), and
    iii. Section 190.07(e)(2)(ii)(B) Remove the words ``commodity 
transaction'' and

[[Page 33857]]

add, in their place, the words ``commodity contract transaction'' in 
Sec.  190.02(d)(3).
    4. In Sec.  190.01, redesignate paragraphs (e) through (oo) as (f) 
through (pp), add a new paragraph (e) and revise paragraphs (a), (f), 
and newly redesignated paragraphs (cc), (hh), (ll)(2)(ii), (ll)(4), 
(ll)(5), and (pp) to read as follows:

Sec.  190.01  Definitions.

* * * * *
    (a)(1) Account class means each of the following types of customer 
accounts which must be recognized as a separate class of account by the 
trustee: futures accounts, foreign futures accounts, leverage accounts, 
delivery accounts as defined in Sec.  190.05(a)(2) of this part, and 
cleared swaps accounts.
    (2)(i) To the extent that the equity balance, as defined in Sec.  
190.07 of this part, of a customer in a commodity option, as defined in 
Sec.  1.3 of this chapter, may be commingled with the equity balance of 
such customer in any domestic commodity futures contract pursuant to 
regulations under the Act, the aggregate shall be treated for purposes 
of this part as being held in a futures account.
    (ii) To the extent that such equity balance of a customer in a 
commodity option may be commingled with the equity balance of such 
customer in any cleared swaps account pursuant to regulations under 
this act, the aggregate shall be treated for purposes of this part as 
being held in a cleared swaps account.
    (iii) If positions or transactions in commodity contracts that 
would otherwise belong to one account class (and the money, securities, 
or other property margining, guaranteeing, or securing such positions 
or transactions), are, pursuant to a Commission rule, regulation, or 
order (or a derivatives clearing organization rule approved in 
accordance with Sec.  39.15(b)(2) of this chapter), held separately 
from other positions and transactions in that account class, and are 
commingled with positions or transactions in commodity contracts of 
another account class (and the money, securities, or other property 
margining, guaranteeing, or securing such positions or transactions), 
then the former positions (and the relevant money, securities, or other 
property) shall be treated, for purposes of this part, as being held in 
an account of the latter account class.
* * * * *
    (e) Calendar day. A calendar day includes the time from midnight to 
midnight.
    (f) Clearing organization shall have the same meaning as that set 
forth in section 761(2) of the Bankruptcy Code.
* * * * *
    (cc) Non-public customer means any person enumerated in the 
definition of Proprietary Account in sections 1.3 or 31.4(e) of this 
chapter, any person excluded from the definition of ``foreign futures 
or foreign options customer'' in the proviso to section 30.1(c) of this 
chapter, or any person enumerated in the definition of Cleared Swaps 
Proprietary Account in section 22.1 of this chapter, in each case, if 
such person is defined as a ``customer'' under paragraph (k) of this 
section.
* * * * *
    (hh) Principal contract means a contract which is not traded on a 
designated contract market, and includes leverage contracts and dealer 
options, but does not include:
    (1) Transactions executed off the floor of a designated contract 
market pursuant to rules approved by the Commission or rules which the 
designated contract market is required to enforce, or pursuant to rules 
of a foreign board of trade located outside the United States, its 
territories or possessions; or (2) cleared swaps contracts.
* * * * *
    (ll) * * *
    (2) * * *
    (ii) Is a bona fide hedging position or transaction as defined in 
Sec.  1.3 of this chapter or is a commodity option transaction which 
has been determined by the registered entity to be economically 
appropriate to the reduction of risks in the conduct and management of 
a commercial enterprise pursuant to rules which have been approved by 
the Commission pursuant to section 5c(c) of the Commodity Exchange Act; 
and
* * * * *
    (4) Any cash or other property deposited prior to the entry of the 
order for relief to pay for the taking of physical delivery on a long 
commodity contract or for payment of the strike price upon exercise of 
a short put or a long call option contract on a physical commodity, 
which cannot be settled in cash, in excess of the amount necessary to 
margin such commodity contract prior to the notice date or exercise 
date, which cash or other property is identified on the books and 
records of the debtor as received from or for the account of a 
particular customer on or after three calendar days before the first 
notice date or three calendar days before the exercise date 
specifically for the purpose of payment of the notice price upon taking 
delivery or the strike price upon exercise, respectively, and such 
customer takes delivery or exercises the option in accordance with the 
applicable contract market rules.
    (5) The cash price tendered for any property deposited prior to the 
entry of the order for relief to make physical delivery on a short 
commodity contract or for exercise of a long put or a short call option 
contract on a physical commodity, which cannot be settled in cash, to 
the extent it exceeds the amount necessary to margin such contract 
prior to the notice date or exercise date, which property is identified 
on the books and records of the debtor as received from or for the 
account of a particular customer on or after three calendar days before 
the first notice date or three calendar days before the exercise date 
specifically for the purpose of a delivery or exercise, respectively, 
and such customer makes delivery or exercises the option in accordance 
with the applicable contract market rules.
* * * * *
    (pp) Cleared Swap. This term shall have the same meaning as set 
forth in Sec.  22.1 of this chapter.
* * * * *
    5. In Sec.  190.02, revise paragraphs (a), (b)(1), (b)(2), (d)(11), 
(e), (f)(1), and (g)(2)(i) to read as follows:

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

* * * * *
    (a) Notices to the Commission and Designated Self-Regulatory 
Organizations--
    (1) General. Each commodity broker which files a petition in 
bankruptcy shall, at or before the time of such filing, and each 
commodity broker against which such a petition is filed shall, as soon 
as possible, but no later than one calendar day after the receipt of 
notice of such filing, notify the Commission and such broker's 
designated self-regulatory organization, if any, in accordance with 
Sec.  190.10(a) of the filing date, the court in which the proceeding 
has been filed, and the docket number assigned to that proceeding by 
the court.
    (2) Of transfers under section 764(b) of the Bankruptcy Code. As 
soon as possible, but in no event later than the close of business on 
third calendar day after the order for relief, the trustee, the 
applicable self-regulatory organization, or the commodity broker must 
notify the Commission in accordance with Sec.  190.10(a) whether such 
entity or organization intends to transfer or to apply to transfer open 
commodity contracts on behalf of the commodity

[[Page 33858]]

broker in accordance with section 764(b) of the Bankruptcy Code and 
Sec.  190.06(e) or (f).
    (b) Notices to customers. (1) Specifically identifiable property 
other than commodity contracts. The trustee must use its best efforts 
to promptly, but in no event later than two calendar days after entry 
of the order for relief, commence to publish in a daily newspaper or 
newspapers of general circulation approved by the court serving the 
location of each branch office of the commodity broker, for two 
consecutive days a notice to customers stating that all specifically 
identifiable property of customers other than open commodity contracts 
which has not otherwise been liquidated will be liquidated commencing 
on the sixth calendar day after the second publication date if the 
customer has not instructed the trustee in writing on or before the 
fifth calendar day after the second publication date to return such 
property pursuant to the terms for distribution of specifically 
identifiable property contained in Sec.  190.08(d)(1) and, on the 
seventh calendar day after such second publication date, if such 
property has not been returned in accordance with such terms on or 
prior to that date. Such notice must describe specifically identifiable 
property in accordance with the definition in this part and must 
specify the terms upon which that property may be returned. Publication 
of the form of notice set forth in the appendix to this part will 
constitute sufficient notice for purposes of this paragraph (b)(1).
    (2) Request for instructions regarding transfer of open commodity 
contracts. The trustee must use its best efforts to request promptly, 
but in no event later than two calendar days after entry of an order 
for relief, customer instructions concerning the transfer or 
liquidation of the specifically identifiable open commodity contracts, 
if any, not required to be liquidated under paragraph (f)(1) of this 
section. The request for customer instructions required by this 
paragraph (b)(2) must state that the trustee is required to liquidate 
any such commodity contract for which transfer instructions have not 
been received on or before the sixth calendar day after entry of the 
order for relief, and any such commodity contract for which 
instructions have been received which has not been transferred in 
accordance with Sec.  190.08(d)(2) on or before the seventh calendar 
day after entry of the order for relief. A form of notice is set forth 
in the appendix to this part.
* * * * *
    (d) * * *
    (11) Whether the claimant's positions in security futures products 
are held in a futures account or a securities account, as these terms 
are defined in Sec.  1.3 of this chapter;
    (e) Transfers--(1) All cases. The trustee for a commodity broker 
must immediately use its best efforts to effect a transfer in 
accordance with Sec.  190.06(e) and (f) no later than the seventh 
calendar day after the order for relief of the open commodity contracts 
and equity held by the commodity broker for or on behalf of its 
customers.
    (2) Involuntary cases. A commodity broker against which an 
involuntary petition in bankruptcy is filed, or the trustee if a 
trustee has been appointed in such case, must use its best efforts to 
effect a transfer in accordance with Sec.  190.06(e) and (f) of all 
open commodity contracts and equity held by the commodity broker for or 
on behalf of its customers and such other property as the Commission in 
its discretion may authorize, on or before the seventh calendar day 
after the filing date, and immediately cease doing business: Provided, 
however, That the commodity broker may trade for liquidation only, 
unless otherwise directed by the Commission, by any applicable self-
regulatory organization or by the court: And, Provided further, That if 
the commodity broker demonstrates to the Commission within such period 
that it was in compliance with the segregation and financial 
requirements of this chapter on the filing date, and the Commission 
determines, in its sole discretion, that such transfer or liquidation 
is neither appropriate nor in the public interest, the commodity broker 
may continue in business subject to applicable provisions of the 
Bankruptcy Code and of this chapter.
    (f) * * *
    (1) Open commodity contracts. All open commodity contracts except:
    (i) Dealer option contracts, if the dealer option grantor is not 
the debtor, which cannot be transferred on or before the seventh 
calendar day after the order for relief; and
    (ii) Specifically identifiable commodity contracts as defined in 
Sec.  190.01(kk)(2) for which an instruction prohibiting liquidation is 
noted prominently in the accounting records of the debtor and timely 
received under paragraph (b)(2) of this section. Notwithstanding the 
foregoing, an open commodity contract must be offset if: such contract 
is a futures contract or a cleared swaps contract which cannot be 
settled in cash and which would otherwise remain open either beyond the 
last day of trading (if applicable), or the first day on which notice 
of intent to deliver may be tendered with respect thereto, whichever 
occurs first; such contract is a long option on a physical commodity 
which cannot be settled in cash and would be automatically exercised, 
has value and would remain open beyond the last day for exercise; such 
contract is a short option on a physical commodity which cannot be 
settled in cash; or, as otherwise specified in these rules.
* * * * *
    (g) * * *
    (2) * * *
    (i) 100% of the maintenance margin requirements of the applicable 
designated contact market or swap execution facility, if any, with 
respect to the open commodity contracts in such account; or
* * * * *
    6. In Sec.  190.03, revise paragraphs (a)(3), (b)(3), (b)(4), 
(b)(5), and (c) to read as follows:

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

* * * * *
    (a) * * *
    (3) Margin calls. The trustee must promptly issue margin calls with 
respect to any account referred to under paragraph (a)(1) of this 
section in which the balance does not equal or exceed 100% of the 
maintenance margin requirements of the applicable designated contact 
market or swap execution facility, if any, with respect to the open 
commodity contracts in such account, or if there are no such 
maintenance margin requirements, 100% of the clearing organization's 
initial margin requirements applicable to the open commodity contracts 
in such account, or if there are no such maintenance margin 
requirements or clearing organization initial margin requirements, then 
50% of the customer initial margin applicable to the commodity 
contracts in such account: Provided, That no margin calls need be made 
to restore customer initial margin.
* * * * *
    (b) * * *
    (3) The trustee has received no customer instructions with respect 
to such contract by the sixth calendar day after entry of the order for 
relief;
    (4) The commodity contract has not been transferred in accordance 
with Sec.  190.08(d)(2) on or before the seventh calendar day after 
entry of the order for relief; or
    (5) The commodity contract would otherwise remain open (e.g., 
because it cannot be settled in cash) beyond the last day of trading in 
such contract (if

[[Page 33859]]

applicable) or the first day on which notice of delivery may be 
tendered with respect to such contract, whichever occurs first.
    (c) Liquidation of specifically identifiable property other than 
open commodity contracts.
    All specifically identifiable property other than open commodity 
contracts which have not been liquidated prior to the primary 
liquidation date, and for which no customer instructions have been 
timely received must be liquidated, to the extent reasonably possible, 
no later than the sixth calendar day after final publication of the 
notice referred to in Sec.  190.02(b)(1). All other specifically 
identifiable property must be liquidated or returned, to the extent 
reasonably possible, no later than the seventh calendar day after final 
publication of such notice.
    7. In Sec.  190.04, revise paragraph (d)(1) to read as follows:

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

* * * * *
    (d) Liquidation--(1) Order of Liquidation. (i) In the Market. 
Liquidation of open commodity contracts held for a house account or 
customer account by or on behalf of a commodity broker which is a 
debtor shall be accomplished pursuant to the rules of a clearing 
organization, a designated contract market, or a swap execution 
facility, as applicable. Such rules shall ensure that the process for 
liquidating open commodity contracts, whether for the house account or 
the customer account, results in competitive pricing, to the extent 
feasible under market conditions at the time of liquidation. Such rules 
must be submitted to the Commission for approval, pursuant to section 
5c(c) of the Act, and be approved by the Commission. Alternatively, 
such rules must otherwise be submitted to and approved by the 
Commission (or its delegate pursuant to Sec.  190.10(d) of this part) 
prior to their application.
    (ii) Book entry. Notwithstanding paragraph (d)(1) of this section, 
in appropriate cases, upon application by the trustee or the affected 
clearing organization, the Commission may permit open commodity 
contracts to be liquidated, or settlement on such contracts to be made, 
by book entry. Such book entry shall offset open commodity contracts, 
whether matched or not matched on the books of the commodity broker, 
using the settlement price for such commodity contracts as determined 
by the clearing organization. Such settlement price shall be determined 
by the rules of the clearing organization, which shall ensure that such 
settlement price is established in a competitive manner, to the extent 
feasible under market conditions at the time of liquidation. Such rules 
must be submitted to the Commission for approval pursuant to section 
5c(c) of the Act, and be approved by the Commission. Alternatively, 
such rules must otherwise be approved by the Commission (or its 
delegate pursuant to Sec.  190.10(d) of this part) prior to their 
application.
* * * * *
    8. In Sec.  190.05, revise paragraph (b) introductory text to read 
as follows:

Sec.  190.05  Making and taking delivery on commodity contracts.

* * * * *
    (b) Rules for deliveries on behalf of a customer of a debtor. 
Except in the case of a commodity contract which is settled in cash, 
each designated contract market, swap execution facility, or clearing 
organization shall adopt, maintain in effect and enforce rules which 
have been submitted in accordance with section 5c(c) of the Act for 
approval by the Commission, which:
* * * * *
    9. In Sec.  190.06, remove paragraph (e)(1)(iv) and redesignate 
paragraph (e)(1)(v) as (e)(1)(iv), revise paragraphs (a), (e)(1)(iii), 
(e)(2), (f)(3)(i) and (g)(2), and add paragraph (g)(1)(iii) to read as 
follows:

Sec.  190.06  Transfers.

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

[[Page 33860]]

    (A) On or before the seventh calendar day after the entry of the 
order for relief; and
    (B) The Commission is notified in accordance with Sec.  
190.02(a)(2) prior to the transfer and does not disapprove the 
transfer; or
    (ii) The transfer of a customer account at the direction of the 
Commission on or before the seventh calendar day after the order for 
relief upon such terms and conditions as the Commission may deem 
appropriate and in the public interest.
* * * * *
    10. In Sec.  190.07, redesignate paragraph (b)(2)(xiii) as 
paragraph (b)(2)(xiv), add a new paragraph (b)(2)(xiii), and revise 
paragraphs (b)(2)(viii), (b)(2)(ix), (b)(3)(v), (c)(1)(i), (e) 
introductory text, (e)(1) and (e)(4) to read as follows:

Sec.  190.07  Calculation of allowed net equity.

* * * * *
    (b) * * *
    (2) * * *
    (viii) Subject to paragraph (b)(2)(ix) of this section, the futures 
accounts, leverage accounts, options accounts, foreign futures 
accounts, delivery accounts (as defined in Sec.  190.05(a)(2)), and 
cleared swaps accounts of the same person shall not be deemed to be 
held in separate capacities: Provided, however, that such accounts may 
be aggregated only in accordance with paragraph (b)(3) of this section.
    (ix) an omnibus customer account of a futures commission merchant 
maintained with a debtor shall be deemed to be held in a separate 
capacity from the house account and any other omnibus customer account 
of such futures commission merchant.
* * * * *
    (xiii) with respect to the cleared swaps customer account class, 
each individual customer account within each omnibus customer account 
referred to in paragraph (ix) of this section shall be deemed to be 
held in a separate capacity from each other such individual customer 
account; subject to the provisions of paragraphs (i) through (xii) of 
this paragraph (b)(2).
* * * * *
    (3) * * *
    (v) The rules pertaining to separate capacities and permitted 
setoffs contained in this section must be applied subsequent to the 
entry of an order for relief; prior to the filing date, the provisions 
of Sec.  1.22 of this chapter and of sections 4d(a)(2) and 4d(f) of the 
Act shall govern what setoffs are permitted.
* * * * *
    (c) * * *
    (1) * * *
    (i) Multiplying the ratio of the amount of the net equity claim 
less the amounts referred to in (c)(1)(ii) of this section of such 
customer for any account class bears to the sum of the net equity 
claims less the amounts referred to in (c)(1)(ii) of this section of 
all customers for accounts of that class by the sum of:
    (A) The value of the money, securities or property segregated on 
behalf of all accounts of the same class less the amounts referred to 
in (1)(ii) of this section;
    (B) The value of any money, securities or property which must be 
allocated under Sec.  190.08 to customer accounts of the same class; 
and
    (C) The amount of any add-back required under paragraph (b)(4) of 
this section; and
* * * * *
    (e) Valuation. In computing net equity, commodity contracts and 
other property held by or for a commodity broker must be valued as 
provided in this paragraph (e): Provided, however, that for all 
commodity contracts other than those listed in paragraph (e)(1) of this 
section, if identical commodity contracts, securities, or other 
property are liquidated on the same date, but cannot be liquidated at 
the same price, the trustee may use the weighted average of the 
liquidation prices in computing the net equity of each customer holding 
such contracts, securities, or property.
    (1) Commodity Contracts. Unless otherwise specified in this 
paragraph (e), the value of an open commodity contract shall be equal 
to the settlement price as calculated by the clearing organization 
pursuant to its rules: Provided, that such rules must either be 
submitted to the Commission, pursuant to section 5c(c)(4) of the Act 
and be approved by the Commission, or such rules must be otherwise 
approved by the Commission (or its delegate pursuant to Sec.  190.10(d) 
of this part) prior to their application; Provided, further, that if 
such contract is transferred its value shall be determined as of the 
end of the settlement cycle in which it is transferred; and Provided, 
finally, that if such contract is liquidated, its value shall be equal 
to the net proceeds of liquidation.
* * * * *
    (4) Securities. The value of a listed security shall be equal to 
the closing price for such security on the exchange upon which it is 
traded. The value of all securities not traded on an exchange shall be 
equal in the case of a long position, to the average of the bid prices 
for long positions, and in the case of a short position, to the average 
of the asking prices for the short positions. If liquidated prior to 
the primary liquidation date, the value of such security shall be equal 
to the net proceeds of its liquidation. Securities which are not 
publicly traded shall be valued by the trustee, subject to approval of 
the court, using such professional assistance as the trustee deems 
necessary in its sole discretion under the circumstances.
* * * * *
    11. In Sec.  190.09, revise paragraph (b) to read as follows:

Sec.  190.09  Member property.

* * * * *
    (b) Scope of Member Property. Member property shall include all 
money, securities and property received, acquired, or held by a 
clearing organization to margin, guarantee or secure, on behalf of a 
clearing member, the proprietary account, as defined in Sec.  1.3 of 
this chapter, any account not belonging to a foreign futures or foreign 
options customer pursuant to the proviso in Sec.  30.1(c), and any 
Cleared Swaps Proprietary Account, as defined in Sec.  22.1: Provided, 
however, that any guaranty deposit or similar payment or deposit made 
by such member and any capital stock, or membership of such member in 
the clearing organization shall also be included in member property 
after payment in full of that portion of the net equity claim of the 
member based on its customer account and of any obligations due to the 
clearing organization which may be paid therefrom in accordance with 
the by-laws or rules of the clearing organization, including 
obligations due from the clearing organization to customers or other 
members.
    12. In Sec.  190.10, revise paragraph (a) to read as follows:

Sec.  190.10  General.

    (a) Notices. Unless instructed otherwise by the Commission, all 
mandatory or discretionary notices to be given to the Commission under 
this part shall be directed by electronic mail to 
bankruptcyfilings@cftc.gov, with a copy sent by overnight mail to 
Director, Division of Clearing and Intermediary Oversight, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, 
NW., Washington, DC 20581. For purposes of this part, notice to the 
Commission shall be deemed to be given only upon actual receipt.
* * * * *
    13. Revise Appendix A to Part 190 to read as follows:

[[Page 33861]]

Appendix A to Part 190--Bankruptcy Forms

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

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

All Cases

Date of Order for Relief

    1. Assure that the commodity broker has notified the Commission, 
its designated self-regulatory organization (``DSRO'') (if any), and 
all applicable clearing organizations of which it is a member that a 
petition or order for relief has been filed (Sec.  190.02(a)(1)).
    2. Attempt to effectuate the transfer of entire customer 
accounts wherein the commodity contracts are transferred together 
with the money, securities, or other property margining, 
guaranteeing, or securing the commodity contracts (hereinafter the 
``transfer'').
    3. Attempt to estimate shortfall of customer funds segregated 
pursuant to sections 4d(a) and (b) of the Act; customer funds 
segregated pursuant to section 4f of the Act; and the foreign 
futures or foreign options secured amount, as defined in Sec.  1.3 
of this chapter.
    a. The trustee should:
    i. Contact the DSRO (if any) and the clearing organizations and 
attempt to effectuate a transfer with such shortfall under section 
764(b) of the Code; notify the Commission for assistance (Sec.  
190.02(a)(2) and (e)(1), Sec.  190.06(b)(2), (e), (f)(3), (g)(2), 
and (h)) but recognize that if there is a substantial shortfall, a 
transfer of such funds or amounts is highly unlikely.
    ii. If a transfer cannot be effectuated, liquidate all customer 
commodity contracts that are margined, guaranteed, or secured by 
funds or amounts with such shortfall, except dealer options and 
specifically identifiable commodity contracts which are bona fide 
hedging positions (as defined in Sec.  190.01(kk)(2)) with 
instructions not to be liquidated. (See Sec. Sec.  190.02(f) and 
190.06(d)(1)). (In this connection, depending upon the size of the 
debtor and other complications of liquidation, the trustee should be 
aware of special liquidation rules, and in particular the 
availability under certain circumstances of book-entry liquidation 
(Sec.  190.04(d)(1)(ii)).
    b. If there is a small shortfall in any of the funds or amounts 
listed in paragraph 2, negotiate with the clearing organization to 
effect a transfer; notify the Commission (Sec. Sec.  190.02(a)(2) 
and (e)(1), 190.06(b)(2), (e), (f)(3), (g)(2), and (h)).
    4. Whether or not a transfer has occurred, liquidate or offset 
open commodity contracts not eligible for transfer (i.e., deficit 
accounts, accounts with no open positions) (Sec.  190.06(e)(1)).
    5. Offset all futures contracts and cleared swaps contracts 
which cannot be settled in cash and which would otherwise remain 
open either beyond the last day of trading (if applicable) or the 
first day on which notice of intent to deliver may be tendered with 
respect thereto, whichever occurs first; offset all long options on 
a physical commodity which cannot be settled in cash, have value and 
would be automatically exercised or would remain open beyond the 
last day of exercise; and offset all short options on a physical 
commodity which cannot be settled in cash (Sec.  190.02(f)(1)).
    6. Compute estimated funded balance for each customer commodity 
account containing open commodity contracts (Sec.  190.04(b)) (daily 
thereafter).
    7. Make margin calls if necessary (Sec.  190.02(g)(1)) (daily 
thereafter).
    8. Liquidate or offset any open commodity account for which a 
customer has failed to meet a margin call (Sec.  190.02(f)(1)) 
(daily thereafter).
    9. Commence liquidation or offset of specifically identifiable 
property described in Sec.  190.02(f)(2)(i) (property which has lost 
10% or more of value) (and as appropriate thereafter).
    10. Commence liquidation or offset of property described in 
Sec.  190.02(f)(3) (``all other property'').
    11. Be aware of any contracts in delivery position and rules 
pertaining to such contracts (Sec.  190.05).

First Calendar Day After the Entry of an Order for Relief

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

Second Calendar Day After the Entry of an Order for Relief

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

Third Calendar Day After the Entry of an Order for Relief

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

Sixth Calendar Day After the Entry of an Order for Relief

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

Seventh Calendar Day After the Entry of an Order for Relief

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

Eighth Calendar Day After the Entry of an Order for Relief

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

Ninth Calendar Day After the Entry of an Order for Relief

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

Tenth Calendar Day After the Entry of an Order for Relief

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

Separate Procedures for Involuntary Petitions for Bankruptcy

    1. Within one business day after notice of receipt of filing of 
the petition in bankruptcy, the trustee should assure that proper 
notification has been given to the Commission, the commodity 
broker's designated self-regulatory organization (Sec.  
190.02(a)(1)) (if any), and all applicable clearing organizations; 
margin calls should be issued if necessary (Sec.  190.02(g)(2)).
    2. On or before the seventh calendar day after the filing of a 
petition in bankruptcy,

[[Page 33862]]

the trustee should use his best efforts to effect a transfer in 
accordance with Sec.  190.06(e) and (f) of all open commodity 
contracts and equity held for or on behalf of customers of the 
commodity broker (Sec.  190.02(e)(2)) unless the debtor can provide 
certain assurances to the trustee.

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

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

Kinds of Property to Which This Notice Applies

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

--Registered in your name,
--Not transferrable by delivery, and
--Not a short-term obligation.

    2. Any fully-paid, non-exempt security held for your account in 
which there were no open commodity contracts as of (date petition 
was filed). (Rather than the return, at this time, of the specific 
securities you deposited with (commodity broker), you may instead 
request now, or at any later time, that the trustee purchase ``like-
kind'' securities of a fair market value which does not exceed your 
proportionate share of the estate).
    3. Any warehouse receipt, bill of lading or other document of 
title deposited as margin which, as of (date petition was filed), 
was securing an open commodity contract and--can be identified in 
(commodity broker)'s records as being held for your account, and--is 
neither in bearer form nor otherwise transferable by delivery.
    4. Any warehouse receipt bill of lading or other document of 
title, or any commodity received, acquired or held by (commodity 
broker) to make or take delivery or exercise from or for your 
account and which--can be identified in (commodity broker)'s records 
as received from or for your account as held specifically for the 
purpose of delivery or exercise.
    5. Any cash or other property deposited to make or take delivery 
on a commodity contract may be eligible to be returned. The trustee 
should be contacted directly for further information if you have 
deposited such property with (commodity broker) and desire its 
return.
    Instructions must be received by (the 5th calendar day after 2d 
publication date) or the trustee will liquidate your property. (If 
you own such property but fail to provide the trustee with 
instructions, you will still have a claim against (commodity broker) 
but you will not be able to have your specific property returned to 
you).

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

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

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

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

    United States Bankruptcy Court ----District of ----------In re 
----------, Debtor, No. ----------.

    Please take notice: On (date), a petition in bankruptcy was 
filed by [against] (commodity broker).

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

Bankruptcy Appendix Form 4--Proof of Claim

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

Proof of Claim

    United States Bankruptcy Court ----District of ----------In re 
----------, Debtor, No. ----------. Return this form by ---------- 
or your claim will be barred (unless extended, for good cause 
only).&
    I. [If claimant is an individual claiming for himself] The 
undersigned, who is the claimant herein, resides at ----------.
    [If claimant is a partnership claiming through a member] The 
undersigned, who resides at ----, is a member of ----------, a 
partnership, composed of the undersigned and ----------, of --------
--, and doing business at ----, and is duly authorized to make this 
proof of claim on behalf of the partnership.
    [If claimant is a corporation claiming though a duly authorized 
officer] The undersigned, who resides at ---- is the ---------- of 
----, a corporation organized under the laws of ---- and doing 
business at ----------, and is duly authorized to make this proof of 
claim on behalf of the corporation.
    [If claim is made by agent] The undersigned, who resides at ----
------, is the agent of ----------, and is duly authorized to make 
this proof of claim on behalf of the claimant.
    II. The debtor was, at the time of the filing of the petition 
initiating this case, and still is, indebted to this claimant for 
the total sum of $ ----------.
    III. List EACH account on behalf of which a claim is being made 
by number and name of account holder[s], and for EACH account, 
specify the following information:
    a. Whether the account is a futures, foreign futures, leverage, 
option (if an option account, specify whether exchange-traded, 
dealer or cleared swap), ``delivery'' account, or a cleared swaps 
account. A ``delivery'' account is one which contains only documents 
of title, commodities, cash, or other property identified to the 
claimant and deposited for the purposes of making or taking delivery 
on a commodity underlying a commodity contract or for payment of the 
strike price upon exercise of an option.

[[Page 33863]]

    b. The capacity in which the account is held, as follows (and if 
more than one is applicable, so state):
    1. [The account is held in the name of the undersigned in his 
individual capacity];
    2. [The account is held by the undersigned as guardian, 
custodian, or conservator for the benefit of a ward or a minor under 
the Uniform Gift to Minors Act];
    3. [The account is held by the undersigned as executor or 
administrator of an estate];
    4. [The account is held by the undersigned as trustee for the 
trust beneficiary];
    5. [The account is held by the undersigned in the name of a 
corporation, partnership, or unincorporated association];
    6. [The account is held as an omnibus customer account of the 
undersigned futures commission merchant];
    7. [The account is held by the undersigned as part owner of a 
joint account];
    8. [The account is held by the undersigned in the name of a plan 
which, on the date the petition in bankruptcy was filed, had in 
effect a registration statement in accordance with the requirements 
of Sec.  1031 of the Employee Retirement Income Security Act of 1974 
and the regulations thereunder]; or
    9. [The account is held by the undersigned as agent or nominee 
for a principal or beneficial owner (and not described above in 
items 1-8 of this II, b)].
    10. [The account is held in any other capacity not described 
above in items 1-9 of this II, b. Specify the capacity].
    c. The equity, as of the date the petition in bankruptcy was 
filed, based on the commodity contracts in the account.
    d. Whether the person[s] (including a general partnership, 
limited partnership, corporation, or other type of association) on 
whose behalf the account is held is one of the following persons OR 
whether one of the following persons, alone or jointly, owns 10% or 
more of the account:
    1. [If the debtor is an individual--
    A. Such individual;
    B. Relative (as defined below in item 8 of this III,d) of the 
debtor or of a general partner of the debtor;
    C. Partnership in which the debtor is a general partner;
    D. General partner of the debtor; or
    E. Corporation of which the debtor is a director, officer, or 
person in control];
    2. [If the debtor is a partnership--
    A. Such partnership;
    B. General partner in the debtor;
    C. Relative (as defined in item 8 of this III,d) of a general 
partner in, general partner of, or person in control of the debtor;
    D. Partnership in which the debtor is a general partner;
    E. General partner of the debtor; or
    F. Person in control of the debtor];
    3. [If the debtor is a limited partnership--
    A. Such limited partnership;
    B. A limited or special partner in such partnership whose duties 
include:
    i. The management of the partnership business or any part 
thereof;
    ii. The handling of the trades or customer funds of customers of 
such partnership;
    iii. The keeping of records pertaining to the trades or customer 
funds of customers of such partnership; or
    iv. The signing or co-signing of checks or drafts on behalf of 
such partnership];
    4. [If the debtor is a corporation or association (except a 
debtor which is a futures commission merchant and is also a 
cooperative association of producers)--
    A. Such corporation or association;
    B. Director of the debtor;
    C. Officer of the debtor;
    D. Person in control of the debtor;
    E. Partnership in which the debtor is a general partner;
    F. General partner of the debtor;
    G. Relative (as defined in item 8 of this III,d) of a general 
partner, director, officer, or person in control of the debtor;
    H. An officer, director or owner of ten percent or more of the 
capital stock of such organization];
    5. [If the debtor is a futures commission merchant which is a 
cooperative association of producers--
    Shareholder or member of the debtor which is an officer, 
director or manager];
    6. [An employee of such individual, partnership, limited 
partnership, corporation or association whose duties include:
    A. The management of the business of such individual, 
partnership, limited partnership, corporation or association or any 
part thereof;
    B. The handling of the trades or customer funds of customers of 
such individual, partnership, limited partnership, corporation or 
association;
    C. The keeping of records pertaining to the trades or funds of 
customers of such individual, partnership, limited partnership, 
corporation or association; or
    D. The signing or co-signing of checks or drafts on behalf of 
such individual, partnership, limited partnership, corporation or 
association];
    7. [Managing agent of the debtor];
    8. [A spouse or minor dependent living in the same household of 
ANY OF THE FOREGOING PERSONS, or any other relative, regardless of 
residency, (unless previously described in items 1-B, 2-C, or 4-G of 
this III, d) defined as an individual related by affinity or 
consanguinity within the third degree as determined by the common 
law, or individual in a step or adoptive relationship within such 
degree];
    9. [``Affiliate'' of the debtor, defined as:
    A. Entity that directly or indirectly owns, controls, or holds 
with power to vote, 20 percent or more of the outstanding voting 
securities of the debtor, other than an entity that holds such 
securities--
    i. In a fiduciary or agency capacity without sole discretionary 
power to vote such securities; or
    ii. Solely to secure a debt, if such entity has not in fact 
exercised such power to vote;
    B. Corporation 20 percent or more of whose outstanding voting 
securities are directly or indirectly owned, controlled, or held 
with power to vote, by the debtor, or by an entity that directly or 
indirectly owns, controls, or holds with power to vote, 20 percent 
or more of the outstanding voting securities of the debtor, other 
than an entity that holds such securities--
    i. In a fiduciary or agency capacity without sole discretionary 
power to vote such securities; or
    ii. Solely to secure a debt, if such entity has not in fact 
exercised such power to vote;
    C. Person whose business is operated under a lease or operating 
agreement by the debtor, or person substantially all of whose 
property is operated under an operating agreement with the debtor;
    D. Entity that otherwise, directly or indirectly, is controlled 
by or is under common control with the debtor];
    E. Entity that operates the business or all or substantially all 
of the property of the debtor under a lease or operating agreement; 
or
    F. Entity that otherwise, directly or indirectly, controls the 
debtor; or
    10. [Any of the persons listed in items 1-7 above of this III, d 
if such person is associated with an affiliate (see item 9 above) of 
the debtor as if the affiliate were the debtor].
    e. Whether the account is a discretionary account. (If it is, 
the name in which the ``attorney in fact'' is held).
    f. If the account is a joint account, the amount of the 
claimant's percentage interest in the account. (Also specify whether 
participants in a joint account are claiming separately or jointly).
    g. Whether the claimant's positions in security futures products 
are held in a futures account or securities account, as those terms 
are defined in Sec.  1.3 of this chapter.
    IV. Describe all claims against the debtor not based upon a 
commodity contract account of the claimant (e.g., if landlord, for 
rent; if customer, for misrepresentation or fraud).
    V. Describe all claims of the DEBTOR against the CLAIMANT not 
already included in the equity of a commodity contract account[s] of 
the claimant (see III, c above).
    VI. Describe any deposits of money, securities or other property 
held by or for the debtor from or for the claimant, and indicate if 
any of this property was included in your answer to III, c above.
    VII. Of the money, securities, or other property described in VI 
above, identify any which consists of the following:
    a. With respect to property received, acquired, or held by or 
for the account of the debtor from or for the account of the 
claimant to margin, guarantee or secure an open commodity contract, 
the following:
    1. Any security which as of the filing date is:
    A. Held for the claimant's account;
    B. Registered in the claimant's name;
    C. Not transferable by delivery; and
    D. Not a short term obligation; or
    2. Any warehouse receipt, bill of lading or other document of 
title which as of the filing date:
    A. Can be identified on the books and records of the debtor as 
held for the account of the claimant; and
    B. Is not in bearer form and is not otherwise transferable by 
delivery.
    b. With respect to open commodity contracts, and except as 
otherwise provided below in item g of this VII, any such contract 
which:
    1. As of the date the petition in bankruptcy was filed, is 
identified on the books and records of the debtor as held for the 
account of the claimant;

[[Page 33864]]

    2. Is a bona fide hedging position or transaction as defined in 
Rule 1.3 of the Commodity Futures Trading Commission (``CFTC'') or 
is a commodity option transaction which has been determined by a 
registered entity to be economically appropriate to the reduction of 
risks in the conduct and management of a commercial enterprise 
pursuant to rules which have been approved by the CFTC pursuant to 
section 5c(c) of the Commodity Exchange Act;
    3. Is in an account designated in the accounting records of the 
debtor as a hedging account.
    c. With respect to warehouse receipts, bills of lading or other 
documents of title, or physical commodities received, acquired, or 
held by or for the account of the debtor for the purpose of making 
or taking delivery or exercise from or for the claimant's account, 
any such document of title or commodity which as of the filing date 
can be identified on the books and records of the debtor as received 
from or for the account of the claimant specifically for the purpose 
of delivery or exercise.
    d. Any cash or other property deposited prior to bankruptcy to 
pay for the taking of physical delivery on a long commodity contract 
or for payment of the strike price upon exercise of a short put or a 
long call option contract on a physical commodity, which cannot be 
settled in cash, in excess of the amount necessary to margin such 
commodity contract prior to the notice date or exercise date which 
cash or other property is identified on the books and records of the 
debtor as received from or for the account of the claimant within 
three or less days of the notice date or three or less days of the 
exercise date specifically for the purpose of payment of the notice 
price upon taking delivery or the strike price upon exercise.
    e. The cash price tendered for any property deposited prior to 
bankruptcy to make physical delivery on a short commodity contract 
or for exercise of a long put or a short call option contract on a 
physical commodity, which cannot be settled in cash, to the extent 
it exceeds the amount necessary to margin such contract prior to the 
notice exercise date which property is identified on the books and 
records of the debtor as received from or for the account of the 
claimant within three or less days of the notice date or of the 
exercise date specifically for the purpose of a delivery or 
exercise.
    f. Fully paid, non-exempt securities identified on the books and 
records of the debtor as held by the debtor for or on behalf of the 
commodity contract account of the claimant for which, according to 
such books and records as of the filing date, no open commodity 
contracts were held in the same capacity.
    g. Open commodity contracts transferred to another futures 
commission merchant by the trustee.
    VIII. Specify whether the claimant wishes to receive payment in 
kind, to the extent possible, for any claim for securities.
    IX. Attach copies of any documents which support the information 
provided in this proof of claim, including but not limited to 
customer confirmations, account statements, and statements of 
purchase or sale.
    This proof of claim must be filed with the trustee no later than 
------, or your claim will be barred unless an extension has been 
granted, available only for good cause.
    Return this form to:
(Trustee's name (or designee's) and address)---------------------------
-----------------------------------------------------------------------
Dated:-----------------------------------------------------------------
(Signed)---------------------------------------------------------------
    Penalty for Presenting Fraudulent Claim. Fine of not more than 
$5,000 or imprisonment for not more than five years or both--Title 
18, U.S.C. 152.

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

    14. Revise Appendix B to Part 190 to read as follows:

Appendix B to Part 190--Bankruptcy Forms

Special Bankruptcy Distributions Framework 1--Special Distribution of 
Futures Customer Funds When FCM Participated in Cross-Margining

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

----------------------------------------------------------------------------------------------------------------
                                                                      Non-XM            XM             Total
----------------------------------------------------------------------------------------------------------------
Funds in 4d(a) segregation......................................             150             150             300
4d(a) Segregation requirement...................................             150             150             300
Shortfall (dollars).............................................               0               0  ..............
Shortfall (percent).............................................               0               0  ..............
Distribution....................................................             150             150             300
----------------------------------------------------------------------------------------------------------------

[[Page 33865]]

     There are adequate funds available and both the non-XM and the 
XM customer claims will be paid in full.
    2. Shortfall in Non-XM Only:

----------------------------------------------------------------------------------------------------------------
                                                                      Non-XM            XM             Total
----------------------------------------------------------------------------------------------------------------
Funds in 4d(a) segregation......................................             100             150             250
4d(a) Segregation requirement...................................             150             150             300
Shortfall (dollars).............................................              50               0  ..............
Shortfall (percent).............................................   50/150 = 33.3               0  ..............
Pro rata (percent)..............................................    150/300 = 50    150/300 = 50  ..............
Pro rata (dollars)..............................................             125             125  ..............
Distribution....................................................             125             125             250
----------------------------------------------------------------------------------------------------------------

     Due to the non-XM account, there are insufficient funds 
available to meet both the non-XM and the XM customer claims in 
full. Each customer will receive his pro rata share of the funds 
available, or 50% of the $250 available, or $125.
    3. Shortfall in XM Only:

----------------------------------------------------------------------------------------------------------------
                                                                      Non-XM            XM             Total
----------------------------------------------------------------------------------------------------------------
Funds in 4d(a) segregation......................................             150             100             250
4d(a) Segregation requirement...................................             150             150             300
Shortfall (dollars).............................................               0              50  ..............
Shortfall (percent).............................................               0   50/150 = 33.3  ..............
Pro rata (percent)..............................................    150/300 = 50    150/300 = 50  ..............
Pro rata (dollars)..............................................             125             125  ..............
Distribution....................................................             150             100             250
----------------------------------------------------------------------------------------------------------------

     Due to the XM account, there are insufficient funds available 
to meet both the non-XM and the XM customer claims in full. 
Accordingly, the XM funds and non-XM funds are treated as separate 
pools, and the non-XM customer will be paid in full, receiving $ 150 
while the XM customer will receive the remaining $100.
    4. Shortfall in Both, With XM Shortfall Exceeding Non-XM 
Shortfall:

----------------------------------------------------------------------------------------------------------------
                                                                      Non-XM            XM             Total
----------------------------------------------------------------------------------------------------------------
Funds in 4d(a) segregation......................................             125             100             225
4d(a) Segregation requirement...................................             150             150             300
Shortfall (dollars).............................................              25              50  ..............
Shortfall (percent).............................................   25/150 = 16.7   50/150 = 33.3  ..............
Pro rata (percent)..............................................    150/300 = 50    150/300 = 50  ..............
Pro rata (dollars)..............................................          112.50          112.50  ..............
Distribution....................................................             125             100             225
----------------------------------------------------------------------------------------------------------------

     There are insufficient funds available to meet both the non-XM 
and the XM customer claims in full, and the XM shortfall exceeds the 
non-XM shortfall. The non-XM customer will receive the $125 
available with respect to non-XM claims while the XM customer will 
receive the $100 available with respect to XM claims.
    5. Shortfall in Both, With Non-XM Shortfall Exceeding XM 
Shortfall:

----------------------------------------------------------------------------------------------------------------
                                                                      Non-XM            XM             Total
----------------------------------------------------------------------------------------------------------------
Funds in 4d(a) segregation......................................             100             125             225
4d(a) Segregation requirement...................................             150             150             300
Shortfall (dollars).............................................              50              25  ..............
Shortfall (percent).............................................   50/150 = 33.3   25/150 = 16.7  ..............
Pro rata (percent)..............................................    150/300 = 50    150/300 = 50  ..............
Pro rata (dollars)..............................................          112.50          112.50  ..............
Distribution....................................................          112.50          112.50             225
----------------------------------------------------------------------------------------------------------------

     There are insufficient funds available to meet both the non-XM 
and the XM customer claims in full, and the non-XM shortfall exceeds 
the XM shortfall. Each customer will receive 50% of the $225 
available, or $112.50.
    6. Shortfall in Both, Non-XM Shortfall = XM Shortfall:

----------------------------------------------------------------------------------------------------------------
                                                                      Non-XM            XM             Total
----------------------------------------------------------------------------------------------------------------
Funds in 4d(a) segregation......................................             100             100             200
4d(a) Segregation requirement...................................             150             150             300
Shortfall (dollars).............................................              50              50  ..............
Shortfall (percent).............................................   50/150 = 33.3   50/150 = 33.3  ..............
Pro rata (percent)..............................................    150/300 = 50    150/300 = 50  ..............

[[Page 33866]]

 
Pro rata (dollars)..............................................             100             100  ..............
Distribution....................................................             100             100             200
----------------------------------------------------------------------------------------------------------------

     There are insufficient funds available to meet both the non-XM 
and the XM customer claims in full, and the non-XM shortfall equals 
the XM shortfall. Each customer will receive 50% of the $200 
available, or $100.
    These examples illustrate the principle that pro rata 
distribution across both accounts is the preferable approach except 
when a shortfall in the XM account could harm non-XM customers. 
Thus, pro rata distribution occurs in Examples 1, 2, 5 and 6. 
Separate treatment of the XM and non-XM accounts occurs in Examples 
3 and 4.

Special Bankruptcy Distributions Framework 2--Special Allocation of 
Shortfall to Customer Claims When Futures Customer Funds and Cleared 
Swaps Customer Collateral Are Held in a Depository Outside of the 
United States or in a Foreign Currency

    The Commission has established the following allocation 
convention with respect to futures customer funds (as Sec.  1.3 of 
this chapter defines such term) and Cleared Swaps Customer 
Collateral (as Sec.  22.1 of this chapter defines such term) 
segregated pursuant to the Act and Commission rules thereunder held 
by a futures commission merchant (``FCM'') or derivatives clearing 
organization (``DCO'') in a depository outside the United States 
(``U.S.'') or in a foreign currency. The maintenance of futures 
customer funds or Cleared Swaps Customer Collateral in a depository 
outside the U.S. or denominated in a foreign currency will result, 
in certain circumstances, in the reduction of customer claims for 
such funds. For purposes of this proposed bankruptcy convention, 
sovereign action of a foreign government or court would include, but 
not be limited to, the application or enforcement of statutes, 
rules, regulations, interpretations, advisories, decisions, or 
orders, formal or informal, by a Federal, state, or provincial 
executive, legislature, judiciary, or government agency. If an FCM 
enters into bankruptcy and maintains futures customer funds or 
Cleared Swaps Customer Collateral in a depository located in the 
U.S. in a currency other than U.S. dollars or in a depository 
outside the U.S., the following allocation procedures shall be used 
to calculate the claim of each futures customer or Cleared Swaps 
Customer (as Sec.  22.1 of this chapter defines such term). The 
allocation procedures should be performed separately with respect to 
each futures customer or Cleared Swaps Customer.

I. Reduction in Claims for General Shortfall

A. Determination of Losses not Attributable to Sovereign Action

    1. Convert the claim of each futures customer or Cleared Swaps 
Customer in each currency to U.S. Dollars at the exchange rate in 
effect on the Final Net Equity Determination Date, as defined in 
Sec.  190.01(s) (the ``Exchange Rate'').
    2. Determine the amount of assets available for distribution to 
futures customers or Cleared Swaps Customers. In making this 
calculation, include futures customer funds and Cleared Swaps 
Customer Collateral that would be available for distribution but for 
the sovereign action.
    3. Convert the amount of futures customer funds and Cleared 
Swaps Customer Collateral available for distribution to U.S. Dollars 
at the Exchange Rate.
    4. Determine the Shortfall Percentage that is not attributable 
to sovereign action, as follows:
[GRAPHIC] [TIFF OMITTED] TP09JN11.042

B. Allocation of Losses Not Attributable to Sovereign Action

    1. Reduce the claim of each futures customer or Cleared Swaps 
Customer by the Shortfall Percentage.

II. Reduction in Claims for Sovereign Loss

A. Determination of Losses Attributable to Sovereign Action 
(``Sovereign Loss'')

    1. If any portion of the claim of a futures customer or Cleared 
Swaps Customer is required to be kept in U.S. dollars in the U.S., 
that portion of the claim is not exposed to Sovereign Loss.
    2. If any portion of the claim of a futures customer or Cleared 
Swaps Customer is authorized to be kept in only one location and 
that location is:
    a. The U.S. or a location in which there is no Sovereign Loss, 
then that portion of the claim is not exposed to Sovereign Loss.
    b. A location in which there is Sovereign Loss, then that entire 
portion of the claim is exposed to Sovereign Loss.
    3. If any portion of the claim of a futures customer or Cleared 
Swaps Customer is authorized to be kept in only one currency and 
that currency is:
    a. U.S. dollars or a currency in which there is no Sovereign 
Loss, then that portion of the claim is not exposed to Sovereign 
Loss.
    b. A currency in which there is Sovereign Loss, then that entire 
portion of the claim is exposed to Sovereign Loss.
    4. If any portion of the claim of a futures customer or Cleared 
Swaps Customer is authorized to be kept in more than one location 
and:
    a. There is no Sovereign Loss in any of those locations, then 
that portion of the claim is not exposed to Sovereign Loss.
    b. There is Sovereign Loss in one of those locations, then that 
entire portion of the claim is exposed to Sovereign Loss.
    c. There is Sovereign Loss in more than one of those locations, 
then an equal share of that portion of the claim will be exposed to 
Sovereign Loss in each such location.
    5. If any portion of the claim of a futures customer or Cleared 
Swaps Customer is authorized to be kept in more than one currency 
and:
    a. There is no Sovereign Loss in any of those currencies, then 
that portion of the claim is not exposed to Sovereign Loss.
    b. There is Sovereign Loss in one of those currencies, then that 
entire portion of the claim is exposed to Sovereign Loss.
    c. There is Sovereign Loss in more than one of those currencies, 
then an equal share of that portion of the claim will be exposed to 
Sovereign Loss.

B. Calculation of Sovereign Loss

    1. The total Sovereign Loss for each location is the difference 
between:
    a. The total futures customer funds or Cleared Swaps Customer 
Collateral deposited in depositories in that location and
    b. The amount of futures customer funds or Cleared Swaps 
Customer Collateral in that location that is available to be 
distributed to futures customers or Cleared Swaps Customers, after 
taking into account any sovereign action.
    2. The total Sovereign Loss for each currency is the difference 
between:
    a. The value, in U.S. dollars, of the futures customer funds or 
Cleared Swaps Customer Collateral held in that currency on the day 
before the sovereign action took place and
    b. The value, in U.S. dollars, of the futures customer funds or 
Cleared Swaps Customer Collateral held in that currency on the Final 
Net Equity Determination Date.

C. Allocation of Sovereign Loss

    1. Each portion of the claim of a futures customer or Cleared 
Swaps Customer exposed to Sovereign Loss in a location will be 
reduced by:

[[Page 33867]]

[GRAPHIC] [TIFF OMITTED] TP09JN11.043

    2. Each portion of the claim of a futures customer or Cleared 
Swaps Customer exposed to Sovereign Loss in a currency will be 
reduced by:
[GRAPHIC] [TIFF OMITTED] TP09JN11.044

    3. A portion of the claim of a futures customer or Cleared Swaps 
Customer exposed to Sovereign Loss in a location or currency will 
not be reduced below zero. (The above calculations might yield a 
result below zero where the FCM kept more futures customer funds or 
Cleared Swaps Customer Funds in a location or currency than it was 
authorized to keep.)
    4. Any amount of Sovereign Loss from a location or currency in 
excess of the total amount of futures customer funds or Cleared 
Swaps Customer Funds authorized to be kept in that location or 
currency (calculated in accord with section II.1 above) (``Total 
Excess Sovereign Loss'') will be divided among all futures customers 
or Cleared Swaps Customer who have authorized funds to be kept 
outside the U.S., or in currencies other than U.S. dollars, with 
each such futures customer or Cleared Swaps Customer claim reduced 
by the following amount:
[GRAPHIC] [TIFF OMITTED] TP09JN11.045

    The following examples illustrate the operation of this 
convention.
    Example 1. No shortfall in any location.

------------------------------------------------------------------------
                                                   Location(s) customer
            Customer                  Claim      has consented to having
                                                        funds held
------------------------------------------------------------------------
A..............................             $50  U.S.
B..............................        [euro]50  U.K.
C..............................        [euro]50  Germany.
D..............................      [pound]300  U.K.
------------------------------------------------------------------------
                    Location                       Actual asset balance
------------------------------------------------------------------------
U.S............................................  $50.
U.K............................................  [pound]300.
U.K............................................  [euro]50.
Germany........................................  [euro]50.
------------------------------------------------------------------------

    Note: Conversion Rates: [pound]1 = $1; [pound]1=$1.5.

    Convert the claim of each futures customer or Cleared Swaps 
Customer in each currency to U.S. Dollars:

----------------------------------------------------------------------------------------------------------------
                                                                                                Claim in U.S.
                      Customer                              Claim          Conversion rate         dollars
----------------------------------------------------------------------------------------------------------------
A..................................................                 $50                 1.0               $50
B..................................................            [euro]50                 1.0                50
C..................................................            [euro]50                 1.0                50
D..................................................          [pound]300                 1.5               450
                                                    ------------------------------------------------------------
    Total..........................................  ..................  ..................               600.00
----------------------------------------------------------------------------------------------------------------

    Determine assets available for distribution to futures customers 
or Cleared Swaps Customers, converting to U.S. dollars:

[[Page 33868]]

----------------------------------------------------------------------------------------------------------------
                                                                            Shortfall      Actual
                                                               Assets in      due to     shortfall      Amount
             Location                  Assets     Conversion      U.S.      sovereign      due to      actually
                                                     rate       dollars       action     sovereign    available
                                                                            percentage     action
----------------------------------------------------------------------------------------------------------------
U.S...............................          $50          1.0          $50  ...........  ...........          $50
U.K...............................   [pound]300          1.5          450  ...........  ...........          450
U.K...............................     [euro]50          1.0           50  ...........  ...........           50
Germany...........................     [euro]50          1.0           50  ...........  ...........           50
                                   -----------------------------------------------------------------------------
    Total.........................  ...........  ...........       600.00  ...........            0       600.00
----------------------------------------------------------------------------------------------------------------

    There are no shortfalls in funds held in any location. 
Accordingly, there will be no reduction of futures customer or 
Cleared Swaps Customer claims.
    Claims:

----------------------------------------------------------------------------------------------------------------
                                          Claim in
                                            U.S.      Allocation
                                          dollars         of
                                           after      shortfall    Claim after
               Customer                  allocated      due to         all
                                            non-      sovereign    reductions
                                         sovereign      action
                                         shortfall
------------------------------------------------------------------------------
A.....................................          $50           $0        $50
B.....................................           50            0         50
C.....................................           50            0         50
D.....................................          450            0        450
    Total.............................       600.00         0.00        600.00
----------------------------------------------------------------------------------------------------------------

    Example 2. Shortfall in funds held in the U.S.

------------------------------------------------------------------------
                                                   Location(s) customer
            Customer                  Claim      has consented to having
                                                        funds held
------------------------------------------------------------------------
A..............................            $100  U.S.
B..............................        [euro]50  U.K.
C..............................       [euro]100  U.K., Germany, or
                                                  Japan.
------------------------------------------------------------------------
                    Location                       Actual asset balance
------------------------------------------------------------------------
U.S............................................  $50
U.K............................................  [euro]100
Germany........................................  [euro]50
------------------------------------------------------------------------

    Note: Conversion Rates: [euro]1 = $1.

    Reduction in Claims for General Shortfall
    There is a shortfall in the funds held in the U.S. such that 
only \1/2\ of the funds are available. Convert the claim of each 
futures customer or Cleared Swaps Customer in each currency to U.S. 
Dollars:
    Convert each customer's claim in each currency to U.S. Dollars:

----------------------------------------------------------------------------------------------------------------
                      Customer                              Claim          Conversion rate       Claim in US$
----------------------------------------------------------------------------------------------------------------
A..................................................                $100                 1.0              $100
B..................................................            [euro]50                 1.0                50
C..................................................           [euro]100                 1.0               100
                                                    ------------------------------------------------------------
    Total..........................................  ..................  ..................               250.00
----------------------------------------------------------------------------------------------------------------

    Determine assets available for distribution to futures customers 
or Cleared Swaps Customers, converting to U.S. dollars:

----------------------------------------------------------------------------------------------------------------
                                                                           Shortfall      Actual
                                                                             due to     shortfall      Amount
            Location                 Assets     Conversion    Assets in    sovereign      due to      actually
                                                   rate     U.S. dollars     action     sovereign     available
                                                                           percentage     action
----------------------------------------------------------------------------------------------------------------
U.S.............................          $50          1.0        $50.00  ...........  ...........        $50
U.K.............................    [euro]100          1.0        100     ...........  ...........        100
Germany.........................     [euro]50          1.0         50     ...........  ...........         50
                                 -------------------------------------------------------------------------------

[[Page 33869]]

 
    Total.......................  ...........  ...........        200.00  ...........  ...........        200.00
----------------------------------------------------------------------------------------------------------------

     Determine the percentage of shortfall that is not attributable 
to sovereign action:
Shortfall Percentage = (1-(200/250)) = (1-80%) = 20%.
    Reduce each futures customer or Cleared Swaps Customer claim by 
the Shortfall Percentage:

----------------------------------------------------------------------------------------------------------------
                                                                                                Claim in U.S.
                     Customer                          Claim in US$     Allocated shortfall     dollars after
                                                                          (non-sovereign)    allocated shortfall
----------------------------------------------------------------------------------------------------------------
A................................................              $100                  $20.00               $80.00
B................................................                50                   10.00                40.00
C................................................               100                   20.00                80.00
                                                  --------------------------------------------------------------
    Total........................................               250.00                50.00               200.00
----------------------------------------------------------------------------------------------------------------

    Reduction in Claims for Shortfall Due to Sovereign Action
    There is no shortfall due to sovereign action. Accordingly, the 
futures customer or Cleared Swaps Customer claims will not be 
further reduced.
    Claims After Reductions

----------------------------------------------------------------------------------------------------------------
                                                       Claim in U.S.
                                                       dollars after        Allocation of      Claim after all
                     Customer                          allocated non-     shortfall due to        reductions
                                                    sovereign shortfall   sovereign action
----------------------------------------------------------------------------------------------------------------
A.................................................               $80     ..................               $80.00
B.................................................                40     ..................                40.00
C.................................................                80     ..................                80.00
                                                   -------------------------------------------------------------
    Total.........................................               200.00                   0               200.00
----------------------------------------------------------------------------------------------------------------

    Example 3. Shortfall in funds held outside the U.S., or in a 
currency other than U.S. dollars, not due to sovereign action.

------------------------------------------------------------------------
                                                   Location(s) customer
            Customer                  Claim      has consented to having
                                                        funds held
------------------------------------------------------------------------
A..............................            $150  U.S.
B..............................       [euro]100  U.K.
C..............................        [euro]50  Germany.
D..............................            $100  U.S.
D..............................       [euro]100  U.K. or Germany.
------------------------------------------------------------------------
                    Location                       Actual asset balance
------------------------------------------------------------------------
U.S............................................  $250
U.K............................................  [euro]50
Germany........................................  [euro]100
------------------------------------------------------------------------

    Note: Conversion Rates: [euro]1 = $1.

Reduction in Claims for General Shortfall

    Convert the claim of each futures customer or Cleared Swaps 
Customer in each currency to U.S. Dollars:

----------------------------------------------------------------------------------------------------------------
                      Customer                              Claim          Conversion rate       Claim in US$
----------------------------------------------------------------------------------------------------------------
A..................................................                $150                 1.0               150
B..................................................           [euro]100                 1.0               100
C..................................................            [euro]50                 1.0                50
D..................................................                $100                 1.0               100
D..................................................           [euro]100                 1.0               100
    Total..........................................  ..................  ..................               500.00
----------------------------------------------------------------------------------------------------------------

[[Page 33870]]

    Determine assets available for distribution to futures customers 
or Cleared Swaps Customers, converting to U.S. dollars:

----------------------------------------------------------------------------------------------------------------
                                                                           Shortfall      Actual
                                                                             due to     shortfall      Amount
            Location                 Assets     Conversion    Assets in    sovereign      due to      actually
                                                   rate     U.S. dollars     action     sovereign     available
                                                                           percentage     action
----------------------------------------------------------------------------------------------------------------
U.S.............................         $250          1.0       $250     ...........  ...........       $250
U.K.............................     [euro]50          1.0         50     ...........  ...........         50
Germany.........................    [euro]100          1.0        100     ...........  ...........        100
                                 -------------------------------------------------------------------------------
    Total.......................  ...........  ...........        400.00  ...........            0        400.00
----------------------------------------------------------------------------------------------------------------

    Determine the percentage of shortfall that is not attributable 
to sovereign action:

Shortfall Percentage = (1-400/500) = (1-80%) = 20%.

    Reduce each futures customer or Cleared Swaps Customer by the 
shortfall percentage:

----------------------------------------------------------------------------------------------------------------
                                                                                                 Claim in U.S.
                                                                               Allocated         dollars after
                      Customer                           Claim in US$       shortfall (non-        allocated
                                                                              sovereign)           shortfall
----------------------------------------------------------------------------------------------------------------
A..................................................              $150                 $30.00              120.00
B..................................................               100                  20.00               80.00
C..................................................                50                  10.00               40.00
D..................................................               200                  40.00              160.00
                                                    ------------------------------------------------------------
    Total..........................................               500.00              100.00              400.00
----------------------------------------------------------------------------------------------------------------

Reduction in Claims for Shortfall Due to Sovereign Action

    There is no shortfall due to sovereign action. Accordingly, the 
claims will not be further reduced.

Claims After Reductions

----------------------------------------------------------------------------------------------------------------
                                                         Claim in U.S.
                                                         dollars after       Allocation of
                      Customer                          allocated non-     shortfall due to     Claim after all
                                                           sovereign       sovereign action       reductions
                                                           shortfall
----------------------------------------------------------------------------------------------------------------
A...................................................             $120.00  ..................                $120
B...................................................               80.00  ..................                  80
C...................................................               40.00  ..................                  40
D...................................................              160.00                   0                 160
                                                     -----------------------------------------------------------
    Total...........................................              400.00                   0                 400
----------------------------------------------------------------------------------------------------------------

    Example 4. Shortfall in funds held outside the U.S., or in a 
currency other than U.S. dollars, due to sovereign action.

------------------------------------------------------------------------
                                                    Location(s) where
            Customer                  Claim       customer has consented
                                                    to have funds held
------------------------------------------------------------------------
A..............................             $50  U.S.
B..............................        [euro]50  U.K.
C..............................        [euro]50  Germany.
D..............................            $100  U.S.
D..............................       [euro]100  U.K. or Germany.
                                ----------------------------------------
                    Location                       Actual asset balance
------------------------------------------------------------------------
U.S............................................  $150
U.K............................................  100
Germany........................................  100
------------------------------------------------------------------------

    Notice: Conversion Rates: [euro]1 = $1; [yen]1 = $0.01, 
[pound]1= $1.5.

Reduction in Claims for General Shortfall

    Convert each futures customer or Cleared Swaps Customer claim in 
each currency to U.S. Dollars:

[[Page 33871]]

----------------------------------------------------------------------------------------------------------------
                      Customer                              Claim          Conversion rate       Claim in US$
----------------------------------------------------------------------------------------------------------------
A..................................................                 $50                 1.0               $50
B..................................................            [euro]50                 1.0                50
C..................................................            [euro]50                 1.0                50
D..................................................                $100                 1.0               100
D..................................................           [euro]100                 1.0               100
                                                    ------------------------------------------------------------
    Total..........................................  ..................  ..................               350.00
----------------------------------------------------------------------------------------------------------------

    Determine assets available for distribution to futures customers 
or Cleared Swaps Customers, converting to U.S. dollars:

----------------------------------------------------------------------------------------------------------------
                                                                          Shortfall      Actual
                                                                            due to      shortfall      Amount
            Location                Assets     Conversion    Assets in    sovereign      due to       actually
                                                  rate     U.S. dollars     action      sovereign     available
                                                                          percentage     action
----------------------------------------------------------------------------------------------------------------
U.S............................         $150          1.0       $150     ...........  ............       $150
U.K............................    [euro]100          1.0        100     ...........  ............        100
Germany........................    [euro]100          1.0        100             50%         50            50
                                --------------------------------------------------------------------------------
    Total......................  ...........  ...........        350.00  ...........         50.00        300.00
----------------------------------------------------------------------------------------------------------------

    Determine the percentage of shortfall that is not attributable 
to sovereign action:

Shortfall Percentage = (1-350/350) = (1-100%) = 0%.

    Reduce each futures customer or Cleared Swaps Customer claim by 
the shortfall percentage:

----------------------------------------------------------------------------------------------------------------
                                                                                                 Claim in U.S.
                                                                         Allocated shortfall     dollars after
                     Customer                           Claim in US$       (non-sovereign)         allocated
                                                                                                   shortfall
----------------------------------------------------------------------------------------------------------------
A.................................................               $50                    0                 $50.00
B.................................................                50                    0                  50.00
C.................................................                50                    0                  50.00
D.................................................               200                    0                 200.00
                                                   -------------------------------------------------------------
    Total.........................................               350.00                 0.00              350.00
----------------------------------------------------------------------------------------------------------------

Reduction in Claims for Shortfall Due to Sovereign Action

    Due to sovereign action, only \1/2\ of the funds in Germany are 
available.

----------------------------------------------------------------------------------------------------------------
                                                                     Presumed location of funds
                     Customer                     --------------------------------------------------------------
                                                           U.S.                 U.K.               Germany
----------------------------------------------------------------------------------------------------------------
A................................................               $50     ...................  ...................
B................................................  ...................               $50     ...................
C................................................  ...................  ...................               $50
D................................................               100     ...................               100
                                                  --------------------------------------------------------------
    Total........................................               150.00                50.00               150.00
----------------------------------------------------------------------------------------------------------------

     Calculation of the allocation of the shortfall due to sovereign 
action--Germany ($50 shortfall to be allocated):

----------------------------------------------------------------------------------------------------------------
                                                                           Allocation share
                      Customer                         Allocation share        of actual       Actual shortfall
                                                                               shortfall           allocated
----------------------------------------------------------------------------------------------------------------
C...................................................            $50/$150        33.3% of $50              $16.67
D...................................................           $100/$150        66.7% of $50               33.33
                                                     -----------------------------------------------------------
    Total...........................................  ..................  ..................               50.00
----------------------------------------------------------------------------------------------------------------

[[Page 33872]]

    Claims After Reductions:

----------------------------------------------------------------------------------------------------------------
                                                       Claim in U.S.        Allocation of
                                                       dollars after      shortfall due to     Claim after all
                     Customer                          allocated non-     sovereign action        reductions
                                                    sovereign shortfall     from Germany
----------------------------------------------------------------------------------------------------------------
A.................................................               $50     ..................               $50
B.................................................                50     ..................                50
C.................................................                50                 $16.67                33.33
D.................................................               200                  33.33               166.67
                                                   -------------------------------------------------------------
    Total.........................................               350.00               50.00               300.00
----------------------------------------------------------------------------------------------------------------

    Example 5.  Shortfall in funds held outside the U.S., or in a 
currency other than U.S. dollars, due to sovereign action and a 
shortfall in funds held in the U.S.

------------------------------------------------------------------------
                                                   Location(s) customer
            Customer                  Claim      has consented to having
                                                        funds held
------------------------------------------------------------------------
A..............................            $100  U.S.
B..............................        [euro]50  U.K.
C..............................       [euro]150  Germany.
D..............................            $100  U.S.
D..............................      [pound]300  U.K.
D..............................       [euro]150  U.K. or Germany.
------------------------------------------------------------------------
                    Location                       Actual asset balance
------------------------------------------------------------------------
U.S............................................  $100
U.K............................................  [pound]300
U.K............................................  [euro]200
Germany........................................  [euro]150
------------------------------------------------------------------------

    Conversion Rates: [euro]1 = $1; [pound]1 = $1.5.

Reduction in Claims for General Shortfall

    Convert each futures customer or Cleared Swaps Customer claim in 
each currency to U.S. Dollars:

----------------------------------------------------------------------------------------------------------------
                      Customer                              Claim          Conversion rate      Claim in U.S.$
----------------------------------------------------------------------------------------------------------------
A..................................................                $100                 1.0              $100
B..................................................            [euro]50                 1.0                50
C..................................................           [euro]150                 1.0               150
D..................................................                $100                 1.0               100
D..................................................          [pound]300                 1.5               450
D..................................................           [euro]150                 1.0               150
                                                    ------------------------------------------------------------
    Total..........................................  ..................  ..................             1,000.00
----------------------------------------------------------------------------------------------------------------

    Determine assets available for distribution to futures customers 
or Cleared Swaps.
    Customers, converting to U.S. dollars:

----------------------------------------------------------------------------------------------------------------
                                                                          Shortfall      Actual
                                                                            due to      shortfall      Amount
            Location                Assets     Conversion    Assets in    sovereign      due to       actually
                                                  rate     U.S. dollars     action      sovereign     available
                                                                          percentage     action
----------------------------------------------------------------------------------------------------------------
U.S............................         $100          1.0       $100     ...........  ............       $100
U.K............................   [pound]300          1.5        450     ...........  ............        450
U.K............................    [euro]200          1.0        200     ...........  ............        200
Germany........................    [euro]150          1.0        150            100%       $150             0
                                --------------------------------------------------------------------------------
    Total......................  ...........  ...........        900.00  ...........        150.00        750.00
----------------------------------------------------------------------------------------------------------------

     Determine the percentage of shortfall that is not attributable 
to sovereign action:
    Shortfall Percentage = (1 - 900/1000) = (1 - 90%) = 10%. Reduce 
each futures customer or Cleared Swaps Customer claim by the 
shortfall percentage:

[[Page 33873]]

----------------------------------------------------------------------------------------------------------------
                                                                                                 Claim in U.S.
                                                                               Allocated         dollars after
                      Customer                          Claim in U.S.$      shortfall (non-        allocated
                                                                              sovereign)           shortfall
----------------------------------------------------------------------------------------------------------------
A..................................................              $100                 $10.00              $90.00
B..................................................                50                   5.00               45.00
C..................................................               150                  15.00              135.00
D..................................................               700                  70.00               63.00
                                                    ------------------------------------------------------------
    Total..........................................             1,000.00              100.00              900.00
----------------------------------------------------------------------------------------------------------------

Reduction in Claims for Shortfall Due to Sovereign Action

    Due to sovereign action, none of the money in Germany is 
available.

----------------------------------------------------------------------------------------------------------------
                                                                     Presumed location of funds
                     Customer                     --------------------------------------------------------------
                                                           U.S.                 U.K.               Germany
----------------------------------------------------------------------------------------------------------------
A................................................              $100     ...................  ...................
B................................................  ...................               $50     ...................
C................................................  ...................  ...................              $150
D................................................               100                  450                  150
                                                  --------------------------------------------------------------
    Total........................................               200.00               500.00               300.00
----------------------------------------------------------------------------------------------------------------

    Calculation of the allocation of the shortfall due to sovereign 
action Germany ($150 shortfall to be allocated):

----------------------------------------------------------------------------------------------------------------
                                                                      Allocation share of      Actual shortfall
               Customer                      Allocation share          actual shortfall           allocated
----------------------------------------------------------------------------------------------------------------
C.....................................  $150/$300................  50% of $150.............               $75
D.....................................  150/300..................  50% of $150.............                75
                                       -------------------------------------------------------------------------
    Total.............................  .........................  ........................               150.00
----------------------------------------------------------------------------------------------------------------

Claims After Reductions

----------------------------------------------------------------------------------------------------------------
                                                      Claim in U.S.        Allocation of
                                                      dollars after       shortfall due to     Claim after all
                     Customer                         allocated non-      sovereign action        reductions
                                                   sovereign shortfall      from Germany
----------------------------------------------------------------------------------------------------------------
A................................................               $90     ...................               $90
B................................................                45     ...................                45
C................................................               135                  $75                   60
D................................................               630                   75                  555
                                                  --------------------------------------------------------------
    Total........................................               900.00               150.00               750.00
----------------------------------------------------------------------------------------------------------------

    Example 6.  Shortfall in funds held outside the U.S., or in a 
currency other than U.S. dollars, due to sovereign action, shortfall 
in funds held outside the U.S., or in a currency other than U.S. 
dollars, not due to sovereign action, and a shortfall in funds held 
in the U.S.

------------------------------------------------------------------------
                                                   Location(s) customer
            Customer                  Claim      has consented to having
                                                        funds held
------------------------------------------------------------------------
A..............................             $50  U.S.
B..............................        [euro]50  U.K.
C..............................             $20  U.S.
C..............................        [euro]50  Germany.
D..............................            $100  U.S.
D..............................      [pound]300  U.K.
D..............................       [euro]100  U.K., Germany, or
                                                  Japan.
E..............................             $80  U.S.
E..............................     [yen]10,000  Japan.
------------------------------------------------------------------------

[[Page 33874]]

 
                    Location                       Actual asset balance
------------------------------------------------------------------------
U.S............................................  $200
U.K............................................  [pound]200
U.K............................................  [euro]100
Germany........................................  [euro]50
Japan..........................................  [yen]10,000
------------------------------------------------------------------------

    Conversion Rates: [pound]1 = $1; [yen]1=$0.01, [pound]1=$1.5.

Reduction in Claims for General Shortfall

    Convert each futures customer or Cleared Swaps Customer claim in 
each currency to U.S. Dollars:

----------------------------------------------------------------------------------------------------------------
                     Customer                              Claim          Conversion rate       Claim in U.S.$
----------------------------------------------------------------------------------------------------------------
A.................................................                 $50                 1.0                $50
B.................................................            [euro]50                 1.0                 50
C.................................................                 $20                 1.0                 20
C.................................................            [euro]50                 1.0                 50
D.................................................                $100                 1.0                100
D.................................................           [euro]300                 1.5                450
D.................................................          [pound]100                 1.0                100
E.................................................                 $80                 1.0                 80
E.................................................         [yen]10,000                 0.01               100
                                                   -------------------------------------------------------------
    Total.........................................  ..................  ...................             1,000.00
----------------------------------------------------------------------------------------------------------------

    Determine assets available for distribution to futures customers 
or Cleared Swaps Customers, converting to U.S. dollars:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Shortfall due      Actual
                                                                            Conversion    Assets in U.S.   to sovereign    shortfall due      Amount
                        Location                              Assets           rate           dollars         action       to sovereign      actually
                                                                                                            percentage        action         available
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S.....................................................            $200            1.0             $200  ..............  ..............         $200
U.K.....................................................      [pound]200            1.5              300  ..............  ..............          300
U.K.....................................................       [euro]100            1.0              100  ..............  ..............          100
Germany.................................................        [euro]50            1.0               50            100%          $50               0
Japan...................................................     [yen]10,000            0.01             100             50%           50              50
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................  ..............  ..............             750  ..............          100.00          650.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

     Determine the percentage of shortfall that is not attributable 
to sovereign action:
    Shortfall Percentage = (1-750/1000) = (1-75%) = 25%.
    Reduce each futures customer or Cleared Swaps Customer claim by 
the shortfall percentage:

----------------------------------------------------------------------------------------------------------------
                                                                                                 Claim in U.S.
                                                                               Allocated         dollars after
                      Customer                          Claim in U.S.$     shortfall  (non-        allocated
                                                                              sovereign)           shortfall
----------------------------------------------------------------------------------------------------------------
A..................................................               $50                 $12.50              $37.50
B..................................................                50                  12.50               37.50
C..................................................                70                  17.50               52.50
D..................................................               650                 162.50              487.50
E..................................................               180                  45.00              135.00
                                                    ------------------------------------------------------------
    Total..........................................             1,000.00              250.00              750.00
----------------------------------------------------------------------------------------------------------------

Reduction in Claims for Shortfall Due to Sovereign Action

    Due to sovereign action, none of the money in Germany and only 
\1/2\ of the funds in Japan are available.

[[Page 33875]]

----------------------------------------------------------------------------------------------------------------
                                                                    Presumed location of funds
                    Customer                     ---------------------------------------------------------------
                                                       U.S.            U.K.           Germany          Japan
----------------------------------------------------------------------------------------------------------------
A...............................................          $50     ..............  ..............  ..............
B...............................................  ..............          $50     ..............  ..............
C...............................................           20     ..............          $50     ..............
D...............................................          100             450              50             $50
E...............................................           80     ..............  ..............          100
                                                 ---------------------------------------------------------------
    Total.......................................          250.00          500.00          100.00          150.00
----------------------------------------------------------------------------------------------------------------

     Calculation of the allocation of the shortfall due to sovereign 
action--Germany ($50 shortfall to be allocated):

----------------------------------------------------------------------------------------------------------------
                                                                           Allocation share
                 Customer allocation                   Allocation share        of actual       Actual shortfall
                                                                               shortfall           allocated
----------------------------------------------------------------------------------------------------------------
C...................................................            $50/$100          50% of $50                 $25
D...................................................              50/100           50% of 50                  25
                                                     -----------------------------------------------------------
    Total...........................................  ..................  ..................                  50
----------------------------------------------------------------------------------------------------------------

     Japan ($50 shortfall to be allocated):

----------------------------------------------------------------------------------------------------------------
                                                                                                      Actual
                Customer                       Allocation share       Allocation share of actual     shortfall
                                                                               shortfall             allocated
----------------------------------------------------------------------------------------------------------------
D.......................................  $50/$150..................  33.3% of $50..............          $16.67
E.......................................  100/150...................  66.6% of 50...............           33.33
                                         -----------------------------------------------------------------------
    Total...............................  ..........................  ..........................           50.00
----------------------------------------------------------------------------------------------------------------

Claims After Reductions

----------------------------------------------------------------------------------------------------------------
                                                    Claim in US    Allocation of   Allocation of
                                                   dollars after   shortfall due   shortfall due
                    Customer                      allocated non-   to sovereign    to sovereign     Claim after
                                                     sovereign      action from     action from   all reductions
                                                     shortfall        Germany          Japan
----------------------------------------------------------------------------------------------------------------
A...............................................          $37.50  ..............  ..............           37.50
B...............................................           37.50  ..............  ..............           37.50
C...............................................           52.50          $25     ..............           27.50
D...............................................          487.50           25              16.67          445.83
E...............................................          135.00  ..............           33.33          101.67
                                                 ---------------------------------------------------------------
    Total.......................................          750.00           50.00           50.00          650.00
----------------------------------------------------------------------------------------------------------------

    Example 7. Shortfall in funds held outside the U.S., or in a 
currency other than U.S. dollars, due to sovereign action, where the 
FCM kept more funds than permitted in such location or currency.

------------------------------------------------------------------------
                                                   Location(s) customer
            Customer                  Claim      has consented to having
                                                        funds held
------------------------------------------------------------------------
A..............................             $50  U.S.
B..............................              50  U.S.
B..............................        [euro]50  U.K.
C..............................        [euro]50  Germany.
D..............................             100  U.S.
D..............................       [euro]100  U.K. or Germany.
E..............................              50  U.S.
E..............................        [euro]50  U.K.
------------------------------------------------------------------------
                    Location                       Actual asset balance
------------------------------------------------------------------------
U.S............................................  $250
U.K............................................  [euro]50
Germany........................................  [euro]200
------------------------------------------------------------------------

[[Page 33876]]

     Conversion Rates: 1 = $1.

Reduction in Claims for General Shortfall

    Convert each futures customer or Cleared Swaps Customer claim in 
each currency to U.S. dollars:

------------------------------------------------------------------------
                                                Conversion    Claim in
            Customer                 Claim         rate         U.S.$
------------------------------------------------------------------------
A...............................          $50          1.0         50
B...............................           50          1.0         50
B...............................     [euro]50          1.0         50
C...............................     [euro]50          1.0         50
D...............................    [euro]100          1.0        100
D...............................    [euro]100          1.0        100
E...............................           50          1.0         50
E...............................     [euro]50          1.0         50
                                 ---------------------------------------
    Total.......................  ...........  ...........        500.00
------------------------------------------------------------------------

    Determine assets available for distribution to futures customers 
or Cleared Swaps Customers, converting to U.S. dollars:

----------------------------------------------------------------------------------------------------------------
                                                                           Shortfall      Actual
                                                                             due to     shortfall      Amount
            Location                 Assets     Conversion    Assets in    sovereign      due to      actually
                                                   rate     U.S. dollars     action     sovereign     available
                                                                           percentage     action
----------------------------------------------------------------------------------------------------------------
U.S.............................         $250          1.0       $250     ...........  ...........       $250
U.K.............................     [euro]50          1.0         50     ...........  ...........         50
Germany.........................    [euro]200          1.0        200            100%          200          0
                                 -------------------------------------------------------------------------------
    Total.......................  ...........  ...........        500.00  ...........          200        300.00
----------------------------------------------------------------------------------------------------------------

    Determine the percentage of shortfall that is not attributable 
to sovereign action.

Shortfall Percentage = (1 - 500/500) = (1 - 100%) = 0%.

    Reduce each futures customer or Cleared Swaps Customer claim by 
the shortfall percentage:

----------------------------------------------------------------------------------------------------------------
                                                                                                 Claim in U.S.
                                                                                Allocated        dollars after
                        Customer                           Claim in U.S.$    shortfall (non-       allocated
                                                                                sovereign)         shortfall
----------------------------------------------------------------------------------------------------------------
A......................................................             $50                 $0                $50.00
B......................................................             100                  0                100.00
C......................................................              50                  0                 50.00
D......................................................             200                  0                200.00
E......................................................             100                  0                100.00
                                                        --------------------------------------------------------
    Total..............................................             500.00               0.00             500.00
----------------------------------------------------------------------------------------------------------------

Reduction in Claims for Shortfall Due to Sovereign Action

    Due to sovereign action, none of the money in Germany is 
available.

------------------------------------------------------------------------
                                       Presumed location of funds
           Customer            -----------------------------------------
                                    U.S.          U.K.         Germany
------------------------------------------------------------------------
A.............................        $50     ............  ............
B.............................         50            50     ............
C.............................  ............  ............         50
D.............................        100     ............        100
E.............................         50            50     ............
                               -----------------------------------------
    Total.....................        250.00        100.00        150.00
------------------------------------------------------------------------

[[Page 33877]]

     Calculation of the allocation of the shortfall due to sovereign 
action--Germany ($200 shortfall to be allocated):

----------------------------------------------------------------------------------------------------------------
                                                                             Allocation share
                         Customer                          Allocation share      of actual      Actual shortfall
                                                                                 shortfall         allocated
----------------------------------------------------------------------------------------------------------------
C........................................................          $50/$150     33.3% of $200            $66.67
D........................................................         $100/$150     66.7% of $200            133.33
                                                          ------------------------------------------------------
    Total................................................  ................  ................            200.000
----------------------------------------------------------------------------------------------------------------

     This would result in the claims of customers C and D being 
reduced below zero.
    Accordingly, the claims of customer C and D will only be reduced 
to zero, or $50 for C and $100 for D. This results in a Total Excess 
Shortfall of $50.

----------------------------------------------------------------------------------------------------------------
                                                           Allocation of      Allocation of
                    Actual shortfall                       shortfall for      shortfall for       Total excess
                                                             customer C         customer D         shortfall
----------------------------------------------------------------------------------------------------------------
$200...................................................               $50               $100                $50
----------------------------------------------------------------------------------------------------------------

    This shortfall will be divided among the remaining futures 
customers or Cleared Swaps Customers who have authorized funds to be 
held outside the U.S. or in a currency other than U.S. dollars.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Allocation share
                                                           Total claims of                         (column B-C/
                                                              customers       Portion of claim   column B Total--   Allocation share     Actual total
                        Customer                          permitting funds   required to be in     all customer     of actual total    excess shortfall
                                                         to be held outside       the U.S.       claims in U.S.)    excess shortfall       allocated
                                                              the U.S.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B......................................................             $100                   $50           $50/$200         25% of $50              $12.50
C......................................................               50                     0              (\1\)  .................                0
D......................................................              200                   100            100/200         50% of $50               25
E......................................................              100                    50             50/100         25% of $50               12.50
                                                        ------------------------------------------------------------------------------------------------
    Total..............................................              450.00  .................  .................  .................               50.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Claim already reduced to $0.

Claims After Reductions

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Claim in U.S.
                                                           dollars after       Allocation of       Allocation of
                       Customer                           allocated non-     shortfall due to      total excess       Claim after all
                                                             sovereign       sovereign action        shortfall          reductions
                                                             shortfall            Germany
--------------------------------------------------------------------------------------------------------------------------------------
A.....................................................              $50     ..................  ..................              $50.00
B.....................................................              100     ..................               12.50               87.50
C.....................................................               50                  50     ..................                0
D.....................................................              200                 100                  25                  75.00
E.....................................................              100     ..................               12.50               87.50
                                                       -------------------------------------------------------------------------------------------------
    Total.............................................              500.00              150.00               50.00              300.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Issued in Washington, DC, on April 27, 2011, by the Commission.
David A. Stawick,
Secretary of the Commission.

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

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

Appendix 1--Commission Voting Summary

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

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rule on protection of cleared swaps 
customer contracts and collateral and the associated conforming 
amendments. The proposal carries out the Dodd-Frank Act's mandate 
that futures commission merchants (FCMs) and derivatives clearing 
organizations (DCOs) segregate customer collateral supporting 
cleared swaps. FCMs and DCOs must hold customer collateral in an 
account that is separate from that belonging to the FCMs or DCOs.
    Under the Dodd-Frank Act, an FCM or DCO must not use the 
collateral of one swaps customer to cover the obligations of another 
swaps customer or itself. Under the proposed rule, in the event that 
an FCM defaults simultaneously with one or more of its cleared swaps 
customers, the DCO may access the collateral of the FCM's defaulting 
cleared swaps customers to cure the default, but not the collateral 
of the FCM's non-defaulting cleared swaps customers. The

[[Page 33878]]

proposal also asks a variety of questions regarding alternative 
means of implementing protection of customer collateral.
    This proposed rulemaking benefited from public input received 
during the CFTC staff roundtable on segregation and in other 
meetings and from the 32 comments received in response the 
Commission's advanced notice of proposed rulemaking. I look forward 
to further hearing from the public on this proposed rulemaking.

[FR Doc. 2011-10737 Filed 6-2-11; 11:15 am]
BILLING CODE 6351-01-P
```