This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents. Prices of

new books are listed in the first FEDERAL

REGISTER issue of each week.

Rules and Regulations Federal Register

66621 

Vol. 78, No. 215 

Wednesday, November 6, 2013 

1A ‘‘new counterparty’’ is a counterparty with 

whom, at the time of the effective date of this final 

rule, no agreement exists between the SD or MSP 

and that counterparty concerning uncleared swaps. 

2An ‘‘existing counterparty’’ is a counterparty 

with whom, at the time of the effective date of this 

final rule, an agreement exists between the SD or 

MSP and that counterparty concerning uncleared 

swaps. 

3Public Law 111–203, 124 Stat. 1376 (2010). The 

text of the Dodd-Frank Act may be accessed at 

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

documents/file/hr4173_enrolledbill.pdf. 

4Pursuant to section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010’’. 

5 7 U.S.C. 1 et seq. 

6The Commission notes that these rules were 

proposed as §§ 23.600 through 23.604. Because 

other rulemakings use these sections, this final 

rulemaking will use and reference §§ 23.700 

through 23.704 throughout, notwithstanding the 

numbering in the proposal. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 23 and 190 

RIN 3038–AD28 

Protection of Collateral of 

Counterparties to Uncleared Swaps; 

Treatment of Securities in a Portfolio 

Margining Account in a Commodity 

Broker Bankruptcy 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (the 

‘‘Commission’’) is issuing final rules 

implementing new statutory provisions 

enacted by Title VII of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (the ‘‘Dodd-Frank Act’’). 

Specifically, the final rule contained 

herein imposes requirements on swap 

dealers (‘‘SDs’’) and major swap 

participants (‘‘MSPs’’) with respect to 

the treatment of collateral posted by 

their counterparties to margin, 

guarantee, or secure uncleared swaps. 

Additionally, the final rule includes 

revisions to ensure that, for purposes of 

subchapter IV of chapter 7 of the 

Bankruptcy Code, securities held in a 

portfolio margining account that is a 

futures account or a Cleared Swaps 

Customer Account constitute ‘‘customer 

property’’; and owners of such account 

constitute ‘‘customers.’’ 

DATES: Effective date: This rule is 

effective January 6, 2014. 

Compliance dates: For uncleared 

swap transactions that are entered into 

with ‘‘new counterparties,’’ 1 all persons 

shall be in compliance with the 

requirements set forth in Subpart L of 

Part 23 not later than May 5, 2014. For 

uncleared swap transactions that are 

entered into with ‘‘existing 

counterparties,’’ 2 all persons shall be in 

compliance with the requirements set 

forth in Subpart L of Part 23 not later 

than November 3, 2014. All parties must 

comply with the Part 190 rules by 

January 6, 2014. 

FOR FURTHER INFORMATION CONTACT: 

Robert B. Wasserman, Chief Counsel, 

Division of Clearing and Risk (DCR), at 

202–418–5092 or rwasserman@cftc.gov; 

Laura Astrada, Associate Chief Counsel, 

DCR, at 202–418–7622 or lastrada@

cftc.gov; Thomas Smith, Deputy 

Director, Division of Swap Dealer and 

Intermediary Oversight at 202–418– 

5495 or tsmith@cftc.gov; or Martin 

White, Assistant General Counsel, 

Office of the General Counsel at 202– 

418–5129 or mwhite@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. Background 

A. Statutory Background 

B. Section 4s(l) of the CEA 

C. Section 20(c) of the CEA 

II. Margin Segregation for SD or MSP 

Counterparties With Respect to 

Uncleared Swaps 

A. Regulation 23.700: Definitions 

B. Regulation 23.701: Notification of Right 

to Segregation 

C. Regulation 23.702: Requirements for 

Segregated Margin 

D. Regulation 23.703: Investment of 

Segregated Margin 

E. Regulation 23.704: Requirements for 

Non-Segregated Margin 

F. Compliance Date 

III. Portfolio Margining 

IV. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

C. Cost-Benefit Considerations 

I. Background 

A. Statutory Background 

On July 21, 2010, President Obama 

signed the Dodd-Frank Act.3 Title VII of 

the Dodd-Frank Act 4 amended the 

Commodity Exchange Act (‘‘CEA’’) 5 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 SDs and 

MSPs; (ii) imposing mandatory clearing 

and trade execution requirements on 

clearable swap contracts; (iii) creating 

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. 

Section 724(c) of the Dodd-Frank Act 

amended the CEA to add section 4s(l), 

which includes provisions concerning 

the rights of counterparties to SDs and 

MSPs with respect to the treatment of 

such counterparty’s margin for 

uncleared swaps. As discussed further 

in Part II of this preamble, these changes 

are implemented in new Subpart L to 

Part 23 of Title 17, §§ 23.700 through 

23.704.6

Section 713(c) of the Dodd-Frank Act 

amends the CEA to add, as section 20(c) 

thereof, a provision that requires the 

Commission to exercise its authority to 

clarify the legal status, in the event of 

a commodity broker bankruptcy, of (i) 

securities in a portfolio margining 

account held as a futures account, and 

(ii) an owner of such account. 

B. Section 4s(l) of the CEA 

Section 4s(l) of the CEA sets forth 

certain requirements concerning the 

rights of counterparties of SDs and 

MSPs with respect to the segregation of 

money, securities, or other property 

used to margin, guarantee, or otherwise 

secure uncleared swaps. These 

requirements apply only to initial 

margin. Section 4s(l) requires that: 


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7 In a separate rulemaking, the Commission 

proposed ‘‘minimum initial and variation margin 

requirements’’ for each SD or MSP for which there 

is no prudential regulator as a way to ‘‘help ensure 

the safety and soundness of the [SD or MSP].’’ See 

Margin Requirements for Uncleared Swaps for 

Swap Dealers and Major Swap Participants, 76 FR 

23732 (Apr. 28, 2011). Among other things, the 

Commission proposed to require SDs and MSPs to 

segregate margin for uncleared swaps that such SD 

or MSP receives from other SDs and MSPs 

(hereinafter known as the ‘‘SD/MSP Specific 

Segregation Requirements’’). See id. at 23748. Thus, 

under that proposal, even if an SD or MSP did not 

exercise its right to require segregation of the funds 

or other property that it supplies to margin, 

guarantee, or secure its obligation, such funds or 

other property would nonetheless be segregated. 

The U.S. banking regulators have proposed 

similar segregation requirements for those SDs and 

MSPs that are prudentially regulated and that will 

be subject to their margin rules. See Margin and 

Capital Requirements for Covered Swap Entities, 76 

FR 27564 (May 11, 2011). The Commission is 

continuing to consider this proposal in light of this 

related work by U.S. banking regulators and related 

efforts by regulators in other countries. The 

Commission is aware of the importance of 

developing consistent SD/MSP Specific Segregation 

Requirements where possible in order to address 

systemic risk issues and to avoid regulatory 

arbitrage concerns. See also section 752 of the 

Dodd-Frank Act. 

8The transcript from the roundtable is available 

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

documents/dfsubmission/dfsubmission6_102210- 

transcrip.pdf. 

9See Protection of Collateral of Counterparties to 

Uncleared Swaps; Treatment of Securities in a 

Portfolio Margining Account in a Commodity 

Broker Bankruptcy, 75 FR 75432 (Dec. 3, 2010). 

10The comment period closed on February 1, 

2011, and was reopened for 30 days on May 4, 

2011. See Reopening and Extension of Comment 

Periods for Rulemakings Implementing the DoddFrank Wall Street Reform and Consumer Protection 

Act, 76 FR 25274 (May 4, 2011). 

11Letters were received from Alternative 

Investment Management Association Limited 

(AIMA), American Gas Association (AGA), the 

Asset Management Group (AMG) of Securities 

Industry and Financial Markets Association 

(SIFMA), Edison Electric Institute (EEI), Federal 

Home Loan Banks (FHLB), Federated Investors, Inc. 

(Federated), Fidelity Investments (Fidelity), 

Intercontinental Exchange, Inc. (ICE), International 

Swaps and Derivatives Association (ISDA), 

Investment Company Institute (ICI), Managed 

Funds Association (MFA), MetLife Inc. (MetLife), 

National Rural Electric Cooperative Association 

(NRECA), New York City Bar Association (NYCBA), 

Norges Bank Investment Management (Norges), 

State Street Corporation (State Street), SIFMA, 

SIFMA and ISDA (SIFMA/ISDA), and the Working 

Group of Commercial Energy Firms (Working 

Group). NYCBA’s letter was a pre-NRPM letter 

dated November 29, 2010. SIFMA’s letter was a preNPRM letter dated October 27, 2010. Federated 

submitted two letters, both of which focused on the 

investment of segregated funds. The Commission 

also received letters from the following individuals: 

Chris Barnard, Leigh Mckeirnan, and Bill 

Granberry. 

12See AIMA letter at 2. 

13Working Group letter at 3. 

14 7 U.S.C. 6s(l)(3)(B). 

15See discussion in section C.1 infra. 

16SIFMA/ISDA, ISDA, FHLB, NRECA, AIMA, 

AMG. 

17SIFMA/ISDA letter at 2. See also ISDA letter 

at 2. 

18SIFMA/ISDA letter at 2. See also ISDA letter 

at 2. 

19SIFMA/ISDA letter at 3. See also ISDA letter 

at 3. 

• An SD or MSP notify each 

counterparty at the beginning of a swap 

transaction that the counterparty has the 

right to require segregation of the funds 

or other property supplied to margin, 

guarantee, or secure the counterparty’s 

obligations; 7 and 

• at the request of the counterparty, 

the SD or MSP shall segregate such 

funds or other property with an 

independent third party custodian. The 

funds or other property of the 

counterparty must be kept in a 

segregated account with an independent 

third party, designated for and on behalf 

of that counterparty, separate from the 

assets and other interests of the SD or 

MSP. 

C. Section 20(c) of the CEA 

Section 713(c) of the Dodd-Frank Act, 

codified as section 20(c) of the CEA, 

directs the Commission to exercise its 

authority to ensure that securities held 

in a portfolio margining account carried 

as a futures account are customer 

property and the owners of those 

accounts are customers for the purposes 

of subchapter IV of chapter 7 of title 11. 

II. Margin Segregation for SD or MSP 

Counterparties With Respect to 

Uncleared Swaps 

The Commission sought public 

comment on customer collateral 

protection with respect to money, 

securities, or other property used to 

margin, guarantee, or otherwise secure 

uncleared swaps. First, on October 22, 

2010, the Commission, through its staff, 

held a roundtable to discuss individual 

customer collateral protection with 

respect to cleared and uncleared 

swaps.8 Following consideration of the 

comments made during the roundtable, 

on December 3, 2010, the Commission 

issued a Notice of Proposed Rulemaking 

(‘‘NPRM’’),9 and sought comment on all 

aspects of the NPRM, including the 

definition of initial margin, 

counterparty notification, the nature of 

the custodian, and the investment of 

segregated collateral.10 The Commission 

received comments from twenty-two 

different commenters regarding the 

proposed regulations in the NPRM.11

The Commission, through its staff, also 

met extensively with market 

participants both prior to and following 

issuance of the NPRM. 

A. Regulation 23.700: Definitions 

1. ‘‘Segregate’’ 

In the NPRM, the Commission 

proposed to define ‘‘segregate’’ 

according to its commonly-understood 

meaning: To keep two or more items in 

separate accounts, and to avoid 

combining them in the same transfer 

between two accounts. 

One commenter agreed with the 

Commission’s proposed definition of 

‘‘segregate.’’ 12 Another commenter 

requested clarification regarding the 

definition of the term segregate and 

whether it requires that collateral be 

held in an individual customer account 

or whether such term permits an SD or 

MSP to hold segregated customer 

collateral in an omnibus customer 

account.13 The Commission notes that 

section 4s(l)(3)(B) requires that a 

segregated account be ‘‘designated as a 

segregated account for and on behalf of 

the counterparty.’’ 14 Moreover, 

regulation 23.702(b) of the final rules 

requires initial margin that is segregated 

pursuant to a counterparty’s election to 

be held in an account for and on behalf 

of the counterparty.15 Thus, regulation 

23.702(b) requires initial margin to be 

held in an individual customer account. 

As such, the Commission is adopting 

the definition of ‘‘segregate’’ as 

proposed. 

2. ‘‘Variation Margin’’ 

The Commission proposed to define 

‘‘variation margin’’ (for which a 

counterparty does not have the right to 

segregation as section 4s(l)(2)(B)(i) 

prescribes) as an amount calculated to 

cover the current exposure arising from 

changes in the market value of the 

position since the trade was executed or 

the previous time the position was 

marked to market. 

Six commenters discussed the 

‘‘variation margin’’ definition.16 SIFMA/ 

ISDA wrote that the concept of variation 

margin is different in the over-thecounter swaps market than it is in the 

futures market.17 In particular, SIFMA/ 

ISDA noted that parties to swaps do not 

‘‘pay’’ margin to each other based on 

mark-to-market prices; rather they post 

and grant a security interest in collateral 

based on estimated payment amounts 

derived from current market 

conditions.18 SIFMA/ISDA 

recommended replacing the term 

‘‘variation margin’’ with the term 

‘‘exposure collateral,’’ and defining 

‘‘exposure collateral’’ to mean ‘‘money, 

securities or property posted by a party 

to secure its obligations pursuant to the 

terms of a swap agreement, the amount 

of which is based on an estimate of the 

net mark-to-market exposure of all 

transactions under the master swap 

agreement.’’ 19 AIMA wrote that the 


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20AIMA letter at 1. 

21SIFMA/ISDA letter at 2. See also ISDA letter 

at 2. 

22 ICI, Fidelity, FHLB, AMG, ISDA, Chris Barnard, 

AIMA, NRECA, MetLife, SIFMA/ISDA. 

23 ICI letter at 2. 

24Fidelity letter at 2. 

25FHLB letter at 6. 

26FHLB letter at 6. See also AMG letter at 5. 

27SIFMA/ISDA letter at 2–3. See also ISDA letter 

at 2–3. 

28Chris Barnard letter at 1. 

29AIMA letter at 1. See also MetLife letter at 3, 

stating that for purposes of the proposed rule, the 

definition of initial margin was sufficient, although 

noting it would request more specific guidance for 

calculating initial margin in the event of ‘‘future use 

or expanded definition.’’ 

30See Paragraph 13 of the ISDA Credit Support 

Annex. See also definition of ‘‘Independent 

Amount’’ in the ISDA Credit Support Annex. 

31As discussed above, section numbers in the 

NPRM are slightly different from those in this final 

rulemaking. See supra n. 6. Proposed regulation 

23.601(a) is being finalized herein as regulation 

23.701(a). 

32 75 FR at 75433 (Dec. 3, 2010). 

33See also CEA section 4s(l)(4) (referring to cases 

where the counterparty ‘‘does not choose to require 

segregation’’ of margin). 7 U.S.C. 6s(l)(4). 

34 75 FR at 75433 (Dec. 3, 2010). 

35 Id. 

36AMG, MFA, State Street, AGA, Fidelity, ICI, 

SIFMA/ISDA, ISDA, FHLB, Chris Barnard, AIMA, 

MetLife, EEI. 

37AMG letter at 8. 

38MFA letter at 4. 

proposed definition of ‘‘variation 

margin’’ was appropriate.20

The fact that the statute refers to 

‘‘variation margin’’ indicates that 

Congress was contemplating the use of 

the term ‘‘variation margin’’ as opposed 

to ‘‘exposure collateral.’’ For the sake of 

consistency with other regulations, the 

Commission is amending the definition 

of ‘‘variation margin’’ to add the phrase 

‘‘or collateral posted by’’ after the 

phrase ‘‘a payment made by’’. However, 

the Commission agrees with SIFMA/

ISDA’s comments regarding the fact that 

in the uncleared OTC derivatives 

markets, parties do not necessarily 

‘‘pay’’ variation margin to each other, 

and instead post collateral.21 The 

Commission therefore notes that 

although the definition of variation 

margin will include payments, where a 

payment is made, there would not be 

any collateral to be segregated. The 

definition is otherwise being adopted as 

proposed. 

3. ‘‘Initial Margin’’ 

The Commission proposed to define 

‘‘initial margin’’ (for which a 

counterparty has the right to segregation 

pursuant to CEA section 4s(l)) as an 

amount calculated based on anticipated 

exposure to future changes in the value 

of a swap. 

Ten commenters addressed the 

definition of ‘‘initial margin.’’ 22 ICI 

wrote that the proposed definition of 

initial margin was too broad, and might 

be interpreted to also include variation 

margin.23 By contrast, Fidelity 

suggested that ‘‘the proposed definition 

of ‘initial margin’ may be too narrow 

and could exclude ‘upfront’ deliveries 

of collateral that should properly be 

treated as initial margin.’’ 24 FHLB 

recommended that the term 

‘‘independent amount’’ be used instead 

of ‘‘initial margin.’’ 25 However, if the 

Commission elects to use the term 

‘‘initial margin,’’ FHLB argued that the 

definition of ‘‘initial margin’’ should, at 

the very least, track and reference 

‘‘independent amount’’ as it appears in 

the ISDA documentation.26 SIFMA/

ISDA also recommended that the term 

‘‘independent amount’’ be used in the 

place of ‘‘initial margin,’’ and suggested 

that ‘‘independent amount’’ be defined 

to mean ‘‘money, securities or property 

posted by a party to secure its 

obligations pursuant to the terms of a 

swap agreement and that is either (i) 

specified as an [‘independent amount’] 

in the relevant agreement of the parties 

or (ii) calculated based upon terms 

agreed between the parties (in either 

case, in addition to and separately from 

any [exposure collateral] 

requirement).’’ 27 Chris Barnard 

suggested that the Commission clarify 

that initial margin is posted at the 

commencement or outset of a swap 

transaction as a way to distinguish 

initial margin from variation margin.28

AIMA and MetLife wrote that the 

proposed definition of initial margin 

was appropriate.29

The Commission has considered the 

comments and understands that some 

commenters prefer the traditional 

practice of using the term ‘‘independent 

amount.’’ However, the statute uses the 

term ‘‘variation margin’’ and the 

obvious complimentary term to 

‘‘variation margin’’ would be ‘‘initial 

margin.’’ Moreover, a reference to 

‘‘independent amount,’’ by itself, would 

not be effective, since the definition of 

‘‘independent amount’’ in the ISDA 

‘‘Credit Support Annex’’ directs the 

reader to a form.30 A reference to a form 

would not be desirable as a definition 

both because it is ambiguous and 

because the substance of the form is 

subject to change. Therefore, the 

Commission is adopting the definition 

of initial margin as proposed. 

B. Regulation 23.701: Notification of 

Right to Segregation 

1. Required Notification 

Proposed regulation 23.601(a) 31

implemented the statutory requirement 

set forth in section 4s(l)(1)(A) of the 

CEA. Specifically, with respect to an 

uncleared swap, proposed regulation 

23.601(a) would have required an SD or 

MSP to notify each of its counterparties 

that a counterparty has the right to 

require any initial margin posted by it 

to be segregated in accordance with 

Commission regulations.32 The 

Commission also stated that it 

interpreted the language of CEA section 

4s(l)(1)(A) as a segregation right that can 

be elected or renounced by the SD’s or 

MSP’s counterparty in its discretion.33

As stated in the NPRM, Congress’s 

description as a ‘‘right’’ of what would 

otherwise be a simple matter for 

commercial negotiation suggests that 

this decision is an important one, with 

a certain degree of favor given to an 

affirmative election.34 As such, in 

implementing section 4s(l)(1)(A) the 

Commission is requiring SDs and MSPs 

to offer their counterparties segregation 

that meets the minimum standards set 

forth in these rules. However, SDs, 

MSPs and counterparties may negotiate 

alternative arrangements for the 

handling of collateral if all parties agree. 

In the NPRM, the Commission did not 

propose specific disclosure 

requirements with respect to this 

notification. Instead, the Commission 

requested comment as to whether the 

SD or MSP should be required to 

disclose the price of segregation, the 

price of fees to be paid to the custodian 

(if the SD or MSP is aware of the amount 

of such fees), or differences in the terms 

of the swap that the SD or MSP is 

willing to offer to the counterparty (e.g., 

differences in the fixed interest rate for 

an interest rate swap) if the counterparty 

elects or renounces the right to 

segregation.35

Thirteen commenters discussed the 

costs associated with segregation,36 with 

most expressing concern about proper 

price disclosures by the SDs and MSPs. 

Two commenters indicated that price 

disclosure was not particularly 

important. 

Several commenters expressed 

concern that an SD or MSP would not 

make counterparties aware of the price 

associated with segregation and might 

impose higher prices or offer less 

attractive terms to counterparties 

electing segregation.37 MFA 

recommended ‘‘that the Commission 

require SDs and MSPs to provide 

counterparties with robust disclosure of 

all costs that the SD or MSP will charge 

to the counterparty if the counterparty 

elects to segregate its initial margin.’’ 38

State Street suggested that ‘‘the 

Commission should . . . provide that, 

although the pricing of the same 


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39State Street letter at 3. 

40AGA letter at 4. See also Fidelity letter at 3. 

41 ICI letter at 3. 

42SIFMA/ISDA letter at 3, ISDA letter at 3–4. 

43FHLB letter at 7. 

44However, if the counterparty selects to use an 

independent custodian (e.g., a non-affiliate of the 

SD or MSP or a custodian with which the SD or 

MSP does not have a pre-existing relationship), the 

SD or MSP may not be required to inform the 

counterparty of the price of custodianship because 

the SD or MSP may not have that information. 

45Several commenters highlighted the 

importance of have the choice of at least one 

custodian who is not affiliated with the SD or MSP. 

See generally EEI letter at 2, AIMA at 2, MFA letter 

at 4, and Fidelity letter at 5. 46Proposed regulation 23.601(b) is being finalized 

herein as regulation 23.701(b). 47Fidelity letter at 4. See also AMG letter at 6. 48Fidelity letter at 3–4. 49See section 4s(l)(2)(B)(i) of the CEA. 

50Proposed regulation 23.601(c) is being finalized 

herein as 23.701(c). 

51SIFMA/ISDA, NRECA, EEI, ICI, AGA, ISDA, 

AMG, Fidelity, Working Group, AIMA, FHLB. 

52EEI letter at 3. 

53 ICI letter at 3. 

54AGA letter at 5. 

55 ISDA letter at 5 and SIFMA/ISDA letter at 4. 

See also AMG letter at 7, suggesting that notice be 

made to any party authorized by the counterparty. 

56Fidelity letter at 3. See also Working Group 

letter at 5. 

transaction with and without a 

segregated account may differ, the 

pricing difference should be reflective of 

actual out-of-pocket costs expected to be 

incurred by the [SD/MSP] as a result of 

use of the segregated account, and that 

the nature and amounts of those costs 

should be fully disclosed.’’ 39 AGA 

argued that, without proper disclosure, 

counterparties will be forced ‘‘to 

exercise in a vacuum their right to seek 

segregation of initial margin for an 

uncleared swap’’ and suggested that 

each SD or MSP be required to notify 

each counterparty as to the price of 

having a third party hold collateral.40

ICI sought to distinguish between fees 

charged by the custodian—which ICI 

does not believe need be disclosed by 

the SD or MSP—and fees embedded in 

the SD’s swaps pricing for not having 

access to the customer’s collateral.41

SIFMA/ISDA do not believe that 

mandating disclosure is necessary or 

desirable because ‘‘a counterparty can 

always, in accordance with current 

market practice, request the disclosures 

it considers necessary from its SD/MSP 

. . . [and] mandatory disclosure by the 

SD/MSP is impractical because much of 

the material costs are within the control 

of a third party: the custodian.’’ 42

Finally the FHLB wrote that ‘‘it is 

very important for SDs/MSPs to respond 

to requests for information regarding the 

additional costs that may be imposed on 

end-user counterparties that elect to 

have initial margin segregated with an 

independent custodian.’’ 43

In light of the concerns expressed by 

commenters, the Commission has 

determined that a limited set of 

disclosures should be required. First, 

the SD or MSP must inform the 

counterparty of the price associated 

with segregation, including custodial 

fees, to the extent the SD or MSP has 

such information. It is the Commission’s 

view that the price of segregation is a 

material term in any segregation 

package offered by the SD or MSP. 

Further, where the custodian is an 

affiliate of, or a regular custodian for, 

the SD or MSP, the SD or MSP may be 

better positioned to know the amount of 

any such custody costs.44 In addition, in 

order for counterparties to make an 

informed decision as to whether to 

exercise the right of segregation, the 

identity of an acceptable custodian(s) is 

a material aspect of the notification so 

that counterparties may make informed 

decisions as to the degree of 

independence of such custodian(s).45 As 

described in more detail in section C.1, 

below, this notification must include at 

least one credit-worthy non-affiliate as 

an option for custodian of segregated 

initial margin. The Commission has 

amended regulation 23.701 accordingly. 

The Commission notes that certain 

entities have developed or are in the 

process of developing electronic 

platforms through which counterparties 

could access account information 

regarding the status of their collateral. 

The Commission may consider, in a 

future rulemaking, whether the 

notification required pursuant to 

regulation 23.701 should include 

information from the SD or MSP 

regarding such platforms. 

2. Limitation of Right—Variation Margin 

Proposed regulation 23.601(b) 46

incorporated the limitation in section 

4s(l)(2)(B)(i) of the CEA that the right to 

segregation does not apply to variation 

margin. Fidelity recommended that the 

final rule require that SDs and MSPs 

‘‘segregate variation margin posted by a 

counterparty at the counterparty’s 

request.’’ 47 Fidelity requested that, at a 

minimum, the rule clarify that ‘‘no 

change will be necessary to collateral 

agreements [not in conflict with the 

rule] . . . that involve segregation of all 

margin, initial and variation. . . .’’ 48

The statute clearly excludes variation 

margin from the 4s(l) segregation 

requirements.49 Thus, the request for 

such a requirement is not supported by 

the statute. However, the Commission 

confirms that this rule governs collateral 

arrangements for swaps entered into on 

and subsequent to the compliance date 

and does not affect collateral 

arrangements agreed to for swaps that 

are entered into prior to the compliance 

date. In addition, the Commission notes 

that this rulemaking does not restrict 

parties from negotiating segregation 

arrangements for variation margin. 

3. Counterparty Notification 

The Commission regards the 

inclusion of the term ‘‘right to require 

segregation’’ in section 4s(l) of the CEA 

as requiring that the segregation 

decision is made by appropriate 

decision-makers within the 

counterparty organization. Proposed 

regulation 23.601(c) 50 would require 

that the ‘‘right to require segregation’’ 

notification be made to certain senior 

decision-makers, in descending order of 

preference. Notification would be made 

to the Chief Risk Officer, or the Chief 

Executive Officer, or to the highest level 

decision-maker for the SD’s or MSP’s 

counterparty. The Commission sought 

comment as to whether this list of 

decision-makers would be appropriate. 

Eleven commenters opposed the 

requirement that the Chief Risk Officer 

receive the segregation notification.51

EEI wrote that this requirement ‘‘fails to 

take into account existing governance 

and compliance structures and 

processes developed and implemented 

by entities for the express purpose of 

meeting compliance and risk 

management objectives.’’ 52 ICI 

suggested that notices go to ‘‘an 

authorized person to avoid the 

disruption that would be associated 

with a [Chief Risk Officer] or other 

‘high-level decision-maker’ making an 

election to each SD or MSP before a 

trade can settle.’’ 53 AGA recommended 

that the notification ‘‘be made to the 

officer in the counterparty responsible 

for the management of collateral.’’ 54

ISDA suggested that the counterparty 

should identify the proper party to 

receive notice from the SD or MSP.55

Similarly, Fidelity wrote that the ‘‘final 

rule should allow the counterparty to 

select the notice recipient.’’ 56

A counterparty’s decision to elect its 

segregation right is a financial decision 

that is heavily dependent on such 

counterparty’s risk assessments. It 

would seem appropriate, therefore, for a 

counterparty employee who is involved 

in the assessment of risk and/or 

collateral management to receive this 

notification. However, after 

consideration of the comments, it is 

clear that such person does not 

necessarily need to be the Chief Risk 

Officer. The Commission agrees with 

AGA’s comment that a notification 

should be sent to the ‘‘officer in the 


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57AGA letter at 5. 

58Proposed regulation 23.601(d) is being 

finalized herein as regulation 23.701(d). 

59 17 CFR 1.31. 

60 ICI letter at 3. 

61 ICI letter at 3. See also discussion in section C.1 

infra. 

62Proposed regulation 23.601(e) is being finalized 

herein as regulation 23.701(e). 

63NRECA, Working Group, FHLB, MetLife, EEI, 

AGA, SIFMA/ISDA, ISDA, AIMA, AMG, Fidelity, 

ICI. 

64Working Group letter at 4. 

65Fidelity letter at 3. See also ICI letter at 3. 

66FHLB letter at 6, MetLife letter at 2. See also 

EEI letter at 3. 

67AGA letter at 5–6. 

68NRECA letter at 13, SIFMA/ISDA letter at 4, 

ISDA letter at 4, AIMA letter at 2 and AMG letter 

at 7. 

69SIFMA/ISDA letter at 4. See also ISDA letter 

at 4. 

70Proposed regulation 23.601(f) is being finalized 

herein as regulation 23.701(f). 

71Working Group letter at 5. 

counterparty responsible for the 

management of collateral.’’ 57 If such a 

person is not identified by the 

counterparty to the SD or MSP, then the 

notification should be sent to the Chief 

Risk Officer and so on, as described in 

the proposed rule. Regulation 23.701(c) 

has been amended accordingly. 

4. Required Confirmation 

Before the terms of an uncleared swap 

are confirmed, proposed regulation 

23.601(d) 58 would require that the SD 

or MSP obtain from the counterparty 

(1) confirmation of receipt of the 

segregation notification by a specified 

decision-maker, and (2) whether the 

counterparty has elected to exercise its 

section 4s(l) segregation rights. The SD 

or MSP must maintain records of such 

confirmation and election as business 

records in accordance with regulation 

1.31.59

ICI’s comment letter alone addressed 

this point.60 ICI agreed with the 

proposal that ‘‘confirmation of receipt of 

the notification and election to require 

segregation or not should occur prior to 

confirming the terms of the uncleared 

swap.’’ 61 The Commission believes that 

requiring the SD or MSP to obtain 

confirmation of receipt of the 

segregation notification and the 

counterparty’s decision whether to elect 

segregation prior to confirming the 

terms of the swaps will provide greater 

certainty for both parties regarding the 

counterparty’s segregation election. The 

Commission also agrees that such 

confirmation should be obtained prior 

to confirming the terms of the uncleared 

swap. Therefore, the Commission is 

adopting paragraph (d) as proposed. 

5. Limitation of Responsibility To Notify 

Section 4s(l)(1)(A) of the CEA states 

that an SD or MSP must notify its 

counterparty of the right to require 

segregation of funds or other property 

supplied to margin, guarantee or secure 

the obligations of the counterparty ‘‘at 

the beginning of a swap transaction.’’ 

While this language could be read to 

require transaction-by-transaction 

notification, where the parties have a 

preexisting or on-going relationship, 

such repetitive notification could be 

redundant, costly and needlessly 

burdensome. On the other hand, the 

importance of the segregation decision, 

as discussed above, suggests that some 

periodic reconsideration might be 

appropriate. Proposed regulation 

23.601(e) 62 sought to balance these 

considerations by providing that 

notification to a particular counterparty 

by a particular SD or MSP need only be 

made once in any calendar year. 

Twelve commenters discussed issues 

surrounding the substance and timing of 

segregation notification,63 with the 

primary concern being whether the 

notification of the right to segregation 

had to be done on a transaction-bytransaction basis or merely once per 

year. 

The Working Group requested that the 

rule require notification on segregation 

no more often than once a year, rather 

than a transaction-by-transaction 

notification.64 Fidelity supported the 

proposal that notification be required at 

least annually, stating that this could 

‘‘prompt a counterparty to reconsider its 

elections in light of [changes that could 

occur during the life of a swap 

transaction].’’ 65 FHLB and MetLife 

characterized transaction-by-transaction 

notification as repetitive and 

redundant.66 AGA believes that once a 

year is an appropriate notification 

frequency, unless the price of 

segregation has changed in which case 

another notice should be delivered.67

Several commenters requested that 

the Commission loosen the once-peryear notification in the Commission’s 

proposed rule. NRECA, SIFMA/ISDA, 

AIMA and AMG each wrote that an 

initial notification is all that should be 

required—a counterparty’s initial choice 

should be deemed to apply to all future 

swaps unless the counterparty seeks to 

change its election.68 SIFMA/ISDA 

proposed ‘‘that an [SD or MSP] should 

only be required to deliver a single 

notification of the right to segregate, and 

the counterparty should be deemed to 

have elected not to require segregation 

of its [independent amount] until such 

time as the counterparty duly notifies 

the [SD or MSP] of its election to require 

segregation.’’ 69

After careful consideration of the 

comments, the Commission agrees that 

requiring notification on a transactionby-transaction basis may be overly 

costly and burdensome. In addition, the 

Commission notes the difficulty 

associated with identifying material 

changes in the cost of segregation and 

the burden that would be created should 

the Commission require that additional 

notices be delivered upon such event. 

However, the Commission notes that 

Congress emphasized the importance of 

the ability of a counterparty to elect to 

have its collateral segregated, describing 

segregation as a ‘‘right.’’ Moreover, the 

statute does not merely grant 

counterparties the legal right to 

segregation; it specifically requires that 

the existence of this right be 

communicated to them. The 

Commission therefore believes that this 

notification requirement is met when an 

SD or MSP provides notification to a 

counterparty, at least once, in each 

calendar year. Where an SD or MSP 

does not enter into any swap with the 

counterparty during a calendar year, the 

notification requirement would not 

apply. The Commission believes that 

such notification requirement would not 

be overly burdensome, particularly 

when one considers the importance of 

the counterparty’s decision to require 

segregation. Thus, the Commission has 

decided to adopt the final rule language 

as proposed. 

6. Power To Change Election With 

Regard to Segregation 

In the NPRM, the Commission 

proposed regulation 23.601(f),70 which 

makes clear that a counterparty’s 

election with respect to the segregation 

of initial margin may be changed at the 

discretion of the counterparty upon 

delivery of written notice, and such 

decision shall be applicable with 

respect to swaps entered into between 

the parties after such delivery. Rather 

than grant the counterparty an absolute 

right to change its election, the Working 

Group recommended that the 

counterparty must expressly reserve 

such right: ‘‘[if] a party makes an 

election under the Proposed Rule and 

does not expressly reserve the right to 

change that election in the relevant 

swap trading relationship 

documentation, then they cannot do 

so.’’ 71

The Commission does not believe that 

the commenter’s clarification is 

appropriate. The Commission notes that 

the rule clearly states that any change to 

the counterparty’s segregation election 

would only apply to ‘‘swaps entered 

into between the parties after . . . 

delivery’’ of written notice to the SD or 


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72Proposed regulation 23.602(a)(1) is being 

finalized herein as regulation 23.702(a). 

73Proposed regulation 23.602(a)(2) is being 

finalized herein as regulation 23.702(b). 

74See discussion in section A.1 supra. 

75MFA, SIFMA/ISDA, ISDA, ICI, Working Group, 

NRECA, AMG, MetLife, EEI, Fidelity, AIMA, FHLB, 

Norges, State Street. 

76 ICI letter at 3–4. 

77AIMA letter at 2. 

78Working Group letter at 2. 

79NRECA letter at 14. 

80AMG letter at 3. 

81MetLife letter at 2. 

82AMG letter at 2. See also MFA letter at 3–4, EEI 

letter at 2. 

83Fidelity letter at 5. 

84AIMA letter at 2. 

85FHLB letter at 8. 

86SIFMA/ISDA letter at 5. See also ISDA letter 

at 7. 

87AMG letter at 2. 

88State Street letter at 2. 

89Fidelity letter at 5. See also FHLB letter at 8, 

recommending that if parties cannot agree on a 

custodian then the counterparty should be able to 

designate the custodian. 

90Norges letter at 2. 

MSP. Therefore, if a counterparty sought 

to change its segregation election, such 

election would not have retroactive 

effect (unless both the counterparty and 

the SD or MSP so agreed). In other 

words, the proposed rule leaves changes 

in terms for pre-existing swaps— 

including with respect to segregation of 

collateral—as matters for negotiation 

between the parties. The counterparty 

should retain its rights, under the 

statute, to change its election as to 

swaps entered into after the notice is 

delivered. As such, the Commission is 

adopting the final rule language as 

proposed. 

C. Regulation 23.702: Requirements for 

Segregated Margin 

1. Independent Custodian and Separate 

Account 

Pursuant to section 4s(l)(3) of the 

CEA, the Commission proposed 

regulation 23.602(a)(1),72 which 

required that initial margin, segregated 

in accordance with an election under 

regulation 23.601, be held with a 

custodian that is independent of both 

the SD or MSP and the counterparty. 

Proposed regulation 23.602(a)(2) 73

required such initial margin to be held 

in an account designated as a segregated 

account for and on behalf of the 

counterparty.74 While, as noted, the 

right to segregation does not apply to 

variation margin, the proposed 

regulation provided that the SD or MSP 

and the counterparty may agree that 

collateral falling within the definition of 

variation margin may also be held in 

such segregated account. The 

Commission requested comment on, 

among other things, whether an affiliate 

of the SD, MSP or the counterparty 

should be considered an independent 

custodian. In addition, the Commission 

requested comment on whether either 

party could choose a custodian and, if 

so, what restrictions, if any, should be 

placed on that choice. 

Fourteen commenters discussed the 

choice of custodian for segregation.75

The topics discussed by commenters 

included the freedom of negotiation 

between the SD or MSP and 

counterparty, the use of a custodian 

affiliated with an SD or MSP, the right 

of the counterparty to choose the 

custodian, and qualifying criteria for a 

custodian. 

Four commenters argued that the 

custodian should be determined purely 

by negotiation between the counterparty 

and SD or MSP. ICI opined that ‘‘the 

choice of custodian should be left to the 

agreement of the parties.’’ 76 AIMA 

wrote that ‘‘[t]he parties should be free 

to negotiate which custodian is used, 

and it may be useful for the [SD] or MSP 

to let the customer know which 

custodians it has relationships with and 

has conducted appropriate due 

diligence on, including affiliates and 

non-affiliates, and thus its preferred 

choices of custodian.’’ 77 Similarly, the 

Working Group suggested ‘‘that outside 

the election to segregate collateral, 

which is the right of a [SD’s or MSP’s] 

counterparty, all other terms and 

parameters of a custodial relationship 

should be left to negotiation between 

counterparties. . . .’’ 78 The NRECA 

wrote that it ‘‘see[s] no benefit to the 

Commission making [the choice of 

custodian] by regulation, rather than 

leaving them to arm’s length 

negotiations between contract 

counterparties.’’ 79

However, AMG stated that while both 

the counterparty and the SD or MSP 

have an interest in the selection of the 

custodian, the counterparty is likely the 

party with the greatest interest and 

should therefore have the right to select 

the custodian.80

Several commenters discussed 

whether an affiliate of the SD or MSP 

would qualify as an independent 

custodian. MetLife suggested ‘‘that a 

custodial arrangement with an affiliate 

of the SD or MSP would satisfy the 

requirements for the use of an 

Independent Custodian. . . .’’ 81 AMG 

wrote that ‘‘the CFTC should not limit 

the choice of custodian solely to those 

unaffiliated with the relevant SD/MSPs 

and Customer Counterparties but should 

provide the flexibility to use a custodian 

who may also be affiliated with any SD/ 

MSP or Customer Counterparty.’’ 82

Fidelity expressed concern that an 

‘‘unintended and undesirable 

consequence of banning affiliates from 

acting as third-party custodians could 

be to prevent counterparties from 

entering into swaps with [SD/MSPs], 

where an affiliate of the [SD/MSP] 

already serves as a depository or 

custodian of the counterparty.’’ 83

Other commenters were receptive to 

the idea of an affiliate custodian, but 

advised that the SD or MSP should be 

required to present options to the 

counterparty on this issue. For example, 

AIMA recommended that the 

Commission require SDs and MSPs to 

‘‘offer a choice of . . . five custodians 

on whom they have conducted [a] due 

diligence examination, including both 

an affiliate (if applicable) and a nonaffiliate.’’ 84 Similarly, FHLB urged the 

Commission to condition allowing an 

affiliate of the SD or MSP to act as 

custodian upon mutual agreement of the 

counterparty and the SD or MSP, and 

suggested that ‘‘the SD/MSP [should be] 

required to offer segregation with at 

least one non-affiliated custodian.’’ 85

SIFMA/ISDA wrote that an SD or MSP 

‘‘should be required, upon counterparty 

request, to propose at least one 

creditworthy non-affiliated custodian 

that the SD/MSP is willing to use, as an 

option.’’ 86 AMG noted that the 

regulations should be flexible enough to 

allow the use of a custodian affiliated 

with an SD, MSP, or the counterparty.87

Three other commenters suggested 

that counterparties should have the 

right to designate a non-affiliate 

custodian. State Street recommended 

that the proposed rules be revised to 

provide that a ‘‘counterparty has the 

right to designate the independent 

custodian, if that custodian is a U.S. 

bank . . . and otherwise serves as a 

usual depository for assets of the 

counterparty.’’ 88 Fidelity wrote that 

while affiliates of the SD or MSP can be 

appropriate custodians, ‘‘a counterparty 

should have the right to require that a 

third-party custodian be independent 

from the [SD or MSP].’’ 89 Norges 

proposed that the final rule should 

provide the ‘‘non-dealer/MSP 

counterparties the option to require that 

initial margin . . . be held with a 

custodian that is in fact independent of 

any affiliate of the swap dealer or 

MSP.’’ 90

Two commenters offered qualifying 

criteria for a custodian. The MFA 

suggested that a custodian ought to be 

‘‘regulated by a federal or state bank 

regulator, be authorized under federal or 

state laws to exercise corporate trust 

powers, and have equity of at least 


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91MFA letter at 4. 

92MetLife letter at 2. 

93SIFMA/ISDA letter at 5. See also ISDA letter 

at 5. 

94SIFMA/ISDA letter at 5, ISDA letter at 5. 

95See regulation 23.701(a)(2). 

96Proposed regulation 23.602(b) is being finalized 

herein as regulation 23.702(c). 

97 If the SD or MSP and the counterparty were to 

make competing claims to the collateral, and if the 

custodian did not have a means under the 

agreement among the parties to decide between 

such claims without risking legal liability, the 

custodian would likely choose to interplead the 

collateral. 

98See 28 U.S.C. 1746. See also 18 U.S.C. 1621 

(Perjury Generally). 

99The importance of taking steps to ensure that 

unauthorized withdrawals are not made is 

enhanced by the findings of the Commission’s 

Division of Clearing and Intermediary Oversight in 

Financial and Segregation Interpretation 10–1, 20 

FR 24768, 24770 (May 11, 2005) (‘‘Findings by both 

Commission audit staff and the SROs of actual 

releases of customer funds [from third-party 

custodial accounts], without the required 

knowledge or approval of the FCMs, further 

demonstrate that the risks associated with thirdparty custodial accounts are real and material, not 

merely theoretical.’’). 

100 ICI, Working Group, AMG, Fidelity, SIFMA/

ISDA, MFA, ISDA, FHLB, MetLife. 

101 ICI letter at 4. See also Working Group letter 

at 4, AMG letter at 6, Fidelity letter at 4–5, SIFMA/ 

ISDA letter at 6, MFA letter at 5, ISDA letter at 7, 

MetLife letter at 2. 

102 In times of significant market stress, any 

unnecessary impediments or restrictions on a 

counterparty’s ability to obtain immediate access to 

posted margin when such access is legitimate could 

impair the operations of the counterparty, impair 

the liquidity of other market participants and 

magnify the impact of a market disruption. 

103A party facing insolvency or fearing imminent 

insolvency on the part of its counterparty might be 

tempted to demand transfer of margin without fully 

ensuring they were entitled to it, to take the margin 

without plans to return it, or take the margin for the 

purpose of covering an unrelated debt in the 

expectation of saving their business and returning 

the margin shortly thereafter. 

[$200 million].’’ 91 MetLife suggested 

that an affiliate custodian could satisfy 

the requirements for an independent 

custodian where it, inter alia, 

‘‘maintains a minimum asset value [of at 

least $2 billion] under custodial 

management.’’ 92

The Commission also received one 

comment regarding the timing of the 

requirement to segregate. SIFMA/ISDA 

requested that, due to the amount of 

time required to fully negotiate a 

custodial arrangement, parties ‘‘be 

permitted to enter into new swaps 

pending completion of custodial 

documentation satisfactory to both 

parties for so long as the parties are 

negotiating in good faith to complete 

such custodial documentation.’’ 93

SIFMA/ISDA also argued that the 

requirement to segregate the initial 

margin ‘‘with respect to all swaps 

entered into after delivery of an election 

to require segregation . . . unless 

otherwise agreed, become effective only 

upon the completion of custodial 

documentation.’’ 94

The language of the statute does not 

require that affiliates of a counterparty 

be prohibited from serving as the 

custodian for segregated funds. 

Affiliates are third-parties in that they 

are separate legal entities, and therefore 

fall within the terms of the statute. 

However, in light of the correlated 

insolvency risk wherein if an SD or MSP 

becomes insolvent its affiliates will have 

an elevated risk of also becoming 

insolvent, the Commission has 

determined that an SD or MSP should 

be required to provide the counterparty 

with at least one credit worthy nonaffiliate as an option to serve as the 

custodian. The final rule text has been 

amended to incorporate the requirement 

that SDs and MSPs must provide their 

counterparties with at least one credit 

worthy non-affiliate as an option to 

serve as the custodian.95

Regarding SIFMA/ISDA’s question 

relating to the timing of segregation, 

waiting until the completion of 

custodial documentation for an election 

to require segregation to become 

effective would likely create difficulties 

where an insolvency occurs in the time 

period between agreement and 

documentation. Thus, it is the 

Commission’s position that protection 

of initial margin is best achieved by 

requiring customer segregation to 

become effective upon election, not 

upon completion of custodial 

documentation. In addition, the 

Commission notes that compliance with 

SIFMA/ISDA’s suggested ‘‘good faith’’ 

requirement would be impracticable to 

assess and is not amending the rule as 

suggested. 

2. Requirements for Custody Agreement 

In the NPRM, the Commission 

proposed regulation 23.602(b),96 which 

imposed certain requirements on 

agreements for the segregation of 

margin. Regulation 23.602(b) was 

intended to provide a balance between 

the minimum interests of (i) the 

counterparty posting the margin, (ii) the 

SD or MSP for whom the margin is 

posted, and (iii) the custodian, while 

avoiding the necessity for timeconsuming and expensive interpleader 

proceedings.97 Under the proposal, an 

agreement for the segregation of margin 

would have to be in writing, and must 

include the custodian as a party. In 

addition, to ensure that the SD or MSP 

receives the margin promptly in case it 

is entitled to do so, and that the margin 

is returned to the counterparty in case 

it is entitled to such return, the 

agreement must also provide that 

turnover of control shall be made 

promptly upon presentation of a 

statement in writing, signed by an 

authorized person under penalty of 

perjury, that one party is entitled to 

such turnover pursuant to an agreement 

between the parties.98 Otherwise, 

withdrawal of collateral may only be 

made pursuant to the agreement of both 

the counterparty and the SD or MSP, 

with the non-withdrawing party also 

receiving immediate notice of such 

withdrawal.99

Nine commenters argued against 

imposing a perjury standard on any 

written statements by either the 

counterparty or the SD or MSP 

informing the custodian to turn over of 

control of margin.100 For example, ICI 

wrote that it ‘‘believe[s] that it is 

unnecessary to introduce the specter of 

criminal prosecution into custodial 

account documentation. . . .’’ 101

The Commission believes that a 

perjury standard is appropriate because 

it mitigates the tradeoff between speed 

and accuracy in stress situations. In 

circumstances where one party to a 

swap needs expedient turnover of 

segregated margin (for example, in order 

to meet margin calls on positions 

hedging the swap) and is unable to 

obtain timely approval from the 

counterparty (e.g., if margin is being 

taken from the account because the 

counterparty is in financial trouble), it 

is important for a depository to be able 

to respond to a unilateral request for 

collateral without having to take the 

time to independently investigate the 

legitimacy of the request.102 At the same 

time, circumstances of market stress 

may also create incentives for parties to 

illegitimately withdraw collateral from a 

segregated account.103 The perjury 

standard acts as a check on the 

legitimacy of a demand for collateral 

without requiring the time needed for 

an independent inquiry by the 

depository. At the same time, an SD, 

MSP or counterparty making a demand 

for collateral can avoid criminal liability 

if it does not engage in purposeful fraud. 

The Commission has decided to adopt 

the rule substantively as proposed. 

However, the Commission points out 

that it has re-organized the rule and 

modified certain language to provide 

greater clarity. Specifically, the 

Commission combined the language in 

paragraphs (a) and (a)(1) into paragraph 

(a). The Commission also renumbered 

paragraph (a)(2) as paragraph (b). The 

Commission then renumbered 

paragraph (b) as paragraph (c) and 

switched the text in subparagraphs (1) 

and (2). The Commission also added 


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104Proposed regulation 23.603(a) is being 

finalized herein as regulation 23.703(a). 

105Section 4s(l)(2)(B)(ii)(I) of the CEA refers to 

‘‘commercial arrangements regarding the 

investment of segregated funds or other property 

that may only be invested in such investments as 

the Commission may permit by rule or regulation.’’ 

106MetLife, Federated, ICI, AMG, Fidelity, 

SIFMA/ISDA, ISDA, FHLB. 

107Fidelity letter at 5–6. 

108Fidelity letter at 4. 

109AMG letter at 6. 

110MetLife letter at 3. See also Federated letter at 

3–7, ICI letter at 4–6, AMG letter at 3–5, Fidelity 

letter at 5–6, SIFMA/ISDA letter at 6, ISDA letter 

at 8, FHLB letter at 12. 

111FHLB letter at 13. 

112Federated letter at 7, 11. 

113AIMA letter at 3. 

114See Investment of Customer Funds and Funds 

Held in an Account for Foreign Futures and Foreign 

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

115 Id. at 78776. 

116 Id. at 78778. 

117But cf. Margin Requirements for Uncleared 

Swaps for Swap Dealers and Major Swap 

Participants, 76 FR 23732 (Apr. 28, 2011) 

(proposing to limit the forms of acceptable initial 

margin to a specified list of eligible collateral for 

transactions between a swap dealer or major swap 

participant for which there is no prudential 

regulator and a counterparty that is a swap dealer, 

a major swap participant or a financial entity). 

118See discussion in section B.2 supra. 

119Proposed regulation 23.603(b) is being 

finalized herein as regulation 23.703(b). 

clarifying language to paragraphs (a),(b) 

and (c) to facilitate this reorganization. 

D. Regulation 23.703: Investment of 

Segregated Margin 

1. Limitations on Investments 

Proposed regulation 22.603(a) 104

provides that segregated initial margin 

may only be invested consistent with 

the standards for investment of 

customer funds that the Commission 

applies to exchange-traded futures and 

cleared swaps, regulation 1.25.105

Eight commenters expressed the view 

that imposing the standards of 

regulation 1.25 on the investment of 

collateral for uncleared swaps was 

overly restrictive.106

Fidelity suggested that ‘‘custodians 

under tri-party custody arrangements 

may limit the types of collateral that it 

will permit under such arrangements to 

those investments permitted pursuant to 

[regulation] 1.25.’’ 107 Fidelity further 

proposed that the Commission require 

not only segregation of initial margin 

but also variation margin, explaining 

that ‘‘the right to require segregation of 

variation margin . . . would reduce 

systemic risk for the same reasons that 

segregation of initial margin reduces 

systemic risk.’’ 108 Similarly, AMG 

argued that the Commission should 

‘‘confirm the right of Customer 

Counterparties to require segregation of 

both initial margin and variation 

margin,’’ explaining that the current 

practice in the OTC market is to require 

all collateral to be segregated and held 

by a third-party custodian.109

MetLife wrote that such a restriction 

is ‘‘outside the scope of normal market 

practice’’ and that counterparties 

‘‘should be able to negotiate the terms 

for investment of Initial Margin 

consisting of cash within [their] own 

established investment guidelines.’’ 110

FHLB added that ‘‘Congress 

appropriately did not seek to limit how 

margin for uncleared swaps would be 

invested,’’ asserting that Congress had 

assumed that ‘‘both the end-user 

counterparty and the SD/MSP would 

necessarily be involved in the decision 

as to how such funds would be 

invested.’’ 111 Federated warned that 

this proposal will cause a loss of 

investment returns.112

In contrast, AIMA wrote that ‘‘[t]he 

requirements of Regulation 1.25 of the 

CFTC Regulations . . . likely strike[ ] 

the right balance between flexibility and 

the protection of the value of the 

collateral.’’ 113

Regulation 1.25 establishes a general 

prudential standard used in the futures 

and cleared swaps markets that requires 

all permitted investments of customer 

segregated funds to be consistent with 

the objectives of preserving principal 

and maintaining liquidity.114 As stated 

by the Commission in regulation 1.25’s 

adopting release, ‘‘[i]n finalizing 

amendments to Regulation 1.25, the 

Commission seeks to impose 

requirements on the investment of 

customer segregated funds with the goal 

of enhancing the preservation of 

principal and maintenance of liquidity 

consistent with Section 4d of the Act.’’ 

Similarly, the Commission believes 

that applying the requirements of 

regulation 1.25 to uncleared swaps will 

increase the safety and maintain the 

liquidity of counterparty funds held by 

the custodian. Regulation 1.25 

establishes a general prudential 

standard by requiring that all permitted 

investments be ‘‘consistent with the 

objectives of preserving principal and 

maintaining liquidity.’’ 115 While such a 

standard may lead to lower investment 

returns, lower investment returns 

correlate to decreased investment risk 

and must be viewed in the context of 

the importance of protecting 

counterparties’ collateral and mitigating 

systemic risk that could result from the 

loss of access to such collateral and, in 

turn, adversely impact the stability of 

the U.S. financial markets. After 

considering the comments, the 

Commission has decided to adopt the 

rule as proposed. The Commission 

believes that the rule achieves the 

appropriate balance between the goals 

of protecting counterparties’ collateral 

and mitigating systemic risk, on the one 

hand, and the goals of retaining an 

appropriate degree of investment 

flexibility and opportunities for 

attaining capital efficiency for DCOs and 

FCMs investing customer segregated 

funds, on the other hand.’’ 116

It should be noted that § 23.703(a) 

only restricts the manner in which an 

SD or MSP may invest margin that is 

segregated pursuant to an election under 

§ 23.701. This rule does not in any way 

restrict the types of collateral that a 

counterparty may post to an SD or MSP, 

nor does it require an SD or MSP to 

convert, in any way, posted 

collateral.117

In addition, as discussed above, the 

Commission notes that requiring the 

segregation of variation margin would 

be beyond the scope of section 4s(l) of 

the statute and what Congress 

prescribed therein.118 However, the 

Commission believes that it would be 

consistent with that statute to allow the 

parties to agree to have segregation 

arrangements for variation margin. 

Moreover, the Commission 

acknowledges that where a counterparty 

and its SD or MSP have agreed to 

segregate both initial margin and 

variation margin, such margin may be 

commingled and held in the same 

account. But, to the extent that the 

parties agree to commingle segregated 

initial and variation margin, the 

Commission clarifies that the 

requirements set forth in Subpart L to 

this Part 23, including the investment 

restrictions in regulation 23.703(a), 

would apply to all margin held (both 

initial margin and variation margin) in 

such account. 

2. Commercial Arrangements Regarding 

Investments and Allocations 

As required by section 4s(l)(2)(B)(ii) of 

the CEA and subject to the limitations 

set forth in regulation 23.603(a), 

proposed regulation 22.603(b) provided 

that the SD or MSP and the counterparty 

may enter into any written commercial 

arrangement regarding the terms of the 

investment of segregated margin and the 

related allocation of gains and losses 

resulting from such investment. The 

Commission is adopting this aspect of 

the rule as proposed.119

E. Regulation 23.704: Requirements for 

Non-Segregated Margin 

Section 4s(l)(4) of the CEA mandates 

that, if the counterparty does not choose 

to require segregation, the SD or MSP 

shall report to the counterparty, on a 


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120 7 U.S.C. 6s(l)(4). 

121Proposed regulation 23.604 is being finalized 

herein as regulation 23.704. 

122Working Group, AIMA, ISDA and SIFMA/

ISDA. 

123Working Group letter at 5–6. See also SIFMA/ 

ISDA letter at 7 and ISDA letter at 8. 

124SIFMA/ISDA letter at 7 and ISDA letter at 9. 

125SIFMA/ISDA letter at 7 and ISDA letter at 8. 

126Working Group letter at 6. 

127SIFMA/ISDA letter at 7 and ISDA letter at 8. 

128Working Group letter at 3. 

129 Id. 

130AIMA letter at 3. 

131The reporting requirement found in section 

4s(l)(4) of the CEA states that if the counterparty 

does not choose to require segregation of the funds 

or other property supplied to margin, guarantee, or 

secure the obligations of the counterparty, the swap 

dealer or major swap participant shall report to the 

counterparty of the swap dealer or major swap 

participant on a quarterly basis that the back office 

procedures of the swap dealer or major swap 

participant relating to margin and collateral 

requirements are in compliance with the agreement 

of the counterparties. 

132See generally section 4s(k)(2)(E) of the CEA 

(stating that the chief compliance officer shall 

‘‘ensure compliance with the [CEA] (including 

regulations) relating to swaps, including each rule 

prescribed by the Commission under [section 4s].’’) 

133SIFMA/ISDA letter at 8. See also ISDA letter 

at 9. 

134Working Group letter at 7. See also ICI letter 

at 6. 

135The Commission proposed to define 

‘‘customer’’ as follows: ‘‘Customer shall have the 

same meaning as that set forth in section 761(9) of 

the Bankruptcy Code. To the extent not otherwise 

included, customer shall include the owner of a 

portfolio margining account carried as a futures 

account.’’ 

136The Commission proposed to include ‘‘To the 

extent not otherwise included, securities held in a 

portfolio margining account carried as a futures 

account’’ in the definition of ‘‘customer property.’’ 

75 FR at 75435 (Dec. 10, 2010). 

137 ICE, AIMA, ICI. 

138 ICE letter at 2. 

139 Id. at 3. 

140 Id. at 2. 

quarterly basis, ‘‘that the back office 

procedures of the swap dealer or major 

swap participant relating to margin and 

collateral requirements are in 

compliance with the agreement of the 

counterparties.’’ 120 Proposed regulation 

23.604(a) 121 implemented this 

provision and required that such reports 

be made no later than the fifteenth 

(15th) business day of each calendar 

quarter for the preceding calendar 

quarter. Proposed regulation 23.604(a) 

made the Chief Compliance Officer of 

the SD or MSP responsible for such 

report. In addition, proposed regulation 

23.604(b) provided that this obligation 

shall apply no earlier than the 90th 

calendar day after the date on which the 

first swap is transacted between the 

counterparties. 

Four commenters discussed this 

proposal.122 The Working Group wrote 

that quarterly report of back office 

compliance for swaps with nonsegregated margin is unnecessarily 

burdensome.123 SIFMA and ISDA also 

argued that the requirement for a Chief 

Compliance Officer statement would be 

burdensome.124

SIFMA and ISDA went further, 

suggesting that disclosure should not be 

required especially where the relevant 

SD/MSP is permitted to freely sell, 

pledge, rehypothecate, assign, invest, 

use, commingle, or otherwise dispose of 

any independent amount that it holds, 

since any such disclosure would be 

meaningless.125

The Working Group argued that an 

initial representation as to compliance 

should be treated as renewed each 

quarter unless altered by the SD or 

MSP.126 SIFMA and ISDA proposed 

giving the counterparty permission to 

waive receipt of the quarterly 

disclosure.127

The Working Group also suggested 

that in addition to forgoing or electing 

segregation under the rule, parties may 

choose to segregate outside of the 

proposed rule.128 For example, the 

Working Group stated that a 

counterparty may wish to have its 

collateral held in an SD’s omnibus 

customer account, and that such 

agreements should be permitted.129

By contrast AIMA agreed with the 

proposal for reporting on a regular basis 

and suggested that reporting also occur 

immediately following entry of a swap 

agreement.130

While quarterly reporting may impose 

certain administrative burdens on SDs 

and MSPs, such quarterly reporting, as 

contemplated by regulation 23.704, is 

expressly required by the statute.131 The 

Commission agrees that since a 

counterparty may choose not to 

segregate at all, it also may elect to 

segregate in some lesser manner than 

that contemplated by regulation 23.702. 

However, the Commission notes that, 

for counterparties who do not choose 

segregation, as contemplated by section 

4s(l)(1)(B) of the CEA, the purpose of 

section 4s(l)(4) of the CEA is to confirm 

that the SD or MSP is adhering to the 

obligations of their agreement. 

Therefore, the requirements of 

regulation 23.704 will apply to all 

agreements relating to uncleared swaps 

for which the counterparty does not 

elect to segregate initial margin 

pursuant to regulation 23.702. 

Moreover, the Commission believes that 

placing responsibility for the report 

with the chief compliance officer of the 

SD or MSP required by Section 4s(k) of 

the CEA is appropriate in light of the 

chief compliance officer’s role in 

making sure the SD or MSP complies 

with its statutory and regulatory 

obligations.132 The Commission is 

adopting the rule as proposed. 

F. Compliance Date 

In the NPRM, the Commission 

requested comment on the appropriate 

timing of effectiveness for the final rules 

for Part 23. SIFMA/ISDA recommended 

a 6 month implementation period for 

swaps that are entered into with new 

counterparties and a 12 month 

implementation period for swaps that 

are entered into with existing 

counterparties.133 The Working Group 

recommended a 12 month 

implementation period.134 After 

consideration of the comments, the 

Commission has decided to adopt 

SIFMA/ISDA’s suggestion, which would 

provide a 6 month implementation 

period for swaps that are entered into 

with ‘‘new counterparties’’ and a 12 

month implementation period for swaps 

that are entered into with ‘‘existing 

counterparties.’’ 

III. Portfolio Margining 

The NRPM proposed changes to the 

definition of ‘‘customer’’ in 

§ 190.01(k) 135 and the definition of 

‘‘customer property’’ in 

§ 190.08(a)(1)(i)(F) 136 to implement 

section 713(c) of the Dodd-Frank Act, 

which added section 20(c) of the CEA 

and stated that the Commission ‘‘shall 

exercise its authority to ensure that 

securities held in a portfolio margining 

account carried as a futures account are 

customer property and the owners of 

those accounts are customers for the 

purposes of’’ subchapter IV of chapter 7 

of the U.S. Bankruptcy Code. 

The Commission received three 

comments on these proposals.137 ICE 

agreed with the proposed amendments 

to the definition of ‘‘customer’’ and 

‘‘customer property’’ stating that the 

proposal was ‘‘a necessary step toward 

realizing the important benefits of 

portfolio margining for market 

participants.’’ 138 ICE also expressed 

concern that the reference to ‘‘futures 

account’’ while excluding swaps 

referred to in 4d(f) of the CEA would 

‘‘create artificial and unnecessary 

distinctions between futures and other 

products regulated by the 

Commission,’’ 139 and would detract 

from the ‘‘certainty for the treatment in 

insolvency of portfolio margining 

arrangements that include both swaps 

and securities.’’ 140 As such, ICE 

requested a technical clarification to 

make clear that the treatment in 

insolvency of portfolio margining 

arrangements includes arrangements 


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141 Id. at 2. 

142AIMA letter at 3. 

143 ICI letter at 6–7. 

144See Protection of Cleared Swaps Customer 

Contracts and Collateral; Conforming Amendments 

to the Commodity Broker Bankruptcy Provisions, 77 

FR 6336 (Feb. 7, 2012). 

145 5 U.S.C. 601 et seq. 

146 5 U.S.C. 601(2), 603, 604 and 605. 

147 75 FR 75432, 75435–36 (Dec. 3, 2010). 148See 77 FR 48208, 48306 (Aug. 13, 2012); 

Further Definition of ‘‘Swap,’’ ‘‘Security-Based 

Swap,’’ and ‘‘Security-Based Swap Agreement’’; 

Mixed Swaps; Security-Based Swap Agreement 

Recordkeeping, citing 76 FR 29868–29869 (May 23, 

2011). See also, Swap Dealer and Major Swap 

Participant Recordkeeping, Reporting, and Duties 

Rules; Futures Commission Merchant and 

Introducing Broker Conflicts of Interest Rules; and 

Chief Compliance Officer Rules for Swap Dealers, 

Major Swap Participants, and Futures Commission 

Merchants, 77 FR 20128, 20193 (Apr. 3, 2012); 

Registration of Swap Dealers and Major Swap 

Participants, 77 FR 2613, 2620 (Jan. 19, 2012), citing 

75 FR 71379, 71385 (Nov. 23, 2010) (Registration of 

Swap Dealers and Major Swap Participants). 

149The Small Business Administration (‘‘SBA’’) 

identifies (by North American Industry 

Classification System codes) a small business size 

standard of $7 million or less in annual receipts for 

Subsector 523—Securities, Commodity Contracts, 

and Other Financial Investments and Related 

Activities. 13 CFR 121.201 (1–1–11 Edition). 65 FR 

30840 (May 15, 2000). 

150Further Definition of ‘‘Swap Dealer,’’ 

‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap 

Participant’’ and ‘‘Eligible Contract Participant,’’ 77 

FR 30596, 30701 (May 23, 2012). 

151See id. 

152 77 FR at 30701 (May 23, 2012). See also 

‘‘Registration of Swap Dealers and Major Swap 

Participants,’’ 77 FR 2613, 2620 (Jan. 19, 2012) 

(‘‘Registration Adopting Release’’) (‘‘In terms of 

affecting a substantial number of small entities . . . 

the Commission is statutorily required to exempt 

from designation as an SD those entities that engage 

in a de minimis quantity of swaps dealing.’’). 

153NRECA letter at 16. 

involving swaps.141 AIMA also 

indicated its approval of the proposed 

amendments to the definition of 

‘‘customer’’ and ‘‘customer 

property,’’ 142 and ICI supported the 

proposed amendment as an 

implementation of section 713(c) of the 

Dodd-Frank Act.143

After careful consideration of the 

comments, the Commission agrees that 

Congress, in directing the Commission 

to clarify the treatment of ‘‘securities’’ 

held in a ‘‘futures account,’’ did not 

mean to imply that securities held in a 

Cleared Swaps Customer Account 

would not be treated as customer 

property. Accordingly, the Commission 

will adopt a technical clarification, as 

suggested by ICE’s comments, to avoid 

the implication that portfolio margining 

arrangements involving swaps do not 

receive the same bankruptcy protection 

as portfolio margining arrangements 

involving futures. Thus, where the 

Commission has referred to a ‘‘futures 

account’’ in the definition of 

‘‘customer’’ in § 190.01(k) and the 

definition of ‘‘customer property’’ in 

§ 190.08(a)(1)(i)(F), the Commission is 

adding a reference to a ‘‘Cleared Swaps 

Customer Account.’’ The Commission is 

otherwise adopting these changes as 

proposed. 

The Commission also proposed 

certain technical corrections to sections 

190.02 and 190.06. The Commission 

notes, however, that substantively 

identical technical corrections were 

completed in a prior rulemaking, and 

thus no further action is necessary in 

this regard herein.144

IV. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires Federal agencies to 

consider the impact of its rules on 

‘‘small entities.’’ 145 A regulatory 

flexibility analysis or certification 

typically is required for ‘‘any rule for 

which the agency publishes a general 

notice of proposed rulemaking pursuant 

to’’ the notice-and-comment provisions 

of the Administrative Procedure Act, 5 

U.S.C. 553(b).146

With respect to the proposed release, 

while the Commission provided an RFA 

statement that the proposed rule would 

impose regulatory obligations on SDs 

and MSPs and noted that SDs and MSPs 

were new categories of registrants, the 

Commission determined that the SDs 

and MSPs were like FCMs and large 

traders that have been determined not to 

be small entities.147 Thus, in the 

proposal, the Commission certified that 

the rulemaking would not have a 

significant economic effect on a 

substantial number of small entities. 

Comments on that certification were 

sought. 

As indicated in the NPRM, the final 

rule will impose regulatory obligations 

on SDs and MSPs. The conclusion that 

the rule will not have a significant 

economic impact on a substantial 

number of small entities within the 

meaning of the RFA remains valid for 

the final rule, which like the proposed 

rule, imposes duties only on SDs and 

MSPs. Subsequent to the publication of 

the NPRM for this rule, the Commission 

has determined in other rulemakings 

that SDs and MSPs should not be 

considered small entities based on their 

size and characteristics analogous to 

non-small entities that pre-dated the 

adoption of the Dodd-Frank Act and has 

certified that these entities are not small 

entities for RFA purposes.148 As stated 

in prior rules, because of the SDs and 

MSPs size and characteristics and the 

‘‘de minimis’’ requirements, SDs and 

MSPs should not be considered small 

entities for purposes of the RFA and 

SBA regulations.149 Nevertheless, in the 

‘‘entities’’ rule that further defined the 

terms SD and MSP, supplementing the 

statutory definitions of those terms, the 

Commission expected that if any small 

entity were to engage in the activities 

covered by the definition, most such 

entities would be eligible for the ‘‘de 

minimis’’ exception from the 

definition.150 Also, the Commission 

noted that the MSP participant 

definition applies only to persons with 

very large swap positions, and therefore 

the definition of MSP is incompatible 

with small entity status.151 Thus, the 

‘‘entities’’ final rule concluded that the 

rule, insofar as it affected SDs and 

MSPs, would not have a significant 

economic impact on a substantial 

number of small entities.152 The same 

reasoning applies to the present rule. 

One commenter, representing a 

number of market participants in the 

energy business, submitted a comment 

related to the RFA, stating that ‘‘[e]ach 

of the complex and interrelated 

regulations currently being proposed by 

the Commission has both an individual, 

and a cumulative, effect on . . . small 

entities.’’ 153 Upon consideration of this 

commenter’s statements, the CFTC notes 

that it is not required to consider the 

cumulative economic impact of the 

entire mosaic of rules under the DoddFrank Act, since an agency is only 

required to consider the impact of how 

it exercises its discretion to implement 

the statute through a particular rule. In 

all rulemakings, the Commission 

performs an RFA analysis for that 

particular rule. The observations of this 

commenter therefore do not provide a 

reason to conclude that the rules being 

promulgated in this rulemaking will 

have a significant economic impact on 

a substantial number of small entities 

within the legal meaning of the RFA. 

This is so because, as explained above, 

the rules in question impose duties only 

on SDs and MSPs and not on other 

entities, small or otherwise. 

Accordingly, the Chairman, on behalf 

of the Commission, hereby certifies 

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

rules will not have a significant 

economic impact on a substantial 

number of small entities. 

B. Paperwork Reduction Act 

1. Introduction 

Provisions of new regulation Part 23, 

specifically regulations 23.701 and 

23.704, include information disclosure 

requirements that constitute the 

collection of information within the 

meaning of the Paperwork Reduction 


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154 44 U.S.C. 3501 et seq. 

155 Id. 

156See generally Notice of Proposed Rulemaking, 

Privacy of Consumer Financial Information; 

Conforming Amendments Under Dodd-Frank Act 

75 FR 66014 (Oct. 27, 2010). 

157 In the NPRM these provisions were numbered 

as regulation 23.601 and 23.604. 

158The comments referred to regulation 23.601, 

reflecting the numbering in the NPRM. 

159 ISDA letter at 5. 

160SIFMA/ISDA letter at 4. 

161See discussion in Registration of Swap Dealers 

and Major Swap Participants, 77 FR 2613, 2622 

(Jan. 19, 2012). 

162This estimate is based on the assumption that 

about three quarters of the work will be done by 

junior level staff with a salary of approximately $25 

per hour and that about one quarter of the work will 

be done by senior level staff with a salary of 

approximately $100 per hour. Compare SIFMA, 

Report on Management and Professional Earnings 

in the Securities Industry-2011 at 4 (national 

average total compensation for a junior level 

compliance specialist in the survey equaled $50,998 

per year, an hourly equivalent of approximately 

$25), 8 (national average total compensation for a 

compliance attorney in the survey equaled $131,304 

per year, an hourly equivalent of approximately 

$65). 

163The estimate in the NPRM assumed that the 

largest SDs and MSPs would make the required 

disclosure to an average of 5,000–10,000 

counterparties per year and that smaller SDs and 

MSPs would make the required disclosure to an 

average of about 200 counterparties per year. See 75 

FR at 75436 (Dec. 3, 2010) and n. 29. 

Act of 1995 (‘‘PRA’’).154 The 

Commission therefore has submitted 

this 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.155 The 

title for this collection of information is 

‘‘Disclosure and Retention of Certain 

Information Relating to Swaps Customer 

Collateral,’’ OMB Control Number 

3038–0075, which has been submitted 

to OMB for approval. The 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.156

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 OMB control 

number. 

2. Comments Received on Collection of 

Information Proposed in NPRM 

Estimates of the expected information 

collection burden related to regulations 

23.701 and 23.704 were published for 

comment in the NPRM.157 General 

comments on these regulations and the 

Commission’s response are discussed in 

a previous section of this preamble. The 

Commission received two comments 

specifically addressing the 

Commission’s numerical PRA burden 

estimate for regulation 23.701.158 A 

comment from ISDA stated that the 

annual burden estimate of 0.3 hours per 

counterparty for this requirement 

appeared insufficient. The comment 

stated: 

Specifically, the following 

documentation-related functions would 

be necessary: Scheduling, drafting, 

issuing, tracking, receipt, validation, 

classification and storage. As a result, 

we believe that the process 

contemplated by the Proposed Rules 

would entail multiple hours of staff time 

per counterparty.159

The second comment made 

substantially the same point.160 In 

response to these comments, and certain 

other considerations, the Commission 

has reevaluated the per-disclosure 

burden estimate for regulation 23.701 

and has modified the estimate as 

discussed below. 

3. Adjustments to Estimate of 

Information Collection Burden Based on 

New Estimate of Expected Total Number 

of Swap Dealers and Major Swap 

Participants 

The Commission has determined to 

adjust the burden estimate for 

Regulations 23.701 and 23.704 based on 

a number of considerations. Both 

regulations apply to SDs and MSPs. At 

the time the NPRM was published, it 

was estimated, for purposes of the PRA 

burden estimate, that the total number 

of SDs and MSPs would be about 300 

entities. Based on information 

developed since that time, the 

Commission now estimates that the total 

number of SDs and MSPs, and thus the 

total number of entities required to 

engage in information collection 

pursuant to these rules, will be about 

125 entities.161

For the disclosure required by 

regulation 23.701 the Commission is 

also adjusting its estimate of the per 

disclosure burden, for a number of 

reasons. First, the final regulation 

requires that the disclosure (a) identify 

one or more custodians for segregated 

initial margin acceptable to the SD or 

MSP, at least one of which must be 

legally independent of the parties to the 

transactions and (b) provide information 

on the price of segregation for each 

identified custodian to the extent that 

the SD or MSP has such information. As 

a result of these changes, it is expected 

that part of the disclosure required by 

the regulation will be standardized, 

with accompanying efficiencies in 

drafting and making disclosure, but that 

part of the disclosure may be specific to 

particular transactions. Second, as noted 

above, commenters suggested that the 

burden estimate in the NPRM was 

insufficient to cover all of the tasks 

necessary to make the required 

disclosure. 

In the NPRM, the Commission 

estimated that disclosure required by 

regulation 23.701 would require 0.3 

hours of work per disclosure, which 

could be performed by staff with a 

salary level of approximately $20 per 

hour. The Commission has adjusted this 

time estimate to 2 hours per disclosure 

based on the considerations discussed 

immediately above. The Commission 

further estimates that the average dollar 

cost of the disclosure per hour will be 

$50, giving a cost of $100 for 2 hours of 

work.162 In addition, for purposes of the 

NPRM, the Commission estimated that 

each SD and MSP would make the 

disclosure once per year to an average 

of between 433 and 666 

counterparties.163 The Commission is 

adjusting the estimate of number of 

disclosures per SD or MSP per year 

based on the reduction, noted above, in 

the estimate of the total number of SDs 

and MSPs from about 300 to about 125. 

Assuming a roughly similar total 

number of counterparties will be doing 

business with SDs and MSPs, this 

implies that the number of 

counterparties doing business with each 

individual SD or MSP in a year will 

probably be higher on average than was 

estimated at the time of the NPRM. To 

account for this likely effect, the 

Commission now estimates that each SD 

and MSP will, on average, make the 

disclosure to approximately 1300 

counterparties each year. As at the time 

of the NPRM, the Commission expects 

that the number of counterparties per 

SD or MSP per year is likely to be 

considerably higher than this average 

figure for the largest SDs and MSPs, and 

smaller than this average figure for some 

other SDs and MSPs. Given the absence 

of experience with this newly 

promulgated rule, these estimates are 

subject to an inherent degree of 

uncertainty. 

The Commission, in the NPRM, 

estimated that regulation 23.701 would 

require a total of approximately 

130,000–200,000 disclosures per year, 

generating an estimated total annual 

information collection burden of 

approximately 40,000–60,000 hours and 

$800,000–$1,200,000. Based on the 

adjustments described above the 


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164This estimate in the NPRM was based on the 

requirement of regulation 23.704 that SDs and 

MSPs make the required disclosure four times each 

year to each of their uncleared swaps counterparties 

that does not choose to require segregation of initial 

margin. It was further based on estimates that each 

disclosure would require, on average, 

approximately 0.3 hours of staff time by staff with 

a salary level of approximately $30 per hour 

although, per the terms of the rule, this would vary 

depending on the specifics of the agreement of the 

parties with regard to the back-office procedures of 

the SD or MSP and the extent to which such 

procedures were standardized. The estimate further 

assumed that about half of all uncleared swaps 

counterparties would not choose segregation of 

initial margin and that, as a result, the largest SDs 

and MSPs would make the required disclosure to 

an average of 2,500–5,000 counterparties four times 

per year and that smaller SDs and MSPs would 

make the required disclosure to an average of about 

100 counterparties four times per year. See 75 FR 

at 75436 (Dec. 3, 2010) and n. 30; SIFMA, Report 

on Management and Professional Earnings in the 

Securities Industry-2011 at 4 (national average total 

compensation for a junior level compliance 

specialist in survey equaled $50,998 per year, an 

hourly equivalent of approximately $25). 

165 75 FR at 75437 (Dec. 3, 2010). 

166FHLB letter at 6, MetLife letter at 2, EEI letter 

at 3. 

167SIFMA/ISDA letter at 4, ISDA letter at 4, AMG 

letter at 7. 

168Federated letter at 7, 11. 

169Working Group letter at 6. 

170 7 U.S.C. 19(a). 

Commission estimates that regulation 

23.701 will require a total of 

approximately 162,500 disclosures per 

year, generating an estimated total 

annual information collection burden of 

approximately 325,000 hours and cost 

of $16,250,000. 

The Commission, in the NPRM, 

estimated that regulation 23.704 would 

require a total of approximately 

260,000–400,000 disclosures per year, 

generating an estimated total annual 

information collection burden of 

approximately 80,000–120,000 hours 

and $2,400,000–$3,500,000.164 The 

Commission is adjusting this estimate 

based on the reduced estimate of the 

number of affected SDs and MSPs from 

300 to 125, and the increased estimate 

of 1300 counterparties per SD or MSP. 

In the absence of more specific 

information, the Commission continues 

to assume for purposes of this 

calculation that half of counterparties 

will elect not to segregate, and will 

receive the required quarterly 

disclosure. The Commission notes that 

the cost per counterparty can be divided 

into two costs: An initial cost and an ongoing, annual cost. In respect of the 

initial cost, the Commission estimates a 

total of twenty hours of the Chief 

Compliance Officer’s time to prepare 

and design the SD or MSP’s compliance 

procedures for its 23.704 disclosure 

requirements. In respect of ongoing 

costs, the Commission recognizes that, 

while the degree of disclosure to 

particular counterparties may differ 

(e.g., agreements may require no 

disclosure, high-level disclosure only or 

more in-depth disclosure), it is likely 

that the levels of disclosures may 

coalesce around certain intervals such 

that efficiencies may be observed in 

respect of analysis and preparation of 

current disclosures and ongoing updates 

to the same. The Commission estimates 

that the Chief Compliance Officer will 

spend five hours, on an annual basis, 

updating the existing procedures and 

reviewing compliance with such 

procedures as well as an additional 

hour, on a non-regular basis in perhaps 

2% of the cases, addressing non-routine 

issues that may arise in respect of a 

particular disclosure to a counterparty. 

The Commission further estimates that 

a junior compliance officer will spend, 

on average, approximately 0.3 hours per 

counterparty on a quarterly basis, 

analyzing the procedures followed and 

preparing the disclosure to be sent. 

Based on these adjustments, the 

Commission now estimates that 

regulation 23.704 will require initial 

costs of approximately $280,000 and, on 

an ongoing basis, a total of 

approximately 325,000 disclosures per 

year generating an estimated total 

annual information collection burden of 

approximately $3.7 million, based on 

the following: An annual cost of $29,300 

per SD/MSP comprising eighteen hours 

for the Chief Compliance Officer with a 

salary level of approximately $110.97 

per hour and the annual cost of 780 

hours for junior compliance staff with a 

salary level of approximately $35 per 

hour, multiplied by an estimated 125 

SD/MSPs. 

C. Cost-Benefit Considerations 

1. Background 

Prior to the passage of the Dodd-Frank 

Act, the decision to segregate and the 

mechanics of such segregation were 

unregulated and left to the negotiation 

of the parties to the swap. Under new 

CEA section 4s(l)(1)(A), an SD or MSP 

is required to notify the counterparty of 

its right to segregation. Upon request by 

the counterparty, the SD or MSP must 

segregate the funds for the benefit of the 

counterparty, among other requirements 

under section 4s(l)(1)(B). Other 

paragraphs of section 4s(l) outline the 

applicability of the segregation 

notification, the nature of the custodian 

and the reporting requirement for 

unsegregated initial margin. 

This legislative act is indicative of 

Congress’s broad intent to increase the 

safety of the swaps market. While many 

aspects of Title VII of the Dodd-Frank 

Act promote the increased clearing of 

swaps, section 4s(l) indicates Congress’ 

intent to increase the safety in the 

market for uncleared swaps by creating 

a self-effectuating requirement for the 

segregation of counterparty initial 

margin in an entity legally separate from 

the SD or MSP. 

In the NPRM, the Commission invited 

the public ‘‘to submit any data or other 

information that they may have 

quantifying or qualifying the costs and 

benefits of the proposal with their 

comment letters.’’ 165 The Commission 

received no such quantitative data or 

information with respect to these rules. 

While the Commission did not receive 

comments directly on the costs and 

benefit analysis, it did receive 

comments that alluded to costs, as 

discussed in more detail in the sections 

below. For example, some commenters 

believed that the notification of 

counterparties of their right to 

segregation would create an 

administrative cost (although no 

commenters attempted to quantify such 

costs). FHLB, MetLife and EEI 

characterized transaction-by-transaction 

notification as repetitive and 

redundant.166 Some commenters 

believed that even yearly notification 

was unnecessary.167 On the topic of 

investing initial margin only as allowed 

under regulation 1.25, Federated 

directly stated that this would cause a 

loss of investment returns.168 Finally, 

the Working Group wrote that requiring 

quarterly reporting for non-segregated 

margin would be unnecessarily 

burdensome, indicating that producing 

such reports might create a needless 

administrative cost.169

2. Statutory Mandate To Consider Costs 

and Benefits 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its action before 

promulgating a regulation.170 In 

particular, costs and benefits must be 

evaluated in light of five broad areas of 

market and public concern: (1) 

Protection of market participants and 

the public; (2) efficiency, 

competitiveness, and financial integrity 

of futures markets; (3) price discovery; 

(4) sound risk management practices; 

and (5) other public interest 

considerations. Accordingly, the 

Commission considers the costs and 

benefits resulting from its own 

discretionary determinations with 

respect to the section 15(a) factors. 

In issuing these final rules, the 

Commission has considered the costs 

and benefits of each aspect of the rules, 

as well as alternatives to them. In 

addition, the Commission has evaluated 


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Federal Register / Vol. 78, No. 215 / Wednesday, November 6, 2013 / Rules and Regulations 66633 

171See CEA section 4s(l)(1)(A) (A swap dealer or 

major swap participant shall be required to notify 

the counterparty of the swap dealer or major swap 

participant at the beginning of a swap transaction 

that the counterparty has the right to require 

segregation.). 

172See generally Further Definition of ‘‘Swap 

Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major 

Swap Participant,’’ ‘‘Major Security-Based Swap 

Participant’’ and ‘‘Eligible Contract Participant,’’ 77 

FR 30596 (May 23, 2012). 

comments received regarding costs and 

benefits in response to its proposal. 

Where quantification has not been 

reasonably estimable due to lack of 

necessary underlying information, the 

Commission has considered the costs 

and benefits of the final rules in 

qualitative terms. 

3. Benefits and Costs of the Final Rule 

A discussion of the costs and benefits 

of this rule and the relevant comments 

is set out immediately below and 

continues in the discussion of the 

section 15(a) factors. The discussion of 

costs and benefits here should be read 

in conjunction with the discussion of 

rule provisions and comments in the 

remainder of the preamble, which was 

also taken into account in the 

Commission’s overall consideration of 

costs and benefits as part of its decision 

to promulgate the rule. 

The major provisions of this final rule 

reflect specific requirements compelled 

by the CEA, as amended by the DoddFrank Act. This discussion of costs and 

benefits focuses on the areas in which 

the Commission used its discretion to 

introduce standards or requirements 

beyond those which were required by 

statute. 

a. Benefits 

The final rule, in regulation 23.701(e), 

requires notification of the right to 

segregation once per each year that a 

new swap is entered into rather than, 

e.g., at the beginning of a swap 

transaction or notification only when a 

counterparty first does business with 

the SD or MSP. Annual notification 

offers the benefit of ensuring that the 

right to segregation is called to the 

attention of counterparties reasonably 

close in time to the point at which 

decisions are made with respect to the 

handling of collateral for particular 

swaps transactions without requiring 

excessive or repetitive notification in 

cases where a counterparty engages in 

multiple swaps with a particular SD or 

MSP over the course of a year. Annual 

notification also reduces the likelihood 

that required information regarding 

custodians and pricing will become 

obsolete, which would be a significant 

possibility if notification were given 

only at the beginning of a multi-year 

business relationship between a 

counterparty and the SD or MSP. 

The final rule, in regulation 

23.701(a)(2), requires the SD or MSP to 

identify, in the notification, at least one 

creditworthy non-affiliate acceptable to 

the SD or MSP as a custodian. As 

discussed above, there are benefits to 

requiring that the counterparty have the 

option of using a non-affiliate custodian 

for collateral because of the likely 

higher correlation of default risk 

between an affiliate custodian and the 

SD or MSP. There are also benefits to 

requiring the identity of such a 

custodian acceptable to the SD or MSP 

to be specifically disclosed because the 

identity of the custodian is a material 

aspect of any segregation package. 

The final rule also requires, in 

regulation 23.701(a)(3), the SD or MSP 

to provide the counterparty with the 

price of segregation to the extent that 

the SD or MSP has such information 

(e.g., where the custodian is an affiliate 

of, or a regular custodian for, the SD or 

MSP). Requiring the SD or MSP to 

disclose price information that it has 

available is beneficial because 

knowledge of the price of segregation is 

essential in order for the counterparty to 

determine the net value of choosing 

segregation. In transactions in which the 

parties have agreed that a withdrawal of 

segregated margin may be made without 

the written consent of both the 

counterparty and the SD or MSP, the 

final rule, in regulation 23.702(c)(2), 

includes a perjury standard for a party 

unilaterally representing to the 

custodian that it is entitled to segregated 

initial margin. The benefit of a perjury 

standard for unilateral requests for 

collateral is that it provides a 

disincentive to parties who might 

otherwise be inclined to fraudulently 

request collateral, particularly in 

circumstances where financial distress 

may create incentives to cut corners. 

The final rule requires, in regulation 

23.703(a), that any investments of 

segregated initial margin given to an SD 

or MSP conform to regulation 1.25. 

While not required by statute, this 

aspect of the final rule is beneficial 

because it will serve to safeguard 

segregated initial margin in the same 

way that regulation 1.25 safeguards 

futures and cleared swaps customer 

collateral. Without this requirement, 

there exists a possible moral hazard 

concern that an SD or MSP may engage 

in excessive risk taking with the funds 

of a counterparty. This moral hazard 

arises out of either (i) lack of customer 

awareness, (ii) agency costs facing the 

customer that make it difficult to 

contract around issues of collateral use 

(e.g., monitoring costs of the SD’s or 

MSP’s activities by the customer), or 

(iii) existence of a potential government 

backstop, which lessens the incentive of 

either SDs or MSPs or their customers 

to impose restrictions on collateral 

investment. 

The final rule, in regulation 23.704(a), 

also makes the Chief Compliance Officer 

of the SD or MSP required by section 

4s(k) of the CEA responsible for the 

report to each counterparty that elects 

not to require segregation whether or 

not the back office procedures relating 

to margin and collateral requirements of 

the SD or MSP were out of compliance 

with the agreement between the SD or 

MSP and the counterparty, consistent 

with the Chief Compliance Officer’s 

section4s(k)(2)(D) of the CEA duties. 

This provision should enhance 

compliance by SDs and MSPs with 

these aspects of their agreements with 

their counterparties by highlighting 

breaches and by incentivizing SDs and 

MSPs to avoid breaches that would have 

to be reported. Compliance by SDs and 

MSPs with provisions concerning 

margin and collateral requirements 

should lead to better protection of 

counterparties in the event of the 

insolvency of the SD or MSP. 

b. Costs 

As noted previously, the final rule, in 

regulation 23.701(e), requires yearly 

notification of the right to segregation. 

This is less costly than a requirement 

that such notification be given with 

each swap transaction, which would 

result from a more literal reading of the 

statute.171

An estimate of the cost of the required 

yearly notification is given in the 

Paperwork Reduction Act section of this 

preamble, above. The Commission 

believes that the cost of requiring SDs 

and MSPs to deliver one notification per 

year to each counterparty is not overly 

burdensome, particularly when one 

considers the importance of the 

counterparty’s decision to require 

segregation and the large dollar volume 

of business that is typically done by SDs 

and MSPs.172 The increased cost 

associated with an annual notification 

requirement, as compared to a 

requirement that notification only be 

required at the beginning of a swap 

relationship between the parties as was 

urged by some commenters, is the 

difference in the administrative costs of 

sending each additional yearly 

notification as opposed to just one 

initial notification. Commenters who 

favored less-than-annual notification 

did not provide specific estimates of 

this cost difference. Based on its 

assessment of the cost of annual 

notification, the Commission does not 


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66634 Federal Register / Vol. 78, No. 215 / Wednesday, November 6, 2013 / Rules and Regulations 

173For the Commission’s analysis and estimate of 

the costs of annual notification, please see the 

discussion in the Paperwork Reduction Act section 

of this preamble, above. 

174See generally 7 U.S.C. 6d. 

175This range is based on an average yield on 10- 

year T-bonds between 4% and 6% and a long-run 

annualized return on equities between 6% and 8%. 176SIFMA/ISDA letter at 3 and ISDA letter at 

3–4. 

177 ICI letter at 3. 

178State Street letter at 3. 

179See generally MFA Letter at 4 and State Street 

letter at 3. 

believe that this cost difference would 

impose an unreasonable burden.173

The requirement that SDs or MSPs 

reveal to counterparties the identity of 

one or more potential custodians (one of 

which must be unaffiliated), and their 

respective prices of segregation, should 

impose minimal costs. It is likely that 

both the identities of custodians and 

related pricing information would, in 

the ordinary course, be included in any 

negotiation between an SD or MSP and 

a counterparty. In any event, the SD’s or 

MSP’s own custodial and pricing 

decisions are known (or certainly 

readily knowable) by the SD or MSP, 

and thus requiring them to be disclosed 

should introduce minimal cost upon the 

SD or MSP. There may be an 

administrative cost to the SD or MSP in 

initially selecting an unaffiliated 

custodian, if the SD or MSP did not 

previously have a relationship with 

such an entity. This administrative 

expense need only be a one-time cost 

and should not be overly burdensome. 

The perjury standard introduces a 

heightened punishment for the 

inappropriate seizure of customer 

collateral based on false representations. 

The primary cost of such a standard is 

the exercise of excessive caution by SDs 

or MSPs in asserting their right to this 

collateral, even in instances where that 

right is warranted. 

The requirement that investments of 

segregated margin given to an SD or 

MSP adhere to regulation 1.25 may 

impose costs. The primary cost would 

be a loss of investment returns to SDs 

and MSPs under the rule as opposed to 

investment returns that would have 

been permitted without the regulation’s 

restriction. Regulation 1.25 requires that 

investments of customer collateral by an 

SD or MSP adhere to a list of 

enumerated investments, concentration 

limits and other restrictions because 

certain investments may not adequately 

meet the statute’s paramount goal of 

protecting customer funds.174

Nonetheless, the Commission 

recognizes that restricting the type and 

form of permitted investments could 

result in certain SDs and MSPs earning 

less income from their investments of 

customer funds. The Commission has 

(conservatively) estimated the excess 

return (or spread) of investing without 

restrictions, as compared to investing 

according to regulation 1.25 guidelines, 

to be between 0% and 4%.175 The 

associated cost of imposing regulation 

1.25, which needs to also consider the 

(risk-based) preferences of 

counterparties over the set of foregone 

investment opportunities, exists 

somewhere within this range. 

Secondarily, there may be 

administrative costs to SDs and MSPs in 

ensuring compliance with regulation 

1.25 limitations. However, the 

Commission notes that parties are free 

to negotiate arrangements outside of the 

final rule. 

An estimate of the cost of the 

quarterly reporting required pursuant to 

regulation 23.704 is given in the 

Paperwork Reduction Act section of this 

preamble, above. As noted above, the 

Chief Compliance Officer and junior 

compliance officers’ time may result in 

an added cost to the implementation of 

regulation 23.704. The Chief 

Compliance Officer’s involvement with 

design and implementation of these 

procedures, however, is commensurate 

with its section 4s(k)(2)(D) CEA 

responsibilities for ‘‘administrating each 

policy and procedure that is required to 

be established pursuant to [section 4s].’’ 

In addition, this cost is outweighed by 

the relative benefit of the design and 

implementation of effective 

recordkeeping procedures for the large 

number of counterparties served by each 

SD or MSP. 

c. Consideration of Alternatives 

In arriving at the final rules, in areas 

in which the Commission exercised its 

discretion, the Commission has 

considered a number of alternatives 

suggested by commenters. 

The Commission asked in the NPRM 

whether the SD or MSP should be 

required to disclose the price of 

segregation, the fees to be paid to the 

custodian (if the SD or MSP was aware 

of such costs) or differences in the terms 

of the swap that the SD or MSP is 

willing to offer to the counterparty if the 

counterparty elects or renounces the 

right to segregation. SIFMA/ISDA wrote 

that mandating disclosure is not 

necessary or desirable because ‘‘a 

counterparty can always, in accordance 

with current market practice, request 

disclosures it considers necessary from 

its SD/MSP ... [and] mandatory 

disclosure by the SD/MSP is impractical 

because much of the material costs are 

within the control of a third party: The 

custodian.’’ 176 ICI sought to distinguish 

between fees charged by the custodian— 

which ICI does not believe need to be 

disclosed by the SD or MSP—and fees 

embedded in the SD’s or MSP’s 

pricing.177 State Street suggested that 

‘‘the Commission should ... provide 

that, although the pricing of the same 

transaction with and without a 

segregated account may differ, the 

pricing difference should be reflective of 

actual out-of-pocket costs expected to be 

incurred by the [SD or MSP] as a result 

of use of the segregated account, and 

that the nature and amounts of those 

costs should be fully disclosed.’’ 178

The Commission could have chosen 

to take the path requested by SIFMA/

ISDA, in which no disclosures are 

mandated by the regulation, or the path 

requested by ICI, in which only fees 

embedded in the SD’s or MSP’s pricing 

for segregated margin are disclosed. 

However, as discussed by several 

commenters, what is relevant to the 

counterparty in determining whether to 

segregate (and with which custodian) is 

the sum of all associated costs; 179 both 

those directly associated with the 

custodian, and any additional charges 

imposed by the SD or MSP. 

The SD or MSP will typically be in a 

better position to know the fees charged 

by the custodian than the counterparty. 

In such instances, the alternatives 

suggested by SIFMA/ISDA and ICI 

could result in a lack of pricing 

information for the counterparty, or at 

best, a more difficult path for a 

counterparty to obtain such information. 

The SD or MSP is responsible for 

segregation and for using an 

independent third-party custodian, and 

providing price information about the 

total cost of segregation to the 

counterparty is a key component of 

evaluating a custodian’s service. 

The Commission notes State Street’s 

argument, but believes that mandating 

that the difference in prices charged by 

the SD or MSP should only reflect the 

SD’s or MSP’s out-of-pocket costs would 

be excessively proscriptive. To the 

extent that this rule promotes price 

transparency, it will foster more 

competitive pricing. 

In addition, several commenters 

requested the Commission eliminate the 

once-per-year notification in the 

Commission’s proposed rule. SIFMA/

ISDA and AMG each wrote that an 

initial notification is all that should be 

required. The Commission considered 

requiring only an initial notification, 

however it opted for a yearly 

notification. Yearly notification serves 


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Federal Register / Vol. 78, No. 215 / Wednesday, November 6, 2013 / Rules and Regulations 66635 

180As discussed below, the perjury rule may in 

certain instances lead to excess caution by SDs and 

MSPs in cases where they do have a right to the 

collateral. In such instances, the perjury rule could 

adversely affect sound risk management. 

181While Federated provided some general 

suggestions, such as setting concentration limits on 

investments with a particular fund or family of 

funds, it argued that there ‘‘should be no limits on 

investment of collateral for uncleared or cleared 

swaps.’’ See Federated letter at 10–11. 

182The reporting requirement found in section 

4s(l)(4) of the CEA states that if the counterparty 

does not choose to require segregation of the funds 

or other property supplied to margin, guarantee, or 

secure the obligations of the counterparty, the swap 

dealer or major swap participant shall report to the 

counterparty of the swap dealer or major swap 

participant on a quarterly basis that the back office 

procedures of the swap dealer or major swap 

participant relating to margin and collateral 

requirements are in compliance with the agreement 

of the counterparties. 

as an appropriate means for calling 

attention to the importance of the right 

to segregate collateral, and offers a 

number of benefits, relative to one-timeonly disclosure, as has been discussed 

above. Similarly, the Commission has 

concluded that any difference in 

administrative costs should not be 

excessively burdensome. 

The alternative to a perjury standard 

for unilateral requests to withdraw 

collateral from segregation is not to have 

one. However, it is the Commission’s 

view that heightening the penalty for 

fraudulently requesting funds to which 

one is not entitled reduces the incidence 

of such claims, and may serve the 

general intent of section 4s(l) to increase 

the safety and financial integrity of the 

uncleared swap market and to safeguard 

the initial margin of parties to uncleared 

swaps, once segregated, while still 

providing the benefits of a unilateral 

ability to withdraw collateral to parties 

who agree to such an approach.180

The alternatives to subjecting the 

investment of segregated initial margin 

to regulation 1.25 are to subject it to no 

restrictions at all or to subject it to some 

other collateral investment regime. The 

Commission notes that none of the 

commenters proposed an alternative 

investment framework or detailed set of 

restrictions.181 It is the Commission’s 

view that the purpose of section 4s(l) is 

to increase the safety of the uncleared 

swaps market and to protect initial 

margin, once segregated. Regulation 

1.25 is used by the Commission for both 

futures and cleared swaps as a means by 

which to protect segregated customer 

funds against risky investment. Having 

created a legal standard for this purpose, 

it makes sense to apply it to uncleared 

swaps transactions in which 

counterparties choose to have their 

collateral segregated within a regulatory 

framework established by the 

Commission under the authority of 

section 4s(l). 

Alternatives to reporting requirements 

to non-segregated collateral would be to 

require reports less frequently than 

quarterly and to not place responsibility 

for such reports on the chief compliance 

officer. The Commission notes that 

while quarterly reporting may impose 

certain administrative burdens on SDs 

and MSPs, such quarterly reporting, as 

contemplated by regulation 23.704, is 

expressly required by the statute.182 In 

addition, under section 4s(k)(2)(D) of 

the CEA, the chief compliance officer is 

‘‘responsible for administering each 

policy and procedure that is required to 

be established pursuant to [section 4s].’’ 

Thus, responsibility for compliance 

with the quarterly reporting 

requirement, a procedure required by 

section 4s(l)(4) of the CEA, properly 

rests with the chief compliance officer. 

4. Section 15(a) Factors 

As noted above, in this final rule, the 

Commission considers the costs and 

benefits that result from the regulations 

issued herein according to the 

requirements of section 15(a) of the 

CEA. Previous sections identify four 

main issues for cost-benefit 

considerations: (1) Notification of the 

right to segregate, (2) requirements to 

reveal the price of segregation, (3) 

statements affirming the right to seize 

collateral, and (4) adherence to 

regulation 1.25 in the investment of 

segregated collateral. This section 

discusses those considerations in light 

of the section 15(a) criteria described 

above. 

a. Annual Notification of the Right to 

Segregate 

This requirement ensures that the 

right to segregation is called to the 

attention of counterparties reasonably 

close in time to the point at which they 

make decisions regarding the handling 

of collateral for particular swaps 

transactions and therefore increases the 

likelihood that counterparties will make 

informed decisions on whether to elect 

segregation. It thereby furthers the 

protection of market participants and 

the public and promotes sound risk 

management practices. 

b. Revealing the Price of Segregation 

and Identifying a Custodian 

The statute requires the SD or MSP to 

notify the counterparty of its right to 

segregation. The final regulation goes 

beyond the statutory requirement by 

also requiring that the SD or MSP 

provide an unaffiliated custodian that it 

would be willing to use as well as the 

price associated with segregation. The 

Commission has determined that the 

benefits for this requirements are 

compelling and do not entail any 

significant costs. 

The requirement also promotes the 

protection of market participants and 

the public and promotes sound risk 

management practices. The ability of a 

counterparty to know the custodian and 

the price associated with segregation is 

important because it facilitates the 

counterparty’s decisions regarding 

whether to segregate initial margin and 

with whom it wishes to transact swaps. 

In addition to benefitting counterparties 

facilitating decisions regarding 

protection of collateral in uncleared 

swaps transactions benefits the public. 

Notwithstanding the movement towards 

clearing, a large number of swaps will 

remain bilateral contracts. Congress has 

determined that systemic risk will be 

reduced by offering counterparties the 

right to segregate collateral to avoid 

losses brought about by default of an SD 

or MSP and providing information on 

custodians and pricing promotes the 

exercise of this right. 

This requirement also promotes 

market efficiency, competitiveness and 

financial integrity by facilitating 

counterparty comparison of custodians, 

which may influence its choice of the 

SD or MSP with which it wishes to 

transact swaps. To the extent that such 

price transparency promotes 

competition among custodians, one can 

expect reductions in the cost of 

segregation, which, in turn, may lead to 

increased use of the segregation option, 

with the resultant positive implications 

for sound risk management practices. 

Second, requiring that pricing 

information be obtained by the party 

best positioned to know such 

information eliminates a circumstance 

where a party at a comparative 

disadvantage for obtaining such 

information has to do so. 

c. Perjury Standard for Statements 

Affirming the Right to Unilaterally 

Withdraw Collateral From a Custodian 

The baseline for comparison of this 

requirement is typical market practice, 

which may include civil and criminal 

actions against a party falsely claiming 

that it is entitled to funds to which it, 

in fact, is not. 

Introducing a perjury standard for 

unilateral requests for collateral will 

serve as an additional disincentive for 

parties who might otherwise be inclined 

to fraudulently request collateral. To the 

extent this standard reduces the 

incidence of such false claims, the rule 

acts to promote the protection of market 

participants and the public. In addition, 

fraudulent requests for collateral, if 


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66636 Federal Register / Vol. 78, No. 215 / Wednesday, November 6, 2013 / Rules and Regulations 

183Based on the subject matter of the rule and 

comments received, the Commission does not 

expect the rule to have a significant effect on price 

discovery or on other public interest considerations 

not already discussed. 

honored, can shake victimized parties’ 

confidence in the uncleared segregation 

regime and damage public confidence in 

the safety of the uncleared swap market. 

Heightening disincentives for fraudulent 

conduct will therefore help to safeguard 

the financial integrity of the uncleared 

swap market place. As previously 

mentioned, a primary cost of this 

standard is the exercise of excessive 

caution by SDs or MSPs in asserting 

their right to this collateral, even in 

instances where the SD or MSP believes 

that the unilateral withdrawal of such 

collateral is authorized, because of the 

costs and risks of exposure to a potential 

criminal action. To the extent that this 

potential cost arises, therefore, the 

requirement can negatively impact the 

practice of sound risk management. 

d. Adherence to Regulation 1.25 

Absent this requirement, an SD or 

MSP’s investment options for collateral 

would be left up to the negotiation of 

the counterparties. 

As discussed above, without this 

requirement, there exists a possible 

moral hazard concern that an SD or 

MSP may engage in excessive risk 

taking with the funds of a counterparty. 

The Commission agrees with 

commenters who claim that this 

requirement may constrain the 

investment returns of SDs and MSPs 

relative to those returns achievable 

absent the enhanced safety criteria. 

Recognizing that there may be some 

reduction in returns, applying 

regulation 1.25 standards to segregated 

initial margin of uncleared swaps will 

benefit market participants and the 

public by safeguarding such segregated 

funds. 

This regulation also benefits the 

financial integrity of the market place. A 

party who invests its customer’s 

segregated funds is required to replenish 

any losses in the customer account with 

its own funds. During a period of market 

stress, such a party might be 

experiencing losses in other areas, 

which may increase the difficulty of 

making the customer whole. In that 

regard, even if there are not losses in the 

customer account, strains on the SD’s or 

MSP’s sources of funds may cause 

delays in a counterparty receiving funds 

to which it is entitled. Regulation 1.25 

requires that customer fund investments 

be made in an enumerated list of 

instruments which preserve principal 

and maintain liquidity. 

Finally, requiring that investments of 

segregated initial margin adhere to 

regulation 1.25 benefits sound risk 

management practices by ensuring that 

segregated funds are invested in a safe 

manner. This benefits the counterparty, 

whose initial margin is safeguarded, and 

the market as a whole, because of the 

decreased likelihood of a market shock 

causing a chain reaction which results 

in the loss of segregated funds. While 

the Commission realizes that there may 

be administrative costs in ensuring that 

regulation 1.25 requirements are 

followed, the Commission expects that 

SDs and MSPs are sophisticated firms 

that should be able to make the 

necessary adjustments without much 

delay or expense. The overall benefits of 

safeguarding segregated funds and the 

resultant reductions in risk to portfolios, 

as compared to those based on a 

regulatory framework without such 

limitations, exceed those costs.183

List of Subjects 

17 CFR Part 23 

Consumer protection, Reporting and 

recordkeeping requirements, Swaps. 

17 CFR Part 190 

Bankruptcy, Brokers, Commodity 

futures, Reporting and recordkeeping 

requirements, Swaps. 

For the reasons stated in the 

preamble, the Commodity Futures 

Trading Commission amends 17 CFR 

parts 23 and 190 as follows: 

PART 23—SWAP DEALERS AND 

MAJOR SWAP PARTICIPANTS 

■ 1. The authority citation for part 23 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b– 

1, 6c, 6p, 6r, 6s, 6t, 9, 9a, 12, 12a, 13b, 13c, 

16a, 18, 19, 21. 

■ 2. Add and reserve subpart K. 

■ 3. Add subpart L to read as follows: 

Subpart L—Segregation of Assets Held as 

Collateral in Uncleared Swap Transactions 

Sec. 

23.700 Definitions. 

23.701 Notification of right to segregation. 

23.702 Requirements for segregated margin. 

23.703 Investment of segregated margin. 

23.704 Requirements for non-segregated 

margin. 

Subpart L—Segregation of Assets Held 

as Collateral in Uncleared Swap 

Transactions 

§ 23.700 Definitions. 

As used in this subpart: 

Initial Margin means money, 

securities, or property posted by a party 

to a swap as performance bond to cover 

potential future exposures arising from 

changes in the market value of the 

position. 

Margin means both Initial Margin and 

Variation Margin. 

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. 

Variation Margin means a payment 

made by or collateral posted by a party 

to a swap to cover the current exposure 

arising from changes in the market value 

of the position since the trade was 

executed or the previous time the 

position was marked to market. 

§ 23.701 Notification of right to 

segregation. 

(a) Prior to the execution of each swap 

transaction that is not submitted for 

clearing, a swap dealer or major swap 

participant shall: 

(1) Notify each counterparty to such 

transaction that the counterparty has the 

right to require that any Initial Margin 

the counterparty provides in connection 

with such transaction be segregated in 

accordance with § 23.702 and § 23.703; 

(2) Identify one or more custodians, 

one of which must be a creditworthy 

non-affiliate and each of which must be 

a legal entity independent of both the 

swap dealer or major swap participant 

and the counterparty, as an acceptable 

depository for segregated Initial Margin; 

and 

(3) Provide information regarding the 

price of segregation for each custodian 

identified in paragraph (a)(2) of this 

section, to the extent that the swap 

dealer or major swap participant has 

such information. 

(b) The right referred to in paragraph 

(a) of this section does not extend to 

Variation Margin. 

(c) The notification referred to in 

paragraph (a) of this section shall be 

made to an officer of the counterparty 

responsible for the management of 

collateral. If no such party is identified 

by the counterparty to the swap dealer 

or major swap participant, then the 

notification shall be made to the Chief 

Risk Officer of the counterparty, or, if 

there is no such Officer, the Chief 

Executive Officer, or if none, the 

highest-level decision-maker for the 

counterparty. 

(d) Prior to confirming the terms of 

any such swap, the swap dealer or major 

swap participant shall obtain from the 

counterparty confirmation of receipt by 

the person specified in paragraph (c) of 

this section of the notification specified 

in paragraph (a) of this section, and an 

election to require such segregation or 

not. The swap dealer or major swap 

participant shall maintain such 


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Federal Register / Vol. 78, No. 215 / Wednesday, November 6, 2013 / Rules and Regulations 66637 

confirmation and such election as 

business records pursuant to § 1.31 of 

this chapter. 

(e) Notification pursuant to paragraph 

(a) of this section to a particular 

counterparty by a particular swap dealer 

or major swap participant need only be 

made once in any calendar year. 

(f) A counterparty’s election to require 

segregation of Initial Margin, or not to 

require such segregation, may be 

changed at the discretion of the 

counterparty upon written notice 

delivered to the swap dealer or major 

swap participant, which changed 

election shall be applicable to all swaps 

entered into between the parties after 

such delivery. 

§ 23.702 Requirements for segregated 

margin. 

(a) The custodian of Margin, 

segregated pursuant to an election under 

§ 23.701, must be a legal entity 

independent of both the swap dealer or 

major swap participant and the 

counterparty. 

(b) Initial Margin that is segregated 

pursuant to an election under § 23.701 

must be held in an account segregated 

for and on behalf of the counterparty, 

and designated as such. Such an 

account may, if the swap dealer or major 

swap participant and the counterparty 

agree, also hold Variation Margin. 

(c) Any agreement for the segregation 

of Margin pursuant to this section shall 

be in writing, shall include the 

custodian as a party, and shall provide 

that: 

(1) Any withdrawal of such Margin, 

other than pursuant to paragraph (c)(2) 

of this section, shall only be made 

pursuant to the agreement of both the 

counterparty and the swap dealer or 

major swap participant, and notification 

of such withdrawal shall be given 

immediately to the non-withdrawing 

party; 

(2) Turnover of control of such Margin 

shall be made without the written 

consent of both parties, as appropriate, 

to the counterparty or to the swap dealer 

or major swap participant, promptly 

upon presentation to the custodian of a 

statement in writing, made under oath 

or under penalty of perjury as specified 

in 28 U.S.C. 1746, by an authorized 

representative of either such party, 

stating that such party is entitled to 

such control pursuant to an agreement 

between the parties. The other party 

shall be immediately notified of such 

turnover. 

§ 23.703 Investment of segregated margin. 

(a) Margin that is segregated pursuant 

to an election under § 23.701 may only 

be invested consistent with § 1.25 of this 

chapter. 

(b) Subject to paragraph (a) of this 

section, the swap dealer or major swap 

participant and the counterparty may 

enter into any commercial arrangement, 

in writing, regarding the investment of 

such Margin, and the related allocation 

of gains and losses resulting from such 

investment. 

§ 23.704 Requirements for non-segregated 

margin. 

(a) The chief compliance officer of 

each swap dealer or major swap 

participant shall report to each 

counterparty that does not choose to 

require segregation of Initial Margin 

pursuant to § 23.701(a), no later than the 

fifteenth business day of each calendar 

quarter, on whether or not the back 

office procedures of the swap dealer or 

major swap participant relating to 

margin and collateral requirements 

were, at any point during the previous 

calendar quarter, not in compliance 

with the agreement of the 

counterparties. 

(b) The obligation specified in 

paragraph (a) of this section shall apply 

with respect to each counterparty no 

earlier than the 90th calendar day after 

the date on which the first swap is 

transacted between the counterparty 

and the swap dealer or major swap 

participant. 

PART 190—BANKRUPTCY 

■ 4. 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. 

■ 5. In § 190.01, revise paragraph (l) to 

read as follows: 

§ 190.01 Definitions. 

* * * * * 

(l) Customer shall have the same 

meaning as that set forth in section 

761(9) of the Bankruptcy Code. To the 

extent not otherwise included, customer 

shall include the owner of a portfolio 

margining account carried as a futures 

account or cleared swaps customer 

account. 

* * * * * 

■ 6. In § 190.08, redesignate paragraph 

(a)(1)(i)(F) as paragraph (a)(1)(i)(G) and 

add new paragraph (a)(1)(i)(F) to read as 

follows: 

§ 190.08 Allocation of property and 

allowance of claims. 

* * * * * 

(a) * * * 

(1) * * * 

(i) * * * 

(F) To the extent not otherwise 

included, securities held in a portfolio 

margining account carried as a futures 

account or a cleared swaps customer 

account; 

* * * * * 

Issued in Washington, DC, on October 31, 

2013, by the Commission. 

Melissa D. Jurgens, 

Secretary of the Commission. 

Appendices to Protection of Collateral 

of Counterparties to Uncleared Swaps; 

Treatment of Securities in a Portfolio 

Margining Account in a Commodity 

Broker Bankruptcy—Commission 

Voting Summary and Statement of 

Chairman 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting Summary 

On this matter, Chairman Gensler and 

Commissioners Chilton, O’Malia, and Wetjen 

voted in the affirmative; no Commissioner 

voted in the negative. 

Appendix 2—Statement of Chairman Gary 

Gensler 

I support the final rule enhancing the 

protection of customer funds when entering 

into uncleared swap transactions. Today’s 

final rule fulfills Congress’ mandate that 

counterparties of swap dealers be given a 

choice regarding whether or not they get the 

protections that come from segregation of 

monies and collateral they post as initial 

margin. These are important customer 

protections for counterparties as they enter 

into customized swaps with swap dealers. 

Swap dealers will be required to give each 

of their counterparties the choice with regard 

to segregation. The dealers also will have to 

provide the prices for the various segregation 

choices. Further, the dealers must give the 

customers at least one custodial arrangement 

choice not affiliated with the swap dealer’s 

bank. 

In addition, this rule provides clarifying 

changes to ensure that if a counterparty 

chooses segregation for its funds, those funds 

will not be tied up in the bankruptcy of its 

swap dealer. 

These rules are critical to protecting 

insurance companies, pension funds, 

community banks and municipal 

governments wishing to hedge a risk in using 

the customized swaps market. 

[FR Doc. 2013–26479 Filed 11–5–13; 8:45 am] 

BILLING CODE 6351–01–P 


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